Published by Leonardo Calcagno
Every entrepreneur wants to build a stable company and make money. For this, an effective business development strategy is important. The Ansoff Matrix is used in strategy creation. This analytical tool helps businesses of any kind, be it Woo Casino Canada or a streaming platform, identify growth directions and evaluate potential risks and benefits. Let’s learn how to use the Ansoff Matrix and assess potential risks with its help.
What Is the Ansoff Matrix and What Is It Used for?
The Ansoff Matrix was developed by mathematician and economist Igor Ansoff in 1957. It allows businesses to determine the optimal way to grow a company and evaluate the risks that may arise when choosing a particular business expansion strategy. Analysts, managers, and marketers use the matrix today.
For example, imagine you are the owner of a Japanese cuisine café. You have been operating in the food service market for over three years. In the last six months, the volume of orders has neither decreased nor grown. To successfully develop your business, you need to not only retain current customers but also attract new ones. To determine which development strategy to choose to increase order volume and profits, you can try working with the Ansoff Matrix.
The Ansoff Matrix is a table consisting of quadrants. Simply put, it’s a sheet divided into four segments: “Existing Market and Existing Product,” “Existing Product and New Market,” “Existing Market and New Product,” and “New Market and New Product.” Each segment corresponds to one of four strategies: “Market Penetration,” “Market Development,” “Product Development,” and “Diversification.” A company needs to identify the types of products and markets it operates in and then choose the most suitable strategy.
The advantage of the Ansoff Matrix lies in its versatility and the ability to choose an appropriate development strategy for businesses of any size. It can be used by a shopping mall with 30,000 daily visitors, a gold mining company, a small photo service salon, or a coffee shop.
Understanding the Current State of a Business
The matrix helps select a strategy, but it doesn’t help determine the stage the business is in. Before turning to the matrix, a business should assess its product and financial indicators and address weaknesses. This requires analyzing the market, competitors, and their quantity, and understanding what sets the company apart (identifying competitive advantages). This will allow for selecting a winning strategy in the matrix. It’s often used in conjunction with other business analytical tools.
PEST analysis helps consider external factors affecting the enterprise: political, economic, social, and technological (Political, Economic, Social, Technological). It allows businesses to evaluate risks and opportunities for the coming years, making it useful for long-term planning.
SWOT analysis highlights the company’s strengths, weaknesses, opportunities, and threats. This comprehensive approach yields a more accurate and predictable result.
How to Use the Ansoff Matrix
The matrix does not account for certain variables — it rather reflects an ideal situation with minimal competition. It won’t provide an exact forecast of how the market will respond to a particular product and won’t allow a business to analyze its costs and benefits, but it will outline a direction. Consider the specifics of your business as well: some may benefit from a less risky strategy, while others may achieve results only through higher-risk approaches.
For example, selling an existing product in a new market can bring benefits if a company has spare funds since significant investments will be needed. This approach is suitable if the business already has experience successfully promoting goods or services. An example could be expanding the geography of a well-known pizzeria by opening franchised locations in new cities.
Launching a new product in an existing market is often used by manufacturers of household appliances and electronics, who continually release new products. An entrepreneur should choose this strategy in two cases: when their field has many competitors and frequent new product launches, or when the field requires constant product updates.
If a preliminary business analysis indicates that less risky strategies will not be effective and the company is prepared for serious risks, diversification can be attempted.
The four segments of the Ansoff Matrix offer several strategies:
Selling an Existing Product in an Existing Market
Market Penetration. This strategy involves selling existing products in markets where the company already has customers, while increasing market share or sales volume. In other words, it focuses on deepening the company’s presence.
This strategy is considered the least risky. The main requirements are lowering product prices or increasing marketing expenses. Both can also be done simultaneously.
The main risk of the strategy is a possible decrease in income. By lowering product prices and offering discounts, the company reduces profit margins. In this case, the organization may sell more products at a lower price but earn less income overall. Therefore, everything must be carefully calculated.
Another danger is reputational loss. Long-term price reductions across a wide range of products may lead consumers to believe the quality has dropped, and investors may think the company is struggling.
A successful example of market penetration was demonstrated by Coca-Cola. The soda is considered a seasonal drink, especially popular in summer. Sales decline in winter. To mitigate losses, the company launched a powerful marketing campaign associating the product with New Year’s celebrations. This helped increase sales ahead of New Year’s and associated Coca-Cola with holiday festivities.
Selling an Existing Product in a New Market
Market Development. In this case, the business introduces an existing product to a new market. There are more risks compared to the previous strategy, but the business can potentially capture a new segment of consumers, sell goods or services in another region, or enter international markets.
However, there’s a caveat: the strategy requires significant investment to enter the new market. If these investments don’t pay off, the company may suffer significant losses. Additionally, market expansion requires time and effort, potentially impacting current market operations and leading to losses there.
A notable example of entering a new market with an existing product is the shoe manufacturer Crocs. Initially designed as non-slip footwear for boating, it gained popularity among medical workers, gardeners, and chefs. Eventually, Crocs became everyday footwear for everyone. Effective advertising helped capture new markets.
Selling a New Product in an Existing Market
Product Development. This strategy involves launching a new product in an existing market. It is more complex and riskier than previous strategies, requiring investments in product creation and audience loyalty. Companies expand product lines, improve existing products, or develop next-generation items to implement this strategy.
In 2007, Apple released the first iPhone. The following year, a new model was launched. It became popular, building the brand’s reputation. In 2010, Apple released the first iPad, targeting iPhone users.
Selling a New Product in a New Market
Diversification. This is the most challenging and risky strategy in the Ansoff Matrix. Diversification requires substantial capital investments, sometimes involving loans. Expenses related to production, logistics, and storage increase. However, if successful, diversification can bring the highest profits.
For example, BIC initially focused on ballpoint pens. Using similar production technology, the company began producing lighters and razors. Now, it’s hard to tell what BIC is more associated with.