Using the Concept to Clarify Thinking

As with time order, you can use the concept of structural order to help you sort out faulty logic in a grouping. Suppose you are the manager of a major city's department of transportation, and have this set of steps presented to you for approval:

The objectives for the assignment, as we understand them, are:

1. To review and analyze field operations in maintenance and construction areas

2. To determine if adequate organizational and managerial flexibility exists to allow field engineers to properly respond to day-to-day operating problems and demands from the public.

3. To review and analyze the areas of preliminary engineering, road and bridge design, environmental process, right-of-way acquisition and traffic management

4. To review and analyze the organization structure of the Department

5. To identify the strengths and weaknesses within each study area

Why that order? Where did these ideas come from? First of all, you can see that point 5 does not go with the others because it refers to them all, so we can eliminate that from consideration. Then let's see what subjects he's talking about in the others:

If you attempt to see them in terms of a process concerned with roadbuilding, etc., you would assume the steps involved would be these:

l. Design

2. Construct

3. Operate

4. Maintain

In that case, perhaps the author meant to say that the objective for the assignment would be to:

Determine whether the Department is properly organized and managed to carry out its activities, of which there are four:

I want to give you one more example. It is a very difficult one, in that the list is almost a free association of points. However, it does demonstrate that the author had a structure in his head before he began to write; but because he was not overtly aware of it, he could not use it to guide his thinking.

The list was written by someone in a soft-drinks manufacturing company that had decided to put its product into plastic rather than glass bottles. However, it had two choices about how to go about it: buy the plastic bottles on the outside or create its own plastic bottle manufacturing capability. The author was against creating its own manufacturing capability.

There are a number of internal/external risks and constraints that preclude an investment in any plastic bottle venture:

1. Technical risk-undeveloped design problems

2. Environmental risk--legislated nonreturnable ban

3. Premium risk-consumer rejection of a premium package during an inflationary period

4. Nonexclusivity: (a) outside sales diminish marketing impact, (b) sales to others may be difficult with our ownership

5. Capital intensiveness ---the project has an extremely long payback period

6. Negative EPS impact (accentuated by leveraging)

7. Near-term R&D expense

8. Corporate cash flow problems---funds needed for expansion of existing business

9. Price slashing by glass manufacturers and/or lower than projected glass inflation rate vis- á -vis plastic

10. Other plastic manufacturers may effect dramatic price cuts upon entry due to lower return on investment goals (many are in 7-10% range)

11. Entry in the container industry which is typified by lower margins and in which the key is to be the lowest cost producer: Implicit in the entry is the probable downward reassessment of our P/E

This looks like a terrible mess, but the sorting process for fixing it would be the same as in other cases. First, go down the list and see why he is complaining about each point. Why is each one considered to be a bad thing? This will allow you to see some patterns.

1. High cost

2. Prevented by law from doing

3. Force lower sales or lower price

4. Low sales

5. High investment, low ROI

6. Lower EPS

7. High cost

8. Must borrow

9. Force lower price

10. Force lower price

11. Low margins, lower P/E

Whenever business people talk about things like costs, sales, prices, investment, and ROI, they are implying their knowledge of the relationships between these things as displayed on a standard ROI tree. If you impose the relevant points on such a tree, it is relatively easy to see what his message is: The project would have a negative impact on ROI.

The points about Earnings per Share and Price/Earnings Ratio suggest another tree and another message: The project would have a negative impact on EPS.

We are then left with two points: No. 8, we must borrow, and No. 2, there is a risk that we won't be able to sell because of a ban on nonreturnable bottles. The borrowing point can be fitted into the tree if l add another layer below profits to make room for taxes and interest. I've left this out to make the technique easier to comprehend.

If we try to put it all together, he appears to be saying:

We should think carefully before going into the plastic bottle business:

If there is a nonreturnable ban, we may be

precluded from doing so

Even if there is no ban, it would dilute our

profitability

Short term, lower EPS

Long term, lower ROI

Now that you see what the message is, you can scrutinize the individual points to make sure they are properly supported. I would guess they are not, only because I know that this particular company did go into the plastic bottle business and has made an immense success of it. What was left out of the author's thinking, apparently was an assessment of the favorable effect of plastic containers on the sales of the product.

The point I wish to reiterate is that you cannot tell that nonsense is being written unless you first impose a structure on it. It is the imposition of the structure that permits you to see flaws and omissions.