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The Right Way to Solve Complex Business Problems

Corey Phelps, a strategy professor at McGill University, says great problem solvers are hard to find. Even seasoned professionals at the highest levels of organizations regularly...

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Corey Phelps, a strategy professor at McGill University, says great problem solvers are hard to find. Even seasoned professionals at the highest levels of organizations regularly fail to identify the real problem and instead jump to exploring solutions. Phelps identifies the common traps and outlines a research-proven method to solve problems effectively. He’s the coauthor of the book, Cracked it! How to solve big problems and sell solutions like top strategy consultants.

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Welcome to the IdeaCast from Harvard Business Review. I’m Curt Nickisch.

Problem-solving is in demand. It’s considered the top skill for success at management consulting firms. And it’s increasingly desired for everyone, not just new MBA’s.

A report from the World Economic Forum predicts that more than one-third of all jobs across all industries will require complex problem-solving as one of their core skills by 2020.

The problem is, we’re often really bad at problem-solving. Our guest today says even the most educated and experienced of senior leaders go about it the wrong way.

COREY PHELPS: I think this is one of the misnomers about problem-solving. There’s this belief that because we do it so frequently – and especially for senior leaders, they have a lot of experience, they solve problems for a living – and as such we would expect them to be quite good at it. And I think what we find is that they’re not. They don’t solve problems well because they fall prey to basically the foibles of being a human being – they fall prey to the cognitive biases and the pitfalls of problem-solving.

CURT NICKISCH: That’s Corey Phelps. He says fixing these foibles is possible and almost straightforward. You can improve your problem-solving skills by following a disciplined method.

Corey Phelps is a strategy professor at McGill University. He’s also the co-author of the book “Cracked It: How to Solve Big Problems and Sell Solutions like Top Strategy C onsultants.” Corey thanks for coming on the show.

COREY PHELPS: Thank you for the opportunity to talk.

CURT NICKISCH: Another probably many, many biases that prevent people from solving big problems well.

COREY PHELPS: Absolutely.

CURT NICKISCH: What are some of the most common, or your favorite stumbling blocks?

COREY PHELPS: Well, one of my favorites is essentially the problem of jumping to solutions or the challenge of jumping to solutions.

CURT NICKISCH: Oh, come on Corey. That’s so much fun.

COREY PHELPS: It is, and it’s very much a result of how our brains have evolved to process information, but it’s my favorite because we all do it. And especially I would say it happens in organizations because in organizations when you layer on these time pressures and you layer on these concerns about efficiency and productivity, it creates enormous, I would say incentive to say “I don’t have time to carefully define and analyze the problem. I got to get a solution. I got to implement it as quick as possible.” And the fundamental bias I think is, is illustrated beautifully by Danny Kahneman in his book “Thinking, Fast and Slow,” is that our minds are essentially hardwired to think fast.

We are able to pay attention to a tiny little bit of information. We can then weave a very coherent story that makes sense to us. And then we can use that story to jump very quickly to a solution that we just know will work. And if we just were able to move from that approach of what Kahneman and cognitive psychologists called “System 1 thinking” to “System 2 thinking” – that is to slow down, be more deliberative, be more structured – we would be able to better understand the problem that we’re trying to solve and be more effective and exhaustive with the tools that we want to use to understand the problem before we actually go into solution-generation mode.

CURT NICKISCH: Complex problems demand different areas of expertise and often as individuals we’re coming to those problems with one of them. And I wonder if that’s often the problem of problem-solving, which is that a manager is approaching it from their own expertise and because of that, they see the problem through a certain way. Is that one of the cognitive biases that stop people from being effective problem solvers?

COREY PHELPS: Yeah. That’s often referred to as the expertise trap. It basically colors and influences what we pay attention to with respect to a particular problem. And it limits us with respect to the tools that we can bring to bear to solve that problem. In the world of psychology, there’s famous psychologist, Abraham Maslow, who is famous for the hierarchy of needs. He’s also famous for something that was a also known as MaSlow’s axiom, Maslow’s law. It’s also called the law of the instrument, and to paraphrase Maslow, he basically said, “Look, I suppose if the only tool that you have in your toolkit is a hammer, everything looks like a nail.”

His point is that if you’re, for example, a finance expert and your toolkit is the toolkit of let’s say, discounted cash flow analysis for valuation, then you’re going to see problems through that very narrow lens. Now, one of the ways out of this, I think to your point is collaboration becomes fundamentally important. And collaboration starts with the recognition that I don’t have all of the tools, all of the knowledge in me to effectively solve this. So I need to recruit people that can actually help me.

CURT NICKISCH: That’s really interesting. I wonder how much the fact that you have solved a problem before it makes you have a bias for that same solution for future problems?

COREY PHELPS: Yeah, that’s a great question. What you’re alluding to is analogical reasoning, and we know that human beings, one of the things that allows us to operate in novel settings is that we can draw on our past experience. And we do so when it comes to problem solving, often times without being conscious or mentally aware of it. We reach into our memory and we ask ourselves a very simple question: “Have I seen a problem like this before?”

And if it looks familiar to me, the tendency then is to say, “Okay, well what worked in solving that problem that I faced before?” And then to say, “Well, if it worked in that setting, then it should work in this setting.” So that’s reasoning by analogy.

Reasoning by analogy has a great upside. It allows human beings to not become overwhelmed by the tremendous novelty that they face in their daily lives. The downside is that if we don’t truly understand it at sort of a deep level, whether or not the two problems are similar or different, then we can make what cognitive psychologists called surface-level analogies.

And we can then say, “Oh, this looks a lot like the problem I faced before, that solution that worked there is going to easily work here.” And we try that solution and it fails and it fails largely because if we dug a little bit deeper, the two problems actually aren’t much alike at all in terms of their underlying causes.

CURT NICKISCH: The starkest example of this, I think, in your book is Ron Johnson who left Apple to become CEO of JC Penney. Can you talk about that a little bit and what that episode for the company says about this?

COREY PHELPS: So yes, its – Ron Johnson had been hired away from Target in the United States to, by Steve Jobs to help create Apple stores. Apple stores are as many people know the most successful physical retailer on the planet measured by, for example, sales per square foot or per square meter. He’s got the golden touch. He’s created this tremendously successful retail format for Apple.

So the day that it was announced that Ron Johnson was going to step into the CEO role at JC Penney, the stock price of JC Penney went up by almost 18 percent. So clearly he was viewed as the savior. Johnson moves very, very quickly. Within a few months, he announces that he has a strategic plan and it basically comes in three parts.

Part number one is he’s going to eliminate discount pricing. JC Penney had been a very aggressive sales promoter. The second piece of it is he’s going to completely change how they organize merchandise. It’s no longer going to be organized by function – so menswear, housewares, those sorts of things. It’s going to be organized by boutique, so there’s going to be a Levi’s boutique, a Martha Stewart Boutique, a Joe Fresh Boutique and so on.

And it would drop the JC P enney name, they would call it JCP. And he rolls this out over the course of about 12 months across the entire chain of over 1100 stores. What this tells us, he’s so confident in his solution, his strategic transformation, that he doesn’t think it’s worth it to test this out on one or two pilot stores.

CURT NICKISCH: Yeah, he was quoted as saying: “At Apple, we didn’t test anything.”

COREY PHELPS: We didn’t test. Yes. What worked at Apple, he assumed would work at JC Penney. And the critical thing that I think he missed is that JC Penney customers are very different from Apple store customers. In fact, JC Penney customers love the discount. They love the thrill of hunting for a deal.

CURT NICKISCH: Which seems so fundamental to business, right? Understanding your customer. It’s just kind of shocking, I guess, to hear the story.

COREY PHELPS: It is shocking and especially when you consider that Ron Johnson had spent his entire career in retail, so this is someone that had faced, had seen, problems in retailers for decades – for over three decades by the time that he got to JC Penney. So you would expect someone with that degree of experience in that industry wouldn’t make that leap of, well, what worked at Apple stores is going to work at JC Penney stores, but in fact that’s exactly what happened.

CURT NICKISCH: In your book, you essentially suggest four steps that you recommend people use. Tell us about the four steps then.

COREY PHELPS: So in the book we describe what we call the “Four S method,” so four stages, each of which starts with the letter “s”. So the first stage is “state the problem.” Stating the problem is fundamentally about defining what the problem is that you are attempting to solve.

CURT NICKISCH: And you probably would say don’t hurry over that first step or the other three are going to be kind of pointless.

COREY PHELPS: Yeah, that’s exactly the point of of laying out the four s’s. There’s a tremendous amount of desire even amongst senior executives to want to get in and fix the problem. In other words, what’s the trouble? What are the symptoms? What would define success? What are the constraints that we would be operating under? Who owns the problem? And then who are the key stakeholders?

Oftentimes that step is skipped over and we go right into, “I’ve got a hypothesis about what I think the solution is and I’m so obsessed with getting this thing fixed quickly, I’m not going to bother to analyze it particularly well or test the validity of my assumptions. I’m going to go right into implementation mode.”

The second step, what we call “structure the problem” is once you have defined the problem, you need to then start to identify what are the potential causes of that problem. So there are different tools that we talked about in the book that you can structure a problem for analysis. Once you’ve structured the problem for analysis and you’ve conducted the analysis that helps you identify what are the underlying causes that are contributing to it, which will then inform the third stage which is generating solutions for the problem and then testing and evaluating those solutions.

CURT NICKISCH: Is the danger that that third step – generating solutions – is the step that people spend the most time on or have the most fun with?

COREY PHELPS: Yeah. The danger is, is that what that’s naturally what people gravitate towards. So we want to skip over the first two, state and structure.

CURT NICKISCH: As soon as you said it, I was like, “let’s talk about that more.”

COREY PHELPS: Yeah. And we want to jump right into solutioning because people love to talk about their ideas that are going to fix the problem. And that’s actually a useful way to frame a discussion about solutions – we could, or we might do this – because it opens up possibilities for experimentation.

And the problem is that when we often talk about what we could do, we have very little understanding of what the problem is that we’re trying to solve and what are the underlying causes of that problem. Because as you said, solution generation is fun. Look, the classic example is brainstorming. Let’s get a bunch of people in a room and let’s talk about the ideas on how to fix this thing. And again, be deliberate, be disciplined. Do those first stages, the first two stages – state and structure – before you get into the solution generation phase.

CURT NICKISCH: Yeah. The other thing that often happens there is just the lack of awareness of just the cost of the different solutions – how much time, or what they would actually take to do.

COREY PHELPS: Yeah, and again, I’ll go back to that example I used of brainstorming where it’s fun to get a group of people together and talk about our ideas and how to fix the problem. There’s a couple challenges of that. One is what often happens when we do that is we tend to censor the solutions that we come up with. In other words, we ask ourselves, “if I say this idea, people are gonna, think I’m crazy, or people going to say: that’s stupid, that’ll never work, we can’t do that in our organization. It’s going to be too expensive, it’s going to take too much time. We don’t have the resources to do it.”

So brainstorming downside is we we self-sensor, so that’s where you need to have deep insight into your organization in terms of A. what’s going to be feasible, B. what’s going to be desirable on the part of the people that actually have the problem, who you’re trying to solve the problem for and C. from a business standpoint, is it going to be financially attractive for us?

So applying again a set of disciplined criteria that help you choose amongst those ideas for potential solutions. Then the last stage of the process which is selling – because it’s rare in any organization that someone or the group of people that come up with the solution actually have the power and the resources to implement it, so that means they’re going to have to persuade other people to buy into it and want to help.

CURT NICKISCH: Design thinking is another really different method essentially for solving problems or coming up with solutions that just aren’t arrived at through usual problem-solving or usual decision-making processes. I’m just wondering how design thinking comes to play when you’re also outlining these, you know, disciplined methods for stating and solving problems.

COREY PHELPS: For us it’s about choosing the right approach. You know what the potential causes of a problem are. You just don’t know which ones are operating in the particular problem you’re trying to solve. And what that means is that you’ve got a theory – and this is largely the world of strategy consultants – strategy consultants have theories. They have, if you hear them speak, deep understanding of different types of organizational problems, and what they bring is an analytic tool kit that says, “first we’re going to identify all the possible problems, all the possible causes I should say, of this problem. We’re going to figure out which ones are operating and we’re going to use that to come up with a solution.” Then you’ve got problems that you have no idea what the causes are. You’re in a world of unknown unknowns or unk-unks as the operations management people call them.

CURT NICKISCH: That’s terrible.

COREY PHELPS: In other words, you don’t have a theory. So the question is, how do you begin? Well, this is where design thinking can be quite valuable. Design thinking says: first off, let’s find out who are the human beings, the people that are actually experiencing this problem, and let’s go out and let’s talk to them. Let’s observe them. Let’s immerse ourselves in their experience and let’s start to develop an understanding of the causes of the problem from their perspective.

So rather than go into it and say, “I have a theory,” let’s go the design thinking route and let’s actually based upon interactions with users or customers, let’s actually develop a theory. And then we’ll use our new understanding or new insight into the causes of the problem to move into the solution generation phase.

CURT NICKISCH: Problem-solving – we know that that’s something that employers look for when they’re recruiting people. It is one of those phrases that, you know, I’m sure somebody out there has, has the title at a company Chief Problem Solver instead of CEO, right? So, it’s almost one of those phrases that so over used it can lose its meaning.

And if you are being hired or you’re trying to make a case for being on a team that’s tackling a problem, how do you make a compelling case that you are a good problem solver? How can you actually show it?

COREY PHELPS: It’s a great question and then I have two answers to this question. So one is, look at the end of the day, the proof is in the pudding. In other words, can you point to successful solutions that you’ve come up with – solutions that have actually been effective in solving a problem? So that’s one.

The second thing is can you actually articulate how you approach problem-solving? In other words, do you follow a method or are you reinventing the wheel every time you solve a problem? Is it an ad hoc approach? And I think this issue really comes to a head when it comes to the world of strategy consulting firms when they recruit. For example, Mckinsey, you’ve got the Mckinsey problem-solving test, which is again, a test that’s actually trying to elicit the extent to which people are good applicants are good at solving problems

And then you’ve got the case interview. And in the case interview, what they’re looking at is do you have a mastery over certain tools. But what they’re really looking at is, are you actually following a logical process to solve this problem? Because again, what they’re interested in is finding- to your point – people that are going to be good at solving complex organizational problems. So they’re trying to get some evidence that they can demonstrate that they’re good at it and some evidence that they follow a deliberate process.

CURT NICKISCH: So even if you’re not interviewing at a consulting firm, that’s a good approach, to show your thinking, show your process, show the questions you ask?

COREY PHELPS: Yeah, and to your point earlier, at least if we look at what recruiters of MBA students are saying these days, they’re saying, for example, according to the FT’s recent survey, they’re saying that we want people with really good problem solving skills, and by the same token, we find that that’s a skill that’s difficult for us to recruit for. And that reinforces our interest in this area because the fundamental idea for the book is to give people a method. We’re trying to equip not just MBA students but everybody that’s going to face complex problems with a toolkit to solve them better.

CURT NICKISCH: Corey, this has been really great. Thank you.

COREY PHELPS: Thanks for the opportunity. I appreciate it.

CURT NICKISCH: That’s Corey Phelps. He teaches strategy at McGill University, and he co-wrote the book “Cracked It: How to Solve Big Problems and Sell Solutions Like Top Strategy Consultants.”

This episode was produced by Mary Dooe. We got technical help from Rob Eckhardt. Adam Buchholz is our audio product manager.

Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.

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Money Basics  - Financial Problem Solving Strategies

Money basics  -, financial problem solving strategies, money basics financial problem solving strategies.

Money Basics: Financial Problem Solving Strategies

Lesson 2: financial problem solving strategies.

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Financial problem-solving strategies

Have you ever experienced a financial problem? Do you feel like finances are holding you back from reaching your goals? This lesson will give a brief overview of the general problem-solving process and how to apply it to the most common financial problems.

The problem-solving process

First, let's take a look at a general problem-solving process that you can apply to any situation, not just a financial one.

• Identify the problem . The first step in solving a problem is to identify it. What exactly do you need to overcome?
• Make a plan. What are the steps you need to take in order to overcome the problem?
• Implement the plan . This step actually puts the plan you created in place. While it sounds fairly straightforward, this is usually the most difficult step.
• Evaluate the plan . Although this is listed last, this step might actually occur simultaneously with implementing the plan. Things happen and circumstances change, so you may need to re-evaluate your plan as it is happening.

Identifying the problem

The first step in the problem-solving process is to get to the root of the problem and understand what you need to overcome. Here is a list of the most common financial problems people may face:

• Lack of income/job loss
• Unexpected expenses
• Too much debt
• Need for financial independence
• Overspending or lack of budget
• Lack of savings

When thinking about these common problems, each one falls into one of three areas: You need more money, you need to reduce your debt, or you need to change how you spend.

Making a plan

After identifying the problem you need to overcome, it's time to make a plan. Not sure where to start? No worries! We have you covered with some tips and places to begin.

Problem 1: You need more money . Whether you've lost your job, met an unexpected expense, or are working on becoming more financially independent, a form of income is necessary.

If you are a looking for additional work or maybe just a better-paying job, take some time to update your resume and cover letter. Make sure they are neat, up to date with your most current information, and free of spelling and grammar errors.

Be wary of any advertisements or jobs that offer fast, easy money. A lot of quick-cash methods come with unintended consequences. More often than not, if something sounds too good to be true, it probably is.

Problem 2: You need to reduce your debt . With high interest rates or the need to live paycheck to paycheck, high debt can be debilitating. Sometimes it feels like climbing a neverending mountain with an invisible peak. However, by prioritizing and negotiating your debt, you can make it more manageable.

Try listing all of your debt and the interest rates associated with each. Focus on paying off the ones with the highest interest rates first. If you're having trouble making payments, call the loan company and see if it can offer any solutions for you. The company may be able to lower your interest rate or offer a temporary forbearance to help you get back on your feet. If you need more help tackling your debt, you may want to contact a professional debt counselor like Consolidated Credit.

Problem 3: You need to change how you spend . Going from financial problems to a healthy financial status often requires organization and a shift in thinking. Avoiding overspending, building your savings, and gaining financial independence can often be accomplished with good spending habits.

The first thing you may want to try is creating a budget. There are many templates and resources available to help you create one. Sticking to one can be challenging, but simply having a budget laid out can help you see where you need to start spending less.

In addition to your budget, create a savings plan. Start out small. Even stowing away an extra dollar or two here and there can make a big difference. Also, try placing your savings in a place you cannot easily access. For example, create a savings account at a bank you don't usually use. The more difficult it is to access your money, the less likely you are to spend it.

Implementing the plan

Although the explanation of this part is the simplest, this is often the most difficult part to actually execute. It requires self-discipline and perseverance. The most important part of this step is to know that if your plan doesn't work or if you have a difficult time sticking to it, all is not lost. If it happens, move on to the next step, evaluate your plan, then repeat the process.

Overcoming financial obstacles can require changing your lifestyle, and this does not happen overnight. However, just having a plan itself can help to give you confidence and reassurance that you can eventually overcome whatever is in your way.

Evaluating your plan

As you implement your plan, you'll need to continually evaluate it. Maybe something happens and your original plan needs to change. Perhaps you've learned more along the way and realize that your original plan was incomplete. Or maybe your first plan went as planned and was a success. No matter the circumstances, it is always a good idea to look back and re-evaluate. Try answering these questions:

• Was your problem solved? Did a new problem arise?
• What went right?
• What went wrong?
• What circumstances changed?
• Was there anything you didn't account for?
• What was easy about implementing your plan?
• What was difficult about implementing your plan?

Financial obstacles can often seem debilitating and impossible to overcome. They often create a significant source of financial anxiety . We hope this lesson will help give you the confidence to take on your problem one step at a time so you can conquer your anxiety and move forward.

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10 Step Process for Effective Business Problem Solving

Posted august 3, 2021 by harriet genever.

When you start a small business or launch a startup, the one thing you can count on is the unexpected. No matter how thoroughly you plan, forecast , and test, problems are bound to arise. This is why as an entrepreneur, you need to know how to solve business problems effectively.

What is problem solving in business?

Problem solving in business relates to establishing processes that mitigate or remove obstacles currently preventing you from reaching strategic goals . These are typically complex issues that create a gap between actual results and your desired outcome. They may be present in a single team, operational process, or throughout your entire organization, typically without an immediate or obvious solution. 

To approach problem solving successfully, you need to establish consistent processes that help you evaluate, explore solutions, prioritize execution, and measure success. In many ways, it should be similar to how you review business performance through a monthly plan review . You work through the same documentation, look for gaps, dig deeper to identify the root cause, and hash out options. Without this process, you simply cannot expect to solve problems efficiently or effectively. 

Why problem solving is important for your business

While some would say problem-solving comes naturally, it’s actually a skill you can grow and refine over time. Problem solving skills will help you and your team tackle critical issues and conflicts as they arise. It starts from the top. You as the business owner or CEO needing to display the type of level-headed problem solving that you expect to see from your employees.

Doing so will help you and your staff quickly deal with issues, establish and refine a problem solving process, turn challenges into opportunities, and generally keep a level head. Now, the best business leaders didn’t just find a magic solution to solve their problems, they built processes and leveraged tools to find success. And you can do the same.

By following this 10-step process, you can develop your problem-solving skills and approach any issue that arises with confidence. 

1. Define the problem

When a problem arises, it can be very easy to jump right into creating a solution. However, if you don’t thoroughly examine what led to the problem in the first place, you may create a strategy that doesn’t actually solve it. You may just be treating the symptoms.

For instance, if you realize that your sales from new customers are dropping, your first inclination might be to rush into putting together a marketing plan to increase exposure. But what if decreasing sales are just a symptom of the real problem? 

When you define the problem, you want to be sure you’re not missing the forest for the trees. If you have a large issue on your hands, you’ll want to look at it from several different angles:

Competition 

Is a competitor’s promotion or pricing affecting your sales? Are there new entrants in your market? How are they marketing their product or business?

Business model 

Is your business model sustainable? Is it realistic for how fast you want to grow? Should you explore different pricing or cost strategies?

Market factors

How are world events and the nation’s economy affecting your customers and your sales?

Are there any issues affecting your team? Do they have the tools and resources they need to succeed? 

Goal alignment 

Is everyone on your team working toward the same goal ? Have you communicated your short-term and long-term business goals clearly and often?

There are a lot of ways to approach the issue when you’re facing a serious business problem. The key is to make sure you’re getting a full snapshot of what’s going on so you don’t waste money and resources on band-aid solutions. 

Going back to our example, by looking at every facet of your business, you may discover that you’re spending more on advertising than your competitors already. And instead, there’s a communication gap within your team that’s leading to the mishandling of new customers and therefore lost sales. 

If you jumped into fixing the exposure of your brand, you would have been dumping more money into an area you’re already winning. Potentially leading to greater losses as more and more new customers are dropped due to poor internal communication.

This is why it’s so vital that you explore your blind spots and track the problem to its source.

2. Conduct a SWOT analysis

All good businesses solve some sort of problem for customers. What if your particular business problem is actually an opportunity, or even a strength if considered from a different angle? This is when you’d want to conduct a SWOT analysis to determine if that is in fact the case.

SWOT is a great tool for strategic planning and bringing multiple viewpoints to the table when you’re looking at investing resources to solve a problem. This may even be incorporated in your attempts to identify the source of your problem, as it can quickly outline specific strengths and weaknesses of your business. And then by identifying any potential opportunities or threats, you can utilize your findings to kickstart a solution. 

3. Identify multiple solutions with design thinking

As you approach solving your problem, you may want to consider using the design thinking approach . It’s often used by organizations looking to solve big, community-based problems. One of its strengths is that it requires involving a wide range of people in the problem-solving process. Which leads to multiple perspectives and solutions arising.

This approach—applying your company’s skills and expertise to a problem in the market—is the basis for design thinking.

It’s not about finding the most complex problems to solve, but about finding common needs within the organization and in the real world and coming up with solutions that fit those needs. When you’re solving business problems, this applies in the sense that you’re looking for solutions that address underlying issues—you’re looking at the big picture.

4. Conduct market research and customer outreach

Market research and customer outreach aren’t the sorts of things small business owners and startups can do once and then cross off the list. When you’re facing a roadblock, think back to the last time you did some solid market research or took a deep dive into understanding the competitive landscape .

Market research and the insights you get from customer outreach aren’t a silver bullet. Many companies struggle with what they should do with conflicting data points. But it’s worth struggling through and gathering information that can help you better understand your target market . Plus, your customers can be one of the best sources of criticism. It’s actually a gift if you can avoid taking the negatives personally .

The worst thing you can do when you’re facing challenges is isolating yourself from your customers and ignore your competition. So survey your customers. Put together a competitive matrix . 

5. Seek input from your team and your mentors

Don’t do your SWOT analysis or design thinking work by yourself. The freedom to express concerns, opinions, and ideas will allow people in an organization to speak up. Their feedback is going to help you move faster and more efficiently. If you have a team in place, bring them into the discussion. You hired them to be experts in their area; use their expertise to navigate and dig deeper into underlying causes of problems and potential solutions.

If you’re running your business solo, at least bring in a trusted mentor. SCORE offers a free business mentorship program if you don’t already have one. It can also be helpful to connect with a strategic business advisor , especially if business financials aren’t your strongest suit.

Quoting Stephen Covey, who said that “strength lies in differences, not in similarities,” speaking to the importance of diversity when it comes to problem-solving in business. The more diverse a team is , the more often innovative solutions to the problems faced by the organization appear.

In fact, it has been found that groups that show greater diversity were better at solving problems than groups made up specifically of highly skilled problem solvers. So whoever you bring in to help you problem-solve, resist the urge to surround yourself with people who already agree with you about everything.

6. Apply lean planning for nimble execution

So you do your SWOT analysis and your design thinking exercise. You come up with a set of strong, data-driven ideas. But implementing them requires you to adjust your budget, or your strategic plan, or even your understanding of your target market.

Are you willing to change course? Can you quickly make adjustments? Well in order to grow, you can’t be afraid to be nimble . 

By adopting the lean business planning method —the process of revising your business strategy regularly—you’ll be able to shift your strategies more fluidly. You don’t want to change course every week, and you don’t want to fall victim to shiny object thinking. But you can strike a balance that allows you to reduce your business’s risk while keeping your team heading in the right direction.

Along the way, you’ll make strategic decisions that don’t pan out the way you hoped. The best thing you can do is test your ideas and iterate often so you’re not wasting money and resources on things that don’t work. That’s Lean Planning .

7. Model different financial scenarios

When you’re trying to solve a serious business problem, one of the best things you can do is build a few different financial forecasts so you can model different scenarios. You might find that the idea that seemed the strongest will take longer than you thought to reverse a negative financial trend. At the very least you’ll have better insight into the financial impact of moving in a different direction.

The real benefit here is looking at different tactical approaches to the same problem. Maybe instead of increasing sales right now, you’re better off in the long run if you adopt a strategy to reduce churn and retain your best customers. You won’t know unless you model a few different scenarios. You can do this by using spreadsheets, and a tool like LivePlan can make it easier and quicker.

8. Watch your cash flow

While you’re working to solve a challenging business problem, pay particular attention to your cash flow and your cash flow forecast . Understanding when your company is at risk of running out of cash in the bank can help you be proactive. It’s a lot easier to get a line of credit while your financials still look good and healthy, than when you’re one pay period away from ruin.

If you’re dealing with a serious issue, it’s easy to start to get tunnel vision. You’ll benefit from maintaining a little breathing room for your business as you figure out what to do next.

9. Use a decision-making framework

Once you’ve gathered all the information you need, generated a number of ideas, and done some financial modeling, you might still feel uncertain. It’s natural—you’re not a fortune-teller. You’re trying to make the best decision you can with the information you have.

This article offers a really useful approach to making decisions. It starts with putting your options into a matrix like this one:

Use this sort of framework to put everything you’ve learned out on the table. If you’re working with a bigger team, this sort of exercise can also bring the rest of your team to the table so they feel some ownership over the outcome.

10. Identify key metrics to track

How will you know your problem is solved? And not just the symptom—how will you know when you’ve addressed the underlying issues? Before you dive into enacting the solution, make sure you know what success looks like.

Decide on a few key performance indicators . Take a baseline measurement, and set a goal and a timeframe. You’re essentially translating your solution into a plan, complete with milestones and goals. Without these, you’ve simply made a blind decision with no way to track success. You need those goals and milestones to make your plan real .

Problem solving skills to improve

As you and your team work through this process, it’s worth keeping in mind specific problem solving skills you should continue to develop. Bolstering your ability, as well as your team, to solve problems effectively will only make this process more useful and efficient. Here are a few key skills to work on.

Emotional intelligence

It can be very easy to make quick, emotional responses in a time of crisis or when discussing something you’re passionate about. To avoid making assumptions and letting your emotions get the best of you, you need to focus on empathizing with others. This involves understanding your own emotional state, reactions and listening carefully to the responses of your team. The more you’re able to listen carefully, the better you’ll be at asking for and taking advice that actually leads to effective problem solving.

Jumping right into a solution can immediately kill the possibility of solving your problem. Just like when you start a business , you need to do the research into what the problem you’re solving actually is. Luckily, you can embed research into your problem solving by holding active reviews of financial performance and team processes. Simply asking “What? Where? When? How?” can lead to more in-depth explorations of potential issues.

The best thing you can do to grow your research abilities is to encourage and practice curiosity. Look at every problem as an opportunity. Something that may be trouble now, but is worth exploring and finding the right solution. You’ll pick up best practices, useful tools and fine-tune your own research process the more you’re willing to explore.

Brainstorming

Creatively brainstorming with your team is somewhat of an art form. There needs to be a willingness to throw everything at the wall and act as if nothing is a bad idea at the start. This style of collaboration encourages participation without fear of rejection. It also helps outline potential solutions outside of your current scope, that you can refine and turn into realistic action.

Work on breaking down problems and try to give everyone in the room a voice. The more input you allow, the greater potential you have for finding the best solution.

Decisiveness

One thing that can drag out acting upon a potential solution, is being indecisive. If you aren’t willing to state when the final cutoff for deliberation is, you simply won’t take steps quickly enough. This is when having a process for problem solving comes in handy, as it purposefully outlines when you should start taking action.

Work on choosing decision-makers, identify necessary results and be prepared to analyze and adjust if necessary. You don’t have to get it right every time, but taking action at the right time, even if it fails, is almost more vital than never taking a step.  

Stemming off failure, you need to learn to be resilient. Again, no one gets it perfect every single time. There are so many factors in play to consider and sometimes even the most well-thought-out solution doesn’t stick. Instead of being down on yourself or your team, look to separate yourself from the problem and continue to think of it as a puzzle worth solving. Every failure is a learning opportunity and it only helps you further refine and eliminate issues in your strategy.

Problem solving is a process

The key to effective problem-solving in business is the ability to adapt. You can waste a lot of resources on staying the wrong course for too long. So make a plan to reduce your risk now. Think about what you’d do if you were faced with a problem large enough to sink your business. Be as proactive as you can.

Editor’s note: This article was originally published in 2016. It was updated in 2021.

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Harriet Genever

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Consultant Toolbox: Frameworks for Solving Anything

When something is not right in a business, it can be confusing knowing where to start to fix it. Objective frameworks like issue trees, funnel analysis, and business canvases provide an organized and data-driven way of getting to the root of a problem and give cast-iron evidence toward plotting a route forward.

When something is not right in business, the sincere urgency to try and fix it immediately can result in a haphazard approach. During an unstructured firefight, a hypothesis will be taken that a particular area is definitely not right, and the validity of it won’t be tested beyond just the depth of a hunch. Or, those tasked with fixing things will spread themselves around many areas, resulting in a dilutive, reactive effect.

Making a plan of attack for putting out a fire is neither indecisive nor an exercise in time-wasting. There’s nothing wrong with taking a step back to assess the situation. Here, I will share some methods for business problem solving - beginning with appraising problems, then onto some area-specific tests for digging deeper into the root cause.

Business problems tend to manifest in quantitative ways: e.g., sales have fallen. Yet, their symptoms may be derived from qualitative factors: e.g., culture. While I will focus more on objective reasoning, I will conclude with some thoughts on rectifying the more subjective elements that manifest in the root cause of business problems.

Isolating Problems: Issue Trees

Income statements.

The core skills a finance professional learns early in their career and leans upon throughout the rest of it is the ability to read a financial statement and translate it into “words” for the layman. The supplementary notes to the financial statements are meant to provide such illumination but can oftentimes obfuscate root causes or just further frustrate with jargon.

One of the best ways to kick off a firefight is to use an issue tree analysis to pinpoint what has happened financially that has led to the problem at hand. While at first, it may be evident that “sales have fallen,” an issue tree analysis may identify a degree of mutual exclusivity with other factors that may have had a secondary effect on the headline figure.

Issue trees should be built following the MECE business problem solving framework, where everything is captured in a m utually e xclusive, c ollectively e xhaustive manner down to the smallest fragments. When applied to an income statement, it can help to break the numbers down and isolate the issue.

Example of a Profitability Issue Tree

Not only does this allow the analyst to pinpoint the root cause of the issue, but it also provides a very clear way of demonstrating it visually.

Isolating which ratio has resulted in underperformance will then turn focus to efforts on rectifying the issue at hand in a more concerted way. For example, if sales have fallen due to price cuts in a specific geography, instead of castigating other regional sales teams, the company can focus efforts in a more proactive way on the problem territory.

Further Work

• Funnel analysis : Mapping out the conversion steps customers go through is a particularly useful exercise and one that should be done on an ongoing basis. Looking back at a period when sales dropped will help to identify the most painful point in the chain where customers dropped out.
• Business as usual : Costs required to keep the lights on and operate (e.g., head office rent)
• Unavoidable : Costs that are necessary to be “in the game” (e.g., company registration licenses)
• Secret sauce : What contributes to the differentiation that builds the competitive advantage of the business? (e.g., a star designer, an IP license agreement, etc.)
• Not required : Costs that do not objectively backtrack toward clearly assisting sales (e.g., old software that has replicated functionality in a more modern suite)
• Return on talent . Segmenting and appraising staff by their role within a business line helps to understand whether certain areas are bloated and/or underserved. This can be useful for back-office roles that only serve one function versus being central across the organization. Correctly mapping staff (an issue tree works here too) can lead to correctly adjusting cost accounting measures of apportioning out staff costs to correct business units.

Balance Sheets

Issue trees can be expanded upon to include balance sheet related components if the problem is related to the broader financial health of the business. Frameworks such as DuPont analysis can combine income statement metrics with those of the company’s leverage to pinpoint the areas implicating issues with return on equity (ROE).

For older businesses that have more dividend-centric shareholder bases (e.g., banks) - who aren’t solely looking at a topline metric expansion (e.g., VCs) - relative income returns to equity capitalization are paramount. While a business may be profitable, if it’s being funded by a disproportionately larger equity base, it may not be financially efficient relative to the opportunity cost.

DuPont Analysis Issue Tree

ROE is essential in an industry such as banking, which has in recent years been stuck at low levels . While on the face of it, a profitable bank may appear sound, using a DuPont issue tree to assess the interconnectivity of the income statement and balance sheet will uncover that while profits may have risen if equity has been recapitalized upward, it won’t lead to higher relative returns on equity.

In the face of lower interest rates , we have seen banks retrench from certain areas in order to increase their profitability with a view to enhancing their ROEs.

By again using a MECE mentality to list all factors, what a DuPont issue tree result shows is an almost complete financial picture of the company in a far more digestible manner than streams of spreadsheets and financial statements.

Liquidity: Cash Conversion Cycle

The cash conversion cycle is a metric regularly calculated by potential lenders and investors of a business. It assesses how quickly a firm can convert its operating activities into realized cash. The longer the cycle, the less liquid the business is in, and this, if left unchecked, can escalate and bring about serious implications. For example:

• Over time, creditors may extend less leeway or put more onerous terms on payables/short-term loans.
• Chasing sales too aggressively can result in too many receivables being extended to customers.
• Inventory build-ups result in fire sales that affect margins.

The formula for calculating the cash conversion cycle is as follows:

Cash conversion cycle = days inventory outstanding + days sales outstanding - days payable outstanding

Days inventory outstanding = average inventory in period / cost of goods sold * 365 Days sales outstanding = average accounts receivable in period / revenue * 365 Days payable outstanding = average accounts payable in period / cost of goods sold * 365

Graphically, the diagram below shows how the cash conversion cycle fits into the operating cycle of a company.

Cash Conversion Cycle Within the Operating Cycle of a Business

Continual monitoring of the cash conversion cycle will allow managers to be more on the front foot about changes happening to their liquidity positions. If a certain tolerance of acceptable days is extended to each part, once triggered, a review can occur in the specific area.

Once identified, further analysis can uncover the root cause, such as:

• Accounts receivables aging report : To dig into arrears of potential problem customers and specific trends over time. This should, in turn, lead to a review of the collections process.
• Lender stress test : Most corporates have a Rolodex of banks and suppliers that extend credit, which can be drawn upon to provide immediate liquidity. A stress test of these (e.g., drawing them all down at once) can test for whether external credit views of the business have changed.
• Inventory turnover ratio (COGS/Average inventory) : This helps to determine how quickly inventory is “turned” in terms of being sold off. Compiling this analysis for individual SKUs and geographies can help work toward whether a specific product has an issue.
• Liquidity horizon : By taking all assets and liabilities of the business and netting off their tenors (or expected time to liquidate), an analyst can determine the financial life horizon of an entity. Such an exercise is vital in financial services but also quite pertinent for businesses that operate with short-term liabilities and long-term assets. If it’s noticed that a company is operating with a very short horizon, it may become obvious that the stress is spilling over into the income statement through decreased sales margins and lower-quality units of production.

Starting a Turnaround: Business Canvas Exercises

After moving on from the financials, a business model canvas exercise allows for a deeper understanding of the commercial fabric of the business and how attuned the operation is to consumer needs. This is where a more qualitative insight comes into play. While the profitability tree may show that sales volume has dropped in a certain geography, it will not be particularly evident as to why this is happening. A canvas exercise will help to dig into the operational aspects of this issue.

Creating a canvas for the entire business will help to provide an eagle-eye view of the current operation. Most companies only ever touch on this kind of overview when writing their initial business plan. Aside from then potentially never reviewing it again, a verbose business plan may struggle to come to life in the eyes of the reader. A canvas exercise is both regularly reviewed and very expressive to conceptualize when read.

The Business Model Canvas

In terms of what these boxes mean, below are brief explanations and examples.

• Key partners : Outside stakeholders that assist the business model (e.g., having an exclusivity agreement with a local best-in-class logistics provider)
• Key activities : What are the most important things done by the business that allow its business model to work? (e.g., having a streamlined product development team that gets new releases out quickly)
• Key resources : The most valuable assets (financial, human, physical, and intellectual property) required for the business to excel (e.g., a key patent)
• Value propositions : This must explain succinctly why customers go to the business, what value they get from it, and what problem is solved.
• Customer relationships : How do customers interact with the business - is it a self-serve, long-term relationship or one that is merely transactional?
• Channels : How do customers want to reach the business and how are they currently being served?
• Customer segments : Who does the business deliver value to, which segment is the most important?
• Cost structure : What are the most prominent costs in the business and how much does it cost to deliver the key resources and activities?
• Revenue streams : How does the business make money from customers - is it on a recurring basis or one-off transactions?

Once complete, this exercise should help to uncover some red flags, depending on which box will determine how serious they are. For example, if a business struggles to settle on its key value proposition, then it will be quite evident why financials have underperformed and that a more profound turnaround effort is required. Yet, if it’s uncovered that customers desire a heavy touch approach to onboarding and support, and the business is currently offering a self-service model, the focus can quickly switch toward tweaking the plan.

Whenever I work on a project, irrespective of whether it’s forward-facing or a firefight, a canvas is the first thing I do. It helps to focus on the unique advantages that a business has and how it is capitalizing upon them in the market.

Product Market Fit: Jobs to Be Done

When addressing sales issues, the default approach can tend to be adjusting the seller’s manner of conducting sales. It is a rather binary assumption that spending more on marketing, adding more salespeople, or tweaking a website will help sales in a linear (or exponential) fashion. While all of these tactics are indeed valid approaches, they are enacted under the paradigm of appeasing the seller’s needs and having a slightly arrogant attitude toward assuming that customers will want what is being delivered to them.

What can go unnoticed here is what the consumer actually wants and how the product/service serves their needs. Jobs To Be Done (JTBD) is a concept developed by Clayton Christensen at Harvard Business School, centered around a mentality of serving the needs customers are trying to fulfill from using a product or service. He says that “we hire products to do jobs for us.” While this may sound vague at first, the genesis of his idea - which came from studying commuters using McDonald’s drive-thru to buy milkshakes - explains it vividly.

The JTBD theory states that customers have three “jobs” they are trying to get done: functional, emotional, and consumption-led.

• Functional: Reaching a fixed outcome that is measured by speed and accuracy
• Emotional: How a customer wants to feel and be perceived by others while doing the job
• Consumption: Jobs that must be done to enable a solution elsewhere

The last two are usually derivatives of functional jobs, which is the key job to be done. A visible way to see whether a company espouses JTBD thinking is when their products are named and targeted at outcomes people want to achieve. For example, LinkedIn Premium is not just one generic product but a number of tiered services aimed at users, whether they are job hunting or hunting for talent to fill other jobs.

Below are some tips for instilling a JTBD mentality in business.

Remove Bias from Surveys and Customer Outreach

When I was in graduate school, whenever group work involved testing a hypothesis for a business idea, groups would create surveys for their classmates, usually with the explicit goal of validating what they wanted to hear. Questions would go along the lines of:

“How would you feel about purchasing an internet-of-things connected teapot?”

Aside from the sample bias of sending a survey to a homogeneous stratum of classmates (i.e., similar psychographics), using such leading questions can corrupt a survey and fail to understand what needs the customer wants to fulfill. Questions like this return to the original point about companies trying to fit their round peg solution into a square hole. Remember when the iPhone came out? No one knew they wanted an iPhone before then, as they didn’t exist, so a leading question about their desires for one would have left consumers flummoxed.

Instead, a more useful question would be:

“When you prepare hot beverages, what do you do during the boiling period?”

Answers to this question would provide more insight into the job being done by the drinker and, thus, how the provider could serve them.

Job Statements

Writing down job statements for the jobs customers are doing helps to really simplify what it is they are doing and why. Statements are constructed using three parts: a verb, an object, and a contextual modifier. Here are some varied examples for products/services that have been tailored toward specific jobs consumers want done:

Once complete, job statements can be a powerful and concise way of remembering what it is customers are doing and how a business can strive toward making the contextual modifier as seamless as possible for them.

Outcome Expectations

Further to compiling job statements, work toward understanding the outcome expectations for both your customers and your business for the desired and undesired outcomes of the provision. Understanding the needs and avoidances of both parties serves to uncover friction that may appear during a service. For example, a taxi rider wants to get to a destination as soon as possible, while a driver will not want to break speed laws. Marrying these two frictions together can assist with uncovering stumbling points in service delivery and reaching the most optimal compromise.

Find Customer Workarounds

Look at data clues and customer patterns for how they are purchasing and using the service. If they are doing specific workarounds (e.g., ordering a product on specific days, using an app more than a browser, etc.), consider why this is happening and how that is fulfilling their needs more than how you initially intended.

Firefights Are Inevitable, so at Least Be Prepared

The more a business plans its activities using objective metrics, the less time it has to spend finding the causes of problems when they occur. Referring back to the introduction, when I mentioned qualitative issues, in a roundabout way, they can be the main reason why problems begin to occur quantitatively. Oftentimes, when budgets are set, they are done in a siloed manner, which can ignore debilitating competitive friction between teams, or the butterfly effect of one team’s goals negatively affecting another’s.

A balanced scorecard is a simple but effective way to appraise business performance on an ongoing basis and monitor the key metrics that contribute to holistic success. Such a method also accounts for the qualitative issues that can eventually spill over into finances. Goals and quantitative measures are collected along four key lines:

• Learning and Growth: Can we continue to improve and create value?
• Business Processes: What must we excel at?
• Customer Perspectives: How do customers see us?
• Financial Data: How do we look to shareholders?

Each focuses on the aspects that matter to the core stakeholders of a business: investors, employees, customers, and non-human assets. Applying quantitative goals and prescribing how they will be measured ensures that periodically, they can be reviewed and then measures put in place to rectify underperformance. While firefights are almost always inevitable in business, having a firehose on hand and with water in the tank ensures that a response can be immediate and effective.

Further Reading on the Toptal Blog:

• The Undeniable Importance of a Business Plan
• The Rules of Motivation: A Story About Correcting Failed Sales Incentive Schemes
• Working Capital Optimization: Practical Tips From a Pro
• Do Economic Moats Still Matter?
• Forecaster’s Toolbox: How to Perform Monte Carlo Simulations
• C Corp, S Corp, LLC? Finding the Best Fit for Your New Business

Understanding the basics

Why is a business model canvas important.

A business model canvas provides an eagle-eye view of the current operation and allows for a deeper understanding of the commercial fabric of the business and how attuned the operation is to consumer needs. There is a significant amount of qualitative insight required.

What is a problem tree analysis?

Problem trees list all of the factors that contribute to a final figure. For example, business profitability is affected by revenue and costs, so a problem tree will fork out toward those two factors.

• BestPractices
• BusinessModel
• Profitability

Alex Graham, CFA (deleted)

About the author.

Alex is a trained treasurer and CFA charterholder who has managed investments ranging from $3bn of bond assets to $15m Latin American micro-VC funds.

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How to Conduct a Problem-Solving Session with Finance?

In the fast-paced and dynamic world of finance, problem-solving skills are invaluable. Whether you are a financial manager, a business owner, or an aspiring finance professional, being able to effectively address and solve financial issues is crucial for success. In this article, we will explore the importance of problem-solving in finance and provide a step-by-step guide on how to conduct a problem-solving session with finance.

Understanding the Importance of Problem-Solving in Finance

Problem-solving is a fundamental skill in financial management. It involves identifying, analyzing, and resolving financial issues that may arise in a business or organizational setting. Successful problem-solving not only helps in mitigating risks but also contributes to the overall growth and profitability of a company.

When it comes to financial management, problem-solving plays a pivotal role in ensuring the smooth operation and sustainability of a business. Financial managers are responsible for making strategic decisions that can impact the organization’s financial performance. By effectively addressing problems and finding innovative solutions, financial managers can enhance financial stability, optimize resource allocation, and foster growth.

Effective problem-solving in finance offers numerous benefits. Firstly, it helps in identifying and rectifying financial inefficiencies, thus improving cost-effectiveness. For example, if a company is experiencing cash flow issues, a financial manager can analyze the problem and implement strategies to improve cash flow, such as negotiating better payment terms with suppliers or implementing more efficient billing processes.

Secondly, effective problem-solving in finance aids in identifying potential opportunities and enhancing revenue generation. Financial managers who are skilled problem solvers can identify market trends, analyze customer needs, and develop innovative financial strategies to capitalize on emerging opportunities. This could involve launching new products or services, entering new markets, or implementing cost-saving measures.

Moreover, successful problem-solving fosters teamwork, promotes critical thinking, and strengthens decision-making abilities within the finance department. When financial managers and their teams work together to solve complex financial problems, it encourages collaboration and knowledge sharing. This not only leads to better problem-solving outcomes but also cultivates a culture of continuous improvement and learning within the organization.

Preparing for a Problem-Solving Session

Before conducting a problem-solving session, thorough preparation is essential to ensure its effectiveness. Here are the key steps involved:

Identifying the Financial Issues at Hand

The first step is to clearly identify the financial issues that need to be addressed. This could include problems with cash flow, budgeting, financial reporting, investment decisions, or any other challenge affecting the financial performance of the organization.

For example, if the organization is experiencing cash flow problems, it is important to determine the root cause of the issue. Is it due to slow-paying customers, high expenses, or ineffective collection procedures? By identifying the specific financial issues, the problem-solving session can be focused and targeted.

Gathering Relevant Financial Data

Once the issues have been identified, gather all the relevant financial data that is necessary for analysis and decision-making. This may include financial statements, sales reports, budget details, and any other financial information related to the problem at hand.

For instance, if the problem is related to budgeting, it is crucial to gather information on the organization’s current budget, actual expenses, and projected revenue. This data will provide a comprehensive understanding of the financial situation and enable the team to make informed decisions during the problem-solving session.

Assembling the Right Team for the Session

Next, assemble a team of individuals who possess the required expertise and knowledge to contribute to problem-solving. This could include financial analysts, accountants, business strategists, and other relevant stakeholders. Ensure that the team members have diverse perspectives and can bring fresh insights to the table.

For example, having a financial analyst on the team can provide valuable insights into financial data analysis and forecasting. An accountant can offer expertise in identifying financial discrepancies and suggesting corrective measures. By assembling a diverse team, the problem-solving session can benefit from a wide range of perspectives and expertise.

Additionally, it is important to consider the dynamics of the team. Are the members able to collaborate effectively? Do they have good communication skills? These factors can significantly impact the success of the problem-solving session.

Conducting the Problem-Solving Session

Once the preparation phase is complete, it’s time to conduct the problem-solving session. Follow these steps to ensure a productive and efficient session:

Before diving into the problem-solving session, it is important to understand the significance of this phase. This is where the real work happens, where ideas are shared, and solutions are generated. It is a collaborative effort that requires effective communication and critical thinking.

Setting the Agenda for the Meeting

Start by setting a clear agenda for the problem-solving session. Outline the goals, objectives, and topics that need to be discussed during the meeting. This ensures that everyone is aware of the purpose of the session and can come prepared with relevant information and ideas.

When setting the agenda, consider the time constraints and prioritize the most pressing issues. This will help keep the session focused and ensure that valuable time is not wasted on less important matters.

Facilitating Open and Constructive Dialogue

During the session, encourage open and constructive dialogue among the team members. Create a safe and non-judgmental environment where everyone feels comfortable expressing their opinions and challenging existing beliefs. This fosters creativity and innovation, leading to better problem-solving outcomes.

As the facilitator, it is important to actively listen to each team member and ensure that their voices are heard. Encourage active participation and discourage any form of dominance or bias. This will help create a collaborative atmosphere where diverse perspectives can be explored.

Utilizing Problem-Solving Techniques in Finance

There are several problem-solving techniques that can be applied in a finance context. These include brainstorming, SWOT analysis, financial modeling, cost-benefit analysis, and root cause analysis, among others. Apply the appropriate techniques to systematically analyze the financial issues and generate potential solutions.

Brainstorming is a valuable technique that allows team members to freely share their ideas and thoughts without any judgment. This can lead to innovative solutions that may not have been considered otherwise. SWOT analysis helps identify the strengths, weaknesses, opportunities, and threats associated with the problem at hand. Financial modeling allows for a quantitative analysis of different scenarios, helping to evaluate the potential outcomes of each solution.

Cost-benefit analysis helps weigh the financial costs and benefits of each solution, enabling decision-makers to make informed choices. Root cause analysis helps identify the underlying causes of the problem, allowing for targeted solutions that address the core issues.

By utilizing these problem-solving techniques, the team can approach the financial issues from different angles, ensuring a comprehensive analysis and a wider range of potential solutions.

Remember, the problem-solving session is not just about finding a quick fix. It is about understanding the problem, exploring various options, and making informed decisions that will have a positive impact on the financial health of the organization.

Post-Session Actions and Follow-ups

Once the problem-solving session is over, there are critical steps to take to ensure the proposed solutions are implemented effectively:

Analyzing the Results of the Session

Review and analyze the outcomes of the problem-solving session. This step is crucial as it allows for a comprehensive understanding of the proposed solutions and their potential impact on the organization. By carefully evaluating the feasibility, potential impact, and alignment with the organization’s goals, finance professionals can make informed decisions on which solutions to prioritize.

During the analysis, it is essential to consider various factors, such as the resources required for implementation, the potential risks involved, and the expected timeline for achieving the desired outcomes. By conducting a thorough evaluation, finance professionals can identify the most viable options and prioritize them based on their urgency and significance.

Implementing the Proposed Solutions

Once the proposed solutions have been analyzed and prioritized, the next step is to develop an actionable plan for their implementation. This plan should outline the specific steps required to execute each solution effectively.

Assigning responsibilities is a critical aspect of the implementation process. By clearly defining who is accountable for each task, finance professionals can ensure that everyone involved understands their role and can contribute to the successful execution of the solutions. Additionally, setting deadlines is crucial to keep the implementation process on track and avoid unnecessary delays.

Furthermore, allocating the necessary resources is essential for the successful implementation of the proposed solutions. This includes financial resources, human resources, and any other required assets. By ensuring that the necessary resources are available, finance professionals can increase the likelihood of achieving the desired outcomes.

Effective implementation also requires clear communication and coordination among all stakeholders. Regular updates and progress reports should be shared to keep everyone informed and aligned. Additionally, monitoring the progress of the implementation is vital to identify any potential issues or roadblocks early on and take corrective actions as needed.

Monitoring the Impact of Implemented Solutions

Implementing the proposed solutions is not the end of the problem-solving process. It is crucial to regularly monitor the impact of the implemented solutions on the financial performance of the organization. This step allows finance professionals to assess the effectiveness of the solutions and make any necessary adjustments to optimize the outcomes.

Tracking relevant key performance indicators (KPIs) is an effective way to measure the impact of the implemented solutions. These KPIs can include financial metrics, such as revenue growth, cost savings, and profitability, as well as non-financial metrics, such as customer satisfaction and employee productivity. By monitoring these indicators, finance professionals can gain valuable insights into the success of the implemented solutions and identify areas for improvement.

Continuous feedback gathering is also essential in monitoring the impact of the implemented solutions. By seeking input from various stakeholders, including employees, customers, and partners, finance professionals can gain a holistic understanding of the outcomes and identify any potential issues or areas of improvement.

Based on the feedback and performance data gathered, finance professionals can make necessary adjustments to optimize the outcomes of the implemented solutions. This iterative approach ensures that the organization remains agile and responsive to changing circumstances.

In conclusion, conducting a problem-solving session with finance is an essential process for mitigating financial risks and driving organizational growth. By understanding the importance of problem-solving in finance, adequately preparing for the session, conducting it effectively, and taking post-session actions and follow-ups, finance professionals can effectively address financial challenges and steer their organizations toward success.

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5 Common Financial Problems That Small Businesses Face

Surviving as a small business was challenging even before the coronavirus pandemic, with only about half of small businesses keeping their doors open for at least five years and only about a third lasting 10 years.

The pandemic has worsened already challenging conditions, per a recent Small Business Pulse Survey by the U.S. Census Bureau, which gauges the impact of the pandemic on small businesses.

Only 28% reported they had enough cash on hand to operate for three months. And nearly 50% expected it would take more than six months for business to return to the level it was at a year ago. Nearly 80% have requested Paycheck Protection Program (PPP) loans .

Every four years, the National Federation of Independent Businesses (NFIB) surveys small businesses as part of its Problems and Priorities Survey . It just released its 2020 results, collected right before the U.S. economy really began feeling the impact of the coronavirus. Results point to some prominent problems—such as financing—that will likely worsen post-pandemic. Other issues include customer loss, the cost of health insurance and finding qualified employees.

5 Common Financial Problems that Small Businesses Face

1. loss of customers.

Customer retention is a perennial concern, and tracking retention and churn rates is a good way to measure the effectiveness of different tactics to minimize customer loss . Mixpanel analyzed anonymized data from 1.3 billion users to come up with benchmarks for customer retention and found the average eight-week retention rate across industries is 20%.

To calculate retention rate , take the number of customers at the end of a certain period and subtract the number of customers acquired during that period. Then divide that number by the number of customers at the start of the period, and multiply that by 100 for a percentage.

Small changes in retention rate can make a big difference in profits. An oft-quoted Bain & Company statistic says that by increasing customer retention rate by 5%, a business can increase its profits by 25-95% . 

To increase customer retention, look at ways to increase customer loyalty , as the cost of acquiring new customers is much higher than keeping existing ones. Tactics include instituting loyalty programs, offering customers exclusive discounts and developing easy ways to solicit feedback from customers. Make sure you’re connecting with clients frequently so you can address any concerns quickly.

2. Pressure from Credit Sources

The most common source of capital to finance business expansion is personal and family savings, followed by using the business’s profits and assets, getting business loans from financial institutions and obtaining business credit cards.

The Federal Reserve Banks’ Small Business Credit Survey (SBCS) shows that securing credit and making payments on debt are the second- and third-biggest financial challenges, behind paying operating expenses (including payroll). The most common types of external financing for small businesses are loans and lines of credit.

In that same survey, small businesses owners reported they most often use a personal guarantee to receive financing, with 88% relying on an owner’s personal credit score. Additionally, 86% of firms said they would need to find new funding or reduce costs if their business didn’t see revenue for two months. In that scenario, 46% of companies that had applied for financing in the past 12 months would likely take out additional debt.

What’s more, some 40% of firms surveyed by the SBCS were already holding outstanding debt of up to $100,000. And that’s before the pandemic hit.

One of the major ways small businesses have been able to protect jobs is with cash influxes from the PPP, loans that the government will forgive as long as certain conditions are met . While there is no data on the companies that applied for loans under $150,000, data from the Small Business Administration said PPP loans have supported 51.1 million jobs, or up to 84% of all small business employees. The average PPP loan was for $107,000, and 85.6% of all loans were for less than $150,000.

One way small businesses can ensure they don’t take on more debt from this program than expected is to diligently and accurately track expenses covered by the loans, so they have the documentation to prove where they spent the money.

3. Repeated Loan Refinancing

Another way businesses may look for cash is by refinancing loans.

When the business took out its first loan, the terms may not have been as favorable as they are when the organization has been making money for a few years. For business owners who have improved their credit scores, increased revenue or increased the value of assets, LendingTree says refinancing a loan may be a good idea. Rates could be more favorable and payments will be lower, which means more cash the business can use.

It’s no wonder, then, that the Federal Reserve’s SBCS survey revealed 30% of those seeking financing are doing so to refinance or pay down debt, with most seeking amounts between $50,000 and $100,000.

While refinancing is a common practice, doing so to cover operating expenses could signal trouble. If a small business owner used their own credit score to secure a loan, refinancing debt will lower that person’s credit score, possibly affecting their personal financial standing. Small business owners also need to consider whether there are penalties for paying off the old loan early. If those penalties outweigh the benefits of refinancing, it’s not a good idea.

While a borrower may refinance in order to shorten the loan term, this is unlikely to be the case if the goal is to reduce monthly expenses. The benefits of a lower interest rate are partially offset by an increase in total debt, as refinancing fees are often added to the total owed. Depending on the size of the debt, how much lower the new interest rate is and the company’s objectives, refinancing will likely extend the duration of a loan, or at best retain the current payment schedule.

4. Human Capital and Staffing Issues

This month’s NFIB Jobs Report showed 33% of businesses have at least one unfilled position, up three points from the previous month. Pre-coronavirus, small businesses said finding qualified labor was a top challenge in the NFIB’s Problems and Priorities survey. This was especially true in the construction and manufacturing industries.

The biggest related problem small businesses have—and have identified as their top financial challenge for decades—is the cost of health insurance. It was No. 1 across every industry in the NFIB survey, which noted insurance costs have risen 43% over the last decade, outpacing both inflation and wages. Small businesses struggle to provide the health care packages larger businesses can and have resorted to shifting more of the costs to employees.

Generally, an individual will stay with an organization if the pay, working conditions and developmental opportunities are equal to or greater than the contributions (e.g., time and effort) required of the employee, per the Society of Human Resources Management (SHRM). Therefore, health insurance is a huge motivator in employee retention. Small businesses looking to control costs can negotiate for lower rates, shift to individual plans or look for plans on the Small Business Health Options (SHOP) exchange.

5. Poor Work Environment

SHRM says one in five Americans departed a job in the past five years because of poor company culture, and it estimates that turnover cost businesses a grand total of $223 billion—the most important factor to a strong company culture is the employee’s manager, followed by meaningful work and flexibility, commute times and professional development.

A “poor work environment” can also refer to one that is physically unsafe or enables harassment. Small businesses must be mindful of Occupational Safety and Health Administration (OSHA) requirements that organizations with 10 employees or more must follow. Adopting an effective safety and health program can save $4-6 for every $1 invested.

And employees can feel unsafe in their work environment for other reasons. According to the Equal Employment Opportunity Commission (EEOC) , retaliation continued to be the most common charge filed with the agency, followed by discrimination based on  disability, race and sex. The EEOC shares tips for preventing and handling common workplace issues, which can be costly to small businesses.

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How Financial and Accounting Software Can Help Solve Financial Problems

In preventing all of the above issues—or catching them before they become bigger problems—the organization needs to see and understand how cash is moving in and out of the business, and have total confidence in those numbers.

Accounting software gives companies visibility into all their revenue and expenses and allows them to track and analyze key financial metrics over time. Additionally, this software can automate accounts receivable processes to help reduce days sales outstanding and increase cash flow. It also helps business track bills and make the most of their payment terms to optimize accounts payable management, all while maintaining strong relationships with key suppliers. Finally, accounting software makes it easier for companies to provide financial statements and other essential information required to secure financing—or qualify for PPP loan forgiveness, to use a current example.

Having automated accounting processes also helps small business hold on to a very important part of their team—those in the finance organization. Robert Half’s 2020 Salary Guide said demand is high and supply is low for accounting and finance professionals in the U.S. Companies are holding on to good people by providing better pay, perks and advancement opportunities than competitors. With many mundane accounting tasks automated , accounting and finance team members can refine other skills, such as critical thinking and communication. And with a cloud-based accounting system, they can further improve on one of the most in-demand technology skills for accountants: proficiency with cloud-based systems.

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Effective Problem-Solving Techniques in Business

January 20, 2023

Purdue Online

Problem solving is an increasingly important soft skill for those in business. The Future of Jobs Survey by the World Economic Forum drives this point home. According to this report, complex problem solving is identified as one of the top 15 skills that will be sought by employers in 2025, along with other soft skills such as analytical thinking, creativity and leadership.

Dr. Amy David , clinical associate professor of management for supply chain and operations management, spoke about business problem-solving methods and how the Purdue University Online MBA program prepares students to be business decision-makers.

Why Are Problem-Solving Skills Essential in Leadership Roles?

Every business will face challenges at some point. Those that are successful will have people in place who can identify and solve problems before the damage is done.

“The business world is constantly changing, and companies need to be able to adapt well in order to produce good results and meet the needs of their customers,” David says. “They also need to keep in mind the triple bottom line of ‘people, profit and planet.’ And these priorities are constantly evolving.”

To that end, David says people in management or leadership need to be able to handle new situations, something that may be outside the scope of their everyday work.

“The name of the game these days is change—and the speed of change—and that means solving new problems on a daily basis,” she says.

The pace of information and technology has also empowered the customer in a new way that provides challenges—or opportunities—for businesses to respond.

“Our customers have a lot more information and a lot more power,” she says. “If you think about somebody having an unhappy experience and tweeting about it, that’s very different from maybe 15 years ago. Back then, if you had a bad experience with a product, you might grumble about it to one or two people.”

David says that this reality changes how quickly organizations need to react and respond to their customers. And taking prompt and decisive action requires solid problem-solving skills.

What Are Some of the Most Effective Problem-Solving Methods?

David says there are a few things to consider when encountering a challenge in business.

“When faced with a problem, are we talking about something that is broad and affects a lot of people? Or is it something that affects a select few? Depending on the issue and situation, you’ll need to use different types of problem-solving strategies,” she says.

Using Techniques

There are a number of techniques that businesses use to problem solve. These can include:

• Five Whys : This approach is helpful when the problem at hand is clear but the underlying causes are less so. By asking “Why?” five times, the final answer should get at the potential root of the problem and perhaps yield a solution.
• Gap Analysis : Companies use gap analyses to compare current performance with expected or desired performance, which will help a company determine how to use its resources differently or adjust expectations.
• Gemba Walk : The name, which is derived from a Japanese word meaning “the real place,” refers to a commonly used technique that allows managers to see what works (and what doesn’t) from the ground up. This is an opportunity for managers to focus on the fundamental elements of the process, identify where the value stream is and determine areas that could use improvement.
• Porter’s Five Forces : Developed by Harvard Business School professor Michael E. Porter, applying the Five Forces is a way for companies to identify competitors for their business or services, and determine how the organization can adjust to stay ahead of the game.
• Six Thinking Hats : In his book of the same name, Dr. Edward de Bono details this method that encourages parallel thinking and attempting to solve a problem by trying on different “thinking hats.” Each color hat signifies a different approach that can be utilized in the problem-solving process, ranging from logic to feelings to creativity and beyond. This method allows organizations to view problems from different angles and perspectives.
• SWOT Analysis : This common strategic planning and management tool helps businesses identify strengths, weaknesses, opportunities and threats (SWOT).

“We have a lot of these different tools,” David says. “Which one to use when is going to be dependent on the problem itself, the level of the stakeholders, the number of different stakeholder groups and so on.”

Each of the techniques outlined above uses the same core steps of problem solving:

• Identify and define the problem
• Consider possible solutions
• Evaluate options
• Choose the best solution
• Implement the solution
• Evaluate the outcome

Data drives a lot of daily decisions in business and beyond. Analytics have also been deployed to problem solve.

“We have specific classes around storytelling with data and how you convince your audience to understand what the data is,” David says. “Your audience has to trust the data, and only then can you use it for real decision-making.”

Data can be a powerful tool for identifying larger trends and making informed decisions when it’s clearly understood and communicated. It’s also vital for performance monitoring and optimization.

How Is Problem Solving Prioritized in Purdue’s Online MBA?

The courses in the Purdue Online MBA program teach problem-solving methods to students, keeping them up to date with the latest techniques and allowing them to apply their knowledge to business-related scenarios.

“I can give you a model or a tool, but most of the time, a real-world situation is going to be a lot messier and more valuable than what we’ve seen in a textbook,” David says. “Asking students to take what they know and apply it to a case where there’s not one single correct answer is a big part of the learning experience.”

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An online MBA from Purdue University can help advance your career by teaching you problem-solving skills, decision-making strategies and more. Reach out today to learn more about earning an online MBA with Purdue University .

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Why Problem-Solving Skills Are Essential for Leaders in Any Industry

• 17 Jan 2023

Any organization offering a product or service is in the business of solving problems.

Whether providing medical care to address health issues or quick convenience to those hungry for dinner, a business’s purpose is to satisfy customer needs .

In addition to solving customers’ problems, you’ll undoubtedly encounter challenges within your organization as it evolves to meet customer needs. You’re likely to experience growing pains in the form of missed targets, unattained goals, and team disagreements.

Yet, the ubiquity of problems doesn’t have to be discouraging; with the right frameworks and tools, you can build the skills to solve consumers' and your organization’s most challenging issues.

Here’s a primer on problem-solving in business, why it’s important, the skills you need, and how to build them.

Access your free e-book today.

What Is Problem-Solving in Business?

Problem-solving is the process of systematically removing barriers that prevent you or others from reaching goals.

Your business removes obstacles in customers’ lives through its products or services, just as you can remove obstacles that keep your team from achieving business goals.

Design Thinking

Design thinking , as described by Harvard Business School Dean Srikant Datar in the online course Design Thinking and Innovation , is a human-centered , solutions-based approach to problem-solving and innovation. Originally created for product design, design thinking’s use case has evolved . It’s now used to solve internal business problems, too.

The design thinking process has four stages :

• Clarify: Clarify a problem through research and feedback from those impacted.
• Ideate: Armed with new insights, generate as many solutions as possible.
• Develop: Combine and cull your ideas into a short list of viable, feasible, and desirable options before building prototypes (if making physical products) and creating a plan of action (if solving an intangible problem).
• Implement: Execute the strongest idea, ensuring clear communication with all stakeholders about its potential value and deliberate reasoning.

Using this framework, you can generate innovative ideas that wouldn’t have surfaced otherwise.

Creative Problem-Solving

Another, less structured approach to challenges is creative problem-solving , which employs a series of exercises to explore open-ended solutions and develop new perspectives. This is especially useful when a problem’s root cause has yet to be defined.

You can use creative problem-solving tools in design thinking’s “ideate” stage, which include:

• Brainstorming: Instruct everyone to develop as many ideas as possible in an allotted time frame without passing judgment.
• Divergent thinking exercises: Rather than arriving at the same conclusion (convergent thinking), instruct everyone to come up with a unique idea for a given prompt (divergent thinking). This type of exercise helps avoid the tendency to agree with others’ ideas without considering alternatives.
• Alternate worlds: Ask your team to consider how various personas would manage the problem. For instance, how would a pilot approach it? What about a young child? What about a seasoned engineer?

It can be tempting to fall back on how problems have been solved before, especially if they worked well. However, if you’re striving for innovation, relying on existing systems can stunt your company’s growth.

Related: How to Be a More Creative Problem-Solver at Work: 8 Tips

Why Is Problem-Solving Important for Leaders?

While obstacles’ specifics vary between industries, strong problem-solving skills are crucial for leaders in any field.

Whether building a new product or dealing with internal issues, you’re bound to come up against challenges. Having frameworks and tools at your disposal when they arise can turn issues into opportunities.

As a leader, it’s rarely your responsibility to solve a problem single-handedly, so it’s crucial to know how to empower employees to work together to find the best solution.

Your job is to guide them through each step of the framework and set the parameters and prompts within which they can be creative. Then, you can develop a list of ideas together, test the best ones, and implement the chosen solution.

Related: 5 Design Thinking Skills for Business Professionals

4 Problem-Solving Skills All Leaders Need

1. problem framing.

One key skill for any leader is framing problems in a way that makes sense for their organization. Problem framing is defined in Design Thinking and Innovation as determining the scope, context, and perspective of the problem you’re trying to solve.

“Before you begin to generate solutions for your problem, you must always think hard about how you’re going to frame that problem,” Datar says in the course.

For instance, imagine you work for a company that sells children’s sneakers, and sales have plummeted. When framing the problem, consider:

• What is the children’s sneaker market like right now?
• Should we improve the quality of our sneakers?
• Should we assess all children’s footwear?
• Is this a marketing issue for children’s sneakers specifically?
• Is this a bigger issue that impacts how we should market or produce all footwear?

While there’s no one right way to frame a problem, how you do can impact the solutions you generate. It’s imperative to accurately frame problems to align with organizational priorities and ensure your team generates useful ideas for your firm.

To solve a problem, you need to empathize with those impacted by it. Empathy is the ability to understand others’ emotions and experiences. While many believe empathy is a fixed trait, it’s a skill you can strengthen through practice.

When confronted with a problem, consider whom it impacts. Returning to the children’s sneaker example, think of who’s affected:

• Your organization’s employees, because sales are down
• The customers who typically buy your sneakers
• The children who typically wear your sneakers

Empathy is required to get to the problem’s root and consider each group’s perspective. Assuming someone’s perspective often isn’t accurate, so the best way to get that information is by collecting user feedback.

For instance, if you asked customers who typically buy your children’s sneakers why they’ve stopped, they could say, “A new brand of children’s sneakers came onto the market that have soles with more traction. I want my child to be as safe as possible, so I bought those instead.”

When someone shares their feelings and experiences, you have an opportunity to empathize with them. This can yield solutions to their problem that directly address its root and shows you care. In this case, you may design a new line of children’s sneakers with extremely grippy soles for added safety, knowing that’s what your customers care most about.

Related: 3 Effective Methods for Assessing Customer Needs

3. Breaking Cognitive Fixedness

Cognitive fixedness is a state of mind in which you examine situations through the lens of past experiences. This locks you into one mindset rather than allowing you to consider alternative possibilities.

For instance, your cognitive fixedness may make you think rubber is the only material for sneaker treads. What else could you use? Is there a grippier alternative you haven’t considered?

Problem-solving is all about overcoming cognitive fixedness. You not only need to foster this skill in yourself but among your team.

4. Creating a Psychologically Safe Environment

As a leader, it’s your job to create an environment conducive to problem-solving. In a psychologically safe environment, all team members feel comfortable bringing ideas to the table, which are likely influenced by their personal opinions and experiences.

If employees are penalized for “bad” ideas or chastised for questioning long-held procedures and systems, innovation has no place to take root.

By employing the design thinking framework and creative problem-solving exercises, you can foster a setting in which your team feels comfortable sharing ideas and new, innovative solutions can grow.

How to Build Problem-Solving Skills

The most obvious answer to how to build your problem-solving skills is perhaps the most intimidating: You must practice.

Again and again, you’ll encounter challenges, use creative problem-solving tools and design thinking frameworks, and assess results to learn what to do differently next time.

While most of your practice will occur within your organization, you can learn in a lower-stakes setting by taking an online course, such as Design Thinking and Innovation . Datar guides you through each tool and framework, presenting real-world business examples to help you envision how you would approach the same types of problems in your organization.

Are you interested in uncovering innovative solutions for your organization’s business problems? Explore Design Thinking and Innovation —one of our online entrepreneurship and innovation courses —to learn how to leverage proven frameworks and tools to solve challenges. Not sure which course is right for you? Download our free flowchart .

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Dr. Kevin Bracker, Dr. Fang Lin and Jennifer Pursley

The three-step valuation process for stocks differs from bonds due to the differences in the structure of the cash flow stream. Conceptually, the process is different. However, the cash flow stream for stocks (dividends) has a variable, infinite time horizon which makes forecasting all expected cash flows impossible to do without some simplifying assumptions.

When forecasting dividends, we use one of three assumptions. First, we can assume that dividends exhibit no growth over time. The dividend will remain the same forever. Second, we can assume dividends grow at a constant rate over time. Third, we can assume dividends will grow at a non-constant rate for a specific number of years and then a constant rate after that. The assumption that we make about the dividend stream will determine how we solve for present value in step three of the 3-step valuation method.

The process of choosing an appropriate discount rate is similar (at least until we introduce the Security Market Line in Ch. 8). We need to determine the riskiness of the security and then select a discount rate based on the rate of return we can earn on other similar risk investments. One item of note is that the discount rate for stocks will tend to be higher than the discount rate for bonds due to the fact that stocks (on average) are riskier than bonds.With bonds, solving for PV was simply to use the 5-key approach to find PV.

With stocks, we need to either use a formula (for dividend assumptions one and two) or a process involving the CF worksheet (for dividend assumption three). The formula for the no-growth model is:

The formula for the constant growth model is:

P 0 =D 1 /(k-g)

Par value is the value stated on the stock certificate and is essentially a meaningless number. This reflects the minimum amount of capital that must be supplied by stockholders to meet the limited liability characteristic of stock ownership. If the stock is originally issued for less than par value, the stockholders are liable for the difference in the event of bankruptcy. However, in practice, most firms set par value for common stock so low (often $0.01 per share or less) that it is no practical meaning.

Book value represents the accounting value of each share of stock based on the balance sheet. Book value per share can be found by solving for one of the following two equations (note – both equations are identical since A = L + OE):

BV = (A – L)/(number of common shares outstanding) or BV = (OE)/(number of common shares outstanding)

Book value tends to understate the true value of the firm because of the historical cost bias and the omission of most intangible assets.

Market value represents the “true” (sometimes called “economic” or “financial”) value of the share of stock. This is the price at which investors are willing to buy and sell shares.

No one individual determines market value, instead it is set by the equilibrium price in the financial markets (in other words, the price at which both buyers and sellers agree that they are getting their best price). Market value changes constantly based on new information. Any information that causes investors to change their perception on the magnitude, riskiness, or timeliness of expected cash flows will result in changes in the market value. When you look at a stock quote in the Wall Street Journal or online, this represents the market value.

Market value is the most important measure of value for a common stock because it reflects the current price at which people are willing to buy/sell the stock.

The right to information – Stockholders have a right to know what is going on in the firm. At a minimum, firms must prepare quarterly and annual audited financial statements that are made available to the stockholders and have annual meetings which stockholders can attend. Most firms make significant information available on their company web page in an investor relations section. Most of the information made available is detailed financial performance information and general firm strategy information.

Limited Liability – Stockholders can lose no more than their initial investment in common stock. This is a function of the separation of ownership and decision making within the corporate form of ownership. Since the stockholders are not making the management decisions, they are not liable for the results. The stock price can fall to zero and the investor can lose their entire investment made in the stock, but the investor can not be required to supply more money beyond that to meet creditor obligations.

The right to “control” – Stockholders get voting rights. These voting rights allow them to elect the board of directors who are responsible for hiring and compensating management as well as approving major strategic decisions. Stockholders also have voting rights on a limited set of corporate decisions such as authorizing additional shares of stock to be created and issued. However, for most practical purposes, the average stockholder has no real control over corporate activities. The way that board of director votes are handled are designed to keep current boards in place and unless there is a very significant amount of shareholder dissatisfaction their will not be any board shakeups. Also, shareholders do not vote or influence day-to-day corporate decisions or even larger corporate strategies. Finally, some firms issue dual-class shares where the public holds non-voting shares or shares with drastically diluted voting rights while the firm founders hold the shares with voting or super-voting rights.

The right to transfer – Stockholders can sell their shares in the open market whenever they choose. Thus, most stockholders will “vote with their feet” when they don’t like the way a company is running its business. Since they know their ability to influence company policy through voting rights is minimal at best, simply selling shares is often the best strategy. However, selling stock does not have to be due to dissatisfaction with the way the company is doing business. Shareholders may sell for many reasons including diversifying their holdings, taking profits, raising cash, cutting losses, etc. However, this ability to sell shares whenever one wants is critical to the success of corporate form of ownership as it creates liquidity which is necessary to get people to buy stock.

The right to residual income – this is the most important right associated with common stock and is the principle reason why people invest in common stock. When you buy common stock you are buying ownership into the company and with that ownership comes a right to your proportion of the profits. Residual income refers to income left over after preferred stockholders are paid. It is important to note that the right to residual income is NOT the same as the right to dividends. Firms can choose to pay out the residual income to investors in the form of dividends or they can reinvest into the firm. If the residual income is invested wisely, this will result in even more profits for stockholders later on. However, if it is invested poorly, it may all be lost before the stockholders receive any in dividends. Ultimately, if you bought every share of stock outstanding, you would own all of the firm’s profits and would be able to decide for yourself whether to pay dividends or reinvest in the firm.

The holding period of a stock is irrelevant to determining its value. The value is based on the present value of all future dividends. The reason holding period is irrelevant is that when I sell the stock, I will be able to sell it for all the future dividends at that point. Whether I actually receive the dividends or sell the stock for the value of those dividends doesn’t matter. Another way to look at this is with the constant growth pricing model ⇒ P 0 = (D 1 )/(k – g). Note that no where in that model do you plug in your holding period. Since it is not part of the formula, it can’t have an influence on the price of the stock.

No, it is not a realistic assumption. Dividends will grow at varying rates over time depending on the success of the firm and the new products it introduces. However, we know that our predictive ability is limited. How fast is Wal-Mart going to grow 16 years from now? How about 17 years? Since we know that there is no way to make precise forecasts, we assume that after a certain time, the firm will grow at approximately the same rate as the economy (or maybe a bit slower) and use this as our constant growth rate. This allows us to use what information we can to forecast growth rates (and dividends) as far as we can and then approximate the rest with a constant growth assumption. Is it 100% accurate? No. Is it more reasonable than trying to forecast year- by-year growth rates for the next 1000 years? Definitely!

Market efficiency refers to the concept that all relevant information that influences a firm’s value is already reflected into its stock prices. As new information comes out, the stock price will respond immediately to reflect that new information. There are no “undervalued” stocks to buy that will earn us higher than a fair, risk-adjusted rate of return and there are no “overvalued” stocks that we should sell. Instead (assuming market efficiency is valid), the best that we can do is own a diversified portfolio of stocks and expect to earn a fair, risk-adjusted rate of return.

The three types of market efficiency are weak form, semi-strong form, and strong form and the difference between the three is based on the definition of “relevant information.”

• Weak Form Market Efficiency assumes all information related to past price data is already reflected in the current market price. Whether the stock is in an “uptrend” or “downtrend” is merely coincidence and doesn’t tell us anything about the future direction of the stock. If the stock increased in value for the past three days or decreased in value for the past three days, it is equally likely to increase or decrease the next day. Stock prices have no “memory.” If markets are weak-form efficient, technical analysis (a process of trying to identify stocks to buy or sell based primarily on charts and other forms of past price trends) is not going to work. A chart of a stock’s past price information is meaningless in helping us identify its future price information.
• Semi-strong Form Market Efficiency assumes all publicly available information is already reflected in the current market price. This means that there can be no “edge” gained from evaluating a firm’s financial statements or trying to project its future cash flows based on economic, demographic, or firm specific factors that might influence the success (or lack of success) in a firm’s product line. Reading the Wall Street Journal, Business Week, financial statements, etc. will not allow you to identify which stocks to buy or sell. This process of trying to value stocks based on projecting future cash flows is referred to as fundamental analysis. If markets are semi-strong form efficient, fundamental analysis will not serve as a worthwhile tool for picking stocks other than to find a risk level that you are comfortable with. While new “fundamental” information will influence stock prices, it is only the “surprise” portion that will drive the stock price up or down. For instance, if a company was expected to report earnings of $1.00 per share and a 15% growth rate from the previous year and instead reported earnings of $0.90 per share and a 10% growth rate from the previous year, this would be a negative surprise (even though both earnings and growth were positive) and would cause the stock price to decline. However, the decline would be so immediate that you would not be able to respond to the news and sell before the price declined.
• Strong Form Market Efficiency assumes all information, public or private, is already reflected in the current market price. Based on this, not even having access to inside information would allow you to identify good/bad stocks ahead of time.

This would be evidence AGAINST semi-strong form market efficiency. If markets were semi-strong form efficient, the only way I would be able to earn a higher rate of return than the market with publicly available information would be if I (A) only (or primarily) invested in high risk stocks or (B) was lucky. Since the statement says that I’ve not faced higher than average risks, (A) is not valid. Also, since this is over a 10-year time horizon, it is not likely just luck (although that is still a possibility). Finally, I’ve done this using publicly available information. Therefore, this would be evidence AGAINST semi-strong form market efficiency.

There are a couple of reasons why we would like to see markets be efficient. First, is that if markets were NOT efficient, then it would be difficult for management to know if they were maximizing firm value. If stock prices reflect all available information and management engages in value maximizing activities, the stock price should go up. If markets were not efficient, there would be no predictable relationship between management activities and stock price response so it would be hard for management to maximize value. As a side note, this is a very important issue. The more efficient markets are, the more focus management will place on long-term value maximization instead of short-term manipulation and accounting gimmickry. This is because investors will see through the manipulation and not “reward” management’s trickery. Instead, management that operates with a clear, long-term strategy will see higher stock prices.

A second reason has to do with a concept called allocational efficiency. Allocational efficiency means money flows to the “right” places (right ⇒ productive). Thus, if scientists are working for a cure for a major disease and have a real shot at producing it, markets will recognize this as a profitable opportunity and fund it. While it may seem cold-hearted to define the “correct” places to spend capital as those that produce the best risk-adjusted returns, it actually is just society “voting” on what is the best use of their dollars (as that spending is what produces profits). We may not individually agree with those decisions, but it is a much better system for allocating capital than any other.

We expect markets to be efficient for the same reason we don’t expect to find $20 bills laying all over the hallways. People do not like to leave money on the table. There are a large number of extremely intelligent individuals with large budgets for information and information processing power constantly looking for opportunities to make money in the financial markets. As soon as they find those opportunities, the take advantage of them (pick up the $20 bills). As such, we should not expect to see any unexploited opportunities. The profit motive creates a strong incentive to drive markets towards efficiency.

On the other hand, if people do not see the $20 bills laying in the hallway, they will not pick them up. Despite the apparent precision of our stock valuation models, predicting prices is not a precise process. Given all the uncertainties involved in estimating growth rates, future cash flows, and discount rates it is hard to place 100% confidence in our final results. Let’s say we found the stock value was $50 and the current stock price was $49. This means we get a free $1 for every share we buy. Theoretically we would keep buying as much stock as possible until the stock price increased to $50. However, how much are you willing to commit to your $50 forecast being right?

Another argument against market efficiency (also related to us not “seeing” the opportunities) is that there may be behavioral biases built in to human nature that prevent us from being able to “pick up the free money.” For instance, we tend to over-react to news and place too much weight on new evidence in some cases and in others we tend to under-react and place to much weight on our previous views. For instance, if Apple reports a bad quarter, we are apt to dismiss it as we “know” Apple is a good investment in the long-run. How do we know this? Because we rely on the past performance. On the other hand, when the Internet boom was underway in the late 1990’s, we over-reacted to how that was going to make EVERY company related to the Internet profitable. We also do not process information very well and can easily be tricked by the way the information is presented. This is referred to as framing. The exact same information can be presented in two different ways and we will interpret it differently each time. How do these behavioral biases relate to market efficiency? Well, one way is that individuals tend to sell their winners too soon and hold their losers too long. The way the tax code is written, there is an advantage to hold on to winning stocks longer and to sell losing stocks quicker…however, there is strong evidence that people do the opposite which costs them money.

There are reasons why we should expect markets to be efficient and reasons why we should expect them to NOT be efficient, so which is it? Ask 100 different finance professors and you’ll probably get 50 different answers ranging from markets are 100% efficient to markets are not even close to efficient. My view is that market inefficiencies exist, but taking advantage of them is not easy. For most individual investors (and institutional investors as well), attempting to “outperform the market” is not only a waste of time, but a costly waste of time. However, there are a few people that have both the ability and effort to earn higher than risk-adjusted rates of return. It requires two factors. One, being extremely intelligent (you have to outthink everyone else that is searching for those $20 bills on the ground so that you can either “see” them more easily or grab them quicker). Two, you must be committed. Keep in mind that the more trading you do to outperform the market, the harder it is. That is because transaction costs (brokerage commissions, taxes, other costs) add up with each trade.

P 0 = D/k = (Dividend Rate * Par Value)/k P 0 = (0.06×$80)/.07 P 0 = $4.80/.07 P 0 = $68.57

P 0 = D 1 /(k – g) P 0 = 3.50/(0.13 – 0.04) P 0 = $38.89

P 0 = D/k P 0 = 2.00/0.12 P 0 = $16.67

P 0 = D 1 /(k – g) P 0 = (2.00×1.05)/(0.12 – 0.05) P 0 = 2.10/0.07 P 0 = $30.00

P 0 = D 1 /(k – g) P 0 = (2.00×1.10)/(0.12 – 0.10) P 0 = 2.20/0.02 P 0 = $110.00

P 0 = D 1 /(k – g) P 0 = (2.00×1.15)/(0.12 – 0.15) P 0 = 2.30/-0.03 P 0 = -$76.67

No, the answer to part 4 does not make sense. As we can see from part 1-3, increases in the growth rate make the stock more valuable. Also, due to the limited liability feature of corporations, the lowest value a stock can take is $0.00. Therefore, it makes no sense to say that as growth increases from 10% to 15%, the stock price not only declines, it turns negative. The problem is that the formula we developed for solving for the present value of dividends when the growth rate is constant only works if the required return is greater than the growth rate (k>g). If that does not hold, the formula is no longer solving for present value, but instead is generating a meaningless number.

While this may appear to be a significant flaw at first glance, it really isn’t as bad as it seems. Remember that the model assumes that the growth rate will continue not for a short time, but forever. How likely is it for a company to grow at 15% forever? Since the overall economy only grows at about a 3-4% annual rate, this company would overtake the world before too long. When companies exhibit extremely high growth rates, we know that their growth must decline over time because of (A) they will have no new areas of growth after the control their entire market or (B) new competition will enter the market. Consider Wal-Mart. It is unreasonable to assume they will grow at the same rate over the next 20 years as they have over the past 20 because they don’t have as many untapped markets to expand into. When companies exhibit high growth rates, we must use the non-constant dividend growth model.

Step 1 – Forecast all dividends up to and including the first year of constant growth

D 1 = 3.00×(1.35) = $4.05 D 2 = 4.05×(1.25) = $5.06 D 3 = 5.06×(1.20) = $6.07 D 4 = 6.07×(1.10) = $6.68

Step 2 – Solve for the value of all dividends during the constant growth stage

P 3 = D 4 /(k – g) = 6.68/(0.18 – 0.10) = $83.50

Step 3 – Solve for PV

CF 0 = 0 CF 1 = 4.05 CF 2 = 5.06 CF 3 = 89.57 ⇐ $6.07 + $83.50 I = 18 NPV = P 0 = $61.58

D 1 = 1.50*(0.90) = $1.35 D 2 = 1.35*(1.00) = $1.35 D 3 = 1.35*(1.20) = $1.62 D 4 = 1.62*(1.20) = $1.94 D 5 = 1.94*(2.50) = $4.85 D 6 = 4.85*(1.03) = $5.00

P 5 = D 6 /(k – g) = 5.00/(0.15 – 0.03) = $41.67

CF 0 = 0 CF 1 = 1.35 CF 2 = 1.35 CF 3 = 1.62 CF 4 = 1.94 CF 5 = 46.52 ⇐ $4.85 + $41.67 I = 15 NPV = P 0 = $27.50

The key for this problem is to remember the concept that the value of the stock is equal to the present value of the remaining cash flows. The cash flows are the same as the ones we forecasted to solve for problem 5, except that we have moved through the first three years and the first three dividends are no longer associated with the stock. The person buying the stock is going to receive all of the dividends from year 4 on (but remember that since we are in year three, the year 4 dividend is only 1 year out).

CF 0 = 0 CF 1 = 1.94 CF 2 = 46.52 I = 15 NPV = P 3 = $36.86

Business Finance Essentials Copyright © 2018 by Dr. Kevin Bracker, Dr. Fang Lin and Jennifer Pursley is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License , except where otherwise noted.

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Five routes to more innovative problem solving

Rob McEwen had a problem. The chairman and chief executive officer of Canadian mining group Goldcorp knew that its Red Lake site could be a money-spinner—a mine nearby was thriving—but no one could figure out where to find high-grade ore. The terrain was inaccessible, operating costs were high, and the unionized staff had already gone on strike. In short, McEwen was lumbered with a gold mine that wasn’t a gold mine .

Then inspiration struck. Attending a conference about recent developments in IT, McEwen was smitten with the open-source revolution. Bucking fierce internal resistance, he created the Goldcorp Challenge: the company put Red Lake’s closely guarded topographic data online and offered $575,000 in prize money to anyone who could identify rich drill sites. To the astonishment of players in the mining sector, upward of 1,400 technical experts based in 50-plus countries took up the problem. The result? Two Australian teams, working together, found locations that have made Red Lake one of the world’s richest gold mines. “From a remote site, the winners were able to analyze a database and generate targets without ever visiting the property,” McEwen said. “It’s clear that this is part of the future.” 1 1. See Linda Tischler, “ He struck gold on the Net (really) ,” fastcompany.com, May 31, 2002.

McEwen intuitively understood the value of taking a number of different approaches simultaneously to solving difficult problems. A decade later, we find that this mind-set is ever more critical: business leaders are operating in an era when forces such as technological change and the historic rebalancing of global economic activity from developed to emerging markets have made the problems increasingly complex, the tempo faster, the markets more volatile, and the stakes higher. The number of variables at play can be enormous, and free-flowing information encourages competition, placing an ever-greater premium on developing innovative, unique solutions.

This article presents an approach for doing just that. How? By using what we call flexible objects for generating novel solutions, or flexons , which provide a way of shaping difficult problems to reveal innovative solutions that would otherwise remain hidden. This approach can be useful in a wide range of situations and at any level of analysis, from individuals to groups to organizations to industries. To be sure, this is not a silver bullet for solving any problem whatever. But it is a fresh mechanism for representing ambiguous, complex problems in a structured way to generate better and more innovative solutions.

The flexons approach

Finding innovative solutions is hard. Precedent and experience push us toward familiar ways of seeing things, which can be inadequate for the truly tough challenges that confront senior leaders. After all, if a problem can be solved before it escalates to the C-suite, it typically is. Yet we know that teams of smart people from different backgrounds are more likely to come up with fresh ideas more quickly than individuals or like-minded groups do. 2 2. Lu Hong and Scott Page, “Groups of diverse problem solvers can outperform groups of high-ability problem solvers,” Proceedings of the National Academy of Sciences of the United States of America , 2004, Volume 101, pp. 16385–89. For more on the benefits of open innovation, see John Seely Brown and John Hagel III, “ Creation nets: Getting the most from open innovation ,” McKinsey Quarterly , May 2006. When a diverse range of experts—game theorists to economists to psychologists—interact, their approach to problems is different from those that individuals use. The solution space becomes broader, increasing the chance that a more innovative answer will be found.

Obviously, people do not always have think tanks of PhDs trained in various approaches at their disposal. Fortunately, generating diverse solutions to a problem does not require a diverse group of problem solvers. This is where flexons come into play. While traditional problem-solving frameworks address particular problems under particular conditions—creating a compensation system, for instance, or undertaking a value-chain analysis for a vertically integrated business—they have limited applicability. They are, if you like, specialized lenses. Flexons offer languages for shaping problems, and these languages can be adapted to a much broader array of challenges. In essence, flexons substitute for the wisdom and experience of a group of diverse, highly educated experts.

To accommodate the world of business problems, we have identified five flexons, or problem-solving languages. Derived from the social and natural sciences, they help users understand the behavior of individuals, teams, groups, firms, markets, institutions, and whole societies. We arrived at these five through a lengthy process of synthesizing both formal literatures and the private knowledge systems of experts, and trial and error on real problems informed our efforts. We don’t suggest that these five flexons are exhaustive—only that we have found them sufficient, in concert, to tackle very difficult problems. While serious mental work is required to tailor the flexons to a given situation, and each retains blind spots arising from its assumptions, multiple flexons can be applied to the same problem to generate richer insights and more innovative solutions.

Networks flexon

Imagine a map of all of the people you know, ranked by their influence over you. It would show close friends and vague acquaintances, colleagues at work and college roommates, people who could affect your career dramatically and people who have no bearing on it. All of them would be connected by relationships of trust, friendship, influence, and the probabilities that they will meet. Such a map is a network that can represent anything from groups of people to interacting product parts to traffic patterns within a city—and therefore can shape a whole range of business problems.

For example, certain physicians are opinion leaders who can influence colleagues about which drugs to prescribe. To reveal relationships among physicians and help identify those best able to influence drug usage, a pharmaceutical company launching a product could create a network map of doctors who have coauthored scientific articles. By targeting clusters of physicians who share the same ideas and (one presumes) have tight interactions, the company may improve its return on investments compared with what traditional mass-marketing approaches would achieve. The network flexon helps decompose a situation into a series of linked problems of prediction (how will ties evolve?) and optimization (how can we maximize the relational advantage of a given agent?) by presenting relationships among entities. These problems are not simple, to be sure. 3 3. For more on network analysis, see Robert L. Cross, Roger D. Martin, and Leigh M. Weiss, “ Mapping the value of employee collaboration ,” McKinsey Quarterly , August 2006. For more on the role of brokers in filling organizational gaps, see Ronald S. Burt, Structural Holes: The Social Structure of Competition , first edition, Cambridge, MA: Harvard University Press, 1992. But they are well-defined and structured—a fundamental requirement of problem solving.

Evolutionary flexon

Evolutionary algorithms have won games of chess and solved huge optimization problems that overwhelm most computational resources. Their success rests on the power of generating diversity by introducing randomness and parallelization into the search procedure and quickly filtering out suboptimal solutions. Representing entities as populations of parents and offspring subject to variation, selection, and retention is useful in situations where businesses have limited control over a large number of important variables and only a limited ability to calculate the effects of changing them, whether they’re groups of people, products, project ideas, or technologies. Sometimes, you must make educated guesses, test, and learn. But even as you embrace randomness, you can harness it to produce better solutions to complex problems.

That’s because not all “guessing strategies” are created equal. We have crucial choices to make: generating more guesses (prototypes, ideas, or business models) or spending more time developing each guess or deciding which guesses will survive. Consider a consumer-packaged-goods company trying to determine if a new brand of toothpaste will be a hit or an expensive failure. Myriad variables—everything from consumer habits and behavior to income, geography, and the availability of clean water—interact in multiple ways. The evolutionary flexon may suggest a series of low-cost, small-scale experiments involving product variants pitched to a few well-chosen market segments (for instance, a handful of representative customers high in influence and skeptical about new ideas). With every turn of the evolutionary-selection crank, the company’s predictions will improve.

Decision-agent flexon

To the economic theorist, social behavior is the outcome of interactions among individuals, each of whom tries to select the best possible means of achieving his or her ends. The decision-agent flexon takes this basic logic to its limit by providing a way of representing teams, firms, and industries as a series of competitive and cooperative interactions among agents. The basic approach is to determine the right level of analysis—firms, say. Then you ascribe to them beliefs and motives consistent with what you know (and think they know), consider how their payoffs change through the actions of others, determine the combinations of strategies they might collectively use, and seek an equilibrium where no agent can unilaterally deviate from the strategy without becoming worse off.

Game theory is the classic example, but it’s worth noting that a decision-agent flexon can also incorporate systematic departures from rationality: impulsiveness, cognitive shortcuts such as stereotypes, and systematic biases. Taken as a whole, this flexon can describe all kinds of behavior, rational and otherwise, in one self-contained problem-solving language whose most basic variables comprise agents (individuals, groups, organizations) and their beliefs, payoffs, and strategies.

For instance, financial models to optimize the manufacturing footprint of a large industrial company would typically focus on relatively easily quantifiable variables such as plant capacity and input costs. To take a decision-agent approach, you assess the payoffs and likely strategies of multiple stakeholders—including customers, unions, and governments—in the event of plant closures. Adding the incentives, beliefs, and strategies of all stakeholders to the analysis allows the company to balance the trade-offs inherent in a difficult decision more effectively.

System-dynamics flexon

Assessing a decision’s cascading effects on complex businesses is often a challenge. Making the relations between variables of a system, along with the causes and effects of decisions, more explicit allows you to understand their likely impact over time. A system-dynamics lens shows the world in terms of flows and accumulations of money, matter (for example, raw materials and products), energy (electrical current, heat, radio-frequency waves, and so forth), or information. It sheds light on a complex system by helping you develop a map of the causal relationships among key variables, whether they are internal or external to a team, a company, or an industry; subjectively or objectively measurable; or instantaneous or delayed in their effects.

Consider the case of a deep-sea oil spill, for example. A source (the well) emits a large volume of crude oil through a sequence of pipes (which throttle the flow and can be represented as inductors) and intermediate-containment vessels (which accumulate the flow and can be modeled as capacitors). Eventually, the oil flows into a sink (which, in this case, is unfortunately the ocean). A pressure gradient drives the flow rate of oil from the well into the ocean. Even an approximate model immediately identifies ways to mitigate the spill’s effects short of capping the well. These efforts could include reducing the pressure gradient driving the flow of crude, decreasing the loss of oil along the pipe, increasing the capacity of the containment vessels, or increasing or decreasing the inductance of the flow lines. In this case, a loosely defined phenomenon such as an oil spill becomes a set of precisely posed problems addressable sequentially, with cumulative results.

Information-processing flexon

When someone performs long division in her head, a CEO makes a strategic decision by aggregating imperfect information from an executive team, or Google servers crunch Web-site data, information is being transformed intelligently. This final flexon provides a lens for viewing various parts of a business as information-processing tasks, similar to the way such tasks are parceled out among different computers. It focuses attention on what information is used, the cost of computation, and how efficiently the computational device solves certain kinds of problems. In an organization, that device is a collection of people, whose processes for deliberating and deciding are the most important explanatory variable of decision-making’s effectiveness. 4 4. See Dan Lovallo and Olivier Sibony, “ The case for behavioral strategy ,” McKinsey Quarterly , March 2010.

Consider the case of a private-equity firm seeking to manage risk. A retrospective analysis of decisions by its investment committee shows that past bets have been much riskier than its principals assumed. To understand why, the firm examines what information was transmitted to the committee and how decisions by individuals would probably have differed from those of the committee, given its standard operating procedures. Interviews and analysis show that the company has a bias toward riskier investments and that it stems from a near-unanimity rule applied by the committee: two dissenting members are enough to prevent an investment. The insistence on near-unanimity is counterproductive because it stifles debate: the committee’s members (only two of whom could kill any deal) are reluctant to speak first and be perceived as an “enemy” by the deal sponsor. And the more senior the sponsor, the more likely it is that risky deals will be approved. Raising the number of votes required to kill deals, while clearly counterintuitive, would stimulate a richer dialogue.

Putting flexons to work

We routinely use these five problem-solving lenses in workshops with executive teams and colleagues to analyze particularly ambiguous and complex challenges. Participants need only a basic familiarity with the different approaches to reframe problems and generate more innovative solutions. Here are two quite different examples of the kinds of insights that emerge from the use of several flexons, whose real power emerges in combination.

Reorganizing for innovation

A large biofuel manufacturer that wants to improve the productivity of its researchers can use flexons to illuminate the problem from very different angles.

Networks. It’s possible to view the problem as a need to design a better innovation network by mapping the researchers’ ties to one another through co-citation indices, counting the number of e-mails sent between researchers, and using a network survey to reveal the strength and density of interactions and collaborative ties. If coordinating different knowledge domains is important to a company’s innovation productivity, and the current network isn’t doing so effectively, the company may want to create an internal knowledge market in which financial and status rewards accrue to researchers who communicate their ideas to co-researchers. Or the company could encourage cross-pollination by setting up cross-discipline gatherings, information clearinghouses, or wiki-style problem-solving sites featuring rewards for solutions.

Evolution. By describing each lab as a self-contained population of ideas and techniques, a company can explore how frequently new ideas are generated and filtered and how stringent the selection process is. With this information, it can design interventions to generate more varied ideas and to change the selection mechanism. For instance, if a lot of research activity never seems to lead anywhere, the company might take steps to ensure that new ideas are presented more frequently to the business-development team, which can provide early feedback on their applicability.

Decision agents. We can examine in detail how well the interests of individual researchers and the organization are aligned. What financial and nonfinancial benefits accrue to individuals who initiate or terminate a search or continue a search that is already under way? What are the net benefits to the organization of starting, stopping, or continuing to search along a given trajectory? Search traps or failures may be either Type I (pursuing a development path unlikely to reach a profitable solution) or Type II (not pursuing a path likely to reach a profitable solution). To better understand the economics at play, it may be possible to use industry and internal data to multiply the probabilities of these errors by their costs. That economic understanding, in turn, permits a company to tailor incentives for individuals to minimize Type I errors (by motivating employees to reject apparent losers more quickly) or Type II errors (by motivating them to persist along paths of uncertain value slightly longer than they normally would).

Predicting the future

Now consider the case of a multinational telecommunications service provider that operates several major broadband, wireless, fixed, and mobile networks around the world, using a mix of technologies (such as 2G and 3G). It wants to develop a strategic outlook that takes into consideration shifting demographics, shifting technologies for connecting users with one another and with its core network (4G), and shifting alliances—to say nothing of rapidly evolving players from Apple to Qualcomm. This problem is complicated, with a range of variables and forces at work, and so broad that crafting a strategy with big blind spots is easy. Flexons can help.

Each view of the world described below provides valuable food for thought, including potential strategic scenarios, technology road maps, and possibilities for killer apps. More hard work is needed to synthesize the findings into a coherent worldview, but the different perspectives provided by flexons illuminate potential solutions that might otherwise be missed.

Decision agents. Viewing the problem in this way emphasizes the incentives for different industry players to embrace new technologies and service levels. By enumerating a range of plausible scenarios from the perspective of customers and competitors, the network service provider can establish baseline assessments of future pricing, volume levels, and investment returns.

Networks. This lens allows a company or its managers to look at the industry as a pattern of exchange relationships between paying customers and providers of services, equipment, chips, operating systems, and applications, and then to examine the properties of each exchange network. The analysis may reveal that not all innovations and new end-user technologies are equal: some provide an opportunity for differentiation at critical nodes in the network; others do not.

System dynamics. This flexon focuses attention on data-flow bottlenecks in applications ranging from e-mail and voice calls to video downloads, games, and social-networking interactions. 5 5. The information-processing flexon, which focuses attention on the computational tasks required to give users access to assured data streams, is also relevant for evaluating bottlenecks and facilitating predictions about how networks and operators will fare in the future. The company can build a network-optimization map to predict and optimize capital expenditures for network equipment as a function of expected demand, information usage, and existing constraints. Because cost structures matter deeply to annuity businesses (such as those of service providers) facing demand fluctuations, the resulting analysis may radically affect which services a company believes it can and cannot offer in years to come.

Flexons help turn chaos into order by representing ambiguous situations and predicaments as well-defined, analyzable problems of prediction and optimization. They allow us to move up and down between different levels of detail to consider situations in all their complexity. And, perhaps most important, flexons allow us to bring diversity inside the head of the problem solver, offering more opportunities to discover counterintuitive insights, innovative options, and unexpected sources of competitive advantage.

Olivier Leclerc is a principal in McKinsey’s Southern California office. Mihnea Moldoveanu is associate dean of the full-time MBA program at the University of Toronto’s Rotman School of Management, where he directs the Desautels Centre for Integrative Thinking.

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A NASA astronaut, former SpaceX flight surgeon, and father of 2 says parenting is by far his hardest job

• Anil Menon is a former SpaceX medical director, flight surgeon, and a newly minted NASA astronaut.
• But he said his most important (and challenging) job is being a dad to his two young children.
• Menon encourages parents: If you can be a parent, you can be an astronaut, he said.

Anil Menon is one of NASA's newest astronauts and former SpaceX flight surgeon, but none of that compares to, what he said, is his hardest job: being a dad.

"I would say that parenting is probably the most challenging thing that I do, because it requires so much emotional intelligence ," he said.

On top of it all, his wife, Anna Menon, is a lead space operations engineer at SpaceX. She's gearing up to go to space too, as a crew member on the Polaris Dawn mission .

Balancing work and family life isn't easy for anyone . But when both parents work in space flight, unique challenges arise like conflicting schedules and time management.

Together, Anil and Anna Menon have crafted a specific approach to parenting. Above all, they work to show their children, ages 3 and 6, that it's important to follow their dreams — even if those dreams are not the same as their parents'.

Here's how Anil and Anna manage their demanding careers while raising two young kids.

Astronaut-level problem solving

Astronauts are constantly juggling a bunch of different problems under high pressure, and solving them in real time. Funnily enough, so are parents.

As a dad, Anil Menon uses his astronaut problem-solving skills all the time, he said. Especially when the demands of his job present logistical challenges.

"When we took on these jobs, that helped tremendously with parenting," he said.

For example, when he was training to become a NASA astronaut in Houston, his wife was called away to LA for a month to act as mission director for NASA's SpaceX Crew-4 launch .

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Her flight simulation shifts could happen at different times of the day and last well into the night, while his NASA schedule in Houston could have very early start times.

But the couple didn't dwell on their challenging circumstances and instead focused on finding a solution together. Ultimately, they decided to have the kids stay in LA with mom for a month and hired a nanny to travel with them.

"We were lucky to have the extra support and the kids had fun," Anil Menon said.

This is just one example where Anil and Anna have been pulled in one direction or another. During astronaut training, Anil spent two months away from home in Florida learning how to fly a T-6 aircraft for pilot training.

And once Anna Menon was selected to fly on SpaceX's Polaris Dawn mission, scheduled to launch no earlier than this summer, both she and Anil were busy with space flight training . Yet, despite the time commitment, their children are still central to their lives.

"As we've gotten closer to her launch date, and we just finished my training, along the way we've discovered ways of involving the kids in these things — bringing them closer and making that distance seem smaller," Anil Menon said.

For example, he brought his two kids, James and Grace, to his spacewalk training. And at SpaceX, the kids got to explore inside the Dragon mission capsule . Plus, the couple said they love going to their kids' school to discuss their careers.

Overcoming logistical challenges like these is why Anil believes that parenting is the best astronaut training there is.

"I certainly encourage parents to apply to this new astronaut program," he said. "If they can do that, then they can be an astronaut."

Inspiring their kids to shoot for the moon

Their hope isn't that their kids will follow in their footsteps and become astronauts themselves . Rather, Anil and Anna Menon hope that by showing James and Grace how passionate they are about their careers, their kids will feel encouraged to chase their own dreams, no matter what they are.

Anil applied to NASA's astronaut program several times before getting accepted. Even though he thought "it probably had a 0% chance of happening" he kept applying.

"They may not be interested in space, and they probably won't be interested," Anil Menon said with a laugh. "But hopefully they see that it's important to follow your passion. That's the model we're trying to demonstrate to them. Because you can tell kids anything, but I think actions speak louder than words."

Setting that example is what motivates Anil and Anna Menon to keep saying yes to new opportunities, even if it means learning to adapt to new challenges, Anil said.

Watch: Why one mother fled Texas to keep her child safe

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