The Growth Opportunity Matrix lays out several different ways (realistically) to get a business back on a growth trajectory when options for "easy" growth are no longer available.
In highly competitive situations, the traditional classification of products into quadrants does not work. Therefore, companies with strategic operations utilize the matrix to create a systematic method for determining trade-offs in the following areas:
Market saturation
Market competitors' ability to retaliate
Execution friction
Anticipated payback period
Defining Executive Choices
The Growth Opportunity Matrix serves as an outline of various choices available to executives in determining: to continue focusing on market penetration, to risk investing in creating new products, to attempt expanding into new markets, or to engage in potentially risky strategies through diversification.
By combining these elements into a single analytical framework, the matrix helps facilitate better informed, less costly and more cost-effective decisions for all businesses.
In addition to covering a number of strategic options, the Growth Opportunity Matrix is also valuable in assisting organizations with their operational and capital alignment.
This strategic framework enables leaders to remain agile, regardless of whether or not they are experiencing challenging times and provides an ongoing, practical guide to staying focused on continuous improvement.
What the Growth Opportunity Matrix Really Represents
Most strategic planning sessions in boardroom meetings view the Growth Opportunity Matrix, or Ansoff Matrix, as a simple template that aligns "old" products with "new" products against the "existing" and "new" markets.
Although the initial representation of the grid highlights the principal uses of the matrix, the true value of the Growth Opportunity Matrix lies in how senior leadership utilizes the framework to impose stringent criteria for prioritization.
Once operational saturation occurs within a market, the standard directives of "grow sales" become irrelevant until they have first been disaggregated into distinct, delineated operational decisions.
To successfully establish a direction for a given product line:
Is an organization willing to accept reduced margins in order to maintain its existing market penetration?
Is the organization willing to risk investing capital to support the extension of a product line?
Is the organization willing to forcibly enter an untested market segment?
Or will the organization simply acquire an adjacent business or capability by using the existing product line?
Utilizing the four quadrants of the Growth Opportunity Matrix requires teams to objectively evaluate options and eliminate those with the lowest potential for success. When businesses overlay key indicators on all four quadrants of the Growth Opportunity Matrix, the framework evolves from an academic presentation to an actionable playbook for executing successful real-world strategies.
Deconstructing the Four Growth Paths
Market Development
The safest and least risky way to approach growth is through market development, which builds off the existing offer while aggressively pursuing additional demographics, platforms, and regions.
This option also allows companies to offer their core products to customers in new areas while keeping their existing core products and revenues intact. When the current market begins to plateau, this option presents another opportunity to explore new areas of growth.
However, the entry path into these new areas involves significant localization costs and new demand generation processes, as well as unknown points along the distribution chain where access may be restricted.
Product Development
Product development focuses on creating new products based on the company's existing customer base.
This strategy depends upon the continued loyalty of a company's existing customers to its brand, while also assuming that these customers will switch to purchasing newly developed or enhanced products.
The complexity associated with this strategy arises from the ongoing costs associated with research and development and the associated risks of weakening the core company's positioning as a trusted source for quality products.
Diversification
Diversification represents the highest risk associated with product development because it tries to enter the market with unknown products, which means that companies must simultaneously test two unknowns.
Unless companies have significant financial resources available or a very strong competitive advantage, diversification generally results in high rates of failure.
The Impact of Marketplace Competition
The complexity of additional competition within the marketplace also impacts how companies could introduce new products into the marketplace.
When competitors within the marketplace have strong, stable positions, revenue growth requires either the use of predatory tactics or the company having a strong advantage within their product category. The addition of the matrix also indicates options for achieving growth by both consolidating and/or creating new products.
Furthermore, the matrix provides insights into bogus strategies. Companies that have made substantial investments in new market entry could be losing significant amounts of money due to having inherited fundamentally flawed product economics and access to distribution chains through partnerships.
Breaking Down the Search Intent and Existing Guidance
Shortcomings of Standardized Strategic Content
A review of the leading-ranking materials on this issue demonstrates a consistent pattern of introductory blog post style pieces, high-level framework breakdowns and reference-based pages. Most of these materials rely on examples taken from text books and contain very little information regarding the day-to-day commercial realities of implementation.
Therefore, there is a significant void in available actionable intelligence.
The majority of the existing materials merely recite the definitions of the quadrants as well as the relative scale of risk (from penetration to diversification), and then provide a "clean" corporate case example.
They do not provide the diagnostic rigor necessary to assist any management team that is under extreme financial pressure, attempting to deal with the aggressive behaviour of competitors, or experiencing disruption due to a tight supply chain.
Flaws in the Structural Design of Generic Frameworks
The redundancy throughout the guides is astounding, with extremely similar wordings of: Existing vs. New; Lowest-Risk to Highest-Risk; and Four Box Grid. The formulaic response reduces the framework to being a trivia question versus being a mobile and active operational tool.
Moreover, there is an implication in these references that mapping the matrix is the strategy itself, when in fact this is not the case.
The matrix is merely used to organize the data. There is no validation of Demand Density, predicting Competitive Retaliation, or even ensuring the Business has the Ability to act on the increased opportunity identified.
Deciding on the Growth Path in the Face of Constraints
How to Execute Market Penetration
Market penetration is the most reasonable course of action to take when your total addressable market is still growing and the brand has unused Pricing Power and there is Data to back up Buying more frequently.
The approach to execution should include:
- Optimizing pricing architecture
- Enhancing aggressive bundling
- Providing Maximum Customer Lifetime Value
Market saturation is the primary risk.
In an environment where there are too many competitors in a saturated marketplace, and there is no longer any significant demand growth opportunity; penetration pricing strategies in a commoditized space quickly lead to margin loss due to all competitors following suit, and engaging in a "race" to the bottom to maintain the same level of flat volume – all at a reduced margin while depleting cash reserves.
Forcing a Market Development Strategy
If the core offering has strong, defendable margins, and there are visible signs of market fatigue in the primary market, and the path forward is to enter into a new vertical or to enter into cross-border ecommerce (international) for a B2B or retail brand.
The key mistake with this scenario is underestimating the level of "transferability" of value propositions from one segment of customers to another.
Value propositions that are the dominant proposition in one segment may be completely inappropriate for another segment of customers. This could be due to different purchasing behaviors, price sensitivity, or completely different regulatory environments.
The Hidden Costs of New Product Development
When a company has a substantial amount of brand equity, but there is an accelerating rate of customer churn due to model stagnation, product development is often required. Adjacent service offerings, premium or enhanced service tiers, or complementary hardware can help re-engage current customers.
However, product development is costly and time-consuming.
The cash required for design, testing, and creating a marketing plan for a new product is typically greater than the projected initial costs. Additionally, in highly competitive environments, successful features of a product are generally reverse-engineered by competitors unless they have significant "technical moats" and/or patents to protect them.
Risking Diversification
Diversification should only be attempted where the primary market is substantially decaying, the company has a wealth of cash to use for this strategy, or the target for an acquisition provides a strategic leap.
Related diversification, where existing operational infrastructure is utilized, is less risky than pursuing totally unrelated ventures.
However, related moves also require a high level of operational discipline. Companies often believe their brand reputation will protect them in new markets when, in actuality, they underestimate the challenges of establishing distribution networks.
Traditional Execution Blind Spots
Not Taking Competitor Response into Account
A comprehensive growth model should account for immediate competitive counter-moves.
For example, should a competitor drastically reduce prices to enter a new market, or introduce an aggressive product line extension, the current market leaders will respond.
They may bundle specific services to lock customers into contracts; they may spend a significant amount of money on advertising, resulting in increased customer acquisition costs (CAC); and, they may use their supplier relationships to limit inventory availability.
Most theoretical models generally consider competitors to be static entities. However, with each strategic initiative undertaken by one competitor, every other competitor will respond aggressively and many times asymmetrically.
Operational Friction
Strategic planning often does not consider operational realities.
For example, an excellent market development strategy will fail if the company’s supply chain is unable to manage the addition of geographic complexity; if the company’s selling cycle is greater than its cash flow tolerance; or if the company’s customer support infrastructure cannot accommodate the influx of new customer inquiries.
The operational limitations of the organization should dictate which areas of the matrix should be pursued, and not vice versa.
Lack of Decision Criteria
The major flaw of the matrix is the lack of a mechanism for scoring/ranking different quadrants against hard data.
A management team must score/rank each quadrant of the matrix based on the following criteria:
- Estimated payback period
- Amount of capital required
- Speed of execution
- Degree of protection from direct imitation
In the absence of this scoring process, the matrix will not effectively prioritize.
Examples of Diagnostic Scenarios for Competitive Marketplaces
The Saturated SaaS Provider
A software provider with a loyal customer base faces stagnation in terms of revenue growth and an increase in CAC. Increased marketing expenditures for deeper penetration into the marketplace will create diminishing returns on investment. The matrix directs the company to focus on product development.
As the current customer base can be monetized through high-margin add-on products and workflow tools, the company can increase ARR using only its current customer base without having to spend time and money to win over new customers with high CACs.
The Constrained E-commerce Brand
A DTC (direct-to-consumer) brand is suffering from the ability to generate profit margins due to aggressive discounting from its competitors in the primary market. Additionally, the brand cannot engage in price wars to further penetrate the market due to impact on profitability. Therefore, the matrix suggests that the brand enters new marketplaces by conducting market development.
The brand can expand into international territories where the competitive density is lower or pivot to special order distribution (wholesale) to generate revenue from bulk buyers rather than compete in the retail marketplace.
The Regional Service Firm
A B2B service firm dominates its local area; however, the company cannot generate additional revenue through its pricing; therefore, the best option is to develop adjacent markets within the same region for the company.
In order to develop adjacent markets, the service delivery and sales methods of the company must be able to scale to limit localized overhead.
The Commoditized Manufacturer
A manufacturing company recognizes that its primary product has become commoditized, creating intense pricing competition.
The matrix indicates two different routes to survive the decline in margins: either aggressive product development (developing proprietary components with higher specifications that are defensible) or careful related diversification (using existing production resources to enter into a slightly different industrial sector).
Evidence of Execution Requirements
Prioritize Capital Velocity
Companies in very aggressive, cutthroat markets cannot afford to have multi-year timeframes associated with strategic planning; revenue must have an immediate impact. Therefore, in reviewing each quadrant, the capital velocity of the strategy is the most important consideration.
Although a small penetration play may provide cash in ninety days, it is often far superior to a complex diversification play that takes twenty-four months to breakeven.
Building Defensible Moats
A growth strategy that is completely dependent upon a temporary marketing position is vulnerable. To achieve long-term sustainable growth, a business must build sustainable structural advantages.
Examples of structural advantages may include:
- Obtaining exclusive distribution rights while developing a market
- Developing proprietary technology while developing a product
The goal is to make it almost impossible for competitors to duplicate your accomplishment.
Organizational Alignment
The last obstacle businesses face is achieving organizational alignment of the various Matrix Quadrants. The Matrix selected by a business must not only align with the business's DNA, but must also complement the business's operational structure.
A business that is organized primarily for rapid execution of sales may excel at penetrating markets, however, it may not be able to execute the type of nuanced, slow-burn research and development required for complex product development. Elite strategic planning is characterized by an ability to identify operational limitations before significant capital expenditures are made.
Finalization of the Matrix
Strategic Filtering
The Growth Opportunity Matrix is not a plan of action, but rather an effective filtering tool that will allow a business to look at where it has leverage and where it has risk.
The ability to identify the path that can provide the greatest revenue growth with the least amount of risk from devastating backlash from competitors is critical for success in a competitive environment.
Increasing the Utility of the Framework
Abandon the classic textbook definitions associated with this tool; create your own definitions based on real-world constraints.
Evaluate all options by:
- Capital velocity
- Margin impact
- Operational drag
When used correctly, the Matrix will evolve from a simplistic 2x2 grid to a powerful, competitive weapon.
Questions and Answers
How can the behaviour of competitors impact matrix choices?
The behaviour of competitive organisaties significantly alter an organization's risk profile. If incumbent organizations control the distribution, entering new markets becomes risky.
Conversely, if an organization's competitors are slow to innovate, entering into new markets through product development provides a greater opportunity to capture market share before competitors react.
Why do so many organizations fail to achieve market penetration within mature industries?
In mature industries, a large and stable customer base is "locked" into contracts with established competitors.
Thus, an organization trying to gain market share from entrenched competitors must aggressively price cut or spend heavily on advertising. Both actions lead to the destruction of profit margin, often initiating a price war where neither competitor will win.
When should a company consider diversification as a viable option despite the associated risks?
Diversification is a viable option for organizations experiencing significant declines in their core market due to technology changes and/or legislative changes.
In addition, an organization should only consider diversification if it has substantial capital and a strong history of success in its current market due to its myriad of transferable core competencies that provide distinct advantages in the diversification market.
