Growth strategy for startups: Mastering Ansoff's matrix

A deep-dive into Ansoff's four growth strategies including how to execute them, key considerations & risk factors, keys for success, and global and Africa-specific case studies

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The previous article ‘How (African) startups should think about growth' introduced Ansoff's matrix, and this post explores it more deeply.

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Ansoff's matrix is a powerful but underutilized growth strategy tool for startups. Once they’ve established a beachhead — serving a core market with a core product — Ansoff’s matrix provides a great framework to evaluate various alternatives for growth in a structured manner. According to Ansoff, there are just four growth strategies available to a company:

  1. Sell more of existing products to existing markets/customers (Market penetration)

  2. Sell new products to existing markets/customers (Product development)

  3. Sell existing products to new markets/customers (Market development)

  4. Sell new products to new markets/customers (Diversification)

Whereas the previous article, ‘How (African) startups should think about growth', introduced Ansoff’s matrix and its applicability to startups, this article explores in greater depth Ansoff’s four growth strategies. Topics covered include common ways of executing the strategies, key considerations & risk factors involved in a given strategy, keys for success, and global and Africa-specific case studies.


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Market Penetration Strategy

Overview

The goal of a market penetration strategy is to increase a company’s market share. It consists of selling more of existing products to existing customers and/or finding & converting new customers within the company’s existing target market. This strategy is said to offer the lowest risk as it introduces few new variables; the company sells already existing core products & services via established channels to customers and markets it’s familiar with.

Executing the strategy

Executing a market penetration strategy involves strengthening relationships with existing customers and developing relationships with new, but similar, customers. This generally involves:

  1. Selling more to existing customers

    • optimizing sales & distribution teams and channels

    • instituting customer relationship management & loyalty programs

    • increasing brand awareness and mindshare

    • developing a strong internal upselling capability

    • creating ‘magic moments’ for customers & minimizing churn

  2. Finding new customers within the original target market:

    • increasing advertising spend

    • offering promotions & special offers or otherwise reducing prices

    • experimenting with new acquisition strategies and channels

    • operating the customer service function as a customer acquisition channel

    • acquiring a rival in the same market

Key Considerations

Industry growth and structure are among the key considerations in pursuing a market penetration strategy. It’s best suited for a) fast-growing markets with b) weaker or disorganized competition and c) underserved customers. It’s also a good fit for companies that are bootstrapped or otherwise unwilling to invest significantly in riskier growth strategies.

If a market is in decline, it may be more sensible to focus on adjacent opportunities rather than dominating a dying market. Similarly, if there are strong competitors in the market, it may be prudent to tread carefully rather than risking a price war or otherwise poking the bear. And finally, if customers in the market are generally satisfied, new entrants may find it challenging to win them over.

Keys to success

Focus, product/service quality, and a deep understanding of customer needs and market positioning are the keys to success with this strategy.

Examples

Global: While today Google is known for a variety of offerings from the Android OS to the Google Chrome web browser to Gmail and more, the company was much more focused at launch. After its 1998 founding, the company’s singular focus was on its search engine in a market where customers were generally underserved. Moreover, its competition was largely weak and fragmented.

"In late 1995 I started collecting the links on the web … No one was really looking at the links on the web—which pages link to which pages ... I started off by reversing the links …and we ended up with this way of ranking links … and then we were like ‘wow, this is really good, it ranks thinks in the order you'd expect to see them’ ... We thought ‘this is really interesting, this thing really works, we should use it for search’ and so I started building a search engine and Sergey also came on very early ... and basically we thought we should be able to make a better search engine this way because search engines didn't really understand the notion of which pages were more important.”
Larry Page (interview on starting Google, 2000)

Thanks to an initial focus on its search engine product and on growth via market penetration, Google quickly rose to enjoy over 50% search engine market share just five years after launch. While the company has since turned to product development, market development, and diversification strategies, its relentless focus on penetrating the search engine market provided it with a solid base; this has since compounded and today Google accounts for over 90% of the search engine market.

Africa: Another company that deployed a market penetration strategy in its early days is Paystack. Paystack, the Nigerian company referred to by Techcrunch as the ‘Stripe of Africa,’ was founded in 2015 and helps businesses in Africa get paid. At the end of 2016, the company had acquired 1400 merchants, and by the end of 2017, this number had grown to 7,700 merchants. By 2018, the company had acquired 17,000 merchants and accounted for 15 percent of all online payments in Nigeria. And today, while the company has begun to explore other strategies for growth, it currently has over 60,000 merchants and processes over 50% of online payments in Nigeria.

Product Development Strategy

Overview

In pursuing a product development strategy, a company leverages its pre-existing relationships to offer current customers additional products and services. This is riskier than a market penetration strategy as it involves the creation & uptake of unproven products/services.

Executing the strategy

Executing a product development strategy involves extensive research and development to identify unmet customer needs. It also necessitates adequate innovation and new product development capabilities to bring solutions that meet those needs to market.

This typically involves:

  • close interactions with current customers

    • listening intently to customer complaints to identify hidden insights & opportunities for new products/services

    • prioritizing customer feedback and early market testing during the product development process

  • adding new features to an existing product

  • developing new products that are related to the core product

  • adding a service element to existing products

  • productizing parts of an existing service

  • creating strategic partnerships or joint ventures where complementary assets are pooled to create new products/services

  • acquiring a company with a complementary product line

Key Considerations

The assets held by a company (including a company’s brand and relationship with customers) and the company’s R&D capability are among the key considerations in pursuing a product development strategy. It’s best suited for companies a) with strong core assets that can be leveraged for other use cases b) that are trusted by their customers and c) that have robust teams and operational processes to effectively develop new products and services.

The key risk involved in pursuing this strategy is failing to recoup the investment required to develop a new product and bring it to market. If a company doesn’t have strong core assets or lacks an adequate product development or R&D capability, it may be more sensible to focus on maximizing the existing product in the current market or in other markets. Similarly, if a company has not won customer trust (as evidenced by retention/churn rates, NPS, customer satisfaction scores, and brand awareness/recognition metrics), it’s unlikely that customers will adopt the company’s new products.

One additional consideration worth mentioning is customer spending power; if current customers have low spending power, it may be worthwhile to seek out new customer segments rather than developing new products for this segment.

Keys to success

A deep understanding of customer/market needs and strong internal assets, competencies, and capabilities to drive innovation are among the keys to success with this strategy.

Examples

Global: Two companies/brands that stand out for their pursuit of a product development strategy are Apple and WeChat. Apple is well known for leveraging a core asset — iOS — to offer new products from computers to MP3 players to tablets to phones to watches to Apple TV.

Perhaps a lesser-known case is that of WeChat whose creator, Allen Zhang, is sometimes referred to as China's Steve Jobs. As explored in this article, Why super apps are proliferating across emerging markets, WeChat found success early in its history by continuously tinkering and adding new features that changed its growth trajectory.

Africa: It’s been said by many that every company is a fintech company. This seems to be increasingly true for startups in Africa. When it comes to growth via product development, a variety of companies in various sectors have rolled out financial products to their customers. See, for example, Kobo360’s working capital product for drivers, KoPay, Helium Health’s launch of CareCredit, a digital loan product for healthcare providers, or TradeDepot’s provision of credit facilities to its informal retailer customers.

Market Development Strategy

Overview

A market development strategy involves selling existing products/services to new markets/customers. It’s considered to be riskier than the product development strategy as selling in new markets can be much more complex and unpredictable than selling to existing customers. It’s worth noting that while pursuing this strategy often involves a new geographic market, this isn’t necessary. Firms can pursue a market development strategy by targeting different customer segments or “jobs-to-be-done” within the same geographic location.

Executing the strategy

Executing a market development strategy involves adapting an existing product for a new use case or job-to-be-done or new customer segment (geographic or other).

This typically involves:

  1. New uses

    • Repurposing a product for new verticals or jobs-to-be done
      (For example: Listerine was first developed as a surgical antiseptic and later marketed as a floor cleaner and dandruff solution before finding success as a mouth wash)

  1. New customers

    • Repurposing a product for new demographic groups

    • Repurposing a B2C product for the B2B market (or vice versa) or other customer segment changes

    • Entering into a new domestic geographic market

      • creating strategic partnerships or joint ventures that leverage a partner’s local knowledge

    • Entering into a foreign market

      • creating strategic partnerships or joint ventures that leverage a partner’s local knowledge

      • franchising/licensing a product to experts with regional knowhow

      • acquiring a rival company with a complementary geographic footprint

Key Considerations

The characteristics of the potential new markets are among the key considerations in pursuing a market development strategy. The strategy tends to be most successful a) if consumer behavior in the new market is similar to that of consumers in existing markets and b) if consumers in the new market are profitable (i.e., they possess sizeable spending power).

The key risk involved in pursuing this strategy is a failure to appreciate the differences between the new market and the existing market and the implications therein; there can be ‘unknown unknown’ risks in entering a new market blindly. If consumer behavior in the new market is markedly different, it may be more sensible for a company to move closer to their zone of competence/experience. Similarly, if consumers in the new market do not have worthwhile spending power, it may prove fruitless to target them.

It’s also worth noting that while, ideally, market development involves selling the exact same product in a new context, in reality, customizations to the product/service are often necessary to account for cultural & other market differences. These may include modifications related to routes-to-market, distribution channels, promotional activities, positioning, and even language/branding changes.

Keys to success

Strong internal market expansion playbooks & processes and a deep understanding of needs in the target market are the keys to success with this strategy.

Examples

Global: An example of a structured and intentional market development strategy comes from Facebook. Initially, the platform was limited to Harvard students. It then expanded to other schools in the Boston area, then to other Ivy League institutions, and then gradually to other universities in the US & Canada. It was only in September 2006, over two years after its launch, that Facebook was open to anyone with a valid email address.

Africa: Given the uncertainty and risk inherent in some African countries, some argue that savvy startups would do well do pursue a geographic market development strategy as soon as possible. One of the proponents of this school of thought is serial entrepreneur Sim Shagaya, uLesson’s Founder & CEO. Although uLesson is also focused on product development via the introduction of ‘Live Lessons,’ the company was formed with a commitment to market development as explained by Shagaya:

“One of the things that has been a big learning for me, and that why we built uLesson like this from day 1, is that for the enterprise to be stable, we must [expand to new markets] very quickly. The business model must speak to [regional expansion]. So if you look at it today, 20% of our revenues are coming from Ghana already even though we're just three months old and I will continue to look [to expand to] Kenya & South Africa. I think this is very important for digital entrepreneurs.” — Sim Shagaya, uLesson Founder & CEO. Invest Africa podcast.

Diversification Strategy

Overview

The riskiest strategy of all is diversification as it encompasses both the complexities of bringing new products to market and those of selling to new markets/customers. It’s, as Ansoff put it, “a simultaneous departure from the present product line and the present market structure.

Executing the strategy

Executing a diversification strategy involves extensive market research to understand customer behavior in a new market and robust R&D and new product development capabilities to bring new products to that market

Broadly speaking, there are two types of diversification strategy a firm can pursue:

  1. Related diversification: The value chains involved in the new product-market are related to existing value chains such that potential synergies exist.

  2. Unrelated/conglomerate diversification: The value chains involved in the new product-market are so dissimilar that few potential synergies exist.

The core activities involved include those of the product development and market development strategies.

Key Considerations

A company’s appetite for risk is often the key consideration in a diversification strategy. Some scenarios, such as participation in a dwindling market or a strong belief in the future of an unrelated market may increase a company’s appetite for risk such that it pursues a diversification strategy.

Such a strategy is well suited for situations with potential economies of scope — where a firm may drive efficiencies by leveraging existing resources and capabilities for new uses. The diversification strategy may also be used as a means for companies to stretch their competencies, particularly when risks are mitigated by partnerships or joint ventures.

While pursuing diversification strategies multiply product development and market development risks, they also offer great potential return as they may open up entirely new revenue streams in attractive markets. The pursuit of this strategy is often characterized as either a game-changing, last-effort ‘hail-mary’ pivot, or a high-conviction ‘time-will-tell’ bet on a particular vision of the future

Keys for success

A highly capable leadership team and a culture of operational excellence are the keys to success with this strategy.

Examples

Global: In 2000, America Online, the web portal and internet service provider, announced that it was buying media-and-entertainment company Time Warner for $163 billion in what would be called the ‘deal of the century.’ At the time, the merger was largely applauded as a visionary, prescient attempt to meld old media with new media. Unfortunately, however, the diversification strategy failed with purported synergies left unrealized and in 2009 the companies went their separate ways. Read more about the deal here.

Africa: In November 2018 Guaranty Trust Bank (GT Bank), the multinational Nigerian bank, launched its all-in-one e-commerce / news & entertainment / lifestyle super app Habari. GT Bank’s MD/CEO, Segun Agbaje stressed his vision of a future where banks would be embedded in customers’everyday lives, saying at the time:

By reimagining the role of banking and driving innovation in how we serve customers, we have built a platform that is less about us as bank and more about our customers and everything they need to enable their lifestyle. Habari is not a mobile banking application; it is the start of our journey towards building a platform that connects our customers to everything that they need, and which continues to evolve with their lifestyle.
— Segun Agbaje

Time will tell how the pursuit of this diversification strategy plays out for GTBank but currently public sentiment seems to be mixed.

Conclusion

While the sections above describe distinct strategies startups can pursue towards future growth, it’s important to note that startups can and often do pursue multiple strategies at the same time. Indeed, as Ansoff himself noted, “it must be emphasized that in most actual situations a business would follow several of these paths at the same time. As a matter of fact, a simultaneous pursuit of market penetration, market development, and product development is usually a sign of a progressive, well-run business and may be essential to survival in the face of economic competition.


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RECOMMENDED

How (African) startups should think about growth - Emeka Ajene

Strategies for Diversification - H. Igor Ansoff


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