Theoretic Background Ansoff Matrix SWOT

¶ … Theoretic background

Ansoff Matrix

SWOT Analysis

BCG Growth-Share Matrix

PESTEL Analysis

Limitation of individual model - synergies obtained by combining strategic analyses models

Nike Case Study

Nike - Past and Present

Nike - Composed analysis

The present paper aims at offering an overview over the main tools used by companies in deciding their strategic approach to the markets, as demanded by their objectives.

The main instrument approached within the paper is the Ansoff matrix, which will be described and analyzed together with the SWOT analysis, BCG Matrix and PESTLE analysis as part of the theoretic background chapter. Each of the instruments will also count with a short examination of its limitations.

A study case on Nike will be briefly developed, aiming to demonstrate that the use in conjunction of the above presented tools may bring a significantly richer and realistic analysis over one company in its environment, than compared with an analysis only based on one of the instruments.

2. Theoretic background

2.1. Ansoff Matrix

The Ansoff Matrix, also known as the market/product analysis, presents the strategic choices a company may have when it takes into consideration is product and market variables.

As terms, the market will be represented by the customers of the product, and the product itself will be defined as the items that are being sold to customers. (Lynch, 2003)

The Ansoff Matrix offers the foundation for the objective setting process within a company and sets the basis of its future directional policy. (Bennett, 1994)

The matrix involves four possible product / market combinations. As shown in the image below, these are market penetration, product development, market development and diversification. (Ansoff, 1957, 1989)

Source: Ansoff (1957, 1989)

Market Penetration is used by firms when they aim at increasing sales while still applying the same product-market strategy. This occurs by penetrating a market with the current products, and it is important to note that this strategy begins with the organization's existing customers. (Ansoff, 1957)

There are three ways companies can penetrate markets: by winning customers from competitors, by improving the quality of a product or the level of offered services, and either by making current customers to intensify their consumption of the product or attract non-users towards the product / service. All these venues will be approached through the use of tools of marketing communications. (Ansoff, 1989, Lynch, 2003)

This is a very important strategy for businesses, as the costs of retaining existing customers are significantly lower than the ones for attracting new ones, motives that make various companies start relationship marketing activities. (Lynch, 2003)

Product Development represents the strategy companies would normally apply when they want to utilize excess production capacity, fight against the entry of competitors, maintain a certain 'product innovator' reputation, make use of new technologies, or protect its market share. They will do this through significant new product development directed to the company's traditional market. (Lynch, 2003)

This strategy can often direct the company towards markets and customers that are not yet being reached by the company.

Market Development is the strategy a company will follow when it wants to enter new markets with its existing products.

This strategy might materialize in the exploration of new segments within markets, in finding new uses for the existent products and services, or the approach of new geographical areas with the purpose of enticing new customers. (Lynch, 2003)

Diversification is a distinct strategy, as it implies that the company will move out both of its current markets and products into new areas. The diversification can be made into related and unrelated domains.

Related diversification can take the form of forward (company extends business towards its outputs), backward (extending business towards its inputs - such as raw material supplying businesses) and horizontal integration (moving into related businesses). (Lynch, 2003; Macmillan et al., 2000)

Unrelated diversification will often present synergies with the original business. Nevertheless, it remains one risky alternative, as detailed knowledge regarding key success factors may not exist. (Lynch, 2003)

Diversified businesses appear to grow faster when the diversification is unrelated, nevertheless it must be noted that track records regarding diversifications are poor, as in various cases the diversifications were divested (Porter, 1987). There are also voices claiming that related diversification will be generally more profitable (Macmillan et al., 2000; Pearson, 1999). These risks that companies take by entering in territories with unknown parameters can be reduced by entering related markets. (Ansoff, 1989)

2.2. SWOT Analysis

The SWOT analysis is one of the most well-known and used analysis, evaluating the strengths and weaknesses of an organization next to its environmental opportunities and threats.

There is no acknowledged creator of the SWOT analysis, nevertheless for decades until today it has featured strategy textbooks. It can be of use in determining the degree an organization's strategies fit with its environment, and in suggesting the ways in which an organization can take advantage of its strengths and opportunities and how to cope with the weaknesses and threats. (Adams, 2005)

Strengths are meant to define the strong points of an organization, coming both from internal and external customers. They arise from internal competencies and resources that give companies a comparative advantage on the market.

Weaknesses are very important aspects to be determined, both from company's point-of-view, as also from its customer point-of-view. Weaknesses can be defined as limitations or deficiencies in one or various resources or competencies when related to competitors. They will tend to hamper an organization's performance.

Opportunities define the ways an organization could follow in order to grow within the market. By opportunity one can understand the major situations in the environment of a company, taking the form of government policies, changes in technology, social patterns, etc.

Threats represent external factors out of one organization's control materializing in seriously unfavorable situations in the environment of a company. They can take the shape of new competitor's entrance, slow or inexistent market growth, high bargaining power of key suppliers or customers, technological advances, new or revised regulations, etc.

2.3. BCG Growth-Share Matrix

BCG Matrix is a strategic management tool serving four distinct purposes: classifying the product portfolio into four business types: Stars, Question Marks, Dogs and Cash Cows; deciding what product from a company's portfolio should be given priority; classifying the product portfolio of an organization depending on their generation and cash usage; offering management strategies in order to tackle the different product lines (Cipher, 2006)

The matrix is based on two variables: relative market share and market growth, which many times appear to measure the healthiness of businesses (Kotler, 2003), and therefore, the idea that products with higher market share or that are located within a fast growing market would be expected to show relatively higher profit margins, and vice-versa.

Under the two dimensions, of relative market share and market growth, the products can be categorized as:

Cash Cows - products with high profitability, requiring low investors, because they have leadership positions in slowly growing markets. According to specialists, the surplus cash obtained from cash cows should be invested into Stars and Question Marks as a venue in creating future Cash Cows (Drummond and Ensor, 2004)

Stars - are the leading products in high growth markets. They normally generate good revenues, but they use much of it due to the market growth conditions.

Question Marks - products that have not achieved dominant market positions and therefore do not generate much cash, but do use a lot of cash due to the growing market conditions

Dogs - products draining large amounts of cash and showing little future opportunities, as a result of their low levels of market share and the highly low growth markets they are into.

The available strategies to follow are Build - in order to strengthen the market share of the product short-term earnings will be forfeited as hopes are that long-term gains will be higher. Strategy is suited to Question Marks in they way to becoming Stars

Hold - maintain the current position (share) on the market - suited to Cash Cows

Harvest - efforts to increase short-term cash flows for the longest period possible (by cutting costs or increasing prices) - suited to Cash Cows in limited future markets or to weak Cash Cows

Divest - give up the products that drain profits in order to use more efficiently the company's resources - suited for Question Marks that will not transform into Stars, and for Dogs.

2.4. PESTEL Analysis

The PESTEL analysis looks at the "radical and ongoing changes occurring in society [and that] create an uncertain environment and have an impact on the function of the whole organization" (Tsiakkiros, 2002)

Getting to know the macro-environment of an organization is important, as it allows to identify certain factors that can affect vital variables influencing the supply and demand levels of an organization, as well as its costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993)

The influences it analyses are the political, economical, social, technological, environmental, and legal are meant to be used to make the most of opportunities and to find defensive strategies for threats at the moment of preparing strategic business plans.

3. Limitation of individual model - synergies obtained by combining strategic analyses models

All analysis models presented in the previous chapter represent useful but not exhaustive methods of deciding the future of a company or its products.

As there is no perfect model, the joint usage of them might bring most value to the company.

Ansoff analysis generally assumes that diversification will bring higher returns when higher levels of risks are undertaken (diversifying the market and/or the product), should not be practically used by itself, as it does not say anything about a company's capacity of venturing in new markets or sustaining the development of new products, as it also does not say anything about the acceptance of the new product on the existent market and/or of the existent products on new markets.

Therefore, other analysis that will take into consideration both internal and external variables of a company (like SWOT analysis) will be necessary, because they will be able to reflect if the company has the capacity or the skills to venture into new markets or to develop new products, and in the same time - by studying the external environment, to see if these kind of strategic moves will be welcomed or not. PESTEL analysis can also help in understanding if the external environment is favorable to the strategic moves the company might plan.

Nevertheless, SWOT analysis has been criticized to offer sometimes outputs that are either trivial or too broad that it becomes rather meaningless when searching to make genuine marketing decisions. As commented by some specialists, "The assessment of strengths and weaknesses may be unreliable, being bound up with aspirations, biases and hopes. Therefore, it is important for strengths and weaknesses to be defined in the context of a situation" (Mintzberg, 1990)

Combined with the information and analysis regarding both internal and external environments, data obtained through different sources that can also include the SWOT and PESTEL analysis, a company can decide the best way to act on its product portfolio by making use of the BCG Matrix, which can give some suggestions regarding the best way to act in order to obtain an equilibrated situation between cash users and cash makers within the product portfolio.

Nevertheless, the BCG Matrix has its own limitations that can be dismantled by the parallel usage of other tools of strategic decision making. Some of these limitations are the lack of a clear definition of the term of "market"; the assumption that a high market share will automatically lead to profitability, which is not a realistic situation at all times; low share products or businesses can also be profitable; the employment of only two dimensions - the market share and the growth rate - could actually lead / tempt managers to emphasize investments only on a particular product or to divest prematurely; the matrix only considers the product or the business unit in relation to only one competitor - the leader, not taking into consideration other small competitors that might have fast growing market shares.

4. Nike Case Study

4.1. Nike - Past and Present

Initially starting as Blue Ribbon Sports, in the year of 1962, it became the today's well-known Nike Inc. In 1972, with its headquarters in Beaverton, Oregon, USA.

The name of Nike comes from the winged goddess of victory in Greek mithology. And it seems the name has been a good omen for the company.

Its founders were Bill Bowerman and Phil Knight, the first - a track and field coach, and the latter - a runner under Bowerman.

With such a modest start, it is almost unbelievable to see that the company transformed into a global leader within the sporting goods industry.

Today, the principal activities of the group are covering the design, production, development and market of high quality sports and fitness products, such as footwear, apparel, equipment and accessories, with a focus on the first two categories previously stated. The company caters its products to various athletic and recreational uses, such as tennis, soccer, golf, football, baseball, bicycling, wrestling, volleyball, aquatic activities, cheerleading, hiking, and so on.

Today's trademarks include NIKE ® and the Swoosh Design ®, that are being sold under brand names like Bauer ®, Cole Haan ® and NIKE ®.

It operates today in 21 centers of distribution in Europe, Latin America, Africa, Canada, Australia and Asia.

4.2. Nike - Composed analysis

Due to the characteristics of the case study and to the limited length of the present paper, a significant attention will be given to the Ansoff and SWOT analysis applied to Nike, the BCG and PESTEL analysis being only briefly approached.

If we were to historically approach the group from the point-of-view of the Ansoff analysis, we would be able to notice that all of the four strategies have been applied by the company during its lifetime. It remains to be seen, in combination with the various other analytic tools presented in the theoretical chapter, what would be the best move for the future.

To start with, it can be observed that the always active marketing activity of the company demonstrates a continuous strategy of market penetration.

Its advertising and promotion success - which can be also considered one of the strengths of the company - made the Nike brand images (the Nike name and the Swoosh trademark) to be considered today to represent one of the top most recognizable in the whole world.

This power of its brand will actually mean bottom-line revenues for the group. The Nike name itself, and its associated trademarks have been appearing continuously starting with player's shirts, hats, pants, to stadium walls and banners.

The aggressive advertising campaigns, combined with strong endorsements offered by association with celebrities, and the quality products help at enhancing the brand. In the 1999 NCAA Basketball tournament, Nike has demonstrated the power of its presence, when 42 out of 64 participating teams were shoes provided by the group. (Enderle et all, 2000).

Another strategic option specific to the Ansoff matrix and that has been adopted by Nike was the product development - the company has continuously developed new products that catered the same traditional market, with the aim of maintaining both the company's reputation of product innovator and of protecting its overall market share.

Its applied research mostly focuses on short-term projects aiming at successfully developing new lines of products.

Equally, the market development strategy has been more than obvious through the international expansion of the company's distribution network, as well as the continuous venture into gaining new segments of the market (women, children, etc.).

Diversification strategy has been mostly applied into related areas, following a horizontal path, gaining clients for products related to its existent ones, addressed mostly to the same type of clients.

Due to its position and actual global reach, possibilities of significantly increasing market share would mainly regard the conquest of clients from the competitors or of new market segments that have not been previously explored (lower price - good quality seekers might be one of these segments).

Nevertheless, a more complete overview over the situation might be given by using the SWOT analysis.

Strengths

Nike can be fully defined as being a very competitive company. Its founder and CEO, Phil Knight, has been quoted various times as saying "Business is war without bullets." Nike shows a rater normal dislike of its competitors.

Nike has no plants: it does not use to invest in buildings and workers, reaching globally competitive manufacturing costs, which make it a very lean organization. It manufactures wherever is possible to produce its high quality products with the lowest possible costs. In the case of rise in prices and opportunities to make cheaper products elsewhere, the company will move its production.

Nike has very strong R&D activities, translating into its evolving and always innovative product range.