Dragon flying through a fiery sky

A business needs to constantly develop to survive. Just like a living organism, you must adapt to changes in your environment. New technologies, consumer attitudes, regulatory requirements and cost structures constantly turn over your market, changing the routes to success. Failing to evolve and grow your business is a recipe for decline and ultimate irrelevance. That decline may be slow, and you may remain profitable for a while, but changes in the market will ultimately get you.

The Ansoff Matrix

So businesses are always looking for routes to growth. Where should I innovate? Can I expand into new markets and geographies? What new solutions can I offer to the customers, and what will they pay? Many business strategy tools exist to help you answer these questions.

Ansoff or Growth Matrix 2x2 matrix. Axes: Product - new and existing, and Market - new and existing Four quadrants labelled market penetration, market development, product development and diversification

“…there is a Dragon lurking in the Ansoff matrix that can burn your business to the ground if you are not careful”

A popular tool for thinking about business growth is the Ansoff or Growth Matrix, originally published by Igor Ansoff in 1957. Over time, the idea evolved into the classic 2×2 matrix that is still a staple of business strategy. The layout is simple; you can sell an existing product or a new product into an existing or new market. That produces four quadrants, each representing a different strategy:

  • Market penetration achieves growth by selling existing products to an existing market. Can I get more of the target customers to buy?
  • Market development focuses on finding new markets for my existing products.
  • Product development uses my understanding of my existing market to create new products.
  • Diversification moves the company to a different business area; selling a new product to a new market.

So far, so good. A nice, simple, easily understood aid to strategic thinking. But there is a Dragon lurking in the Ansoff matrix that can burn your business to the ground if you are not careful. It must be treated with great caution.

Here be Dragons!

So, what’s the problem? Where is the Dragon? The problem is human nature and the way we evaluate opportunities.

Ansoff Matrix with arrows showing increasing risk towards new products and markets and increasing knowledge towards existing products and markets

If you look at the matrix, it is fairly obvious that the market penetration quadrant is where you have the most knowledge about both the product and the customers you want to sell to. You may not see massive opportunities for growth, but it is the strategy which makes the best use of your existing knowledge and minimises the risk.

With the market and product development strategies, you are secure in your understanding of existing market or product, and taking a risk with the new product or market. In the diversification strategy, your knowledge is least and your risk the greatest. What could be easier?

This is where human nature comes in and creates problems. As innovators and entrepreneurs, we are optimists. We seek novelty and believe we can improve the future. A strategy of market penetration is dull. We see the deficiencies of our current products, the unreasonable demands of our customers and the threats from our competitors. We understand the difficulties, and only see a modest upside that is hard to deliver.

On the other hand, the possibilities of the diversification strategy are enormous. We don’t have the product and don’t understand the technology. We don’t understand the customers and what they do and don’t want. We are unconstrained by knowledge and our imaginations can fly free. It is easy to be optimistic; to believe in the opportunity. We desperately want to believe.

The Lure of the Unknown

The diversification strategy exerts a powerful pull. It looks exciting, and it is exciting.

Books and articles tout examples of massive successes through diversification. Apple – from consumer hardware to software and music. Google – from search into web services. Coca-Cola – from fizzy drinks to coffee shops. This is where the action is!

Academics and consultants push the ‘Blue Ocean’ strategy. Create industries that do not yet exist in uncontested market space. They tell you to stay away from ‘Red Oceans’; the existing industries and markets where there is competition.

When the strategy works, it is brilliant with vast opportunities for growth and profit. But  mostly it does not work. Case studies of successful diversification suffer massive survivorship bias. Alongside the sudden successful leaps into new markets and products made by a few companies, lies the wreckage of all those that didn’t make it. And the wrecks massively outnumber the successes. Don’t be seduced by your ignorance to bet the whole business on diversification.

Over the years, I have seen many companies caught out by the diversification dream. Mistaking their lack of knowledge for the absence of problems. I have done it myself more than once, and I have the scars to prove it. Now, it is an immediate flashing amber light if I hear someone talking new product and new market. Do they really understand the nature of the market and the customer’s needs? The expectations, the regulatory requirements, the technical and commercial feasibility of the product? If yes, proceed with caution. If no, stop now!

By all means, dance with the Dragon. It can lead to dramatic growth. But be aware of the limits of your knowledge, aware of the risks, have a backup plan, and keep your armour on!

Hoping to Grow? Beware, There is a Dragon Lurking in the Matrix!
Tagged on:         

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.