Transcript from the video
Pivoting a company’s business model is not new but recently it seems to have become one of those new buzz words as business owners figure out how to respond to the Covid-19 crises. Many companies are having to shift their business models quickly in order to survive.
Today I’m like to talk about the Pathway Matrix, also known as The Ansoff Matrix which was developed by Igor Ansoff and initially published in the Harvard Business Review in 1960. It is a core business strategy tool which is incredibly useful for mapping out your business options and helping gain some clarity on how to take your business forward.
Ansoff suggested that there were effectively only two approaches to developing a growth strategy; through varying what is sold (product growth) and who it is sold to (market growth). If you combine these two variables then it delivers four strategic options, each with a differing level of risk. I have attached a downloadable pdf which I encourage you to use. I’ve used this concept in my own business and found it really helped with structuring my ideas and gaining much-needed clarity. In essence it is a two by two matrix with one axis representing new and existing markets and one axis representing new and existing products or services.
I’m going to look at each of these, in turn, starting with the lowest risk option first.
The lowest risk strategy is for a company to sell its existing products into existing markets as it knows its customers, has established channels and so on. This method of Market Penetration is only really possible where markets are still growing, or where organisations are prepared to use other elements of the marketing mix (such as price discounting and additional promotional activity) to penetrate the market at the expense of competitors. In the current climate staying still may carry more risk than it has previously. I would suggest that there is another way to consciously stay in this segment and that is though improving the internal efficiencies of your organisation.
The second strategic option is to develop new products or services for existing markets or customers through a ‘Product Development’ strategy. Last week I spoke about businesses still having loyal customers, but they were demanding a different product or service. If I liken this to my business, we clearly offer a payroll service but three months ago I did not offer the service of processing Furlough or claiming the government CJRS grant. Let’s face it three months ago no-one had even heard of Furlough! But if I hadn’t adapted and offered this new service I would have lost or driven away many customers, customers that have been with me for a long time. I would now argue that Covid-19 has made this second option a lower risk option than remaining in the first, traditionally viewed, lower risk space of operation. Adapt or die as Charles Darwin said.
The third strategic option involves taking existing products or services into new markets using a ‘Market Development’ strategy. This is also considered to be risker than the first option of market penetration as it can be difficult to understand the complexities of new markets. If this is the route you choose to follow then there will be a large focus on marketing efforts and relationship building as, for example, the channels to sell a product to industrial users will be a very different to the way in which a business reaches household consumers.
Both these options represent incremental changes.
The final strategy in the Ansoff Matrix is ‘Diversification’, which is developing new products for new markets. This is seen as the riskiest strategy of all four, as the organisation is moving into an unfamiliar markets with a completely new offering. However, this risk can be mitigated by undertaking ‘related’ diversification and it could be that adopting this option may have the potential to gain the highest returns. In essence, this is the equivalent of a business being in Start-Up phase. One genius example of this adaptation I have read about recently was a hotel in Edinburgh who has changed its business model from offering rooms as sleeping areas to offering its rooms as single occupancy office areas for those struggling to WFH, there was even the additional option of lunch being delivered! How clever is that!
The success of any of these strategies is dependent on the organisation being able to effectively conduct research and insight into their customer and market needs as well as their own internal capabilities and competencies for driving innovation.
So download the attached pdf and see if you can apply this to your own business.
Good questions you can ask yourself when considering your options are:
The market size you are moving into, the strengths and weakness of your competition, the cost of implementing your new strategy and how long it will take and your ROI or Return on Investment.
Hopefully, it will encourage some new ideas and innovations.