Businesses are like machines, with moving parts that require maintenance and upgrades in order to keep them functioning and producing results. If a business loses its momentum, a common side effect is for the business to reach a plateau, making it difficult for the company to expand and grow.
When companies are trying to adapt their product ranges or dip into new markets, they can often become overwhelmed by the financial and business risks involved, making it difficult for the business to increase their return on investment. As a business owner, it’s crucial for you to take advantage of every tool at your disposal by planning ahead of making any big business decisions.
There are a number of competitive analysis and strategy tools that help businesses to assess their growth opportunities and develop products in different markets. For business owners that want to scale their company, the Ansoff matrix or Ansoff’s growth matrix can be the perfect tool to help you assess, strategize and mitigate the risks involved.
What Is the Ansoff Matrix?
The Ansoff Matrix is a strategic planning tool that was developed by Igor Ansoff in the year 1957. Ansoff proposed there are two approaches to developing a business growth strategy. The first is through diversifying what is sold (product growth) and the second is who the products are sold to (market growth.)
The Ansoff Matrix can be split into four quadrants:
- Market penetration
- Market development
- Product development
Ansoff’s two core principles combined with the four sections of the Ansoff’s matrix help companies strategize their growth by looking at markets, products and services. Each of the four strategies provides a business with an opportunity for growth, however, they all come with their own level of risk and it’s important for business owners to use their own judgment.
Consider this strategy if your company has established a demand for your product and narrowed down the necessary market to target customers. A market penetration strategy will help grow your sales within your existing market by utilizing your current products or services.
The key benefit of this marketing strategy is that you’ve already laid the groundwork for your existing products. This makes the strategy low-risk, by leveraging your existing data, resources and market share.
There are a number of ways that a business can implement a market penetration strategy and the most suitable one for you will depend on your organization. For example, a chain of coffee shops may introduce a loyalty scheme, offer special promotions or double their Facebook advertising spend. By taking advantage of their existing product selection, they’re able to improve their market share, bring in new leads and retain customer loyalty.
Market penetration is ideal for companies with a strong competitive advantage to tap into their existing customer base and maximize their ROI. However, innovation often helps companies to scale and a market penetration strategy can be a short-term approach to improving your bottom line.
The second section of the Ansoff Matrix is a strategy that’s based on expanding your existing products and services into new markets. This could entail enticing new customers and bringing in fresh leads, or dipping your toes into different geographical locations.
With the wonders of technology, market development has become increasingly easy. One of the core benefits of a market development strategy is taking advantage of online channels to acquire new leads and convert customers through online platforms. For example, a brick and mortar only store could benefit from a company website, social media, email marketing campaigns and an E-commerce store, such as Amazon.
This strategy offers a lot of growth potential for companies that want a low- to mid-risk strategy, by expanding their geographical reach and targeting customers from all over the world. It’s important to note that a market development strategy may not be ideal for you if:
- There’s no demand for your product outside of your existing target market
- You don’t have the data to successfully localize your products worldwide
- If your company can’t support this strategy with existing resources
Diversifying into new markets with new products is the riskiest strategy in the Ansoff Matrix. However, don’t be put off by the thought of delving into uncharted territory. Diversification presents the perfect opportunity for companies that want to vary their revenue by entering untapped markets and supplying the demand for new products.
Vertical integration can synergize your business by acquiring businesses involved in your supply chain to catalyze your company’s growth. For example, by owning the companies that produce and distribute your product, you’re able to help your company by decreasing manufacturing costs and logistic expenses. Furthermore, synergizing with your transportation company will help to reduce the turnaround times in creating and distributing your products.
If you’re not ready to take on the risk of starting an entirely new venture, then horizontal diversification may be an option. This entails targeting your existing customer base by offering them new products. This part of the diversification strategy is aimed at customers loyal to your brand and often increases your company’s dependence on the market segment.
As business owners often know, the competition can be fierce and it can be difficult to differentiate a company from the competitors. Horizontal diversification enables your company to improve its competitive position with a broad product offering.
Company’s implement a product development growth strategy by shifting their focus to targeting existing markets with new products. Approaching your existing customer base with new products can be done by repackaging products, streamlining services to improve the customer experience or developing related products.
Crunching the data and customer feedback is essential to product development. Understanding customers based on demographics and psychographics can distinguish why a customer prefers red over blue or chocolate over vanilla. By offering related products to existing markets your company is able to boost profits and build brand loyalty by providing additional value to your customers.
Product development does have its perks for companies that are consistently competing to be the most innovative in their industry. By adding to product ranges or offering stellar customer service, it improves the overall customer experience. Furthermore, the potential for growth is supported by the possibility to offer products with a higher ROI than your existing range.
While some of the risk involved in implementing this strategy is mitigated by targeting your existing customer base. It’s important to note that developing new products can be a costly endeavor. Companies should expect upfront costs while factoring in losses that may occur from delays in production and unforeseen expenses.
Factoring Risk Using the Ansoff Matrix
Thomas Jefferson said it best: “With great risk often comes great reward,” meaning that the opportunities for your business to grow are there, providing that you’re willing to take the risk and help your business advance.
The Ansoff Matrix provides practical solutions to help your company strategize its potential growth opportunities to tap into new markets and produce new products. The suggestions that the matrix highlights can be adapted to suit your business needs if you research and assess the risks involved for each strategy.
The starting point to any profitable strategy is to plan ahead and understand your company’s key strengths and weaknesses. The matrix acts as a tool to help your company identify which strategy will be the most suitable for you and to avoid costly problems further down the line.