Finding opportunities for your business using Ansoff’s Matrix

Finding opportunities for your business using Ansoff’s Matrix

Igor AnsoffIf your business is looking to expand, the Product-Market Growth Matrix – usually referred to as the Ansoff Matrix – can be a useful tool to help you create a strategy. The matrix, which was first published in the Harvard Business Review, identifies four different possible approaches – market penetration, market development, product development and diversification. In this article I explain how these approaches could work for your business.

The four approaches are set out on the matrix as follows:

Ansoff's Matrix

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1. Market penetration

The market penetration approach is about increasing your current market share. This means selling more of your existing products within your existing markets. Market penetration is the strategic direction that most businesses take because it is the least risky – it involves products and markets that the business is already familiar with.

To increase market share, you need to:

  1. Get existing customers to buy more products, or
  2. Attract new customers who do not currently buy your products, or
  3. Attract new customers who currently buy competitors’ products.

To achieve this, many businesses choose to adapt some elements of the marketing mix, in order to boost their target customer’s perceived value of their product. This is not the only possible approach however – merging with or acquiring a competitor, creating a joint venture or a strategic alliance can all be effective ways to increase your share of the market.

The marketing mix

Here are some examples of how the marketing mix can be used to help increase your current market share:

Product: Make minor changes to your product such as adding a new feature, changing the colour or offering a new design. Improve your packaging, increase your packaging size, offer a proportion free.

Price: Lower your price, offer a promotion (e.g. BOGOF), offer rewards, incentives and loyalty schemes.

Place: Find a new distribution channel e.g. put your product in a new store, create an internet site, open a sales phone line, offer a delivery service.

Promotion: Use advertising to tell potential customers about the product and its benefits.

People: Improve your customer service to the extent that it is a unique selling point, allow your customers to nominate staff for exceptional service.

As your market becomes more mature and saturated, market penetration becomes more and more difficult. In such circumstances, many businesses devote their time to defending their market share and retaining their existing customers, rather than trying to acquire new ones. For these businesses, some of the other approaches to expansion may be worth considering.

2. Product development

Product development is about offering new products to your existing market. This is a riskier strategy than market penetration because, as with any strategy that involves new product development, the products may not be a success. The risk of new product failure is higher in some markets, and is particularly high for technology products. The stage-gate model can help with new product development:

Stage Gate Model for new product development

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In the stage-gate model, each clearly defined stage takes you from idea generation through to initial testing, launch and review. Each state is separated by a ‘gate’. These gates are meant to focus new product development teams on the financial and strategic considerations involved in progressing to the next stage. Early ideas are evaluated against business considerations, such as consumer and market research, the availability of funding and internal/external constraints. The ideas are reduced continually until a limited number of prototypes are agreed upon and developed, tested and ultimately launched. Customer involvement is essential at all stages of development.

Crucial to the stage-gate model’s effectiveness are the overriding economic rationale, the need for tight control of the process (to keep costs down) and the need to expedite through the process to maximise potential competitive advantage. On this last point, the speed at which competitors bring out ‘me too’ products has increased, making time very much of the essence.

The stage-gate model provides:

  • A rational, sequential process with emphasis on analysis of the product’s ‘fit’ with the company’s objectives and resources.
  • A common focus and language for various departments/teams.
  • An implicit multifunctional coordination as the various stages (e.g., testing, business analysis,etc.) are conducted within different organisational areas, requiring shared information.

(Source: Managing Marketing, B716 Management:perspectives and practice (2011) The Open University Business School, Milton Keynes)

In practice, the different stages are likely to be iterative and not quite so neatly defined. Information gathering and analysis, for example, tends to be an ongoing process with constant reflection taking place. Stakeholders with different expectations and objectives will often make decisions during the process that will pull the project in different directions.

Aside from the new product development process, you can achieve product development in other ways – for example, by merging with or acquiring another company, creating a joint venture or a strategic alliance. These have their advantages: for example, the cost will be clearer, the process will usually be faster and you may even eliminate one of your competitors! On the downside, merging or acquiring an existing business has many difficulties, such as those involved in working with a different organisational culture to your own.

3. Market development

Market development is about finding new markets for your existing products.

Whenever a business launches, it will usually identify its primary customer. For example, a take away opening close to student accommodation might identify that students looking for late night fast food are its primary target market, and adjust its products, prices and opening times accordingly. Over time, the business may gain the biggest possible share of this market, and decide to expand to attract a different crowd. But which crowd should it target?Early morning breakfasts? Business lunches? Busy families at tea time?

To select the best market to expand into, ‘attractiveness’ factors need consideration:

Market factors Economic and technological factors
Segment size
Segment growth rate
Product life-cycle stage
Predictability of demand
Price sensitivity and demand elasticity
Customer bargaining power
Seasonality issues
Customer needs and expectations
Ability to satisfy customer needs
Barriers to entry
Barriers to exit
Bargaining power of suppliers
Level of technology utilisation
Required investment
Margins available
Degree of technological change
Scale economies
Competitive factors Environmental factors
Number of competitors and level of competition
Quality of competition
Threat of substitution
Degree of differentiation
Exposure to economic fluctuation
Exposure to political and legal factors
Degree of regulation
Social acceptability and physical environment impact
Natural forces

Source: Dibb, S. and Simkin, L. (2008) Market segmentation success: Making it happen,
New York,The Haworth Press,Taylor and Francis Group.

Each relevant factor needs considering from both a short term and long term perspective. It is essential that businesses don’t focus too much on the short term (e.g. profitability) as this short-sighted view can mean that both opportunities and dangers are not properly considered.

For some businesses, expanding to offer their products internationally seems like a logical step in market development. This will always require thorough research of the target country. Sometimes it may be desirable to vary your offering based on what you find out about your target customers’ values, beliefs, needs and preferences. The degree that you vary your offering can be visualised on a scale: at one side, there is pure standardisation, and at the other, complete differentiation. A pure standardisation approach means that despite marketing in a new country, you don’t change anything about your product, its packaging, how you advertise and so on. A pure differentiation approach means that you create a completely separate strategy for each new country. Both of these are extremes and you will usually find middle ground – a mixed strategy where you keep some aspects of your product or service the same, and change others to suit the needs and preferences of your target market, as illustrated below:

The standardisation–differentiation continuum

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As for the other approaches to growth, mergers and acquisitions are an alternative way to achieve market development. Merging with a company that is already trading in the target country has many advantages – since that company will already be familiar with local practices, preferences and customs.

4. Diversification

The last – and riskiest – approach to growth for you to consider is diversification. Diversification means developing new products for new markets. This usually means you will develop a new offering – which may be related or unrelated to what you currently sell.

Why would a company want to diversify? The benefits include:

  • Spreading risk;
  • Entry into a more profitable market;
  • Avoidance of monopoly legislation; and
  • Exploitation of under-utilised resources.

Diversification can make perfect sense if you create a related product that your existing customer base could use and would find convenient to purchase from you.

Diversification can also work well for seasonal businesses where a large number of staff are sat around for part of the year with little to do.

There are, of course, potential problems. Trying to conquer a different market with a product that you are not familiar with is extremely risky.

Reference: Ansoff, I., Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5,Sep-Oct 1957, pp. 113-124

Featured image source: Smart insights

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