Properly framing a situation is one of the most important things you can do when trying to develop winning strategies. The profit tree is a straightforward tool to help you properly frame your situation. When it comes to profit, are you growing or shrinking? If you are shrinking, is it because of a decline in revenues, an increase in costs, both? If revenues are decreasing, is it because of a decreasing number of customers, or decreasing average sales per customer, or both? The deductive logic can continue down the tree until you get to some of the root levers of what is driving profit dynamics.
In many strategy projects, the profit tree is one of the first tools we use, because it helps a team quickly work with management to diagnose a situation, explore the business, and come up with hypotheses on profit growth opportunities. Most strategy consulting firms use the profit tree, and once you start using it, you’ll quickly understand why.
To get you going on profit trees, download the Profit Tree Improvement PowerPoint Template.