The article focuses on the main aspects of Ansoff analysis. The four strategic options entailed in the Ansoff matrix are discussed along with the risks inherent with each option. The
article includes tips for students and analysts on how to write a good Ansoff analysis for a firm. Moreover, sources of findings
information for Ansoff analysis have been discussed. The limitations of Ansoff analysis as a strategic model have also been
discussed.
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 (Lynch, 2003). The Ansoff matrix is
also referred to as the market/product matrix in some texts. 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 (Lynch,
2003). 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 (Proctor, 1997).
Main aspects of Ansoff Analysis
The well known tool of Ansoff matrix was published first in the
Harvard Business Review (Ansoff, 1957). It was consequently published in Ansoff’s book on ‘Corporate Strategy’ in 1965 (Kippenberger, 1988). 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 about strategy. 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 (Macmillan et al, 2000).
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. Ansoff Product-Market Growth Matrix
Source: Ansoff (1957, 1989)
Market penetration
Market penetration occurs when a company penetrates a market with its current
products. It is important to note that the market penetration strategy begins with the existing customers of the organisation.
This strategy is used by companies in order to increase sales without drifting from the original product-market strategy (Ansoff,
1957). Companies often penetrate markets in one of three ways: by gaining competitors customers, improving the product quality
or level of service, attracting non-users of the products or convincing current customers to use more of the company’s
product, with the use of marketing communications
tools like advertising
etc. (Ansoff, 1989, Lynch, 2003). This strategy is important for businesses because retaining existing customers is cheaper
than attracting new ones, which is why companies like BMW
and Toyota
(Lynch, 2003), and banks like HSBC
engage in relationship marketing
activities to retain their high lifetime value customers.
Product development
Another strategic option for an organisation is to develop new products. Product development
occurs when a company develops new products catering to the same market. Note that product development refers to significant
new product developments and not minor changes in an existing product of the firm. The reasons that justify the use of this
strategy include one or more of the following: to utilise of excess production capacity, counter competitive entry, maintain
the company’s reputation as a product innovator, exploit new technology, and to protect overall market share (Lynch,
2003). Often one such strategy moves the company into markets and towards customers that are currently not being catered for.
Market development
When a company follows the market development strategy,
it moves beyond its immediate customer base towards attracting new customers for its existing products. This strategy
often involves the sale of existing products in new international markets. This may entail exploration of new segments of
a market, new uses for the company’s products and services, or new geographical areas in order to entice new customers
(Lynch, 2003). For example, Arm & Hammer was able to attract new customers when existing consumers identified new uses
of their baking soda (Christensen et al, 2005).
Diversification
Diversification strategy is distinct in the sense that when a company diversifies,
it essentially moves out of its current products and markets into new areas. It is important to note that diversification
may be into related and unrelated areas. Related diversification may be in the form of backward, forward, and horizontal integration.
Backward integration takes place when the company extends its activities towards its inputs such as suppliers of raw materials
etc. in the same business. Forward integration differs from backward integration, in that the company extends its activities
towards its outputs such as distribution etc. in the same business. Horizontal integration takes place when a company moves
into businesses that are related to its existing activities (Lynch, 2003; Macmillan et al, 2000).
It is important to note that even unrelated diversification often has some synergy
with the original business of the company. The risk of one such manoeuvre is that detailed knowledge of the key success factors
may be limited to the company (Lynch, 2003). While diversified businesses seem to grow faster in cases where diversification
is unrelated, it is crucial to note that the track record of diversification remains poor as in many cases diversifications
have been divested (Porter, 1987). Scholars have argued that related diversification is generally more profitable (Macmillan
et al, 2000; Pearson, 1999). Therefore, diversification is a high-risk strategy as it involves taking a step into a territory
where the parameters are unknown to the company. The risks of diversification can be minimised by moving into related markets
(Ansoff, 1989).
