Post #9 All growth strategies are not created equal

Great businesses never stick to a "business as usual" mindset. They find new ways to grow and improve their earnings. As an investor, it is important to develop a framework that helps differentiate between, and understand the risk-reward tradeoffs pertinent to different growth strategies.

One such framework is called the Ansoff's Matrix as show in the figure below.

To understand the four quadrants of this matrix, we will use Mc Donald's as an example. 

Market Penetration

This strategy aims to expand business through increased sales of its existing products in its existent markets. Mc Donald's leveraged this strategy when they opened their first Drive-Thru in Sierra Vista, Arizona in 1975. At that time, Mc Donald's was an already established brand with about 4000 restaurants. By doing this, Mc Donald's was able to sell more of its fast food products to existing customers who were pressed for time and could not wait much for their food. The strategy picked up steam quickly and continues to work well. Today, drive-thru is estimated to contribute a whopping 65% of Mc Donald's revenue in the US.

Hence to summarise, Market penetration is a strategy devised to sell more of a company's existing products in existing markets.

Market Development

The next strategy available for a company is to establish itself in new markets with existing products. These new markets can be new countries, new target customers etc. By the late 60's, there was a Mc Donald's in virtually every state in the US. However, the story of the company was just getting started.

The company went international in 1967 and opened restaurants in Canada and Puerto Rico. In the 70's and 80's it expanded to European countries, Japan, Australia, Brazil. By 2008, McDonald's had grown to 31,967 locations in 118 countries. Today, Mc Donald's international business contributes more than 60% of its total revenue.

However, conquering new markets is no easy feat and there are considerable risks involved. For example, while Mc Donald's has established its presence world wide, it could not succeed in every country. In Iceland, Mc Donald's had to shut shop due to large import costs and stiff competition from local food joints.

Product Development

This strategy is centred around R&D of new products and improvements to existing products. Mc Donald's started with Barbeque in the 40s, moved to Hamburgers and Cheeseburgers in the 50s, introduced the Big Mac in the 60s, Quarter pounder and McMuffin in the 70s, Happy Meal in the 80s, McFlurry in the 90s. Heck, it even started serving Oatmeal in 2010! 

"Keeping up with the times" is a full time endeavour. And, great companies must keep innovating, keep researching and must keep experimenting.

Diversification

When a company wades into new markets and new products at the same time - it is called diversification. This is the toughest beast of the four and if not done correctly turns into what Peter Lynch called "diworsification". Mc Donald's adventure into this quadrant began in Switzerland with the  opening of "Golden Arch Hotel" - four star hotels targeting business travellers in the week and families on the weekends. However, their decision to quit this business after three years speaks of just how profitable this venture must have been for them. 

An investor has to be careful of "diworsification" - it is many times the favourite of many hotshot CEOs and business executives but seldom bears fruit.

If you managed to reach here, congrats!! hope you learned something new today. Take care, enjoy ❤️