Let’s talk about first principles thinking. It has been used by brilliant minds like Aristotle, Thomas Edison, and Nikola Tesla, and it is reported to be Elon Musk’s and Netflix CEO Reed Hastings’ favorite way to solve problems.
How does it work? The idea is to break down complicated problems into basic elements and then reassemble them from the ground up. Boiling things down to their fundamental basics requires fundamental understanding of the problem.
I applied first principles thinking when I was interviewing at Boston Consulting Group (BCG) and KPMG Advisory, and I successfully landed roles there because of it.
To illustrate the principle and how to use it in practice, I took a case study from a recent interview at a top management consulting firm and solved it.
"You meet an old friend for breakfast, and she is looking for some business advice. She is thinking of creating a nutritious and delicious smoothie product which may last for five days (without refrigeration). She lives in downtown Montreal and a small storefront is available nearby for rent. Your help is required in determining whether she should be developing her product for sale via storefront properties or should be packaged for distribution through online channels."
There is no right or wrong answer. Instead, management consulting firms evaluate how you think rather than what your answer is. They won’t be impressed if you use existing frameworks. The Big 3 companies want to see how deeply you can understand the problem before you start solving the case.
1. Break down the problem
The first step is to apply the principle and break down a problem into several chunks of information (e.g. strategic logic, economics of decision and risks/other). Each piece should have smaller building blocks or questions. By reframing the problem and formulating an overview, a good candidate demonstrates an understanding of what the client actually needs.
2. Build connections
The second step is to build connections between building blocks, like key factors or growth drivers, that will impact your answer. If industry trends are changing, your recommendation will change, too.
3. Do the math
The third step is to do the math and find the market size for two options: storefront vs online. For this example I made many assumptions and used a three-step process:
Total population of the city > Target audience (e.g. age 15-24) > Clients who live in Downtown Montreal.
However, there may be several variants of decomposition for this case.
4.Re-design the blueprint
The fourth step is to show your creativity and re-design the blueprint according to first principles.
I suggested a new symbiotic model (100% in-store sales and 33% online) and compared the pros and cons of this approach. A storefront location has its capacity when online business is limited by two factors: manufacturing capacity and the demand, which appears to be lower because there is an assumption that only 10% of tourists will decide to buy online.
(Note: Again, there is no right or wrong answer. Everything depends on your ability to develop arguments, logic, and structure. If you optimistically assume that 50% of tourists are going to buy online, you will arrive at a different answer.)
5. Don’t forget about risks and impact
Finally, to reassemble building blocks and do the math, I estimated costs and calculated operating profits. Based on these calculations, the client should move forward with the new product. The best candidates will also mention risks and their impact.
Overall, by using first principles thinking it’s possible to crack business cases without using popular frameworks or templates. It’s important to demonstrate the understanding of a problem rather than solving it by applying previous experience.
Eugene Hayden previously worked as an industry manager at Google, senior consultant at KPMG, and researcher at Boston Consulting Group.
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Eugene Hayden May 9, 2021 at 10:27PM