Identifying a winning growth strategy for your business can be one of the most difficult and often contentious activities you undertake.  The allure of chasing that new “high growth” market is strong.  On the other hand, the inertia to “stay the course” can feel comfortable to many.  Finding a way to cut through the emotional reactions and chart a course to your best strategies is crucial.

The Ansoff Matrix

With that as a backdrop, let’s visit a classic tool for guiding growth strategies: the Ansoff Matrix.  In his 1957 HBR Article “Strategies for Diversification”, H. Igor Ansoff introduced concepts on product-market alternatives that he distilled into what is known as the Ansoff Matrix.  Born in Russia to an American father and a Russian mother, Ansoff moved to the US for his studies and obtained degrees in engineering, physics and applied mathematics before becoming one of the early stars of modern business strategy.

Ansoff’s original article, while dated in many ways, is brilliant in that he foreshadows several management concepts well before they were in broad usage, for example:

• He uses the phrase ‘product mission’ to refer to ‘the job your product is intended to do’
• He recognizes that company evolution is necessary for long-term survival, so defining your business by product alone is inherently dangerous
• He suggests that diversification should only be pursued if the selected strategy leverages some underlying expertise that will allow you to succeed in the new business, which feels like an early version “capabilities driven strategy”

Ansoff’s matrix as it is usually displayed highlights 4 different strategies: existing product/market penetration, market development, product development, and diversification (which entails simultaneous product and market development).  As an aside, Ansoff also offers vertical integration as another dimension not captured on the product-market matrix.

Many of our clients have used the matrix as part of their search for profitable growth opportunities.  We have come to realize that, like any tool that has been around for over 60 years, Ansoff’s Matrix has some embedded wisdom. But, at the same time, like any tool that has been around that long, it is prone to misuse as well.

The Ansoff matrix can be useful in the ideation process to surface new growth ideas and it can be useful in assessing the risk of different growth initiatives. It can also be a useful tool for examining exposure to risk across a corporate portfolio. But it is only relevant with the context of the rationale for the company to seek diversification in the first place. So, it is in no way prescriptive and does little to guide the development of a strategy.

The primary failure modes we have seen in the application of the Ansoff matrix are:

• Assuming they need to have some funded initiatives in each of the quadrants (or else it will look like they are not thinking outside of the box)…
• …Or alternatively, believing there is some optimal mix of growth across quadrants that can be pre-determined

Somehow the Ansoff Matrix has been confounded with a balanced portfolio concept in technology management. The balanced portfolio concept suggests that R&D investments should be managed in a ratio to include business sustaining investments, incremental investments, and disruptive investments. The concept is that disruptive investments have both the highest risk and the highest reward. The confusion in the Ansoff matrix is the assumption that the increased risk as we move out of our core will also yield increased return but there is no reason to believe this is true especially in the new/new quadrant. When companies use the Ansoff matrix in this way without any additional intervention (such as a capabilities approach), they are likely skewing their strategy to higher risk initiatives which will likely yield lower not higher returns.

Finding Your Sweet Spots!

As we alluded to above, our suggested approach is actually embedded in Ansoff’s original article. We believe the first step is to define the company’s differentiating capabilities, what are we really good at. Then develop a set of potential growth opportunities where we believe those capabilities may solve problems for a set of customers, we call these our sweet spots.

In Grassroots Strategy we describe finding your Strategic Sweet-spots, or “natural right to win” opportunities.  Those sweet-spots are intersections of what you are uniquely qualified to provide with customer needs in the market. 

Once you have generated this list of potential sweet spots develop and evaluate each of these sweet spots using basic strategic marketing principles, what we call our Grassroot Strategy Framework.

Specifically make sure that you:

• Define both current and available markets in terms of the problems you solve for the customer
• Understand the economic value of solving these problems in better or different ways
• Segment the market based on differences in customers’ needs
• Develop segment-specific value propositions that leverage your differentiation (either current or potential)

With this market-back perspective, you’re ready to develop a more informed assessment of growth opportunities. You will identify winning business opportunities and follow them where they go, not just try to populate the matrix.  Diversification may be one of the outcomes of this market-back approach, whereas pursuing diversification for its own sake almost always leads you astray.

As Ansoff points out, there can be  inherent risk in doing ONLY current market/product penetration, because eventually markets evolve – IBM would no longer exist if they had remained a mainframe computer company.  But part of the reason that a market-back perspective is so critical is that the cost and risk of trying to grow in the other quadrants is non-linear – it grows exponentially as you move farther from customers and products you know well. Specifically, we believe:

• Taking new products to existing customers is often incrementally riskier than your home quadrant, but often not dramatically so. Especially if you differentiate not just with product features, finding ways to add more value for customers you know well (and know you) is usually not a big stretch
• The risk of taking existing products to new markets is often overlooked. The key to mitigating this risk is building the detailed market understanding of customer needs and their current alternatives (not assuming they are the same as the customers you know well), then proceeding only where there is a clear under-met need that your differentiated capabilities can plausibly fill. Details matter here – For example, we have seen an aerospace company fail in the automotive market because they assumed that a technically less complicated product meant a less demanding customer, when in fact, the opposite turned out to be true.
• The last quadrant, pure diversification, is almost always a bad idea – the costs and risks are clearly the highest but there is no reason to expect higher returns. Here we begin to step into the realm that Donald Rumsfeld famously referred to as the unknown-unknowns.  Ansoff call these ‘unknowable risks,’ and we would agree.

The key is not better defining your aspirations, but rather a grounded and objective market-back perspective on your differentiating capabilities and how they might add value with products and customers that you don’t know. A thorough market study of customers, competitors and current offerings is necessary to reduce this risk, but realistically will not eliminate it.

In the end, while we might quibble with Ansoff’s detailed approach, we strongly agree with his original premise: evolving with markets is key, but diversification of any kind without a clear view the capabilities that will allow you to win is a recipe for disaster.

Summary

The Ansoff matrix can be a great tool for ensuring coverage of the range of opportunities to be explored in a growth strategy.  But what should be clear is that the ultimate growth strategy should be grounded in market economics and differentiation. While mechanisms of achieving growth vary significantly across the quadrants, the growth journey always starts with an outside in view of your differentiation – being ruthlessly objective is the only way to make this work.

We are reminded on an old saying: “don’t marry for money… only date rich people and then marry for love.” Translating this for our clients, we might say “don’t chase growth for its own sake…only look where you can provide value through your differentiation and the growth will follow.”

---