Ansoff Matrix is a tool for improving revenue. Even more important is profitability. Ansoff matrix can help us extract more profit too. So, how exactly can an analytical tool invented in 1957 help us today?
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Igor Ansoff
The Ansoff Matrix was developed by Igor Ansoff. He published this strategic tool in the article ‘Strategies for Diversification’ in 1957.
He comes from an applied mathematics background. However, he is known for his work in strategy. In fact, he is known as the father of strategic management.
Ansoff’s strategies
One of the challenges for a firm is growing. The shareholders demand growth every quarter of every year! Therefore, growth is a primary focus. This is where this matrix helps us. As a result, it can help us generate alternative growth strategies. Now, the next question arises how do we generate these alternatives. In order to answer this question, let us first consider two broad areas of concern for a firm.
What are the two broad areas of concern?
- Products
- Markets
The firm can grow either by having more products out in the market. Also, it can grow by catering to more people. Subsequently, we shall see, how to make this possible through different types of strategies.
Types of strategies for growth
- Pure product Strategy – Product development
- Pure market strategies – Market development & Penetration
- Combined Strategies – Diversification
Product development
Pure product strategy is about product development. Therefore, in this type of growth strategy, the firm only focuses on the introduction of new products. The primary consideration is to sell more products by introducing new products to the market. New product creation is fraught with risks.
Market development
On the other hand, an example of a pure market-based strategy is market development. In this approach, the firm attempts to enter a new market or expand into new geography. This strategy has a moderate risk because we are trying to expand into unknown territory(quite literally). A lot of things can go wrong.
Market Penetration
Another pure market strategy is market penetration. In this type of approach, the firm tries to capture more market share within the same geography and with the same set of products. Market penetration has the lowest risk. As a result of having a known market as well as a product.
Diversification
Finally, the firm may try a combination of marketing and product strategy. This comes under the diversification strategy. Here, the firm focuses on the creation of new products that it uses to enter a new market.
Ansoff Matrix explained
Product Development
The products are the final sellable output. For example, the iPhone is a product from the firm Apple. In order to grow its market share, it can introduce a new product for the market. For example, it introduced AirPods.
Market Development
Another way of growing is market development. Let us take our Apple example. Market development means that the firm seeks a new market. Let us say Apple sells well in North America, China, and Europe. However, it did not have presence in Africa. Apple can start selling phones in Africa to increase its revenue. This would be an example of Market Development.
Market Penetration
Now, let us consider that Apple wants to improve its revenue but does not want to introduce new products. Also, they don’t want to enter a new market. In this case, they have one option: capture more market share of the current market. For instance, let us say, Apple has 39% of the market share in the US. Meanwhile, they can develop a strategy to increase the market share by 5% in the next two years. As a result, this strategy would be an example of market penetration.
Diversification
Finally, Apple can also expand its market and introduce new products at the same time. This is the most realistic scenario among all four. Apple can pursue diversification by launching a new product and expanding into a new market at the same time. For example, Apple realized that there is a demand for a cheaper iPhone in developing economies like India and Brazil. However, their current lineup is expensive for the market. Consequently, they introduced the iPhone SE 2020 model. A phone that is priced more appropriately for the developing economies.
Ansoff Matrix for Apple
We have created the Ansoff matrix for Apple based on our discussion. We can also use tools like SWOT analysis to further scrutinize the different strategies. Therefore, it can give us an idea of how firms develop strategies.
Important questions on Ansoff Matrix
It provides a fast and easy to use framework to analyze all the strategic directions for a firm.
The Ansoff Matrix is based on the idea of providing the right products to the right customers. The right product can be in the form of a newer product or offering the existing product.
1. Market penetration
2. Product extension
3. Market development
4. Diversification
The Ansoff Matrix is used to assess the opportunities and risks associated with growth. It can help us identify the best approach for growth.
The Ansoff Matrix was invented by Harry Igor Ansoff. He had a master’s degree in Modern Physics and a doctorate in Applied Mathematics.
The ‘diversification’ strategy is the riskiest. In this strategy, we have more things that are unknown. Therefore, more things can go wrong.
You can draw Ansoff Matrix by drawing a quadrant. In the top left quadrant you can write ‘market penetration.’ In a clockwise manner you can write ‘product development’ in top right, ‘diversificaiton’ in the bottom right. Finally you can write ‘market development’ in the bottom left side.
> Ansoff Matrix looks at both products and markets. BCG focuses on the products only.
> The Ansoff-matrix is forward-looking while BCG is better suited as an assessment tool for past performance.
You can use the ‘market penetration’ strategy to grab a larger market share.
You can use the Ansoff Matrix to develop a strategy to expand into a new market. This will help the firm grow as well.
The answer depends on a lot of factors. Firstly, entering a new market with new products is risky. Secondly, you need to ascertain what benefits you get by developing new product vis-a-vis using available products.
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