What is Ansoff Matrix? Market Penetration, Market and Product Development, Diversification

What is Ansoff Matrix?

The Ansoff Matrix, also known as the Product-Market Expansion Grid, is a strategic planning tool that helps businesses explore growth opportunities by analyzing their product and market options. It was developed by Igor Ansoff, a Russian-American mathematician, and business manager, in 1957. The matrix provides a framework to assess different growth strategies based on two main dimensions: products and markets.

Until the publication of the corporate strategy, companies had little guidance on how to plan for or make decisions about, the future. Traditional methods of planning were based on an extended budgeting system that used the annual budget, projecting it a few years into the future. By its nature, this system paid little or no attention to strategic issues.

With the advent of greater competition, higher interest in acquisitions, mergers, and diversification, and greater turbulence in the business environment, however, strategic issues could no longer be ignored. Ansoff felt that, in developing strategy, it was essential to systematically anticipate future environmental challenges to an organization, and draw up appropriate strategic plans for responding to these challenges.

In corporate strategy, Igor Ansoff explored these issues and built up a systematic approach to strategy formulation and strategic decision-making through a framework of theories, techniques, and models.

Strategy Decisions

Ansoff identified four standard types of organizational decisions as related to strategy, policy, programs, and standard operating procedures. The last three of these, he argued, are designed to resolve recurring problems or issues and, once formulated, do not require an original decision each time. This means that the decision process can easily be delegated. Strategy decisions are different, however, because they always apply to new situations and so need to be made anew every time.

Ansoff developed a new classification of decision-making, partially based on Alfred Chandler’s work, Strategy, and Structure (Cambridge, Mass, MIT Press, 1962). This distinguished decisions as either: strategic (focused on the areas of products and markets); administrative (organizational and resource allocating), or operating (budgeting and directly managing). Ansoff’s decision classification became known as Strategy-Structure-Systems or the 3S model.

Components of Strategy

Ansoff argued that within a company’s activities, there should be an element of core capability, an idea later adopted and expanded by Hamel and Prahalad. To establish a link between past and future corporate activities (the first time such an approach was undertaken) Ansoff identified four key strategy components:

• Product-market scope: A clear idea of what business or products a company was responsible for (predating the exhortations of Peters and Waterman to “stick to the knitting”).
  
  
• Growth vector: As explained in the section below on the Ansoff matrix, this offers a way of exploring how growth may be attempted.
  
  
• Competitive advantage: Those advantages an organization possesses that will enable it to compete effectively. A concept later championed by Michael Porter.
  
  
• Synergy: Ansoff explained synergy as “2 + 2 = 5”, or how the whole is greater than the mere sum of the parts, and it requires an examination of how opportunities fit the core capabilities of the organization.

Paralysis by Analysis

It has sometimes been suggested that the application of the ideas in corporate strategy can lead to an over-heavy emphasis on analysis. Ansoff himself recognized this possibility, however, and coined the now-famous phrase “paralysis by analysis” to describe the type of procrastination caused by excessive planning.

Turbulence

The issue of turbulence underlies all of Ansoff’s work on strategy. One of his key aims in establishing a better framework for strategy formulation was to improve the existing planning processes of the stable, postwar economy of the USA since he realized these would not be sufficient to cope with pressures that rapid and discontinuous change would place on them. By the 1980s change, and the pace of change, had become a key issues for management in most organizations.

Ansoff recognized, however, that if some organizations were faced with conditions of great turbulence, others still operated in relatively stable conditions. Consequently, although strategy formulation had to take environmental turbulence into account, one strategy could certainly not be made to fit every industry. These ideas are discussed in Implanting Strategic Management, where five levels of environmental turbulence are outlined as:

• Repetitive: Change is at a slow pace, and is predictable.
  
• Expanding: A stable marketplace, growing gradually.
  
• Changing: Incremental growth, with customer requirements altering fairly quickly.
  
• Discontinuous: Characterised by some predictable change and some more complex change.
  
• Surprising: Change which cannot be predicted and which both develops and develops from, new products or services.

Ansoff’s Work in Perspective

Although Ansoff’s work is frequently referred to by other strategists, it has not become more generally recognized in comparison with that of other theorists. The complexity of his work, and its reliance on the disciplines of analysis and planning, are perhaps among the reasons why Ansoff is not popularly viewed as belonging within the top echelons of management thinkers. Other theorists were working on similar themes to Ansoff at similar times.

In the 1960s Ansoff’s notion of competence (which was later developed by Hamel and Prahalad) was not unique, and although Ansoff seems to have been the originator of his 2 × 2 growth vector component matrix, a similar matrix had been published earlier. During the 1980s and 1990s, it is likely that much work by other theorists about strategy formation under conditions of uncertainty or chaos owed something to Ansoff’s theory of turbulence, though it is difficult to evaluate the extent of the debt.

A debate between Ansoff and Henry Mintzberg over their differing views of the strategy was reflected in print over many years, particularly in the Harvard Business Review. Ansoff has often been criticized by Mintzberg, who disliked the idea of the strategy being built from planning which is supported by analytical techniques.

This criticism was based on the belief that Ansoff’s reliance on planning suffered from three fallacies: that events can be predicted, that strategic thinking can be separated from operational management, and that hard data, analysis, and techniques can produce novel strategies.

Ansoff Matrix

Variously known as the “product-mission matrix” or the “2 × 2 growth vector component matrix”, the Ansoff Matrix remains a popular tool for organizations that wish to understand the risk component of various growth strategies, including product versus market development and diversification.

The matrix was first published in a 1957 article called ‘Strategies for diversification’ and the example below illustrates what such a matrix may look like the matrix.

Ansoff’s product/market growth matrix suggests that a business’ attempts grow to depend on whether it markets new or existing products in new or existing markets.

The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the direction for the business strategy. These are described below:

Market Penetration

Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets. Market penetration seeks to achieve four main objectives:

• Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion, and perhaps more resources dedicated to personal selling.
  
  
• Secure dominance of growth markets.
  
  
• Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive to competitors.
  
  
• Increase usage by existing customers – for example by introducing loyalty schemes.

A market penetration marketing strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.

Market Development

Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets. There are many possible ways of approaching this strategy, including:

• New geographical markets, for example, exporting the product to a new country.
  
• New product dimensions or packaging, for example, New distribution channels.
  
• Different pricing policies attract different customers or create new market segments.

Product Development

Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products that can appeal to existing markets.

Diversification

Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risky strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.

Of the four strategies given in the matrix, market penetration requires increasing existing product market share in existing markets.