Successful business owners and leaders know that in order for their organization to continue growing in the long term, they have to innovate and find unique ways of reaching more customers. They have to find untapped ways of increasing profits while at the same time adding value to their customers.
There are always new and unique ways of increasing revenue and profits and also finding new customers. This can include tapping into new markets and territories, developing new deals and partnerships and rolling out new products.
But all of these options can present serious risks to organizations. How do you know which strategy or business plan will work best for your company while presenting the lowest amount of risk?
This is where the Ansoff Matrix comes into play. It’s a tool which is meant to help guide your business to make more systematic decisions which allow you to carefully access and weigh out the risks associated with all of your options. It’s also meant to help you build out and carry a business plan that is in line with your company goals.
What is the Ansoff Matrix?
The Ansoff Matrix is named and created by the Russian mathematician and business manager Igor Ansoff. The Ansoff Matrix is an old school strategic planning tool that is meant to help create the necessary structure to help managers, executives, operations and marketing create effective strategies for the future growth of their business.
The matrix breaks into four major categories or strategies:
- Market Development
- Product Development
- Diversification
- Market Penetration
Yes, it sounds boring, but it’s an effective tool for businesses to use in order to help them grow over the long term.
Market Development Strategy
Inside the market development strategy, businesses attempt to expand into new markets that they haven’t explored before. This can include new states, countries, age groups, demographics and more. The key component is to do all of this without making massive changes in the products or services that the business offers.
This is typically accomplished by some of the following actions:
- Targeting different customers
- Exploring commercial and wholesale customers
- Overseas markets
- Different area codes or regions of the country in which you operate
The market development strategy tends to be most successful in areas where a business has an advantage with a product or service and can expand it in a new market segment. It can also experience success if the market it plans to expand to shares similarities to the market it currently operates in.
Example of Market Development Strategy
An example of the market development strategy in action today is the software company Slack. Slack started off as an internal company chat program to help staff communicate better. Their advantage was that they took a simple software like chat and made it into something truly unique that customers loved.
The company initially launched Slack for free to its users to get a feel of their behaviors and tendencies. From there Slack evolved and has become a market leader in chat software.
Product Development Strategy
The product development strategy is when a company tries to build new products and services which are aimed at their existing customers and markets in order to achieve growth.
This typically includes adding new products to a businesses product line and marketing it to it’s existing markets and clients. It can function almost like an upsell and it’s meant to be new and exciting.
New products tend to be created and brought into the existing markets through:
- Buying patents and licensing rights to produce someone else’s product
- Massive investments into research and development
- Reducing costs and adding features
- Private labeling products with company’s brand
- Acquisition of other companies and their products and services
This type of strategy can carry a ton of risk for companies because it tends to be very capital intensive. As a result companies need to make sure to have good practices in place to measure their marketing and advertising spend.
Recommended Reading: Sales and Marketing Techniques to Help Improve Your Conversions
Examples of Product Development Strategy
A clear cut example of the product development strategy is the iPod expanding into the iPod min and the iPod nano.
Each model serves the same function but has a unique look and appeal to more buyers. It was cost effective and extremely profitable for Apple
Diversification Strategy
The diversification strategy is one of the most interesting and exciting components of the Ansoff Matrix. In this strategy an organization tries to its market share by creating different types of offers in different marketplaces.
This strategy carries some risk because if a company totally misreads what it’s customers want and it diversifies too much it can leave a bad taste in their mouth. As a result the diversification strategy involves plenty of research and market testing before a company fully commits to it.
Companies who attempt to diversify and do it successfully can have tremendous success because they can create new markets and customers that previously didn’t exist. It can allow you to capture a more niche audience and establish yourself as an authority.
Example of the Diversification Strategy
The different strategies behind diversification can all carry significant risk IF not properly researched and tested. Some the the strategies include:
- Internal development and testing of new product lines
- Merging with a company who has similar products in order to capture a bigger market
- Creating multiple variations of products (color, price, sizes, etc.)
- Creating a green initiative product line
Market Penetration Strategy
The market penetration strategy is probably one of the most effective for companies if they have a good grasp on their advertising and marketing and know good ways to scale it. In this strategy a business tries to grow its profits and customers by expanding its existing offerings in existing marketplaces.
This is a strategy that is meant to help increase a company’s market share in a particular industry or niche. Market penetration is typically done by turning up advertising and marketing with the intent to sell more products and capture more customers. Common actions behind market penetration includes:
- Volume discounts for existing customers
- Price reductions
- Increase in advertising and marketing spend
- Competitive partnerships with other companies
- Mergers and acquisitions of companies in a similar industry
This strategy tends to carry the least amount of risk because a company isn’t making large changes in its underlying products and services.
Recommended Reading: Strategies for Market Penetration To Increase Sales
Example of Market Penetration Strategy
A good example of market penetration is penetration pricing. This is when you expand your business into a new market and drop your prices lower than your competitors for a period of time until you capture a healthy customer base.
This works especially well in areas where customers are very sensitive to price and the product is highly sought after.
Conclusion
The Ansoff Matrix can be a very useful tool for organizations who want to identify ways to expand their growth for the long term. It’s worth noting that each strategy can carry its own unique risk if not properly researched.
It’s recommended that companies that don’t rely solely on the strategies and framework inside the Ansoff Matrix because there could be strategies that are better suited for your type of business.
However, it can serve as a baseline tool for companies to open up healthy discussions within their organization to exchange ideas about creating growth for the future.