This articles explains the main features of the Ansoff Matrix, the context in which such an analysis would be undertaken and also gives practical advice on how to carry out an analysis using this matrix. The article also points out the weaknesses of this model.
Introduction The Ansoff matrix presents the product and market choices available to an organisation. Herein markets may be defined as customers, and products as items sold to customers (Lynch, 2003). The Ansoff matrix is also referred to as the market/product matrix in some texts. Some texts refer to the market options matrix, which involves examining the options available to the organisation from a broader perspective. The market options matrix is different from Ansoff matrix in the sense that it not only presents the options of launching new products and moving into new markets, but also involves exploration of possibilities of withdrawing from certain markets and moving into unrelated markets (Lynch, 2003). Ansoff matrix is a useful framework for looking at possible strategies to reduce the gap between where the company may be without a change in strategy and where the company aspires to be (Proctor, 1997).
Main aspects of Ansoff Analysis
The well known tool of Ansoff matrix was published first in the Harvard Business Review (Ansoff, 1957). It was consequently published in Ansoff’s book on ‘Corporate Strategy’ in 1965 (Kippenberger, 1988). Organisations have to choose between the options that are available to them, and in the simplest form, organisations make the choice between for example, taking an option and not taking it. Choice is at the heart of the strategy formulation process for if there were no choices, there will be little need to think about strategy. According to Macmillan et al (2000), “choice and strategic choice refer to the process of selecting one option for implementation.” Organisations in their usual course exercise the option relating to which products or services they may offer in which markets (Macmillan et al, 2000).
The Ansoff matrix provides the basis for an organisation’s objective setting process and sets the foundation of directional policy for its future (Bennett, 1994). The Ansoff matrix is used as a model for setting objectives along with other models like Porter matrix, BCG, DPM matrix and Gap analysis etc. The Ansoff matrix is also used in marketing audits (Li et al, 1999). The Ansoff matrix entails four possible product/market combinations: Market penetration, product development, market development and diversification (Ansoff 1957, 1989). The four strategies entailed in the matrix are elaborated below.
Ansoff Product-Market Growth Matrix
Source: Ansoff (1957, 1989)
Market penetration occurs when a company penetrates a market with its current products. It is important to note that the market penetration strategy begins with the existing customers of the organisation. This strategy is used by companies in order to increase sales without drifting from the original product-market strategy (Ansoff, 1957). Companies often penetrate markets in one of three ways: by gaining competitors customers, improving the product quality or level of service, attracting non-users of the products or convincing current customers to use more of the company’s product, with the use of marketing communications tools like advertising etc. (Ansoff, 1989, Lynch, 2003). This strategy is important for businesses because retaining existing customers is cheaper than attracting new ones, which is why companies like BMW and Toyota (Lynch, 2003), and banks like HSBC engage in relationship marketing activities to retain their high lifetime value customers.
Product development Another strategic option for an organisation is to develop new products. Product development occurs when a company develops new products catering to the same market. Note that product development refers to significant new product developments and not minor changes in an existing product of the firm. The reasons that justify the use of this strategy include one or more of the following: to utilise of excess production capacity, counter competitive entry, maintain the company’s reputation as a product innovator, exploit new technology, and to protect overall market share (Lynch, 2003). Often one such strategy moves the company into markets and towards customers that are currently not being catered for.
Market development When a company follows the market development strategy, it moves beyond its immediate customer base towards attracting new customers for its existing products. This strategy often involves the sale of existing products in new international markets. This may entail exploration of new segments of a market, new uses for the company’s products and services, or new geographical areas in order to entice new customers (Lynch, 2003). For example, Arm & Hammer was able to attract new customers when existing consumers identified new uses of their baking soda (Christensen et al, 2005).
Diversification strategy is distinct in the sense that when a company diversifies, it essentially moves out of its current products and markets into new areas. It is important to note that diversification may be into related and unrelated areas. Related diversification may be in the form of backward, forward, and horizontal integration. Backward integration takes place when the company extends its activities towards its inputs such as suppliers of raw materials etc. in the same business. Forward integration differs from backward integration, in that the company extends its activities towards its outputs such as distribution etc. in the same business. Horizontal integration takes place when a company moves into businesses that are related to its existing activities (Lynch, 2003; Macmillan et al, 2000).
It is important to note that even unrelated diversification often has some synergy with the original business of the company. The risk of one such manoeuvre is that detailed knowledge of the key success factors may be limited to the company (Lynch, 2003). While diversified businesses seem to grow faster in cases where diversification is unrelated, it is crucial to note that the track record of diversification remains poor as in many cases diversifications have been divested (Porter, 1987). Scholars have argued that related diversification is generally more profitable (Macmillan et al, 2000; Pearson, 1999). Therefore, diversification is a high-risk strategy as it involves taking a step into a territory where the parameters are unknown to the company. The risks of diversification can be minimised by moving into related markets (Ansoff, 1989).
How to write a Good Ansoff Analysis
It is important for analysts to acknowledge that different strategic options are suitable for companies operating in different types of industries and markets. No one strategic option for growth is appropriate for all types of companies at all times. The business environment, including competitive activity, also plays a key role in determining which strategic choice is most appropriate for a company. It is not possible to write a good Ansoff analysis without looking at the various factors in the business environment, which impact the choice of a firm’s strategic options. Market penetration, for example, may prove to be a wise strategy only when the overall market is growing. In a growing market, companies are often able to increase sales to existing and some new customers without increasing their relative market share. Note that companies with low market share in a growing market can make gains by attacking a competitor head on. For example, Burger King (relatively low market share) to an extent has been successful at attacking McDonald’s sales (relatively high market share). However, it is more difficult to reap benefits of market penetration strategy in a declining market. Note that each strategic option brings with it some inherent risks, which can be reduced through careful planning and implementing control mechanisms. Overall, market penetration strategy is a low risk strategy as the business parameters of product and market more or less remain the same. It is important to discuss the benefits and appropriateness of the strategic option for an organisation while mentioning the risks inherent with each strategic option.
While writing about the product development strategy, it is important to mention that it is often a part of the natural growth of organisations. Look for the reasons as to why the company selected the strategy and explain the reasons and implications. In many cases, innovation serves as the most important reason as it may present an opportunity to take market share from competitors or a threat to an existing product line. Product development strategy can in some cases be risky, as was the case of the New Coke. While customers liked the taste of the New Coke in the taste tests conducted by Coca Cola, customers of the brand favoured Classic Coke over the new product. Clearly remember the differences between market penetration and product development strategies, as it may be easy to confuse the two strategies if the analysis is not performed carefully.
Note that the core competency of a firm becomes crucial in case of the market development strategy. For example, Glaxo has been able to develop new markets for its anti-ulcer drugs by developing and marketing a lower-strength version of the drug in many countries that can be sold without prescription as a stomach remedy. Market development strategy, like other strategic options, entails certain risks also. McDonald’s entered a number of new markets in the wake of globalisation with its existing products. Due to the nature of the company’s products, McDonald’s had to make changes in the ingredients of its burgers in order to cater to the market.
It is imperative for analysts who are trying to identify the growth strategies or are formulating proposals for such strategies for a particular firm, that firms in today’s fiercely competitive business environment often pursue multiple strategies. In fact, most big businesses today pursue multiple strategies for growth at the same time in order to achieve their strategic objectives. For example, the two Internet incumbents of Amazon and E*Trade are both operating in a fast evolving, uncertain business environment and have pursued multiple and high-risk growth strategies, which include market development, product development and diversification strategies. Amazon focused more on the diversification strategy while E*Trade focused on market development. The differences in strategic choices in this case were due to the differences in the type of markets in which both companies operate. Notably Amazon operates in a wider retail setup while E*Trade operates in a narrower are of financial services retailing. Both companies chose product development as the second most preferred strategic option, which shows commitment to innovation in products and services. Another similarity that comes across in the analysis of the two incumbents is that the low risk strategy of market penetration was the least favourite option for both companies (Constantinides, 2004). Therefore, it is crucial to note that one firm may be pursuing multiple strategies and it is important to write about all the strategic options that the firm is pursuing.
A common mistake made while conducting Ansoff analysis is that analysts are not able to acknowledge how different growth strategies are suitable for companies operating in different types of markets, and how changes in business environment make the same company choose a different strategic option at stage time in its organisational life cycle. Perry (1987) identified product development and market development as appropriate growth strategies (Watts et al, 1998) for small and medium enterprises (SMEs). On the other hand, the IT bluehood of the corporate world, IBM, successfully follows the high-risk diversification strategy. Earlier, IBM followed a vertical integration strategy wherein it had entered new industries to strengthen the core business model. It also enjoyed backward vertical integration into the disk drive industry and forward vertical integration into the consulting services and computer software industries (Hill et al, 2007). IBM’s vertical integration was once widely considered a vital source of competitive advantage. However, due to the fiercely competitive business environment, IBM has been acquiring a large number of firms in the last few years and had more than 400 strategic alliances as of 2003 (Thompson et al, 2003). The diversification strategy is deemed as a high risk strategy but IBM has been successful due to business foresight and effective control mechanisms. Therefore, organisations change their strategic options in accordance with changes in competitive scenario, and it is important to mention the transition in the write up of Ansoff analysis.
Analysts can explore various sources to find information necessary for conducting Ansoff analysis. Possible sources of information include company and competitor websites as they would highlight the portfolio of products and services and how the company may have diversified over time. Up to three years of annual reports of the company can be analysed to see how the company has changed its business focus, according to changes in the business environment.
Marketing communications tools used by the company can reflect which growth strategy is being pursued by the company. For example, corporate advertisements along with adverts of products and services can show whether the company is targeting existing or new customers and/or existing or new markets. Press releases are also a useful source for evaluating the growth strategy that a firm is pursuing or should pursue. Journal articles, trade publications and magazines are useful sources of information to identify growth strategies.
Limitations of Ansoff Analysis
While Ansoff analysis helps in mapping the strategic options for companies, it is important to note that like all models, it has some limitations. By itself, the matrix can tell one part of the strategy story but it is imperative to look at other strategic models like SWOT analysis and PESTLE in order to view how the strategy of an organisation is formulating and might change in the course of its future. For example, the Ansoff analysis of Virgin Cola shows that the brand has been launched in the UK and USA using a market penetration strategy, which essentially reflects that the brand needs to increase its brand recognition (Vignali, 2001). The SWOT analysis conducted by Vignali (2001) showed an opportunity that Virgin Cola could explore diversification into new ranges of Virgin Cola products. PESTEL analysis of Virgin Cola showed that there was need to constantly evaluate the soft drinks industry in all countries, in order to reflect customer trends, thereby allowing the brand to gain market share and also predict trends faster than the competition. Therefore, the steps to be taken while conducting a strategic analysis of an organisation include SWOT analysis, PESTEL and Ansoff matrix as fundamental models of analyses, which should be used in conjunction and not in isolation, to view the complete strategic scenario. Also, recommendations made on the basis on only one of the models are not concrete and lack in depth.
The above is also supported by the example of M&S where the company was not able to keep up with the trends and suffered from decline in sales due to competitors like Next, which were relatively more aware of customer trends and needs. Marks and Spencer came up with the Per Una range of clothing in order to compete effectively and gained market share. M&S would not have been able to identify which strategy to opt for growth, if a PESTEL analysis was not conducted.
While the role of analysis in making strategic choices cannot be undermined, it is imperative to note that judgement plays a crucial role in making critical strategic choices that may change the future of the firm (Macmillan et al, 2000). Lastly, the use of Ansoff matrix as a marketing tool may not be really useful as the matrix is critical for analysing the strategic path that the brand may be following, and does not essentially identify marketing options.
Conclusion Ansoff matrix is one of the most well known frameworks for deciding upon growth strategies of an organisation. Strategic options relating to which products or services an organisation may offer in which markets are critical to the success of companies. The Ansoff matrix is a useful, though not an exhaustive, framework for an organisation’s objective setting process and marketing audits.
The differences in strategic choices of organisations can often be attributed to the type of market in which the company operates. Changes in business environment play a crucial role in the strategic options that an organisation may pursue over its life stages. There are risks associated with all of the four strategic options entailed in the Ansoff matrix. Market penetration is generally considered as a low risk strategy while diversification, on the other hand, is deemed as a high risk growth strategy as it involves moving simultaneously into new products and new markets. Diversification remains a popular strategic option for firms in today’s competitive business arena, and if the diversification strategy is consistent and well though-out, like the case of IBM, significant improvements in profitability can be experienced.
Sources of finding information for Ansoff analysis include company websites, marketing communications activities, company’s annual reports, journal articles, trade publications and well reputed business magazines. Lastly, Ansoff matrix as a strategic model has certain limitations. The use of SWOT and PESTEL analysis is recommended, along with Ansoff analysis, to be able to capture a holistic view of the strategic scenario of an organisation.
If you found this article useful please have a look at the other articles we have written: PEST analysis, Porter's 5 Forces analysis, SWOT analysis, BCG Growth-Share Matrix, Porter's Generic Strategies, Scenario Planning, Value chain analysis.
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