One of the first subjects discussed in the timeline of this blog was the strategic growth matrix designed by the American mathematician and business guru, Igor Ansoff. This matrix has been rightfully lauded as an important tool for considering business growth strategies particularly in raising issues of business risk.
The matrix suggests four main strategies for growing a business:
- Market Penetration – selling more of your existing product range to your existing market
- Market Expansion – selling your existing product range to new markets
- New Product Development – developing new products for your existing market
- Diversification – developing new products for new markets.
Ansoff argued that cost and risk increased as you moved through the matrix. Market penetration was the least costly; and least risky; option. Costs and risk to the business was highest if a diversification strategy is followed. Ansoff concluded that a business should first look to penetrate its existing market before moving on, in turn, to examine market expansion, new product development or diversification. He warned that a move to the next matrix segment should only be taken once all existing strategy options had been exhausted.
As is the case with most academic studies, theories and models are constantly adapted and refined. The Ansoff matrix is no exception. An early amendment to the matrix was the inclusion of brand extension in the new product development quadrant of the matrix. Brand extension is the practice of using an existing brand name to sell a new but associated product. For example, Mars, famous for their chocolate bars extended the brand first into ice cream and then to milk drinks.
The risk associated with brand extension is that your existing customer base either do not get the association with the existing product or that the brand extension product places an unfavourable comparison on existing products. Xerox fell into such a brand extension trap.
Xerox were the brand leading manufacturer of photocopiers. Seeing the oncoming technology of the desktop computer, Xerox were keen to enter that market and developed a range of desktop computers under their brand name. However, Xerox were strongly identified with copiers amongst their existing customer base and they simply could not see the relationship to computers. The Xerox PC range bombed, costing the company millions.
Others have also worked on the Ansoff Matrix, refining it for modern markets and including other marketing factors. For example, Willis et al. adapted the matrix to take account of the status of the market i.e. whether it was a new, emerging market or a mature market.
Wiles split markets by adding two new groupings; new product areas, closely associated with existing products; and new emerging segments. Product were refined into existing products, modified products, brand extensions and two types of new product; those using existing technology and those using new technology.
This expansion of the Ansoff matrix allows for additional strategies to be included whilst retaining the risk element.
The first option under Willis is to penetrate your existing market with your existing product range. Willis equates this risk with selling your existing products in new areas i.e. geographic expansion. In existing markets, the next strategy is to modify products through reformulation, brand extension or by refocusing the market.
For new markets, the easiest strategy is carry out market development with existing products. Risk increases when market extension or diversification strategies are followed.
It is easiest where new or emerging segments are identified to segment them through the use of modified products or brand extensions. The further the new segment is from your existing market, the higher the level of innovation required and the higher the risk.
In all market quadrants, the highest risk is where new products are developed using new technology. This requires a high risk diversification strategy.
Although the Willis model increases the options open to businesses seeking growth, it is a complex model. The Ansoff matrix remains a simple and easily understood model which clearly identifies the level of business risk associated with various growth strategies.