Intensive Growth Strategies – Expansion through intensification
Intensification involves expansion within the existing line of business. Intensive growth strategy involves safeguarding the present position and expanding in the current product-market space to achieve growth targets. Such an approach is very useful for enterprises that have not fully exploited the opportunities existing in their current products-market domain. A firm selecting an intensification strategy, concentrates on its primary line of business and looks for ways to meet its growth objectives by increasing its size of operations in its primary business. Intensive expansion of a firm can be accomplished in three ways, namely, market penetration, market development and product development first suggested in Ansoff’s model.
Intensification strategy is followed when adequate growth opportunities exist in the firm’s current products-market space. However, while going in for internal expansion, the management should consider the following factors.
- While there are a number of expansion options, the one with the highest net present value should be the first choice.
- Competitive behavior should be predicted in order to determine how and when the competitors would respond to the firm’s actions. The firm must also assess its strengths and weaknesses against its competitors to ascertain its competitive advantages.
- The conditions prevailing in the business environment should be carefully examined to determine the demand for the product and the price customers are willing to pay.
- The firm must have adequate financial, technological and managerial capabilities to expand the way it chooses.
- Technological, social and demographic trends should be carefully monitored before implementing product or market development strategies. This is very crucial, especially, in a volatile business environment.
Ansoff Matrix: Product-Market Expansion Grid
To portray intensive growth strategies, Igor Ansoff presented a matrix that focused on the firm’s present and potential products and markets (customers). This well known marketing tool was first published in the Harvard Business Review (1957) in an article called ‘Strategies for Diversification’. By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff matrix is shown below:
Ansoff matrix provides four different growth strategies:
- Market Penetration – the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share.
- Market Development – the firm seeks growth by targeting its existing products to new market segments.
- Product Development – the firms develops new products targeted to its existing market segments.
- Diversification – the firm grows by diversifying into new businesses by developing new products for new markets.
Selecting a Product-Market Growth Strategy
Ansoff matrix is used by companies which have a growth target or a strategy of specialization. This tool, crossing products and markets of a company, facilitates decision making.
A company should decide which strategy to use based on the strengths and weaknesses of the company and its competitors. Each strategy has a different level of risk, with market penetration having the lowest risk and diversification having the highest risk. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques, and new facilities.
1. Market Penetration
When a firm believes that there exist ample opportunities by aggressively exploiting its current products and current markets, it pursues market penetration approach. Market penetration involves achieving growth through existing products in existing markets and a firm can achieve this by:
- Motivating the existing customers to buy its product more frequently and in larger quantities. Market penetration strategy generally focuses on changing the infrequent users of the firm’s products or services to frequent users and frequent users to heavy users. Typical schemes used for this purpose are volume discounts, bonus cards, price promotion, heavy advertising, regular publicity, wider distribution and obviously through retention of customers by means of an effective customer relationship management.
- Increasing its efforts to attract its competitors’ customers. For this purpose, the firm must develop significant competitive advantages. Attractive product design, high product quality, attractive prices, stronger advertising, and wider distribution can assist an enterprise in gaining lead over its competitors. All these require heavy investment, which only firms with substantial resources, can afford. Firms less endowed may search for niche segments. Many small manufacturers, for instance, survive by seeking out and cultivating profitable niches in the market. They may also grow by developing highly specialized and unique skills to cater to a small segment of exclusive customers with special requirements.
- Targeting new customers in its current markets. Price concessions, better customer service, increasing publicity and other techniques can be useful in this effort.
In a growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if competitors reach capacity limits. While following market penetration strategy, the firm continues to operate in the same markets offering the same products. Growth is achieved by increasing its market share with existing products. However, market penetration has limits, and once the market approaches saturation another strategy must be pursued if the firm is to continue to grow. Unless there is an intrinsic growth in its current market, this strategy necessarily entails snatching business away from competitors. The market penetration strategy is the least risky since it leverages many of the firm’s existing resources and capabilities. Another advantage of this strategy is that it does not require additional investment for developing new products.
2. Market Development Strategy
Market Development strategy tries to achieve growth by introducing existing products in new markets. Market development options include the pursuit of additional market segments or geographical regions. The development of new markets for the product may be a good strategy if the firm’s core competencies are related more to the specific product than to its experience with a specific market segment or when new markets offer better growth prospects compared to the existing ones. Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy. This is because managers do not normally possess sound knowledge of new markets, which may result in inaccurate market assessment and wrong marketing decisions.
In market development approach, a firm seeks to increase its sales by taking its product into new markets. The two possible methods of implementing market development strategy are, (a) the firm can move its present product into new geographical areas. This is done by increasing its sales force, appointing new channel partners, sales agents or manufacturing representatives and by franchising its operation; or (b) the firm can expand sales by attracting new market segments. Making minor modifications in the existing products that appeal to new segments can do the trick.
3. Product Development Strategy
Expansion through product development involves development of new or improved products for its current markets. The firm remains in its present markets but develops new products for these markets. Growth will accrue if the new products yield additional sales and market share. This strategy is likely to succeed for products that have low brand loyalty and/or short product life cycles. A Product development strategy may also be appropriate if the firm’s strengths are related to its specific customers rather than to the specific product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers. Although the firm operates in familiar markets, product development strategy carries more risk than simply attempting to increase market share since there are inherent risks normally associated with new product development.
The three possible ways of implementing the product development strategy are:
- The company can expand sales through developing new products.
- The company can create different or improved versions of the currents products
- The company can make necessary changes in its existing products to suit the different likes and dislikes of the customers.
4. Diversification Strategy
In this case the company will launch new products for new customers. There are several diversification strategies:
- Horizontal Diversification: The company is developing a new product or activity capable of satisfying the same clientele, even if the new products are technologically independent of the existing products.
- Vertical Diversification: The company starts to make the work of its suppliers and/or customers.
- Concentric Diversification: The company develops new products/activities with a complementary technology to existing products/activities. These products may attract a new group of customers and there will be a transfer of key skills.
- Conglomerate Diversification: the company has different products/activities for various markets. The firm now settles on a market where it has no previous experience nor industry but it could attract new groups of customers.
Diversification is the most risky of the four growth strategies since it requires both product and market development and may be outside the core competencies of the firm. In fact, this quadrant of the matrix has been referred to by some as the “suicide cell”. However, diversification may be a reasonable choice if the high risk is compensated by the chance of a high rate of return. Other advantages of diversification include the potential to gain a foothold in an attractive industry and the reduction of overall business portfolio risk.
The advantage of Ansoff Matrix is that it helps business owners to analyse the potential for each of the growth strategies. A business that operates in an expanding market can grow through market penetration. However, a business in a mature, stable market may choose to grow either through market development or product development depending on its internal strengths. If neither of these offers sufficient potential, a business may consider diversification to achieve further growth.