The Ansoff matrix presents the product and market choices available to an organization. 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 organization 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 the 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, organizations make the choice between for example, taking an option and not taking it. The 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), ³choice 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 organization’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.
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 organization. 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 are 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.
Another strategic option for an organization 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 utilize 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.
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 maneuver 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 minimized by moving into related markets (Ansoff,1989).