Business Knowledge

A Guide to Corporate Strategy Frameworks: Ansoff and BCG Matrix

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Corporate Strategy Business Strategy Growth Strategy Portfolio Management

Summary

Corporate strategy deals with the overall scope and direction of a corporation. While competitive strategy focuses on how to win in a specific market, corporate strategy asks, “What markets should we be in?” Two of the most enduring applied frameworks for answering this question are the Ansoff Matrix, which helps to structure thinking about growth, and the Boston Consulting Group (BCG) Matrix, which aids in managing a portfolio of business units. This guide explains how to use these powerful frameworks to make better corporate-level strategic decisions.

The Concept in Plain English

Imagine you own a successful bakery that only sells bread. Corporate strategy is about deciding your next big move.

  • Ansoff Matrix (The Growth Map): This framework gives you four basic options for growth.
    1. Sell more bread to your existing customers (Market Penetration).
    2. Start selling your bread in the next town over (Market Development).
    3. Start selling cakes and pastries to your existing customers (Product Development).
    4. Buy a chain of coffee shops (Diversification).
  • BCG Matrix (The Portfolio Manager): Now imagine your bakery has grown into a small empire. You own the bread bakery, a coffee shop, a new gluten-free cake line, and an experimental pizza restaurant. The BCG Matrix helps you manage this portfolio. It would classify the bread bakery as a “Cash Cow” (high market share, low growth) that generates steady cash, and the new pizza restaurant as a “Question Mark” (low market share, high growth) that needs a lot of investment and might become a “Star” or a “Dog.”

These frameworks provide a simple but powerful way to structure your thinking about the biggest questions facing your company.

The Ansoff Matrix: A Framework for Growth

The Ansoff Matrix identifies four strategies for growth based on whether a company is offering new or existing products in new or existing markets.

  1. Market Penetration (Existing Product, Existing Market): The goal is to increase market share. This is the least risky strategy.
    • Tactics: Price decreases, increased promotion, loyalty programs.
  2. Market Development (Existing Product, New Market): The goal is to find new markets for your existing products.
    • Tactics: Expanding to new geographic regions (local or international), or targeting new customer segments.
  3. Product Development (New Product, Existing Market): The goal is to launch new products for your current customers.
    • Tactics: Creating new product features, new product lines, or entirely new products that serve your existing customer base.
  4. Diversification (New Product, New Market): The goal is to enter a new market with a new product. This is the riskiest strategy.
    • Related Diversification: The new market/product has some synergy with your existing business (e.g., a shoemaker starting to sell handbags).
    • Unrelated Diversification: There is no synergy (e.g., a shoemaker buying a hotel chain).

The BCG Matrix: A Framework for Portfolio Management

The BCG Matrix classifies a company’s business units into four categories based on their Market Growth Rate and their Relative Market Share.

  1. Stars (High Growth, High Share): These are leaders in high-growth markets. They require significant cash investment to sustain their growth, but they have the potential to become future cash cows.
    • Strategy: Invest for growth.
  2. Cash Cows (Low Growth, High Share): These are mature, successful businesses that generate more cash than they consume.
    • Strategy: “Milk” the cash cow. Harvest the profits and reinvest them into Stars and promising Question Marks.
  3. Question Marks (High Growth, Low Share): Also known as “Problem Children.” These are businesses in high-growth markets where the company has a small market share. They are cash-intensive and their future is uncertain.
    • Strategy: Decide whether to invest heavily to turn them into Stars, or to divest (sell) them.
  4. Dogs (Low Growth, Low Share): These businesses have a low market share in a mature, slow-growing market. They typically generate low profits or even losses.
    • Strategy: Divest or liquidate. These businesses are often a drain on resources.

Worked Example: A Tech Company’s Portfolio

  • Star: A new, rapidly growing AI software unit.
  • Cash Cow: The established, market-leading database software.
  • Question Mark: An experimental venture into virtual reality hardware.
  • Dog: An old, legacy IT consulting service with few clients. Strategy: Use the cash from the database software to fund the growth of the AI unit and to make a strategic bet on the VR hardware, while selling off the IT consulting service.

Risks and Limitations

  • Oversimplification: Both matrices are simplifications of reality. The BCG matrix, for example, only uses two variables (share and growth) and ignores synergies between units.
  • Execution is Everything: These frameworks help you decide what to do, but they don’t tell you how to do it. A market development strategy, for example, requires complex execution.
  • “Garbage In, Garbage Out”: The outputs of the analysis are only as good as the market share and growth rate data you put in.
  • SWOT Analysis: Often used in conjunction with these frameworks to assess the internal strengths/weaknesses and external opportunities/threats for each growth path or business unit.
  • Mergers & Acquisitions (M&A): M&A is a common tactic for executing a diversification or market development strategy.
  • Business Life Cycle: The BCG Matrix is closely related to the concept of the business life cycle, where products move from introduction (Question Mark) to growth (Star), maturity (Cash Cow), and decline (Dog).