Ansoff matrix is a four-point grid showing the relationship of a company’s products with its market and the various options the company can take as it charts its course. Ansoff analyses are commonly employed by established businesses which have the financial capability to move forward and are looking for the right strategies to take to ensure business growth (Business Edge Consortium, 2006).
The model shows four possible product-market combinations that can be the bases for determining the appropriate corporate strategy to be undertaken. Combined with the other useful matrices and strategic growth models such as SWOT analysis, Porter’s five forces, BCG matrix and value chain analysis, the Ansoff matrix can be a very useful management and marketing tool (Stone, 2001).
The objective of this paper is to take a more focused look at the Ansoff matrix, find out how it works and see how it can be applied in real business situations to determine the appropriate growth strategy. Given that there are many variables and influencing factors affecting business (Stone, 2001), this paper will attempt to correlate how the Ansoff analysis can be employed with the other strategy models in narrowing down this choice.
The Ansoff Matrix
The Ansoff Product-Market Growth Matrix, as originated by Russian-American mathematician Igor Ansoff, first saw print in 1957 in the Harvard Business Review (Lester, 2009), and later in his book Corporate Strategy in 1965. The matrix presents in grid form four product and market combinations which could serve as options in determining where the company will go next. In the matrix, product refers to the items or services a company sells and market refers to its customers. The matrix works on the basis that for a company to grow, it must decide where and how to be competitive, in current or new markets, or through current or new products (Lester, 2009).
Uses of the Ansoff Matrix
The Ansoff matrix is another way of looking at the 4P marketing mix after a business has had the time to operate in its market and is poised for strategic decision-making. The matrix is used in determining what strategies to employ to bridge the gap between where an organization wants to be and where it is (Proctor, 1997). It is also used in determining whether it is wise or unwise to keep to the existing market for the present products or move out and expand into another. It is useful in goal setting and in establishing the future direction of the company (Stone, 2001). It is also used in marketing audits. For companies which aim to be always competitive, the Ansoff matrix can be a regular analytical tool for checking this competitiveness.
Looking at the two major elements of product and market, the model offers a wide range of variations that can help organizations select which option is or are the most suitable. Since businesses differ in the way they operate even if they belong to the same industry, there is not a single strategic option that is suitable to all, much more at all times. The most suitable may be derived only after all the variables have been considered.
Stone (2001) identifies the model’s four possible strategic combinations bearing the product-market elements as market penetration, product development, market extension and diversification. He defines market penetration as increasing present share in the present market, product development as modifying present products into the present market, market extension as taking present products into new markets, and diversification as expanding into products or markets which may be related or not to the present (Stone, 2001).
The strategy of market penetration primarily looks at the existing customer base. It is aiming to increase sales performance by competing more effectively in existing markets using existing products (Lester, 2009). Companies use this strategy to boost sales without shifting away from the original product-market conceptual framework. It is a wise choice when the market is generally untapped or is growing, but is unwise if the competition is fierce.
There are three ways this can be done: improve the quality of the product or service, attract the open market of non-users, and attract the market of the competition. All of these are focused on selling more to the existing base using marketing communications tools.
Product development is usually a part of the company’s natural growth. In these high-technology fast-paced times, innovation is the key to keeping in place and in pace. Product development strategies pertain to significant changes in the product or service. Companies choose this strategy when there is a need to counter a strong challenge to the existing market and protect market share, or when there is unused capacity for production, or simply to maintain the image of being an innovative company.
The strategy of market development, or extension as Stone (2001) calls it, involves the identification of a new market for existing products. The strategy may explore new usage for a product or service or may add new geographical areas to add to the customer base. A decision to expand a fast-food chain in another geographical location is an example of a market development strategy.
Diversification means that the company is moving to an unknown or new territory with an unknown or new product (Mercer, 2001). When a company diversifies, it expands its product offering and its market to other types which may involve related or unrelated product or service types.
Diversification may involve inward (backward), forward or horizontal integrations. Inward is when diversification involves inputs such as supplies (supplying one’s own chicken in a fast-food chain), horizontal is when diversification involves related business (a hamburger fast-food chain acquiring a pizza parlor), and forward is when diversification involves output such as distribution (an insurance company setting up its separate marketing agency for its products).
Each of the strategic options carries a certain amount of risks brought about by the variables. These risks may be lessened or cushioned by careful planning and the deployment of risk control mechanisms.
It is also not unusual for some businesses, especially the bigger ones, to pursue multiple strategies for growth. It is possible that an aggressive business would have simultaneous strategies for market penetration, product development and market development or even all four. A McDonald franchise, for example, may have as market penetration strategy the use of loyalty coupons or special promotions for selected occasions, as product development strategy the introduction of barbecue chicken in the menu, as market development strategy the introduction of call-in delivery service, and as diversification strategy the opening of another branch at the other side of the city.
Another example of market penetration strategy would be an insurance company’s massive recruitment program for new agents or annual raffle for its policyholders. The same company may introduce a new version of a product to gain a share of the competitor’s market as a product development strategy, or introduce a new system for its corporate market as a market development strategy, and launch a new product under the mass market distribution as a diversification strategy.
The Ansoff matrix is not a matrix-suits-all tool. It also has its limitations and attendant risks. It is advisable to do an Ansoff analysis together with the other models for growth. The SWOT is an acronym that stands for the strengths and weaknesses of a firm and the opportunities and threats to it from the external environment. SWOT enables a company to identify these factors and exploit them to its full advantage (Stapleton et al, 1998).
Porter’s Five Forces Model of competitive analysis uses his five forces to establish a firm’s competitiveness. The five forces are the rivalry among competing firms, the potential entry of new competitors, the potential development of new products, suppliers’
bargaining power and the customers’ bargaining power (David, 2006). According to Porter, the competitiveness of a business is a result of the action of the five forces (David, 2006).
BCG Matrix, as developed by the Boston Consulting Group in 1960, classifies products according to cash usage and cash generated relative to market share and growth rate. BCG sorts out products as star (high market share, positive cash flow), cash cow (market leaders, positive cash flow, stable market), question mark (expensive to keep, growing), and dog (no future, in decline) (Stone, 2001).The BCG is mostly used in product audit.
Value chain analysis allows a firm to understand the parts of its operations that create value and those that do not. It is a template to understand cost and the means to facilitate the implementation of a business strategy. The main idea in value chain analysis is creating additional value without significant costs (Hitt et al, 2009).
When used with SWOT analysis, Porter’s Five Forces, value chain and BCG matrix, Ansoff becomes more reliable in plotting the variations in the quadrants and should therefore lead to a more reasoned choice of strategy.
Usage of Ansoff Matrix:
It is suggested to run the following analysis before doing the Ansoff analysis: SWOT, Porter’s Five Forces, value chain analysis and BCG matrix.
To start the Ansoff analysis, it is suggested to do a four quadrant grid, identifying the quadrants as 1. market penetration, 2. product development, 3. market development and 4. diversification.
In market penetration, the strategy is to sell more of the same things to the same people. A list of all possible ways this can be done is suggested. Approaches to this may consider marketing communications. There may be a need to advertize to attract more people to use the existing product. Some companies use coupons for rebates or discounts. Some offer special promotions. There may be a need to hold a contest;
In product development, the strategy is to sell more items to the same people. A list is also suggested. New products related to the existing product may appeal to the market. Some product variations or packagings are suggested. A new service may be offered. A new food preparation may be added to the menu.
In market development, the strategy is to sell more of the same things to different markets. List down all possible ways this can be done. Opening up a new branch is opening a new market. Creating a marketing website is another way of opening a new market. Direct marketing is a profitable distribution system.
In diversification, the strategy is to sell different products to different markets. List down all possible ways this can be done. Entering a new industry is an option. Branching out is both a diversification and market development strategy.
Do a thorough analysis. Make a choice.
The Ansoff matrix is one of the more popular analytical tools for business. It offers an easy way of understanding a company’s present position relative to its products and markets. At the same time, it also enables an organization to chart its direction and determine what appropriate strategies for growth should be taken. While it has its own limitations and inherent risks, these can be overcome by careful analysis and with the help of the other analytical tools available. The beauty of the Ansoff matrix is in its simplicity, utility and ease of use.