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MBA Essentials
JAN 23, 2017

The logic tree, or how to avoid critical mistakes

By Gil Chavez

Logic Tree: The Young Managing Director’s Dilemma

A young managing director sat in the business class lounge staring out at the tarmac. His laptop was open to his office’s most recent financial report. He had worked hard to improve the performance of his company and in the first year achieved record profits. He expected even greater success in his second year. Looking at the report it was clear that it had not happened. He was stunned.

He hadn’t had time to watch the numbers as closely this year; he had been out of the office for much of the first six months. He knew his team was working well and he felt the CEO, who had supported him in the past, would maintain the processes he had implemented. Still, the financials showed a steady erosion of profitability with expenses rising across all accounts.

What was wrong?

It is at times like these that a logic tree can prove useful. The logic tree is a graphic representation of the systematic splitting of an issue into components. Beginning with broad categories and working to increasingly narrower categories, it eliminates all possibilities until a specific factor(s) is isolated.

With practice, creating a logic tree is less time consuming than not using one, but it’s not an oracle. It is a simple tool that assists the user to follow a thorough step-by-step process. Put simply, it only tells you what you ask it to tell you. The questions you ask determine the answers you get.

Let’s ask, “How can I accumulate more wealth?” One person might first split the question into “reduce expenses and/or increase income.” Perhaps, another person will write “increase working hours or hourly wage.”

In both cases the first split of the tree reflects how the user defines the problem—one person thinks of expenses and income, the other thinks of hours and pay. Neither is wrong, however, in both cases the person should be aware of the assumptions that are built into their logic tree. “Should be aware” is the key phrase here because often the person is not.

Back to the question above: Why not make the first split “Legally” and “Illegally”? Selling a kidney or robbing a bank will also allow you to increase your wealth—at least initially. In fact, we could add that stealing food and gasoline will reduce your expenses. The point here is not that you should consider illegal activities to increase your wealth (you don’t want to do illegal things) but that you should be aware of how you’ve limited the range of your question.

Techniques that help:

• Decide what it is you want to know.
Then create a logic tree that answers the question. Now, step back and broaden it by adding a split in the tree that would occur before the first split you made. If your first logic tree begins “How can I lose weight?” Broaden that to “How can I live a healthier life?” Now “losing weight” is a later branch.

• Rephrase the question.
“How can I accumulate more wealth?” can be changed to “How can I save more money?” or “How can I earn more?” These redefine the problem and the structure of your logic tree and, of course, what it will tell you.

Ask for help.
Perhaps most useful, is to have your work reviewed by a colleague, a consultant, or anyone that gives you a fresh view.

Now, let’s return to our young managing director:

He took his seat on the airplane and pulled a yellow legal pad from his briefcase. He made a list of the key factors under the question, “What is causing the erosion of profit?” His first attempt didn’t feel right. He tried another, “What is causing the steady increase in costs?”

Finally, he circled variable expenses, but lacking key information he would have to ask the CEO. He shook his head. How could the other managers be so irresponsible? What were these costs? He made a note to arrange for a meeting. For now, he had more pressing matters. He sighed and closed his eyes…

Over the next several months the executive continued to travel. He never had the full formal meeting with the CEO, who rescheduled repeatedly. Finally, exasperated, he accepted another position and left the company. Sometime later, he encountered one of his former team members and asked about business. The colleague shook his head and looked away. The CEO and two executives had to resign abruptly—there was suspicion that they had been using expenses to siphon money from the company. The young managing director’s jaw dropped. He had been looking directly at the problem…

Looking back, we cannot say that defining the problem in broader terms would have led the executive to its source. The past provides clarity that the present almost never allows. We can say, however, that defining the problem narrowly did not help the executive at all.

(The discussion of the logic tree was inspired by the work of Matthew Juniper, Cambridge University.