Growing your business requires that you generate possible options and then make decisions as to which of those will work best for your business. Here are the tools most commonly used to help you set out the options.
Ansoff’s Growth Matrix
Igor Ansoff, while Professor of Industrial Administration in the Graduate School at Carnegie Mellon University, published his landmark book, Corporate Strategy (1965), where he explained a way of categorising strategies as an aid to understanding the nature of the risks involved in them. Ansoff invited his students to consider growth options as a square matrix divided into four segments. The axes are labelled with products and services running along the ‘x’ axis, starting with ‘present’ and ‘new’; and markets up the ‘y’ axis, similarly labelled (see the following Figure). Ansoff then went on to assign titles to each type of strategy, in an ascending scale of risk):
Market penetration, which involves selling more of your existing products and services to existing customers – the lowest-risk strategy.
Product/service development, which involves creating extensions to your existing products or new products to sell to your existing customer base. This is more risky than market penetration, but less risky than entering a new market where you face new competitors and may not understand the customers as well as you do your current ones.
Market development involves entering new market segments or completely new markets either in your home country or abroad.
Diversification is selling new products into new markets, the riskiest strategy as both are relative unknowns and this one is best avoided unless you’ve exhausted all other strategies. Diversification can be further subdivided into four categories of increasing risk profile:
Horizontal diversification – taking an entirely new product into your current market.
Vertical diversification – moving backwards into products that you currently get from your firm’s suppliers or forward into your customer’s business.
Concentric diversification – introducing a new product closely related to your current products either in terms of technology or marketing presence, but into a new market.
Conglomerate diversification – introducing a completely new product into a new market.
Ansoff’s Growth Matrix.
The Boston Consulting Group Matrix
This tool was developed in 1969 by the Boston Consulting Group; you can use the group matrix to plan a portfolio of product or service offers. The thinking behind the matrix is that a company’s products and services should be classified according to their cash-generating or consumption ability against two dimensions: the market growth rate and the company’s market share (see the following Figure).
Cash is used as the measure rather than profit, as cash is the real resource used to invest in new offers. The objective then is to use the positive cash flow generated from cash cows, usually mature products that no longer need heavy marketing support budgets, to invest in stars, that is, fast-growing, usually newer products, positioned in markets in which the company already has a high market share – usually newer markets.
Dogs, which are products with a low market share and slow growth rates, should be disinvested and question marks, which are products with low market share but where market growth looks high, should be limited in number as these are big cash consumers and need to be watched carefully to see whether they are more likely to become stars or dogs.
The Boston Consulting Group Matrix is explained in more detail at Value Based Management, net, and you can access a tutorial showing how to create a BCG Matrix in Excel at Best Excel Tutorial.
The GE–McKinsey Growth Matrix
General Electric (GE) was much taken by the visual aspect of the Boston Matrix and was using it to enhance its own performance using another consulting firm, McKinsey and Company, to help. Between them, in 1971, they came up with a variant (see the following Figure), and in some ways an improvement, by substituting business strength and industry attractiveness for market share and market growth rate. The logic was that although these measures are subjective, they are more accessible than market growth and share, which are hard to establish.
You can find out more about the GE–McKinsey Growth Matrix at MBA Knowledge Base.
The Long-Run Return Pyramid
Another helpful strategy tool is the long-run return pyramid, which is in effect a checklist of growth options. None of the options are mutually exclusive and the tool doesn’t provide for any form of evaluation. Nevertheless, the pyramid can be a valuable memory aid to help you ensure that you’ve left no stone unturned during your strategic review process. The pyramid in the form shown this Figure is attributed to Robert Brown, a senior academic at Cranfield School of Management.
