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4. MECE Part 2
In this lesson, we go deeper into the MECE concept, exploring the challenges that analysts often face when trying to apply this concept to a real-world problem.
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Lesson Goal (00:06)
The goal of this lesson is to create a MECE issue tree for an investment decision.
Analyzing a Single Issue (00:23)
A MECE issue tree can become large and complex very quickly. For example, in analyzing a potential company purchase, one issue we need to consider is the intrinsic value of the target company. We can consider four components of this value: existing products, product pipeline, intellectual capital, and other assets. We can then break these components down further, for example by analyzing each existing product and each pipeline product separately.
When analyzing an individual product, we need to consider various factors affecting the product’s value. For example, when analyzing a pharmaceutical product, we need to consider the R&D cost, the likelihood of regulatory approval, and other such factors. Clearly, when we reach lower levels of an issue tree, domain-specific knowledge becomes particularly important.
Conducting a Thorough Analysis (01:52)
Although it can be tempting to ignore certain difficult issues or sub-issues, this is not good practise. It’s best to conduct a thorough analysis of the problem, at least initially. You may then decide to prioritize certain issues later. Conducting a thorough analysis can lead to your presentations being long, particularly when analyzing broad questions. It also allows you to divide up the work associated with a project knowing that you are addressing all the relevant issues because of the MECE structure you have in place.
In the previous lesson, we created a MECE structure based on the initial statement that we should buy a firm or company. In this lesson, I'm going to delve deeper into this MECE structure to show you how complicated a full issue tree can become when using the pyramid principle.
Let's start by picking the issue of intrinsic value. This is the standalone value that we, the company, places on the target. To evaluate the intrinsic value, I'm going to apply a MECE structure, splitting the problem into four separate issues. Existing products, product pipeline, intellectual capital, and other assets, such as buildings, cash, et cetera. For a large pharma company, there may be many existing products. So when calculating the intrinsic value of this issue, as an analyst, you will need to evaluate each existing product one by one. Similarly, if the product has many products in the pipeline, the analyst will need to analyze each of these products one by one as well to gain a full picture of the intrinsic value.
As you can imagine, the issue tree can get very big, very quickly. Let's take the example of one product in the product pipeline and deep dive on this sub-issue.
For this product, we'll need to consider factors, such as the R&D cost, the stage of development, potential market size, likelihood of regulator approval, substitution risk, et cetera.
As you may have noticed, once you delve deeper into an issue tree, the need for more domain-specific knowledge becomes very apparent. To assess the likelihood of regulatory approval, for example, you may need to interview market experts to gauge their opinion on this product. At this stage of a process, it's crucial not to skip a particular issue or sub-issue because it's not convenient or within your immediate grasp.
The easiest way to differentiate the quality of your analysis is to just be more thorough. If you do feel that your analysis is going to be too granular, it's still worth constructing the issue tree and then working with your manager to decide which issues to prioritize. In this way, if you don't offer a complete MECE solution, this will not come as a surprise to your superiors.
By being so thorough in your analysis, you can see how a document can quickly become longer than say 100 slides, particularly when analyzing broad, complex questions, such as should we buy this company? What you'll also quickly grasp is the great structure that an issue tree gives your work. Say if you have a team of five analysts working with you on this project. You can allocate each analyst's specific issues or sub-issues confident in the knowledge that they will not be duplicating any work due to the MECE structure that you have in place. Unfortunately, when a presentation grows to become a very large document, it's imperative that you help your audience navigate through the document with ease. To do this, I'll use a dynamic table of contents, which I'll show you in the next lesson.