Ansoff’s Matrix: A Tool for Strategic Business Development

Ansoff’s matrix is a chart that can be used to analyze the product lines and market segments of a business. It can also be referred to as product/market matrix. The Ansoff’s matrix is a relevant tool for organizations because it can be used by an organization to determine its product or market strategy. Ansoff’s growth matrix suggests that the ability of a business to grow depends on whether it markets an existing or a new product in an existing or a new market. The construction of an Ansoff’s matrix begins with the identification of a series of suggested growth strategies that can set the direction for strategic management. This can be illustrated in the diagram below.

  • Market penetration

The first cell of the Ansoff’s matrix represents market penetration as a one of the possible business strategies for a company or business organization. It involves the strategy of selling existing products to existing markets. This strategy has various objectives for the business. First, it seeks to maintain or increase the market share of existing products (Ansoff, 1965). This is normally achieved through competitive pricing strategy, sales promotion, advertising and personal selling. Market penetration also secures dominance of growth markets for business organizations. It also entails restructuring of a mature market by driving competitors out of the market through aggressive promotional campaign and pricing strategy enhanced in such a way that it becomes difficult for competitors to survive in the market. The last objective of market penetration is that it targets to increase usage of existing products by existing customers through such mechanisms as loyalty schemes.

Although this strategy is the least risky of all the four strategies in the matrix, it also has some risks. One of the risks is that the changing and turbulent business environment may make the existing products obsolete or less attractive as competitors attempt to introduce new products that can make the existing products less valued. Market penetration may also lose customers through changes in demographic structure of the existing markets. As the environment changes, a new generation of customers may emerge in the market which demands different products from the existing products; and the existing population in the existing market may also change in future as the young people move to other areas, leaving old people in the market.

  • Market development

Market penetration refers to a business strategy whereby a business sells existing products into new markets (Ansoff, 1965). Some of the approaches to this strategy include: selling in new geographical areas e.g. new countries; new distribution channels e.g. moving from selling through retail stores to selling through online channels; and different pricing mechanisms to attract new customers or develop new market segments.

This strategy is more risky than market penetration because it targets new markets. There is no guarantee for the business that the new market segments created will respond positively to the business product offerings. Another risk is that it may receive strong competition from existing firms which may make it difficult for the business to enter the market.

  • Product development

In this strategy, a business introduces a new product to an existing market. In this case, the business develops new competencies and modified products to please the existing customers (Ansoff, 1965). This strategy is mainly applicable if the business wants to differentiate its products in order to remain competitive. A company that exercises this strategy relies heavily on research and development, technology and innovation in order to come up with new or modified and differentiated products. The business also needs to understand customer needs in order to develop new products that can meet such needs. It should also be the first in the market to product such new products.

The risk of this strategy is that changes and turbulence in the business environment may lead a company to produce new products that do not meet customer needs, especially if an appropriate research is not conducted to determine the right customer demands.

  • Diversification

This is a growth strategy in which businesses introduce new products in new markets (Ansoff, 1965). This is the most risky strategy among the four strategies in Ansoff’s matrix because it involves selling new products to a new environment where the business has little or no experience. However, if the business affords the right balance between risk and reward, diversification may be highly rewarding. One of the risks of this strategy is that customers may not respond positively to the new products. Furthermore, the new markets may not be composed of the right customers for the business.

Leave a Reply

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