Ansoff matrix - Lecture notes 10 PDF

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Ansoff matrix The Ansoff matrix was invented by Igor Ansoff in 1965 and is used to develop strategic options for businesses. It is one of the most commonly used tools for this type of analysis due to its simplicity and ease of use. As the diagram demonstrates, the matrix will give managers four possible scenarios, or strategies for future product and market activities.

Market Penetration This strategy focuses on increasing the volume of sales of existing products to the organisation’s existing market. Questions asked: 

How can we defend our market share?

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How can we grow our market?

Product Development This strategy focuses on reaching the existing market with new products. Questions asked: 

How can we expand our product portfolio by modifying or creating products?

Market Development This strategy focuses on reaching new markets with existing products in the portfolio. Questions asked: 

How can we extend our market?

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Through new market sectors?

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Through new geographical areas?

Diversification This strategy focuses on reaching new markets with new products. Diversification can be either related or unrelated. Related Diversification: The organisation stays within a market they have familiarity with. Unrelated Diversification: The organisation moves into a market or industry they have no experience with. This is considered a high risk strategy. So that’s the Ansoff matrix, you can see how it visualises your current strategic position and offers four possible routes to take next.

Boston Consulting Group (BCG) Matrix The Boston Consulting Group Matrix (BCG Matrix), also referred to as the product portfolio matrix, is a business planning tool used to evaluate the strategic position of a firm’s’ brand portfolio.  The BCG Matrix is one of the most popular portfolio analysis methods and classifies a firm’s product and/or services into a two-by-two matrix.  Each quadrant is classified as low or high performance depending on the relative market share and market growth rate. The BCG Matrix: Question Marks o Products in the question marks quadrant are in a market that is growing quickly and of which the product(s) have a low market share. o Question marks are the most managerially intensive products and require extensive investment and resources to increase their market share. Investments in question marks are typically funded by cash flows from the cash cow quadrant. o In the best-case scenario, a firm would ideally want to turn question marks into stars (as indicated by A). If question marks do not succeed in becoming a market leader, they end up becoming dogs when market growth declines. 

The BCG Matrix: Dogs o Products in the dogs quadrant are in a market that is growing slowly and of which the product(s) have a low market share. o Products in the dogs quadrant are typically able to sustain themselves and provide cash flows, but the products will never reach the stars quadrant. o Firms typically phase out products in the dogs quadrant (as indicated by B) unless the products are complementary to existing products or are used for a competitive purpose. The BCG Matrix: Stars o Products in the star quadrant are in a market that is growing quickly and of which the product(s) have a high market share. o Products in the stars quadrant are market-leading products and require significant investment to retain their market position, boost growth, and maintain a competitive advantage. o Stars consume a significant amount of cash and also generates large cash flows. o As the market matures and the products remain successful, stars will migrate to become cash cows. o Stars are a company’s prized possession and are top-of-mind in a firm’s product portfolio. The BCG Matrix: Cash Cows o Products in the cash cows quadrant are in a market that is growing slowly and of which the product(s) have a high market share. o Products in the cash cows quadrant are thought of as products that are leaders in the marketplace. The products already have a significant amount of investments in them and do not require significant further investments to maintain their position. o Cash flows generated by cash cows are high and are generally used to finance stars and question marks. Products in the cash cows quadrant are “milked” and firms invest as little cash as possible while reaping the profits generated from the products.

The experience curve The more experience a firm has in producing a particular product, the lower its costs The experience curve is an idea developed by the Boston Consulting Group (BCG) in the mid-1960s. Working with a leading manufacturer of semiconductors, the consultants noticed that the company's unit cost of manufacturing fell by about 25% for each doubling of the volume that it produced. This relationship they called the experience curve: the more experience a firm has in producing a particular product, the lower are its costs. Costs characteristically decline by 20-30% in real terms each time accumulated experience doubles. This means that when inflation is factored out, costs should always decline. The decline is fast if growth is fast and slow if growth is slow

THE EXPERIENCE CURVE EFFECT IN STRATEGIC MARKETING PLANNING MARKETING MANAGEMENT In 1925, the commander of the Wright Patterson Air Force Base in the USA observed that the number of direct labour hours required to build an aeroplane decreased as the number of aircraft previously assembled increased. Eventually this phenomenon was explored across a wide range of industries and was found to be present in most of them. The phenomenon came to be termed the ‘experience curve’. It has significant implications for the determination of marketing objectives and strategy. Basis and definition Experience curve Analysis in Strategic Management The experience curve effect are relatively easy to understand, and are encapsulated in the name of the phenomenon itself. Put simply, experience curve effects are derived from the fact that the more times we repeat an activity, the more proficient we become: in other words ‘practice makes perfect’. In the case of the Wright Patterson Air Force Base, the commander noticed that this led to a reduction in the time it took to assemble an aircraft as cumulative production increased. The assembly workers simply became more adept at assembling an aircraft because over time they had assembled increasing numbers. In the 1960s, the Boston Consulting Group,3 whose work we look at in more detail later in this chapter, observed that the experience curve effect was not confined to assembly operations, or even simply to direct labour costs, but encompassed almost all cost areas of a business. The experience curve effect is observed to encompass all costs – capital, administrative, research and marketing – and to have transferred impact from technological displacements and product evolution. (Boston Consulting Group: 1970) Furthermore, not only was the experience curve effect found to encompass more than just production, even more importantly, the effect was found to be predictable (Abell and Hammond). Personnel from the Boston Consulting Group and others showed that each time cumulative volume of a product doubled, total value-added costs . . . fell by a constant and predictable percentage.(Abell and Hammond: 1986) It is this predictable relationship between costs and experience that constitutes the experience curve effect. Specific sources of experience curve effects We have observed that experience curve effects are based on the old adage ‘practice makes perfect’.

We can now isolate five specific major sources: 1. increased labour efficiency, e.g. learning short cuts, improved dexterity and greater familiarity with systems/procedures; 2. greater specialization/redesign of working methods; 3. process and production improvements, e.g. design of more effective plant and increased automation; 4. changes in the resources mix, e.g. substitution of initially highly qualified labour by less qualified personnel; 5. product standardization and product redesign. The important point to note about these sources of experience curve effects is that many of them are not ‘automatic’, i.e. in order to achieve experience curve effects management must undertake the necessary steps and exercise initiative. Experience effects provide the opportunities to lower costs, but appropriate strategies are required to grasp them. Calculating experience curve effects Understandably experience curve effects differ between industries and between companies. The basic formula for the experience curve is: Cq = Cn _qn_–b Where: q = the experience (cumulative production) to date n = the experience (cumulative production) at an earlier date Cq = the cost of a unit q (adjusted for inflation) Cn = the cost of a unit n (adjusted for inflation) b = a constant depending on the learning rate. Experience curves are normally expressed in percentage terms, e.g. an ‘85 per cent’ experience curve or a ‘70 per cent’ experience curve. Expressing the experience curve in this way tells us the expected reduction in costs for each doubling of cumulative production. An ‘85 per cent’ curve means that the unit cost of producing (say) 2,000 cumulative units of production will be only 85 per cent of the unit cost when cumulative production had reached only 1,000 units. It is important to note that evidence shows that this percentage impact in costs is the same across the whole range of cumulative experience i.e. doubling experience from four million to eight million units results in exactly the same percentage cost reduction as doubling experience from 100 to 200 units in the company. This too, has important strategic implications. A typical experience curve. Note how the curve shows that the higher the level of cumulative production the lower the cost per unit will be. Strategic implications of the experience curve effect

In industries where curve effects are present (and this is in most industries) and particularly where these are substantial, a significant competitive edge can be gained by adopting a strategy aimed at moving down the experience curve more rapidly than competitors. In effect, this means being the dominant firm in an industry, with strategies aimed at being the early leader and capturing market share. Remember that the experience curve effect is based on cumulative production and not scale of production. This means that in the early stages it is simple to, for example, double market share at relatively low volumes. Early leadership can thus ensure that the leaders’ costs can be reduced relatively quickly and often before competitors have time to enter the market. By the time these competitors are able to do this the early market leader has established an unassailable cost advantage and competes on price leadership. Owing to the experience curve effect, high market share undoubtedly becomes a prime objective in marketing strategies. When considering this strategy the following points need to be borne in mind: 

Achieving high market shares can be expensive. In the short term we need to consider if we can finance the capture of market share.

A typical experience curve

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Market share – and hence cumulative volume – is easier to achieve in high growth markets where experience can be gained by taking a disproportionate share of new sales.

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The pursuit of market share in order to lower costs – and hence competing through price leadership – assumes that the market is price sensitive. Not all markets are; it often makes more sense to compete on superior products or service rather than price.

Experience curve effects are much greater and therefore more relevant in industries such as Aerospace than they are in many service product industries. This explains why the European Consortium which has produced the ‘Eurofighter’ aeroplane was reliant on securing market share. Only major orders from the defence departments of different governments enabled the venture to succeed. In short, the pursuit of competitive advantage based on experience curves is not a certain solution for success in an industry. The experience curve concept is a useful adjunct to the strategic market planner’s portfolio of ideas and is particularly useful for market share and pricing decisions. Like the product life cycle concept, it has in part provided the impetus to the development of more comprehensive planning tools. The first of these is the Boston Consulting Group’s growth/share matrix, but before this we need to consider the nature of these modern tools of strategic marketing planning.

What is PIMS? Profit Impact of Market Strategies

A comprehensive, long-term study of the performance of strategic business units in thousands of companies in all major industries. According to the Strategic Planning Institute(SPI), the PIMS database is "a collection of statistically documented experiences drawn from thousands of businesses, designed to help understand what kinds of strategies work best in what kinds of business environments. Example of database: quality, pricing, vertical integration, innovation, advertising The data constitute a key resource for such critical management tasks as evaluating business performance, analyzing new business opportunities, evaluating and reality testing new strategies, and screening business portfolios. PIMS highlight the relationship between a business's key strategic decisions and its results. The data can help managers gain a better understanding of their business environment, identify critical factors in improving the position of their company, and develop strategies that will enable them to create a sustainable advantages. The PIMS Database o

Companies members of Strategic Planning Institute contribute profiles of their Strategic Business Units (financial data, customers information, markets, competitors, and operations)

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The strategic business units in the database are separated into eight classifications:

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producers of consumer durables

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consumer non-durables

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capital goods

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raw materials

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Components/supplies

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Wholesale distributors

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retail distributors

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providers of services.

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Specific companies and industries are not identified. Each Strategic Business Units profile includes financial data from the income statement and balance sheet, information about quality, price, new products, market share, and competitive tactics.

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From this database of Each Strategic Business Units experiences and results, Strategic Planning Institute researchers developed a set of strategic principles and a methodology for examining business problems and opportunities.

Four Stages of Strategic Planning

Phase 1 Basic financial planning. Organizations in phase 1 emphasize preparing and meeting annual budgets. Financial targets are established and revenues and costs are carefully monitored. The emphasis is short-term, and the primary focus is on the functional aspects of the organization. Most organizations in this phase exhibit few other characteristics relating to the future Phase 2 Forecast-based planning. Organizations in phase 2 usually extend of the time frames covered by the budgeting process. Managers tend to seek more sophisticated forecasts and to become aware of their external environment and its effect on their organizations. Therefore, organization in phase 2 has more effective resource allocation and more timely decisions relating to organization's long-range competitive position. Phase 3 Externally oriented planning. Phase 3 is characterized by the attempt to understand basic marketplace phenomena. Organization begin to search for new ways to define and satisfy customer needs. Moreover, phase 3 differs from the earlier phases that the corporate planners are expected to generate a number of alterative courses of action for top management. Top management begins to evaluate strategic alternatives in a formalized manner to planning and actions. Phase 4 Strategic Management. Phase 4 is characterized by the merging of strategic planning and management into a single process. This integrated approach is accomplished through the presence of three elements: pervasive strategic thinking (managers all levels have learned to think strategically), comprehensive planning process, and supportive value system.

Porter's Five Forces Porter's Five Forces is a business analysis model that helps to explain why different industries are able to sustain different levels of profitability. Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness and profitability of an industry or market. These forces are: 1. Competition in the industry; 2. Potential of new entrants into the industry; 3. Power of suppliers; 4. Power of customers; 5. Threat of substitute products. Competition in the Industry The importance of this force is the number of competitors and their ability to threaten a company. The larger the number of competitors, along with the number of equivalent products and services they offer, the lesser the power of a company. Suppliers and buyers seek out a company's competition if they are unable to receive a suitable deal. When competitive rivalry is low, a company has greater power to do what it wants to do to achieve higher sales and profits. Potential of New Entrants Into an Industry

A company's power is also affected by the force of new entrants into its market. The less time and money it costs for a competitor to enter a company's market and be an effective competitor, the more a company's position may be significantly weakened. An industry with strong barriers to entry is an attractive feature for companies that would prefer to operate in a space with fewer competitors. Power of Suppliers This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the number of suppliers of key aspects of a good or service, how unique these aspects are, and how much it would cost a company to switch from one supplier to another. The fewer the number of suppliers, and the more a company depends upon a supplier, the more power a supplier holds. Power of Customers This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers or customers a company has, how significant each customer is, and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds. Threat of Substitutes Competitor substitutes that can be used in place of a company's products or services pose a threat. For example, if customers rely on a company to provide a tool or service that can be substituted with another tool or service or by performing the task manually, and if this substitution is fairly easy and of low cost, a company's power can be weakened. Understanding Porter's 5 Forces and how they apply to an industry, can enable a company adjust its business strategy to better use its resources to generate higher earnings for its investor ways to work around the constraints Porter's 5 Forces • Changes in Industry structure – Shifting Threat of new entry Discount retailers like Wal-Mart – Changing Power of suppliers and buyers – Shifting Threat of substitutes microwave ovens vs conventional ovens; flash drive vs hard disk drives with low capacity – New bases of Rivalry technology innovation in the retail brokerage • Implications for Strategy

– Positioning the company – Shaping industry structure • Redividing profitability (IBM open architecture because of late entry, standardized PCs and ceded power to suppliers) ...