Igor Ansoff, a Russian born mathematician and business manager, is often known as the father of Strategic management. One of his seminal pieces of work has been the Ansoff growth matrix, a framework that is taught in most management institutions across the world today. In brief, the Ansoff growth matrix seeks to help businesses map strategic product market growth by honing in on developing products and/or markets.
The Ansoff Matrix has four alternative marketing strategies – Market Penetration, product development, market development and diversification.
Market Penetration is the most relevant for current products in an existing market. In this strategy, there can be further exploitation of the products without necessarily changing the product or the outlook of the product. This is often the lowest risk of the four strategies and often the attempt is to increase number of transactions and conversion of leads and enquiries.
Product Development focusses on either introducing new products to existing markets or modifying existing products. Typically our average value based strategies revolve around developing or enhancing products and up selling/ cross selling.
Market Development or Market Extension involves the business moving to new markets with its current set of products. This can be done through segmenting the market, moving to new geographies, franchising or setting up new distribution channels. This strategy assumes that the existing markets have been fully exploited. Clearly, this strategy is riskier and secondary to the previous strategies.
Diversification involves marketing or selling new products to new markets at the same time. It is by far the riskiest of strategies as it involves two unknowns. Before starting to diversify the business needs to have done a clear risk and return assessment.
Diversification could be related (within the same broad industry or sector) or unrelated (similar to Virgin Group). This is often an attempt to build a portfolio of businesses and decrease overall risk for the business owners/ shareholders.
The small business relevance
The Ansoff matrix helps the small business owner identify which strategy makes the most sense. Working with businesses across industries, I’ve often found that the ‘exciting’ things to do are often fraught with risks and more importantly not the most profitable.
Most small businesses would not figure in the 100 largest companies in their industry in their location. What that immediately points towards is that Market Penetration is likely to be by far the most useful and profitable strategy. The trouble often is that for an entrepreneur, doing more of the same thing is ‘boring’ and they yearn to start experimenting again.
As one of my mentors once told me, the most successful small businesses focus on saturating their current market rather than expanding to new ones. It is satisfying to the ego to have a client in every part of the world but it is immensely more satisfying to have ten times the number of clients in a radius of ten miles from where you are – and often a lot more money in your pocket too.
When working with business owners keen to diversify and enter new markets, we often first go back to fundamentals to check how much of the current market has been penetrated by the business. For most small businesses, the answer is usually less than 1%. If you do decide to pursue the riskier strategies, make sure they are not at the expense of the simpler and more profitable ones.