Thursday, June 27, 2013

Corporate Strategy by Ansoff

 Before the report of the project on the lost Twitter bird(our previous post-an experiment on how to go viral on Twitter),let's take a break and talk about Ansoff.
Ansoff’s 1965 classic, Corporate Strategy, contains one of business’s most important and enduring strategic formulations. Before becoming a distinguished academic, writer, and consultant in the mid-1960s,Ansoff progressed through a series of planning positions at the Rand Corporation and Lockheed, ending this phase of his career as vice president and general manager of the Industrial Technology Division at Lockheed Electronics. Experience with diversification planning helped him formulate key issues and tensions that firms face in choosing a growth strategy. The operating problem is akin to determining the best way to milk a cow. The strategic challenge is of a different order: “But if our basic interest is not the cow but in the most milk we can get for our investment, we must make sure that we have the best cow money can buy.”
 In strategic terms,this translates into product-market combinations that are most advantageous to the firm. The Product-Market matrix (sometimes called the Corporate Strategy matrix) defines the options for achieving this.The Two Dimensions and Their Extremes. The Product-Market matrix explores two key dimensions: Product and Market.

Product. Businesses are built around products and services that define their value offering. Most offerings are limited in at least two ways: time, in that their relevance diminishes and redesign or renewal is usually required, and transferability, in that they tend to work best under certain market conditions. Ansoff noted that modifying the core offering is a key strategic choice.
Market. Generally applied as Market options, this dimension distinguishes between customer markets that are well established and known to the firm versus all the rest that are not.

The Four Quadrants. In Ansoff’s terms, each of the four possible options defines a core strategic response to a different set of internal and external conditions. Careful assessment leads to better understanding and decision making:

• Upper left: Product Development. Marketers understand the enormous value of a positive customer relationship and the goodwill and trust that go with it. This relationship capital allows a company to make new product offers more effectively and inexpensively to existing customers than to new ones. The advantages of this must be weighed against the possible damage resulting from negative spillover from the new to the existing product experience should it not be entirely satisfactory. When Stihl, the maker of the world’s top chain saws began to sell augurs, hedge trimmers, and complementary items such as cut-retardant leg chaps, it was practicing Product Development. Heineken has achieved great success by introducing over eighty brands around the world.

• Lower left: Market Penetration. This is the de facto strategy: change nothing and sell more of the same to existing customers. When a business does not consciously select a growth or diversification strategy, it is doing this. When Stihl sells to the forestry industry, it is in this quadrant, as is Heineken when it supplies beer to European drinkers. This is the preferred strategy when a company’s product is performing well and there is room to increase market share.

• Lower right: Market Development. A well-developed product can be introduced into new markets to extend its value. This is ideal when little modification is required and room for growth in the original market is restricted.Products as diverse as food, pharmaceuticals, and automobiles fit this category.When Stihl reached out to recreational users and North American buyers, it was employing a Market Development strategy, as was Heineken when it began exporting its beer outside Europe, with great success.

Time for diversification?

• Upper right: Diversification. Diversification represents a near total strategic overhaul, simultaneously trading in both Product and Market. It is the most challenging, costly, and risky of the options. New skills and relationships need to be developed. Companies choose this strategy in conjunction with one or more of the others or when they have recognized a crisis. Ideally, there is a gradual migratory path leading from the known to the unknown. It would be easier for Stihl to evolve into a retail hardware supplier, say, than a candy manufacturer or entertainment company(The Power of the 
2 x 2 Matrix). The recent misfortunes of Seagram’s Distillers and Vivendi’s (historically a water and utility company) painful transformation into a communications, media, and entertainment company are a reminder of the riskiness of Diversification.