The Ansoff Matrix
1125 words · 6 minutes
As the world of business evolves, managers must approach business planning and strategy with a contemporary mindset. According to Dess, McNamara, Eisner, and Lee, managers must be willing to adapt to the modern business environment by going beyond "'incremental management', whereby they view their job as making a series of small, minor changes to improve the efficiency of the firm's operations"1.
One reason that strategic management is crucial is because most businesses that fail in the United States each year fail due to a lack of strategic focus or direction2. The rate of failure for businesses with poor strategies shows that strategic planning and management are crucial to a business's strength and longevity, injecting the critical factors of growth and direction into a company's business plan.
One of the most significant strategic planning and management frameworks that companies can use is the Ansoff Matrix. While this framework has unique purposes and use-cases, it can effectively help an organization grow and compete. Specifically, the Ansoff matrix is one of the most effective frameworks for companies who want to focus on increasing sales revenue or profitability3.
This framework uses a two-by-two figure to show the four strategic options for companies to use in this framework: market penetration, market development, product development, and diversification (see Figure 1). The x-axis of the matrix focuses on the firm's markets and also determines if the firm is looking to enter new markets or innovate in its current markets. The y-axis of the matrix focuses on the firm's products and determines if the firm wants to pursue strategies around their existing products or explore new products.
Figure 1: The Ansoff Matrix - By JaisonAbeySabu, Own work, CC BY-SA 3.0
The most straightforward strategy in the Ansoff matrix is to focus on existing products in existing markets, also known as market penetration3. Companies such as Coca-Cola have used market penetration successfully by investing a lot of money to get further value out of their current markets. Coca-Cola does this by introducing new features such as Christmas-themed bottles, personal names on the bottles, and other marketing schemes.
Market development extends existing products into new markets in an attempt to increase the number of buyers. One interesting way that Coca-Cola used this strategy comes from the stigma that Diet Coke is a woman's drink4. Coca-Cola introduced Coca-Cola Zero, which contained the same nutritional content as Diet Coke, but was packaged in a dark black can to appear more "manly"4.
Product development uses existing markets to introduce new products so that the firm can better meet customer needs4. The extreme end of diversification is home to companies such as Johnson & Johnson, a healthcare company that has developed a business portfolio of more than 60,000 different products5. Johnson & Johnson's dedication to continuous diversification has led them to a balance sheet rating of "AAA", industry recognition for diversification, and increases in their investor dividends for 57 consecutive years6.
Diversification, the final strategy of the Ansoff Matrix, is more difficult than the others since it involves exploring both new markets and new products. Related diversification is a diversification strategy that closely relates to the firm's core business. Coca-Cola's best example of related diversification is its acquisition of Glaceau and Vitamin Water, which expanded their drinking lines of business4.
Unrelated diversification is a diversification strategy that does not really relate to the firm's core business but still diversifies their business portfolio. A good example of this would be a coffee company who has decided to enter the market for bicycle sales. The main purpose of this strategy is to an extremely diverse company that will not go bankrupt if one market goes through difficult times. However, this requires a lot of independent skills and heavy investments since the company most likely cannot easily transfer knowledge between the markets they compete in.
Requirements for Success
To use the Ansoff Matrix framework, managers need to formulate corporate goals and objectives. Without goals and direction, management frameworks do not present much practical utility. Further, the Ansoff Matrix requires the managers involved to make tactical decisions and create a path for the company to take toward their goals. Lastly, both the Ansoff Matrix needs to consider both internal and external perspectives throughout the strategy formulation process.
One interesting probability is that companies will be using multiple strategic planning and management frameworks at the same time. While this may sound like it could crowd the management process, there are numerous reasons to do so. For example, the Ansoff Matrix and the Balanced Scorecard are relatively popular, and they cover entirely different parts of a company's strategy. Using the results from the Balanced Scorecard could inform a company of the potential product and market demands, such as from customer or supplier survey results, to help the company determine which Ansoff Matrix strategy to pursue. However, a combined approach at this level would require mature frameworks and focused managers who are able to strategize at a high level.
Lastly, it should be noted that the author of the Ansoff matrix, Igor Ansoff, often used the term paralysis by analysis to explain the mistake of companies who overuse analysis and spend too much time planning. Companies need to understand the utility of a strategic management framework while ensuring that the company is poised to execute as efficiently as they have planned.
Dess, G. G., McNamara, G., Eisner, A. B., Lee, S. H. (2019). Strategic management: Text & cases, ninth edition. New York, NY: McGraw-Hill Education.
Juneja, P. (n.d.). Benefits of strategic management. Management Study Guide. Retrieved from https://www.managementstudyguide.com/strategic-management-benefits.htm.
Meldrum M., McDonald M. (1995) The Ansoff matrix. In: Key Marketing Concepts. London: Palgrave.
Oakley, T. (2015). Coca-Cola: The Ansoff matrix. The Marketing Agenda. Retrieved from https://themarketingagenda.com/2015/03/28/coca-cola-ansoff-matrix/.
Lemke, T. (2019). The most diversified companies in the stock market. The balance. Retrieved from https://www.thebalance.com/the-most-diversified-companies-in-the-stock-market-4169730.
Johnson & Johnson. (2018). 2018 Investor Fact Sheet. [PDF file]. Retrieved from http://www.investor.jnj.com/_document/2018-investor-fact-sheet-4-19'id=0000016a-5681-d475-a17f-d78db54a0000.