In this excellent Cautionary Tale, Tim Harford perfectly illustrates the versatility of a two by two grid to guide strategic decision making.
The grid described in the podcast can be seen below:
Perhaps the most famous application of this two by two grid, can be found in the work of Igor Ansoff and Michael Porter.
Ansoff's Matrix
For his strategic matrix, Ansoff was interested in the different growth strategies available to a business. He set out the methods of expansion to be based around releasing new or existing products, in new or existing markets. Ansoff's Matrix can be viewed here:
The strategies can be described as follows:
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Market penetration is the simplest of the strategies. It essentially involves trying to do more of what you are already doing — taking your existing products, continuing to sell them in the same markets, but trying to attract more customers along the way. The goal is usually to push out competition by using strategies such as price reductions or more effective promotion.
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Market development involves selling the business’s existing products in new markets. The most obvious example of this would be geographical (for example, international expansion). However, it may also include targeting different customer demographics.
This can enable more rapid expansion than market penetration, while retaining the security of familiarity with the products being sold.
- Product development keeps the business on home ground in terms of the market, but launches new and updated products in an attempt to attract more customers. Examples include Apple with their countless new models of the iPhone, and Dyson launching increasing numbers of products in the consumer electronics market.
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Diversification is the most ambitious of the growth strategies outlined in the Ansoff Matrix. It introduces products which are new to the business and takes them into unfamiliar markets. For example, Virgin began as a record store in the UK, but has since pivoted to media, transportation and hotels.
Ansoff was not the only business theorist to harness the strategic power of this two by two matrix structure though.
Porter's Generic Strategies
Michael Porter used this framework to set the scope of the market being targeted by the business (mass or niche) against the source of its competitive advantage (low cost or differentiation).
The four strategies that Porter's grid generated are:
- Cost leadership — targeting the mass market with a low-cost strategy. Once low cost has been selected as the source of competitive advantage, targeting a mass market seems like the obvious option. This is because economies of scale from the mass market provide further opportunities for reducing average costs.
- Cost focus — targeting a market niche with a low-cost strategy. Smaller businesses operating in a niche may not gain the same economies of scale, but they can still keep costs low by being as efficient as possible and by avoiding costly research and development.
- Differentiation focus — targeting a niche market with a differentiation strategy. Trying to offer unique features which are different from those of competitors can lend itself nicely to the niche market, where knowledge of customers’ needs is paramount.
- Differentiation leadership — targeting a mass market with a differentiation strategy. Operating in the mass market can make standing out from the competition more difficult. The most successful businesses achieve this with strong marketing and by making their brand part of their differentiation.
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