Implications of the Ansoff Matrix on Channel Strategy

In last month’s article – Not Everybody Wants to Grow – we made a brief reference to the Ansoff Growth Matrix. In this month’s article, we explore this model further, and its implications for your channel strategy.

Igor Ansoff was born in Russia in 1918, but is largely considered to be the father of strategic management. An applied mathematician and business manager, he emigrated to the United States with his family where he continued his education and received a doctorate in Applied Mathematics. He held senior academic posts at a number of prestigious universities including Carnegie-Mellon and Vanderbilt, before retiring in the late 1980’s. He died in California in 2002.

Professionally, Ansoff is known worldwide for his research in three specific areas:

  • The concept of environmental turbulence
  • The contingent strategic success paradigm
  • Real-time strategic management

To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm’s present and potential products and markets (customers). 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.

Although this marketing tool was first published in the Harvard Business Review in 1957 (in an article called ‘Strategies for Diversification’) it continues to be used by companies and marketers who have objectives for growth. Each quadrant or strategy however has a differing amount of risk, reward and cost associated with the strategy and its successful implementation.

Ansoff Growth Matrix

Let’s look at each of these quadrants in turn.

1.  Market Penetration

Here the company markets its existing products to its existing customers. This means increasing revenue by actively promoting their products or services within the existing customer base rather than seeking any new customers. This is the lowest risk and lowest cost option for the company (often called a “depth strategy).

It is estimated that the cost of sales in this quadrant, for a channel model within the IT industry, is approximately 10-15%. That is, the partner already knows their product and knows where or who the customers are, so the cost of winning business is relatively easy. Note: most partners operate in this quadrant.

2.  Market Development (Customer Acquisition)

Here the company markets its existing product or services range into a new market. This means that the product remains the same, but it is marketed to a new audience, typically this is what most vendors what their partners to do. There are often over and above program incentives for “Net New Logos” to encourage partners to perform this task, partly to offset the increased cost of sales.

It is estimated that the cost of sales in this quadrant, for a channel model within the IT industry, is approximately 20-40%. Additionally, this strategy will have an ongoing operational cost impact which we covered in the business PSYCO article.

3.  Product Development (New Product Introduction)

This is a new product to be marketed to the company’s existing customers. Here the company will develop and innovate new product or service offerings to replace existing ones and then are marketed to the existing customers. The recent trend to managed services and cloud computing are good examples of where some partners have thrived. But others have struggled with this strategy, depending on the technology “gap” between the existing product and the new product offering.

Similar to Quadrant 2, it is estimated that the cost of sales in this quadrant is approximately 20-40%. Again, this strategy is likely to have an ongoing post sale cost impact for the partner.

4.  Diversification

This is where the company will market completely new products to new customers. There are two types of diversification, namely related and unrelated diversification. Related diversification means the company remains in a market or industry they are familiar with. For example, a storage vendor diversifies into IT security (i.e. the IT industry). Unrelated diversification is where the company has no previous industry or market experience. A recent spectacular failure of this strategy was Woolworths entering the big box hardware market with Masters to compete against Bunnings.

This is the riskiest and most expensive quadrant.  Cost of sales can range from 60-80% cost of sales. Unless the company is very lucky or has very deep pockets, this strategy can take you down a financial “black hole”.

Implications for the channel

For channel account managers the Ansoff Matrix is a useful tool to help you manage your territory from two perspectives.

Firstly, it can be used to understand your partner’s growth strategy. If, for example, the partner is focused on growth through Quadrants 1 and 3, then it is not worth investing in lead generation campaigns for them, as that is not their focus. For these partners, it may be best to invest in product training and enablement, and spend your MDF dollars on partners who have an active Quadrant 2 strategy.

Secondly, a channel manager can analyse the growth strategy in their own territory by changing the word “customers” on the axis to “partners”. In other words, which partners is the growth going to come from to meet your target?

The reality is that Quadrant 1 – Market Penetration – has limited potential. It is certainly the easiest to work with, because you’re dealing with partners and products you know, but sooner or later you are going to run out of sufficient opportunities.

Quadrant 2 – Partner Acquisition – should be a key part of your strategy. In particular, targeting partners that are selling complementary solutions, or a weak competitor, would be wise. The effort required to do this is far greater than Quadrant 1, as you will need to enable these new partners, but the effort is worth it for sales growth in next 12-18 months.

For many channel managers, investment in Quadrant 3 is largely determined by the company you work for. If you do not have any new products in your portfolio, this quadrant will not yield much in the way of sales growth. What is important however, is if you do have new products, then your strategy should be to identify the partners that will help you sell them, rather than blindingly treating your entire channel as equal.

And finally, the hardest strategy of all is quadrant 4 – Diversification – that is, finding new unrelated partners and enabling them to sell products they’ve never sold before. We would recommend you try all other alternatives before heading down this path.