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1.1Introduction To The Ansoff Matrix

The Ansoff Matrix provides a framework for growth strategies using two dimensions - products (existing and new) and markets (existing and new). It was developed by H. Igor Ansoff and was first published in his article “Strategies for Diversification” in the Harvard Business Review (1957) 1 and further developed in his book Corporate Strategy2, published in 1965. The Ansoff Matrix offers a combination of four product/market growth options, with varying degree of risk – Market penetration, product development, market development, diversification

The need and/or potential for product development and the prospect of market growth influence each of the four options. Generally, the first three strategies are pursued utilizing the same (or enhanced) technical, financial and marketing resources. A diversification strategy usually involves acquiring new skills, technologies and resources, e.g., new equipment or premises.

1.2Market Penetration

Market penetration involves increasing the volume of current products within existing markets. It is the least risky options as new products are not being developed and no new markets are being entered. Existing products and services can undergo slight changes or modifications and still stay within the market penetration strategy quadrant, as long as the product and market are fundamentally the same. Market penetration is application when the market is not saturated and there is scope within the market for increasing sales.

How

  • Persuade existing customers to use more, e.g., loyalty schemes or bulk buying
  • Attract new customers in the same market segments
  • Devise and encourage new applications of use
  • Attract customers away from the competition
  • Restructure the market by driving out competitors
  • Change elements of the marketing mix, e.g., intensify promotion, use price reduction strategies

Example: L’Oreal selling travel size personal care products to its existing customer base.

Advantages / Disadvantages
Less expensive
Less risky
Customer base is retained
Minimal product development costs / Growth can be limited
Dependent on the existing market being conducive to growth
Does not promote innovation
Reliance existing products and customer base

1.3Market Development

Market development involves offering current products to new markets, either geographically or in new market segments. It is a moderate risk option and involves entering unknown territory but no product development is required. It is most successful in markets that are growing, as there is less rivalry and more demand. Market development is applicable when there is a demand in a new market for the existing product, there is an untapped market, there is the capacity and capability to move into a new market and the distribution channels are accessible.

How

  • Target new geographical markets
  • Target new market segments e.g. new customer groups
  • Use new distribution channels e.g. Internet sales, sales agents and export merchant
  • License the product for use by other sellers
  • Rebrand products
  • Franchise the business
  • Set up a joint venture or merge with another company
  • Apply different pricing policies to attract new market segments
  • Find a new use for an existing product by a new market

Example: Johnson and Johnson repositioned its baby shampoo to appeal to the female market.

Advantages / Disadvantages
Low product development costs
Maximizes return on product investment
Economies of scale / Unknown markets
Competitive rivalry
Requires extensive market research and market planning
Will require changes to the existing marketing strategy

1.4Product Development

Product development involves developing new products for the existing market. It is a moderate risk option as no new markets are being entered but engaging in product development can be costly and detract from consolidating the existing product range. Organizations that adopt a product development strategy usually develop related products, e.g., Apple developed the iPad. Product development is applicable when the organisation is in a position to engage in product development, the market is growing, there is a strong brand that a new product can be built upon and the competition has superior products.

How

  • Create new products to meet the changing needs of the existing market
  • Supply new products closely aligned to the current portfolio
  • Provide new services to complement existing products
  • Modify or adapt existing products
  • Extend existing product lines
  • Expand into new product lines
  • Find new uses for products
  • Develop new packaging

Example: Ziploc has expanded their product lines to be more than food bags to include containers and non-food storage bags.

Advantages / Disadvantages
Understanding of the current market
Promotes innovation
Provides a succession of products in the product life cycle / Costly, e.g., R & D expenditure
More risky than market penetration
Can detract from the core product line
Need to develop new capabilities
Product development risks

1.5.Diversification

Diversification involves developing new products for new markets. It is the most precarious option because of the combined risks associated with developing new products and entering new unknown markets. Diversification is applicable when existing products and markets offer no growth opportunities, the organisation has the capability and capacity to engage in diversification and there is growth in the new market

Within the diversification quadrant a range options are available and these are based on how different the new product and or market are. There are two main types of diversification:

a) Unrelated – where new products and new markets are completely unrelated. There is one form of unrelated diversification:

Conglomerate diversification – a completely new unrelated product is offered to a new unrelated market; this is the highest risk option

b) Related - where new products and markets have some characteristics with existing products and markets. Related diversification strategies can be sub-divided into three different forms:

Horizontal diversification – offering new unrelated products to the existing market.

Vertical diversification – move backwards or forwards along the value chain

Concentric diversification – new closely related products are introduced to new markets.

How

  • Use brand recognition to enter new market with new products
  • Enter new markets through mergers, takeovers, joint ventures or collaborations
  • License new technologies
  • Distributing or importing products manufactured by another organisation

Example: Virgin created new products (e.g. Virgin Money and Virgin Healthcare) in markets where it had no presence before by leveraging the Virgin brand.

Advantages / Disadvantages
  • Allows for expertise and resources to be allocated synergistically
  • Spreads the risk
  • Promotes innovation
  • Brings new opportunities
/
  • Most risky growth strategy
  • Expensive
  • Loss of core business or brand focus
  • Requires significant allocation of resources

1.6Benefits and limitations of the Ansoff Matrix

Benefits of the Ansoff Matrix

Conceptualizes the main options for strategic growth

Presents complex growth scenarios in a simplistic way

Serves as a framework for exploring and mapping product/market growth opportunities

Encourages the consideration of risk when evaluating growth options

Limitations of the Ansoff Matrix

Over simplistic, two dimensional (products and markets) approach

Does not consider internal factors (e.g., resources available to support the strategy) and external factors (e.g., market trends)

Difficult to use in today’s marketplace where the environment is unstable and hard to predict

Real world growth strategies do not fit neatly into the four quadrants

1.7References

1 Ansoff, I.: Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5, Sep-Oct 1957, pp. 113-124

Hussey, D., and Ansoff, I. “Continuing Contribution to Strategic Management.” Strategic Change, 8(7), 375–392.

2 Ansoff, I. Corporate Strategy - an analytic approach to business policy for growth and expansion. New York: McGraw-Hill, 1965