Applying Core Mental Models to Strategy Consulting
As a Farnam Street post states:
Mental models are how we understand the world. A mental model is simply a representation of how something works.
The page provides a long list of mental models, with summaries, and books that go into further detail.
According to FS, there are nine “core” mental models:
- The Map is Not the Territory
- Circle of Competence
- First Principles Thinking
- Thought Experiment
- Second-Order Thinking
- Probabilistic Thinking
- Occam’s Razor
- Hanlon’s Razor
Given I’m a consultant, I thought it could be fun to invent a consulting scenario utilising all these. Note this is entirely a creation and has no relation to any client I or my company have worked with (not that I know of anyway!)
A client, a US renewable energy company, brings you in as they are unsure which country in Europe they should expand to.
The client provides you with information about their operating model and current business units, as background for your research. But beware - this is only the Map, not the Territory. A company is a complex beast, and it cannot, in its entirety, be easily explained. Therefore, make sure to probe and gather as much truth as possible. Is this genuinely how the company functions in reality, or how it does on paper? What about the underlying attitudes and drivers of the organisation? If possible, speak with someone from every team involved in the proposed international expansion, both blue-collar and white-collar. You need to try to remove the risk of an unexpected forest to waste time in (e.g. zero interest in geothermal energy), or a fog-hidden mountain you’ll need to overcome (e.g. the CEO is banned from visiting Slovenia) - anything that could invalidate your findings.
If you find they have missed something, don’t put it down to malice - as Hanlon’s Razor states, it’s probably… Well, the Razor says stupidity, but let’s say an honest mistake. After all, Language is only a Map of the Territory of Feelings, Emotions, and Thoughts.
Now we know the ask, it’s time to create the team. Ask yourself: Is this an area you know about? In other words, is it within your Circle of Competence? Consultancies are full of incredibly intelligent people with varied backgrounds. Even if you do know about renewable energy and international expansion, it’s always worth asking around to see who might have complementary experience.
When you get onto the assignment itself, First Principles Thinking can give some key insights. What are the root questions that need to be answered, and the fundamental data that needs to be gathered, to provide the optimum solution to the client? Be sure to question assumptions. For example, you hear it’s always raining in England, so it’s a terrible place for renewable energy. But is this true? Let’s see. What is the solar potential in Great Britain? What are the trends in PV installation? And what about non-solar renewables? Turns out the UK is an excellent place for wind power. There are other factors to consider too - the cost of energy, the demand for electricity, the price to the client. Don’t let an unchecked assumption strike out a good path of inquiry.
Once you have a hypothesis, do a Thought Experiment to iron out the specifics: “If the client decides to expand into Germany, what would happen?” Lay out all the steps, the things to measure, the possible consequences. What would be required for it to be a success? Who would need to be involved? What could go wrong? Try to imagine this in as much detail as possible.
Use Second-Order Thinking to assist in this. For example, say there was a change in the German government - so what? Perhaps a change in regulation to be more welcoming to renewable energy. But what if, in response, France changed their regulations to be even more welcoming - how would that change the calculations? Or, would Germany’s change in regulations change the competitive environment significantly, attracting other companies, meaning the client would have to cut prices, reducing profits?
There are, of course, an infinite number of possible outcomes, and not are all worth spending time on. Use Probabilistic Thinking to work out the chance of each of these combinations being true and what effect they’d have on the project. The election is in six months and the current approval rating is at 30% for the incumbent - so the chance of a change of government before the project starts in 12 months is 80%. Definitely something to be considered. But both parties and the populace have similar attitudes towards renewable energy, so the chance of a policy change is only 10% - not worth investing too much time into.
If you want to go even further, challenge the default question (depending on the client!) with Inversion. What if they didn’t expand their renewable energy business into Europe? What about expanding into Asia? Or is expansion the best option right now? There are opportunity costs to every decision.
Although the answer is probably Occam’s Razor - put solar in Spain, it’s big and sunny.