The topic of Ansoff’s Matrix is covered in the E2 syllabus when looking at strategy and to be more specific, it’s used in the strategic choice part of the strategic planning process.
Quite simply put, Ansoff’s matrix is designed to look at the market in which the company operates in and the products which the company is looking to sell, then based on the current conditions/situation of the market and products a strategic choice can be derived.
Ansoff’s Matrix
The below image is a clear representation of Ansoff’s Matrix with the strategic choices laid out in each quadrant of the matrix.
Let’s take a closer look at each box.
Market Penetration
This strategic choice should be applied when the product is already existing and so is the market in which the company wants to operate.
This would be the most ideal situation as the company will look increase the revenues and profitability of the business by penetrating the exisiting market with their proven product.
It is considered a low risk strategy as no product development is required, which means R&D costs will not exist meanwhile, if the market for the product is also there, then no research or market creation will be required which also reduces costs.
A company may seek to eliminate the weaker competitors in the market by using economies of scale to offer the product at a lower price to the market. This will increase their market share as well as driving out weaker competitors.
How do companies do penetrate the market?
Well, there are several options and avenues a company may seek to take. Increasing their advertising and marketing in the market will help penetrate and attract customers – they also might seek to modify and innovate the product so it becomes more attractive for consumers.
Overall, this would be the ideal situation and is considered the least risky of the strategic choices but it shouldn’t be seen as an automatic way to success and growth.
Ansoff was always quick to point out that the company must still possess a competitive advantage for market penetration to be effective.
Product Development
Next up is the product development stage.
This is when the market is existing but the product is new and still needs to be developed somewhat.
For example, Apple would have taken this strategic choice when developing and launching the version of the Apple Watch. They already had a devoted customer base (market) based on their strong brand but wanted to release a new product – the Apple Watch.
This would involve product development, research into customers needs as well as what the competition was doing. Apple would also have to consider the costs of producing a new product – new machinery, technology as well as the time and effort in training the workforce to produce and sell the new product.
There is also no guarantee of success with a new product. It might have completely flopped and failed to make a profit or even cover their costs. On the flip side, it might exceed expectations and also increase the market share of the company and bring new customers to the market.
So you can see this strategic choice carries a higher risk and is more cost involved but the upsides are also there for every one to see.
Market Development
As you can see from Ansoff’s Matric, the market development strategy should be employed when the product is existing but there currently isn’t a market for it to be successful.
This can also be referred to as “market creation”
This is usually done by a company re-positioning the product to a different market segment by the way of advertising and brand awareness.
A company may find it’s product is stagnating in the current climate and decides to look towards a new market to enter.
This was the case with Lucozade who felt their market was limited as it was seen as a drink to aid recovery from sickness.
However, they made the decision to promote it as a sports drink and also develop the product to fit that market. It resulted in a whole new customer base and increased their market share and sales figures at the same time.
A lot of big global corporations use this strategy to increase their dominance in their market and leverage of the strong brand and identity by appealing to new customers.
Diversification
Finally, the strategic choice of diversification will be chosen if a company is trying to create new markets with a completely new product. This is a massive risk as there are no indications it will be a success.
However, it’s usually used when trying to turn around ailing companies in a stagnate market place. Management may decide to completely diversify their strategy and product line by making a new product and taking it to a new market.
It could turn out to be a stroke of genius, however, if the company are confident their new product is revolutionary and will create a significant demand in the market.
Costs, of course, will be high as the product will need to be developed while the market will also need to be created.
Generally speaking there are two types of diversification.
Vertical Integration – involves taking over a supplier or a customer to increase the chances of success in the marker place.
Horizontal Diversification – means developing a complimentary product to whats already being produces. i.e. a company who makes household vacuum cleaners could diversify by launching a range of commercial cleaning products – it’s a similar product but would appeal to a whole new market.
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