January 18th, 2012 Ansoff Matrix
To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm's present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff's matrix is shown below:
Ansoff Matrix Growth Strategies
Ansoff's matrix provides four different growth strategies:
1. Market Penetration - the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share.
2. Market Development – the firm seeks growth by targeting its existing products to new market segments.
3. Product Development – the firms develops new products targeted to its existing market segments.
4. Diversification - the firm grows by diversifying into new businesses by developing new products for new markets.
Selecting a Product-Market Growth Strategy
The market penetration strategy is the least risky since it leverages many of the firm's existing resources and capabilities. In a growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if competitors reach capacity limits. However, market penetration has limits, and once the market approaches saturation another strategy must be pursued if the firm is to continue to grow.
Market development options include the pursuit of additional market segments or geographical regions. The development of new markets for the product may be a good strategy if the firm's core competencies are related more to the specific product than to its experience with a specific market segment. Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy.
A product development strategy may be appropriate if the firm's strengths are related to its specific customers rather than to the specific product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers. Similar to the case of new market development, new product development carries more risk than simply attempting to increase market share.
Diversification is the most risky of the four growth strategies since it requires both product and market development and may be outside the core competencies of the firm. In fact, this quadrant of the matrix has been referred to by some as the "suicide cell". However, diversification may be a reasonable choice if the high risk is compensated by the chance of a high rate of return. Other advantages of diversification include the potential to gain a foothold in an attractive industry and the reduction of overall business portfolio risk.
The product/market grid of Ansoff is a model that has proven to be very useful in business unit strategy processes to determine business growth opportunities. The product/market grid has two dimensions: products and markets.
Over these 2 dimensions, four growth strategies can be formed:
- Market penetration,
- Market development,
- Product development, and
Company strategies based on market penetration normally focus on changing incidental clients to regular clients, and regular client into heavy clients. Typical systems are volume discounts, bonus cards and customer relationship management.
Company strategies based on market development often try to lure clients away from competitors or introduce existing products in foreign markets or introduce new brand names in a market.
Company strategies based on product development often try to sell other products to (regular) clients. This can be accessories, add-ons, or completely new products. Often existing communication channels are leveraged.
Company strategies based on diversification are the most risky type of strategies. Often there is a credibility focus in the communication to explain why the company enters new markets with new products. This 4th quadrant (diversification) of the product/market grid can be further split up in four types:
- horizontal diversification (new product, current market)
- vertical diversification (move into firms supplier's or customer's business)
- concentric diversification (new product closely related to current product in new market)
- conglomerate diversification (new product in new market).
Although already decennia old, the product/market grid of Ansoff remains a valuable model for communication around business unit strategy processes and business growth.