Knowlege Mission - Ansoff Matrix

ANSOFF'S MATRIX - Planning for Growth

Understanding the risks of different options
(Also known as the Product/Market Expansion Grid)

The Ansoff Product-Market Growth Matrix is a marketing tool created by Igor Ansoff. The matrix allows marketers to consider ways to grow the business via existing and/or new products, in existing and/or new markets – there are four possible product/market combinations. This matrix helps companies decide what course of action should be taken given current performance.

This well known marketing tool was first published in the Harvard Business Review (1957) in an article called 'Strategies for Diversification'. It is used by marketers who have objectives for growth. Ansoff's matrix offers strategic choices to achieve the objectives.

Ansoff's matrix provides a very simple but very effective focus for considering different options for growth, and shows whether it is better to find new customers for existing products, offer more products to the existing consumer, or stay with existing products and attempt to gain a greater share of the market. Each section of Ansoff's matrix shows a strategy which would be used in times with what you are doing.

The Corporate Ansoff Matrix:

Looking at it from a business perspective, staying with your existing product in your existing market is a low risk option: You know the product works, and the market holds few surprises for you. However, you expose yourself to a whole new level of risk either moving into a new market with an existing product, or developing a new product for an existing market. The market may turn out to have radically different needs and dynamics than you thought, or the new product may just not work or sell. And by moving two quadrants and targeting a new market with a new product, you increase your risk to yet another level.

As you can see although Ansoff Matrix is admired for its simplicity it does show that many large corporate companies tend to follow it as guide to marketing a new or old product in this case Apple and Dell seems to follow the Matrix to the letter in terms of it's needs of developing a market for a new product such as the iPod for Apple and servers for Dell tends to be very useful when deciding what sort of product should be aimed at a market segment so it useful but perhaps only to a certain extent. As it is not a definite guide to the market but does show in it's simplicity how and what a product should be marketed at.

Ansoff’s matrix is one of the best known frameworks for deciding upon strategies for growth. Commonly used within marketing. His model gives organisation five strategic business options from which they can select their best option:

9 Box Grid -Fig1

Fig 2

The matrix consists of four strategies:Fig 2

Market penetration (existing markets, existing products): Market penetration occurs when a company enters/penetrates a market with current products. The best way to achieve this is by gaining competitors' customers (part of their market share). Other ways include attracting non-users of your product or convincing current clients to use more of your product/service, with advertising or other promotions. Market penetration is trying to drive an existing product deeper into an existing market. This involves increasing market share, usually in one of these ways -

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  Persuading existing customers to buy more of the product by increasing their usage. This may be accomplished by becoming more environmentally friendly, putting recipe suggestions on packaging or suggesting "frequent use" on their products (common on shampoo).
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  Taking customers away from competitors by using penetration pricing (pricing products low to lure customers away from other companies), destroyer pricing (putting prices so low that competitors will be put out of business. The prices are too low to be sustained and will be put back up again once competitors are defeated).
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  Finding new customers altogether by expanding the market.
• This strategy is used most commonly by firms because it is the least risky.

Product development (existing markets, new products): A firm with a market for its current products might embark on a strategy of developing other products catering to the same market. For example, McDonalds is always within the fast-food industry, but frequently markets new burgers. Frequently, when a firm creates new products, it can gain new customers for these products. Hence, new product development can be a crucial business development strategy for firms to stay competitive. Product development is just as risky as market development, perhaps more so because more capital will probably be needed in research and development. It involves introducing a new product into an existing market, and some aspect of the product or its marketing mix needs to be differentiated from that of the existing products to make it viable and obtain a competitive advantage. This can be done by -

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  Developing entirely new products, risky indeed. The company will need to do a lot of research into the area and hope its reputation of products past will help get it a foothold. An example is when Mars released Mars ice-cream.


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  Making a change to an existing product and relaunching it.
  

Market development (new markets, existing products): An established product in the marketplace can be tweaked or targeted to a different customer segment, as a strategy to earn more revenue for the firm. For example, Lucozade was first marketed for sick children and then rebranded to target athletes. This is a good example developing a new market for an existing product.

Diversification (new markets, new products): Virgin Cola, Virgin Megastores, Virgin Airlines, Virgin Telecommunications are examples of new products created by the Virgin Group of UK, to leverage the Virgin brand. This resulted in the company entering new markets where it had no presence before. Diversification involves launching a new product in a new market. Richard Branson is an expert at this, and he needs to be - it's the riskiest way a business can go about making a living. It can also be the most rewarding, as a fresh perspective on a market can often pay huge dividends and deliver a huge competitive advantage to a smart and able company. A lot of research is needed to get things right, and perhaps consultancies will be called in to help educate the business about its new challenges. Diversification can also decrease risk, because a large corporation can spread certain risks if it operates on more than one market.
Diversification can be done in four ways:

Ø Horizontal Diversification: This occurs when the company acquires or develops new products that could appeal to its current customer groups even though those new products may be technologically unrelated to the existing product lines.

Ø Vertical Diversification: The Company moves into the business of its suppliers or into the business of its customers.

Ø Concentric diversification: This results in new products lines or services that have technological and/or marketing synergies with existing product lines, even though the products may appeal to new customer group.

Ø Conglomerate Diversification: This occurs when there is neither technological nor marketing synergy and this requires reaching new customer groups. Sometimes used by large companies seeking ways to balance a cyclical portfolio with non-cyclical one.

How to use Tool:

Market Development
Here, you’re targeting new markets, or new areas of the market. You’re trying to sell more of the same things to different people. Here you might:
Target different geographical markets at home or abroad
Use different sales channels, such as online or direct sales if you are currently selling through the trade.
Target different groups of people, perhaps different age groups, genders or demographic profiles from your normal customers.

Diversification
This strategy is risky: There’s often little scope for using existing expertise or achieving economies of scale, because you are trying to sell completely different products or services to different customers

Its main advantage is that, should one business suffer from adverse circumstances, the other is unlikely to be affected.

Market Penetration
With this approach, you’re trying to sell more of the same things to the same people. Here you might:
Advertise, to encourage more people within your existing market to choose your product, or to use more of it
Introduce a loyalty scheme
Launch price or other special offer promotions
Increase your sales force activities, or
Buy a competitor company (particularly in mature markets)

Product Development
Here, you’re selling more things to the same people. Here you might:
Extend your product by producing different variants, or packaging existing products it in new ways
Develop related products or services (for example, a domestic plumbing company might add a tiling service – after all, if they’re plumbing in a new kitchen, most likely tiling will be needed!)
In a service industry, increase your time to market, customer service levels, or quality.


Manage risk appropriately. For example, if you’re switching from one quadrant to another, make sure:
That you research the move carefully;
That you build the capabilities needed to succeed in the new quadrant;
That you’ve got plenty of resources to cover a possible thin period while you’re developing and learning how to sell the new product, or are learning what makes the new market tick; and
That you have firstly thought through what you have to do if things don’t work out, and that failure won’t “break” you.

Some marketers use a nine-box grid for a more sophisticated analysis. This adds “modified” products between existing and new ones (for example, a different flavor of your existing pasta sauce rather than launching a soup), and “expanded” markets between existing and new ones (for example, opening another store in a nearby town, rather than going into online sales). This is useful as it shows the difference between product extension and true product development, and also between market expansion and venturing into genuinely new markets. However, be careful of the three “options” in grey, as they involve trying to do two things at once without the one benefit of a true diversification strategy (escaping a downturn in one product market). See fig1 above 9 quadrant.