Successful leaders understand that if their organization is to grow in the long term, they can’t stick with a “business as usual” mindset, even when things are going well. They need to find new ways to increase profits and reach new customers. There are numerous options available, such as developing new products or opening up new markets, but how do you know which one will work best for your organization?
The objective of every business is to grow, be it a start-up that’s just closed its first deal or an established market leader seeking to further increase profitability. But how does a business decide upon the best strategy for growth? The Ansoff Matrix management tool offers a solution to this question by assessing the level of risk – considering whether to seek growth through existing or new products in existing or new markets.
This is where you can use an approach like the Ansoff Matrix to think about the potential risks of each option, and to help you devise the most suitable plan for your situation.
The Ansoff Matrix is a strategic planning tool that provides a framework to help executives, senior managers, and marketers devise strategies for future growth.12 It is named after Russian American Igor Ansoff, who created the concept.
The Ansoff Matrix was developed by H. Igor Ansoff and first published in the Harvard Business Review in 1957, in an article titled “Strategies for Diversification.” It has given generations of marketers and business leaders a quick and simple way to think about the risks of growth.
Sometimes called the Product/Market Expansion Grid, the Matrix (see figure 1, below) shows four strategies you can use to grow. It also helps you analyze the risks associated with each one. The idea is that each time you move into a new quadrant (horizontally or vertically), risk increases.
Ansoff, in his 1957 paper, provided a definition for product-market strategy as “a joint statement of a product line and the corresponding set of missions which the products are designed to fulfil”.3 He describes four growth alternatives:
Market Penetration: (EXISTING Market, EXISTING Product)
This strategy involves an attempt to increase market share within existing industries, either by selling more product to established customers or by finding new customers within these markets – typically by adapting the ‘Promotion’ element of the Marketing Mix. Due to the incredible strength of Coca-Cola’s brand, the company has been able to utilise market penetration on an annual basis by creating an association between Coca-Cola and Christmas, such as through the infamous Coca-Cola Christmas advert, which has helped boost sales during the festive period.
In market penetration strategy, the organization tries to grow using its existing offerings (products and services) in existing markets. In other words, it tries to increase its market share in current market scenario.This involves increasing market share within existing market segments. This can be achieved by selling more products or services to established customers or by finding new customers within existing markets. Here, the company seeks increased sales for its present products in its present markets through more aggressive promotion and distribution.
This can be accomplished by:
Increase in promotion and distribution support
Acquisition of a rival in the same market
Modest product refinements
In market development strategy, a firm tries to expand into new markets (geographies, countries etc.) using its existing offerings.
This can be accomplished by:
Different customer segments
Industrial buyers for a good that was previously sold only to the households;
New areas or regions about of the country
This strategy is more likely to be successful where:
The firm has a unique product technology it can leverage in the new market
It benefits from economies of scale if it increases output
The new market is not too different from the one it has experience of
The buyers in the market are intrinsically profitable.
Product Development: (EXISTING Market, NEW Product)
This involves developing new products for existing markets by thinking about how new products can meet customer needs more closely and outperform competitors. A prime example of this was the launch of Cherry Coke in 1985 – Coca-Cola’s first extension beyond its original recipe – and a strategy prompted by small-scale competitors who had identified a profitable opportunity to add cherry-flavoured syrup to Coca-Cola and resell it. The company has since gone on to successfully launch other flavoured variants including lime, lemon and vanilla.In product development strategy, a company tries to create new products and services targeted at its existing markets to achieve growth. This involves extending the product range available to the firm’s existing markets. These products may be obtained by:
Investment in research and development of additional products;
Acquisition of rights to produce someone else’s product;
Buying in the product and “badging” it as one’s own brand;
Joint development with ownership of another company who need access to the firm’s distribution channels or brands.
In diversification an organization tries to grow its market share by introducing new offerings in new markets. It is the most risky strategy because both product and market development is required.
Market Development: (NEW Market, EXISTING Product)
Thirdly, the market development strategy entails finding a new group of buyers for an existing product. The launch of Coke Zero in 2005 was a classic example of this – its concept being identical to Diet Coke; the great taste of Coca-Cola but with zero sugar and low calories. Diet Coke was launched more than 30 years ago, and whilst more females drink it every day than any other soft drink brand, it came to light that young men shied away from it due to its consequential perception of being a woman’s drink. With its shiny black can and polar opposite advertising campaigns, Coke Zero has successfully generated a more ‘masculine’ appeal.
Related Diversification: (NEW Market, NEW Product)
This involves the production of a new category of goods that complements the existing portfolio, in order to penetrate a new but related market. In 2007, Coca-Cola spent $4.1 billion to acquire Glaceau, including its health drink brand Vitaminwater. With a year-on-year decline in sales of carbonated soft drinks like Coca-Cola, the brand anticipates the drinks market may be heading less-sugary future – so has jumped on board the growing health drink sector.
—here there is relationship and, therefore, potential synergy, between the firms in existing business and the new product/market space. Concentric diversification, and (b) Vertical integration.clarification needed
Unrelated Diversification: (NEW Market, NEW Product)
Finally, unrelated diversification entails entry into a new industry that lacks important similarities with the company’s existing markets. Coca-Cola generally avoids risky adventures into unknown territories and can instead utilise its brand strength to continue growing within the drinks industry. That said, Coca-Cola offers official merchandise from pens and glasses to fridges, therefore exploiting its strong brand advocacy through this strategy.
Logical consistency challenges
The logic of the Ansoff matrix has been questioned. The logical issues pertain to interpretations about newness. If one assumes a new product really is new to the firm, in many cases a new product will simultaneously take the firm into a new, unfamiliar market. In that case, one of the Ansoff quadrants, diversification, is redundant. Alternatively, if a new product does not necessarily take the firm into a new market, then the combination of new products into new markets does not always equate to diversification, in the sense of venturing into a completely unknown business.4
What is clear with Ansoff’s Matrix is the incremental increase in risk offered by the five strategies, due to the growing cost with each step beyond market penetration and uncertainty of operating in new markets and industries:
Definition: The Retrenchment Strategy is adopted when an organization aims at reducing its one or more business operations with the view to cut expenses and reach to a more stable financial position.
In other words, the strategy followed, when a firm decides to eliminate its activities through a considerable reduction in its business operations, in the perspective of customer groups, customer functions and technology alternatives, either individually or collectively is called as Retrenchment Strategy.
The firm can either restructure its business operations or discontinue it, so as to revitalize its financial position. There are three types of Retrenchment Strategies:
To further comprehend the meaning of Retrenchment Strategy, go through the following examples in terms of customer groups, customer functions and technology alternatives.
The book publication house may pull out of the customer sales through market intermediaries and may focus on the direct institutional sales. This may be done to slash the sales force and increase the marketing efficiency.
The hotel may focus on the room facilities which is more profitable and may shut down the less profitable services given in the banquet halls during occasions.
The institute may offer a distance learning programme for a particular subject, despite teaching the students in the classrooms. This may be done to cut the expenses or to use the facility more efficiently, for some other purpose.
In all the above examples, the firms have made the significant changes either in their customer groups, functions and technology/process, with the intention to cut the expenses and maintain their financial stability.
Choosing a Retrenchment Strategy
Retrenchment is only one of several strategies corporations can use. A long-running business may use stability, expansion or retrenchment strategies at different points in its life.
Corporations use stability strategies when they’re satisfied with their current position. Stability tactics are keeping everything the same; waiting before making a decision and making temporary changes to keep profits stable. Expansion strategies help corporations grow. They include concentrating and specializing in a profitable line, diversifying into multiple fields or expanding into new markets.
Corporations adopt a retrenchment strategy when they’re overextended. The emphasis is on cutting costs or stabilizing cash flow rather than attracting new customers or boosting sales. There are three main methods:
Turnaround: restructure operations to be leaner and more profitable.
Divestment: getting rid of unproductive divisions, acquisitions or products. The goal is to refocus on profitable products or services rather than spending money on unsuccessful operations. Staff at the remaining divisions may be downsized.
Liquidation: shutting down unprofitable operations and selling the assets. It’s a more drastic step than divestment.
Tesco, the United Kingdom’s largest supermarket chain, has been using a retrenchment strategy for several years. In the early 21st century, Tesco was all about expansion and diversification, but in the century’s second decade, sales started to decline. The reason? Changes in consumer behavior, a rough economy and new competitors.
Tesco adopted a retrenchment strategy so that it could cut costs and thereby lower prices to stay competitive. Its tactics included closing unprofitable stores, canceling plans for opening new stores and selling off its internet service, Tesco Broadband.
Pros and Cons
In business, there’s no strategy guaranteed to win every time. Before a company starts divestment, it needs to weigh the pros and cons of retrenchment.
Retrenchment gets rid of business lines that aren’t profitable.
It allows the corporation to concentrate on the things it’s best at and stop doing things that don’t fit its skill set.
Some markets are changing so radically; it’s best to get out of them.
It frees up money that can be focused on more profitable ventures.
Retrenchment can be expensive. Tesco spent $1.2 billion when it retrenched and gave up on the U.S. market.
Shrinking the company means cutting staff at unsuccessful stores and product lines. That can cost the company the services of skilled, valuable employees.
Outsiders may assume the company is starting a death spiral.
Retrenching and refocusing cut costs. That may not help if what the company needs is newer, more innovative products.
Retrenching Your Staff
The effects of retrenchment on employees are usually listed among the strategic negatives. Just closing stores or product lines is negative for all the employees who suddenly find themselves jobless. Other employees have to deal with the fear they’ll be next or cope with an expanded workload. For example, a company that saves money by centralizing HR or customer-experience staff may saddle the central staff with a lot more work.
Managers who have to tell employee after employee they’ve been downsized may come to dread their job. Staffers who jump ship before they can be downsized may cost the company key people. Any company that plans to retrench needs to think about ways to minimize the impact on corporate staff. Communication is vital; if the corporation doesn’t tell employees what’s going on, the office rumor mill will make it up. One simple step is for managers to ask what they’d want to know if they were in the employees’ shoes. Use that insight as the basis of internal communications during the retrenchment.
Retrenchment is a short-run renewal strategy designed to overcome organizational weaknesses that are contributing to deteriorating performance. It is meant to replenish and revitalize the organizational resources and capabilities so that the organization can regain its competitiveness. Retrenchment may be thought as a minor surgery to correct a problem. Managers often try a minimal treatment first-cost cutting or a small layoff-hoping that nothing more painful will be needed to turn the firm around. When performance measures reveal a more serious situation, more drastic action must be taken to restore performance.
Retrenchment strategies call for two primary actions:
1. Cost cutting and
One or both of these tools will be employed more extensively in turnaround situations, because the problems are deeper there than in retrenchment situations. A cost cutting program should be preceded by careful thought and analysis. Rarely is it wise to use a simplistic “across-the-board” cost cutting program. Some departments or projects may need additional funding, while others need modest cuts, and still others need drastic cuts or need to be eliminated altogether. If cost cutting is a part of the strategy implementation, then the plan of implementation should clearly specify how it will be applied across the organization and why is it being proposed.
Retrenchment strategy alternatives include shrinking selectively, extracting cash for investment in other businesses, and divestment. While these strategies result in generating cash, they differ in terms of their intentions. Divestment of the whole business is an “end game” strategy and it may be done via selling or liquidation of business. Under the strategy of extraction of cash for investment in other business, cash is generated from the troubled business mainly via budget and cost contraction. In both strategies, the intention of management is to quit the troubled business.
In the shrinking selectively strategy (SSS), cash is generated via downsizing (contraction of size or divesting some operations. The strategy of shrinking selectively involves retrieving the value of investments in some parts of the market while reinvesting in others because in some niches’ demand will continue to be grow while in others the demand shrivels. The objective is to capture the desirable niches. A firm, which chooses the shrink selectively strategy, should have some internal competitive advantages, which it hopes to preserve. Thus, it may prefer to retain some part of its former businesses by shrinking rather than divesting, because of the possible advantages it had built up through the years.
Shrinking selectively as a repositioning strategy (i.e., matching market niche with distinctive competence) often results in renewed strength. For example, the TATA group continued concentrating on its various business including steel, automobile manufacturing, etc while selling Tomco, which did not share a synergistic relationship with its current portfolio of businesses. Similarly, the LTV steel company’s decision (after filing in 1986) to concentrate on “flat rolled” steel products, while divesting other steel operations, reflects the intent to maintain a leadership position in production of high-quality, value-added steel for critical engineering application.
In essence, restructuring involves an organization refocusing on its primary business. During the 1970s, many firms diversified into businesses they knew little about. Management teams thought this conglomerate diversification would spread their firms’ risks. If the fortunes of one business declined, the others in its business portfolio would protect earnings. Quite often, companies struggled to compete well in the business lines they knew little about. Many of the mergers of the 1980s occurred because these firms restructured their businesses by trying to sell off these businesses and refocus their efforts in their original lines.
Variants of Retrenchment Strategy:
The three major variants of retrenchment strategy are –
1. Turnaround strategy,
2. Survival strategy and
3. Liquidation strategy.