The Ansoff Matrix is a strategic planning tool that provides a framework to help executives, senior managers, and marketers devise strategies for future growth. Each alternative poses differing levels of risk for an organization:. In market penetration strategy, the organization tries to grow using its existing offerings products and services in existing markets. In other words, it tries to increase its market share in current market scenario. This involves increasing market share within existing market segments. This can be achieved by selling more products or services to established customers or by finding new customers within existing markets.
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In a nutshell, it helps executives, managers, and marketers with business management by analyzing strategic options for further growth while considering the potential risk of each option. Essentially, it breaks down growth options in relation to new products and markets, as well as existing products and markets. Ultimately, it provides the following options:. Managers and executives need to decide which of the possible four strategies is more beneficial and potentially less risky for their business or corporation.
However, it is mainly used on a corporate strategy level, rather than within the marketing department of a business. It replaces static documents and flowcharts - giving you the power to automate and run your processes. By making ourselves write down our processes and know-how on Tallyfy — we can now ensure that steps are never missed or done out of order. The first top-left quadrant A , is generally the starting point for most corporations that are starting to revise their strategic direction.
It is by far the most obvious strategic direction for a company because it tries to gain market share by building on its existing markets with its existing product range.
Increasing existing market share by focusing on market penetration will likely increase rivalry within the industry. With competition getting fiercer on the same range of products, problematic situations such as price wars or expensive marketing campaigns can arise. This is likely to increase the cost and efforts for penetrating the market. In most cases of market penetration, only the companies that possess a clear competitive advantage are able to grow their market share.
Usually, the competitive advantage being inimitable. When facing fierce competition, it might be easier all together to acquire most of the struggling competitors and consolidate all of them within one company. This way you can move rapidly towards gaining the largest market share in your industry. Sometimes it is simply not the right time to focus all marketing efforts on penetrating an existing market.
If the market is bearish, i. Deciding to penetrate a market further implies the end goal of gaining the largest market share within that specific industry. In most countries, however, there are regulators who try to keep under control organizations that gain excessive market power. Product development in the Ansoff Matrix is the approach in which organizations deliver either new products or modified products in existing markets.
In marketing, this is also referred to as product line extension. Usually, it involves higher risk because it contains varying degrees of diversification. When creating new products, some companies use the same core technology. This lowers the risk arising from developing completely new technologies. Apple started growing with the release of the iPod in October Apple then moved on to producing the iPhone, the iPad, the iWatch and so on….
The core technology used behind each of the products produced by Apple is essentially the same one. They took the same operating system continuously updated of course and used it to create new products while targeting the same market. Certainly, the products created by Apple serve different purposes.
As such, they require great efforts from their Research and Development Unit. So what are the possible risks accompanying the product development strategy of the Ansoff Matrix? Market Development, as a strategic option of the Ansoff Matrix, provides an alternative to risky and expensive Product Development strategies.
In most cases, market development requires an effort in product planning and development as well. They go hand-in-hand. If a company is extending its geographic reach and starts targeting European markets in addition to the US market, then the products might need to go through several alterations.
The languages used to describe the nutritional information of the product will be different from the English packages. Additionally, the way it is branded might be different due to trends and differences that might have been discovered between European and American populations. The problems and risks mentioned in the Product Development quadrant of the Ansoff Matrix can arise in a Market Development strategy as well. Several business planning tools can help you analyze the market before entering it.
Diversification is by far the riskiest strategic option of the Ansoff Matrix. It is a strategy that radically shifts the scope of the organization by entering completely new markets with completely new products. Surely, diversification exists in almost every quadrant of the Ansoff Matrix. Even when entering new markets or when creating new products, an organization goes through some type of diversification.
However, the Ansoff Matrix clearly helps us visualize the extent to which a company has to diversify when moving away from its existing products and markets. Several organizations have existing resources and capabilities that they sometimes leave unused or do not use them to their maximal potential. The resources and capabilities are used by diversifying them into new activities.
However, instead of considering the employment of existing resources into new markets and product segments, we consider the managerial parental capabilities. In a nutshell, the managers that are driving business decisions throughout the whole business chain gain valuable experience and knowledge. Overall, it is important to analyze the environment before deciding to diversify. The ultimate goal is to achieve the right synergy and thus drive growth.
Sometimes, negative synergy can be more detrimental than no synergy at all. Meaning that sometimes it is better for different companies not to try complementing each-other. There are cases, however, in which two businesses can result in negative synergy. Generally, diversification and performance follow an inverted U-shape graphical relation. What this means is that undiversified companies exhibit low performance. Companies that apply limited diversification within related activities exhibit a much higher performance.
And ultimately, companies that diversify too much, and thus diversify in unrelated activities, have a much lower performance. Sometimes even lower than that of undiversified companies. Some examples of related diversification would be vertical integration backward integration or forward integration or horizontal integration. Unrelated diversification — you probably have guessed already that this covers the development of products and activities that are not part of, or manageable by the existing capabilities or value network.
As a general rule of thumb, a deep-level analysis has to be done before diversifying into different activities. Otherwise, it can be turn out to be more detrimental. The Ansoff Matrix is probably one of the most widespread tools managers use in strategic planning for most organizations. In combination with other tools, such as the Ishikawa Fishbone diagram , it can efficiently help teams anticipate and calculate risk throughout the whole project management process.
We hope to have covered most of the concepts related to the Ansoff Matrix. If you think we missed something or would like to know more regarding Ansoff Matrix and how to make organizational decisions for driving growth, let us know in the comments section below.
Tallyfy blueprints are far better than traditional process documentation and flowcharts. We started by documenting our workflows in one place and then moved on to automating them. Now, all our processes are being done much faster and with fewer mistakes!
Document playbooks, track progress and improve processes you do between people. Eliminate the chaos of collecting information, getting approvals and automating handovers. Join thousands of companies that have stopped worrying about disorganized processes. Your email address will not be published. The order of the variables is irrelevant. How can you work more effectively from home? Practical Example. An electricity-providing company experiences growth and tries to merge with another electricity company within the same country.
In most cases, they will both face several legal regulations. In Europe for example, the European Commission can intervene in any link of the European Market and force companies to reduce their power in order to allow ways for competition to develop.
One of the best examples related to Market Penetration would be the smartphone industry. Nowadays, the main competitors in the U. As a result, product development generally involves heavy investments which are accompanied by an increased risk of project failures. The most typical example is that of Tesla and their Model 3 sedan. Early customers placed deposits for the first Model 3 starting in March Additionally, Musk pushed back several times his initial goal of building Model 3 sedans per week by the end of June Most of these delays are being caused due to unexpected problems in building the new batteries for the car.
The new lithium batteries require different ways of manufacturing and because of several bottlenecks, the company has not been able to deliver the components on time. Most universities have facilities and buildings that are not used year-round.
During the summer there are almost no full-time students. At least in the American Educational system — the European one works slightly differently. As a result, most universities end up using their facilities for conferences, summer camps and so on. An even better example would be that of AWS. Amazon already possessed server facilities with great computing power. Most of it, they were not using on a continuous basis. As a result, Amazon decided to offer cloud services to users all over the world.
One of the best examples of positive synergy would be that of Disney and Pixar. Since then, they made more than 10 full-featured animated movies. The acquisition of Snapple by Quaker Oats was by far one of the biggest failures in the history of mergers and acquisitions.
How to Use the Ansoff Matrix to Analyze Risk
It is a core business strategy tool, taught in business schools to MBA students and utilised throughout businesses globally. Ansoff suggested that there were effectively only two approaches to developing a growth strategy; through varying what is sold product growth and who it is sold to market growth. When combined with the Ansoff Matrix detailed above, it delivers four strategic options, each with a differing level of risk. The lowest risk strategy is for a company to sell its existing products into existing markets as it knows its customers, has established channels and so on. This is only possible where markets are still growing, or where organisations are prepared to use other elements of the marketing mix such as price discounting and additional promotional activity to penetrate the market at the expense of competitors. The success of this strategy is dependent on the organisation being able to effectively conduct research and insight into their customer and market needs as well as their own internal capabilities and competencies for driving innovation. This is also considered to be risker than market penetration as it can be difficult to understand the complexities of new markets.
Successful leaders understand that if their organization is to grow in the long term, they can't stick with a "business as usual" mindset, even when things are going well. They need to find new ways to increase profits and reach new customers. There are numerous options available, such as developing new products or opening up new markets, but how do you know which one will work best for your organization? This is where you can use an approach like the Ansoff Matrix to think about the potential risks of each option, and to help you devise the most suitable plan for your situation.
Using The Ansoff Matrix to Develop Marketing Strategy
In the paper he proposed that product marketing strategy was a joint work of four growth areas: market penetration, market development, product development, and diversification. When displayed visually, these four areas create the Ansoff Growth Matrix. As part of a larger strategic planning initiative, an Ansoff matrix is a communication tool which helps you see the possible growth strategies for your organization. The hard work is in selecting one of the four Ansoff growth strategies. Market Penetration. The first quadrant in the Ansoff matrix is market penetration. It is often adopted as a strategy when the organization has an existing product with a known market and needs a growth strategy within that market.