Today’s article is about using decision matrices in cases. Decision matrices are a way of visualizing all of the various strategic options you have in a business situation.
They’re useful because they all you to very easily narrow down all of your potential options to the one or two that you will pursue.
We’ll start by talking about the example everybody knows (the BCG Growth-Share Matrix), and then explore how it can be used in both competitive response situations and to prioritize solutions.
The BCG Growth-Share Matrix
Believe it or not, we’re looking at history. In the 1970s this little table allowed BCG to take the consulting market by storm and upend McKinsey’s decades of dominance. It’s a little antiquated by today’s standards but it is still the most famous example of a decision matrix out there.
A decision matrix is a 2×2 table with a different factor (market share, market growth, impact, urgency, ease of implementation, etc. ) plotted on each side. Each quadrant is a possible outcome.
It’s up to you to figure out which quadrant you are in, but once you figure that out you can plot out a potential solution.
In the case of the BCG Matrix, the way it worked was that BCG was hired by companies with multiple products to figure out what strategy they should take with each.
BCG would come in, quantify each product’s market share and market growth, plot them on the matrix, and identify which quadrant each product fell into.
From there, they’d recommend that you try to grow stars, optimize cash flow from cash cows, eliminate dogs, and try to move the question marks to stars or eliminate them.
It’s really easy to understand, right? That’s the power of decision matrices. Now let’s see how they can be applied to determine competitive responses or prioritize potential solutions.
Decision Matrices in Competitive Response Situations
Let’s say that I am Coca-Cola and you are Pepsi. I am thinking about changing my pricing strategy and I’m wondering how you could potentially react.
This is a perfect opportunity for a decision table where I can plot raising / lowering prices for Coke vs. raising / lowering prices for Pepsi and look at each potential outcome.
Here’s a simple decision matrix for raising / lowering price. It’s built on the assumption that customers are price sensitive and would switch brands if prices were changed.
What we can see is that if we decide to raise price and Pepsi follows suit, we both win and have higher margins. If we lower price and they lower price, we both lose and have lower margins.
What’s really interesting is the situations where one player raises prices and the other does not. In those quadrants I’ve assumed that the company who raises price will lose customers to the company that lowers price. That may or may not be true.
What would this table look like if we knew customers were relatively price insensitive and brand loyal?
Under these set of assumptions the only rational thing to do is either raise prices and aim for a mutual win, or if you don’t want Pepsi to have a higher margin and you don’t think they know that customers are price insensitive you can do nothing.
Which set of assumptions are better? I’d argue that reality is somewhere in the middle. Customers are willing to tolerate small changes in price without much change in their behavior, but only up to a point.
This creates an equilibrium price for Coke and Pepsi. Sure, they may change prices a few percent every year in either direction but it’s clustered around an equilibrium price. Pretty interesting to think about.
And that’s the power of a decision matrix!
Decision Matrices for Prioritizing Solutions
Another application of decision matrices is for classifying potential solutions at the end of a case. One way to do this is to create a matrix that plots Impact vs. Ease of Implementation.
Let’s take an example. Let’s say you’re doing a case where the client wants you to improve its profit. You determine that:
1. Customers are price insensitive, so you can raise prices by 20%.
2. There is market demand for a new (but related) product that is within the client’s ability to make, but it will require a significant time and capital investment..
3. A marketing campaign may boost sales of the present product by 10%.
4. There might be a way to lower manufacturing costs by 5%, but it would require a significant time and capital investment.
How would you decide between these options? Potentially you could just choose the one and explain why you favor it, but with the impact / implementation matrix you can classify each solution.
For example, the price increase would be the ideal solution, the marketing campaign the quick win, the cost reduction would have no merit, and the new product would be the possible solution.
Then you could prioritize each of the solutions – raise the price and run the marketing campaign immediately, and look further into the new product to determine if you want to pursue it.
Decision matrices are a way of visualizing all of the various strategic options you have in a business situation.
Use them when you need to consider multiple scenarios (i.e. in a competitive response case) or choose between multiple options (i.e. when you are prioritizing solutions).