Q 254. The Ansoff Matrix helps businesses grow beyond 'Business As Usual'. What are the elements considered in this matrix?

 

 

Note for website visitors - Two questions are asked every week on this platform. One on Tuesday and the other on Friday.

• All questions so far can be seen here - https://www.benchmarksixsigma.com/forum/lean-six-sigma-business-excellence-questions/
• Please visit the forum home page at https://www.benchmarksixsigma.com/forum/ to respond to the latest question open till the next Tuesday/ Friday evening 5 PM as per Indian Standard Time. Questions launched on Tuesdaya are open till Friday and questions launched on Friday are open till Tuesday. 
• The best answer is always shown at the top among responses and the author finds honorable mention in our Business Excellence dictionary at https://www.benchmarksixsigma.com/forum/business-excellence-dictionary-glossary/ along with the related term

 

 

Ansoff Matrix is a popular strategic framework  tool for business growth. It was described by Igor Ansoff , a   business manager in 1957.

The different growth strategies of this model are:

o  Market Penetration

o  Market development

o  Product development

o  Diversification

 

Market penetration: This refers to increasing market share  within existing segment, by increasing the sale of products or services to the customers.

The probable ways are:

o  Price decrease(economies of scale)

o  Increased promotion and distribution

o  Acquisition of  competitors

o  Mild degree of product or service refinement

 

Market Development:  This refers to  expansion and catching a share of new market in different geographical area, different country etc., using existing product or service with minimal refinement.

 

The probable ways are:

 

o  Different Niche/customer segment  of market.

o  Business to Business transactions, rather than only business to customer transactions.

o  Alliance with a local or regional leading player.

 

 

Product development: This refers to  marked refinement and development of new product or service to gain significant growth in existing market.

 

The probable ways are:- 

 

o  Significant emphasis and investment in research and development of new products and services

o  Joint development of new products with other companies

o  Acquiring quality  products from  other firms and selling it under own brand.

 

Diversification: This refers to  getting increased market shares introducing new product or offerings, in addition to the existing offerings.

 

This can again be  classified into:

 

Related diversification:  Venturing into related kind of businesses or product, so there is synergy between existing and new products.

 

Unrelated diversification:  Venturing into unrelated businesses or products, with different kinds of market segments.

 

In Ansoff Matrix, as move from one to another quadrant, the risk increases. So out of all the strategies, Market penetration option is having the least risk, and diversification entails both product and market development, so two quadrant move is required, so having the maximum risk and unrelated diversification is more riskier than related one, due to lack of synergy.

 

Ansoff matrix, with reference to Apple Inc:

 

Market Penetration: Sale of different products through multiple platforms like Apple Stores, Apple.com, in alliance with various telecommunication companies, like Vodafone. Promotion through various media outlets and own website.

 

Market development: Continuously emerging as a global brand, by manufacturing bases at USA, China  and opening exclusive Apple stores and tie up with regional branded stores across different countries.

 

Product development: Product innovation and differentiation has been the major strategy of Apple. Various range of products have evolved with time- I phone, I pad, I watch, I pod, Apple TV, Mac os, ios, I cloud platforms. The versions of different products are also getting updated regularly. The different Apps used in these products are also major  source of revenue for Apple.

 

Diversification: Apple started from a simple computer  and diversified into a number of related and unrelated products, like Apple watch, Apple Pay, Apple Credit Card,  along with new market development for products

 

 

 

 

Image reference: www.tutor2u.net

 

 

Benchmark Six Sigma Expert View by Venugopal R

Any organization that looks for business growth can look at different strategies, viz.

1.     Continue with existing products in the existing markets, but try to sell more (Market Penetration)

2.     Continue with existing products, but try to capture new markets (Market expansion)

3.     Introduce new products and continue with existing markets (Product development)

4.     Develop new products that are meant for new markets (Diversification)

 

Igor Ansof, a Russian American Business Manager introduced this concept for organizations to develop their Marketing strategy, in the form of a four-quadrant grid, which is known as the ‘Ansof Matrix’.

As seen from the Ansof matrix, in quadrant 1, Penetration is considered the least risky, whereas the quadrant 4, Diversification is considered as 'high risk'. The other two options, Market development and Product development are considered as 'medium risk'.

 

Let’s briefly look at each of the strategy options:

 

1. Penetration

This is a low risk strategy and the company tries to grow its presence of its existing products in the existing market. It would involve promotion and advertisement programs to sustain and improve the product sales within the segments and geographies that they already operate. This can happen by increasing the market presence as well as increasing the market share. For instance, a company engaged in selling washing machines may try to grab some of its competitor’s market share, as well as try to convert more customers who never owned a washing machine earlier. Though the risk is low in the penetration strategy, the returns too may not be very high. However, it is very important to keep the pace on, in whatever the company is already into.

 

2. Market Development

This strategy is needed to expand the market for existing products. The expansion could be by new geographies or by new segments. For instance a company would expand its market by deciding to export its existing products. A company who has been focusing on selling air conditioners for commercial customers targeting to sell them for household use, is an example of expanding the market segment. The market development strategy poses medium risk, since the company is treading upon a new market and it requires research and might have to counter unforeseen factors pertaining to the new market. Once successful in expanding the market, the company will benefit from higher revenues.

 

3. Product Development

In this strategy, the company continues to deal with the already familiar market, but with new products that could be variants or upgraded versions of the existing ones. Since the company is dealing with familiar market, the risk is medium and is based to any uncertainties on the new product. Manufacturers of Automobiles, cell phones and consumer durables bringing out new, upgraded or variant versions of products, or even new products that attract existing customers are examples of such strategy. This strategy provides room for innovative offerings that can make the company competitive for a period of time, of course with the risk element. Sometimes, it is important that all companies selling such products quickly upgrade to certain new products… for instance when LCD TVs came to market, all TV manufacturers had to necessarily come up with new products in line with the updated technology to keep them afloat in the market.

 

4. Diversification

This is the most advanced strategy, where in a company decides to explore not only a new product, but also a new market altogether. We have seen companies that were predominantly in steel blanking business becoming major manufacturers of consumer durable goods. We have brands that were famous in automobile field becoming major producers of electrical goods. We have companies whose brand used to be associated with cigarettes becoming major FMCG player. Diversification is a breakthrough strategy that has to be seen for long term pay off. Since this strategy is considered as the highest risk, very detailed planning, foresight, research, learning and unlearning, investments, reviews, experimentation, trials, concerted and patient efforts are required for succeeding.

 

Having gone through the elements of the Ansof matrix, it may be observed that many companies adopt all of these strategies concurrently. Each element has its significance and a balanced approach needs to be adopted, depending upon the capabilities and management vision of the organization.

Sir, Ansoff matrix has elements if moving from Existing to New Products reaching out from Existing to New Markets to penetrate with a much better yield, when old markets are saturated with existing products, many reaching the end of their lifespans

 

It can be used in hospital industry to cater to current and upcoming scenario of reduced reimbursements of hospitalization expenditure and caps on prices of hospital services and materials used coupled with a need to improve quality of services offered, reducing the income from these sources, although improving availability of healthcare for all.

 

New markets of increased volumes can be created by developing new formats of service levels, absolutely cutting out all Non Value Adding transactions, including coaxing authorities to nullify taxation on income generated, subsidized electricity and rentals etc and on time payment of dues, etc and New Products can be introduced based on innovation such as new reasonably priced and easily usable portable ventilators and newly developed instruments to help tracheostomized patients speak and innovative techniques in testing such as algorithmic pooling of samples.

 

May be more support for preventive healthcare, more so for having genetically corrected individuals to prevent any further complications in disease processes and even designing or shifting genetically fit persons based on disease cohorting studies.

 

Immense potential when Mother Nature becomes an important reason for failure, such as the current Covid-19 pandemic.

 

Hope I have dived into the correct pool

 

Regards, 

 

Arvind Khanijo

Ansoff Matrix was developed by Businessman and mathematician, H. Igor Ansoff.

And was published first in Harvard business review in 1957, in an article titled “strategies for diversification”. It forced marketers and business leaders a quick and simple way to think about the risks of growth.

Ansoff matrix gives four possible elements of growth, which vary in risk.

1.   Market Penetration: Focusing on the sales increase of existing product in the existing market..

2.   Product Development: Focusing on new products development for an existing market.

3.   Market Development: Focusing on the new market with existing products.

4.   Diversification: Focusing on introducing new products in new market.

This gives the idea that whenever we move from one quadrant to another the risk increases. And also it helps in analyzing the risks associated with each quadrant.

To use this matrix, we have to write the options in appropriate quadrant and then look for the risks associated with each option. Then develop a contingency plan to address the risks. This activity will help in decision making best for the organization.

Below is the example of the Ansoff matrix:

This is the way organizations take benefits of Ansoff matrix in making decisions.

Few examples of matrix points and their benefits companies made,

Decreasing price to penetrate the market and attract the new customers,e.g. Godaddy (website domain and hosting provider) provides additional discount for startups and first log in’s.

Increasing the expenditure on advertisement of the same product to increase the sale, e.g. most of the film producers do to increase the revenue on the first week of release.

Introducing new products to beat the competitors, e.g. Patanjali introduces a wide range of FMCG products to penetrate the market.

Taking over the competitors business in the same market, e.g. TATA acquired Range Rover and Jaguar.

Ansoff Matrix is a marketing tool that is used for deciding the expansion or the growth strategy of an organization. It has been named after Igor Ansoff - the person who first proposed it. 

 

In the traditional matrix, there are 4 options for growth. These 4 options are bases on two parameters - Markets and Products.

 

Source: https://www.google.com/search?q=ansoff+matrix&rlz=1C1JZAP_enIN732IN732&source=lnms&tbm=isch&sa=X&ved=2ahUKEwjSi_jlq_noAhXBX3wKHY1jACEQ_AUoAXoECBMQAw&biw=1366&bih=657#imgrc=KKD2JCntBwvxYM

 

The 4 strategies are 

1. Market Development - develop new markets for your existing products

2. Market Penetration - increase market share in the existing market for the existing product

3. Diversification - develop new markets for new products

4. Product Development - develop new product for the existing market

 

The extended Ansoff Matrix looks like below

 

Source:https://www.researchgate.net/figure/b-Extended-Ansoff-matrix-The-fourth-activity-is-related-to-planning-of-new-business_fig2_334965141

Best answer has been provided by Shashikant Adlakha as he has explained the Ansoff Matrix along with an application.

 

Do read the answer by Dr. Arvind Khanijo as he has elaborated how Ansoff Matrix can be used for a hospital.

 

Also review the answer provided by Mr Venugopal R, Benchmark Six Sigma's in-house expert.