Octalysis: the business analysis system I created in college

Thinking through all the necessary elements of a business can be a complex and intimidating feat. Most people have no clue where to start, what questions to ask, how to structure things, and how to tackle the problems. Even when you have studied those frameworks, the 3C, 5C, 7S, Porter's Five Forces, you still don't really know what to do once you lay out the structure.

Worry not! When I was a third year in college, I created this business analysis system for my consulting firm, and I have found that it can be adapted to conquer the case. The tool is called Octalysis, as it is a based on an octagon shape. It is an analysis system that divides a business into eight sectors: Finance, Customer/Client, Human Capital, Market, Competition, Resources, Technology and Operations.

1. Finance is pretty straight forward: profits, cash flow, pricing and the bunch.
2. Customer/Client is everything that deals with the customer, ranging from Marketing, Lead Generation, Lead Conversion, and Client Fulfillment.
3. Operations is everything behind the scenes, including logistics, manufacturing, and distribution.
4. Human Capital is everything dealing with the people, including the usual hiring and firing, compensation, management team, but also things like management strategy and culture.
5. Technology is divided into two fields: the technology of the product, and the IT systems of the company.
6. Market deals with issues like the economy, supply and demand, political stability etc.
7. Resources are the intangibles of the business: partnerships, intellectual properties, reputation and such.
8. Competition is what the competitors are doing and how to respond.

Depending on how deep and specific you want to go into the business, Octalysis can be derived into three layers. The octagon with the eight categories is the first level, and each of the sectors branch into the second layer, and even deeper into the third layer if necessary. However, most cases that you will tackle will not need the second and third layers, so you just need to make sure you understand Octalysis in the first layer.

The key to Octalysis is to analyze the branches separately, derive the strength and weaknesses onto the octagon, and visually see which part of the company should we work on. For instance, take Viralogy Shirts, a fictional t-shirt company. After analyzing all the separate sectors, one can plot out the level of each sector on the octagon with a dot extending out from each sector. The 90-degree corners where two legs meet (trace the dotted lines) would be considered normal performance. If it is plotted under the dotted-line intersections, then the company is performing poorly on that sector; if it is plotted over the dotted-line intersections, then the company is performing strongly.

After we have plotted out all eight sectors, we connect the dots and see the company "shape" based on how strong they are at each sector. If the shape cuts into the original octagon, that means there are very weak points side-by-side, and it raises a red flag for improvement. For presentation sake, we can then add the strong and weak points onto each sector. Here is an Octalysis example of Viralogy (click to see text clearly).

Note that the top sectors are the Active Sectors, as in you are able to change these things within a business. You can change your pricing, your marketing strategy, your operations, etc. The sectors on the bottom are the Passive Sectors, since the company cannot really change them. A company cannot change much of the market, their competitors, and can only change its intangible resources very slowly.

The sectors on the right are External Sectors: things dealing with the customer, the employees, the market, whereas the sectors on the left are Internal Sectors: things that deal with the operations, the technology, and the resources of a company. Understanding the nature of the sectors yields a great amount of information regarding a company. If a company is strong in the Passive Sectors - things they cannot change - but weak in the Active Sectors, this means that the industry and market is good, but the company is operating well and needs to improve. However, if the Passive Sectors are extremely weak, this means that factors that the company cannot change are doing poorly, and the company probably should not even be in that industry!

Similarly, if a company is strong in the External Sectors but weak on the Internal Sectors, that means the company is great with the people side of things -the customers, the employees, and the market- but weak on the operations, technology and systems aspect of the business. This is when they should consider upgrading their infrastructure, systems, or invite outside consultants to improve their operations. On the other hand, if a company is strong in the Internal Sectors but weak on the External ones, the company is probably filled with bright engineers, lots of money on infrastructure, great business systems, but lack the human touch of selling to customers with great service, creating a empowering culture where everyone wants to do the work, and too product-focused instead of market-focused.

Keep in mind that in case interviews for consulting firms, do NOT use the whole Octalysis structure as your framework. There are too many sectors to be covered in a 30 min interview, and the interviewer will be looking for very specific things. Rather, use Octalysis as a guideline to derive your own framework. Use it to ask the right questions, jot down notes, and organize your thoughts. When you have finally laid down the framework and structure, it should just be the 3-5 essential factors of the case. If you would like a more in-depth explanation of how to use Octalysis in a case interview, email Yu-kai at yukai.chou@fdcareer.com.

Now that you know the basic structure of Octalysis, you are already ready to tackle some free thinking business cases. In later guides, I will go over the second and some third layers of Octalysis, primarily digging into the eight sectors, benchmarking the strength and weaknesses, and utilizing a numeric rating system to help hone in on the sectors that a company should focus on. A guide will be released for each sector to help obtain an in-depth view of all the elements of a successful business. I hope you tremendous luck and ability in leveling up and growing in the path of the businessperson!