The Ansoff Matrix offers four strategies for growing a business, considering products and markets. We can use this model in strategic planning to get an overview and evaluate growth potential. However, there are some risks inherent in each strategy.
In addition, the matrix also has several disadvantages. For example, it does not take competition in the market into consideration. In addition, the matrix does not consider the company’s current resources and capabilities or to be acquired to develop the chosen strategy. Thus, we must use the matrix with other tools, such as Porter’s five forces and SWOT analysis.
What are the four growth strategies in the Ansoff matrix?
The Ansoff matrix uses two variables to identify growth opportunities. Both are product and market. Companies can develop growth strategies by adapting their products and markets. Specifically, they can achieve growth by focusing on existing or new products to market to existing or new markets. The matrix yields four quadrants:
- Market penetration
- Product development
- Market development
Market penetration means focusing on existing products and markets. The company aims to sell more to its existing customer base and increase its market share.
How does the company do it? For example, companies might increase promotions to encourage customers to repurchase their products. And it also helps them expand their existing customer base by attracting and acquiring new customers.
Meanwhile, a more aggressive strategy might be taken by adjusting their pricing strategy. For example, companies cut their selling prices to lure consumers. As a result, low prices become more attractive and have the potential to shift demand from competitors’ products to theirs.
Or companies add a new feature to an existing product. This strategy may be safer than cutting the selling price because it avoids a potential price war. But conversely, competitors may retaliate by taking similar actions if the company cuts prices.
A product development strategy concentrates on introducing and selling new products to existing markets. As a result, companies add new offerings to their product portfolio and focus on their existing customer base.
This strategy requires companies to understand current market conditions and customer needs. For example, a company observes changes in customer needs and tastes through market research. Take car manufacturers as an example. They introduced electric cars because consumers are increasingly worried about environmental damage.
A market development strategy means the company enters new markets with existing products. They focus on existing products and seek to sell more by targeting potential new markets.
Companies may target markets with different geographic locations. Targeting foreign markets is an often-cited example. They may do so by exporting, franchising, licensing, or investing directly by acquiring or setting up factories in several countries. Fast food companies such as KFC, McDonald’s, and Burger King are good examples where they are expanding into foreign markets through franchising. Nike and Adidas are other examples in the sports shoe business.
In addition to different geographical locations, market development can be done by targeting new segments. Companies target new types of customers in their current market through different market segmentation strategies. For example, online transportation companies are expanding their market by entering the courier and package delivery segment, not only serving the passenger segment.
Diversification is the most complex strategy compared to the three growth strategies above. This is because it requires companies to develop new products and sell them to new markets. And because of this, it is riskier than any other strategy.
Some companies may develop related diversification to minimize uncertainty. They create products and markets around existing ones. They may go into downstream or upstream businesses in the current supply chain. For example, an automobile manufacturer diversifies its business into the tire market. Apart from securing supply for internal car production and locking profit margins in the value chain, these manufacturers can also sell their tire products to other manufacturers.
In contrast, some other companies pursue unrelated diversification strategies. They enter new markets and products which are entirely different from existing ones. In other words, these new products and markets are outside the existing supply chain. Unrelated diversification is riskier than related diversification because the company may not have experience with new businesses. For example, car manufacturers go into plantation or insurance businesses.
What are the risks associated with the four growth strategies in the Ansoff matrix?
The risks associated with the four growth strategies in the Ansoff matrix can be different. For example, market penetration may be less risky than the other three growth strategies because the company focuses on existing products and markets. In other words, they already know their market and customer base.
On the other hand, diversification is considered the riskiest. It requires a significant investment. In addition, the company’s focus is divided into different products and markets, each of which may require different business models and keys to success. Thus, the operation becomes much more complex. As a result, companies may need to reorganize their structures to support effective management.
Risks inherent in a market penetration strategy
The market penetration strategy contains several risks. First, market penetration may intensify competition and elicit retaliatory reactions by existing competitors. Increasing market share can only be done by acquiring new customers or capturing competitors’ customers. Acquiring new customers may be less risky than capturing competitors’ customers.
However, as the market grows, there may be fewer new customers because most of them are already using the product. So finally, there is no other way but to seize competitors’ customers to increase market share.
Then, aggressive promotion to increase market share is also risky. For example, suppose a company lowers prices to attract customers. In that case, competitors may retaliate by reducing prices which could lead to a price war. This also applies when a company intensifies advertising, which triggers competitors to spend more on advertising.
Second, penetration may offer less potential revenue. For example, a company might offer discounts to attract consumers and increase sales. That might encourage more consumers to buy. But, at the same time, the discount lowers the profit margin per unit.
Third, the strategy may damage the company’s image. Changing the marketing mix must be adapted to the company’s competitive strategy. Otherwise, it could damage the reputation.
For example, a company adopts a differentiation strategy. However, the management decided to lower the price to increase the market share.
As a result, customers react negatively because they see the product no longer reflects the status due to the lower price. A good example is Veblen stuff. In this case, the price represents the utility of the good. Thus, the higher the price, the greater the demand because it provides higher satisfaction. Conversely, lowering their prices will hurt demand.
Then, when the selling price is lowered, the customer will get used to the cheaper product. So, they see the product no longer as a luxury item. Finally, this affected the company’s reputation as a luxury goods company.
Risks inherent in product development strategy
The product development strategy has several risks. First, this strategy requires intense research and development, which requires significant investment. Therefore, it may only be suitable for some companies.
Second, product development requires companies to firmly understand market conditions and customer needs. They must identify market gaps in which they can introduce new products. In addition, competition mapping is also essential because competitors may also launch new, more attractive products.
Third, new products cannibalize existing products. As a result, new products reduce interest in existing products. This risk may be overcome by developing products to complement existing products. For example, conventional car manufacturers introduce electric cars.
Fourth, resources are inadequate, and the work environment is unsupportive. Product development requires adequate resources and capabilities, including being supported by talent and innovation culture within the organization. Without them, it isn’t easy to come up with innovative new products.
Fourth, speed is critical. A new product may fail if it is introduced too late. Competitors may arrive more quickly and succeed in capturing consumer interest. A good example is technology, where companies need continuous and rapid innovation. Failure to do so could lead them to disaster, as experienced by Nokia. The company cannot compete with smaller players like Samsung in the smartphone market. Although later, Nokia launched smartphone products, but they were too late to do so, and consumers were reluctant to switch.
Risks inherent in market development strategies
Market development may sound attractive when it comes to growth potential. Exploring new markets is key to increasing sales as more new customers are available for acquisition.
However, market development strategies also contain risks. First, the company does not understand the target market. Customers in new markets, such as foreign markets, may have different needs and tastes than existing ones. Thus, companies need in-depth research on customers in the target market, including concerning size and future demand.
Second, this strategy may be vulnerable to government policies. For example, when exporting products, companies may face trade protections such as tariffs, which make their products less competitive with local products in the destination country.
Third, reputation can be destroyed. For example, entering foreign markets through franchising and licensing carries risks. The franchisee or licensee acted recklessly. As a result, the company’s reputation deteriorates in the destination market. In addition, a damaged reputation in one market can spread to other markets and affect the overall reputation.
Fourth, market development consumes significant costs. For example, a company enters a foreign market. Investments may include conducting market research, establishing a new factory, or acquiring a company in the destination market. If market development fails, losses can be substantial.
Fifth, the operation becomes more complex. Coordination also becomes more difficult because it involves different areas. As a result, some companies may have to reorganize their structure to manage operations across multiple locations, especially if they seek to adopt a glocalization strategy in which they adapt their competitive strategy in each market.
Risks inherent in a diversification strategy
Diversification contains the highest risk compared to the other three strategies. There are several reasons to answer that. First, the company requires a significant investment. They may have to set up new subsidiaries and expand operations from scratch. Or they should acquire an existing company.
Second, operations and management are becoming more complex. Companies may manage markets and products with different business models. Thus, each business requires different core competencies and keys to success.
Third, business growth is slow. Indeed, diversification allows companies to compensate for losses in one business with gains in another. However, growth may be low because they have to focus on different businesses. In addition, they have also just divided the capital expenditures into several businesses. It’s a contrast if they own one business so they can focus their efforts and investments on it.
Fourth, the organization becomes less responsive. Complex operations and divided focus can make companies unable to respond quickly to market changes. Thus, they find achieving a competitive advantage in their business units challenging.
What to read next
- Risks Associated with Four Growth Strategies in Ansoff Matrix
- Ansoff Matrix: Importance, Four Strategies
- Strategic Direction: How To Write It And Its Relation To The Ansoff Matrix