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 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 . 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.

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References www.papers4you.com www.politics.ankara.edu.tr