How Johnson & Johnson Can Use Ansoff Matrix Tool for Diversification - Case Study Example

Institution : xxxxxxxxxxx Title : xxxxxxxxxxx Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2016 How Johnson & Johnson Can Use Ansoff Matrix Tool for Diversification Introduction Young (2013, 65) identifies diversification as one of the most important strategies that business firms use to achieve their various desired goals. For instance, diversification refers to the aspect of branching out into several categories, marketplaces, and industries. Despite the fact that this initiative presents some common risks to a given business company, diversification has always been perceived as a safety approach against different organizational setbacks downturns in a single industry or a way to grow your business. For instance, any step for improvement in the operation of a business is often associated with rewards and benefits. Westwood (2011, 42) adds that successful business leaders and managers have to understand that it is important to take risks and diversify their operations into new markets if their firms need to develop and grow further. As a result, managers need to find new strategies for increasing their organizational profits while reaching new customers in their different locations. There are a plethora of options available including the decision to opening up new markets or developing new products. However, the biggest challenge arises when one wants to choose the best strategy to use (Wernerfelt, 2014, 74). Different approaches including the Ansoff Matrix tool can play a critical role in helping various organizations to think about the potential risks and benefits associated with each and every choice. According to Klier (2009, 48) strategies such as the Ansoff Matrix can also help the own organization manager to devise a plan that best suits the current business situation. This paper examines how Johnson & Johnson, a company with the aim of expanding its business of coffee shops can use the Ansoff Matrix tool to achieve its desired goal in diversification. The paper summarizes a small part of the company, presents a detailed advice to the company management on reducing the risks associated with the diversification process. The article makes a succinct conclusion after demonstrating the cons related to the decision of diversification. An Overview of Johnson & Johnson Company According to Young (2013, 65), Johnson & Johnson operates as a renowned American multinational pharmaceutical, medical devices, and a consumer packaged products processor and manufacturer. The company was founded in 1886 and bears its headquarters at New Brunswick in New Jersey near Rutgers University campus. Conversely, the company’s primary consumer division has its location in Skillman, New Jersey (Wernerfelt, 2014, 74). The company’s common stock comes out as a constituent element of the Dow Jones Industrial Average, which propels it to appear among the Fortune 500. Westwood (2011, 42) adds that Johnson & Johnson Corporation comprises of additional 250 subsidiary companies with their operations and presence being felt in more than 60 countries. The corporation’s products are sold in over 175 countries with more inventions and innovations pushing the company consider diversification as the best strategy to attain more supernormal profits (Klier, 2009, 48). The company prides itself with a plethora of brands of different products whose goal is to satisfy different needs of customers. These products include first aid supplies, numerous household products and a variety of names of medications (Tallman & Li, 2015). The Tylenol medications, Band-Aid Brand line of bandages, Neutrogena skin, Johnson’s baby products, and the beauty products comprising of the clean & clear facial wash, as well as the Acuvue contact lenses, form the company’s widely recognized products. Johnson & Johnson has a long-term responsibility to environmental responsibility emphasized with the company’s social corporate guidance framework. Over the years, the company has maintained its structure through numerous mergers and acquisitions with the emphasis being put on diversification (Tallman & Li, 2015). Currently, Johnson & Johnson Corporation managers have a critical role to play in ensuring that they utilize the Ansoff Matrix Tool to make sure that they achieve their goal of diversification while addressing all the associated challenges. An Overview of the Ansoff Matrix According to John (2012, 54,-), Ansoff Matrix is historically recognized and celebrated as one of the most critical theoretical frameworks invented in the field of entrepreneurship. Ansoff, the founder of the matrix itself, is regarded as the father of strategic management was also a famous mathematician and a renowned business manager. Ansoff developed this tool in the 1950s to provide business managers and the entire marketing world with a practical tool that could help them in solving different business problems and provide critical guidelines to be followed when making decisions regarding investment. This tool has been in use for the last fifty years and helps different managers in making decisions regarding the company products and their corresponding market growth strategy. The matrix postulates that each and every business’s efforts to grow relies on whether the firm decides to sell its new or existing products in either new or its current markets (Kitchen & Proctor, 2011, 78; Tallman & Li, 2015). The entire model can be summarized in a grid as shown below: In summary, the entire process has four alternative approaches to marketing that provide a hint on the type of products, which may be either new or the existing ones (Ansoff, 2008, 47). Each and every strategy presents different risks to the firm. Market penetration is the first strategy and entails the increase of market share within the current market segments by selling more products to the existing customers and locating new customers within the current markets. Johnson & Johnson can use the second strategy referred to like the product development approach to develop new products for the existing markets (Ansoff, 2008, 47). In this case, companies always think about how the strategies that they can use to ensure that the new products conform to the needs of the customer while outperforming the products of their rivals. Thirdly, market development targets to find new markets for the firm’s current and new products. This strategy relies on market research and detailed market segmentation in the identification of new groups of customers. The last plan, which is diversification, entails the movement of new products into the desired market (Wernerfelt, 2014, 74). This initiative is the best strategy that Johnson & Johnson is planning to use to ensure that it achieves its desired goals (Betz, 2012, 56). How Johnson & Johnson can Use Ansoff Matrix Tool to Achieve Diversification and Minimize the Associated Risks Critical analysis of the Ansoff Matrix indicates that diversification strategy is usually applicable when the product of the company is entirely new and is also launched in a new market. Johnson & Johnson can provide the best example of diversification bearing in mind that the business began as a single chain and a pharmaceutical store before expanding into new markets including beauty and overall healthcare. Today, the company remains one of the best accessible firms that consumers can shop from time to time (John, 2012, 54; (Kitchen & Proctor, 2011, 78). Nevertheless, the critical application of the Ansoff Matrix by this company can be a key measure towards ensuring that they succeed to launch its new product, which is coffee in a variety of new markets. Young (2013, 65) adds that this matrix maintains that product diversification involves the addition of new products such as coffee to the current products such as pharmaceuticals and beauty items either being marketed or manufactured. This approach which entails the expansion of the existing product line with the associated products is one of the most critical strategies that need to be adopted by companies such as Johnson & Johnson. The aim of providing coffee in new markets is a typical form of either product or brand extensions that can help in increasing the number of the company’s clients and the overall sales volume. According to Klier (2009, 48), the Ansoff Matrix can also help Johnson & Johnson to understand different types of diversification strategies and settle on one which can achieve the desired success (Young, 2013, 65). These plans may entail the internal development and improvement of new markets and products, considering the acquisition an existing firm, and deciding to form an alliance with a company which is complementary in nature. The Ansoff Matrix can also encourage Johnson & Johnson to license its new technologies or importing and marketing a line of products, mainly coffee manufactured by different companies (Westwood, 2011, 42). Tallman and Li (2015, 43) avow that the Ansoff Matrix discusses three different types of diversification which can play a critical role when used by Johnson & Johnson to achieve its aim of launching new coffee stress in new markets. The concentric diversification is the first strategy and encourages firms to leverage their technical knowledge to gain a competitive edge where there exists a technological similarity between different industries (Johnson, Scholes, & Whittington, 2008, 23). For instance, the company’s decision to launch coffee can help it in earning supernormal profits. This strategy is well-embedded in the Ansoff Matrix and offers the best example of technological-related concentric diversification (Knecht, 2014). The horizontal form of diversification encourages the company to add new products and services that have no any commercial or technological association with the existing ones but are attractive to the firm’s customers. In this case, Johnson & Johnson does not concern itself with beverages, but the decision to launch coffee shops and restaurants can play a critical role in increasing its sales volume and earning more profits (Baker, 2011, 36). As a result, horizontal diversification strategy will help in increasing Johnson & Johnson’s reliance on a variety of market segments such as the pharmaceuticals as well as drinks and the beverages. However, horizontal diversification may pose some typical risks to Johnson & Johnson as there are suitable conditions when it is deemed appropriate. As such this approach requires that all the customers remain loyal to the company’s existing products. Moreover, the newly developed products such as coffee, in this case, must have good quality with proper promotion and pricing (Johnson, Scholes, & Whittington, 2008, 23). Additionally, the use of the Ansoff Matrix will help in ensuring that all the gathered products are marketed and sold to the same economic setting as the company’s current products. This practice can result in increased levels of instability and rigidity. Minimization of the risks associated with the company’s decision for diversification compels the company to put appropriate measures in place. One of the most critical strategies is by ensuring that adequate market research is conducted to offer a broad comprehension of the market that the firm is deciding to invest. Additionally, this analysis should also ensure that appropriate evaluation and testing of the products to be sold is done to make sure that the product, in this case, coffee meets the needs of the targeted customers (John, 2012, 54). The Ansoff Matrix offers different business organizations the opportunity to carry out various tests to ascertain the validity and either cost effectiveness of the move for investing in the different sectors. The attractiveness test is always the first strategy and seeks to ensure that the chosen industry is either attractive or has the potential of being improved and made more interesting. The second test is the cost-of-entry test and targets to capitalize on all future profits (Knecht (2014). The better-off test is the last measure and seeks to ensure that the new unit which is coffee or beverages, in this case, gains a competitive advantage over its competitors. Disadvantages of Diversification Despite the fundamental role played by diversification in different organizations, this decision is known to have a plethora of limitations that can act as a setback to the development of the firm (Kitchen & Proctor, 2011, 78). A firm considering diversifying its operations such as Johnsons & Johnsons through the opening of numerous stores has the effect of reducing the quality of its products as well services. This result is sometimes regarded as a diluted or mediocre form of investment. Baker (2011, 36) research indicates that the higher the number of the stores that a company considers to put up the lesser concentrated the portfolio becomes. As a result, it is recommendable for one to have a distinct store with all the products and services required (Knecht, 2014). Such stores should often be durable, demonstrate a high quality, reliable, consistently profitable, and always growing businesses. Diversification brings more complications to the firm as it has the effect of integrating a plethora of investors who may have a conflict of interest. Additionally, many investors often include many assets in the portfolio of the organization without proper comprehension of their significance. It is important to ensure that all investors keep their collection simple enough to enable the organization to maintain its lead position. Diversification also has the set back of indexing especially to large firms such as Johnson & Johnson where stakeholders usually have too many assets in their portfolio. This malpractice results in the form of an index fund. The correlation of a company’s portfolio tends to increase with the enhancement of the number of the stocks that its stakeholders have on the market returns. Passive management also known as indexing may function in the bull markets but may fail to work well in bear or flat markets conditions (Betz, 2012, 56; Baker, 2011, 36). This assertion is increased by the fact that most of the indices become skewed toward stocks which have already risen when combined with the scrawny stocks that might have undergone substantial reduction to reach the bargain prices. Tallman and Li (2015, 43) avows that diversification also increases the market risk of products especially when a given company is considering venturing into unexploited markets with retarded consumer patterns. Continuous risks can easily proliferate into reduced and below average returns of the firm. This setback is always enhanced with the belief that quality of products always suffers when a company such as Johnson& Johnson has inferior investments coupled with good investments (Johnson, Scholes, & Whittington, 2008, 23). All average returns that tend to remain below the average come as a result of increased transaction fees as well as raised mutual fund fees. David (2015, 50) adds that lowered returns a large number of investors may find themselves buying higher and selling low as a result of diversification. Nevertheless, diversification results in the use in bad investment vehicles such as index funds and the mutual funds that are actively traded but have the effect of increasing the firms loses. Most of the mutual funds sold in and out of stocks actively have the impact of laying a great focus on short term trading as opposed to value. In the long run, these funds may have the effect of underperforming market indices (Betz, 2012, 56). Ansoff (2008, 47) ascertains that diversification also contributes to lowered self-esteem regarding investment as many people tend to assume that stock picking is too expensive when using a single firm. Lastly, diversification can compel Johnson & Johnson to lack the desired focus and attention to its portfolio (Johnson, Scholes, & Whittington, 2008, 23). This effect is increased in the aspect that most of the leading managers and directors tend to delegate their duties to the branch managers. These managers have the responsibility of managing the firm’s portfolio at the department level making the top officials not to pay adequate attention to the survival and sustainability of their firm. Johnson & Johnson may also suffer from the challenge of overextension of it resources (Betz, 2012, 58). This problem may crop up in a situation whereby the company fails to approach its initiative for diversification with caution. Johnson & Johnson needs adequate resources for operational and infrastructural maintenance. The lack of these resources poses a grave risk as it can make the entire business to start declining (Johnson, Scholes, & Whittington, 2008, 23). Additionally, the company’s new and old sectors may also suffer as a result of Johnson & Johnson greed, excessive ambition and increased mismanagement as a consequence of the need for diversification. Betz (2012, 60) adds that these challenges often increase due to insufficient resources for managing each sector and inadequate resources. Diversification may be associated with lack of expertise. Johnson & Johnson is considering moving into the beverage industry, an area that has no any relationship with its initial business aims, goals, vision, and mission. Johnson & Johnson will face a challenge of retaining proper expertise from its original company or else it finds itself in trouble. The beverage industry will require entirely different skill sets from the existing ones. The lack of expertise and experience also introduces us to an adverse effect of increased costs (David, 2015, 51). These costs will be as a result of improving the company infrastructure, hiring new employees, and training them which may compromise the general value of the venture. David (2015, 53) adds that Johnson & Johnson should understand that any form of diversification results in increased costs and overhead regardless of its profitability margin. This company should, therefore, carefully evaluate the new opportunity before starting its investment. The best and safest industries in which a given company can diversify is always closely associated with its current line of business as there is always a pre-existing infrastructure and expertise available. Johnson & Johnson plan to expand into the coffee stores will also result in the reduction of innovation (Betz, 2012, 62). It should be understood that a large proportion of business innovation takes place in smaller companies which are tightly aimed at a few business or technological goals. Johnson, Scholes, and Whittington (2008, 30) assert that the decision of such companies to diversify its operations too widely results in a generation reduction of their focus. Such initiatives also cause businesses to increase their bureaucratic inertia while minimizing their potential to respond quickly, immediately, and creatively to any changes in the market. As a result of most of the companies such as Johnson & Johnson that are responsible for leading a substantial amount of innovation to begin lagging behind (Betz, 2012, 67). This negative issue results in a domino impact, which occurs alongside the cutting edge of technical innovation and slows down economic growth while decreasing innovation. Conclusion Diversification is one of the most critical steps that different business organizations can use to achieve their desired goals. Despite the fact that most of the companies who have tried to diversify their operations and products have ended up recording some failures, Johnson & Johnson has an excellent opportunity to invest in the coffee and beverage industry. However, the company needs to understand that this is one of the most competitive industries that call for critical considerations before making a move to invest. As a result, Johnson & Johnson must conduct a detailed market research and analysis to understand this new product and market so as to ensure that it develops a competitive advantage over its rivals. However, using the Ansoff Matrix can offer the best remedy in solving risks and increasing the firm’s opportunity to gain supernormal profits and attain sustainable performance excellence. Bibliography Ansoff, H. I., 2008, “Strategic issue management” Strategic Management Journal, 1(2), 131–148. Baker, M. J., 2011, Marketing strategy and management, Springer. Retrieved from http://link.springer.com/content/pdf/10.1007/978-1-349-21395-5_3.pdf Betz, F., 2012, “Strategic business models” Engineering Management Journal, 14(1), 21–28. John, L. W. J. P.,2012, Strategic planning for information systems, Place of publication not identified: John Wiley & Sons. Johnson, G., Scholes, K., & Whittington, R., 2008, Exploring corporate strategy: Text and case, Pearson Education. Kitchen, P. J., & Proctor, T., 2011, The informed student guide to marketing, London: Thomson Learning. Klier, D. O., 2009, Managing diversified portfolios: What multi-business firms can learn from private equity, Heidelberg: Physica-Verlag. Knecht, M., 2014, Diversification, industry dynamism, and economic performance: The impact of dynamic-related diversification on the multi-business firm, Wiesbaden: Springer Gabler. Tallman, S., & Li, J., 2015, “Effects of international diversity and product diversity on the performance of multinational firms” Academy of Management Journal, 39(1), 179–196. Wernerfelt, B., 2014, “A resource-based view of the firm” Strategic Management Journal, 5(2), 171–180. Westwood, J., 2011, Marketing your business, London: Kogan Page. Young, L., 2013, Marketing the professional services firm: Applying the principles and the science of marketing to the professions, Hoboken, N.J: Wiley. Top of Form Read More