Marketing and expansion of an organization go hand in hand, and both are perpetual processes. Many economists, management experts, and specialists from various fields have attempted at arriving at an appropriate method of achieving success in the market.
In the year 1957, Russian mathematician and business manager, H. Igor Ansoff introduced to the world a Product/ Market Expansion grid matrix, which later came to be known as the Ansoff Matrix. This matrix was first published in the Harvard Business Review under the title ‘Strategies for Business Diversification’. Ansoff Matrix supports the process of strategic business planning.
This matrix has aided many business development managers and executives understand and analyzing the inherent business risks.
These days Ansoff Matrix is used at a personal level to weigh career choices to make informed decisions.
On corporate level, the Ansoff Matrix helps the business grown in the below stated ways:
- The matrix helps in evaluation and valuation of all possible choices for expansion.
- Facilitates in the process of Risk analysis of the above- mentioned choices.
- The matrix is simple to make, and involves no intricate transactions or calculations or algorithms of any sort.
- Gives a direction to the organization.
The Ansoff Matrix has basic four quadrants named as-
- Market Development
- Market Penetration
- Product Development
The horizontal and vertical sides are further divided into- new and existing.
This quadrant focuses on increasing sales and revenue through introducing existing products in new markets. New markets here could refer to new geographical locations such as foreign markets and even new modes of reaching new markets, like through e-commerce portals. An efficient market development strategy is required, with the following attributes:
- Availability of upgraded technology is pre-requisite.
- The target markets have a consumer base that has disposable income, and is willing to spend it and shall likely spend it in their products.
- Comprehension of existing competitors in the new markets, so as to understand market and consumer behavior.
- Operational cost of catering to the new markets shall also be minimized to best extent possible.
- The demographic study of new market- its population, the dominant age group and the gender group prevalent.
- Accessibility and readiness of suppliers of raw material to fulfil the demand in the new markets.
Companies generally dare to step into new markets, when it is performing very well in the existing markets.
Mc Donalds is a popular example of Market Development, as it continuously strives to open new stores in different countries and have a global reach. However, the basic range of products offered more or less remains the same, that is burgers. The food provider just adapts to the prevalent tastes and preferences, like in India, it introduced Mc Aloo Tikki.
This quadrant focuses on expansion and growth through promoting existing products in existing markets. This mainly focuses on internal decisions of the corporates, related to:
- Opening hours and timing of stores/ showrooms/ shops of the entity.
- Price strategies- if the customer base is price sensitive, will reducing the prices increase revenue and gross sales?
- Innovative marketing strategies keeping in mind the mix of 4Ps- Place, Price, Promotion and Product.
- Acquisition/ merger or collaboration with competitors dealing in the same line of products and in the same market.
- Offers, discounts, buy-one, get-one strategies along with intensive advertisement to increase market share.
An example to understand Market Penetration better is to that of soft-drink giant Coco-Cola. According to data published on various platforms, the company spends heavily to build strong distribution networks and has also collaborated with many stadiums, restaurants, retail stores, super-markets etc.
This quadrant of the Ansoff Matrix caters to provision of new products in the existing markets. Product Development refers to the initiation of the action of introducing new products in the market by understanding the demand of existing customers. If a product is launched without understanding the demand, it might lead to over production, wastage of resources and even business loss.
Factors to be considered before placing a new product in the market:
- Required research and development including facility, equipment and personnel along with the cost and related expenses.
- The target consumers’ whose demand and/or need this product fulfils.
- Pre-launch promotion and advertisement activities to create awareness about the upcoming product.
- Availability of distribution channels- in case they are not sufficient, collaborations with other channels.
- The environmental impact of the new product launched.
An appropriate example of product development is the release of electric vehicles in the market considering the harmful impact of automobiles on the environment.
A much used name to understand Product Development is of Apple. Apple perpetually introduces new and innovative products in the existing market, that have a separate fanbase altogether. This indicates that Apple has great research and development facility. Thus, it is able to introduce a variety of products such as iphones, ipads, and Mac-Pro books etc.
This is possibly a riskier strategy that refers to introduction of new products in new markets. Ansoff’s diversification requires a combination of market and product development. However, it must be noted that diversification holds great potential for achieving new heights. In fact, as they the riskier the proposal, greater are the profits.
Diversification can be bifurcated into two types- Related Diversification and Unrelated Diversification.
Related Diversification refers to venturing into a new industry/ sector that has similar aspects with the existing business. For example, a plastic manufacturer ventures into the business of plastic plates and spoons. A classic real-life instance of related diversification is Disney’s investment in ABC. It must be noted that Disney already was engaged in the entertainment sector and had a reputable name in it.
Another illustration is that of Honda Motor Company. The motor company was essentially engaged in manufacture and sales of cars and trucks. After thorough analysis, Honda Motors diversified into the bikes and two-wheeler sector. This was a successful and profitable diversification, because Honda utilized its core competencies related to engine building skills and its knowledge for vehicles in general.
Unrelated Diversification refers to the decision to invest capital that has no similarities with the existing business whatsoever. A layman example unrelated diversification would be if a smart phone manufacturer starts selling clothes and apparels. It must be kept in mind that not all diversification strategies give desirous results.
A perfect example of unrelated diversification gone wrong is, as per reports Harley Davidson, prominently engaged into motor bikes tried bringing into market mineral water bottles with the brand Harley, but without much success. Another instance is when Starbucks, a known brand for coffee tried diversifying in the furniture industry and did not get appropriate results.
Hence, in conclusion, though the matrix was introduced more than fifty years ago, it is very much relevant in today’s corporate world. The Ansoff Matrix helps businesses grow and also helps analyse the risk-appetite before investment.