Rational Planning Model – Part III: Strategic Option Generation (Part 04)

After a series of Michael Porter’s theories on strategy generations, this article focuses on Igor Ansoff’s ‘Ansoff Matrix’.

Ansoff Matrix – Igor Ansoff

This is also known as ‘Product-Market Matrix’ due to the fact that this theory focuses on the development of strategies based on products and the markets. The matrix focuses on existing products and markets and new products and markets and how strategies should be developed to face each situation appropriately.

Market Penetration

This is the strategy that should be adopted by a business when an existing product is introduced to an existing market. The market is already occupied with the same product and hence the business will have to adopt some pricing strategy to penetrate the market, preferably a cost leader approach.

Diversification

This strategy should be adopted when a business enters into a new market with a new product. A new product naturally signifies ‘differentiation’ from the existing products. However diversification is a broader concept. 

Two major aspects of diversification are horizontal diversification and vertical diversification. Horizontal Diversification signifies entering into different businesses that are related or close to the products of the current business (Eg: A soap company entering into shampoo industry). Vertical Diversification signifies a business entering into the different levels of the supply chain of the same business. (Eg: A cereal producing company purchasing a corn field – Upward Integration or the same cereal company purchasing a cereal distribution company – Downward Integration).

Product Development

This strategy deals with a business introducing a new product to the existing market. Hence strategies to develop the ‘product’ have to be initiated. Marketing, advertising, product promotions, discounts are a few strategies to be adopted.

Market Development

This is where a business introduces an existing product to a new market. So strategies to develop the market have to be adopted. Having a proper distribution channel, having convenient outlets to facilitate easy access for customers are some strategies that could be adopted. 

Portfolio

What is 'Portfolio'?

A Portfolio in general means a collection. A group of something and such. In the Stock Market, your collection of the total investment can be referred to as the Portfolio. But more commonly the collection or the group of invested stocks by you is called as your 'Portfolio'. Your portfolio could consist of a single stock up to a maximum decided by you.

How to manage your 'Portfolio'?

Portfolio management simply refers to the process of making decisions as to the appropriate investment mix, the potential performance of the investments, managing risks and meeting your investment objectives. 

Diversification

The main problem with any type of investment is the certain degree of 'risk' associated with it. Risk could be either favorable or unfavorable outcomes that were not foreseen. There's NO term called 'ZERO RISK', because that is practically unavoidable not to face a risk. But there is a term called 'minimizing risk' or 'managing risk', because that is practically possible. So how to minimize the risk of your overall investment? One word answer. 'Diversification'. Diversification in simple means investing in more than one or two stocks. A more advanced explanation would be, a risk management technique that utilizes a mix of investments in your portfolio. 

Let's see how Diversification reduces the risk of the investment. This could be quoted with a popular proverb, "don't put all your eggs in one basket". If you drop the basket by mistake all the eggs are gone. But if you had the eggs in two baskets and if one basket falls and breaks all the eggs, there's still the other basket with a bunch of saved eggs. If you understand this story, you've understood what diversification is really about. It' that simple. But most of us tend to neglect the small facts and go for big calculations, predictions, equations and stuff. But sticking to the basics will not fail you at all.

So it is said that you should diversify your portfolio in order to minimize your risk. Say you have 10 stocks and if five of them go down, there's still hope with the rest five stocks. With diversified portfolio it's very hard to loose the whole game. But if you have just merely a stock or two your chances of failing are pretty high. Investing is a lesser number of stocks is called as 'Under Diversification'.

Over Diversification

This is the other extreme of diversification. Fearing the risk, the investor tends to diversify his portfolio as much as possible. But this is not good at all. Yes, over diversification could bring your risk to a very low level, but the chances of making profits out of these stocks reduce to a great extent. Because of monetary constraints a single stock in an over diversified portfolio will only have a small quantity of shares. Thus it will be very hard to gain a proper profit when all the stock market fees, brokerage fees and other taxes add up to the cost of buying and selling. So it is not advisable to have a HUGE collection of stocks either. The generally accepted number of stocks that should be present in a good portfolio would be 20. But this will vary immensely based on the value of your total investment. But it is advisable that you don't exceed 20 stocks when buying shares. 

(this is not buy/sell/hold recommendation.)