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Problem Solving

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Problem Solving

  1. 1. 1 • Structured Problem Solving – using the 7 step methodology • Conducting Analysis Agenda for today‟s session
  2. 2. •Understanding and articulating the client problem that the project will solve. •Thinking creatively about innovative, value-adding way to solve the client problem •Decomposing the problem into key issues to analyze and hypotheses to test Taking complex problems, analysing them and communicating findings so that clients want to take action Essence of a good consultant How???? Problem solving is the essence of consulting……
  3. 3. 3 The 7-step problem solving methodology is a structured approach to problem solving and makes use of logical tools at each step…. 1 Define problem 2 Structure problem 3 Prioritize issues 4 Plan analyses and work 5 Conduct Analyses and work 6 Synthesise findings 7 Develop recomm endations Client problem xxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxxxx xxxxxxxx Think impact: what do I need to know and how do I frame the problem? Think disaggregation and early hypothesis: what could be the key elements of the problem and do they create early insight into the answer? Think IMPACT and EFFICIENCY: which parts of the tree are most important for me to focus on? Think effectiveness: How can the resources be utilized optimally? Think answers not analysis: what is the simplest fact-based approach that will prove/ disprove each issue? Think “So what”: how do I use the findings to tell a compelling story? Think buy-in and actionable solution : Is it clear what the client needs to do and how to do it? Think next iteration: what are user/team‟s next priorities? Communication
  4. 4. 4 Step 1: Problem Definition SOURCE: McKinsey 2 structure problem 3 Prioritize issues 4 Plan analyses and work 5 Conduct analyses 6 Synthesis findings 7 Develop recomme- ndations Client problem 1 Define problem Think impact: what do I need to know?
  5. 5. 5 Problem definition worksheet is a tool that consultants use during the problem definition stage Basic question to be resolved Perspective and context Stakeholders Criteria for success Scope of solution space Defines success for the project. Must be shared by client and the engagement team. Should include relevant quantitative and qualitative measures e.g. visible improvements, effect on staff mindset, market share growth, etc Identifies primary decision makers (e.g., CEO, Division Manager) as well as internal and external parties can support( or derail) the project (e.g., shareholders, regulatory authorities, SBU managers). Indicates what will and will not covered by the engagement team. Including accuracy and quality expectation. Defines what must be resolved to deliver impact for the client. The question should be SMART. The more specific the statement the better, provided it is not so narrow that the “wrong” problem is addressed Spells out the situation and complication facing the client e.g., trends in the industry, relative position in the industry etc Think SMART Defines the limits of the set of solutions that can be considered – e.g. team can only consider organic growth and not inorganic Constraints within solution space Key sources of insight Research on where expertise, knowledge, engagement methodology exist both internally (within the firm) and externally (client, specialist firms etc) e.g. Practice databases,
  6. 6. 6 • Specific • Measurable • Action-oriented • Relevant (to the key problem) • Time-bound “SMART” stands for…..
  7. 7. PROBLEM STATEMENT WORKSHEET – EXAMPLE Perspective/context Decision makers/stakeholders 1 3 Criteria for success Scope of solution space 2 4 5 Constraints within solution space Basic question to be resolved How can ABC Bank close the N1 billion profitability gap in 2 years and create a sustainable economic platform for the future? • Consolidation • Deregulation leading to many new non-traditional players e.g. microfinance banks • Banking crisis • Emergence of internet and electronic-banking • CEO of ABC Bank • ABC Board of Directors • Shareholders • CBN Close the N1billion gap within 2 years • Focus on retail banking only • Focus on Nigeria only Keep operating the bank as an independent company Key sources of insights Pass studies on banking, CBN website, Financial and banking databases and journals etc 6
  8. 8. 8 1 Define problem 2 Structure problem 3 Prioritize issues 4 Plan analyses and work 5 Conduct Analyses and work 6 Synthesise findings 7 Develop recomm endations Client problem Think disaggregation and early hypothesis: what could be the key elements of the problem and do they create early insight into the answer? Communication Step 2: Problem Structuring
  9. 9. Key advantages • Facilitates problem-solving – Parts of problem easier to handle – Ensures completeness – Focus topics more easily recognisable • Facilitates planning – Working in parallel possible – Difficulties easier to detect – Scheduling more transparent – Goal-oriented approach • Facilitates communication – Concentration on key topics – Context clearer Principle of structured problem solving SOURCE: McKinsey
  10. 10. Logic trees are tools that help to systematically structure a problem Mutually Exclusive Collectively Exhaustive First line of support Second line of support Problem Statement Worksheet Basic question to be resolved Relevant ConsistentConsistent
  11. 11. Logic trees are the link between the problem statement worksheet and a list of manageable questions Sub-issue Sub-issue Sub-issue Sub-issue Sub-issue Sub-issue Issue/ hypothesis 1 Issue/ hypothesis 2 Issue/ hypothesis 3 Problem statement Why use logic trees? 1. 2. 3. 4. To break a problem into component parts so that • Problem-solving work can be divided into intellectually manageable pieces • Priorities can be allocated to individuals To maintain the integrity of the problem-solving approach • Solving the parts will really solve the problem • The parts are mutually exclusive and collectively exhaustive (i.e., no overlaps, no gaps) To build a common understanding within the team of the problem- solving framework To help focus the use of organizing frameworks and theories
  12. 12. Problem/Issue Problem/Issue Hypothesis-Driven – How? Starts with a potential solution and develop a rationale to validate or disprove it Data-Driven – “Why?” Starts with the problem and decompose it to arrive at a solution. Difference between issue tree and hypothesis tree
  13. 13. M E C E utually xclusive ollectively xhaustive Mutually exclusive: Statements do not overlap in content Collectively exhaustive: Statements jointly fully describe the problem and/or the statement at the next highest level “MECE” means – a problem that has no overlaps and presented in its entirety SOURCE: McKinsey
  14. 14. FRAMING THE PROBLEM – ISSUE TREE EXAMPLE How can Acme increase profits from existing business lines? From Widgets From Thrum-mats From Grommets Increase Revenues Decrease Expenses Decrease raw material costs Decrease labor costs Decrease overhead costs Negotiate wage concessions Implement a labor-saving production process Which Product Lines? How? How? How? Negotiate higher productivity quotas
  15. 15. 15 Why has the machine stopped? • The overload fuse has blown Why did the over- load fuse blow? Why wasn‟t there enough oil? • The oil pump doesn‟t pump enough oil • Because the oil strainer is blocked with metal swarf Why has the shaft worn? • Because the shaft has worn Why doesn‟t the oil pump work properly? Ask „Why?‟ until you get to the bottom of the problem 1 2 3 4 5 Most times, we need to deep dive to get to the root cases of problem. 5-why‟s is a useful tool that underpins the issue tree framework in the investigation of root causes…. ILLUSTRATIVE • There was not enough oil on the shaft
  16. 16. 16 1 Define problem 2 Structure problem 3 Prioritize issues 4 Plan analyses and work 5 Conduct Analyses and work 6 Synthesise findings 7 Develop recomm endations Client problem Think IMPACT and EFFICIENCY: which parts of the tree are most important for me to focus on? Communication Step 3: Prioritisation of issues
  17. 17. • First step in constant, iterative refinement process – Porpoise between hypotheses/theories and data – Use 80/20 thinking • „High grades‟ your effort on what is most important • Always ask „so what‟ … but also ask what you‟ve forgotten • Eliminating nonessential issues is the key to having a reasonable lifestyle on a difficult study Eliminate nonessential issues Problem statement Issue 1 Issue 2 Issue 3 Eliminated issues
  18. 18. 18 Use judgement/intuition Do back-of-the- envelope calculations Involve the team Take risks Focusing on impact Polishing Be practical! Use the 80/20 philosophy 20 80 80 20 Time and effort Benefit for problem solving
  19. 19. Efforts to structure the problem Requirements for analysing problems • Focus on the main starting points of the problem • No gaps, no overlaps (MECE) • Logical hierarchy of levels • Logical elements are consistent on individual levels Time and effort invested in analysing the problem Benefits for problem-solving 20% 100% No cost efficienc y 80% 100% Attempt to be MECE Attempt to be perfect Benefits of the 80/20 rule for problem solving
  20. 20. 20 Low High Impact LowHigh Easeofimplementation Developed solutions can be prioritised along 2 dimensions through the prioritisation matrix
  21. 21. 21 1 Define problem 2 Structure problem 3 Prioritize issues 4 Plan analyses and work 5 Conduct Analyses and work 6 Synthesise findings 7 Develop recomm endations Client problem xxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxx xxxxxxxx xxxxxxxx Think effectiveness: How can the resources be utilized optimally? Communication Step 4: Plan analyses and work
  22. 22. Early Do not wait for data, critical mass, or anything else Often Revise, update, and improve as you porpoise through the data Specific Be very specific on analysis and source Syndicated Test with team members, try alternative hypotheses Realistic Make it manageable and realistic otherwise it will not be used Best practice work planning
  23. 23. Issue End product Description Should ABC Bank invest N200 M in acquiring Virgin Bank? • An issue is typically an important unresolved question, phrased so that it can be answered “yes” or “no” • The end products is a statement of the output from the analysis • Yes, Virgin Bank is the best option for ABC Bank to establish skills and assets quickly compared with both organic growth and other acquisition options. Hypothesis • The hypothesis is a statement of the likely resolution of the issue; it includes the reason for answering yes or no Analysis • The analysis defines the work necessary and sufficient to prove or disprove the hypothesis or resolve the issue • Assessment of organic options for growth – time, risk etc • Comparison of other local banks in the market as well as acquisition options • Cash flow, NPV • April 3, Tunde Responsibility/ timing • Financial forecast and value of investment • Responsibility identifies the person who will obtain the data and undertake the analysis. Also the completion due date Source • The source identifies the likely location or means of obtaining data to undertake analysis • Analyst reports on Nigerian banking industry • In-house financial and banking specialists • M&A valuation methodology Yes or no? How or why? Developing the analysis sheet
  24. 24. DESIGNING THE ANALYSIS – WORKPLAN EXAMPLE Issue/Hypothesis Can we implement the new production process? Yes Does the process require new facilities? No If it does require new facilities, can we acquire them economically? Yes Analyses Technical specifications List of facilities that meet new criteria Map of “facilities gap” Sources of required facilities/equipment Cost to fill gaps Effect on project rate of return Data Sources Articles, interviews Facilities management, interviews Facilities management, thrum-mat line supervisors, interviews Operations, trade publications Operations, contractors, interviews Finance department, prior analysis End Product Chart List Chart List Table Spreadsheet Responsibility Tom Tom Belinda Belinda Belinda Terry Due dates 3-Jun 5-Jun 7-Jun 7-Jun 10-Jun 12-Jun
  25. 25. The final workplan should correspond to the project timing and scope agreed to Analysis (main study steps) 1. Complete overview of the market and industry • Gather market and industry data • Conduct trade interviews • Analyse data and formulate initial view of industry Assessment of attractiveness of the foreign market and industry 2. Carry out an assessment of ABG‟s competitive position • Complete analysis of trends in market share, pricing and distribution • Complete comparative cost analysis • Interview sample of buyers • Interview McKinsey contacts in the retail industry Critical review of ABG‟s strengths and weaknesses compared to competitors 3. Estimate potential for ABG‟s future performance • Define alternative scenarios • Establish most likely case scenario • Conduct sensitivity analysis • Assess maximum improvement potential Financial evaluation of ABG‟s milling and baking interests Progress reviews with XYZ management Key end products 1 2 3 4 5 6 7 8 9 10 11 12 Timetable (weeks) 4 – Workplan
  26. 26. 26 1 Define problem 2 Structure problem 3 Prioritize issues 4 Plan analyses and work 5 Conduct Analyses and work 6 Synthesise findings 7 Develop recomm endations Client problem Think answers not analysis: what is the simplest fact-based approach that will prove/ disprove each issue? Communication Step 5: Conduct analysis Details on analyses will be discussed later
  27. 27. 27 1 Define problem 2 Structure problem 3 Prioritize issues 4 Plan analyses and work 5 Conduct Analyses and work 6 Synthesise findings 7 Develop recomm endations Client problem Think “So what”: do the findings tell a compelling story? Communication Step 6: Synthesis findings
  28. 28. Use situation, complication, resolution State the conditions at point of problem Flesh out difficulties in making situation better Lay out possible solution path 6 – Synthesise findings and build argument…… Situation Complication Resolution and/o r Pyramid structure Main assertion Sub-assertion Sub-assertion Supporting data Supporting data Supporting data Supporting data
  29. 29. 29 ….. Using the Pyramids Principle – built from the bottom, communicated from the top Coherence1 Chapters Subchapters Bullet points Decisive questions: "What?" "Why?" "How?" Governing thought Decisive question: "So what?" Particular insights, reasons, steps, benefits, etc. Analysis results Facts, assump- tions, etc. 1 Same level of abstraction at each level
  30. 30. 30 SAMPLE: Synthesis (Note difference between summary and synthesis) It has many places to go in the evening It has many places to go during the day ? Decisive question: „So what?‟ Synthesis of the facts Lagos is a great place to have fun + ▪ There are many restaurants ▪ There are many theatres ▪ There are many clubs ▪ There are many shops ▪ There is a National museum ▪ There are many beauty spots Summary of the facts Facts about Lagos
  31. 31. 31 Please sort these statements and create a logical pyramid with 3 levels. Formulate suitable overarching conclusions („so what's‟) that synthesise the details, and come up with a governing thought that synthesises all your conclusions He is results-oriented Able to work well in a team Sufficient knowledge of subject area His leadership skills are excellent Conflict management Familiarity with the organisation He has the ability to delegate Understanding of market requirements Good time management Can handle disagreements Coaching 1 2 3 4 5 6 7 9 10 8 Synthesis exercise – what are the characteristics of a great project manager? 11
  32. 32. 32 Solution to synthesis exercise Good project managers possess management, professional and interpersonal capabilities One governing thought at the top (key message) Overall conclusions in complete sentence They possess a set of broad management skills Results- oriented 1 Leader- ship skills 4 Ability to delegate 7 Good time manage- ment 9 Their professional qualifications are outstanding (specialised expertise) Suffi- cient know- ledge of subject area 3 Famili- arity with the organi- sation 6 Under- standing of market require- ments 8 They have polished interpersonal skills Able to work well in a team 2 Conflict manage- ment 5 Coach- ing 11
  33. 33. 33 1 Define problem 2 Structure problem 3 Prioritize issues 4 Plan analyses and work 5 Conduct Analyses and work 6 Synthesise findings 7 Develop recomm endations Client problem Think buy-in and actionable solution : Is it clear what the client needs to do and how to do it? Communication Step 7: Develop recommendations High impact communication which is designed to take care of “Developing Recommendations” will be handled as a separate module
  34. 34. 34 • Conducting Analyses (Internal and external) • Power of Excel • Market analysis • Financial Analysis and Accounting
  35. 35. Excel is a powerful tool for conducting analyses……. Knowing what you want to do Finding out how to do it Implement what you want to do • What do I want to accomplish with my analysis? • What type of calculations do I need to include in my analysis? • How do I need to modify the data so that I can use it? • Excel probably has some functionality that helps you do what you need to • Use formulas and functions that you are familiar with • Seek information on how to do things: – Use Excel‟s formula builder – Use Excel‟s help function (F1 key) – Use the internet to search for help – Ask a friend for tips • Allow yourself to try and fail! It does not have to be right the first time • If you are having trouble, seek help • Make sure analysis is done correctly
  36. 36. Pivot tables are one of Excel‟s most useful features A PivotTable is an important feature of MS Excel. It is an interactive table that quickly summarizes large amounts of data, based on multiple conditions that have intersecting points You can use PivotTables to: • Calculate different summaries (e.g. list the total number of customers per division) • Analyze related totals (e.g., calculate the total spent per account) • Sum a long list of figures and compare details (e.g., number of suppliers with sales largers larger than NGN 1 million) Creating pivot tables • To create a pivot table, highlight the data you want to include, and click on the pivot table icon on the Insert menu Pivot tables can also be created with the following keybaoard shortcuts • Alt + D + P • Alt + N + V + T • Try it, it WILL make you faster!
  37. 37. ….. Also the use of basic formulas Basic formulas in Excel have these two main syntax forms: A1 + B2= SUM ( A1 : B2 )= Equal sign Cell references Operator Equal sign Formula name Parenthesis Cell references or range Examples of basic formlulas include: • AVERAGE – returns the average of a cell range • SUM – returns the sum of a range of cells • MEDIAN – returns the median number in a cell range • MAX – returns the highest number in a cell range • MIN – returns the lowest number in a cell range • And many more – use Excel‟s help function to learn more about them
  38. 38. More advanced formulas often have more elements IF ( A1 > 1 ; “Yes” ; B2 )= Equal sign Formula name Parenthesis Formula input (for IF: logical test) Formula input (for IF: value if true) Formula input (for IF: value if false) Separator for formula arguments (, in some Excel versions) Excel 2007 helps you understand the syntax of your formulas as you write them!
  39. 39. Other examples of advanced formulas Function/ Functionality What does it do? How do we use it? Additional Comments COUNTIF Counts the number of cells within a range that meet the given criteria COUNTIF(cell range you are looking in,criteria - value; cell reference - you are looking for) To count entries using mathematical operators, use "<32" in the <criteria> parameter field, to count the number of values in the range <32 Wildcard Usage: COUNTIF(C2:C40,"*te") will tell you how many words end with "te" SUMIF Adds the cells within a range specified by a given criteria SUMIF(cell range you are looking in,criteria - value; cell reference - you are looking for,Sum_range; the actual cells to add if their corresponding cells in range match criteria) To sum entries using mathematical operators, criteria can be expressed as 32, "32", ">32", or "apples" VLOOKUP Searches for a value in the first column of a table array and returns a value in the same row from another column in the table array VLOOKUP(cell reference of the value to be looked up,table array range where the first column contains the value being looked up,position of the column data needs to be retrieved from,type of match) Type of Match: 0, False : Gives an exact match 1, True : Gives an approximate or exact match (be sure to sort your data in ascenfding order before trying this) HLOOKUP Searches for a value in the first row of a table array and returns a value in the same column from another row in the table array VLOOKUP(cell reference of the value to be looked up,table array range where the first row contains the value being looked up,position of the row data needs to be retrieved from,type of match) Type of Match: 0, False : Gives an exact match 1, True : Gives an approximate or exact match (be sure to sort your data in ascenfding order before trying this)
  40. 40. Market analysis: Helps you understand how a market works, which impacts the behavior and performance of market participants S C P Structure Conduct Performance The structure of the market . . . . . . drives the way companies behave and compete with each other in response to events Their strategy determines their economic performance Feedback By understanding the structure of the market, we can understand why companies behave the way they do and why some firms are successful, while others fail
  41. 41. Porter‟s Five Forces model provides a simple framework through which we can understand the structure and interaction in the market Barriers to entry Can new companies easily enter the market and increase competition? Substitute products Can consumers push down prices by buying other products to do the same job? Bargaining power of input suppliers Can those who supply raw materials force producers to pay more? Bargaining power of consumers Can consumers exert power to force lower prices? Competition between producers Economics of demand Economics of supply
  42. 42. Finance and Accounting: The basic principle of finance is called the time value of money Fundamental valuation is about applying the concept of time value of money to expected cash flows in the future “Money you have today is worth more than money tomorrow” Time value of money Why is this the case?
  43. 43. Information about a company‟s financial position is found in the financial statements – the balance sheet, income and cashflow statements • Shows whether the company‟s operation has resulted in a profit or loss as of a defined time period • Can be thought of like a motion picture since it reports how a company has performed during the period(s) presented • Portrays the financial position of the company by showing what the company owns and what it owes at a reporting date • Can be thought of as a snapshot since it reports the company‟s financial position at a specific point in time. ▪ Reports on company‟s cash generation during the period(s) separating it by operating, investing and financing activities Balance sheet Income statement Cash Flow Statement
  44. 44. Balance sheet
  45. 45. Balance sheet item definitions Accounts receivable Money owned from customers Notes receivable Money owned from loans made (financial) Inventory Assets that are held for sale (or in the process of being produced for sale) Prepaid expenses Expenses that are paid in advance (e.g., rent) Property, plant and equipment Land, building, and equipment owned by the company; shown before and after depreciation Deferred charges Asset used to reduce future income (usually tax) Goodwill Intangible asset created upon an acquisition Assets Accounts payable Money owed to vendors for products purchased Accrued liabilities Expenses incurred but not yet paid (e.g. salaries) Capital lease obligations Payments on a lease treated as a loan Deferred credits Income received but not yet reported as income Reserves for employee benefits plans Money owed to employees (usually pensions and health benefits) Minority interested Third party ownership in company subsidiary Stockholders‟ equity Interest in assets after all liabilities are paid Liabilities and shareholders’ equity NOT EXHAUSTIVE
  46. 46. Income statement
  47. 47. Income statement item definitions NOT EXHAUSTIVE Sales and other operating revenues Money received for goods and services provided Income from equity affiliates Share of earnings in affiliated companies Operating expenses All operating costs (e.g. costs required for lifting oil and gas to the surface) Selling, general and administrative expenses Selling cost and non- production overhead costs such as sales and marketing, and R&D Exploration expenses Costs incurred in the exploration for oil and gas Depreciation, depletion and amortization Non-cash charge for the use of a fixed asset (depreciation), mineral resource (depletion) or intangible (amortization) Operating items Other income May include operating and non-operating income (best to check financials) Taxes Taxes paid or provisions made for taxes to be paid Interest and debt expense Interest paid on debt Minority interest Portion of earnings of subsidiary allocated to minority investor Non-operating items
  48. 48. Statement of cash flows Operating cash flow • Cash flow originating from the firm’s operating activities; sales of goods and services, purchase of supplies, SG&A, taxes Investing cash flow • Cash flow originating from the firm’s investing activities; sale of fixed assets, sale of long-term financial assets, collection of interest acquisitions, long-term financial investments Financing cash flow • Cash flow originating from the firm’s financing activities; insurance of stocks and bonds, long-term borrowings, short- term borrowings, repurchase of stocks and bonds, repayment of long-term debt, repurchase of short-term debt, interest payment, dividend payment
  49. 49. Statement of cash flows
  50. 50. 50 The financial statements are linked NOT EXHAUSTIVE Cash from operations Cash from investing Cash from financing Net change in cash Cash flow statement Investment and divestment by owners Net income and other earnings Net change in owner equity Statement of shareholder’s equity Revenue Expenses Net income Income statement Cash + Other assets Total assets - Liabilities Shareholder’s equity Ending balance sheet Cash + Other assets Total assets - Liabilities Shareholder’s equity Beginning balance sheet
  51. 51. Basic accounting equation….. Assets Liabilities Equity= + •This equality must always be true •For example, any increase in an asset must be offset by a decrease in an asset or an increase in a liability or equity What a company / business owns What a company / business owes= + What’s leftover for the owners of the business
  52. 52. 52 The financial statements can be used to calculate margins that measure cost efficiency of business activities (1) Costs that can be directly attributed to the goods & services produced (i.e., cost of goods sold) (2) Earnings before interest and taxes Metric Gross Margin Ability of a company to control “direct”(1) costs Gross Profit Sales Formulae Measures EBIT(2) Margin Overall operating efficiency; accounts for all operating expenses EBIT Sales Net Profit Margin Proportion of sales available for distribution to shareholders Net Profit Sales
  53. 53. The fundamental value of your company is set by growth, ROIC, and cost of capital Growth Value The money I make The money I invested to make money How much additional capital I am able to invest Cost of Capital How much my capital costs me Return on Invested Capital
  54. 54. Return on invested capital is the fundamental driver of a company‟s value; to have value ROIC must be higher than your cost of capital The money I make The money I invested to make money ROIC = After tax earnings from operations* The amount of operating capital invested in the company (I.C.) ROIC = *Often called “Noplat” or “Nopat” (Net Operating Profit Less Adjusted Taxes) The opportunity cost of employing capital to your business (for example interest cost) Cost of capital =
  55. 55. Understanding what impacts the ROIC Return on invested capital SG&A / Revenues Cost of Goods Sold / Revenues Depreciation / Revenues Property, plant and equipment / Revenues Operating working capital / Revenues Other operating assets, net / Revenues Pre-tax return on invested capital Cash tax rate Capital Turnover = Revenues / Invested Capital Times 1/ Operating margin = EBITA/revenues OR EBITA 1– 1– X X + + + +
  56. 56. 56 How to create value Economic Profit Invested Capital ROIC WACC x – Growth Sales margin Capital turnover xValue Reduce WACC via capital structure Improve return on capital • Increase margin • Increase capital turnover Invest in businesses with returns above cost of capital Increase growth if returns are higher than cost of capital

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