Many times, people will tell me they want to grow their business when in fact, what they are saying is that they want to stop losing money. But as I said in another article, your business must be successful before you can start thinking about growth. And if you want to grow, you must understand the 4 types of business growth strategies.
Business growth = climbing a ladder
Once we start talking about growth, it is important to realise that business growth is like climbing a ladder. When you start climbing the ladder, you start on the first rung; the one that is closest to the ground. Then you put your foot on the 2nd, the 3rd etc. Until you reach the top of the ladder. You cannot start climbing on rung 5, you have to start from rung 1. There may be 1 or 2 people who manage to start at step 3, but the risk of injury is also higher.
It is the same with business growth. You must pass through the lower levels before you attempt the higher levels. If you do not build that foundation, it may be more challenging for your business to survive.
4 types of business growth strategies
Today, many different types of growth strategies exist. Internal and external. Intensive or integrative. Diversification. Concentration. Internationalisation. But way back, a man called Igor Ansoff was the first person to explain the 4 main types of business growth strategies. He used what is now called the “Ansoff Matrix” or the growth strategy matrix. I too will use that matrix today.
Market Penetration Strategy
In this strategy, you grow your business by increasing sales of your existing products or services. It is an attempt to increase your market share by attracting more customers. You are selling existing products (or services) in existing markets. An example is Coca Cola. Almost anywhere you go in your country, you will find their product available for customers. This is one of the easiest types of business growth strategies.
How to do it:
- Lower your price
- Increase your marketing efforts
- Introduce new marketing tactics
- Start selling through new channels, for example online
- Improve your customer service
- Introduce small improvements to make your product more attractive
- Take over a competitor in the same market (if you are big enough and have the money)
- There is a low risk of failure meaning that this is the least risky growth strategy
- It can be challenging because you will need to sell more to existing customers
Market Development Strategy
The market development strategy is a type of business growth strategy where you grow your business by selling your existing products or services in new markets. For example, if you are a bakery selling to private individuals, you can start selling the same breads and pastries to businesses.
There are 2 types of market development:
This means that you look for new customers in the same geographic area. So in the example of the bakery, you will look for businesses in the same area where you are already selling to customers.
This means that you look for new customers in other areas, like in a different town or even across the border in a different country.
An example is Coca Cola selling their product to both younger and older people (demographic) in almost all the countries of the world (geographic)
How to do it:
- Use your marketing and promotion to target different kinds of customers
- Start targeting new cities or regions, or even foreign markets
- Add new distribution channels to reach new types of customers
- This strategy will work well if the new market (customers) is not too different from your existing market (customers)
- If you are successful, it can bring you economies of scale. For example, the bakery will be able to do more bulk purchasing of ingredients and thereby reduce the cost of buying
- This strategy is riskier because you have to develop a new market for your product
- If you do not understand the supply & demand dynamics on the new market, you will fail
- You will struggle unless you are offering something that sets you apart from the existing competition in that new market
Product Development Strategy
In this business growth strategy, you grow your business by selling new products and services to existing markets. For example, if you sell Huawei phones, you add Samsung and iPhone. Or, if you sell one type of ice cream, you start adding different types.
There are 3 types of product development:
This is when you enter your supplier’s market or your customer’s market. For example, your business is construction but you introduce paint and building supplies as new products.
This is when you develop new products or services that are very similar to what you are already selling. You will often find small consumer goods producers using this strategy. For example, a small bakery producing bread will also start selling pastries and cakes.
This is when you introduce new products or services that are very different from what you are already selling. A business may decide to do so to attract a completely different kind of customer or to balance seasonal sales. You will usually see big businesses using this strategy, but sometimes also smaller businesses. For example, a business selling beach towels and beach chairs in the dry season will start selling car repair services in the rainy season.
An example of a company using the product development strategy is Coca Cola. They introduced new products like Cherry Coke, Diet Coke and Coca Cola Zero (concentric product development).
How to do it:
- Improve your existing product or introduce new features. For example:
- Offer different quality versions of the product or service at different price levels
- Offer different sizes or models
- Introduce a new product or service
- Carry out good market research before introducing or developing any new product
- Introduce new products or services based on that market research
- Be prepared to keep experimenting until you know what your customers want
- Partner with another business to start selling their products or services. For example, an accounting firm can work with a financial consultant to add financial consulting as a new service.
- If you are a manufacturer, you can buy the right to produce and sell third-party products
- The risk is limited because you already know the market
- It is a good way to increase sales and profits
- If your business is seasonal, new products (or services) can help to balance your sales throughout the year
- If you are well-established and you have a strong brand, it is easier to introduce new products
- If you do not fully understand the market, you will lose money. For example, if that accounting firm adds financial consulting without knowing for sure whether their customers want this service.
- It may be necessary to learn new marketing and promotion strategies because what you are used to may not bring success for your new product or service.
Note: The product development strategy is also called “product diversification”. For that reason, people often confuse it with the actual diversification strategy.
In this strategy, you develop completely new products or services for new markets. It is the most radical and aggressive business growth strategy. Of all the types of business growth strategies, it is also the strategy with the highest risk. An example of diversification would be if a Sudanese business producing scented soaps for sale in Sudan decided to start designing software for big South African companies.
Before a business chooses diversification as their growth strategy, it must have a good understanding of the new product (or service) and the new market. It should be noted that by choosing diversification, a business is also choosing to spread their (financial) resources across multiple areas. As a result, they may not become a strong player in any area because their attention is diluted.
Diversification is becoming less attractive as a growth strategy because big companies are realising that it difficult to manage many different business operations. This is why you often hear about multinational companies selling parts of the business so they can return to their core business.
There are 2 types of diversification:
This is when there is a relationship or possible synergy between the product that the business is already selling and the new product or market.
This is when there is no relationship or synergy. The example I gave about the Sudanese company is an example of unrelated diversification.
How to do it:
There are many ways to diversify a business. The main thing is that you are introducing a new product or service on a new market. Key questions therefore are:
- Will diversification bring synergy to your business (have you considered all the risks)?
- Does the new market want the new product or service (have you done market research)?
- Does the new product or service have good growth potential (do you know the market size)?
- Highest potential for huge growth
- Potential to create business synergies
- High level of risk because it has the highest level of uncertainty
- You need to learn about new product development while at the same time learning about the new market
- You need big financial reserves to be able to manage any initial failure
Diversification is not recommended for small businesses unless you have a lot of experience and large financial reserves. If your business is lacking in these 2 things, it is better to choose one of the other types of busness growth strategies.
Which of the 4 types of business growth strategies is best for your business? Unfortunately, there is not one definitive answer to this question. Which strategy is best depends on your business and your market.
However, generally speaking, it is best to try the easiest types of business growth strategies before attempting the riskier strategies. That way, you can experiment to see what works for you while keeping your risks low.