Brighter business / Grow by diversifying: The Ansoff Matrix

Grow by diversifying: The Ansoff Matrix

18th April 2018

‘Don’t put all your eggs in one basket’ is a well-known proverb, but what does this mean in the business world? Diversification.

Businesses shift resources around so that they are less vulnerable to market volatility. Think of it in terms of hedging bets; with all your resources in one place, a dramatic change (in market demand, for example) could leave you in a vulnerable position.

But by moving some of your resources into different products or services, you can potentially establish new revenue streams, creating a more resilient business model.

As a business strategy, diversification has been deployed by Apple, Canon, Disney, and Uber to great effect as a means of solidifying brand presence and building a stronger business which will be resilient to changing market conditions.

For businesses that are ambitious about growth – or conscious of changing market conditions which could threaten them – the Ansoff Matrix offers a template to devise opportunities for growth or continued relevance.

What is the Ansoff Matrix?

Harry Igor Ansoff was a Russian-American mathematician and businessperson, widely recognised in academia for his work on strategic planning and management.

Ansoff held several posts at established and respected institutions such as Vanderbilt University, Alliant International University and the Stockholm School of Economics.

Ansoff devised the Ansoff Matrix, a tool which allows businesses to strategise their business growth through different methods. This includes developing new products, entering new markets, and onto diversification, which involves the creation of an entirely new product (or products) to allow business to enter other markets.

There are four areas in the matrix. The actions described in each quadrant move from conservative on the top left to progressive on the bottom right:

1. Market penetration

Market penetration is, in effect, continuing business as normal. There is no diversification in this scenario; rather, a business tries to improve its market share with existing products or services by expanding its customer base or improving sales to existing customers.

Market penetration doesn’t need to be conservative. Acquisitions of rival businesses in the same market, for example, allows for the capture of a greater market share and continued sales of existing products to existing markets.

2. Market development

Market development is when businesses try to expand into new markets. This can be done either by identifying new customer segments, or by entering new markets.

These new markets or segments may exist in different areas or regions of the country in which you operate, or for the more ambitious, there may exist foreign markets which are receptive to the goods or services that your business provides.

3. Product development

Product development is the devising and creating of new products which are targeted at existing customers and markets.

These can be products which are complementary to or logical extensions of the ones already on offer. For example, a business which supplies office furniture could also supply branded stationery and other office equipment.

Business may elect to invest in research and product development, or offer an avenue to market for products from other suppliers. Crucially, it involves targeting the same customer base.

4. Diversification

Diversification is the combination of all these strategies, with businesses developing new products and targeting new markets.

This means undertaking a whole set of actions (market research, R&D, product development, sales) and measuring them rigorously.

It’s important to assess the risks, too. Each of the quadrants in the matrix carries different levels of risk. Market penetration (the business-as-usual strategy) is the safest option, while diversification involves a high amount of risk because businesses will be entering uncharted waters.

It is difficult to predict with any certainty the success of diversification because you will typically have no experience of the product or the market, and may find it difficult to benchmark success against this context.

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Why diversification is a valid strategy

Even with the caveat of the associated risks – financial outlay and a step into the unknown – diversification is a valid strategy for businesses, and there are high-profile examples of success.

Diversification can be carried out either as a way of protecting revenues by moving investment to other streams, or because other streams represent better opportunities for profit and business growth.

The Virgin Group is a good example of successful diversification: the company has actively diversified from its beginnings as a record shop to a global business with holdings across several industries and sectors including aviation, finance, and retail.

For Virgin Group – and other companies like Apple (moving from personal computers into mobile phones) and Uber (from ride-hailing to takeaway delivery) – diversification represents an intelligent way of developing a business.

In conclusion…

If you think diversification is a strategy that could work for your business, spend some time thinking and planning. It’s important to dedicate time and thought, especially if you consider product development a key part of a future strategy.

Market research, financing and planning are all important tasks to undertake before launching new products.

It’s also pertinent to highlight that the quadrants are not mutually exclusive; cherry-pick elements from each quadrant to develop the strategy which best fits your business.