There comes a time for every business when you need to evaluate growth opportunities – entering new markets or launching new products. This will bring many questions to mind as you consider which options will provide the best return for any considerable investment that you’ll need to make to grow your business.
The Ansoff matrix is a great strategy tool for helping you determine a growth strategy for your business. This is probably the most commonly used tool, apart from a basic SWOT.
What is the Ansoff matrix?
The Ansoff matrix is also commonly known as the Product/Market grid or matrix. It shows 4 options for growth by matching up existing and new products with existing and new markets, plotted on a matrix. It helps to highlight the risk that a particular growth strategy may expose you to as you move from one section of the matrix to another. BusinessDictionary.com defines Ansoff matrix as a strategic marketing tool that links a firm’s marketing strategy with its general strategic direction. The approach offers four growth strategies that include market penetration, market development, product development and diversification. The Cambridge Dictionary also defines it in simple terms. It says the Ansoff matrix is, “… a way of examining a company’s existing products and markets, showing products it could start to make and markets it could enter: The Ansoff matrix presents the product and market choices available to an organisation.”
The four growth strategies are:
- Market penetration – This is simply selling more of the same products to existing customers. To do this, a business needs to find new ways to increase customer loyalty and grow customer lifetime values. You might improve your order process, making it easier for customers, extend your business hours or make adjustments that improve the long-term appeal of your offering.
- Market development – For some, the best approach is to attract new customers to an existing product. New customers can be defined by their geographic location – a new country, for example – or they can be an entirely new demographic. If your business sells a tablet computer that traditionally appeals to business users, you might consider a new campaign that uses different sales channels to target university students. However, it’s important to determine whether there’s untapped demand for your product and whether your business can support that demand.
- Product development – This is creating new products or variations of your products to sell to your present customers. A suncream manufacturer might adapt its product to last longer. Alternatively, the company can look at other ways to enhance the product’s aesthetic appeal or improve it in other ways. Any new developments may be influenced by customer feedback.
- Diversification – Considered to be the highest risk strategy, this is selling new products into new markets. A good strategic marketing consultant can help the business to look at whether it has the skills and infrastructure to support such a move. Diversification can work well if the business already has the foundations in place – a brilliant supply chain, for instance – that can be easily adapted to suit a new geographic market and product. Larger organisations might choose to acquire another business entirely to achieve diversification.
The four strategies form a matrix, grouped by present market approaches: market penetration and product development, and new market approaches: market development and diversification. They can also be grouped as present product: market penetration and market development or new product: product development and diversification.
What is the Ansoff matrix used for?
In short, businesses that use the Ansoff matrix can determine the best strategy for increasing sales. The matrix can help you decide how to do this by demonstrating your options clearly, breaking them down into the four strategies. Determining which of these is best for your business will depend on a number of variables including available resources, infrastructure, market position, location and budget.
The idea of viewing the matrix in this way is to demonstrate that each time the business moves into a new marketing strategy quadrant, risk is increased. Of course, if managed correctly, the transition can reap considerable rewards for the business. Again, a good strategic marketing consultant will be able to research and define the risks, determine whether they’re worthwhile, develop contingencies and help manage the transition.
When do you use the Ansoff matrix and how often?
Many marketing professionals advise that the Ansoff matrix should be used annually to determine whether a business needs to improve or adjust existing offerings or venture into new markets. We support this advice.
We applied the Ansoff matrix when exploring growth strategies for tray storage manufacturer Gratnells . The tool helped us see the level of risk associated with different strategies weighed up against the potential return. We considered a number of factors and established the veterinary sector as a profitable new market for Gratnells to enter into. We’ve just completed our first year in the new market. Brand awareness is increasing, credibility is high, and sales are growing.
Who developed the Ansoff matrix?
The Ansoff matrix is named after its Russian-born inventor, Igor Ansoff, who, according to the Ansoff Associates International website, was considered to be the “Pioneer and Father of Strategic Management”. Ansoff was particularly brilliant because his thoughts on “applying strategic thinking to businesses, bridging the gap between concepts and practice” are internationally revered and can be attributed to the success of many multinational corporations worldwide. The Harvard Business Review first published the Ansoff matrix in 1957.
Every Thursday, we’ll take a look at a different strategy tool. We use a variety of strategy tools to help our clients define their marketing strategy. Essentially, the tools help you with your thinking and decision making during the strategic marketing planning process. We hope to give you a better understanding of the tools available, and how and when they can be applied.
If you’d like to know more about how to use the Ansoff matrix or strategy tools, we’re here to help. Contact us on 01206 848 458
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