The Little Blue Reasoning Book - Brandon Royal [17]
Here is the template used to set up this problem:
Toy Production
Here is the nine-box table used to set up this problem:
Say we have a batch of 100 toys. The number 100 will be placed in the extended bottom right corner. Based on available data, the matrix might be filled in as follows:
Why do matrixes work so neatly? Things work neatly as long as all data is “mutually exclusive and collectively exhaustive.” What does this mean? Mutually exclusive is a fancy way of saying that the data does not overlap; it is distinct. In other words, toys must be either blue or green and either large or small. We can’t have toys which are both blue and green (e.g., colored blue-green or striped) or both large and small (i.e., medium-sized). Collectively exhaustive means that the number of data is finite. There are exactly 100 toys, of which 30 are blue, 70 are green, 65 are large, and 35 are small. Data which is mutually exclusive and collectively exhaustive ensures that everything will total both “down” and “across.” Matrixes also work with information (see Exhibit 3.1), in addition to numbers, as long as information makes sense when read across as well as down.
Because matrixes handle information so neatly, it is not surprising that they are a consultant’s favorite presentation tool. Folklore has it that one junior management consultant became so enamored with matrixes that he called them “boxes of joy”!
The truth is that matrixes are wonderful tools that can encapsulate a great deal of information. Case in point: The following write-up sheds light on just how much information can be gleaned from The Lots-Little Matrix (Exhibit 3.2), which can be used to understand how the two basic components of a company’s profitability — margin and volume — accelerate or trade-off with each another in a competitive business marketplace.
Exhibit 3.2 – The Lots-Little Matrix
Notes:
(Q) = Volume = quantity of product sold
($) = Margin = dollar “profit” per unit of product sold
The Lots-Little Matrix is useful for pinpointing where specific companies or industries are competitively positioned:
1. Sell a lot (Q), at a lot ($)
“Selling large quantities at high margins.” The computer software industry has provided examples of companies (Apple and Microsoft in their early days) that are/were able to sell large volumes of product at high margins, within limited time frames.
2. Sell a lot (Q), at a little ($)
“Selling large quantities at low margins.” The airlines industry is known for selling large volumes of product (seats) at low margins.
3. Sell a little (Q), at a lot ($)
“Selling small volumes at high margins.” Companies within the fashion industry (haute couture) are known for being able to sell relatively smaller volumes of product at high margins (sometimes very high).
4. Sell a little (Q), at a little ($)
“Selling small volumes at low margins.” Sam’s Fish & Chips (a generic, local food vendor) sells small volumes of product at low margins.
The Lots-Little Matrix helps tell a story about how businesses thrive and survive. Certainly companies would love to operate in category 1 and enjoy the best of both worlds: high margins and high volumes. But practically, the competitive marketplace does not usually allow such occurrences to be long lived. A company initially operating in category 1 would likely be forced into one of categories 2 or 3, as a result of competitors entering their marketplace.
Many businesses operate in categories 2 or 3. That is, they either have good margins but lower volumes (category 2) or lower margins but good margins (category 3). Category 4 would invariably represent those small businesses