Every business owner wants to grow their business but it is often difficult to determine the best way forward. Here is a straightforward description of four different growth strategies and an explanation of how to determine which is best for your business.

Igor Ansoff suggested that business owners’ ability to grow their businesses comes down to how they market new or existing products in new or existing markets. He outlines four distinct strategies:

- Market Penetration – selling more of the same things to more of the same customers

- Market Development – selling more of the same things to different customers

- Product Development – selling new products or services to the same customers

- Diversification – selling new products or services to different customers

Using Ansoff’s matrix, business owners can evaluate each of the growth strategies in turn to assess which is likely to result in the best possible return.

Market Penetration
Market penetration is the easiest way to grow in an expanding market. However, it becomes more difficult as the market matures and competition increases.

The obvious step is to increase advertising or add more sales people to increase sales. Alternatively, business owners can win business from competitors through competitive pricing, discounting, vouchers or other offers. Business owners can also boost sales by providing additional incentives to sales staff through commissions, bonuses or other reward schemes or by introducing customer loyalty schemes.

But market penetration can also be increased by initiatives that increase usage. Look, for example, at how toothpaste manufacturers increased usage by introducing pump-action toothpaste dispensers that dispense a fixed quantity of toothpaste. Research has also shown that the size of the toothbrush head influences the amount of toothpaste used, so the bigger the toothbrush head, the more toothpaste we use. Manufacturers of health yogurts emphasise the importance of daily consumption. Manufacturers of snack foods that are considered “bad for you” have introduced fat free or low fat versions to counter a trend towards reduced consumption.

Finally, market penetration can be increased by developing new applications. Look at how breakfast cereal makers also promote their products as bedtime snacks.

Market Development
Market development is a riskier strategy and is most appropriate where the core competence of the business is the product or service. A good example is a business providing IT support to small office/home office users. The business growth strategy may be to target larger offices, small and medium enterprises and eventually large multinational companies.

One way to develop the market is to introduce new sales and distribution channels. The most obvious example is to move online and use the Internet to promote and sell products. But markets can also be developed through more traditional means such as developing a strategic partnership with a business that already operates in the target market. New geographical markets can be developed by setting up shops, warehouses or offices in the target areas. Many businesses have adopted the franchise model to access new geographical markets.

An interesting alternative is to develop new markets by finding alternative uses for existing products. Johnson and Johnson repositioned baby shampoo to appeal to the female market by emphasising its gentle, sensitive properties. Manufacturers have repositioned concentrated drinks such as MiWadi to appeal to the health-conscious adult market by promoting it as a flavour to add to the recommended daily water consumption.

Product Development
Developing new products for an existing market is also more risky than market penetration. It is often most appropriate where the strength of the business lies in its relationship with customers. A good example is an accountancy practice. Client retention is high and clients are unlikely to be attracted away from other practices, so the most effective means to grow the business is to develop new products for the existing client base. The more progressive accountancy practices now offer business advice, tax consultancy, wealth management advice, succession planning and many other services in addition to traditional accounting and audit activities. In a similar way, many traditional printers have expanded to offer office stationery and office furniture.

Many product based businesses can add complementary services, for example equipment suppliers can add maintenance and repair services, and service based businesses can add products to increase sales.

An alternative growth strategy is to start to carry out activities further back up the supply chain, so distributors may add warehousing, wholesaling or even importing activities that increase the scale of the business while maintaining the same customer base.

Diversification
Diversification is the most risky strategy since it involves two unknowns: new products with unknown development problems and new markets with unknown characteristics. But it can offer the best potential for growth.

The most common way for a business to diversify is to develop new products that take advantage of the core competencies of the organisation. Examples include how Richard Branson has taken advantage of the Virgin brand and diversified into entertainment, air and rail travel, foods etc. and how EasyJet have diversified into hotels, offices, car rental, gyms, fastfood and a wide range of other goods and services.

Alternatively, a business can diversify by acquiring another business that operates in a separate market.

 

Existing Product

New Product

 

 

Existing Market

Market Penetration
Advertising Sales incentives
Aggressive competition

Loyalty cards
Increase usage, frequency or quantity
New applications

Product Development
Product variants

New products
Complementary products/services

Repackaging
Backward integration

 

 

New Market

Market   Development
New channels
Internet
New territories
Franchise
Export
Alternative uses

Diversification
Reuse competencies
Acquisition

The advantage of Ansoff’s Matrix is that it helps business owners to analyse the potential for each of the growth strategies. A business that operates in an expanding market can grow through market penetration. However, a business in a mature, stable market may choose to grow either through market development or product development depending on its internal strengths. If neither of these offers sufficient potential, a business may consider diversification to achieve further growth.

This matrix was developed by Igor H. Ansoff and first published in a 1957 Harvard Business Review article, Strategies for Diversification and subsequently developed in his book, Corporate Strategy, published in 1965.

 

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