What’s it: The Ansoff matrix shows you four marketing strategies available based on product and target market considerations. Igor Ansoff, a Russian American mathematician, developed it and published it in a Harvard Business Review article entitled “Strategies for Diversification.”
Ansoff divides the matrix into four strategy options based on two general variables: product (existing vs. new) and market (existing vs. new). The four strategies in the Ansoff matrix are market penetration, market development, product development, and diversification.
Why Ansoff matrix matters
The Ansoff Matrix is a strategic framework to help companies know which of the four strategic directions they must take to successfully grow their business. It is typically used during the strategy development stage of the marketing planning process.
From the matrix, management identifies the most likely strategies for adoption. They then devise which tactics they should use in their marketing activities. They may adopt more than one strategy to reach different markets.
Four strategies of Ansoff matrix
Ansoff divides the matrix into four strategies based on new products, existing products, new markets, and existing markets. The four strategies are:
- Market penetration
- Market development
- Product development
The company sells existing products to existing markets.
The market penetration strategy is the least risky compared to the other three options. The company has the historical experience to know the risks, opportunities, and areas for improvement from the previous approach.
Under the penetration strategy, the company seeks to increase its market share for its current products. They can evaluate past approaches to design more effective marketing strategies and tactics.
Companies can increase market share in several ways. First, they can stimulate existing customers to buy more. More effective advertising campaigns, sales promotions, loyalty schemes, and cutting prices are some options.
Second, the company encourages customers to move away from competing products. Therefore, companies must ensure their products are more satisfying than competitors, such as quality improvements, added features, and superior after-sales service. It usually also requires a more aggressive advertising and promotion strategy.
The company may also adopt aggressive strategies to eliminate competitors. For market leaders, an example is loss leader pricing or predatory pricing.
Third, the company stimulates potential customers to buy and use the product. Some people may still not buy the company’s products or competitors’ products. It usually occurs during the beginning of the product life cycle, when some people are not aware of or interested in trying the product. In other words, the market is still growing.
To be successful, companies must recognize weaknesses while maintaining the advantages of their existing products. The company may add attributes that make the product more attractive. Usually, market penetration requires a more aggressive marketing strategy.
The company sells existing products to new markets.
The new market may be a foreign market. Or it is another region within a country. Or, companies target different segments for their products.
To find new potential markets, companies must carry out systematic market research. Then, they individually target clearly identified market segments. New markets may require firms to develop new marketing and distribution channels for each market.
Sometimes, a new market also requires an entirely new approach or business model. When entering new markets, companies need more detailed information from market analysis, including about:
- Macro environment: using the PESTEL analytical approach
- Market segment: identify the most profitable segment using several market segmentation techniques
- Consumer profile: preferences, purchasing power, and tastes.
- Market size: current vs. potential size, trends, and growth
- Market profitability: how profitable is the new market to exploit
- Competition intensity: through Porter’s Five Forces approach, for example.
- Distribution and communication channels: how the company should reach potential customers effectively
The company launches new products to the existing market.
Companies can take several options for new products. First, a new product may be a new variant of an existing product. The company launched it to complement its product portfolio. This strategy minimizes the risk of acceptance by existing consumers.
Second, new products are the result of new innovations using current core resources and competencies. Through intensive market research and past experience, the company designs it to suit today’s market needs.
The second strategy is riskier than the first. Companies must allocate more resources and time to develop and market products. On the other hand, such new products often generate consumer resistance because they are reluctant to take risks to try products.
In general, the success of product development depends on:
- Ability to conduct research and understand customer and market needs
- Internal capability to drive innovation and develop new products
The company sells new products to new markets.
The diversification strategy is the most aggressive and riskiest compared to the other three strategies. The first risk concerns the uncertainty about the acceptance of a new product. Consumers may be unwilling to try new products, for example, because they have no previous experience.
The second risk is about new markets. The company may not have experience with new markets. Therefore, they need in-depth research to provide deeper insights into new markets. Analyzing the market as in a market development strategy is one crucial step.
In carrying out a diversification strategy, companies, in general, can take two options:
- Synergistic diversification
- Conglomerate diversification
Under synergistic diversification, the company uses existing knowledge. New markets and products are around existing products or markets.
Synergic diversification is relatively low risk because the company has the knowledge to implement strategies, be it about production, marketing, or distribution channel development.
Meanwhile, conglomerate diversification involved an entirely new area. The company will probably develop it internally. However, it usually consumes resources and tends to be slow to grow sales.
Another option is to acquire other companies in new markets. Acquisitions promise rapid growth, although they don’t always lead to success.