Grow While Managing Risk With The Ansoff Matrix
In this installment of the Viral Octopus knowledge series, we are going to talk about the Ansoff Matrix. This popular tool for assessing the options and risk inherent in various growth strategies is also called the product/market expansion grid. Applied mathematician and business management theorist H. Igor Ansoff spent his teenage years in the nascent Soviet Union, an experience that left him distrustful of systems premised on an orderly and simple view of the world. He was destined to be a heretic, an outsider, a critic of the normal ways of thinking about things (the kind of person Viral Octopus loves!). In his own words, his experience drove him “to excel through making innovative contributions which challenged the systems cultures”. And so in 1957, Harvard Business review published an article written by Ansoff, Strategies for Diversification, in which he unveiled the matrix. Let’s take a look at the Ansoff Growth Matrix for product and market risk assessment and see how you could apply it to your own business to come up with a great growth strategy. The Ansoff Matrix: Four Strategies For Growth Knowing that most managers want to grow their business, Ansoff recognized strategic planning to drive growth as a central need for management. To allow leaders to get a broad view of their options, Ansoff recognized four categories of growth strategies. A strategy can focus on existing markets or on new markets, and a strategy can focus on existing products or new products, yielding four possible combinations. The most conservative approach would be to refine existing products in existing markets, and the most risky would be to attempt to launch new products in new markets. The four strategies are: Market Penetration: Refine the existing product and the marketing approach in the existing market in an attempt to earn a greater market share. Product Development: Create a new product and present it to your existing market. Market Development: Identify and pursue new markets or customer types for an existing product. Diversification: Double up and boldly risk creating new products for new markets. Let’s take a look at each strategy in further detail. Ansoff Matrix – Least Risky Option – Market penetration Trying something new entails risk. The least risk growth strategy is to stick with what you know and fine tune your current activities. Telecom companies are a good example of this – focusing mostly on their existing products and competing for the same customers using price and marketing strategies. If your marketing team is working well, this strategy will always be in effect to some degree. Whatever you are doing to reach your existing market, you should be measuring it, observing results, and finding opportunities to improve. The market penetration quadrant of the matrix corresponds to focusing on refining your marketing approach and perhaps making small adjustments to your product. Businesses have several tactics for spurring growth that fit within this quadrant. Reducing prices can increase your market share. You could acquire a rival that operates in the same market. This strategy may be outside the wheelhouse of a lot of small and medium sized businesses. While conventional Ansoff analysis categorizes this activity as a type of market penetration and as inherently low-risk, it is this Viral Octopus author’s heretical opinion that for most businesses, this could be a more risk strategy than pursuing a new market or introducing a new product. You can also take a low risk approach to expanding market share by increasing your spending on proven marketing funnels driven by paid advertising. Fine tuning your marketing approach can sometimes yield more sales at a lower cost than increasing your spending. If your in-house marketing team is not able to improve return on ad spend, Viral Octopus has an array of gigs for various marketing channels and budget levels. Ansoff Matrix – More Risky – Market Development When you take your existing product into a new untested market, you are incurring a risk. The simplest example is taking a product into a new country or geographic area, but you could also think of marketing a product to a new type of customer. For instance, you might have a cleaning product that you have exclusively marketed for commercial or industrial use and pivot to market it to households as well. In some cases, the risks of entering new markets can be quite small. If the new market has similar competitors and buyers with similar needs, it can be an easy way to expand. This type of strategy is particularly effective if your company will benefit from economies of scale, reducing the per unit price of production as sales of the existing product expand. Ansoff Matrix – More Risky – Product Development For most businesses, developing a new product may be more risky than entering new but similar markets. With this strategy, you stick with existing markets but expand your offerings. In some cases, this can be an easy and relatively low-risk activity. If you sell cherry flavored soda water, doing a little market testing and then adding a new lime flavor may not require a big investment. This type of conservative product expansion is called “line extension”. There might be more to gain in taking a bolder step and trying to jump from the low-calorie drink market into the energy drink market. You can choose to invest in research and development and make your own products. Some businesses find opportunities to license production of a product someone else owns the rights to. While new product development is generally considered a relatively risky quadrant, once again, this writer has a heretical view. Businesses can expand their product offerings by re-selling “white Label” products. A white label product allows re-sellers to attach their own brand to the product produced by another company. Viral Octopus offers re-sellable “drop-service” marketing services so that Agencies can offer their existing clients new services that they do not have in-house without having to incur any significant risk. An agency that focuses on Google Adwords buys and Facebook ads management but does not have a Hotjar expert on staff can grow with minimal risk by re-selling the Viral Octopus Hotjar gig to clients that recognize the need to create a better user experience for higher conversion. Ansoff Matrix – Most Risky – Diversification The most risky strategy is diversification – new products for a new market. With this strategy, the organization has two challenges. They must design and create a new product and they must study and decide how to reach and persuade a new market. The risk of diversification can be mitigated if there is some relationship between the existing product and market and the new product and market. Kaman aircraft started making helicopter blades and diversified into guitars. That’s a pretty big jump, but it worked out ok. You may have heard of Ovation guitars. The benefit of unrelated diversification like this is that if the defense industry ever goes out of style, Karman can hope demand for acoustic guitars will remain strong. Put this tool to use and come back next week for more insight Thanks for taking the time to read our quick explanation of the Ansoff Growth Matrix. This is a great tool for analyzing opportunities, but like any other tool, it only works if you use it. How can you apply the Ansoff Matrix to help guide decision making and growth strategy in your business?