There are different ways to grow a business.
Igor Ansoff defined four strategies for growth and summarized them in the so called Ansoff Matrix. The Ansoff Matrix (also known as the Product/Market Expansion Grid) helps managers to easily summarize and compare these possible growth strategies with each other’s risks.
The idea is that every time you step into a new quadrant (horizontally or vertically), the risk increases.
- Components of a Ansoff Matrix
- What is a Ansoff Matrix used for
- When to use Ansoff Matrix
- Using the Tool
- Example of Ansoff Matrix
- Ansoff Matrix tips
- Benefits and Limitations of Ansoff Matrix
Growing a business is a process of enhancing some measure of the progress of a company. Company can expand in terms of staff, customer base, international coverage, profits, but growth is most often determined in terms of sales. There are various ways to grow a company.
Igor Ansoff defined four growth strategies and outlined them in the so-called Ansoff Matrix. The Ansoff Matrix (also known as the Product/Market Expansion Grid) helps managers to easily summarize and compare these possible growth strategies with each other’s risks.
The idea is that every time you step into a new quadrant (horizontally or vertically), the risk increases. Each quadrant of the Ansoff Matrix will be elaborated below.
Components of a VRIO Framework
Market Penetration: Existing Products in Existing Markets
Market Penetration is about marketing some of the existing products of the company to existing markets. In order to penetrate and expand the customer base in the existing market, a company can reduce prices, develop its distribution network, invest more in marketing and increase existing production capacity.
Brands such as Coca-Cola and Heineken are considered to have invested a great deal on ads in order to reach their markets. In addition, they aim to optimize the use of distribution networks by making lucrative deals with a wide range of distributors, such as supermarkets, restaurants, bars and football stadiums.
Product Development: New Products in Existing Markets
Product Development is concerned with designing and selling new products to existing markets. For example, businesses may make certain improvements to existing products in order to provide consumers with greater value for their purchase or to create and launch new products alongside the existing product offering of the business.
A classic example of product development is Apple launching a brand-new iPhone every few years. Other examples can be found in the pharmaceutical industry where companies such as Pfizer, Merck and Bayer are investing heavily in research and development (R&D) in order to come up with new and innovative drugs every now and then.
Market Development: Existing Products in New Markets
Market Development is about selling more of the existing products of the company to new markets. The strategy is to enter new customer segments or to grow globally by reaching new geographic areas. If the product of a business is doing extremely well in one market, why not try to reach a new market with the same products?
This is what for example IKEA has done over the last few decades, to become one of the largest furniture retailers in the world. IKEA has begun to spread to markets that are relatively culturally similar to its home country (Sweden) before entering more demanding geographic areas such as China and the Middle East.
The Eclectic Model also known as the OLI Framework) is a great tool for deciding how to reach foreign markets.
Diversification: New Products in New Markets
Diversification strategies are aimed at penetrating new markets with new products that are either connected or entirely unrelated to the existing company offering. Diversification, on the other hand, can be divided into three types of diversification strategies.
Concentric/horizontal diversification (or related diversification) is about entering a new market with a new product that is somewhat related to the existing product offering of the company.
Conglomerate diversification (or unrelated diversification) is on the other hand, about entering a new market with a new product that is entirely unrelated to the company’s current offering. Samsung, which operates in industries ranging from computers, phones and refrigerators to chemicals, insurance and hotel chains, is a perfect example of a conglomerate.
Finally. Vertical diversification (or vertical integration) involves going backwards or forwards in the value chain by gaining charge of operations that used to be outsourced to third parties such as manufacturers, OEMs or distributors.
Ansoff Matrix In Sum
The Ansoff Matrix is a great framework for the structure of the company’s growth options. Market penetration is the least risky of all four, and is most common in day-to-day business.
Diversification is the riskiest because a business is entering a completely new and unfamiliar market with a new and unfamiliar product. However, if a company succeeds in entering many unrelated markets, it has the advantage of having a well-balanced product range that actually reduces the overall risk.
In such a case, it is useful to work with frameworks such as the GE/Mckinsey Matrix or the BCG Growth-Share Matrix.
What is a Ansoff Matrix used for
As stated above the Ansoff Matrix is used by decision-makers to manage the scope of the portfolio of the company. Managers and executives need to determine which of the four alternative strategies is more effective and potentially less costly for their company or organization.
Since the market is one of the two variables that make up the Ansoff Matrix, the tool has been widely described as a marketing planning tool. However, it is primarily used at the business strategy level, rather than within the marketing department of a company.
That’s because growth decisions have a long-term effect on the whole corporation and involve an all-encompassing review of the complexity of the corporation’s portfolio before they are made.
When to use Ansoff Matrix
Many marketing professionals advise that the Ansoff matrix should be used annually to assess whether a company wants to develop or change current products or to expand into new markets. This is a fact agreed upon.
In short, businesses using the Ansoff matrix can determine the best strategy for increasing sales. The matrix can help you determine how to do this by explicitly demonstrating your options, breaking them down into four strategies. Determining which of these is best for your company depends on a variety of variables, including available capital, infrastructure, market place, location and budget.
The idea of interpreting the matrix in this way is to show that risk increases every time a company moves into a new marketing strategy quadrant. Of course, if it is handled correctly, the transformation will bring significant rewards to the company.
Again a successful strategic marketing consultant would be able to study and identify risks, assess if they are worthwhile, establish contingencies and help manage the change.
Using the Tool
It is fairly straightforward to use the Ansoff Matrix to weigh up the risks associated with a number of strategic options.
Step1: Analyze Your Options
The table below helps you think about how you might classify different approaches.
|Market Penetration||Product Development|
With this approach, you’re trying to sell more of the same things to the same market. Here you might:
Develop a new marketing plan to inspire more people to choose or use your product
Introduce a loyalty scheme
Launch price or other exclusive promotions.
Increase the operations of the sales team
Use this Boston Matrix to determine which products warrant more investment and which should be ignored
Buy the rival business (particularly in mature markets
Here, you’re selling different products to the same people, so you might:
Extend the product by making different variants or by repackaging existing products
Create related products and/or services
In the service sector, shorten the time on the market or boost customer service or quality.
Here you are targeting new markets or new areas of your existing market. You’re trying to sell more of the same stuff to different people. Here you might be:
Target various regional markets at home or abroad. Conduct a PEST analysis or use the CAGE Distance Framework to define opportunities and risks in the different industry. Use a range of distribution platforms, such as online or direct sales, if you are already selling by agents or intermediaries.
Use Market Segmentation to reach different groups of consumers, maybe with different age, gender or demographic profiles than your current customers.Use your marketing mix to understand how to reposition your product.
|This strategy is risky: |
There is often no space for using established skills or achieving economies of scale, since you are trying to market entirely different products or services to different customers
Beyond the opportunity to expand your business, the key benefit of diversification is that if one business suffers from adverse conditions, another will not be affected.
Step 2: Manage Risks
Conduct a risk analysis to obtain a better understanding of the hazards associated with each alternative. (If there are a lot of them, prioritize them using the Risk Impact/Probability Chart.) Then, create a contingency plan that addresses those you are most likely to encounter.
Step 3: Choose the Best Option
By now, you may have a sense of which choice is right for you and your organization. You can make sure that it is really the right one with one last step: use Decision Matrix Analysis to evaluate the various factors in each option and make the best choice.
Using a Nine-Box Ansoff Matrix
Some marketers use the 9-box grid for a more sophisticated analysis. This places “modified” products between existing and new ones (for example, a different flavour of your existing pasta sauce rather than beginning soup) and “expanded markets between existing and new ones (for example, opening another store in a nearby town, rather than expanding internationally).
This is useful because it illustrates the difference between product extension and true product development, as well as between market expansion and expansion to genuinely new markets.
Be careful, however, about the three options’ in orange, as they entail attempting to do two things at once without the advantage of a real diversification strategy: absolutely avoiding a decline in the single-product market.
Example of Ansoff Matrix
Ansoff Matrix of B2B Company – Alibaba.com
As of 2020, Alibaba.com is the largest online B2B trading site for small businesses worldwide. Alibaba.com has three main services: Alibaba.com, an English-language platform that handles transactions between importers and exporters from more than 240 countries and regions, 1688.com, a Chinese portal that manages domestic B2B trade in China, and a transaction-based retail website that allows smaller customers to purchase small quantities of goods at wholesale prices.
#1 Market Penetration (Primary Strategy)
How Alibaba applies a market penetration strategy?
The Market Penetration strategy allows Alibaba to lower prices and to use various marketing and promotional tactics to improve revenue in the current consumer segment.
The company provides a range of price cuts and promotions, also runs marketing campaigns and offers the product in new enticing bundles to meet the revenue growth target while remaining on the same market. Aggressive marketing strategies are required when this technique is used in a competitive consumer market.
Alibaba’s strategic goal, linked to a market penetration strategy, is to raise revenue by lowering prices through cost leadership. In this scenario, a link between low cost and low-price leadership is presumed. Another way to accomplish this growth goal is to incorporate innovation in order to create a strong differentiation basis.
It allows Alibaba to grow its consumer base amid the saturation of the market. However, it is also important to remember that market penetration becomes increasingly expensive as the market hits its point of saturation. In that scenario, investing in various marketing and promotional campaigns brings a low return, which allows the organization to consider more intensive growth strategies.
The adoption of market penetration as a primary intensive growth strategy is related to the ability of Alibaba to distinguish its products in addition to cost leadership. The balance of expense and the differentiation of generic strategies underpins this intensive growth strategy.
During the initial phase of expansion, the market penetration strategy played an important role in making Alibaba competitive in its home market. Later, national awareness was used to reach new markets around the world. Brand recognition by high market penetration has also been used as a method to sell new products to current and new customer markets.
While Alibaba is one of the largest global players in the industry, market expansion is still the primary intensive growth strategy, as the company is currently present in multiple consumer markets with further growth potential.
#2 Market Development (Supporting Strategy)
How Alibaba applies market development strategy?
Alibaba uses market development as a growth strategy that encourages market penetration and product development. The company has applied this strategy widely and as a result, is currently present in more than one competing nation.
Effective entrance into new consumer markets has played a key role in making Alibaba a global brand. The key reasons behind the global presence are: low costs, good brand name and flavor. In addition to these factors, active marketing and celebrity promotion strategies have also helped Alibaba to attract new customers and become a market leader in several countries.
Through ongoing investment in research and development, the company is continually expanding its distribution network to reach every corner of the world, especially in developing countries where there is currently a weak presence. However, a corporation has already reached most of the world’s markets; market development now mainly serves as a support strategy and is of secondary importance.
The strategic goal of the Alibaba strategy is to extend the value chain in order to sustain the development of the distribution network. The capacity of Alibaba to reduce costs and maintain a cost leadership role enables the company to effectively execute this intensive growth strategy. Cost minimization helps the increased investment made by Alibaba to reach new consumer markets.
Multinational companies such as Alibaba have four ways of applying this intensive growth strategy: developing new distribution networks, establishing new market segments by charging differing costs, developing new product dimensions or considering new geographic areas.
Geographical expansion involves a significant commitment to resources and it is therefore important for the company to determine whether the existing distribution network and other resources support the decision to enter that specific geographic area.
Entry into culturally distant markets is riskier, since it needs an enterprise to be culturally intelligent and to develop successful knowledge management mechanisms.
Alibaba understands the importance of recognizing culture and incorporating local norms and values into marketing strategies when entering new geographic regions. High cultural intelligence has enabled Alibaba to gain acceptance in culturally diversified consumer markets.
The successful execution of this strategy also allows businesses to undertake comprehensive competition and market intelligence. Well-researched organizational, financial and business data are required to make the right market entry decisions. However, the execution of this approach entails the possibility of alienating current customers.
#3 Product Development (Secondary Strategy)
How Alibaba applies product development strategy?
After its launch, Alibaba has considerably expanded its product line, and its product range has become too wide. It helps the company to cover the risks as it can compensate for the losses suffered from one product line with the profits earned from others. Today the company has more than competitor product brands to represent all over the world. Product development is an effective method for gaining more consumers.
The strategic objective of using this intensive growth strategy is to increase investment in research and development for innovation and new product development. Alibaba’s ability to use the generic growth differentiation strategy helps the product development process and improves the organization’s ability to sell new or new products to grow in existing consumer markets.
The cost-leadership strategy used by Alibaba also supports this intensive growth strategy, as it helps the company to reduce costs and use existing infrastructure to introduce new goods. While the company can use the same resources to broaden the product lines, successful new product creation allows Alibaba to concentrate on research and development and use the new technology needed to follow this strategy.
There are three major approaches open to Alibaba in terms of new product development.
#4 Diversification (Supporting Strategy)
How Alibaba uses diversification strategy?
Alibaba’s portfolio diversification is enabled by its cost-leading generic growth strategy as a cost-reduction capability, and the current infrastructure makes it possible for the company to pursue new product opportunities in new markets.
The strategic goal of a diversification-intensive growth strategy is to broaden the portfolio through successful acquisition strategies. Due to risk factors, the organization focuses on the associated diversification and avoids risky encounters in uncertain regions. However, some examples of the unrelated diversification of Alibaba are selling products from refrigerators, shirts, glasses to pens.
The related diversification strategy is implemented by purchasing productive enterprises after examining business dynamics and changing consumer preferences. For example, in response to increasing criticism from environmental conservation groups, the company attempted to compensate for the loss of declining revenue by investing in green business practices and developing positive brand awareness business partners.
Strategically wise execution of the associated diversification growth plan improves company resilience and helps the enterprise meet long-term growth goals through high market volatility. A well-managed product portfolio with related diversification often provides risk-hedging capabilities, as decreasing trends in some product areas can be balanced by emerging trends in related product areas.
Ansoff Matrix of B2C Company – The Coca-Cola Company
The Coca-Cola Company is the maker of a wide range of non-alcoholic drinks. The flagship product of the company is Coca-Cola and was the first product to be introduced by the company. It was invented by the pharmacist John Stith Pemberton in 1886.
The Coca-Cola Company was launched in Atlanta, Georgia, in 1892 (WII, 2019). The new headquarters are also based in Atlanta, Georgia. Shortly thereafter the company expanded quickly throughout the United States with the aid of its flagship product through advertisements and promotions.
Over the years, the company also acquired various other brands to increase its market share. The company has also spread to different foreign markets and launched a range of other products under the brand name.
In 2018, the company generated revenue of $37.27 billion and had more than 62,600 employees (US SECP, 2019). The company manufactures concentrate syrup, which is then sold to different companies with the rights to bottle Coca-Cola products.
#1 Market Penetration (Primary Strategy)
How Coca-Cola applies a market penetration strategy?
Promoting existing products in existing markets is referred to as market penetration. One of the strategies that Coca-Cola uses to enter markets is to blend drinks with a range of cultural and other activities. One example is the association of Coca-Cola with Christmas, both of which have a red color in common. The same goes for the connection between Coca-Cola and Eid.
The company also reduces competition by the acquisition of rivals. It also provides various types of bottles and tin cans to meet the needs of different customers. Coca-Cola also provides different discounts and bundled pricing at various events to improve sales.
Coca-Cola also provides free samples at marketing activities to help consumers get to know their products. The company also actively advertises its goods using different advertising channels. All of these steps help to increase the accessibility of Coca-Cola goods to its current markets.
#2 Market Development (Supporting Strategy)
How Coca-Cola applies market development strategy?
New markets for existing products are referred to as market developments. Coca-Cola already operates in 200 countries (US SECP, 2019). However, there are certain territories and regions in these countries in which the company does not operate. It can be geographically extended to these markets with the help of the company’s various products.
It also provides different package sizes to accommodate new markets in order to gain acceptance. During its launch in new countries, the business also takes on celebrities and sports stars as part of promoting brand awareness and creating customer loyalty.
In order to advertise itself, it often prints the pictures of these individuals on its goods. It is often associated with various activities and ideas, such as music, festivals and other cultural events. Prices are often reduced during launch in order to draw buyers.
#3 Product Development (Secondary Strategy)
How Coca-Cola applies product development strategy?
Coca-Cola promotes the development of products by promoting new products in developed markets. As part of its product growth plan, Coca-Cola frequently introduces new beverages and versions of its current brands.
These include versions such as Diet Cola, Cola Zero, Fanta in different fruity flavors, zero and dietary variants of Sprite, and so on. In each case the new product varies in flavor, labelling and is aimed at a new market segment.
It also limits certain products to certain geographical regions on the basis of market demand. Not all new products are launched on the market. For example, the number of Fanta variants offered in Pakistan is much lower than that offered in the US or even in India.
New products are typically released at lower prices in order to gain acceptance. Coca-Cola, however, maintained the emblematic signature label and bottle as it did after a century.
#4 Diversification (Supporting Strategy)
How Coca-Cola uses diversification strategy?
Coca-Cola has repeatedly diversified into new brands in new markets. Vitamin water is an example of Coca-extension Cola’s to the realm of energy drinks. Aquafina Mineral Water is another example of diversification of similar industries.
Unrelated diversification is in terms of selling Coca-Cola merchandise such as clothes and fridges. Horizontal diversification enables the business to extend to different beverage markets beyond the carbonated beverage market.
The company also aims to launch itself into numerous other sectors and to boost sales and promote its brand name. The company can easily use its powerful brand identity to diversify its market in similar and unrelated domains.
Ansoff Matrix tips
To perform a Ansoff analysis, some valuable tips are:
- Collaborate-there would be a better result for a study with multiple viewpoints.
- Using the skills and resources inside the organization that are already available.
- Along with other approaches, such as SWOT analysis, Porter’s Five Powers, competitor analysis, or scenario preparation, use Ansoff Matrix.
- To track changes in the market climate, integrate the study into an ongoing process.
- Try not to get bogged down by gathering large quantities of quantitative information without adequately evaluating and interpreting the data.
- Don’t leap to the past or present-based conclusions about the future.
Benefits and Limitations of Ansoff Matrix
There are many benefits of the Ansoff Matrix, including:
- Easy to design – This is basically a 2×2 matrix with 2 variables on the X-axis (Existing & New Products) and 2 variables on the Y-axis (Existing & New Markets). The order of the variables is not important.
- Works as a visual communication tool – it makes it easier for decision-makers to imagine the actual position of their business. From there he/she will trivially map the path to be taken. It takes very little time for the current vendors, customers or staff to make new business decisions, as the matrix itself is self-explanatory (a photo is worth a thousand words)
- Helps in estimating potential risk – the matrix enables a decision maker to quantify potential risk before shifting from one quadrant to the other.
Some limitations of the Ansoff Matrix include the following:
- Lack of depth: by concentrating exclusively on goods and markets, the model has been criticized for being too basic and impractical.
- Critical elements ignored: Critical variables outside product and demand are neglected (e.g., competition). In addition, there is no cost-benefit analysis of the various methods.
- Hard to predict the impact: the Ansoff Matrix is not secure and the degree of risk associated with each strategy cannot be guaranteed. After all it’s hard to know how the goods will take off and how the market will react.
- Outdated: Since it was developed in the 1950s, the Ansoff Matrix is often seen as out of step with today’s market strategies.