Wednesday, October 13, 2021

Ansoff Matrix

Previously, I discussed risk management and industry competitive analysis. I will now extend those earlier discussions in this article by focusing on the ways in which a business can consider its options for its growth. Specifically, 'growth' relates to securing more sales revenue and or volume. Since businesses exist within a competitive landscape, this growth must usually occur after capturing market share from competition while managing the associated competitive risks.

Uses for the Ansoff Matrix

  • Ansoff's Matrix is a marketing & corporate strategy tool. It can be used to formulate your business plan's growth-oriented mission statement. Businesses with strong growth ambitions often consult these strategies. 
  • Third parties reviewing a business plan, especially investors who will suffer loss if your business' ventures fail like venture capitalists are particularly interested in your choice of strategy for enhancing revenue. Growth strategies therefore provide a very strong indication of the level of risk associated with your business' vision. 
  • Defining your business strategies according to the Ansoff Matrix provides a systematic way of  integrating risk management into the marketing strategic plan. Specifically, it allows marketers to easily identify risks, rank those risks and then plan tailored responses for each risk, according to its intensity.


Types of Growth Strategy, Defining 'Product' and 'Market' & Gradations

The 4 strategies in ascending order of risk are as follows. It is worth noting that any of these strategies may be used in conjunction with another. 

1. Market Penetration
2. New Product Development (NPD)
3. New Market Development
4. Diversification

Each of these 4 strategies is graphically represented by a quadrant in the Ansoff matrix. The axes of the matrix represent strategies involving the 1) product and 2) market. Each axis is divided into either 1) current or 2) new. In other words, a strategy can involve either a pre-existing product or a new one. Similarly, the strategy can involve either a pre-existing market or a new one. Each strategy can therefore be plotted within the matrix to simultaneously consider the nature of the product and market in these ways.

As strategies involve newer products and or markets, the risk of loss and faillure increases. In other words, the level of risk increases as a business moves further away from what it already knows and into something new whether new markets and or new products. Since market research and product research & development (R&D) required to engage in something new do not guarantee success (ie sales), there is always a likelihood that your financial investment into these activities can be lost. In fact, non financial losses are also looming probabilities. As discussed below, the least risky strategy is market penetration while the most risky one is diversification

Given the potential for different definitions for 'product' and 'market', managers should communicate the interpretation that should apply to their organization. For instance, in my practice, a 'product' is any unique item for sale. It usually has its unique barcode (a digital fingerprint that hopefully conveys my message of its individuality and uniqueness). In other words, if I sold polo shirts, color variations or other items within a product line can not be collectively called a product. Instead, I select the standard or original version as a single 'product'. As will become apparent below, the decision to introduce newness like variations in color, size and so on requires some specific consideration regarding associated risks.

For my purposes, a 'market' usually consists of members who qualify for the product and can probably be served through sales channels available to their market. If the shirts are sold in City A stores and City B stores but shoppers from either city do not access the other city, I can say that I have 2 markets that are defined in terms of geographic location. I may name them the City A market and City B market. In reality however, markets may also be separated psychographically, socioeconomically and otherwise. The key point is that a 'market' is specifically defined and separate from others. For instance, Stores A and B may be feet away from each other on the same street but belong to different markets. If the stores have extremely different prices; one very high to be exclusive and the other very low to cater to budget conscious shoppers, members of one socioeconomic market are unlikely to ever visit the store of which they are not members, even if the other store is nearer to their homes.

In some organizations, quadrants contain gradients that represent different levels of newness or deviation from the current product or market. Gradation reflects varying levels of risk within a single quadrant. For instance, imagine that you decide to sell your shirts to a new market, ie the middle socioeconomic market but within the same town. The level of risk will be different if you sell the same shirts in a different city whose commercial environment is entirely new to you. The risk increases even further if you sell in a different country. 

As you might have suspected, the same gradation can apply to products. For instance, if you offered polo shirts that were extra small and pink (ie rather than the standard navy blue), you run the risk that your market will not buy them. Has your market consisted of men whose machismo will prevent them from buying pink, even for their sons? Knowing the qwirks of your market, you will also need to decide whether offering a dress shirt of linen (ie rather than a polo shirt made of jersey material) is marginally or considerably more risky. Each of these new items may appear on a different gradient. These differences are clearer if you started to offer products that are: add-ons like belts and hats that complement the main product; upsells like fancier polo shirts or; products in completely different industries like daycare services which drastically deviate from clothing.

Needless to say, while considering the gradations of product newness, you must simultaneously do this for markets. For instance, considering the qwirks of your market, do you need to treat the pink shirts as 'new' products in a 'new' market because, up until this point, your store has only attracted men, but women and their daughters are the only likely buyers? If you are thinking about the daycare services which, in addition to being a different product, also caters to a different market, its riskiness transcends pink polo shirts for women despite the fact that daycare services exists within the same quadrant for both new product and new market.

This post will now explain each of the 4 strategies in turn. However, in the cases of new product and new market development, there is additional discussion about the associated risks.


1. Market Penetration - LOW Risk
This strategy involves a 
  • current product  AND
  • current market

Aim: To increase market share by increasing dollar value of revenue. Within your current market, you have the option of targeting either:

  • customers from competitors (direct and indirect)      --OR--
  • YOUR current users to consume more

This applies to cases in which you are already serving a particular market but wish to deepen your hold on that market, ie expand market share. See examples below this strategy. When using this strategy, you likely need either very little to no market research to achieve this successfully because there are no new markets to be researched, nor products to be developed and tested. The market is already like your familiar 'home base'. NB. This strategy is not ideal if you are in an already crowded market and your product is in its mature stage.

  • Example(s): forms of this strategy.
    • If a brand called Kopa-Cola already sold its drink in City X (ie a pre-existing product and market) but 
      • now tries to increase sales by introducing a 6-pack, perhaps pricing it so that the last bottle is free. With this approach, the brand is targeting its own customers ... OR
      • now offers the drink as part of a bundle that includes tickets to movie theatres that cater to the competition's drink. With this approach, the brand is targeting the competition's customers.
    • Opening new channels and or making existing channels easier to use within the existing market with new physical retail outlets, new websites, new social media, live chat, etc
    • Loyalty programs encourage your current customers to continue buying. Consequently, they meet the objective of this strategy, ie to increase sales. (As a side note, loyalty has the added benefit of raising switching costs as per Porter's Five Forces).
    • Market-appropriate tentpole promotions like Mother's Day special, Christmas sales, etc. These promotions may include sales like buy 1, get 1 free or earn double rewards.
    • Competitions that encourage the engagement of current customers using social media features like questions in Instagram Stories.
    • Shout-outs with strategic alliances, ie other businesses with non-competing offerings but the same market. You may use tools like Instagram @tags. 


2. New Product Development (NPD) - MEDIUM Risk

This strategy involves a:
  • new product - a source of cost and therefore risk
  • current market

This strategy is the 2nd least risky. It evolves naturally from product penetration because it is easier to sell to existing customers that you already know well than to acquire new customers. It relies very heavily on pre-existing deep insight into customer needs and successful innovation. In short, costs that cause risk relate only to new product development (NOT market research).

Uses & benefits:

  • to recapture your customers who are being lured away by the competition (essentially a counter attack)
  • to exploit opportunities to sell a new product. 

Example(s):

  • If the abovementioned Kopa-Cola brand (that already sells its drink in City X) now tries to offer a product variation to its pre-existing market. It might offer a 'light' variation, to prevent customers from having a wondering eye when they notice that the competition and social media is talking about lowering sugar consumption.
  • In the personal care cleaning industry, large synthetic detergent (syndet) bar companies began to receive a lot of competition from cottage industry makers of all-natural soap. In response, syndet makers created 'green' ingredients to their syndet bars and took advantage of the facts that there is no regulation over the word 'natural' and the average consumer does not understand the science. However, to attempt to raise entry barriers to soap makers and secure their competitive advantage, they began to push the idea of pH-neutral products as being superior and safer for human skin. They did this knowing that soap by its nature can never achieve pH balance.
  • New features on the current product
  • Special editions, which are variations of the current product
  • New product updates.
    • Case study: Apple does this very well with new  innnovative operating systems, each with existing new names.
  • Market extension using strategic alliances with other companies.
  • Tentpole-specific variations
  • Glocal variations

Risks asssociated with new product development include the following.

  • Missed opportunities due to inflexible pursuit of and faith in the original plan. This can result in tunnel vision that does not adapt to changing market needs.
  • Delays due to over-stretching (human and other) resources. Allow the R&D team and equipment to focus exclusively on their task. In other words, avoid the temptation to assign these resources over too many projects and normal-business tasks because they will be less equipped to handle the unpredictable nature of R&D. In short, the solution is to have a 'capacity buffer'. A capacity buffer includes not rushing into new projects before properly completing ongoing ones and dedicating teams and equipment to a single project.
  • New products that become unpopular in the market due to being too complicated with an excessive amount of features. This is very applicable to products that are technical and whose method of use needs to be learnt (like software, equipment and information). I will also add that this applies to even consumer goods whose number of components should likely be kept at a minimum to help consumers better identify what they like and consider effective. Rather than make a toothpaste that is for removing tobacco stains but also ideal for sensitivity is confusing. You are better off creating segments. Besides, your production team will have less chance of total work stoppage due to running out of one among numerous components.
  • Product failure due to zero-tolerance for design failures during development process. This can result in entering the market prematurely with sub-standard products that can hurt your brand. The solution is to not only be clear on objectives based on market needs but also willingness to alter the plan and re-design the product as needed during the process. Allowing the R&D process to endure failures prevent designers from only selecting the least-risky options. Enduring the failures in-house early saved the brand from public product failure.


3. New Market Development - MEDIUM RISK

  • current product
  • new market - a source of cost and therefore risk

A new market can be defined by any grouping such as geographic location, psychographic segment and income level segment. Re R&D, since you are targeting new leads with the same product, you only need to perform market research (and NO new product development). You already know your product has a potential to be liked. Since the elements of newness is limited to only or mainly one between product and market, this strategy is considered to carry medium risk. (However, you might still need to follow trends of the target market's evolving needs and desires). 

Case Studies:

  • Some of your high end clothes can not be sold as normal in your usual outlet, possibly due to overproduction, returns, slight defects and so on, you find alternate 'off-price' retail outlets like TJ Maxx. TJ Maxx is a different market segment in that it is renowned for appealing to people who want high quality but at a discounted price. Consequently, your high end buyers are unlikely to shop there. If TJ Maxx is also unable to sell those products, they may pass those products on to thrift stores.
  • Unlike numerous Western companies attempting FDI in China, Starbucks' foreign direct investment (FDI) entry into China was successful after some initial floundering. The success is possibly due to several reasons. For starters, its entry represented the first time a coffee culture was introduced to such an extent in China when the middle class was growing and demanding new experiences. Despite the Chinese culture that is traditionally geared towards tea, the experience was appealing to Chinese. To some extent, the aesthetics are considered glocalized with Chinese wall art, mugs and so on. Senior management admitted that their task was helped significantly by having Chinese 'friends'. My impression is that this success might involve luck because of timing. In contrast, Starbucks failed in Israel. This was due to not appropriately adapting to the  Israeli coffee culture. For instance, Israelis prefer to lounge around with ceramic cups. Carrying away Starbucks' paper cup made some Israelis feel rushed which was therefore unappealing. Since Starbucks charges a premium for the Starbucks experience, it would be understandably hard to justify paying more for an experience people did not value. The brand failed in Australia to the extent that it closed 2/3 of its locations in 2008 (only 8 years after starting its FDI there) and after sustaining over USD 100 million in losses. This occurred despite the fact that the Australia coffee market is among the largest in the world. Its failure appears to have occurred through an attempt to quickly reproduce the same US product, ie as opposed to slowly or organically becoming integrated into the new market. The Australia market is used to a more intimate experience in cafes and also has its own coffee preferences. Starbucks' menu did not adapt from more sugary drinks to what Australians would consider more sophisticated tastes. Furthermore, the high number of locations arguably made the brand appear too mass produced or commoditized and available for a premium brand. Ultimately, the premium price could therefore not be justified by consumers who found the experience below par. This case illustrates that success in one location does not naturally translate to other markets. To be clear, it is not simply a matter of american companies being incapable of globalizing. Afterall, another american company, Gloria Jean's Coffee was successful at glocalizing with over 400 outlets in Australia. Gloria Jean used Australian franchise to accomplish this success but with a menu that is adapted to the Australian taste.
  • The failure experienced by Walmart in Germany is a case in point that shows the risk involved in failing to adjust an incompatible business model to the demands of local markets. Specifically, Walmart did not alter its American model before setting up stores in Germany. It was voted as the "worst supermarket" for several years and lost hundreds of millions of dollars. At the core of this problem is the fact that Walmart's value proposition is competitive price while the German market does not focus heavily on price. In general, Europeans do not even care to know the price of items while shopping.  

Example(s):

  • Brand awareness promotions
  • You want to target not just Gen X and Y as per your norm but now also Baby Boomers.
  • You want to overcome a recession or low-income profile in your country and want to enter a different country's more affluent market. 

Risks associated with new market development may be divided into internal, external and legal. Identify risks by considering the following related factors. In all instances, seeking advice and working closely with locals (like staff, lawyers and other stakeholders) help to manage these risks. These relationships must also be maintained since the rules change. Needless to say, research your market as heavily as possible and without making assumptions.

  • Internal (ie within your business)
    • Cultural differences: segmentation based on demographics &/ psychographics; language; social perceptions regarding matters like race and gender; systems of measurement.
    • Goals that are unclear, inadequately communicated or integrated into the functional processes throughout the organization.
    • Lack of coordination, especially among virtual team members.
    • Cash flow. Given the unpredicatable nature of how things can go wrong, businesses need extra emergency sources of cash.
  • External
    • Conversions across (volatile) foreign exchange rates, foreign business practices.
    • Logistics, especially in developing countries.
    • Technological networks in the location. 
    • Social unrest and trends. Businesses should learn the significance of the social climate, the reasons for protests, riots, labor strikes, revolutions, wars, sudden changes in governments and so on. This is key for planning accordingly, showing appropriate solidarity and avoiding the perception of insensitivity.
    • Physical environmental factors. These involve  issues as insidious as the mold that develops in highly humid climates to the raging nature of hurricanes, earthquakes, floods and so on.
  • Legal
    • Compliance with the regulations and laws of the new market. Consider for instance that, selling marijuana was legal in some US states but carried a severe penalty in others.


4. Diversification - HIGH Risk

This corporate strategy involves:
  • new product - a source of cost and therefore risk  AND
  • new market - a source of cost and therefore risk

Diversification is the single most risky strategy because it involves entering into new markets with new products. Sometimes, this strategy is used as a last resort for survival when a company's product life cycle is in decline in its market or when there is no other foreseeable means for growth (because all other strategies have been exhausted). However, it can also be used by healthy companies that simply want to grow to please its shareholders, like Amazon. I also consider new business ventures as starting in this way. Regardless of the circumstances that lead to diversification, businesses should consider cultural differences when moving internationally. If you lack sufficiently deep knowledge of your product, tread cautiously. You might be better off with another growth strategy. Also consider minimizing the high risk with strategies like franchising.

Case studies

  • Amazon has used diversification simply to grow to please its shareholders. Regarding new markets, it uses strategic alliances in this globalization process. Regarding new products, it leveraged its well known name to diversify into drastically different fields in some instances like the Amazon Web Services (AWS). Unlike the original retail Amazon, this business provides server, storage, networking, remote computing, email and mobile development and security services. In fact, this product has even become Amazon's leading revenue generator. Ultimately, this case is the classic example of the enormous rewards that can come with enormous risk.
  • When a car brand needed a plastic manufacturer to make some of its parts (fairing panels), Swatch, a business that specialized in making plastic watches took the risk of making this new product (fairings) for a new market (the automobile market), both elements (product and market) with which Swatch had no experience. 
  • Alphabet is a case of a highly successfully diversified business. 

Example(s):

  • Mergers & acquisition can give you access to your competitors' customers. 


Sustainability of Growth Strategies

Beware however that these strategies are not always sustainable. For instance, strategies reliant on giving more for less, product variations, new sales channels, new market segments, etc can often be easily imitated by the competition and or deliver diminishing returns over time. Consequently, they are best considered as relatively short-term growth strategies for quick results. As to be expected, the most risky growth strategy, diversification has the greatest potential for more sustainable growth.


CONTENT RELATED TO THE ANSOFF MATRIX

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