This blog article is about a topic that is relevant to any person who is directly or indirectly involved in strategy - and that is Strategic Courses of Action.
We are often spoiled for choice and don't even know where to go. But we need a clear direction in front of our eyes so that we can also make good strategic decisions for our company.
So today I'd like to give you a little insight into the topic of "Strategic Challenges" - which, by the way, we address both in our book and in our StrategyFrame®.
It is of great importance that we look at these two concepts together, because the strategic challenges are closely linked to and derived from the strategic options for action - these in turn are based on the situation analysis, in which the ACTUAL situation is analyzed and defined in order to clearly see where a company stands and what realities we need to take into account.
In short, Strategic Options for Action are virtually different options available to an organization or company to achieve its goals and visions or to grow entrepreneurially.
As is so often the case, there is also a corresponding tool here. An absolute classic is Ansoff's product-market matrix (also Ansoff matrix, after its inventor; 1957), which we will discuss in more detail below.
The Product Market Matrix
The product-market matrix enables to develop a business strategy focused on growth.
For this purpose, on the one hand the market is divided into
- existing market and
- new market.
On the other hand, the products are split up into
- existing products and
- new products.
The corresponding growth strategies for the company can be derived from the respective product-market combinations, which we will explain in more detail in a moment.
The Ansoff matrix distinguishes four strategic options: market penetration, market development, product development and diversification.
Building on this model, there was another 2012 extension by Kotler and Armstrong, who expanded the original 4 panels of the product-market matrix to six panels.
In our eyes, however, there was still something missing in terms of strategic options for action, which is why we took the liberty of expanding the whole thing again.
The result is 15 possible strategic courses of action that are available to you when it comes to further shaping the growth of your company.
And that's exactly where I would like to take you right now.
Strategic options for action at a glance
The process is about the issues:
- Growth or consolidation
- organic or inorganic growth, such as through acquisitions,
- geographic concentration or expansion,
- tapping into new existing markets or customer segments,
- Offering new products or services in known markets and
- the identification of future markets and customer segments.
The whole can then be derived into three main strategy forms:
- Consolidation strategies
- Growth Strategies
- Future and disruptive strategies
Consolidation strategies
The consolidation strategies are, so to speak, three extensions that have not previously appeared in the matrix in this form:
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Retreat
So the reduction of supply with simultaneous reduction of markets from which to withdraw.
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Product constant market compression
This means that an offer or product remains in place, but markets are reduced or existing offers are withdrawn from special markets if they are no longer profitable. It is more or less the counterpart to "market development".
This can happen, for example, by selling regional business units or by giving up the entire market presence. Such market compression was also visible in relation to the Ukraine-Russia war, because the Russia market had to be reduced in part for sanction reasons - not in all countries, not for all companies, but it was a very significant point.
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Constant product compaction
The third area is constant product densification, i.e. the reduction of the product range or offering while remaining in existing markets. This means that loss-makers or resource guzzlers from the portfolio of products and services are reduced, while the company remains in the markets in which they are already active.
These three strategic courses of action should not be forgotten, because our favorite quote at Hope is not a Strategy is, after all, "The essence of strategy is choosing what not to do", i.e. knowing and deciding what not to do (Michael Porter).
The reality is often that companies are in markets that are sometimes not profitable at all and, in case of doubt, do not even cover the costs of the salesperson - or also have products in the portfolio that are perhaps rather loss-makers or, from a strategic point of view, will no longer make sense in the future.
Growth Strategies
The second core block of strategic options for action are then the so-called growth strategies.
This aspect is very diverse and offers many options.
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Market penetration
The classic first option, also represented in the matrix, is market penetration. This is a product-market strategy in which companies use various measures to drive up market share and exploit the full potential of the existing market (with existing product).
And how to do that? Depending on the suitability, need and company, various measures can be implemented, such as more and targeted marketing, price reduction, purchase of a competitor, etc.
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Product modification
Another strategy can be product modification, i.e. a modified offering in existing markets. The existing offering is modified slightly, which should then encourage the existing target groups to buy again.
It can also be a product feature, for example, in terms of material use, quantity, or even just packaging.
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Product development
Another possible option is product development. Here, compared to product modification, it goes one step further, because a new offering is introduced into the existing market. In other words, we try to satisfy existing customer needs in existing markets (even better) with new offerings.
Here, for example, you can also work with new brands or new product lines to point out the new product modification.
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Market expansion
Here, new - but known - markets are to be found or created for already existing products. We are talking about known markets here because the target group is known. This also makes this point different from the next option.
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Limited diversification
Limited diversification describes the modification of existing products for new geographical markets.
In the point before that, we didn't change anything in the offering and went into known markets with the known target customers. In the case of limited diversification, we have a modification of the offering to regional requirements, so to speak, such as through language, cultural, technical requirements or regulatory points.
And then we come to the next option - partial diversification.
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Partial diversification
Partial diversification can take two different forms, depending on the area of the matrix in which the action aimed at growth takes place.
It can be either
>> new products / offer to geographically new, known markets or
>> modified products / offering are marketed to corresponding new customer segments.
9.1 In the first form, new products are developed and sold accordingly for the known target group in new geographic markets. A classic example is the development of innovative offerings tailored to specific regional customer needs, or the development of completely new brands for an adapted regional appeal or differentiation from other markets.
So, as you can see, it's just a minimal further step from the previously mentioned course of action, limited diversification.
9.2 The other partial diversification is, as already mentioned, the modified offer to new customers. The existing offer is thus modified according to the requirements of new customer segments.
An example would be a modification in insurance for a younger target group or the adjustment of marketing for the new customer segments.
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Market development
Market development comprises the opening up of new markets or customer segments for existing products.
By entering new market segments or developing additional geographic regions, a company can thus gain new target groups and customers for its existing products.
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Diversification
This is the riskiest aspect of the product-market matrix.
Diversification requires the development of a new product while entering a new market.
Depending on the company and strategy, a further subdivision can be made here into horizontal, vertical and lateral diversification.
Horizontal development
Here, there is a factual connection between the existing product range and the new product. In horizontal development, therefore, a company expands its range at the same economic level in order to reach new customers.
An example here would be the sausage manufacturer that now makes vegetarian meat substitutes.
Vertical development
In comparison to horizontal development, diversification does not take place at the same level of the value chain, but upstream or downstream.
A classic example is an automobile manufacturer who buys up a supplier of tires or accessories and also offers their products for sale. In this way, dependencies can be reduced, market shares secured and the company's own growth further expanded.
Lateral development
With the lateral (or diagonal) diversification strategy, there is no connection between the old and new product-market combination.
An example would be the gas station that becomes a mini-supermarket.
Future and disruptive strategies
Here we are dealing with topics that I may know from the "Blue Ocean" strategy, which refers to the creation of a new market, often innovated from existing markets. That is, products or markets are developed that do not yet exist.
- Offer determination
What is meant here is the identification of innovative, disruptive offerings for existing or known markets. For example, fintech startups are in known markets, but it runs completely differently to make the service offering in that industry possible.
- Market finding
Market identification involves identifying future markets or customer segments for an existing, modified offering.
The classic example of this is Cirque du Soleil, which virtually created a blue ocean of new market opportunities and challenged the conventions of the circus industry. From the perspective of a competitive strategy, the circus industry appeared unattractive, but Cirque du Soleil did not win by taking customers away from the already shrinking circus industry, which traditionally targeted children. Instead, it created an uncontested market (blue ocean) that made the competition irrelevant. He appealed to a whole new group of customers.
- Future diversification
Future diversification is about creating a new, future offering for future markets. It is therefore the creation of a blue ocean with no or very little competition.
Amazon Web Services (AWS for short) from Amazon is an example of this. It is the world's most comprehensive and widely used cloud and is now Amazon's main profit driver - rather than the book business with which Amazon started or sales per se.
Conclusion
Strategic options for action are a thoroughly exciting topic with many - as the word suggests - options and often also many discussions, as we know from our own experience from our Strategy Workshop 1.
We hope that this article has given you a good overview of all the possible strategic courses of action and also a better understanding based on which you can make good decisions that will bring growth to your business.