Guide to the Ansoff Matrix
The Ansoff matrix is a strategic planning tool that provides a framework to help executives, senior managers, and marketers devise strategies for future growth.
What is Ansoff Matrix
The Ansoff Matrix (also known as the Product / Market Expansion Grid) is a strategic framework designed for organizations who want to move beyond 'business as usual'.
It's designed to help you figure out which of four strategic directions you should take to successfully grow your business. The Ansoff Matrix was created by Igor Ansoff in 1957, and the matrix is as relevant today as it was over 50 years ago.
That's the sign of a strategic framework that must have gotten something right!
The four strategies in the Ansoff Matrix are as follows:
Market Penetration: Focuses on increasing sales of existing products in an existing market.
Market Development: Targeting with current products in a new market.
Product Development: Introducing new products in an existent market for expansion.
Diversification: Introducing new products in a new market.
If you analyse all the four strategies, we can see that Market Penetration seems to be the least risky, and diversification being the high-risk strategy.
1) The Ansoff Matrix: Market Penetration
In the Market Penetration Strategy, the firms focus on selling their current products in an existing market. The firms try to focus on testing with different growth strategies to increase their market share. Before going with a market penetration strategy, firms need to analyse several situations.
Is the market saturated? Going with a market penetration strategy in a saturated market means incurring higher expenses.
Businesses should not be incurring extra cost for new product development or setting up a new unit for that market.
Some ways to execute a market penetration strategy:
Adopting Aggressive Marketing, Increasing Promotions
Focusing on increasing distribution efforts
Giving discounts to attract new customers
Acquiring smaller competitors to decrease competition
Offering customized products
Example
Nestle adopts an aggressive marketing and promotional strategies to penetrate a market. Nestle focuses on launching different sizes of products to increase their customer base. It helps Nestle to acquire customers who cannot afford large-size packages. They also regularly introduce new flavours for its customers to increase their sales. Nestle also focuses on giving huge discounts on large-size products and promotes its offerings on multiple marketing channels. So, all these market penetration strategies help Nestle to sell its products consistently in an existing market.
2) Market Development
In the Market Development Strategy, the businesses enter new markets with existing products.
A Market Development Strategy is used when –
The new market is profitable.
The firm has the required capital to enter a new market.
Consumer behavior of both markets is similar.
While entering a new region, a company should come up with new pricing and promotional strategies. It is also necessary for the firms to properly coordinate with the new distribution channels. So, the products are readily available to the customers.
Market development involves moderate risk because of a lack of familiarity with the customers. A firm entering a new market has to advertise its products which can be expensive. A company also needs to invest in production facilities, promotional strategies, distribution channels, and many more. So, the expenses that the firms will undergo are high.
Example
When Nestle enters a new market, they make sure that the products are readily available to the customers at affordable prices. So, Nestle heavily invests on efficient distribution channels. Also, the company believes in giving excellent quality products to its customers at affordable prices. It helps in winning customers trusts and results in brand loyalty. The company also heavily invests in advertisements to aggressively market its presence in the new region. It also focuses on modifying its products according to the market need by changing the packaging or offering a product variant.
However, high brand equity helps brands like Nestle, Nike or McDonald’s to enter a new market. So, if a product has the backing of a reputed brand name, it gets easier to win the customer’s trust. But, if the product is not rooted in the current market, it is not recommended to implement the market development strategy.
3) Product Development
Product Development in the Ansoff Matrix refers to the development of new products for the existing market. The strategies are implemented when a firm has strong R&D and can provide innovative solutions to its customers. Firms mainly go for product development strategies when the market is growing, and they have a strong understanding of their current market.
A company can come up with a new product in different forms:
New products replacing the old ones
New innovative products based on customer needs
Product line extensions
Several quality products to target different customer segments
A product development strategy is a costly one, and there is a moderate risk associated with it. This strategy can misfire when the company does not have a core of strong brands and less consumer following. Not just cost, but if the product fails to deliver in the market, it might affect the firm’s brand equity.
Example
A part of the success enjoyed by McDonald’s stems from its product development strategy. To succeed internationally, McDonald’s creates several products to meet customers demands in the local markets. They also adapt and modify their products to fit local tastes of that specific region. For example, In India, McDonald’s changed their Big Mac to Maharaja Mac which contains no beef, to satisfy their local customers.
4) Diversification
In a Diversification strategy, a company enters a new market with a new product. This strategy comes up with high risk, but with detailed research and proper execution, it yields high profits.
Firms should first develop secure finances and then opt for this strategy because of the huge investments involved. Think of the money involved in entering a new market with a new product. However, the chances of profits are high because the firm is entering a new market with a whole new segment of customers to target. There are the following two types of diversification:
Related Diversification: Development of new product and market has some synergies with the existing product and market. It means that the new product and market share some commonality with the old ones. For example, a bank develops an insurance product, or a leather wallet company produces a leather wallet product.
Unrelated Diversification: Development of new product and market has little or no relation with the existing product and market. It means that the new product and market no commonality with the current ones. Imagine, a steel company developing an insurance product.
Example
Although Honda motor company has its core competencies in cars and trucks, they started in the motorcycle business. Honda flourished in their new business because they were successfully leveraging their core competencies through related diversification.
How to Implement The Ansoff Matrix
OK, so now we know what the Ansoff Matrix is all about, and how powerful it can be in helping organizations to grow their business. Let's take a look at how exactly to implement it.
1) Start by identifying your strengths.
It's no secret that for the most part, playing to your strengths is a good starting point. There is a range of tools you can use to help identify your strengths as an organization, from SWOT to the more advanced SCOPE analysis techniques - so we won't cover that here. Ultimately, it's about asking yourself critical questions such as:
What makes me different from my competitors?
Why do people buy from me instead of others?
What am I proudest of about my company?
Answering those questions should give you some insight as to which part of the Ansoff Matrix to attack first. For example:
Companies whose product is just average, but are great at making their marketing campaigns stand out, should probably be looking at market penetration or even development.
Companies who have a proven track record of creating solid products (though haven't always been on point with their marketing strategy), are better suited to implement a product development or diversification strategy.
2) Determine your risk appetite.
OK, so just because you're good at something, doesn't mean you should stick to doing only that. In fact, the right move may be to push yourself a little harder - either because you see a big opportunity or even a big looming threat to your current industry.
The more risk appetite you have, the further away from your strengths you might want to push yourself. Generally speaking, the risk factors of the Ansoff Matrix look like this:
Figure out where you want or need to sit on that spectrum and use that to influence your decision as to which quadrant to attack.
3) Finally, make a plan.
Now that you've chosen which part of the Ansoff Matrix you want to attack, it's time to make a plan. Start by creating a succinct vision statement that captures what you're trying to achieve.
If you were Apple and were about to pursue the diversification strategy, you might have had a vision statement somewhere along the lines of:
"To capture the hearts, minds (and wallets) of a new generation of a computer geek, through innovative technology that increases their access to pop culture staples such as music and movies."
(OK, so I made that up on the spot - it's not an actual Apple vision statement, but you get the idea!)
Once you've got your vision, the rest of your strategic plan should be much easier to create.
Coca-Cola: Case Study
The objective of every business is to grow, be it a start-up that’s just closed its first deal or an established market leader seeking to further increase profitability. But how does a business decide upon the best strategy for growth? The Ansoff Matrix management tool offers a solution to this question by assessing the level of risk – considering whether to seek growth through existing or new products in existing or new markets.
To demonstrate the robustness and legitimacy of Ansoff’s Matrix, it has been applied to Coca-Cola, the most well-known trade name in the world and a company today operating in over 200 countries, and a brand that has undertaken countless growth strategies in its 100+ year history.
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