The McKinsey Hierarchy provides a strategic framework for identifying and prioritizing growth opportunities to maximize revenue. In today's competitive business landscape, companies must pursue growth to survive and thrive.
By methodically evaluating potential growth levers from the bottom up, organizations can target investments toward the highest-impact initiatives.
Overview of the McKinsey Hierarchy
The McKinsey Hierarchy categorizes growth opportunities into four tiers:
Existing Products and Existing Customers
This foundational tier involves deepening relationships with current customers by increasing the share of the wallet.
- Upselling and cross-selling: Encouraging customers to buy upgraded products or additional offerings.
- Improving retention: Reducing customer churn by enhancing satisfaction and loyalty.
- Price increases: Raising prices judiciously without losing customers.
Existing Products and New Customers
The second tier focuses on attracting new customers within existing segments. Approaches include:
- Enter new geographies: Expanding into untapped regional markets.
- New distribution channels: Reaching customers through additional sales channels.
- Category expansion: Appealing to fringe segments adjacent to the current customer base.
New Products and Existing Customers
This tier entails selling new products to established customers. Methods include:
- New versions: Releasing improved iterations of existing products.
- Adjacent innovations: Developing products that complement current offerings.
- Product bundling: Offering discounted packages or suites.
New Products and New Customers
The top tier represents entering new markets with innovative offerings. This high-risk, high-reward strategy includes:
- Disruptive innovation: Creating breakthrough products that redefine markets.
- Diversification: Expanding into entirely new segments, customers, and capabilities.
How to Apply the McKinsey Hierarchy
Organizations should proceed methodically up the hierarchy to balance risks and returns.
Step 1: Size the Opportunity
Rigorously evaluate the revenue potential within each tier based on historical data, customer research, competitive analysis, and market projections.
Step 2: Assess Feasibility
Determine the operational, technical, and financial viability of executing each growth initiative based on internal capabilities and resources.
Step 3: Calculate Required Investment
Estimate the investment and resources needed to adequately fund and staff each initiative.
Step 4: Prioritize Based on Returns
Rank opportunities by expected returns based on revenue potential versus required investment. Focus on the highest ratio of investment return.
Best Practices for Maximum Impact
- Pursue a balanced portfolio across all four tiers to mitigate risk. Do not neglect the lower tiers.
- Leverage quick wins from lower tiers to fund bigger bets at higher tiers.
- Review the hierarchy regularly as markets evolve and new opportunities emerge.
- Align organization structure, metrics, incentives, and culture with growth priorities.
- Take an integrated view of the hierarchy. An initiative in one tier can unlock more upside in other tiers.
Structuring the Growth Initiative Portfolio
Existing Products, Existing Customers
- Initiative: Retention program for high-value customers
- Description: Personalized loyalty program with tailored incentives and services for top-quartile customers
- Owner: VP, Customer Success
Existing Products, New Customers
- Initiative: Expansion into the Asia-Pacific region
- Description: Establish regional sales and marketing presence to acquire customers in target Asia-Pacific countries
- Owner: VP, International Expansion
New Products, Existing Customers
- Initiative: Upgraded enterprise platform
- Description: Next-generation version of flagship platform with additional analytics, automation, and AI capabilities
- Owner: CTO
New Products, New Customers
- Initiative: Autonomous vehicle sensors
- Description: Develop and commercialize proprietary sensor technology for autonomous vehicles, entering a high-growth market adjacency
- Owner: SVP, Emerging Technology
The Path to Higher Growth
The McKinsey Hierarchy provides a proven framework to analyze growth systematically. By diligently climbing the hierarchy to balance risk and returns, companies can pursue the most promising opportunities that deliver transformative growth. With consumer expectations rapidly evolving, savvy organizations will embrace this strategic approach to outmaneuver competitors, delight customers, and maximize shareholder value. The path forward is clear - it starts with unlocking the full potential of the McKinsey Hierarchy.
Executing the Growth Strategy
Successfully executing a growth strategy based on the McKinsey Hierarchy requires cross-functional coordination and laser focus on the identified initiatives. Organizations should take the following steps to drive flawless execution:
Secure Leadership Alignment
- Align executives on growth priorities and resource allocation. Address any conflicts early.
- Assign initiative sponsors from senior leadership to provide air cover.
- Communicate priorities across the organization to set expectations.
Structure for Success
- Establish a Program Management Office (PMO) to maintain rigor and coordination across initiatives.
- Develop detailed project plans covering goals, timelines, budgets, risks, and metrics.
- Assign initiative owners who will be fully accountable for delivery. Ensure they are appropriately empowered.
- Consider project organization structures like tiger teams, alignment to business units, or matrixed arrangements to provide the required focus.
Install Robust Governance
- Set regular cross-functional reviews to track progress, address issues, and maintain alignment.
- Implement Stage-Gate reviews to ensure initiatives meet prescribed goals before proceeding to the next phase.
- Enforce tight performance management with clear metrics and accountabilities. Be prepared to quickly reallocate resources from laggards to winners.
- Link incentives like executive compensation and team bonuses to growth initiative success.
Maintain Continuous Communication
- Over-communicate to keep stakeholders engaged through regular meetings, town halls, newsletters, intranet portals, etc.
- Celebrate milestones to build momentum and energize teams.
- Course-correct quickly if the execution goes off-track. Nip issues in the bud.
Sustain Impetus and Impact
- Institute robust change management to support affected groups through the transformation. Address cultural resistance early.
- Invest in capability building via training, outside experts, and talent acquisition to plug gaps.
- Maintain longer-term focus amidst quarterly pressures to avoid undermining growth efforts before they bear fruit.
- Codify changes into policies and processes so they endure organizational shifts.
Continuously Optimize the Portfolio
As market conditions evolve, regularly re-evaluate the portfolio by:
- Updating opportunity sizing - Review revenue projections, competitive dynamics, and customer feedback.
- Re-assessing feasibility - Factor in new internal capabilities and constraints.
- Recalibrating investment levels - Account for overruns or efficiencies realized.
- Re-prioritizing - Rerank initiatives based on the latest return potential and adjusting resource allocation.
- Secure leadership commitment and construct teams for success from the outset.
- Implement robust governance and discipline in planning and delivery.
- Maintain relentless communication and drive to sustain impetus through obstacles.
- Continuously reoptimize the portfolio as assumptions change.
Following a structured approach to execute the right initiatives identified via the McKinsey Hierarchy will enable organizations to realize their full growth potential. But the journey does not end there.
Sustaining Growth Momentum
Many management teams struggle to sustain growth as initial efforts plateau over time. However, the growth needle can continue moving upwards by:
Embedding Growth Capability
- Institutionalize growth disciplines by codifying processes into standard operating procedures.
- Build employee capabilities through training and exposure to best practices.
- Develop growth talent bench via leadership development programs, external hiring, and retention strategies.
Maintaining Healthy Dissatisfaction
- Continuously raise the bar on growth goals and key performance indicators. Avoid complacency.
- Incentivize the outperformance of targets, not just achieving them.
- Encourage productive paranoia - Fear of missing out on competition and disruption.
Sustaining Idea Flow
- Establish formal innovation processes like stage-gate development and internal venturing programs.
- Enable serendipity by driving collaboration across diverse functions, teams, and leadership levels.
- Infuse external perspectives through partnerships with startups, academic institutions, and consultants.
Optimizing Resource Allocation
- Prune legacy activities to free up resources for growth. Ensure sound ROI discipline.
- Maintain long investment horizons instead of eliminating promising initiatives at the first signs of hurdles.
- Balance growth investments across time horizons - near-term incremental improvements and longer-term disruptive innovation.
Making Organizational Change Capacity a Core Competency
- Plan for change fatigue by staggering major initiatives and allowing time for adoption between efforts.
- Develop internal change experts and equip all managers with core change management skills.
- Leverage change resilience built through early initiatives to absorb future efforts.
Keeping Customers at the Center
- Obsess over customer experience across all facets of growth initiatives - from product design to go-to-market.
- Continuously gather Voice-of-Customer insights through research, advisory panels, user groups, and customer advisory boards.
- Pre-empt changing customer needs by spotting subtle shifts in preferences and emerging use cases.
By institutionalizing these best practices, leadership teams can drive a step-change in growth performance that delivers exponential value over time. With disruption only accelerating, building these organizational muscles is imperative to outrun competitors. Companies that rest on their laurels quickly fall behind. Continuous application of the McKinsey Hierarchy and unwavering commitment to growth provide the only proven formula for long-term success.