From our huge experience, we know that many owners and managers, thinking about the ways of their company’s development, intuitively use Ansoff’s growth strategy matrix. Let’s talk about it so that its use becomes conscious.
This will create the basis for more elaborate solutions in the field of business development strategy.
The main idea of the Ansoff matrix
This Ansoff matrix has been known for a long time. The basic idea underlying the matrix is very simple: a search for possible options for the company’s development depends on the ratio of the two components.
1) Market
2) Product
For any company, there are 4 possible options for the ratio of these components.
- Option 1. Old market – old product
- Option 2. Old market – new product
- Option 3. New market – old product
- Option 4. New market – new product
One of the key ideas that arise when considering this model is the direct relationship between the chosen option and the corresponding levels of risk and profitability.
Let’s describe these 4 options
When choosing, it is important to remember the axiom of financial management. The more profit you want to make, the more risk you need to be willing to take.
From this axiom point of view, 4 options above can be described as follows:
Option 1. Low risks – low profitability (over time, the profitability of the business will decrease)
The company has been in this market for a long time, knows its potential customers well, and has been working with many of them for several years. For a number of clients, contracts are of a long-term nature or are constantly being extended. The competitors are well known.
The key drawback of this option is due to the fact that the external environment is changing, customers’ tasks are changing, new needs are becoming relevant, and new technologies are emerging.
All these things put serious pressure on the company and ultimately lead to a decrease in its profitability.
Option 2. A small increase in risks – a small potential for business profitability growth
Having worked with a number of clients for a long time, the company has good knowledge about current and future tasks that concern them.
The future tasks of your customers are important information about what changes in your products may be in demand.
Discussing with your existing customers the necessary changes in your products or the need for new products significantly reduces the risks of failure when launching new products in the existing market. On the other hand, the increase in profitability will also not be very high.
Option 3. Noticeable risk growth – average profitability growth potential
From the production point of view, there are no risks. The company has a stable production cycle. Significant risks arise in marketing and sales. Another market and other customers need new steps both in terms of promotion and sales.
There are new competitors who have been in this market for a long time. In fact, this is the next level of competition.
The probability of failure is increasing, but the potential for profitability growth is also growing.
The key drawback of this option is due to the fact that the external environment is changing, customers’ tasks are changing, new needs are becoming relevant, and new technologies are emerging.
All these things put serious pressure on the company and ultimately lead to a decrease in its profitability.
Option 4. High risk – high profitability potential
The company has come up with a new product, understands its advantages and sees new markets and needs for which it can be useful. However, risks already exist at all stages of the main business process. From procurement and production to marketing and sales.
It is important to understand that certain moments can be calculated, collect the necessary information and still some uncertainty will remain.
Conclusion
Choosing one of the options as the basis for the company’s development over a period of time is a strategic choice of the owner and the top team.
In any case, the first step is to diagnose your current situation.
Which of the described options is the closest for the company now?
If it is option 1, then the profit potential is limited by your ability to reduce costs within the company. If other options, then the profitability potential will depend on the risks you are willing to take.
The next step is to choose the option that will be the main one for your company for the next period of time.
The importance of Ansoff’s growth strategy matrix lies in the fact that it allows you to make strategic decisions consciously, and not go with the flow.
2 Comments
Leave a Comment
Bernardo
Howdy just wanted to give you a quick heads
up. The text in your content seem to be running off the screen in Internet
explorer. I’m not sure if this is a format issue or something to do with web browser
compatibility but I figured I’d post to let you know. The layout look great though!
Hope you get the issue solved soon. Thanks
ReplyEmery
I am no longer sure the place you’re getting your info,
Replybut good topic. I needs to spend some time learning more or understanding more.
Thank you for magnificent information I used to be on the lookout for this info
for my mission.