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ANSOFF GROWTH MATRIX

Igor Ansoff in 1957, developed a matrix based upon markets and products to show the possible
options that organisation have to fill the planning gap.
The Ansoff Matrix identifies four possible combinations:

existing products which they can sell to existing markets

existing products which they can sell to new markets l

new

products which they can sell to existing markets l

new

products which they can sell to new markets.


Using these combinations gives a choice of four possible basic strategies:
Figure 7.1: The Ansoff growth matrix

Market
Penetration

Market
Development

EXISTING NEW
Product
Development

Diversification

PRODUCTS

PRODUCTS

EXISTING
MARKETS

NEW
MARKETS

Market Penetration Strategies


Market penetration means taking advantage of opportunities to increase market share. This
strategy same product/same market will be appropriate when a market is growing and is not
yet saturated. Penetration can then be achieved in one of two ways:

Attracting non-users of a product

Increasing the usage, or purchasing rate, of existing customers.

The strategy will usually be implemented by increasing activity on one or more of the marketing
mix elements for example, using more intensive distribution and aggressive promotion in order to
increase market awareness and availability.
We noted that the strategy is appropriate when the market conditions are that it is growing and not
yet saturated. We can explain this further as follows:

If a market is expanding, it may be relatively easy for an organisation to expand sometimes


because a competitor creates a bigger demand than it can satisfy itself.

In mature markets, penetration is more difficult, because the market leaders have a distinct
cost structure advantage.

In declining markets, there is little opportunity for a company to build its market share unless
others withdraw from the market, and a company perhaps has to hang in there until others
are forced to go never a very comfortable situation.

Market Development Strategies


This strategy same product/new market is often found when a regional business wishes to
expand or if new markets are emerging because of changes in consumer habits. It can also occur
when a new use has been discovered for an existing product.
Implementation of this strategy involves appealing to new market sectors, geographical regions
and new countries not currently catered for and may mean a repositioning of products as well as
considering new distribution methods such as franchising or channels.
a. New Segments
Not all consumers of a product are the same. They can differ in terms of their characteristics
such as age, sex, income, race, location, lifestyle, etc., and in terms of their needs, such as
preferences in respect of price, brand or quality expectations, etc. Consequently, markets
are best thought of in terms of their different segments, rather than the total market as a
whole.
Different segments of the market, then, cater for different, definable, groups of consumers. It
is possible, therefore, for a company to operate successfully by having a foothold in a
number of different segments in its market, without actually being dominant in any one
segment.
A company can then develop by entering a "new" segment i.e. one it was not operating in
previously. It may even be possible to identify a segment that has not been identified
previously, and so be the first to enter.
(b)

New Territories
Another source of market development, very relevant to the International context, is in
entering new territories, such as new geographical territories. This may or may not be
successful. Past failures include Marks and Spencer's attempt to enter the American market
through Brooks Brothers, and Boots' retreat from Holland and Japan. On the other hand, in
the drinks sector, both Budweiser from the US and Foster's from Australia have successfully
entered the UK market for lager, despite European companies having been there much
longer.

(c)

New Uses/Reinvention
New uses can often be found for existing products/technologies and so be a means of
market development. The car brands of the Volkswagen Beetle, the Mini and the Fiat 500
have all been reinvented from being mass market brands to being niche brands. Lucozade
was originally a drink which was drank when people were ill, but has now been repositioned
as a health / energy drink mainly for sports people. Running shoes are now seen as fashion
footwear.

(d)

Heavier/More Frequent Usage


It may be possible for a company to expand by convincing its customers to use its product
more frequently. This type of market expansion can be seen in the cosmetics sector for
example, where shampoo manufacturers advocate the frequent use of their products.

Product Development Strategies


With this strategy new product/existing market an organisation develops new products to
appeal to its existing markets. This may simply be a product "refinement" for example, a change
of packaging or taste or a completely new product which aims to satisfy the same consumers.

Product development is most prevalent when strong branding exists. Promotional aspects will
emphasise the added qualities of the "new" product and link it specifically to the security of, and
confidence in, the brand. This strategy builds on customer loyalty and the benefits to be gained by
purchase. Other marketing mix elements, such as distribution, may remain unchanged.
One example of this approach is Kodak, which saw its annual sales of film decline from 15 billion
dollars to 200 million dollars in the five years to 2010 and were late into the digital camera market,
but have successfully used their technology in the development of printers.

Diversification Strategies
Diversification new product/new market is the most risky strategy (as we shall consider below),
but also offers considerable gains. It is sometimes introduced so that a company does not
become too dependent on its existing SBUs, in which case it is a form of
"insurance" against potential disasters that could occur in the event of drastic environmental
changes. It can also simply be a means of growth and expansion of power.
There are two basic approaches to diversification:
a. When a company develops beyond its present product and market whilst remaining in the
same area, this is described as related diversification. For example, a newspaper
expanding by taking over a radio station remains within the media sector. It has built on its
present strengths by using its expertise to develop new interests in the same sector.
b. The term unrelated diversification is used to describe a company moving beyond its present
interests into unrelated markets or products. For example, when it considered diversification
targets, Philip Morris believed that the core competence it had developed in marketing
cigarettes could apply to other, similar markets. Based on this belief, the company
purchased Miller Brewing and then used the Philip Morris marketing skills to move the Miller
brand from seventh place to second in its market.
Another example is that of General Electric. Jack Welch, the founder of GE transformed the
organisation from a purely manufacturing company into a more diversified company with an
increasingly important service component. In his 1996 annual report, Welch wrote: "Services
is so great an opportunity for the Company that our vision for the next century is that GE is 'a
global service company that also sells high-quality products' ". When asked if GE was going
to become a more productoriented or service-oriented company, Welch replied, "It's got to be
a big combination...
It's an integrated game." In 1996, GE Capital Services earned US$4 billion. In 2005, GE
services agreements increased to $87 billion, up 15% from 2004. In particular, financial
services revenues increased 12% to $59.3 billion.
Diversification can bring a number of advantages to a company.
a. Related diversification can:

take advantage of existing supply chains, leading to continuity, improved quality,


etc.

lead to control of markets, by guaranteeing sales and distribution through tied


outlets
take advantage of existing market expertise and knowledge in the company when
expanding into new activities

(b)

provide better risk control, through no longer being reliant on a single product in the
market.

Unrelated diversification can:

exploit under-utilised resources

provide movement away from declining activities

spread risks by avoiding having "all the eggs in one basket"

reduce seasonal peaks and troughs l create greater positive synergy.

Firms can diversify by producing their own new products or by taking over some other product. In
the latter case there are two main types of diversification integration (which may be vertical or
horizontal) or conglomeration.

Vertical integration

This involves the acquisition of some other enterprise in the chain of distribution between the
manufacturer and the customer. It can be either "forward", i.e. towards the customer, or
"backward" towards the source of raw material.
For example, a company dealing in writing stationery may vertically integrate forward by
taking over a retail outlet to sell its products, or backward by taking over a paper mill.
Although there will obviously be control benefits to be gained in either of these examples, the
company will be dealing with a product, or products, and markets which are new to them.

Horizontal integration

This is the acquisition of another organisation that has a feature that is desired i.e. the
acquired organisation may be using similar materials or components for which they have a
monopoly of supply. This is particularly relevant when materials, etc. are in short supply.
The company that is acquired may use similar production methods and have greater
capacity; or its distribution channels may be highly effective and would prove advantageous;
or it may have some other quality which could be seen as a benefit for example, Johnson
Brothers (china manufacturers) taking over the Wedgwood china company and capitalising
on the Wedgwood brand and reputation.

Conglomeration

This strategy moves the firm away from its existing product-market situation into an entirely
new area in order to satisfy a primary objective. Quite often this is done as a short-term
activity that will allow an organisation to recover from a temporary setback in market
conditions.
Note that diversification does not always improve a company's business. For example, high street
banks who decided they could operate successfully in the property market by buying up estate
agencies found themselves having to dispose of the businesses at a loss when the market
collapsed.

Risk and the Ansoff Model


There are different levels of risk associated with the different Ansoff product/market quadrants. In
general, these are as follows:
Risk factor
Existing product/existing market

Existing product/new market

New product/existing market

New product/new market

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A company selling the current product to the current market is in the safest position. All key factors
such as buyers, distribution, competition, are known.. Once the company begins to change some
aspect, risks occur. With "new" products to existing markets there is always a danger that the
customers will not adopt the new product and, possibly, that the new product will have an adverse
effect on the existing range. Likewise, unknown market sectors, or regions, can be risky and, of
course, the unknown variables involved in diversification make it the most risky strategy of all.
The risk element can vary according to the competences of the organisation. For example, if it has
proven expertise in new product development, particularly with regard to innovation, then the risk
element connected with new products will be lessened the Apple Corporation is a good example

with products such as the IPod. Similarly if an organisation has proven international market entry
capabilities, then the new market risk element will be reduced.
As has been noted earlier, there has been convergences in many markets, so that whilst the Indian
youth market, for example, may at first seem quite different to the French youth market, it has
some key similarities. These will lead to the same, or very similar, buyer behaviours and hence the
new market element of risk will be low.

Use of the Ansoff Model


Ansoff's model is one which is so widely used that you cannot afford not to know it really well.
There is no doubt that it is extremely useful in deciding which strategy to adopt in a given set of
circumstances, and its value can be seen in considering the following examples: l
McDonald's moving into growing coffee bar market with the introduction of Mc Coffee.

Nestl developing new sectors of the coffee-drinking market by introducing coffee capsules
and machines for domestic use.

Honda using their proven competence in small petrol engines from their motorcycles in
developing small engines for products such as powered lawn mowers and portable
generators.

Pepsico using their business expertise in soft drinks on marketing bottled drinking water in
countries where the supply of safe public drinking water is currently a problem.

However, you should recognise that the model is not perfect as it does not cover everything.

It takes no account of any environmental factors.

It does not give any room for judgment on profitability.

It can inhibit the creativity of planners.

It should also be noted that each of the four strategic directions needs detailed and careful analysis
in order to determine their viability in the short, medium and long terms, before a strategic choice is
made. It is on the basis of such quantitative analysis that decisions will be taken, and the growth
matrix is not in itself a decision-making tool.