A 2x2 Matrix Is an Elegant Instrument to Effectively Communicate Insights
A two-by-two matrix is a simple and effective way of presenting information. It is very popular in consulting because it provides a big picture of options that are MECE. The matrix is generally divided into four segments, which indicate different strategic actions for each option within the respective segment. Single options are plotted into the matrix, taking two key decision criteria into account. The chosen two dimensions are independent of each other. Hence, criteria need to be carefully selected.
Use a 2x2 matrix in your interviews as a visual summary of the findings
It is recommended to use matrices (if possible) in case interviews, as it will show the interviewer that you can break down complex ideas and communicate these in a structured manner. A matrix is an ideal tool to synthesize complex ideas into simple options.
As an example, imagine you need to make an investment decision
Question: In which business segments should we invest further?
- Importance for our business (fraction of the overall revenue)
- Expected performance (Growth)
Key takeaways for a 2x2 matrix
- Scatter graph of two variables.
- Provides an effective overview of where to focus first before further analysis.
- Limited to only two variables.
The most known two-by-two matrix is the BCG matrix
The BCG matrix, also called the growth-share matrix, helps assess a company’s current product portfolio based on the product life cycle and the experience curve. Since both criteria are hard to quantify, proxies are used to illustrate them. The product life cycle is reflected by market growth, and the relative market share mirrors a company’s experience curve. Based on these two criteria, investment or divestment decisions can be taken for single products once they are plotted into the matrix.
- Low relative market share in a slow-growing mature market.
- Products mostly do not generate profit and may usually just break even.
- Divest, as these products have a negative effect on the overall profitability of the company.
- Low relative market share in a relatively young but promising market (growing).
- Potential of becoming stars if market share can be increased.
- If necessary market share is not reached, likely to turn into a poor dog, as soon as the market gets more mature.
- Careful analyses are needed to determine if to invest or not.
- High market share in a slowly growing/ mature market.
- Creates the highest cash flow.
- There is no further investment due to limited/ no growth potential, but trying to “milk” as long as possible.
- High market share in a promising market.
- To turn a star into a future cash cow, heavy investment is needed to fight competition and expand market share.
Key takeaways for the BCG matrix
- Helps to analyze where to invest or divest.
- Ideally, a product should develop from a question mark to a star to a cash cow.
- IMPORTANT: This should only be referred to as BCG matrix when interviewing with BCG, otherwise it is the growth-share matrix.
Use the Ansoff matrix to analyze revenue growth options for a company
Besides the BCG matrix, the Ansoff matrix is one of the most known two-by-two matrices. The underlying question of this graph is how a company could achieve future growth in terms of revenue. Here, four different strategic options are available: market penetration, market development, product development, or diversification.
- A Company is trying to grow within an existing market with existing products.
- It can be achieved by attracting new customers (first buyers), which bought previously from competitors (stealing market share).
- Low risk and growth potential.
- A Company is trying to grow in a new market with existing products.
- New markets could be on a regional, national or international level.
- Risk and growth potential are considered to be higher than the ones of a market penetration strategy.
- A Company is trying to grow within an existing market but with new products.
- New products do not need to be necessarily new, but can also be adaptions or updates to existing products developed using companies core competencies.
- Risk and growth potential are comparable to these of a market development strategy.
- A Company is trying to grow in a new market with a new product.
- 3 diversification strategies can be distinguished: horizontal, concentric, and lateral.
- Horizontal diversification: products are often unrelated to current products, but have the potential to attract current customers.
- Concentric diversification: products often display synergies with current products and have the potential to attract new customers.
- Lateral diversification: new products have no relation or synergies with current products.
- Risk and growth potential are the highest of all strategies.
Key takeaways for the Ansoff matrix
- Helps in answering how future growth should be achieved.
- 4 different strategies can be distinguished: market penetration, market development, product development, and diversification.
- Each strategy has a different growth and risk potential.