In this article, we will learn about the Ansoff matrix and its 4 components.

The Ansoff Matrix, also known as the Ansoff Product/Market Growth Matrix, is a strategic planning tool used to analyze and develop four alternative paths for the strategic development of a business or company. In summary, this matrix helps owners, managers, and marketers in business management by analyzing strategic options for further growth while considering the potential risk of the option. The Ansoff Matrix was named in honor of Igor Ansoff after he published an article titled “Strategies for Diversity” in the Harvard Business Review. This matrix separates growth options related to new products and markets along with existing markets and products. Finally, this matrix offers these options:

  • market penetration
  • Product development
  • Market development
  • Diversification

How to use the Ansoff matrix

As mentioned above, the ANSF matrix is ​​used by decision-makers to manage the organization’s portfolio. Managers and business owners must decide which of the four possible strategies will create more benefits and less risk for them.

Since the market is one of the two variables that make up the matrix, this tool is considered by most people as a marketing planning tool. Although this matrix is ​​mainly used at the level of organizational strategies, rather than being used by marketing departments. This is because the decisions related to the growth of the organization have a long-term impact on the entire organization and require a comprehensive analysis of the organization’s portfolio before implementation.

Advantages of the Ansoff matrix

Simple design – this matrix is ​​a two-by-two matrix with two variables on the horizontal axis (current and new products) and two variables on the vertical axis (current and new markets). The order of placing the variables has no particular form and is unrelated.

The matrix acts like a visual communication tool – it makes it easier for the decision-maker to visualize the company’s current position. From here on, he can design the map of the route to be taken. Relating existing suppliers, clients, and employees to newly made decisions at organizational levels requires very little time because the matrix itself is self-explanatory.

Helps in predicting potential risk – the matrix allows the decision maker to calculate the potential risk before moving from one quadrant of the matrix to another.

As we mentioned above, there are 4 different growth strategies that the organization can choose from.

1- Market Penetration

The first quadrant of the ANSF matrix, located at the top left, is the starting point for most organizations that are re-deciding their strategic direction. This is by far the most obvious strategic direction for an organization because it tries to gain more market share by developing existing markets with its current products.

Since this is based on the organization’s current strategic capability, it does not require the company to expand into new markets with new products. As a result, this method requires less risk because the focus of the organization remains unchanged. Although this method is considered among the safe methods, it still has several different concerns that we will take a look at.

The interaction of competitors

Increasing current market share by focusing on market penetration is likely to increase competition in an industry. As competition in the same product range intensifies, problematic situations such as price wars or spend-on-marketing campaigns arise. This usually increases the cost and energy required to penetrate the market. In many cases of market penetration, only companies with a highly visible competitive advantage can grow their market share.

Competitive advantage is usually unrepeatable. When companies face intense competition, it may be better to take all the companies that are in trouble and combine them into a single company. This way, you can quickly move towards gaining the largest market share in your industry.

Economic constraints

Sometimes it’s not the right time to focus all your marketing activities on penetrating a current market. If the market is going down, for example in the stock prices of the target market, it is best to stay still. Instead of spending various resources to penetrate the market, it can be better to change the focus of the organization. When this happens, you can move from the first quadrant of the Ansoff matrix to the second, third, and fourth quadrants.

Legal restrictions

Decisions to penetrate a market usually have one end goal, and that is to gain the largest share of the target market. In most countries, however, some laws try to control organizations that gain too much market power. Many laws attempt to limit and curb mergers and acquisitions that can greatly increase the power of an organization.

Practical example: an electronics company experiences significant growth and tries to merge with another electronics company in its country. In most cases, both of them are faced with numerous legal regulations. In Europe, for example, the European Commission can intervene in any link in the European market and force companies to reduce their power so that there are ways to develop competition.

When it comes to market penetration, there are two ways to go about it.

Downsizing strategy: The business stops all its activities in various departments and then focuses all its activities on the most useful and valuable services and products it has. This strategy requires an active solution towards an in-depth analysis of the organization’s strategic capabilities.

Integration strategy: As the name suggests, the organization continues to do what it already does while integrating its activities into existing products and services. This is called a defensive strategy.

Practical example: One of the best examples related to market penetration is the smartphone industry. About 7-8 years ago, companies like Microsoft, Blackberry, and Apple dominated the smartphone market share in America. Android phones could only have less than 10% of the market share. Today, the main competitors in the American smartphone industry market are Apple and Samsung. The market share of these two companies is now the same in the American smartphone market.

2- Product development

Product development in the Ansoff matrix is ​​a strategy in which organizations launch either a new product or a modified product to existing markets. In marketing, this issue is also called product line expansion. Usually, this method involves more risk because it has different degrees of diversity. When producing a new product, some companies use the same basic technology. This reduces the risk involved in developing a completely new technology.

A clear example would be Apple’s original operating system. Apple started growing with the release of the iPod in October 2001. Apple then went on to produce the iPhone, iPad, iWatch, and more.

The basic technology and core used behind all these products are similar to each other. They take the same operating system and use it to create new products while targeting the same market as before. The products produced by Apple meet different needs and as a result, require extraordinary activities in the field of research and development units.

Possible risks

It involves different degrees of diversity: When developing new products, organizations are forced to diversify not only in the technologies necessary to support product development, but also in new research departments, tools, employees, and more. Simply put, if a company diversifies its product line, it needs to also diversify all the components that contribute to the production of this product line.

New strategic capabilities: Most of the time, new product development requires heavy investment in new technologies. In all cases, a company cannot use current technologies to develop new products, such as the example of Apple.

Practical example: Even considering the example of Apple, each new follower product has brought new and innovative technologies to the hands of customers. The basic and core technology is only used as a basis for creating and mastering new technologies. As a result, product development generally involves heavy investments, which are accompanied by the existing risk of project failure.

Another example in this case is Tesla and its Model 3 sedan. Early customers pre-ordered the Model 3 in March 2016, but Tesla then informed customers that their cars would be delivered in early 2019 instead of late 2018. Additionally, Elon Musk pushed back his original goal of producing 5,000 Model 3s per week by June 2018 for several weeks in a row. Most of these delays were due to unexpected problems in the production of new batteries for cars. The new lithium batteries required different manufacturing methods, and due to several problems, the company could not deliver the components on time.

3- Market development

Market development, as one of the strategic options of Ansoff’s matrix, offers an alternative way to the costly and risky product development strategy. This method works by offering the organization’s current products and services in completely new markets.

In most cases, market development requires product development and planning as well. These two things move together. If a company is expanding its geographic reach and begins to target European markets in addition to the American market, then the products may also need to undergo several changes. At a minimum, the packaging of the products should at least be different. The language used to write product ingredients should be different from English packaging. In addition, product branding may also change according to the trends and differences found between the people of America and Europe.

This strategy itself can consist of one or two of the following.

New users: Sometimes some products that are constantly used in one industry find better use in another industry. A concrete example would be Listerine. Listerine was originally marketed as a floor cleaner until the company decided to use it as a bad breath eliminator. The interesting result is that the company’s income increased from 115 thousand dollars to more than 8 million dollars in 7 years. Listerine’s target audience changed from cleaning companies, working women, and housewives to anyone in the world who wanted to keep their mouth from smelling bad. Similar to Listerine, many examples in history prove that targeting new users can be a successful strategic decision.

New Geography: One of the best examples of market development by targeting new geographic areas is globalization. When a company goes global, it can target new markets and thus new users. This is why we have two models that are sometimes referred to side by side. Of course, market development through globalization is not the only possible way. A small retail store can be spread over different parts of the city or towns, thus targeting a larger geographical area.

The problems and risks mentioned in the Ansoff matrix product development quadrant can also arise in market development strategies. Many business planning tools can help you analyze the market before entering it. Two of the most common tools used for environmental analysis are PESTEL Analysis and Porter’s Five Forces.

It is difficult to predict the exact resources needed and the exact results of the production time of a new product. Similarly, when you want to market existing products in new markets, market developers may not have the knowledge and skills necessary to make the necessary progress in a market with unfamiliar users.

Coordination and management of various activities become difficult due to the need to cater to new users, geographies, and classifications. Although this issue is more directed towards the field of market development globally.

4- Diversification

Diversification is by far the riskiest strategic choice in the Ansoff matrix. It is a strategy that fundamentally shifts an organization’s focus toward entering entirely new markets with entirely new products.

Of course, diversification can be seen in each quadrant of the Ansoff matrix. Even when entering new markets or developing new products, an organization is diversifying in some way, but Ansoff’s matrix helps us visualize the extent to which a company must go for diversification when it wants to move away from its current products and markets.

To be more precise, going from the first quadrant (market penetration) to the second or third quadrant requires less effort for the business than going directly to the fourth quadrant.

Diversification drivers

When deciding to adopt a strategy based on this, there can be several reasons for doing so:

The economy of concentrated points

Various organizations have current resources and abilities that sometimes they do not use or if they are used, they are not used to their full potential. These capabilities can be applied to a variety of activities, creating something called a “point economy”. In this way, these resources and abilities are used by turning them into new activities.

Practical example: Many universities have associations and buildings within them that are not used throughout the year. During the summer, there are almost no full-time students at this location. At least this can be said for American universities, other universities like Europe have a slightly different situation.

As a result, most universities use their buildings and faculties at this time for conferences, summer camps, and the like. A better example would be AWS. Until today, Amazon has been able to own facilities related to American servers with its great computer power. They do not use most of these facilities consistently. As a result, Amazon decided to provide cloud services to users all over the world.

Increasing the competition in organization management

This factor is based on the economies of scale model mentioned above. However, instead of considering the use of current resources in new markets and product categories, we consider core managerial capabilities.

In short, managers who are business decision-makers along the entire length of the business chain gain valuable knowledge and experience. They can then transfer this knowledge and experience to areas of expertise that are not directly related to the organization’s direct products and services.

Bilateral financial assistance: Having a good and diverse range of businesses can allow a business to increase its market power to a great extent. Most diversified organizations can afford bilateral financial contributions from one or more businesses and those that are more profitable. In this way, a business can have a very powerful competitive advantage that can be used to push back competitors. In most cases where one business helps another, it faces strict rules to keep competitors away.

Joint Tolerance: This section can be broken down into two key indicator factors:

Spreading risk: Many companies diversify the core businesses they manage to spread risk among different industries. Although it is in the interest of business owners to invest in businesses that are focused on a very specific industry. Since most investors usually diversify their portfolio by themselves and do not need to diversify a business. On the other hand, for private businesses, it is better to diversify the risk among different activities so that one of them can keep the other in a downward situation.

Responding to market rejection: If a market or industry becomes saturated or slow to respond to marketing activities, businesses may decide to diversify into other industries or activities.

Pressure from powerful shareholders: Sometimes shareholders, if they become too powerful, can directly influence the direction of the company. This is something to be very careful about. Pressure from shareholders can have good results in terms of income in the short term, but in the long term, it can easily damage the business and ultimately destroy the company’s efforts to grow.

cooperation (synergy)

In general, it is important to analyze the environment before deciding to diversify. Many companies decide to find partners to share resources. The ultimate goal is to get the right cooperation and as a result further growth. Sometimes, negative cooperation can be more damaging than no cooperation at all. This means that sometimes different companies shouldn’t try to define each other.

Practical example: One of the best examples of positive cooperation can be Disney and Pixar. Disney bought Pixar in 2006 for $7.4 million, and since then, they’ve made more than 10 full-length animated films together. All of these animations have earned more than $360 million each and have ultimately made Disney more than $5 billion in profit over 12 years.

Of course, there are cases where two businesses can create a negative cooperation.

Practical example: Snapple’s purchase by Quacker Oats is one of the biggest failures in the history of business mergers and partnerships. Quaker Oates could not bring any added value to the merger and had no practical idea of ​​how to run this particular business. As a result, they ended up losing $1.6 million a day until they sold the company.

Diversification and performance

In general, diversity and performance follow an inverted U graphic relationship. This means that companies that are not diversified show low performance. Companies that have created limited diversification show a much higher performance, and finally, those that have done too much diversification and as a result have diversified in unrelated activities, have a much lower performance. have. Sometimes even lower than companies that have not diversified at all.

  • Relevant diversification: includes activities that can go beyond the company’s current products and markets, but still fall within the capabilities of the company’s value network.
  • Irrelevant diversification: You probably guessed that this involves the development of products and activities that are not part of the company’s current capabilities or value network, or cannot be managed.

As a general rule, a very deep analysis should be done before diversifying into different activities. Each diversification needs to be tested about the organization’s capabilities. Otherwise, it can further damage the business.

Leave a Reply

Your email address will not be published. Required fields are marked *