How to Use Logic Trees in Business

Logic Tree diagram

TABLE OF CONTENTS

Introduction

To apply logic trees effectively in business situations, you need to understand the different basic types of logic trees and how to use them. It’s also important to understand their limitations.

Logic trees are a cornerstone of critical thinking. They provide a visually organized way to break down a concept into parts. The trees demonstrate causal relationships between the high-level topic and its pieces. While they are particularly relevant in business, they aren’t the right tool for all situations.

Logic trees are a cornerstone of critical thinking. They provide a visually organized way to break down a concept into parts. The trees demonstrate causal relationships between the high-level topic and its pieces. While they are particularly relevant in business, they aren’t the right tool for all situations.

Types of Logic Trees

First, you need to understand the different types of logic trees.

Factor Tree

You use a factor tree to break a concept into its parts without applying particular rules. They can apply to anything. You could use it to break your product down into its features. Or, if your business produces a physical good, you could break it down into its parts. Alternatively, you could take a business objective and break it into the steps necessary for achieving it.

Deductive Tree

You use a deductive tree to state a rule and break it into the sub-rules that must be true. In business, financial statements are a ubiquitous example of this. For example, return on invested capital is a financial ratio that measures the profit that a firm generates from the investments by its owners. By definition, it can be divided into its components using a tree. Logically, this starts with separating profit and capital into separate branches. And then you decompose profit into revenue and expenses. This process continues until you reach an appropriate level of granularity.

Decision Tree

You might use a decision tree to determine whether to proceed with a project. It assigns a probability to a range of outcomes. Venture capitalists often apply decision trees when evaluating startups. They gauge the exit value of the venture and estimate the likelihood that venture will achieve that value to arrive at its risk-adjusted value.

Heavily regulated and capital intensive companies might also employ decision trees to evaluate investment decisions. For example, how much should an electric power company pay to acquire the rights to build a hydroelectric dam on a river? The risks involved in project approval necessitate a structured approach to quantifying them.

Hypothesis Tree

You use a hypothesis tree to break a high-level hypothesis into specific hypotheses. You use it to focus your attention on the most critical aspects of a problem. And then take the most appropriate action. For example, say your hypothesis is, “we can grow sales by 20% in the next 12 months.” The next step would be to identify the factors that must be true for this to happen. The branches could be, “we can grow sales in mid-Atlantic states by 50%,” and “we can retain 85% of current clients.” You get the idea.

How to Use Logic Trees

Second, you need to understand how to use them. In business, the point of logic trees is to solve problems. You don’t use them to understand or analyze something without taking action. That approach tends to be a waste of time. Instead, after defining a problem, you use logic trees to determine how to solve it.

You start with the factor tree. Because factor trees have the fewest rules, they are the best place to begin. One key benefit of a factor tree is that you can start with the tree’s branches and work backward if you’re having trouble defining your problem. You use inductive logic to refine your problem definition by beginning this way. Once you have arrived at this problem definition, use it as the starting point in all of your trees.

Deductive and decision trees come next. One type of deductive tree is the return-on-invested-capital tree. And it’s vital when analyzing businesses. After all, capitalism relies on investors injecting capital into a venture with the expectation of generating an acceptable return. When a company employs you, you often must demonstrate how solving a problem contributes to overall financial performance.

Decision trees can help capture points of uncertainty. In business, you never know how things are going to turn out. Part of understanding a problem is identifying major if-then questions. For example, if your company gets approved for a credit line, (then) it will invest in more equipment. If not, (then) it will evaluate alternatives for outsourcing production.

You should save your hypothesis tree for last. The hypothesis tree connects your problem to the actions you’re going to take. By breaking the problem into sub-hypotheses, you can determine which one has the most potential to solve your problem with the least amount of effort. This approach is the essence of problem-solving. Do the most with the least as quickly as possible.

How to Create Logic Trees

Third, you need to develop a way to create and update the logic trees. You can build logic trees in several different places. But do them in your head.

Some good tools include:

—Lucidchart. This web app provides you with plenty of flexibility to build your logic trees. And you can share your work with other people, collaborate in real-time, and export them to other programs.

—Microsoft Excel. Microsoft Excel works reasonably well for creating logic trees. You can use the shapes tool to create logic trees in a spreadsheet. However, you can’t work on the tree with someone else in real-time.

—Whiteboard. Whiteboards are probably the most common place where people make logic trees. However, they don’t work for remote collaboration. And they can’t be updated later unless you want to rewrite your work or not clean your whiteboard. For business issues with longer time horizons, it’s preferable to have them in a digital environment.

—Paper. Pen and paper work fine in meetings when you need to test the speaker’s logic. And they can work for brainstorming in a pinch. But for the reasons already mentioned, they’re not ideal.

Understand the Limits of Logic Trees

Fourth, you need to understand the limits of logic trees.

Logic trees can grow unwieldy. For example, mind maps are a form of the factor tree. And they generally do not lead to the desired outcome. Since they inherently lack structure, they are prone to growing large and getting into the weeds. For this reason, it’s essential to stay grounded in the problem-solving process.

Logic is just one type of persuasion. Like any tool in business, you can’t over-rely on it. Causal logic has its flaws. For example, solving problems requires influencing people. And selling your ideas can include logic, emotion, or values-based tactics for winning over the audience. Logic alone will fail to convince many audiences. They will say things like, “well, that’s all in theory, but things don’t work like that in practice.” And logic trees are not particularly effective tools for providing these skeptics with the emotion or values-based arguments they need to get on board.

Logic trees do not demonstrate the relationships between the components. A significant limitation to logic trees is that, even though you can list all of the elements, it is usually impossible to accurately capture how a branch interacts with other tree branches. Attempting to capture these interactions beyond their broadest strokes is a waste of time.

Logic trees also fail to capture the relative importance of components. Not all parts are equal. To overcome this limitation, you can adopt more of a systems approach. This approach lets you reveal pieces of the puzzle and focus on the system’s output without getting bogged down in specific relationships.


BlueRipple can help you build your ideal career and make more money.


Logic trees assume that these components remain more or less constant over time. In reality, the world is in a continual state of flux. In a business environment, inputs can change rapidly. How you deconstruct a problem is never 100% accurate. And it will — in all likelihood — only grow more inaccurate with time.

Conclusion

Understanding how to apply logic trees is one of the core skills of performing at a high level in business. The opportunity is limitless. Few people understand how to use them properly. And those who do will have a significant advantage. However, one must also recognize their limitations. Overuse and misapplication won’t lead you to the results you’re striving to deliver.