McKinsey's Seven Degrees of Freedom for Growth

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LarryHerfindal

Explore many different avenues for growth.

How can you identify new opportunities to increase revenue?

Some organizations use mergers or acquisitions to grow, while others develop new products or expand into different markets. These are all useful; however, some leaders use the same approaches time and again.

If you tend to rely on the same avenues for growth, you're likely to miss out on others that might be more advantageous or less risky. In this article, we'll explore the Seven Degrees of Freedom for Growth – a tool you can use to identify opportunities for expansion that you may otherwise overlook.

About the Tool

Mehrdad Baghai, Stephen Coley and David White, partners at McKinsey and Company, developed the Seven Degrees of Freedom for Growth model and published it in their 2000 book, "The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise."

They created the model to address the constraints that many leaders subconsciously apply when they think about how to grow their businesses. Each "degree" helps you open your mind and break out of habitual thinking patterns.

The Seven Degrees of Freedom for Growth are:

1. Selling existing products to existing customers.
2. Acquiring new customers in existing markets.
3. Creating new products and services.
4. Developing new value-delivery approaches.
5. Moving into new geographies.
6. Creating a new industry structure.
7. Opening up new competitive arenas.

From: "The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise" by Mehrdad Baghai, Stephen Coley and David White. Published by Perseus Publishing, 2000.

How to Apply the Seven Degrees

Let's look at each degree in turn, and explore what you can do to make the most of new opportunities in each area. It's best to analyze the degrees sequentially, as they become more complex as you go down the list.

1. Selling Existing Products to Existing Customers

Your first step is to think about how you can sell more of your existing products to your current customers.

First, look at your marketing strategy   . How can you encourage customers to increase the size or frequency of their purchases, or buy other products from your range?

Next, look at pricing. Have you priced your products or services competitively? How can you add extra value for your customers so that you can charge more for them? Or could you increase volume and maximize profit by dropping price?

Also, use tools such as the Brand Pyramid   to develop customers' loyalty, so that they are more likely to buy from you again.

2. Acquiring New Customers in Existing Markets

The second degree of growth gets you to consider how you can attract new customers for your existing product range.

You'll probably have plenty of ideas on how you can do this. However, if you don't do it already, look at using market segmentation   to divide your market into niche groups. Can you develop marketing approaches that particularly appeal to people in these segments – or to new types of customer altogether?

You can also use the Product Diffusion Curve   to target different customer types, based on the stage a product is at in its life cycle.

3. Creating New Products and Services

With this degree, you look into developing new products and services, and enhancing existing ones.

Review your current offering. How can you improve it to make it more appealing or more effective?

To generate new ideas   for products, use a combination of rational, structured thinking and brainstorming   , as well as creativity tools like the Simplex   process and TRIZ   . You can also use PEST Analysis   to spot trends or changes in customer perceptions, both of which can be opportunities for growth; while tools like Kano Model Analysis   and Doblin's 10 Types of Innovation   can give useful insights that drive product and service development.

4. Developing New Value-Delivery Approaches

This degree relates to how you handle products and services before, and as, they reach your customers. How can you improve the way that you create, offer and deliver your products to increase growth?

First, look at your current business processes   . Can you add value by exploring new approaches   , improving quality   , or working more efficiently   ? Use Value Chain Analysis   and Porter's Value Chain   to understand how you create value throughout your organization, so that you can look for areas where you can do things better.

Key partnerships and alliances can be invaluable here, especially if your organization struggles to meet demand on its own. Use the Outsourcing Decision Matrix   to identify which tasks you can outsource   and which you should keep in-house.

You could also explore entirely new sales channels. This can include bringing on board new distributors, or finding creative ways to get your products into your customers' hands.

5. Moving Into New Geographies

New markets can present exciting areas for growth. Before you start scanning the globe, however, look at the markets you already serve. Is there any way to deepen the distribution you have in these territories?

Then, look at your organization's reach on a national level. If you only serve a limited area, how can you expand into new markets at home? Where are your greatest opportunities?

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As you think about global markets, use the CAGE Distance Framework   to analyze which ones will be the best fit for your organization and which you should avoid. If you do expand into a new market abroad, use the EPRG Model   and Porter's Diamond   so that your organization can adapt to the country's culture effectively.

6. Creating a New Industry Structure

This degree encourages you to see how you can use alliances and acquisitions to grow your business.

Are there any organizations, either in your industry or outside it, that you can partner with or even acquire to achieve shared objectives, or create greater economies of scale   ? Can you increase your bargaining power   or have more influence on industry regulation with a strategic alliance   or merger?

Bear in mind that this can be a risky area for growth, as it's difficult to predict how mergers and acquisitions will play out – very many of them fail to achieve the value desired.

7. Opening up New Competitive Arenas

The last degree of growth involves searching out opportunities to diversify   , so that you can expand into new markets and industries.

Look at your assets using approaches like VRIO Analysis   and Core Competence Analysis   . Can you use any of these to create an entirely new business? Consider your organization's skills and resources, including people, technology and knowledge.