Ansoff Product-Market Expansion Grid
A useful planning tool in respect of markets and products is the matrix developed by Igor Ansoff, who is regarded by some as the ‘Father of Strategic Management’. Fully titled the Ansoff Product-Market Growth Matrix, the tool was first published in Harvard Business Review, 1957, in Ansoff’s paper Strategies for Diversification.
The Ansoff Product-Market Expansion Grid or Ansoff Matrix helps to understand and assess marketing or business development strategy. Any business or part of a business can choose which strategy to employ, or which mix of strategic options to use.
This is a fundamentally simple and effective way of looking at strategic development options.
Each of these strategic options holds different opportunities and downsides for different organizations, so what is right for one business won’t necessarily be right for another. Think about what option offers the best potential for your own business and market. Think about the strengths of your business and what type of growth strategy your strengths will enable most naturally. Generally, beware of diversification – this is, by its nature, unknown territory, and carries the highest risk of failure.
Here are the Ansoff strategies in summary:
- Market penetration – Developing your sales of existing products to your existing market(s). This is fine if there is plenty of market share to be had at the expense of your competitors, or if the market is growing fast and large enough for the growth you need. If you already have a large market share you need to consider whether investing for further growth in this area would produce diminishing returns from your development activity. It could be that you will increase the profit from this activity more by reducing costs than by actively seeking more market share. Strong market share suggests there are likely to better return from extending the range of products/services that you can offer to the market, as in the next option.
- Product development – Developing or finding new products to take to your existing market(s). This is an attractive strategy if you have a strong market share in a particular market. Such a strategy can be a suitable reason for acquiring another company or product/service capability provided it is relevant to your market and your distribution route. Developing new products does not mean that you have to do this yourself (which is normally very expensive and frequently results in simply re-inventing someone else’s wheel) – often there are potential manufacturing partners out there who are looking for their own distribution partner with the sort of market presence that you already have. However, if you already have a good market share across a wide range of products for your market, this option may be one that produces diminishing returns on your growth investment and activities, and instead, you may do better to seek to develop new markets, as in the next strategic option.
- Market development – Developing new markets for your existing products. New markets can also mean new sub-sectors within your market – it helps to stay reasonably close to the markets you know and which know you. Moving into completely different markets, even if the product/service fit looks good, holds risks because this will be unknown territory for you, and almost certainly will involve working through new distribution channels, routes, or partners. If you have a good market share and a good product/service range then moving into associated markets or segments is likely to be an attractive strategy.
- Diversification – taking new products into new markets. This is high risk – not only do you not know the products, but neither do you know the new market(s), and again this strategic option is likely to entail working through new distribution channels and routes to market. This sort of activity should generally be regarded as additional and supplementary to the core business activity and should be rolled out carefully through rigorous testing and piloting.
BCG Growth-Share Matrix
Consider also your existing products and services themselves in terms of their market development opportunity and profit potential. Some will offer very high margins because they are relatively new, or specialized in some way, perhaps because of special distribution arrangements. Other products and services may be more mature, with little or no competitive advantage, in which case they will produce lower margins. The Boston Matrix (also known as the Boston Consulting Group analysis, the Growth-
The Boston Matrix model is a tool for assessing existing and development products in terms of their market potential and thereby implying strategic action for products and services in each category.
- Cash cow – The rather crude metaphor is based on the idea of ‘milking’ the returns from previous investments which established good distribution and market share for the product. Products in this quadrant need maintenance and protection activity, together with good cost management, not growth effort, because there is little or no additional growth available.
- Dog – This is any product or service of yours which has a low market presence in a mature or stagnant market. There is no point in developing products or services in this quadrant. Many organizations discontinue products/services that they consider fall into this category, in which case consider the potential impact on overhead cost recovery. Businesses that have been starved or denied development find themselves with a high or entire proportion of their products or services in this quadrant, which is obviously not very funny at all, except to the competitors.
- Problem child – These are products that have a big and growing market potential, but existing a low market share, normally because they are new products, or the application has not been spotted and acted upon yet. New business development and project management principles are required here to ensure that these products’ potential can be realized and disasters avoided. This is likely to be an area of business that is quite competitive, where the pioneers take the risks in the hope of securing good early distribution arrangements, image, reputation, and market share. Gross profit margins are likely to be high, but overheads, in the form of costs of research, development, advertising, market education, and low economies of scale, are normally high and can cause initial business development in this area to be loss-making until the product moves into the rising star category, which is by no means assured – many problem children products remain as such.
- Rising star – Or ‘star’ products are those which have a good market share in a strong and growing market. As a product moves into this category it is commonly known as a ‘rising star’. When a market is strong and still growing, competition is not yet fully established. Demand is strong; saturation or over-supply do not exist, and so pricing is relatively unhindered. This all means that these products produce very good returns and profitability. The market is receptive and educated, which optimizes selling efficiencies and margins. Production and manufacturing overheads are established and costs minimized due to high volumes and good economies of scale. These are great products and worthy of continuing investment provided good growth potential continues to exist. When it does not these products are likely to move down to cash cow status, and the company needs to have the next rising stars developing from its problem children.
After considering your business in terms of the Ansoff matrix and Boston matrix (which are thinking aids as much as anything else, not a magic solution in themselves), on a more detailed level, and for many businesses just as significant as the Ansoff-type-options, what is the significance of your major accounts – do they offer a better opportunity for growth and development than your ordinary business? Do you have a high-quality, specialized offering that delivers better business benefits on a large scale as opposed to a small scale? Are your selling costs and investment similar for large and small contracts? If so you might do better concentrating on developing large major accounts business, rather than taking a sophisticated product or service solution to smaller companies that do not appreciate or require it and cost you just as much to sell to as a large organization.