Tag: ansoff matrix

Strategic alliances to boost growth

Last week, I mentioned the Ansoff Matrix and the four strategic options for growing a business it proposes.  What is clear from the matrix is that each of the options contains an increasing level of risk.  Several of the options will involve significant level of expenditure. Diversification can be expensive; as is the process of new product development.

With NPD you can spend fortunes on prototype products which never go to market.  It is estimated that James Dyson spent £2 billion on his electric car project before pulling the plug (sorry for the pun) on the concept.  Dyson, when announcing that the car wasn’t going into manufacture said that production would not be financially viable. I also suspect his experimental solid state battery technology was incapable of powering the vehicle.

One way to reduce the costs of, and to some extent the risk of business growth, is to enter an alliance or joint venture.  One wonders that if Dyson had viewed his electric car project as a joint venture with an existing motor manufacturer, instead of slagging them off at the concept launch, his car might have seen the light of day in the marketplace.

Dyson forgot the mantra, ‘No business is an island’. Businesses operate in complex markets where it is likely suppliers, distributors and retailers are shared.

If you are looking to expand your market, either geographically or by moving from commercial markets to consumer markets,, you may well need the expertise and knowledge of those already operating within your expansion target.

When creating new products you may want to spread development costs, or you may need specialist technical know-how.

Diversification is the highest risk and potentially the most expensive growth option for a business.  You may need guidance from those who already know the proposed product category.

At a strategic level alliances should add value by leveraging the optimal level of assets and competencies.

It is increasingly unlikely that a single business can keep all these assets and competencies in-house. ‘No business is an island’. Exclusivity costs.

A partnership or alliance may be the best way to maximise economies of scale.

So a telecommunications firm may choose to partner with an IT firm to create integrated systems.  Computer manufacturers partner with manufacturers of VDUs, processing chips and graphics cards. Car manufacturers share production platforms and car ‘chassis’ designs.

And it isn’t just in production that an alliance can create economies. You can build alliances with retailers, distributors and suppliers.

Alliances are not just for big multi-nationals. take the example of McKean Foods, a Haggis producer. McKean started selling haggis online and received lots of interest from the United States of America.  However, the USA bans imports of haggis as a measure against the spread of the disease Scrapie, which affects sheep.  this ban is completely non-sensical as McKean operates in the UK/EU where animal welfare and food standards regulations are amongst the most comprehensive in the world.

So as McKean Foods cannot export Haggis to the USA, clearly an alliance with a US manufacturer would allow growth through market expansion.

In modern markets there are the following motivations for alliances and joint vewntures:

  1. Globalisation: Many companies are now compelled to work on the world stage.  Globalisation has also led to shorted product lifecycles. the mobile phone market is a clear example of product lifecycle contraction. Contrary to the argument for Brexit, the world is becoming a smaller place and around the world nation states are joining forces to create economic blocs e.g. Mercosur and the South African Development Alliance.
  2. Assets and Competencies: As stated above, a single company cannot be good at everything.  It is almost certain you are going to need specialist knowledge and expertise available through alliances.  An alliance can allow your company to concentrate on its core attributes whilst ancillary functions are outsourced to external specialists.  So, for example, fast food chains link with firms operating home delivery apps such as Just Eat and Deliveroo.
  3. Risk:  Alliances can work to reduce risk.  Financial commitments can be shared.  Going it alone could mean isolation from industry and technical standards.  For example, small food producers wanting to supply UK supermarket chains are expected to meet British Retail Consortium standards which often go beyond EU and UK legislation.
  4. Learning and Innovation:  Alliances and joint-ventures allow businesses to learn. that learning can help firms develop sustainable competitive advantage.

For joint-ventures to be successful, you need more than a strategic fit.  You need a cultural fit as well.  You must be able to work with your chosen partner.  If your business is risk averse, a partnership with a buccaneering high risk operator will be unlikely to succeed.  A fine example is the failed joined venture between BP and the Russian oil firm TNK.  That partnership became distinctly frosty and hostile and in the end BP could no longer work with TNK.

 

Evaluating Brand Extension

Many entries ago, I discussed the theory of product and brand growth proposed by the American mathematician and marketing academic H. Igor Ansoff.

Ansoff believed that there were two customer groups, a brand’s existing customer base and new customers. He also stated that there were two types of brand products, existing products and new products.

This leads to a two by two matrix offering four strategic options for brand growth:

  1.  Market Penetration:  Selling more of your existing products to your existing customer base.  This could be tactics like Buy One Get One Free offers, improving delivery networks and increasing the number of retail outlets.
  2. Market Expansion:  Selling your existing products to new customers.  This could mean geographic expansion of the brand to new territories i.e. to paraphrase Andrea Leadsom, selling innovative jams to the Chinese.  It could mean selling products originally targeted at business customers in the consumer market.
  3. New Product Development/Brand Extension:  This is selling new products to your existing customers.  Dyson make vacuum cleaners but they have extended their cyclone technology into products such as hand driers, room fans, hair dryers and car air conditioning units.  Mars extended their chocolate bar brand into products such as ice cream and milk drinks.
  4. Diversification:  or selling new products to new customers.  Richard Branson’s Virgin group of companies operates a diversification policy. Virgin began as a record shop and importer.  It soon became a music label and a chain of record shops.  Today, the Virgin brand has a radio station, an airline, train franchises, a bank, a hotel chain, an online travel agency and a whole host of other businesses in a variety of sectors.

Ansoff stated that with each step from market penetration to diversification, risk of failure increased.  Diversification is the most risky strategy a business can follow.  It is therefore imperative that a firm looking at diversification strategies carries out comprehensive and accurate strategic planning.

In the early days of Virgin, Richard Branson was of the view that he would do things differently and the standard practice of planning had no place in Virgin’s operations. Virgin after all was a counter culture business.  it is widely known that if Branson hadn’t have signed Mike Oldfield and produced the album Tubular Bells, his company would have failed.  Branson was only able to develop the country house which was used as Virgin’s recording studio thanks to a significant loan from a member of his family.

Richard Branson now states that detailed strategic planning is critical to the success of the Virgin Group.

there is one part of the Ansoff Matrix that is controversial.  Ansoff said that you shouldn’t move on to the next riskiest strategy until all efforts have been exhausted in the lesser risk strategy.  So you do not try to expand your market until you have exhausted all efforts in penetrating your existing market.  Many leading business academics and leaders see this as too restrictive a position.  Business after all is about exploiting opportunities as they arise.

But clearly you need to clearly define the risks and rewards of a business opportunity before you act.  Julian Richer of Richer Sounds, the UK hi-fi retailer has a risk averse approach and has slowly built his brand over fifty years; whereas Richard Branson leaps into new sectors at a pace, giving each new business a defined time to succeed.

For many businesses, growth is defined by diversification or brand extension. For these businesses there is little opportunity to penetrate further or to expand.  For example, farmers will look to sell all their output (the harvest) and they are tied to contracts with suppliers.  For example dairy farmers have close links to dairies.

For these businesses, the instruction has been to diversify.  So farmers built golf courses and hotels, they entered tourism markets and became food manufacturers.  Often these farm-based diversifications are poorly thought through or are ‘me too’ efforts i.e. copying the activities of neighbours.  They have not asked or answered the six crucial questions of brand extension:

  1.  What is the attraction of the new market or product category?  Is the target market growing? Is it less price sensitive than existing markets?  Are existing service levels poor and your existing service offers can thrive?
  2. What advantages do you bring to the new sector?  Do you have better distribution networks? Can you offer better customer service? Can you offer new technologies? Can you provide more efficient manufacture? Do you have higher productivity than your competitors? Can you provide better market coverage and share of voice?
  3. Can you make your market advantages durable?  Do you have intellectual property ownership of technologies? Can you offer the new extension through your existing dealer network? Can you develop exclusive partnerships with retailers? Can you demand eye level shelf space or aisle ends? Can you cut out middle men and sell direct?
  4. What will be the reaction of your new competitors to the market extension? Dyson entered the vacuum cleaner market when the existing market leader, Hoover, was in significant financial difficulty and reeling from the failure of the Sinclair C5 and the disastrous free flights special offer.  Do you have resources available to fight off the reaction of competitors e.g. price drops or aggressive advertising campaigns? Can you offer technological solutions to disrupt competitor’s defence of market share?
  5. How legitimate would your brand be in the new sector? Laughing Cow Cheese is a brand with a child-friendly family image, so an extension into the alcoholic beverage market was not legitimate.  Coca Cola, commonly used as a spirits mixer has successfully extended into the pre-mixed alcoholic beverage market (in conjunction with Bacardi Rum).  Donald Trump released a fragrance.  However it is unlikely that Trump cologne would succeed in the UK where trump is slang for breaking wind.
  6. What does the proposed extension bring to the parent brand?  Some extensions may dilute your existing brand image and identity.

Of course you must seize opportunities to pitch your business ahead but market extensions should simultaneously surprise and leave their mark.  They must be a mix of doing the unexpected and retain brand consistency.

When a brand extension is chosen it must be able to export existing brand attributes and equities; but be able to defend the new market position.

A good example is Apple which caught the music industry on the hop with the development of the iPod and iTunes but retained the brand reputation for design and quality manufacture.

Some firms through history make really surprising leaps into new sectors.  Take as an example Yamaha.

I have just bought an excellent Yamaha acoustic guitar.  Yamaha started in the 19th by making organs and pianos.  Soon it was making guitars and other acoustic instruments.  In World War Two, Yamaha’s factories were turned over to manufacturing military equipment.  After the war, the company repurposed the military manufacturing plant to make motorcycles.  In the 1970’s Yamaha’s piano division started making synthesisers.  This led to the company moving into the semiconductor market where it is now a major producer.

So don’t reject diversification or market expansion as strategies for your business: but if you intend to diversify or expand make sure you have comprehensive SMART strategies in place.