In our latest blog series, we’ve covered the basic concepts of startup growth, the importance of pivoting and persevering, and the real-life consequences of failing to adapt to the market. In this guide, we want to focus on realistic strategies used by companies around the world that can help take your business to the next level.
Analyzing risk using the Ansoff Matrix
Definition: “[A] strategic marketing planning tool that links a firm’s marketing strategy with its general strategic direction and presents four alternative growth strategies as a table (matrix)” (Business Dictionary).
Developed and named after H. Igor Ansoff, the father of strategic management, the matrix presents the level of risk involved with various strategies. The four strategies are:
1. Market development – Building on the success of an existing product but introducing it to a new market or market segment.
2. Market penetration – Building on the success of an existing product and further engaging an existing market.
3. Product development – Introducing a new product to an existing market.
4. Diversification – Creating a new product and introducing it to a new market or market segment.
The Ansoff Matrix is useful in strategic planning because it simplifies the concept of risk as it relates to a company’s target markets, product lines, and industry experience. Market penetration is generally accepted as the safest strategy since it builds on a company’s existing knowledge of their target market and products.
As a company transitions to product or market development, there are significantly more risks involved. For product development, this includes the risk of faulty parts, distribution concerns, or lack of production experience. In terms of market development, it may involve risks of cultural misunderstanding/appropriation, translation issues, or a lack of general interest.
Entrepreneurs would do well to use the matrix any time they introduce a new strategy, from bringing a product to a new country, to adding an update to an existing product line. Doing so can help mitigate overall risk.
Market penetration strategy
Market penetration strategy is one of the most common and reliable ways for a company to grow. Since the product and market have already been “proven,” there is far less risk involved.
Instead of reaching out to a new market or introducing a new product, the risk comes from capturing a larger share of the market. Usually, this means taking away customers from other companies.
A common tactic to gain a larger market share is through market penetration pricing. Companies will offer their product at a far lower price than their competitors, sometimes at a loss, so that they can capture the market in the long term. Walmart, for example, is notorious for using penetration pricing to attract customers away from K-mart and Sears. Today, 90% of Americans live within 15 miles of a Walmart.
Market penetration calculation
With a simple equation, any business can calculate its market penetration rate. First, you need to know your total addressable market (TAM). This is the maximum amount of money you can make from selling your product or service. In other words, it’s the total amount of demand that exists in the market for your particular offering.
Once you have your total addressable market, you can use the following formula:
Market penetration rate = (number of customers ÷ target market size) x 100
This equation may seem daunting, but by segmenting the market into smaller, more manageable niches, you can more accurately and effectively predict the success of your efforts.
It’s important also to understand that the market penetration rate by industry varies significantly. Pricing strategy author Marlene Jensen suggests that the normal penetration for a consumer product is between 2 and 6%, while a business product can have a rate between 10 and 40%. In terms of the smartphone industry, Apple has a 19.2% market share, Samsung has 18.4%, Huawei has 10.2%, while smaller brand names make up the remainder.
Market penetration examples
Under Armour is known for creating some of the highest quality performance gear for athletes. In recent years, Under Armour has even captured second place for biggest athletic wear provider in the U.S., overtaking Adidas.
In 2014, Under Armour was able to increase its market share through increased promotion and distribution. Their ads focused on self-improvement and discipline, as seen in “Rule Yourself” featuring Golden State Warriors player Stephen Curry, and “I Will What I Want” featuring American Ballet Theatre Dancer, Misty Copeland.
Market development strategy
When companies are ready to bring their products to a new market or a new segment of the market, they employ a market development strategy.
The risk in a market development strategy is with the company’s lack of experience with the new audience. Companies may fail to understand each market’s particular needs, desires, pain points, and cultural or socioeconomic traits without first conducting the necessary research.
Two questions must be answered before a company enters a new market: first, will the new customers want the product in the first place? Second, does the company have the production and distribution capabilities to expand to a new market?
It’s not uncommon for businesses to expand to new markets to also double down on talent acquisition. An app development company wanting to introduce its app to the Latin American market may want to consider hiring a Spanish-speaking developer or translator. Or if they are targeting the millennial market, they may consider hiring younger team members to gain their feedback.
Market development examples
Americans may be surprised to learn that Red Bull is not an American company at all— it’s Austrian. But across the world, people develop such a strong connection with the Red Bull brand.
One big reason is through its event marketing. Red Bull features a number of extreme sports events in various countries; these include the Indianapolis Grand Prix, Soapbox Race in Jordan, and the Air Race in the U.K. The brand has become synonymous with high-energy and extreme sports. Instead of merely having the same event around the world, it tailors events to the audience.
Another example comes from Pixar, the famous animation studio behind Toy Story, Finding Nemo, Up, and many more. These films already have a personal and handcrafted touch, but Pixar goes above and beyond by localizing even the smallest props or movie details. For example, the U.S. trailer of Inside Out shows a character watching a hockey game, while in the U.K., they are watching a soccer game. These small touches add up to make Pixar feel more local to international markets, despite it being an American production.
Product development strategy
If a company is comfortable with its existing market but instead wants to introduce a new product, then it must go with a product development strategy.
With a product development strategy, the challenge stems from building a solid product or service that is in line or surpasses your brand’s existing reputation. This applies to both a product introduction and product evolution.
To avoid the potential losses from a failed or faulty product launch, companies invest heavily in research and development, or R&D. Customer needs, competitor landscapes, emerging technology, and macroeconomic factors—these are just a few of the elements that the people in R&D must investigate to inform the product development strategy. In 2018 alone, US-based companies spent a total of 329 billion in R&D, according to PricewaterhouseCoopers LLP. Amazon accounted for $22.6 billion of the investment, while Google parent Alphabet spent $16.2 billion. In the end, a product development roadmap will help align the R&D and strategic divisions of a company with the production and distribution divisions.
To learn more about building a product development roadmap, check out ProductCoalition.com’s guide.
Product development examples
In recent years, automobile manufacturers have begun to introduce more eco-friendly updates to their product lines. A decade ago, the market was a lot less uncertain, but brands such as Tesla and Nissan have demonstrated a strong desire for a fully-electric vehicle. From luxury models such as Ford Mach-E, the BMW i3, and the Porche Taycan, to family options such as the Hyundai Kona EV and the Kia Nero EV, it seems almost every car brand is designing their own electric auto.
After years of highlighting images and short videos on their platform, Instagram introduced IGTV, a place for content creators to publish long-form content. Instagram took the novel approach of introducing IGTV as both a standalone app and a feature within the existing Instagram app, so as not to alienate their audience. Finally, the company partnered with various influencers and creators to promote the launch of IGTV as a live event, including Fortnite streamer Ninja, Susie Shu, Katie Austin, Bryce Xavier, Lauren Riihimaki, and Lele Pons.
The last and riskiest strategy for business growth is diversification, sometimes known as corporate diversification, which involves introducing a new product for a new market. With so many unknowns and a company’s lack of prior experience in the space, there is bound a greater probability of failure. Not only must the product be developed and distributed according to the brand’s standards, but it must also be embraced and adopted by the target market.
Diversification strategy examples
Depending on how you approach diversification, you can also mitigate the amount of risk through strategic planning. There are 5 different types worth understanding:
1. Concentric diversification – Perhaps the safest and also the closest to market development, concentric diversification refers to creating similar products or services using existing assets and infrastructure. For example, a sandwich shop adding burgers and salads to the menu.
2. Conglomerate diversification – As the name suggests, this is when a company enters an entirely new market after being bought out in a merger or acquisition. Marvel, the superhero media franchise, has entered more movie and TV show deals in recent years due to its acquisition by Disney.
3. Horizontal diversification – When a company introduces commercially or technologically unrelated products to customers with similar needs. For example, a GPS company that creates commercial GPS systems may offer a new kind of system to use in vehicles.
4. Vertical diversification – When a company introduces new products to a new market by acquiring either its suppliers or distributors. For example, a furniture company buying its supplier of fabrics (backward vertical integration) or the stores where it distributes its products (forward vertical integration).
5. Internal diversification – Technically referring to product or market strategy, not diversification. “Internal” refers to products or markets that are already within the company’s existing plans and operations.
From its very inception, every company should strive to grow. Of course, this is much easier said than done. With such fierce competition and ever-changing consumer behavior, it seems that any new product or market strategy can be a shot in the dark. Yet entrepreneurs know best that the higher the risk, the higher the reward. As long as company strategies are rooted in research, and as long as the research is based on real customer interactions, the most daring business initiatives may prove to be the ones that have the most significant impact.