Ansoff matrix

Introduction

The Ansoff matrix presents the product and market choices available to

an organisation. Herein markets may be defined as customers, and products as

items sold to customers. The Ansoff matrix is also referred to as the

market/product matrix. Some texts refer to the market options matrix, which

involves examining the options available to the organisation 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 exploration of

possibilities of withdrawing from certain markets and moving into unrelated

markets. 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.

For any decision to be taken at corporate level, you need the right strategic

tools. Ansoff matrix is one of them. Ansoff matrix helps a firm decide their

market growth as well as product growth strategies. The 2 questions which the

Ansoff Matrix can answer is “How can we grow in the existing markets” and

“What amends can be made in the product portfolio to have better growth”.

From the above two questions, it is clear that Ansoff matrix deals with the

companies external market scenario as well as the product portfolio which the

firm has. The matrix is divided in two quadrants – The product quadrant and

the market quadrant. The Product quadrant on the X axis is further divided into

Existing products and New products. The market scenario on the Y axis is

divided into existing markets and new markets. Thus the Ansoff matrix divides

a firm on the basis of the products it has – existing products or new products, as

well as the markets it is in – existing markets or new markets.

Depending on the characteristic of each, the marketing strategy is decided.

These marketing strategy are as follows.

Main aspects of Ansoff Analysis

The well-known tool of Ansoff matrix was published first in the Harvard

Business Review. It was consequently published in Ansoff's book on

„Corporate Strategy' in 1965. Organisations have to choose between the

options that are available to them, and in the simplest form, organisations

make the choice between for example, taking an option and not taking it.

Choice is at the heart of the strategy formulation process for if there were no

choices, there will be little need to think aboutstrategy. According to

Macmillan et al (2000), “choice 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.

The Ansoff matrix provides the basis for an organisation'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.

1) Market Penetration – In the Ansoff matrix, market penetration is adopted as

a strategy when the firm has an existing product and needs a growth strategy for

an existing market. The best example of such a scenario is the telecom industry.

Most telecom products are existing in the market and they have the same market

to cater to. Thus in such cases the competition is higher and you might have to

go out of the way to cater to your market or to increase your firms market share.

Several things have to be considered when adopting the Market penetration

strategy. By using market penetration, you are ensuring that only the existing

resources of the firm are used and no extra costs need to be incurred in setting

up a new unit for . At the same time, your current group of employees are the

best people to notice any growth opportunities in the existing market. Thus they

need to be used optimally by providing them the right information at the right

time. There needs to be a combination of marketing and sales promotions if you

have to grow in an existing market with an existing product.

On the other hand, market penetration might not be the strategy you are looking

for. What if the market becomes too saturated? Fighting for a higher market

share in a saturated market accounts for higher expenses and lower profitability.

Thus the market analysis needs to be spot on and the market penetration

strategy should be adopted only if there is scope for increasing market share in

an existing market.

For example,

Cadbury india is pushing for chocolate to be used as small gifts instead of

more traditional sweets during Diwali and other festivals.

HUL try to capture more market share of already existing market with

already existing products such as in India. It includes aggressive

advertisements, offers etc to penetrate more into existing market.

2) Market Development – Market development is the second market growth

strategy which can be adopted as per the Ansoff matrix. The market

development strategy is used when the firm targets a new market with existing

products. There are several examples of the market development strategy

including leading footwear firms like Adidas, Nike and Reebok which have

started entering international markets for market expansion. Every other day we

hear of one or the other companies thinking of lunching their products in a new

country. That‟s the perfect example of market development. Similarly, on a

micro level, expanding from a current market to another market where your

product does not exist is also an example of market development.

For market development, you have to treat your product as a new entrant in the

market. Thus there are several factors which influence the market development

strategy of a firm. If the product already has a high brand equity, it possibly just

needs distribution points in the new market (Example – Walmart). The same

goes if the product is a needs product and known to be of high quality. On the

other hand, if the product is not established in your current market, it is not

recommended to start a market development strategy. You need to first cater

your existing markets.

The risk factor of a market development strategy is higher. This is because lots

of investment needs to be done when entering new markets. You need to

advertise and market your product for the customers to adopt it. For the same

you need to invest in admin expenses, advertising expenses, possibly new

production facilities, so on and so forth. Thus you might have to develop

new strategic business units itself to have a strong market development. This is

exactly what is done in international firms, wherein the unit in another country

is treated as a separate business unit or a profit center.

3) Product development – Product development in the Ansoff matrix refers to

firms which have a good market share in an existing market and therefore might

need to introduce new products for expansion. Product development mainly

happens when you have a good customer base and you know that the market for

your existing product has reached saturation. Thus you cannot apply the market

penetration strategy. You can therefore opt for a new product

development strategy which caters to your existing market.

Let‟s take an example – Why do firms like P&G and HUL keep on introducing

new products in different categories? This is because both of these top FMCG

firms are already present in the market. They are only leveraging their strength

in the existing market by introducing new products. Imagine if HUL today

introduces a soap. It is already selling its shampoos and soaps in all grocery

stores across a city. Thus it will start selling this new product in the same

distribution channel and achieve new product launch as well as an improvement

in profitability just by using its current market.

The product development strategy, like the market development strategy is

risky. This is because product development involves investing in developing a

completely new product. The product will also need further investments for

distribution, marketing and manpower. Furthermore, by introducing a wrong

product which does not gain acceptance in the market, you might be affecting

your brand equity. Thus plotting your firm in the right quadrant on the Ansoff

matrix becomes critical.

For example,

McDonald‟s introduces salads in their outlets in order to retain its

existing customers, many of whom were becoming more health

conscious. Salads are exactly opposite of what McDonald‟s is known for!

NIVEA Visage soft facial cleansing WIPES show Product Development.

Women are looking for new ways to clean and care for skin.

Colgate Pamolive introduced „colgate active salt‟ as their new product in

highly competitive market of tooth paste. By introducing new product,

colgate want to get more market share.

Colgate Active Salt Healthy White is an innovation from Colgate and has been

developed on a core consumer insight of using a combination of salt and lemon

to remove yellowness. Integrating the benefits of salt and lemon, this new

toothpaste offers an innovative every day solution to yellowness removal.

Developed after extensive consumer research in India, it is positioned as an

everyday family toothpaste that combines a minty taste with a dash of salt for

a unique brushing experience. Using feedback from consumers, we have

combined the wisdom of traditional and modern oral care knowledge to create

a dramatic innovation in the toothpaste category that is contemporary and

beneficial. The launch is being supported by an extensive 360-degree

marketing programme, which was developed following an intensive `Day in the

Life of a Consumer' study, where Colgate marketers acquired significant inputs

about consumer triggers and touch points.

4) Diversification – Diversification is a strategy used in the Ansoff matrix

when the product is completely new and is being introduced in a new market.

The best example for Diversification can be big groups like Tata or Reliance

which initially started with one product but have expanded into completely

unrelated segments by introducing new or their own products. Tata for example

has presence in steel, motors and now in retail.

However, Diversification should be taken as a last option and should be adopted

only when the company is very strong financially. As seen in the above two

strategies, if the product or the market changes, the company has to do some

heavy investments to be successful. In case of Diversification, both product and

market are new and hence the amount of investment required would be high

thereby considerably increasing the risk factor. Therefore we see larger groups

with deep pockets and multiple SBU‟s actually using the process of

diversification.

Thus depending on your product and your existing customer base, you can

decide which quadrant you fall under in the Ansoff matrix. Once you know your

position, the Ansoff matrix also outlines the right kind of strategy to adopt. The

Ansoff matrix is especially useful for multiproduct organizations or

organizations which are planning to increase market share.

For example,

Bharti is one of the conglomerate of telecom industry. But, it joined

hands with AXA (a French insurance company) to form a joint venture

Bharti AXA in india. So, Bharti included insurance product into its

portfolio to diversify itself.

iPod was pehaps one of the most successful diversifications ever. With its

launch, Apple targeted a very large customer group, very different from

its traditional smaller cult-like following. Apple also entered into the

music business that was completely new for the company. Steve jobs and

his team put a tremendous effort in creating contracts with music labels

and artists.

How to write a Good Ansoff Analysis It is important for analysts to acknowledge that different strategic options are

suitable for companies operating in different types of industries and markets.

No one strategic option for growth is appropriate for all types of companies at

all times. The business environment, including competitive activity, also plays

a key role in determining which strategic choice is most appropriate for a

company. It is not possible to write a good Ansoff analysis without looking at

the various factors in the business environment, which impact the choice of a

firm's strategic options. Market penetration, for example, may prove to be a

wise strategy only when the overall market is growing. In a growing market,

companies are often able to increase sales to existing and some new customers

without increasing their relative market share.

Note that companies with low market share in a growing market can make

gains by attacking a competitor head on. For example, Burger King (relatively

low market share) to an extent has been successful at

attacking McDonald's sales (relatively high market share). However, it is more

difficult to reap benefits of market penetration strategy in a declining market.

Note that each strategic option brings with it some inherent risks, which can be

reduced through careful planning and implementing control mechanisms.

Overall, market penetration strategy is a low risk strategy as the business

parameters of product and market more or less remain the same. It is important

to discuss the benefits and appropriateness of the strategic option for an

organisation while mentioning the risks inherent with each strategic option.

While writing about the product development strategy, it is important to

mention that it is often a part of the natural growth of organisations. Look for

the reasons as to why the company selected the strategy and explain the

reasons and implications. In many cases, innovation serves as the most

important reason as it may present an opportunity to take market share from

competitors or a threat to an existing product line. Product development

strategy can in some cases be risky, as was the case of the New Coke. While

customers liked the taste of the New Coke in the taste tests conducted by Coca

Cola, customers of the brand favoured Classic Coke over the new product.

Clearly remember the differences between market penetration and product

development strategies, as it may be easy to confuse the two strategies if the

analysis is not performed carefully.

Note that the core competency of a firm becomes crucial in case of the market

development strategy. For example, Glaxo has been able to develop new

markets for its anti-ulcer drugs by developing and marketing a lower-strength

version of the drug in many countries that can be sold without prescription as a

stomach remedy. Market development strategy, like other strategic options,

entails certain risks also. McDonald's entered a number of new markets in the

wake of globalisation with its existing products. Due to the nature of the

company's products, McDonald's had to make changes in the ingredients of its

burgers in order to cater to the market.

It is imperative for analysts who are trying to identify the growth strategies or

are formulating proposals for such strategies for a particular firm, that firms in

today's fiercely competitive business environment often pursue multiple

strategies. In fact, most big businesses today pursue multiple strategies for

growth at the same time in order to achieve their strategic objectives. For

example, the two Internet incumbents of Amazon and E-Trade are both

operating in a fast evolving, uncertain business environment and have pursued

multiple and high-risk growth strategies, which include market development,

product development and diversification strategies. Amazon focused more on

the diversification strategy while E-Trade focused on market development.

The differences in strategic choices in this case were due to the differences in

the type of markets in which both companies operate.

Notably Amazon operates in a wider retail setup while E-Trade operates in a

narrower are of financial services retailing. Both companies chose product

development as the second most preferred strategic option, which shows

commitment to innovation in products and services. Another similarity that

comes across in the analysis of the two incumbents is that the low risk strategy

of market penetration was the least favourite option for both companies.

Therefore, it is crucial to note that one firm may be pursuing multiple

strategies and it is important to write about all the strategic options that the

firm is pursuing.

A common mistake made while conducting Ansoff analysis is that analysts are

not able to acknowledge how different growth strategies are suitable for

companies operating in different types of markets, and how changes in

business environment make the same company choose a different strategic

option at stage time in its organisational life cycle. On the other hand, the IT

bluehood of the corporate world, IBM, successfully follows the high-risk

diversification strategy. Earlier, IBM followed a vertical integration strategy

wherein it had entered new industries to strengthen the core business model. It

also enjoyed backward vertical integration into the disk drive industry and

forward vertical integration into the consulting services and computer software

industries. IBM's vertical integration was once widely considered a vital

source of competitive advantage. However, due to the fiercely competitive

business environment, IBM has been acquiring a large number of firms in the

last few years and had more than 400 strategic alliances as of 2003. The

diversification strategy is deemed as a high risk strategy but IBM has been

successful due to business foresight and effective control mechanisms.

Therefore, organisations change their strategic options in accordance with

changes in competitive scenario, and it is important to mention the transition in

the write up of Ansoff analysis.

Where to find information for Ansoff Analysis

Analysts can explore various sources to find information necessary for

conducting Ansoff analysis. Possible sources of information include company

and competitor websites as they would highlight the portfolio of products and

services and how the company may have diversified over time. Up to three

years of annual reports of the company can be analysed to see how the

company has changed its business focus, according to changes in the business

environment.

Marketing communications tools used by the company can reflect which

growth strategy is being pursued by the company. For example,

corporate advertisements along with adverts of products and services can show

whether the company is targeting existing or new customers and/or existing or

new markets. Press releases are also a useful source for evaluating the growth

strategy that a firm is pursuing or should pursue. Journal articles, trade

publications and magazines are useful sources of information to identify

growth strategies.

CASE STUDY: Implementation of Ansoff matrix

COCA COLA In the beginning there was Coca-Cola. A single core

product. Geographically located in the US. Overtime, this

singular core product had become established in its home

market by increasing market share and product usage

(Market Penetration Strategy).

Coca-Cola was later launched into foreign markets and

competed within the international arena. This Market

Development Strategy was undertaken by targeting new

geographical areas and target segments.

As these foreign markets developed further, the Coca-

Cola Company was faced with the problem of how to

further penetrate them. The solution was simply to develop

new products (Diet Coke, Fanta and Sprite), which over

time have also become core products (Product

Development Strategy). How does Coca-Cola increase

market penetration still further?

Again, the solution is to develop new products in new

markets. Originally Coca-Cola's business was defined as

one operating in the carbonated soft drinks (CSD) market.

n order to further penetrate these markets Coca-Cola has

broadened the definition of the business it is in to 'ready

packaged liquid refreshments'. This has allowed the

company to look beyond its traditional CSD market, to

markets such as bottled water, fruit juices and innovative

ready to drink tea markets. They have therefore

successfully used a Diversification Strategy.

Strategic marketing planning makes use of a number of analytical

models that help to develop a strategic view of the business,

and thus can be used as decision-making aids.

Ansoff Matrix for Coca Cola

1. Diet Coke - market penetration

Since being introduced in 1982 as a result of a growing trend towards dieting

and healthier living, Diet Coke has been a highly successful product for the

Coca Cola company, selling millions of units per year. Throughout this time,

Coca Cola has constantly adapted aspects of the marketing mix for Diet

Coke in order to continually match customer trends and fashions.

2. Coca Cola Vanilla - product development

Having had a successful launch in America, Coca Cola decided to launch it‟s

new Vanilla flavoured version in Great Britain. Prior to doing so, Coca Cola

carried out taste tests and developed the graphical „look‟ of the Diet Coke

brand. When they did this, they took great care to incorporate aspects of the

Coca Cola brand, but still differentiating it so consumers would see it as an

alternative to Coke.

Fanta Icy Lemon - product development

The development of a new flavour sparkling drink by Coca Cola was as a

direct result of listening to consumers who called the company‟s Care line

telephone service. The business conducted taste tests prior to the 2001

launch.

3. Coca Cola Share Size 1.5l Bottle - market penetration

Desk research showed Coca Cola that a growing number of households

contained 1-2 people, which led them to believe that a smaller version of the

2 litre family sized bottle would sell well to these groups. In launching this

product (simply sell existing brands such as Coca Cola, Diet Coke etc)

4. Diversification

Market penetration: prices reduced in comparison to Pepsi

Selling more of an

EXISTING product to an

EXISTING MARKET

This is going deeper into

the market. Hence called

MARKET PENETRATION

More Promotion

Market development: new market. Provided offers. Increased sales.

Selling an

EXISTING product to an

NEW MARKET

Product development: new product, existing market. In this case, new flavour

Selling an

NEW product to an

EXISTING MARKET

Changes to the product –

New Coke Vanilla Flavor

Diversification: new product. New market (health conscious people)

Selling a NEW Product to NEW MARKET

Diet Coke targeted at people

who are health conscious.

Limitations of Ansoff Matrix While Ansoff analysis helps in mapping the strategic options for companies, it

is important to note that like all models, it has some limitations. By itself, the

matrix can tell one part of the strategy story but it is imperative to look at other

strategic models like SWOT analysis and PESTLE in order to view how the

strategy of an organisation is formulating and might change in the course of its

future. For example, the Ansoff analysis of Virgin Cola shows that

the brand has been launched in the UK and USA using a market penetration

strategy, which essentially reflects that the brand needs to increase its brand

recognition (Vignali, 2001). The SWOT analysis conducted by Vignali (2001)

showed an opportunity that VirginCola could explore diversification into new

ranges of Virgin Cola products. PESTELanalysis of Virgin Cola showed that

there was need to constantly evaluate the soft drinks industry in all countries,

in order to reflect customer trends, thereby allowing the brand to gain market

share and also predict trends faster than the competition. Therefore, the steps

to be taken while conducting a strategic analysis of an organisation

include SWOTanalysis, PESTEL and Ansoff matrix as fundamental models of

analyses, which should be used in conjunction and not in isolation, to view the

complete strategic scenario. Also, recommendations made on the basis on only

one of the models are not concrete and lack in depth.

The above is also supported by the example of M&S where the company was

not able to keep up with the trends and suffered from decline in sales due to

competitors like Next, which were relatively more aware of customer trends

and needs. Marks and Spencercame up with the Per Una range of clothing in

order to compete effectively and gained market share. M&S would not have

been able to identify which strategy to opt for growth, if a PESTEL analysis

was not conducted.

While the role of analysis in making strategic choices cannot be undermined, it

is imperative to note that judgement plays a crucial role in making critical

strategic choices that may change the future of the firm (Macmillan et al,

2000). Lastly, the use of Ansoff matrix as a marketing tool may not be really

useful as the matrix is critical for analysing the strategic path that the brand

may be following, and does not essentially identify marketing options.

Limitation of our Project

References www.papers4you.com

www.politics.ankara.edu.tr