Designing the business portfolio involves finding businesses and products the company should consider in the future. Companies need growth if they are to compete more effectively, satisfy their stakeholders, and attract top talent. At the same time, a firm must be careful not to make growth itself an objective. The company’s objective must be to manage “profitable growth.”
Marketing has the main responsibility for achieving profitable growth for the company. Marketing needs to identify, evaluate, and select market opportunities and establish strategies for capturing them. One useful device for identifying growth opportunities is the product/market expansion grid also known as Ansoff Matrix.
The Ansoff Matrix was first published in the Harvard Business Review in 1957, and has given generations of marketers and business leaders a quick and simple way of thinking about growth.
Sometimes called the Product/Market Expansion Grid, the matrix shows four ways that businesses can grow, and helps people think about the risks associated with each option. The product/market grid has two dimensions: products and markets.
Over these 2 dimensions, four growth strategies can be formed:
- Market penetration
- Market development
- Product development
Market penetration is a name given to a strategy where business focuses on selling existing products into the existing markets. It is the least risky strategy since it leverages on many of the firms existing resource and capabilities.
A market penetration marketing strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.
With this approach, you’re trying to sell more of the same things to the same people. Here you might:
- Advertise, to encourage more people within your existing market to choose your product, or to use more of it.
- Introduce a loyalty scheme.
- Launch price or other special offer promotions.
- Increase your sales force activities.
- Buy a competitor company (particularly in mature markets).
Market development is a name given to a growth strategy where the business seeks to sell its existing products into new markets. Because the firm is expanding into a new market, this strategy has more risk when compared with market penetration.
Here, you’re selling more things to the same people. Here you might:
- Extend your product by producing different variants, or packaging existing products it in new ways.
- Develop related products or services (for example, a domestic plumbing company might add a tiling service – after all, if customers who want a new kitchen plumbed in are quite likely to need tiling as well!)
- In a service industry, shorten your time to market, or improve customer service or quality
- Enter new geographical markets for example exporting the product to a different country
- Introduce different pricing policies to attract different customers or create a new market segment
Product development is a name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require development of new competencies and requires business to develop modified product which can appeal to the existing markets
Here, you’re targeting new markets, or new areas of the market. You’re trying to sell more of the same things to different people. Here you might:
- Target different geographical markets at home or abroad.
- Use different sales channels, such as online or direct sales if you are currently selling through the trade.
- Target different groups of people, perhaps with different age groups, genders or demographic profiles from your normal customers.
Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience. However, diversification may be reasonable choice if the high risk is compensated by the chance of high rate of return.
The main advantage of diversification is that, should one business suffer from adverse circumstances, the other may not be affected. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risk.
The diversification strategies are of three types:
- Concentric Diversification Strategy: Develop new products with the earlier technology for new segments
- Conglomerate Diversification Strategy: Develop new products for new markets.
- Horizontal Diversification Strategy: Develop new products with new technology for old customers.