Strategic direction: choosing which markets to compete in and what products to offer

Welcome to Strategic Direction!

In this chapter, we are looking at the "Big Picture" decisions. Imagine you are the captain of a ship. You need to decide where you are sailing (the Market) and what you are carrying on board to sell (the Product). This is what we call Strategic Direction.

Don't worry if this seems a bit overwhelming at first! We are going to break down the famous Ansoff Matrix into simple steps so you can master this topic for your exams.

Quick Review: What is Strategy?
A strategy is a long-term plan used to achieve a business's Corporate Objectives. Strategic direction is simply the choice of which products to sell and which markets to enter to achieve that growth.

The Core Model: The Ansoff Matrix

The Ansoff Matrix is a tool used by businesses to identify their growth strategy. It looks at two things: Products and Markets. It then decides if they are Existing (things the business already does/knows) or New (things they are trying for the first time).

1. Market Penetration (Existing Product, Existing Market)

This is the "play it safe" strategy. The business tries to sell more of its current products to the people who already buy them.

• How they do it: Better marketing, price cuts, or loyalty schemes.
• Example: Coca-Cola launching a "Share a Coke" campaign with names on bottles to get people to buy more of the same drink.
• Risk Level: Low. The business already knows the product and the customers.

2. Market Development (Existing Product, New Market)

The business takes its current product and tries to find a whole new group of people to sell it to.

• How they do it: Selling in a new country (international trade) or changing the packaging to appeal to a different age group.
• Example: Starbucks opening its first shops in China. The coffee is the same, but the market is brand new.
• Risk Level: Medium. They know the product works, but they don't know the new customers very well.

3. Product Development (New Product, Existing Market)

The business stays with the customers it knows but tries to sell them something brand new.

• How they do it: Research and development (R&D) to create new versions or totally new items.
• Example: Apple, which already had many iPhone customers, launching the Apple Watch.
• Risk Level: Medium. They have a loyal fan base, but the new product might fail or have "bugs."

4. Diversification (New Product, New Market)

This is the "leap into the unknown." The business tries to sell a new product in a market they have never operated in before.

• How they do it: Usually through buying another business or massive investment.
• Example: Virgin, which started as a record shop, moving into the airline industry with Virgin Atlantic.
• Risk Level: High. This is the riskiest strategy because the business has no experience with the product OR the market.

Memory Aid: The "Comfort Zone" Analogy
• Market Penetration: Sitting in your favorite chair at home.
• Market Development: Taking your favorite chair to a friend's house.
• Product Development: Buying a brand new sofa for your own living room.
• Diversification: Buying a brand new sofa for a house you haven't moved into yet!

Key Takeaway: The Ansoff Matrix helps managers see the Risk involved in growth. The further you move away from what you already know (Existing), the higher the risk becomes.

Factors Influencing the Choice of Direction

Why does a business choose one path over another? It isn't just a guess! They look at several factors:

1. Expected Costs vs. Gains
Businesses will look at the Expected Value of a move. They ask: "Will the profit we make be worth the millions we have to spend?"
Formula Reminder: \( \text{Expected Value} = (\text{Payoff} \times \text{Probability}) \)

2. The Level of Risk
Can the business afford to lose the money if the plan fails? A small business might stick to Market Penetration because a failed Diversification could bankrupt them.

3. Core Competences
What is the business actually good at? If a business is great at tech (like Google), it makes sense to develop new tech products. This is using their Strengths (from their SWOT analysis).

4. The External Environment
If the economy is in a recession, a business might avoid the high cost of Diversification and stick to what they know. If technology is changing fast, they might be forced into Product Development just to stay relevant.

Did you know?
Many businesses use Market Penetration during tough economic times because it is the cheapest and least risky way to protect their market share.

Common Mistakes to Avoid

• Confusing Market Development with Product Development: Remember, "Market" = The People/Location. "Product" = The Item. If the product stays the same but the people change, it's Market Development!
• Thinking Diversification is always bad: While it is high risk, it can be very rewarding because it spreads the risk. If one market fails, the business has other products in other markets to keep them going. We call this a Balanced Portfolio.

Summary and Key Takeaways

The Ansoff Matrix is the main tool for choosing strategic direction.
Market Penetration is the lowest risk (Existing/Existing).
Diversification is the highest risk (New/New).
The choice of strategy depends on Resources, Objectives, and the level of Risk the business is willing to take.
Always consider the Opportunity Cost — if a business spends all its money on a new product, what are they giving up?

Top Tip for Exams: When you are given a case study, look at whether the business is staying with what they know or trying something new. Use the Ansoff Matrix terms to get those high marks!