Strategy Consulting is a Science

Good management consultants follow the scientific method

Strategy consulting scientific experiment

A GOOD scientific experiment will follow 7 steps.  The type of science can change: biology, chemistry, physics, mathematics, computing, management consulting – but the steps remain the same.

1. Aim

Clarify the questions that the organisation is trying to answer: Who, What, When, Where, Why, How?  For example, the organisation may come to you with two questions (1) why are we losing money? (2) what should we do about it?  You need to clarify these aims so that you can write down a clear objective:

  1. When we say “losing money”, are we talking profits or revenues? Answer: profits
  2. How much money did the company lose last year? Answer: $5M
  3. Are you aiming to break even, achieve a specific profit target, or gain market share? Answer: break even
  4. When do you want to achieve this objective? Answer: within 1 year

2. Background

Clarify the situation so that you can develop an initial hypothesis.  To do this you may need to ask a few questions.  For example:

  1. How long has the company been losing money?
  2. Are competitors also losing money?
  3. Have there been any recent changes that might explain the drop in profits?

3. Hypothesis

State an initial hypothesis based on the background information that you have.  This gives you a starting point from which to begin your analysis, and you can refine your hypothesis when new information comes to light.  For example, your initial hypothesis might be “that the company is losing money due to a drop in revenues.”

4. Method

Develop a structure for analysis that will allow you to refine your hypothesis.  To identify the source of lower profits you may want to can use the profit framework.

5. Experiment

Progress the analysis.

6. Discussion

Summarise the results of your analysis and update your hypothesis each time you discover something important.

7. Conclusion

Make a clear actionable recommendation.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

5 Principles for Value Investing

WARREN Buffett is the world’s most successful value investor.

Very few people have ever managed to achieve his level of investment success.  The interesting thing about that fact is that there are only a few simple principles that you need to know if you want to be a successful value investor.

  1. Stick to your Circle of Competence – only invest in companies that you understand.
  2. Value Stocks as the Part Ownership of a Business
  3. Focus on Intrinsic Value – determine the underlying value of a business rather than looking at how much the market might be will to pay. Factors to bear in mind when figuring out the value of the business:
    • Business Drivers – what is the company’s business model? How do they make money?
    • Low Leverage – how much debt does the company have? You want to see as little cash going out of the business as possible.
    • Cash Flow – how much cash flow does the company generate? You want to see more and more cash coming into a business over the years.
    • Sustainable Competitive Advantage – what kind of natural advantages does the business have? To sustain and grow earnings the company needs a large moat with alligators in it. Large moats might come from (1) strong brand, (2) patented technology, or (3) incumbent low cost position in a market with economies of scale.
    • Prospects for Growth – what kind of profitable opportunities are available to the business?
    • Quality Management – the company needs honest and able management because an investor should not need to keep checking whether management is doing its job.
  4. Invest with a Margin of Safety – there is always investment uncertainty, so the price should be low enough to ensure that you have a “Margin of Safety”.
  5. Think Independently – it is difficult to outperform the market if you follow the market. Think independently and “be greedy when others are fearful”.