Strategic Directions With Ansoff’s Growth Matrix

Source:https://www.conceptdraw.com/examples/ansoff-matrix

The Ansoff Matrix is also known as the Product/Market Expansion Grid, is a tool used by the organizations to analyze and plan their strategies for growth. It was developed by H. Igor Ansoff and was published in the Harvard Business Review in 1957. The matrix helps business leaders and marketers to better understand the risks inherent in growing their business.

The matrix shows four strategies that can be used to help a firm grow and also analyzes the risk associated with each strategy:

1. Market Penetration

It implies increasing the share in the existing markets with the current product or service range. This strategy is build on established capabilities and does not require the organization to venture into unchartered territories.

The market penetration strategy can be executed in a number of ways:

1. Decreasing prices to attract new customers
2. Increasing promotion and distribution efforts
3. Acquiring a competitor in the same marketplace

However, organizations seeking greater market penetration may face three constraints:

1. Retaliation From Competitors

The danger arising from increasing market penetration is likely to exacerbate industry rivalry as other competitors in the market defend their share. Increased rivalry might involve price wars or expensive marketing battles, which may cost more than any market-share gains are actually worth.

2. Legal Constraints

Countries have official market regulators to control excessive market penetration protecting the overall interests of the industry and supporting the SME businesses from losses.

2. Product Development

Source: https://www.way.com.vn/nhung-y-tuong-kinh-doanh-hay-doc-dao-moi-la-nhat.html

In a product development strategy, the firm plans to develop new products to cater to the existing market. This usually implies extensive research and development and expanding the range of the firms products and services. The product development strategy is employed when firms have a strong understanding of their current market and are able to provide innovative solutions to meet the needs of the existing market.

It can be implemented in a number of ways:

1. Investing in R&D to develop new products to cater to the existing market
2. Acquiring a competitor’s product and merging resources to create a new product that better meets the need of the existing market
3. Forming strategic partnerships with other firms to gain access to each partner’s distribution channels or brand

Despite its advantages, product development can be risky for two reasons:

1. New Resources & Capabilities

Product development strategies involves mastering new processes or technologies that are unfamiliar to the organization which may involve heavy investments and can have high risk of project failures.

2. Project Management Risk

There can be risks of delays and increased costs as extension of current
strategy focus often leads to growing project complexity and changing project specifications over time. For example, the UK’s high-speed rail project HS2, was originally projected to cost £32.7bn in 2010, estimated to cost £56bn in 2018 and now commentators are suggesting it will end up costing between 20% and 60% more making it the world’s most expensive railway.

3. Market Development

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This strategy involves offering existing products and services to new markets. This expansion into new markets may suggest expanding into new geographies or new customer segments and can very successful when

1. The firm owns proprietary technology that it can leverage into new markets
2. Potential consumers in the new market are profitable as they possess disposable income
3. Consumer behavior in the new markets does not deviate too far from that of consumers in the existing markets

4. Diversification

Source: https://www.sarwa.co/blog/the-importance-of-portfolio-diversification

In a diversification strategy, the firm enters a new market with a new product. Although such a strategy is the riskiest, as both market and product development are required, the risk can be mitigated somewhat through related diversification.

Four potentially value-creating drivers for diversification are as follows:

1. Exploiting economies of scope

Economies of scope refer to efficiency gains through applying the organization's existing resources or capabilities to new markets or services.
If an organization has under-utilized resources or capabilities that it cannot effectively close or sell to other potential users, it is efficient to use these resources or capabilities by diversification into a new activity.

2. Stretching corporate management capabilities (Dominant Logics)

This is a special case of economies of scope which applies to the skills of talented corporate-level managers referred to as ‘corporate parenting skills’ to new businesses. The dominant logic is the set of corporate-level managerial capabilities applied across the portfolio of businesses.

Corporate-level managers may have capabilities that can be applied even to businesses not sharing resources at the operating-unit level. Thus the French
luxury-goods conglomerate LVMH includes a wide range of businesses like champagne, fashion, jewelry, perfumes and financial media that share very few operational resources or business-level capabilities. However, LVMH creates value for these specialized companies by applying corporate-level competences in developing classic brands and nurturing highly creative people that are relevant to all its individual businesses.

There are two types of diversification a firm can employ:

1. Related diversification

There are potential synergies to be realized between the existing business and the new product or market.

2. Unrelated diversification

There are no potential synergies to be realized between the existing business and the new product or market.