Using Hypothesis-Driven Thinking In Strategy Consulting by SSRN
University of Virginia – Darden School of Business
Trident Fund LP June 2020 Performance Update: “Don’t Fade the Fed
Trident Fund LP performance update for the month ended June 30, 2020. Q2 2020 hedge fund letters, conferences and more The Trident Fund LP returned +1.1 percent in June, and the fund is +8.3 percent net year to date. The motto “Don’t Fade the Fed” dominated global macro events in June and led the Trident Read More
This technical note describes the process of hypothesis-driven thinking, using examples from strategy consulting, medicine, and architecture. Associated with the scientific method, hypothesis-driven thinking focuses on the creative generation of alternative hypotheses and on their subsequent validation or refutation through the use of data. Hypothesis generation asks the creative question, “What if …?” Hypothesis testing follows with “If …, then …” and brings relevant data to bear on the analysis. Taken together, and repeated over time, this sequence allows us to pose ever-improving hypotheses without forfeiting the ability to explore new ideas.
Using Hypothesis-Driven Thinking In Strategy Consulting – Introduction
That’s what we’re good at—developing good hypotheses about a business situation. When you do a business case, you don’t have to be hypothesis-driven, because you’ve got five or ten pages of data and anybody can process that much in a relatively limited period of time. We have all the data in the world, and it’s really hard to get, and so we need to make some judgments about what we think is going to be important and what’s not…. Our challenge is to say which questions to start with and figure how to collect the data to answer them.
– Senior Partner, Bain & Company
When consultants begin a new project and have not yet conducted the study, they cannot know for sure what the best solution is. At some point fairly early on, however, seasoned consultants use their experience and intuition to make an educated guess as to what they think the best answer will turn out to be. That is why consulting partners are so valuable: they have significant experience looking at certain kinds of problems that business executives might deal with only a few times in their careers. Consultants have “repertoires” similar to those developed by any set of master professionals such as architects and physicians. They can “size up” a site or situation and determine very quickly the kinds of opportunities and problems it presents. We may live in houses all our lives and know what we want our new house to be like, but most of us build only one or two in a lifetime and so we hire someone who builds a lot of houses to help us design ours.
When the consultant is right, this process is very efficient: the company gets a very focused analysis and doesn’t need to do an exhaustive search for all possible solutions—it just zeroes in on “proving” the best one. This is what we mean by hypothesis-driven thinking. Because the costs of being wrong are significant, however, consultants have to look hard for disconfirming data as well as confirming data.
Having identified the most likely solution, consultants must then bring data to bear on it and convince the client that it is the right solution by making the strategic logic explicit about why their solution is the best one. What can we demonstrate about the market today that supports the proposed solution? What conditions and assumptions are we making about the context in which this business operates? These descriptions of today’s reality address what we believe the root cause of the problem is. These descriptions must be testable.
For many business managers and students, the concept of hypothesis-driven decision making is a foreign one. Yet it is fundamental to the skill that we call strategic thinking and is also one of the dominant characteristics of the thought processes of successful senior-level strategy consultants and executives. The traditional decision-making processes that we are most familiar with in business involve a linear method of thinking in which the problem is defined, a comprehensive range of alternative solutions is generated and evaluated, and the optimal one is selected. In contrast, the hypothesis-driven approach, associated with the scientific method, selects the most promising hypothetical solution early in the process and seeks to confirm or refute it.
The Scientific Method
Associated with Sir Isaac Newton, generally considered the “father of science,” the scientific method focuses on the creative generation of alternative hypotheses and on their subsequent validation or refutation through the use of data. It is also frequently associated with Sherlock Holmes, whose intellectual curiosity, attention to detail, willingness to reframe the question, and superior logic exemplify the scientific method’s search for truth—be it at the scene of the crime or the scene of the client.
The scientific method requires us to consider carefully our definition of the question to be answered; to construct an array of specific, testable, and actionable potential answers to that question; and to test the array by gathering data to determine which one answer best explains the situation at hand. The scientific method insists that we be parsimonious in our theorizing, objective in our evaluations, and open-minded in our willingness to search for disconfirming data. All in all, it mirrors a set of behaviors likely to lead to more effective and efficient strategic decision making. In environments of significant ongoing change, where answering the wrong strategic question is increasingly likely and costly, the scientific method is especially useful. Hypothesis generation asks the creative question, “What if?” Hypothesis testing follows with “if x, then y,” and brings relevant data to bear on the analysis. Taken together, and repeated over time, this sequence allows us to pose ever-improving hypotheses without forfeiting the ability to explore new ideas. Such experimentation allows movement beyond simplistic notions of cause and effect to continuous learning. It is a process of iteration and learning, in which both the definition and solution of problems are not neatly compartmentalized. Rather, the testing process creates opportunities to reshape and sharpen the definition of the problem and to refine the hypotheses as we go.
See full PDF below.