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How to Minimize the Risk of Your Growth Strategy

May 20, 2015 5:50:02 PM

All organizations seek growth, and decisions about how to grow involve some level of risk. Clayton Christensen and colleagues - in summarizing some compelling empirical evidence - make a strong statement about how big that risk can be:

“... a 10 percent probability of succeeding in a quest for sustained growth is, if anything, a generous estimate.�? (Clayton Christensen et al. 2004, The Innovator’s Solution)

There are many obstacles to effective growth. So, how can you get a handle on that risk and begin to manage it?

A good start is the Ansoff matrix. Igor Ansoff, a pioneer in the study of strategic management, proposed in 1957 a simple but powerful way to characterize growth opportunities, which is still used widely today. The matrix identifies four categories of growth strategies based on the relative “newness�? of products and customers:

Ansoff Matrix

Starting in the lower left, a market penetration strategy is one in which you seek to do more business with current customers of your current products and services. This is familiar territory. For example, Uber takes business from taxis or a competing ride-sharing service like Lyft.

A product development strategy involves innovation to create new products for existing customers. New products exist on a continuous – from marginal changes like changing the scent of a furniture polish to radical innovations like Swiffer.

In the lower right-hand cell of the Ansoff matrix is market development. This strategy involves taking current products and services into new markets, a critically important source of growth in today’s market. The 2015 PWC CEO survey, 61% of CEOs reported greater growth opportunities, and they expect much of that growth to be fueled by business in new markets.

Finally, diversification represents an effort to stretch simultaneously into new markets with new products. A classic illustration of this was cigarette maker Phillip Morris’ $5.6 billion acquisition of General Foods.

Where is risk highest? Mostly with New Customers.

The pure definition of risk is variance or unpredictability of outcomes. The four strategies in Ansoff’s matrix vary in risk, but until 2007, there were no systematic estimates.
George Day, scholar and Professor of the Wharton School, has collected data to estimate the risks involved.

Day (2007) Risk Matrix

Day 2007 Risk Matrix

Rather than the discrete “new�? or “current�? dimensions of the Ansoff Matrix, Day presents product and customer “newness�? as continuum. Day’s “bands of failure probabilities�? provide some striking insights.

The lower left portion of the graph shows failure probabilities for what Ansoff called market penetration. Even though this is familiar ground for the firm, you can expect at least 25% of these projects to fail. If we stay with current customers and move up the vertical axis to very new products and services, the risk of failure rises to 45-60%. There’s a big jump in risk when you delve into new products or technologies (just ask Smith & Wesson, who tried to introduce a line of mountain bikes).

So, what happens when you attempt to move into new customer markets?

It turns out that moving into new customer markets makes the risk of failure skyrocket. We can see this in moving left-to-right along the horizontal axis in Day’s Risk Matrix. Even staying with current product or technology, moving into increasingly unfamiliar customer segments jumps the probability of failure all the way to potentially 95%!

Why would failure rates be so high in new markets? It’s often due to a failure to carefully study the needs of customers in those markets. Carroll and Mui (2008) cite an 85% failure rate for moves into adjacent (new, but not totally different) customer markets. They suggest that the central reason for these failures is “the company overestimating its hold on customers�? without effective research.

Managing the Risk in Your Growth Strategy

Robert Cooper of McGill University has studied hundreds of new product development projects, representing dozens of different industries, and has come to a single definitive conclusion about what makes new products successful:

“A unique, superior product – a differentiated product that delivers unique benefits and a compelling value proposition to the customer or user – is the number one driver of new product profitability.�?

This provides direction for us on how to minimize risk in growth strategy. If we use the two dimensions of Day’s Risk Matrix, “newness of customer market�? and “newness of product,�? as guides, we can apply Cooper’s prescription to risk mitigation:

When moving up the vertical axis, focus on being different. It’s critical to build a growth strategy around the notion of competitive differences. Cooper cites the development of “me-too, ho-hum, or tired, trivial new products�? as the top root cause of new product failure. A big reason for this? An understanding of what differentiates the competition is not deeply integrated into the product development process, and leadership doesn’t demand superiority to competitors.

When moving along the horizontal axis, focus on deeply understanding customer values. Successful execution of growth strategy demands that the firm know the customer. Often the pressure of time and money leads to the reliance on management’s assumptions about customer values rather than actual customer research. Cooper identified that another key driver of product development failure is that “the overwhelming majority of firms simply do a poor job on the market research,�? often substituting the voice of team members (salespeople, product managers) for the voice of the customer. The risks of poor research get dramatically higher when dealing with unfamiliar customer segments or geographic markets.

With the probability of failure so high, the management of risk is an important task in today’s market. To minimize risk, do your due diligence for growth with an eye toward a single mantra: be different from competitors in ways important to customers.

------------------------------
George Day (2007), “Is it real? Can we win? Is it worth doing?�? Harvard Business Review (December).
Carroll, Paul and Chunka Mui (2008) Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years (New York, NY: Penguin Group).
Cooper, Robert G. (2011), Winning at New Products (Philadelphia, PA: Basic Books), p. 32.

Topics: General

Joe Urbany
Written by Joe Urbany

Cofounder of Vennli and Professor at the University of Notre Dame

Joe is a core marketing faculty member in Notre Dame’s MBA program and past Associate Dean of the Mendoza College of Business with numerous publication credits related to customer decision making and growth strategy.

In 2010, Joe Urbany co-wrote a book entitled Grow by Focusing on What Matters: Competitive Strategy in 3-circles. The premise of the book is that growth and competitive advantage are about effective positioning. The model facilitates speed of understanding and action by focusing strategic attention on what impacts customer decisions. It has been applied in over 800+ MBA projects at Notre Dame. Co-founded in 2013 by Joe, Vennli is based on this proven model. Vennli brings the model to life through the use of collaborative technology and providing a platform that makes an already faster and more intuitive process even more accelerated and streamlined.

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