This article explains the McKinsey Growth Pyramid in a practical way. After reading it, you understand the core of this strategy theory.
What is the McKinsey Growth Pyramid?
American organisational consulting agency McKinsey has developed quite a few strategies throughout the years, among which is the McKinsey Growth Pyramid. This model can be compared to the product market matrix of Igor Ansoff (Ansoff Matrix), which looks at current markets and new markets in combination with the current product range and the new product range. This can lead to 4 growth strategies; product penetration, production development, market development and diversification.
Development based on choices
The McKinsey Growth Pyramid takes this one step further and posits that companies should further develop their growth strategies based on four choices; operational skills, privileged assets, growth opportunities and special relationships. By looking at the business opportunities via various dimensions, a company has a good chance to grow. Below is the explanation of these four factors:
1. Operational skills
This is about the core competences within companies. A growth strategy is based on these skills. Everything that happens within an organisation can cause an organisation to become successful or can reduce performance. Think of departments with strong competences, such as customer service, distribution, technology and production. When these departments don’t function properly, this negatively affects the customer, and a company will notice that the growth process stagnates. The internal structure and collaboration must work well before the customer can be served.
2. Privileged assets
These ensure that an organisation can distinguish itself from the competition. These assets can’t easily be replicated by competitors, which means they give an organisation a distinctive character. Large commercial organisations can have a large and special customer base in the form of a CRM system, in which all their customer data is stored, for instance. The patents companies which have are also difficult to reproduce for competitors, making the respective products unique. Even specific equipment and machines which the company has manufactured especially for a production process are included in these assets.
3. Growth opportunities
A company needs these so-called ‘Growth Skills’ to carry out and direct the right growth strategy. It’s about the skills a company has developed regarding the production of new products. When these new goods are successful, this results in a growth opportunity for the organisation. The possibility of a strong sales team that is able to negotiate powerfully with external parties and carries out good acquisition with which they manage to sell their business fall under these growth skills. Even the possibility for expansion, takeover or focusing on a foreign market fall under the growth skills.
4. Special relationships
This concerns external parties with which a company already collaborates or will collaborate. As a result, an organisation has privileged access to other markets and/or new customers. It opens new perspectives and options that can give rise to trade agreements that benefit the organisation. The collaboration with producing industries, export firms and commercial organisations can also create further growth that keeps the competition at bay.
Seven Opportunities for Growth
From the McKinsey Growth Pyramid, seven opportunities for growth can occur that could lift a company to a higher level. This is a step-wise process, which explains the name ‘pyramid’. Below you can find the seven ways of achieving a growth strategy for companies:
1. Existing products to existing customers
This is the option within the McKinsey Growth Pyramid with the lowest risk and greatly resembles Ansoff’s product penetration. A larger purchase frequency by the customer yields more turnover and growth for the company. This strategy is based on customer loyalty. By trying to increase the purchase frequency, customers will purchase more of the same product. Additionally, it’s important to work on retaining customer loyalty; returning customers often also bring other customers with them. An organisation can use this strategy by opening more branches, for instance, so existing customers can be provided better service.
2. Existing products to new customers
In this McKinsey Growth Pyramid strategy, an organisation with existing products looks for new customers. This can be compared to the market development as mentioned by Ansoff. By offering existing products to a new target group, the turnover grows and profit will also increase. However, new customers must be approached with more power of persuasion. Advertising and social media can play a significant role in this strategy. Additionally, a company can opt to offer the products via other channels. The shop that usually only sold products in the physical shop would do well to also open an online shop. Situating in a different area or even abroad could also open up an entirely new target group.
3. New products and services
This strategy within the McKinsey Growth Pyramid entails a higher risk. By developing new products and/or services, an organisation doesn’t immediately know whether or not these will appeal to current and new customers. When the new products are intended for the existing customers, this can be compared to the product development as mentioned by Ansoff. Think of expanding the product offer and joining new technologies. That’s precisely what customers appreciate and what they expect from organisations.
When it concerns new products and/or services for new customers, this more closely resembles diversification according to Ansoff’s matrix. This entails a risk, as not only new products are developed, but an entire marketing strategy must also be connected to these so as to reach and convince the new group of customers. This often coincides with competition.
4. New distribution channels
This strategy is aimed at new delivery options. By tapping into new channels, more customers can be reached. It can be asked whether there are new ways to transport the existing products and / or services via new or upcoming distribution channels to the customer. Do these new distribution methods boost sales? For instance, customers can be served faster by working with courier services and other possible transporters. This strategy doesn’t just relate to the end product, but also applies to the distribution of materials. The sooner and easier these can be delivered to the company, the faster production arises.
5. New geographies
Looking for new areas as sales market entails a higher risk and is often difficult to achieve. Geographic expansion is one of the most powerful growth opportunities. Looking at the McKinsey Growth Pyramid, it can be compared to Ansoff’s market development in which he indicates that a company can focus on a new target group, but also starts a new geographic adventure, for instance, in a branch abroad. Naturally, this also taps into new target groups. New areas also mean ignorance about the target groups. Therefore, it’s wise to first conduct a thorough market investigation before deciding to rush into the new geographic area.
6. New industry structure
This strategy means that the sector is consolidated by takeover as a result of which the competitive dynamics change. Take into account the possibility of gaining turbulent competitors or consolidating the industry via a general acquisition programme. As a result, one can attract new customers.
7. New competitive areas
This is the most aggressive growth strategy within the McKinsey Growth Pyramid that is aimed at the business chain. It encompasses the possible vertical integration, to be taken over by suppliers or purchasers with their entire industry. For this purpose, an organisation must prepare well so as to properly use and apply the skills of these companies that have been taken over. The takeover or horizontal level is another possibility, which means a company looks for a similar company to with which to expand its own business.
It’s important to look at how all the steps in the McKinsey Growth Pyramid can be carried out properly. For this purpose, McKinsey offers five options. Noted that ‘joint ventures’ entail a very high risk and that the risk decreases step by step. The ‘organic investments’ therefore create the lowest risk.
Entering into close collaboration with other companies, from which a new organisation arises (joint venture), allows an organisation to spread its wings even more. In case of minority stakes, an organisation agrees to a partial takeover. In the form of an alliance, a company enters into a collaboration with another organisation, but the company’s own identity remains intact. In case of a marketing partnership, an organisation chooses to create and carry out a marketing plan with another company. The execution and collaboration with the lowest risk is that of the ‘organic investment’, where the company makes certain investments in other organisations that are carried out in a well-defined manner and according to fixed agreements.
Now it’s your turn
Do you recognize the practical explanation of the McKinsey Growth Pyramid or do your have any additions? Do you have any tips or tricks that you want to share about using the McKinsey Growth Pyramid or any other methods related to organizational or market development?
Share your experience and knowledge in the comments box below.
- Baghai, M., Smit, S., & Viguerie, S. P. (2007). The granularity of growth. The McKinsey Quarterly, 2, 41À51.
- Mwadime, C. (2010). Analysis of Growth Strategies by The Kenya Commercial Bank L td. (Doctoral dissertation, University of Nairobi, Kenya).
- Segev, E. (1995). Corporate strategy: Portfolio models. London: International Thomson Publishing.
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