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Empowerment Through Knowledge
No.21: Ansoff’s Matrix

Most businesses have the intention to grow for a number of reasons. One reason is to increase sales, and hence, profits. In other instances, the business might want to achieve a dominant share of the market so that they may be in the privileged position of having a virtual monopoly, possibly dictating prices. In most cases however, growth strengthens the business, making the firm more sustainable for the future and distancing it from survival mode.

Growing a business can be done in various ways, and there are risks and rewards associated with each path chosen. H. Igor Ansoff was one of the leading lights of early corporate strategy and in his seminal 1957 paper, Strategies for Diversification, he proposed a 4-path framework that has stood the test of time and hence, can be a highly useful tool for strategists and business owners in deciding which way to go to grow their businesses.

Market Penetration – Current Market with Current Product(s)

Growing your business by doing more of the same.

Imagine you are a business in a market which is still growing, and you have a decent competitive advantage, or are at parity level with your main competitor(s). If you have limited resources (who doesn’t?), then your best use of these is to continue hammering away at this market to gain as much market share as possible since it should be relatively low-hanging fruit. This situation will, of course, be temporary, since at some point the market will reach saturation or maturity, at which point it will become increasingly difficult to continue doing what you are doing and continue gaining ground. Why? – Because your other competitors are doing the same, and unless you have a strong, sustainable, competitive advantage, you will need to fight very hard for every new customer. You will need to steal these from your competitors, who in turn will be trying to do the same.

This should be a reasonably good strategy if your business happens to be in a market that is still growing (imagine the mobile telephone industry or the internet industry in the 1990s). If, on the other hand, your market is already mature or even possibly starting its decline phase (imagine the smartphone market now), then your resources will need to be used more and more for the constant, incremental innovation of your products (or services) just to stay ahead of your competition. This is not easy, and can be risky, leading to possible business failure as profits are eroded.

 

Product Development – Current Market with New Product(s)

This is possibly the least risky option to take if you cannot continue growing through market penetration alone.  The risk stems from the fact that you are going to have a learning curve in becoming as good with new product lines as you are with your current ones. Remember that you will be selling to the same market that already expects a certain quality from you, since you built a reputation with your current products (or services). Hence, a false step with the new products and you could end up losing customers, instead of growing your business.

An example of this could be, for instance, a furniture maker who introduces a line of white goods. An important note here is that ideally, if you start offering a new product/service, first check if it is not already a saturated, or worse, declining market which may make it particularly tough to enter, unless, again, you can enter with a strong competitive advantage.

 

Market Development – Current Product(s) in a New Market

This is arguably on a similar risk level to Product Development. On this path, your business decides that, since you are strong in what you do, you want to stick to doing that, but start looking at other markets where to peddle your offerings. This is generally assumed to be a new geographical market, which is the most common form of Market Development. The riskiness of this path of internationalization is called liability of foreignness, whereby you are at a disadvantage in a country that you are not as familiar with as your own, which may include regulations, culture, language etc.

There are various ways to do this, with varying degrees of risk versus control issues. One way is to find a foreign partner to do the work for you in their country while you just supply them with your superior product. This is not very risky since not much investment is needed, but you will have little control over what is being done in that country, in your product’s name. Another way would be to open up your own office in the new market and selling directly in that market. This requires quite some investment through time, money and effort but if successful, you have total control over the operation. Some local examples of Market Development include Malta Business School’s partnership in Georgia, Hili Group’s franchise of McDonald’s in Greece and Latvia (among others) or Hudson Holding’s business set-ups for Nike, Converse etc. in North Africa.

There are other ways to tap into new markets, however, including ones that are not location-based. There may be good reasons why, for example, your product sells mostly to men. But wouldn’t it be useful to see if the 50% market of women that you are not hitting might actually be an untapped market if you only tweaked your marketing campaigns and/or repackaged your product slightly? Think of the killing Gillette have made with their shavers.

 

Diversification – New Products in New Markets

Although this strategic growth path is definitely the riskiest, since it involves simultaneous learning curves in both new products and new markets, sometimes opportunities present themselves that are difficult to ignore. Diversification is further divided into Related or Un-related Diversification, whereby Related Diversification can be Horizontal or Vertical.

Unrelated diversification tends to be the riskiest option since it takes the entrepreneur totally out of their comfort and expertise zones. This, for example, would be an IT company that opens a petrol station. It may sound ridiculous, but similar situations happen all the time. However, usually the entrepreneur facing this challenging opportunity will hire or acquire expertise in that type of business to reduce the risk. Hence, the entrepreneur in question needs to have deep pockets, or be very resourceful. Think Polidano Group or Eden Leisure when they each opened radio stations.

Related diversification is still risky, but less than the unrelated variety, since there is some knowledge overlap. Horizontal diversification partly overlaps with Product Development, since you start offering new products to more customers than your pre-existing ones. The new products become an autonomous business line serving its own set of old and new customers. Imagine a large company that transforms its canteen (which only served its own employees) into a fully-fledged restaurant serving the general public as well.

Vertical diversification involves getting into a business that is within the value chain of your existing business, either upstream or downstream of your current position. For example, Netflix diversified by becoming show and movie producers, instead of remaining video streamers (or originally DVD seller/renters). They hence diversified upstream. A printing firm could open a business importing paper, not just to supply its own printers (also upstream). Alternatively, Millers Distributors, for example, diversified downstream when they opened the Agenda Bookshop chain (and later the Till Late chain).

 

Words of Caution

Firstly, although some cases can be very clear and obvious, the lines can many times be blurry. Please always remember that such instances should not dishearten you if you are unsure whether your particular case fits into one quadrant or another. The framework is there to provide you with insights so that you can make a better, more informed decision but it can often still be difficult to identify the best way forward.

Second, in all of the above, there is an assumption that your product deserves to be bought. If your product or service is of poor quality, then first you need to fix that, or do something else.

Finally, it is unlikely, especially if you are a small business, that you can choose more than one of the above paths at any point in time. You simply won’t have the resources, and you will be spreading yourself too thinly, making yourself too vulnerable in your existing market and to attacks from your competitors. The founders of Google had once asked their employees, according to Doug Edward’s book about the organisation’s early years, what their biggest cost was. The staff’s answers about wages, hardware, software etc. were all summarily shot down. Sergei Brin and Larry Page finally said that it was the opportunity cost… the cost of not doing something because the resources have been used elsewhere. Therefore, to all the business development managers and entrepreneurs out there; do your homework before you commit your resources to the quadrant you choose.

 

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