Growth is imperative for any organization. And every firm encounters growth opportunities that bear a cost. Ansoff matrix is a strategic option tool used to analyze and plan the strategies a firm can use to grow. And the concept was developed by a Russian applied mathematician and business manager, H. Igor Ansoff. He published this matrix in the Harvard Business Review in the year 1957. It guides marketers and executives in a very simple and effective way to weigh various strategies. And to devise the best one for the occasion to grow the business. Moreover, as per Ansoff Matrix, there are four strategies that are available to a firm to grow and prosper. Further, as it is obvious each of these strategies will have its own benefits and costs. And the Four defined strategies of Ansoff Matrix are:
1. Market Penetration,
2. Market Development,
3. Product Development, and
So, let us understand the four strategies of Ansoff Matrix in detail here now.
Market penetration is when the firm chooses to grow in the existing market of its products. The risk factor of this strategy is quite less compared to others. Or we can say this is the least risky bet. The main focus is to increase sales in the current market by deep penetration of the products in the existing market. In one way or another, a firm always aims at growing via the route of increasing sales volume. The ways could be offering discounts to effectively decrease the prices for increasing volumes, expanding the distribution channel to increase the area of operations, and so on.
Moreover, it can also include bringing fresh changes to the product features and utilities and thereby making it better. For example, Cadbury, a huge US-based Multi-National Corporation (MNC), is present in countries with different cultures and values. To pick up a growth strategy by increasing offers on Christmas in the US will help its product sales increase.
A product development strategy involves introducing a new product in the existing market. Starting a new product line is a risky game as there is always some uncertainty of success. Starting with a new product line is costly as it involves high research and development costs and capital expenditure. A detailed analysis of the project to understand the growth and its minute details is very important while selecting this strategy to get a fair idea. Because the product development strategy will have a high chance of success if the product is highly innovative and satisfies the market’s needs. Moreover, the best part of this strategy is that the firm can exploit its current customer base for this new product. And thereby effectively increasing its sales revenue and profits.
A recent example could be the development of electric vehicles by the existing automotive companies—similarly, the development of electric batteries for the vehicles by the existing battery manufacturers.
Market development strategy is when the firm expands the availability of their products in a new market; that is, they expand regionally or globally—or expand in a new customer segment. For instance, a local business based in California has now made it to the shelves of Texas. Moreover, expanding from one area to another is also a part of this strategy. Also, this strategy is less risky when compared to the product development strategy as the costs involved are low relatively. One of the success factors in deciding if the strategy is suitable is understanding the demographics of customers. Will the customers in the new region buy the product? Are the characteristics, needs, and wants of the current customer base similar to the potential customers? The more and more they are alike and in sync will result in the firm’s growth.
A thorough analysis is undertaken to understand the demographics, culture, values, and system of the new market. Therefore, it becomes more important when a firm is thinking of going global or crossing beyond domestic boundaries. Starbucks, a US-based MNC, has to improvise and make changes when expanding its products globally. They have to track the coffee habits of the population in the new country, their preferred style of coffee, their taste, etc.
This is the fourth and the last strategy of the Ansoff matrix. Diversification is considered the riskiest as it involves simultaneous efforts on both the product and the market development. Under this strategy, the firm comes up with a new product and targets a new market. The combined risk of product and market development contributes to the high risk of this strategy. There are two types of diversification:
- Related Diversification: In this scenario, a firm comes up with a new product related to its existing line of products. For example, Hershey, known for its chocolates, introduced various flavors of milkshakes. Or a leather show manufacturer starts manufacturing wallets and belts. This strategy is comparatively less costly and less risky because the firm is introducing only a related product or a secondary or a supporting product. Rather altogether a new product. This way, the sharing of costs also happens as well as mitigation of risk.
- Unrelated Diversification: Under this strategy, the firm starts with a completely new and unrelated product from its current product offerings. For example, a company present in the confectionary business starts producing shoes or dairy products. It is a risky gamble and involves a thorough analysis before the launch.
One Example to Understand All the Strategies:
A chocolate manufacturing company is offering discounts, offers, combo, and gift packs for customers for the upcoming Christmas season. Offering discounts and offers is a part of the market penetration strategy.
The chocolate manufacturing company has introduced a new flavor for the thanksgiving season called ‘Pumpkin spice’ chocolates. Product development is adding a new variant of a product to the market.
The chocolate manufacturing company plans on expanding its products to a new country. After conducting extensive research, the organization gives the idea a green light. This is known as market development.
The chocolate manufacturing company introduces a new flavor in accordance with the tastes and preferences of the customers in the new country. The example includes both market and product development strategy and is also known as related diversification.
Steps in making an Ansoff Matrix:
- Formulate a matrix: There are many templates available on the internet to create an Ansoff matrix.
- Evaluate options: Fill in each quadrant with the appropriate strategies. Exploring new ideas will open up new opportunities.
- Evaluate risk: Failing to understand the risks is one of the key reasons why a growth strategy may fail eventually. It is important to do a risk-reward analysis and see if the risk taken does produce lucrative rewards. Analyzing risk and prospects helps in making a better decision.
- Select and implement the option: After considering the risks and overall profile of the company, one may choose a growth strategy. Implementation and constant monitoring also help in better results.