Decision-makers in companies have to keep looking for new ways to generate sustainable growth, especially in competitive markets.
The so-called product-market matrix (also: Ansoff matrix or market field strategy) is a helpful concept. This can be used as a planning tool for future-oriented growth strategies.
This construct assumes that markets and products influence the growth of companies.
The Ansoff matrix distinguishes four strategic options for achieving growth:
Those of market penetration, market development, product development and diversification.
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When it comes to market penetration, the focus is on gaining additional market shares with existing products. The company is trying to sell more of its products to existing, new, and competitive customers.
Existing marketing activities usually have to be adapted to achieve this goal. Although the product portfolio does not change, companies often have to experiment with new advertising concepts in order to further promote product adoption in the existing market.
However, this market penetration can only be successfully implemented up to the point at which the market has not yet been fully saturated.
The so-called degree of market penetration enables a quantitative assessment of the potential:
Market penetration rate = (number of own customers / number of potential customers on the market) * 100
The following applies: The lower the degree of market penetration, the greater the remaining growth potential for a company with the market penetration strategy.
The focus of the market development strategy is on creating new sales markets for existing products.
By entering new market segments or opening up further geographical regions, a company puts itself in a position to win new target groups for its existing products.
A regionally operating bakery can also offer its own products nationwide, for example by setting up digital sales channels, and thus generate growth.
Of course, the implementation of this strategy is initially offset by considerable investment costs. The chances of success should therefore first be assessed by means of careful planning and a comprehensive risk analysis.
If opening up new markets is not an option, it is often worth taking a look at the product development strategy.
The existing range is expanded through product innovations or the creation of product variants in the existing market. The resulting added value should encourage consumers to buy.
This strategy is particularly attractive for companies in niche markets in which acquiring new customers and upselling would be almost impossible with a pure market penetration strategy.
The reluctance to enter new markets is reinforced by high development costs and the risk of failure of the newly developed product.
The most risky quadrant of the Ansoff matrix is that of diversification.
This requires the development of a new product while at the same time opening up a new market.
The associated investment costs in terms of product development, business analysis, setting up local subsidiaries, etc. can quickly mean the end of a company if the corresponding ROI is not achieved.
The diversification strategy can be broken down into horizontal, vertical and lateral diversification depending on the degree of risk tolerance of a company :
Horizontal diversification describes the development of a new product that is still factually related to the product range previously offered.
The existing value chain can continue to be used with minimal adjustments. With horizontal diversification, a company expands its offerings at the same economic level in order to reach new customers.
An example of this type of diversification is the development of the iPad, which with its introduction gradually expanded Apple’s existing smartphone and computer portfolio.
With vertical diversification, a company deepens its commitment to sales-oriented activities ( forward integration ) and / or the actual manufacturing process of its products ( backward integration ).
As with horizontal diversification, diversification does not take place at the same level of the value chain, but at the upstream or downstream level.
With forward integration, a company takes the sales of its products and services into its own hands, for example by opening its own branches or an online shop.
The backward integration to the effect describes securing the reference markets of a company, for example through the acquisition of previously outsourced to external companies production processes.
While horizontal diversification aims to reduce dependency on one product line, vertical diversification focuses on reducing dependence on suppliers and dealers.
The acquisition of the necessary skills and know-how for the successful implementation of sales and production processes is in turn associated with high investment costs and thus increased financial risks.
With the lateral diversification strategy, companies expand into completely new markets that have no material connection with the existing business.
The aim and purpose of this alignment is to minimize the dependence on developments in the existing market segment.
Google can be mentioned as a good example in this context: In addition to the search engine core business, the company expanded early on into other market segments such as telecommunications ( fiber ), biotechnology ( Calico ) or autonomous automotive technology ( Waymo).
The lateral diversification strategy is used by multinational companies in particular to respond flexibly to changes and trends in the market.
The necessary know-how is usually acquired through the acquisition of specialized companies that are already represented in the market of interest.
Accordingly, this strategy requires enormous investment costs and harbors not only financial but also immaterial risks, such as a watered-down brand image due to product offerings that are too widely diversified.
The extended Ansoff matrix (9-field matrix)
Now the Ansoff matrix described above is a good basis for discussing future growth options for companies. But it suppresses the existence of any interim solutions.
Simple product modifications to reach new target groups in existing markets, for example, are not taken into account in this basic concept.
The following 9-field matrix expands the Ansoff matrix by the
- Market expansion ,
- Product modification ,
- limited diversification and
- partial diversification.
The market expansion here describes the sale of existing products in new geographic markets for a company, during which the target groups remain in those identical.
The product modification closes the gap between the penetration and product development. An existing product with slight modifications is sold in existing markets.
The restricted diversification describes the modification of existing products for new geographic markets.
The partial diversification can take different forms, depending on in which area of the matrix the action aimed at growth takes place. Either new products can be sold to geographically new markets or modified products to corresponding new types of customers.
Conclusion – The Ansoff matrix as a tool for discussing growth strategies
With the Ansoff matrix, decision makers can develop a growth-oriented future strategy for their company.
Depending on the phase in which your products are in the life cycle and the level of innovation and resource availability your company has, different strategic concepts are available.
But regardless of whether the strategy of market penetration, market development, product development or diversification is chosen; the Ansoff matrix suppresses the existence of any competition in all of these fields.
In addition to the actual choice for one of the defined growth strategies, companies should therefore always consider the overall context that actually exists. Extensive competition and environmental analysis define the degree of success of the respective growth strategy as well as the resource strength of your own company.