Ansoff’s matrix and methods of strategic development

A biscuit maker has the same product in the same towns for ten years. Sales are flat. It can push harder in those towns, add a new product, take the product to new towns, or buy a business in a different field. Each choice carries a different level of risk and needs a different amount of money.

Igor Ansoff gave these choices a simple grid, and the exam expects you to use it, to say how the company should carry out the choice (grow alone, buy a rival or join with another firm) and to judge the risk.

This topic covers Ansoff’s growth matrix, gap analysis, withdrawal and consolidation strategies, and the methods of strategic development: internal growth, Greiner’s growth model, mergers and acquisitions, diversification and integration, and product portfolio management. The previous topics ended with the financial markets. The next topic covers how to assess and choose between strategies.

Neither the May 2014 nor the November 2014 Pathfinder sets a stand-alone question on this topic, but strategy choice appears in scenario questions on valuation and acquisitions.

Key terms in plain English

Syllabus check

This topic is in syllabus area B (strategic management, 10% of the marks). It covers:

• strategic direction, product-market strategy and methods of growth;
• mergers, acquisitions, joint ventures and alliances as routes to growth;
• the financial and strategic risks of each route.

CAMA 2020 and growth strategy

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

Takeovers and mergers also fall under competition and securities law, covered in the topic on mergers and acquisitions.

Strategic direction

Growth means selling more in existing markets, selling new products in existing markets, selling existing products in new markets, or selling new products in new markets. A company should signal its product-market scope, its competitive advantage, its growth vector and the synergy it expects. Synergy comes, for example, from making two products on the same equipment or selling two products with the same sales force.

Ansoff’s growth matrix

Market penetration

Sell more of the current products in the current markets. It suits a fast-growing market, where every competitor benefits, and is harder in a mature one. Kotler’s three routes are: get existing customers to use more, get non-users to buy, and win customers from competitors (which risks retaliation). It needs the least new investment so it is low risk. The danger is strategic drift: doing nothing new while competitors innovate.

Market development

Sell existing products in new markets, either new geographical areas (regional, national or international) or new segments, through slightly different versions of the product or new distribution channels. A chocolate maker adds a small diet-conscious size and a large lunch-size bar.

Product development

Sell new products to existing customers. Reasons: a strong brand to extend, strong research and design, technology change, a competitor’s new product, or changing customer needs. Disadvantages: it is expensive and many new products fail.

Diversification

Sell new products in new markets. It is high risk because the company has experience of neither. It is usually done by acquisition.

• Concentric (related): the new area is related to the old, for example a vacuum cleaner maker moving into washing machines, or an airline buying hotels.
• Conglomerate (unrelated): a portfolio of unrelated businesses. The arguments are lower risk, cost savings and synergy, and entrepreneurial skill. Each is weak. Shareholders can spread risk themselves by holding different shares. True unrelated businesses share little, so synergy is hard to find. Skill adds value only if the target is badly managed or holds undervalued assets.

Gap analysis

The gap is the difference between the position the company wants at the end of the plan and the position it will reach with no new strategy. The forecast without change may come from statistical methods such as regression. The chosen strategies must be enough to close the gap, and a mix of product-market strategies is usually needed.

Withdrawal, consolidation and corrective strategies

Withdrawal means narrowing the range, leaving some markets or leaving entirely. Reasons: a declining market, stronger rivals, poor results or the product no longer being core. Consolidation keeps market share without growing, for example because the owner wants a small firm or fears the strain of management. It does not mean doing nothing, because the company must still innovate to stand still.

A corrective strategy adjusts the current strategy to counter threats or changes in customer needs.

Methods of strategic development

There are three routes: internal growth, acquisition or merger, and joint ventures and strategic alliances.

Internal development

Advantages: management controls the pace, the company can focus on its core skills, and it can recruit the skills it lacks. Disadvantages: growth is limited by internal resources and rivals may grow faster; new capacity takes time to build and then lies idle for a while; diversifying alone means learning new skills and making mistakes; and the organisation must eventually change its structure.

Greiner’s growth model

As an entity grows, each phase ends in a crisis that forces a change.

1. Growth through creativity ends in a crisis of leadership: management must become professional.
2. Growth through direction (a formal hierarchy with budgets and controls) ends in a crisis of autonomy: local managers know more than the top.
3. Growth through delegation (divisions and profit centres) ends in a crisis of control: head office loses grip.
4. Growth through co-ordination (reporting systems) ends in a crisis of red tape.
5. Growth through collaboration (teamwork and problem-solving).

An entity that does not change structure becomes inefficient and may become a takeover target.

Mergers and acquisitions

In a merger two entities of about the same size combine. In an acquisition one, usually larger, buys control of the other. ICAN cites Glaxo SmithKline, Time Warner with AOL and Procter & Gamble with Gillette as large mergers.

Advantages: faster than internal growth; immediate ownership of products, markets and customers; entry to markets with high barriers; stops a rival buying the target; possible savings and synergy.

Disadvantages: the bid price may be high so the return is low; shareholders lose proportional ownership; different structures, pay systems and cultures are hard to combine and good staff may leave (disruption often lasts about a year); and a clash of cultures, for example when a commercial bank merges with an investment bank.

Synergy. Savings may come from selling surplus assets, cutting duplicate staff and merging research departments. In practice a large share of deals fail to deliver the synergy expected.

Financial strength. Acquirers need a large cash fund, access to new equity or borrowing, or highly regarded shares for a share-for-share exchange.

Integration

Horizontal integration buys competitors to raise share of existing markets. Vertical integration buys another entity at a different stage of the supply chain and is usually a form of concentric diversification. Forward (downstream) integration moves into customers’ markets: a tyre maker into vehicles, a wholesaler into retail. Backward (upstream) integration moves into suppliers’ markets: a shoe maker into leather.

For: control of supply (backward) and distribution (forward), use of skills in related markets, cost savings in the chain, and product differentiation (Apple and Louis Vuitton own shops to project their brand). Against: the in-house unit escapes the discipline of the market and may become inefficient; the skills are different; management may neglect the core business; the capital might be better used elsewhere; and customers or suppliers may react badly.

Product portfolio management

Managing products as a portfolio lets a company allocate scarce funds to the best products, find improvements and balance the mix. Established “cash cows” fund products in early stages, and decisions can be made on when to drop products in decline. A balanced portfolio matches the company’s objectives and risk appetite.

The rules in more depth

Why risk rises across the matrix

Each move away from the current product or market adds something the company has not done before. Doing both at once means doing two new things.

Why acquisitions disappoint

The buyer pays a premium for the target’s benefits and the synergy has to be found and delivered afterwards, while staff and systems are disturbed.

Why internal growth is slow but controlled

The company expands only as fast as its resources allow, which limits the risk but also lets rivals overtake.

Why a share-for-share bid dilutes owners

New shares are issued to the target’s owners, so existing holders own a smaller part of a larger company.

Effect on analysis

In a scenario, name the strategy, give the risk, state the method of growth and test whether the financing is possible.

Worked examples

1. Gap = 500 − 380 = ₦120m.
2. All three strategies together add 50 + 40 + 30 = ₦120m, which just closes the gap with no room for error.
3. The company should add a margin or a fourth strategy.

1. New shares.
   2,000m ÷ 5 = 400m.
2. Total shares = 1,400m.
3. The holder now owns 100m ÷ 1,400m = 7.14%, down from 10%, of a larger company.

1. (a) Market penetration. (b) Market development. (c) Product development.
2. (d) Diversification, and conglomerate because bakeries and hotels are unrelated. Highest risk.

1. The farm is a supplier, so this is backward (upstream) integration.
2. The bars are customers, so this is forward (downstream) integration.
3. Both are vertical integration. Buying another brewer would be horizontal.

How to score full marks

• Place each option in the matrix and give its risk.
• Link the option to the evidence in the scenario, such as a growing or mature market.
• Name the method (internal, acquisition, alliance) and its advantages and disadvantages.
• Test the financing and the synergy claim.
• Add the people issue in any merger: culture, staff, systems.
• Finish with a recommendation.

Common mistakes in the exam

• Calling any new product a diversification.
• Treating synergy as certain.
• Mixing up forward and backward integration.
• Giving a list of Greiner’s phases without the crisis that ends each one.
• Forgetting that unrelated diversification gives shareholders nothing they cannot do themselves.
• Recommending an acquisition without saying how it will be paid for.

Quick revision

• Ansoff: penetration, market development, product development, diversification.
• Concentric is related. Conglomerate is unrelated.
• Gap = target minus forecast with no change.
• Routes: internal, acquisition or merger, joint venture.
• Greiner crises: leadership, autonomy, control, red tape.
• Vertical: forward to customers, backward to suppliers. Horizontal: competitors.
• CAMA 2020: ss. 305, 308, 385, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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