With a three-dimensional strategy for growth, European retailer grows core businesses while seeding future opportunities.
Challenge
A European retailer had grown to become a top-five player in its industry. However, the company’s relatively simple business model was limiting growth within its core business, and it had not yet addressed its consumers’ evolving preferences for new shopping formats and channels.
The CEO was concerned that the organization was missing opportunities to maximize profits and keep pace with competitors. He believed the solution was to launch bold new initiatives that would take the company in a new direction. Because it had a strong balance sheet and substantial cash holdings, the company had the flexibility to consider multiple opportunities. The CEO asked for the firm’s support to create a five-year strategic plan that would raise the company’s growth rate to the next level and to develop a portfolio of initiatives for pursuing the plan.
Discovery
The McKinsey team used the firm’s Three Horizons of Growth framework to help client executives examine the attractiveness of various opportunities. The framework provides a structure to assess potential opportunities for growth without neglecting performance in the present. It looks at:
1. extending and defending core businesses
2. building emerging businesses
3. creating viable options for future businesses.
Although each of the horizons has its own timeline, companies must manage businesses along all three platforms concurrently.
The McKinsey team first looked at opportunities within the company’s existing operating model and in adjacent areas, such as new markets, channels, and product categories. By analyzing the profit pools and expected trajectories of these areas over the next five years, the team identified 15 opportunities that showed the greatest potential for growth.
Next, the team narrowed the list of the most viable opportunities; helped the client identify the sources of its competitive advantage based on its unique assets, and subsequently targeted six growth areas.
For each, the McKinsey team and the client drafted a business model, including the approach to capturing the opportunity (that is, organic or inorganic growth), and requirements for capital investment and capacity. A series of “war games” helped top executives assess the markets from their competitors’ perspectives and understand how the competitors’ decisions could affect profitability, market share, and industry profit pools.
Pursuing any of the six opportunities would require significant investment of both capital and talent, which meant the client needed to prioritize the opportunities based on return on investment (ROI). The McKinsey team therefore helped analyze the opportunities using a “capital curve” that mapped the capital required for each initiative against its ROI. The analysis revealed that the bold initiatives envisioned by the CEO were not the most attractive opportunities to pursue first.
Somewhat surprisingly, the most attractive opportunity—the highest return with the least capital investment—was expanding the company’s core business. While expanding into other markets, channels, and product categories would also offer high returns, the capital expenditures associated with these initiatives would be significant, and therefore could not be launched at the same time as an expansion of the core business.
The team worked with the client to develop a five-year strategy with initiatives arranged along three timelines. The client would immediately begin expanding its core business—the first horizon of growth—while at the same time planning the capital reallocations required for the second horizon—expansion into new channels, markets, and product categories two years down the road. The company would also pursue a bolder set of initiatives associated with the third horizon which spanned a longer timeline and were driven by large acquisitions.
Impact
The client’s stock price rose sharply immediately following the announcement of the new five-year strategy. The early gains from the first phase of the strategy—growing the core business—were also promising, with the client outperforming competitors in terms of revenue and profit growth, and increasing share in a fiercely competitive market.
McKinsey helped the company to began piloting the three medium-term initiatives—expansion into new markets, channels, and product categories—with plans to roll out across the entire organization within two years. Looking to the third horizon, client executives began assessing potential acquisition targets and exploring creative options for industry-shaping partnerships and joint ventures.