Ansoff matrix
 | This article needs additional citations for verification. (August 2024) |
| Part of a series on |
| Strategy |
|---|
 |
The Ansoff matrix is a strategic planning tool that provides a framework to help executives, senior managers, and marketers devise strategies for future business growth.[1] It is named after Russian American Igor Ansoff, an applied mathematician and business manager, who created the concept.
Growth strategies
Ansoff, in his 1957 paper, "Strategies for Diversification",[2] provided a definition for product-market strategy as "a joint statement of a product line and the corresponding set of missions which the products are designed to fulfill".[2]: 114 He describes four growth alternatives for growing an organization in existing or new markets, with existing or new products. Each alternative poses differing levels of risk for an organization.
Market penetration
Market penetration is a growth strategy where an organization aims to expand using its existing offerings (products and services) within current markets. In simpler terms, it seeks to increase its market share in the existing market landscape. It involves attracting new customers, retaining existing ones, or acquiring competitors to capture more of the existing market. To achieve increased sales for its current products, the company adopts more assertive promotion and distribution strategies.[3]
This can be accomplished by:
- Price decrease: Adjust pricing to make products more attractive to customers.
- Increased promotion and distribution support: Intensify marketing efforts and enhance distribution channels.
- Acquisition of rivals in the same market: Explore opportunities to acquire competitors operating within the same market.
- Modest product refinements: Continuously improve existing products to meet evolving customer needs.
Market penetration is considered the least risky approach for growth.
Market development
In a market development strategy, a firm tries to expand into new markets (geographies, countries etc.) using its existing offerings and also, with minimal product/services development.
This can be accomplished by:
- Targeting different customer segments: Explore beyond current customer base, for instance, consider industrial buyers if product was previously sold to households.
- Venturing into new areas or regions: Identify untapped regions within the country by expanding geographically with existing products.
- Exploring foreign markets: Enter international markets to achieve economies of scale.
This strategy is more likely to be successful when a business has:
- Unique product or technology: A distinctive product or technology that outperforms competitors in the market.
- Economies of scale: Scaling up production to serve new markets lowers overall production costs per unit.
- Market familiarity: Similar markets allow for the application of existing strategies with minimal modifications.
- Better profitability: Entering markets with higher purchasing power allows for increasing profit margins.
This additional quadrant move increases uncertainty and thus increases the risk further.
Product development
In a product development strategy, a company tries to create new products and services targeted at its existing markets to achieve growth. This involves extending the product range in existing markets by:
- Investment in R&D: Developing new products through in-hose research and development efforts.
- Acquisition of rights: Acquiring licenses or patents to produce and sell someone else's product.
- Product sourcing: Getting products manufactured by reliable suppliers and selling them under one's own brand.
- Joint development: Sharing development or marketing and distribution costs with another company that has similar strategic interests but operates in a different market or synergistically within the same market.
This also consists of one quadrant move so is riskier than market penetration and a similar risk as market development.
Diversification
In diversification an organization tries to grow its market share by introducing new offerings in new markets. Unlike other strategies that build upon existing strengths, diversification requires venturing into uncharted territory, where the organization may have little or no prior experience. It is considered the riskiest strategy because it requires both product and market development.
Types of diversification can broadly be categorized as:
- Concentric diversification: Introducing a similar product within the existing product line with the purpose of leveraging existing expertise to expand the product range.
- Horizontal diversification: Introducing an unrelated new product alongside existing offerings with the objective of reaching new customer segments and reducing dependence on a single category.
- Conglomerate diversification: Entering entirely different markets with unrelated products. Typically done to achieve financial stability by diversifying across diverse industries.
Diversification consists of two quadrant moves so is deemed the riskiest growth option.
Uses
The Ansoff matrix is a useful tool for organizations wanting to identify and explore their growth options. Although the risk varies between quadrants, with diversification being the riskiest,[4] it can be argued that if an organization diversifies its offering successfully into multiple unrelated markets then, in fact, its overall portfolio risk is lowered.
An approach to personal career development has also been developed using the matrix, with expert development (same industry, same skills) corresponding to market penetration, industry transfer to market development, functional skill development matching to product development and retraining matching to diversification.[5]
Criticisms
Isolation challenges
Used by itself, the Ansoff matrix could be misleading. It does not take into account the activities of competitors and the ability for competitors to counter moves into other industries. It also fails to consider the challenges and risks of changes to business-as-usual activities. An organization hoping to move into new markets or create new products (or both) must consider whether they possess transferable skills, flexible structures, and agreeable stakeholders.[citation needed]
Logical consistency challenges
The logic of the Ansoff matrix has been questioned. The logical issues pertain to interpretations about newness. If one assumes a new product really is new to the firm, in many cases a new product will simultaneously take the firm into a new, unfamiliar market. In that case, one of the Ansoff quadrants, diversification, is redundant. Alternatively, if a new product does not necessarily take the firm into a new market, then the combination of new products into new markets does not always equate to diversification, in the sense of venturing into a completely unknown business.[6]
See also
References
- ^ Doyle, Charles (2011). "Ansoff matrix (directional matrix)". Oxford dictionary of marketing. Oxford paperback reference (3rd ed.). Oxford; New York: Oxford University Press. pp. 21–22. doi:10.1093/acref/9780199590230.001.0001. ISBN 9780199590230. OCLC 706074575.
- ^ a b Ansoff, H. Igor (Sep–Oct 1957). "Strategies for Diversification", Harvard Business Review, Vol. 35 Issue 5, pp. 113-124
- ^ "Market Penetration: What It Is and Strategies to Increase It". Investopedia. Retrieved 2024-08-29.
- ^ Peterdy, K., Ansoff Matrix, Corporate Finance Institute, updated 24 November 2022, accessed 12 January 2023
- ^ Manktelow J. (2006), The Ansoff Matrix - Understanding the risks of different options, archived 9 April 2016, accessed 11 January 2023
- ^ Dawes, John (2018). "The Ansoff matrix: a legendary tool, but with two logical problems". SSRN 3130530.