The Ansoff Matrix Explained with Example

[0:00]Hello, and welcome to today's lesson, where we're looking at the Ansoff Matrix. Now, this matrix was first introduced in the Harvard Business Review in a 1957 article called strategies for diversification by a man called Igor Ansoff, who was an applied mathematician and business manager. Now, the matrix is based on two dimensions. The horizontal dimension is based on whether the organization is selling new or existing products, and the vertical dimension is based on whether the organization is selling in new markets or existing markets. Now, based on these two dimensions, you can see here that there are four strategies for growth. So, the first strategy is market penetration, where the company tries to grow the market share of its existing products that it already sells. The second strategy is market development, where the company tries to grow by taking its current products into new markets. Third, we have product development, where the company tries to grow by taking new products to its existing markets. And fourth, we have diversification, where the company tries to grow by creating new products and taking those new products into brand new markets. Now, the easiest way to understand the matrix is to imagine that before you begin your Ansoff Matrix, before you start populating it, you're positioned here at the very bottom left of the diagram. And the next thing to understand is that the more newness you introduce to your strategy, the greater the risk of failure. So, that is, the more you move away from your starting position, either horizontally or vertically, the more risk you introduce. So, this means that the lowest risk strategy is to sell more of your existing products to your current markets, because that involves moving the least distance from your starting point. Now, if you decide to create a new product or enter a new market, then that's going to increase the risk because you're moving further away from your starting position, either horizontally or vertically. And finally, suppose you decide to create new products and sell those new products in new markets, which is diversification, then the risk is the greatest, as you're moving away from your starting position, both horizontally and vertically. Now, it's important to understand that just because the risks are high, does not mean that you shouldn't follow a particular approach. It's really up to you to choose the right strategy for your firm by balancing the risks against the potentially higher rewards a riskier strategy may bring. Once you've chosen the right strategy for you, you can then take steps to manage and mitigate those risks as you execute your strategy. So, let's take a look at each of the four growth strategies in turn. So, the first strategy is market penetration, the least risky strategy. And in this strategy, you aim to grow your organization by selling more of your existing products to your current markets. Now, another way to say this is that you're trying to increase your market share within your existing market. Now, there are several different ways in which organizations can seek to improve their market penetration, including enticing customers away from competitors. So, that's usually achieved through a combination of aggressive pricing and advertising campaigns, but it could also be achieved by beefing up the size of your sales force. Secondly, we have encouraging existing customers to become more frequent users of your products. So, for example, by introducing loyalty cards. And finally, we have acquire a competitor. And this strategy can be incredibly successful if increased volumes mean a disproportionate benefit of economies of scale to your organization and therefore that drives and increases profit margins. Next, let's take a look at market development. So, this strategy aims to secure growth by selling existing products to new markets. Now, in this strategy, we're referring to markets in their broadest sense. So, that means it could just mean new customer segments, or it could mean new overseas markets. Now, there are several different ways in which an organization can seek to develop a market, such as entering new territories, so for example, launching your product in a new country. Creating new product dimensions, or new packaging, so that could mean creating different sizes of your product. Maybe one, one type of product might last a day, whereas another huge pack might last a month. It could mean new distribution channels, so for example, a store selling only face-to-face opening an online store. And finally, it could mean creating products targeted at different market segments. So, for example, the same product might be packaged differently to appeal to different genders or different age groups. Now, market development can sometimes be the obvious choice, so for example, when there are large and untapped markets beckoning or new distribution channels have opened up, making it easy for you to reach those new markets. The third strategy is product development, and with this strategy, you attempt to secure growth by curating new products for your existing markets. And there's several ways you can look to do that. So, firstly, investment in research and development. That can be the obvious choice if you are non-competitive because your competitors just simply have a better product. Secondly, we have buying the rights to someone else's product. And finally, we have bringing out new product updates to make previous model models less desirable. So, your customers come back for more. So, for example, Apple regularly releases new iPhones at a higher price than their previous models. The final strategy is diversification, where you aim to grow by offering new products to new market segments. And this strategy is the highest risk. But conceptually, it can offer the highest rewards. And it's worth noting that there are two types of diversification. So, firstly, related diversification, where new markets you enter, or products you create, share some similarity with existing products or existing markets you're operating in. And then we have unrelated diversification, when you're trying to sell completely new products into completely new markets. And in theory, at least, related diversification is a lower risk option than unrelated diversification, although everything into the diversification bracket is considered high risk. So, let's take a look at a simplified example. So, we're going to look at how McDonald's might populate the Ansoff Matrix. Now, for market penetration, the least risk option, we can see that McDonald's might reduce the price of one specific burger and aggressively advertise the discount. And that strategy aims to grow market share by capturing new customers from competitors. Next, let's take a look at market development. And we can see that here, we might do a couple of things, so offer online ordering by partnering with Uber Eats or similar company. And we might also allow online payment with the most popular cryptocurrencies. Now, both those strategies aim to open up new channels to make it easier for new and existing customers within your existing market to get hold of your product. Next, let's take a look at product development. So, here we might introduce a brand new product such as a vegan burger. And this strategy aims to grow market share by attracting new customers who previously may have felt that McDonald's wasn't quite for them. Finally, the most risk option, diversification, under related diversification, we have selling mushroom burgers, which we're going to say is a new product into Vietnam, which we're going to say is a brand new market. And in terms of unrelated diversification, an option might be offering merchandise, which are again new products, so such as things like t-shirts and stationery into Vietnam, which is again a new market. And that strategy aims to achieve growth by launching a brand new product in a brand new market. Now, what you can clearly see hopefully from this example is that the market penetration strategy, whereby McDonald's is trying to sell more of the products it already makes to its existing customers is the least risky, but probably not going to result in the biggest growth. So, conversely, McDonald's trying to sell mushroom burgers, a brand new product, to a brand new market, such as Vietnam, is the riskiest option, as there is more that can go wrong in terms of achieving growth. So, in terms of advantages and disadvantages of the Ansoff Matrix, let's take a look at the advantages. So, it's easy to understand, making it a great tool to use when collaborating with your colleagues or performing presentations. It ensures all four growth strategies are considered or taken into account, which helps avoid a rush decision being taken without considering all the options. And finally, it forces organizations to consider the risks associated with each option. So, that they don't immediately choose the highest reward option without being aware of the risks, without trying to balance risk and reward. Now, in terms of disadvantages, there are a couple. So, it's somewhat myopic and insular as it doesn't take any account of what your competitors are doing, or what is going on in the wider world. And secondly, it doesn't provide any mechanism to weigh up the risk-reward profile of each of the different options. So, in summary, the Ansoff Matrix can help organizations make strategic decisions about how to grow. And it's based on the idea that there are just two fundamental options available to firms that want to grow. Changing what's sold as in creating new products or not, or changing who it is sold to, as in creating or entering new markets or not. Now, the matrix also incorporates the concept of risk to help organizations and strategists better understand the intrinsic risk associated with each growth option. So, that's it for this lesson. I really hope you enjoyed it, and I look forward to speaking to you again soon.