Significance of Ansoff Matrix

Entrepreneurs and Business Leaders understand that if their organisation needs to grow (long term), they can’t stick with a “satisfactory” mindset, even when the things are going pretty well. They need to find new ways to increase profits and reach new and existing customers. There are many options such as "new products/service" or "moving into new markets", but how do you know which one will work best for them. It is in this situation an approach like "Ansoff Matrix"  will help them to think about potential risks of each option, and to help you devise the most suitable plan for my organisation. It is sometimes known as “Product-Market Matrix”.

Ansoff Matrix was developed by H. Igor Ansoff and published in the Harvard Business Review in 1957. It breaks down growth options in relation to new products and markets, as well as existing product and markets. It is a strategic planning tool that provides a framework to help devise strategies for future growth. It is one for the widely used marketing models. Basically, it is developed to answers two questions. 

1. How can we grow in existing markets? and,
2. What amends can be made to have a better growth?

The matrix allows decision makers to quickly summarize the growth strategies and evaluate the associated risks. The key idea is that each time you move into a new quadrant (horizontally or vertically), risk increases.

The Ansoff Matrix is divided into four strategies and each strategy focuses on growth and evaluation. The four strategies are

1. Market Penetration Strategy
2. Product Development Strategy
3. Market Development Strategy
4. Diversification Strategy

Now let us look int each strategy.

Market Penetration Strategy: In this strategy an organisation aim to increase its market share through existing products in an established market. Market penetration is about selling more of the company’s existing products to existing markets. To penetrate and grow its customer base in the existing market, the firm may,

1. Decrease prices to attract existing and new customers
2. Improve distribution network
3. Invest more in marketing, especially promotions
4. Acquire competitors in the same markets
5. Increase production

Product Development Strategy: In this strategy an organisation will focus on developing a new product to cater to an existing market. The organisation employs this strategy when it has a strong understanding of its current market and situation. The product development strategy can be implemented by

1. Investing in Research and Development
2. Acquiring competitor's products that meet the needs of existing market
3. Joint Ventures
4. Strategic partnerships which focus on gaining access to each others distribution channels

Market Development Strategy: In this strategy an organisation enters new market (Geographies, Customer segments, regions etc.,) with its existing products. The strategy is most successful if,

1. The organisation owns proprietary technology that it can leverage into new markets
2. Consumer behaviour in the New Markets does not deviate too far from the existing market
3. Consumers in thee new market are profitable
4. Catering to different customer segment
5. Entering into a new domestic market (expanding regionally)
6. Entering into a foreign market (expanding internationally)

Market development strategy is about selling more the company's existing products to new markets. It is about reaching new customer segment or expanding internationally by targeting new geographical areas.

Diversification: An organisation enters a new market with new product. Correspondingly, this strategy is the riskiest among the strategies in the Ansoff Matrix. This is because executing this strategy requires both Market and Product Development Activities. However, related diversification can mitigate the associated risk. Diversification strategies are about entering new markets with new products that are either related or completely unrelated to a company’s existing offering. Diversification in turn can be classified into three types of strategies: 

1. Concentric diversification: Entering a new market with new product somewhat related to a company's existing product offering
2. Conglomerate diversification: Entering a new market with a new product that is completely unrelated to a company's existing offering
3. Vertical Diversification: Moving backward or forward in the value chain by taking control over activities that used to be outsources, such as suppliers, Original Equipment Manufacturers (OEMs) or Distributors.

End Note:

The Ansoff Matrix is a great framework to structure the option that an organisation basin order to grow.