The Ansoff matrix has advantages and disadvantages. Although simple, the matrix helps companies plan their business growth in the future related to their products and markets. In addition, the matrix provides apparent alternatives for how they should grow the business.
However, the Ansoff matrix does not link each growth strategy to the context in which it will be applied. For example, it does not consider the competition in the market. Thus, the chosen growth strategy may be outside the company’s competitive context. In addition, the matrix does not consider each strategy’s benefits and costs.
What are the other pros and cons of the Ansoff matrix? Before we go into details, let’s briefly review the Ansoff matrix.
What is the Ansoff matrix?
Igor Ansoff put forward four alternative growth strategies in his paper, Strategies for Diversification, published in a Harvard Business Review article. He underlined how companies can grow their business by considering two variables: product and market. Then, he breaks down each variable into two categories: new and existing. Thus, if we put the variables on two different axes, each with these two categories, we produce a matrix with the following four combinations:
- Market penetration
- Market development
- Product development
Under market penetration, companies focus on existing products and markets. They seek to sell more products to their existing target market and customers. And, of course, they should already know how to do it.
This strategy can be increasing promotions, changing pricing, improving product features, etc. And in general, market penetration requires companies to think through strategies on how to acquire new customers in current market segments and encourage existing customers to increase purchases.
Market development requires companies to sell their existing products to new markets. A common strategy is to expand into foreign markets, which can be through exporting, licensing, franchising, or direct investment. Which strategy is most appropriate will vary between companies. In addition, each option has inherent risks. For example, exporting may be the right choice for developing a market with relatively lower risk compared to the other three options.
In addition to selling to foreign markets, developing markets may also target different geographies within the same country. Targeting new market segments could also be an alternative, such as selling watches for accessories and style purposes instead of timekeeping.
Under product development, companies grow businesses by launching new products to sell to existing markets. Therefore, companies need strong research and development capabilities. For example, the process might start with market research to identify product gaps to meet customer needs and wants and can be sold profitably. Then, the company brings the research results internally to be continued in development.
Product development has a high risk. For example, a new product is not in demand by customers even though the company has spent millions of dollars. The reason may be because it does not suit consumer tastes or competitors have preceded it by launching similar products.
Some companies may develop new products around existing products to minimize consumer resistance. For example, a company develops complementary products and bundles them with existing products when it is sold.
Diversification requires companies to develop new products and markets. This strategy is the riskiest compared to the other three growth strategies. New products and markets often require a very different business model to be successful.
To minimize risk, some companies may choose to expand around their existing value chain. For example, a tire company is expanding into the rubber business. Or the company goes into the tire distribution business. This expansion allows the company to secure its tire inputs or sales. We call this strategy related diversification.
However, some other companies may choose to diversify outside their value chain. We call this unrelated diversification or conglomerate diversification. For example, a tire company is expanding into the insurance or banking business.
Conglomerate diversification is riskier than related diversification strategies because the individual businesses are not directly related. However, this strategy allows conglomerates to reduce risk exposure in certain businesses. So, for example, if one business loses, the conglomerate can compensate it from other businesses.
What are the advantages and disadvantages of the Ansoff matrix?
The Ansoff matrix has several advantages and disadvantages. Straightforward is its main strength by providing clear insight into how companies can grow their business regarding their products and markets. However, the matrix relatively simplifies reality because it does not accommodate the context in which the strategy will be applied. In addition, the matrix does not include the benefits and costs associated with each growth strategy.
The advantages of the Ansoff matrix
The Ansoff Matrix helps us develop a business growth plan. It gives alternatives to what we can do with our products and markets. And we can evaluate each option for growth and weigh them to choose the best.
In addition to providing straightforward insights into growth options, Ansoff’s matrix has several advantages. First, the Ansoff matrix makes us more focused. It gives us a to-the-point insight into how to grow a business. The matrix provides apparent alternatives for what we can do with our product and market to generate more sales.
Second, the Ansoff matrix is simple and easy for us to understand. The matrix merely displays four different growth strategies. So, it’s simple for us to understand, even if we don’t have a marketing background.
Third, the matrix indirectly provides insight into each growth strategy’s inherent risks. For example, market penetration could be an option if we have a low tolerance for risk in growing our business. This growth strategy has minimal risk compared to the other three strategies because we already know the existing products and markets – so does the competition.
Disadvantages of the Ansoff matrix
While the Ansoff Matrix visualizes strategic options for growing a business based on markets and products, several challenges loom over its widespread application. The Ansoff matrix contains several drawbacks.
First, the matrix does not yet include the context in which the selected growth alternative will be executed. The context can be related to competition, product or industry life cycle, and competitive strategy.
Concerning competition, for example, this model is more suitable for situations where competition is not an issue. However, otherwise, we must elaborate further on the growth strategy in Ansoff’s matrix by adapting it to the context in which we compete. The alternative strategy in the model may only be a big picture. Still, how to do it, we have to elaborate with other strategic tools.
For example, we choose market penetration as our growth strategy. We then decide whether to do it internally or externally. Let’s say we achieved it with an external growth strategy due to a mature market with intense competition. In such a market, market penetration can only be done by seizing customers from competitors because all consumers have already used the product. However, taking out competitors using conventional strategies such as promotions or price reductions can invite a backlash. Thus, to avoid strong retaliation, we may acquire a competitor to enlarge our market share and strengthen our market position.
In addition, when competition is intense, lowering prices can lead to price wars. If it occurs, a price war can be detrimental to all players because market prices fall, reducing all players’ profitability.
In other cases, we might consider internal growth to penetrate the market. But, again, competition should be a consideration. When competition is less intense, we may rely on promotions, price discounts, and expanding distribution channels to entice more people to buy.
Then, related to competitive strategy, we must adapt our growth strategy to the way we achieve competitive advantage. For example, we adopt a differentiation strategy and want to grow our business internally to penetrate the market. Attracting customers by lowering the selling price may not be suitable for getting more sales. On the other hand, cutting prices can damage our image because customers perceive lower prices to be associated with poorer quality. So instead of increasing purchases, the option might cause the customer to switch.
Second, the Ansoff matrix does not consider each growth strategy’s benefits and costs. Thus, weighing which strategy is right and the most profitable can be challenging.
Third, the Ansoff matrix may not accurately predict how consumers and competitors will react to the growth strategy. For example, lowering the selling price to penetrate the market and increase sales might not be successful. Customers may be disinterested because competitors react by taking similar steps (lowering price) but more aggressively. A similar result may also occur when we develop a new product where competitors have already preceded us and launched the new product into the market first. Thus, they are quicker to divert consumer purchases.
In a broad context, the reaction may also come from the government. Take the market development strategy through exports as an example. Selling products abroad becomes a tough challenge if the government in the destination country sees our products as a threat to their local producers. Thus, they may react by imposing trade barriers such as tariffs, which make our products more expensive and less competitive in the destination country.