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Using the Ansoff Matrix to Evaluate the Product/Market Expansion Risk

Market Expansion Risk

Business growth is something every company aspires to regardless of its stage of development, whether it be exploring new markets, investing in innovations, improving their products and services, optimizing pricing, widening their target audience, and so forth.

However, expanding a business always involves risk, and if it’s not a well-calculated one, the consequences can be devastating.

One way to identify which is the most prominent strategy for your operations is to use the Ansoff Matrix – a verified growth planning framework developed by Igor Ansoff, corporate strategy mastermind. This method has been tested by hundreds of companies over the years.

To find out what the Ansoff matrix is all about, and how to utilize it to your benefit, read on.

What Is the Ansoff Matrix?

The Ansoff matrix, also known as the Ansoff growth matrix, Ansoff’s strategic opportunity matrix, and the product/market expansion grid, is a business management tool that companies can use to assess the risk involved in different growth strategies.

Although the framework was developed in 1957, it hasn’t lost its relevance and can be applied successfully to both digital and traditional businesses.

The creator of the matrix, Harry Igor Ansoff was a visionary in the field of corporate strategy and real-time strategic management for business growth and expansion, and he is considered the founder of both disciplines.

His matrix consists of four quadrants allocated on a flat plane, where every move on the vertical or horizontal axis increases the risk exponentially.

The core principle of Ansoff’s theory is that, when you break it down, there are only two key variables in business growth – the market and the product. By manipulating those the right way and exploring opportunities, companies can identify the right path to growth.

While, by default, the matrix doesn’t take into account important factors such as the competition or PESTLE analysis (overview of political, economic, sociological, technological, legal, and environmental factors), it is a powerful tool that can be very useful during the marketing planning process.

The Ansoff Matrix

Companies can use the framework to evaluate development through product and market expansion. Positioning the variables on the grid above allows businesses to see which strategies outweigh the risks involved.

How to Apply the Ansoff Matrix

Positioning your business opportunities on the grid and analyzing the resources involved in the implementation of each of them compared to the risks, help you decide which initiatives are worth it. However, as the business circumstances and the market environment are always changing, you should periodically reassess your strategies.

We’ll deconstruct the Ansoff matrix by exploring each one of its four strategies and see how they can be applied to your business.

Market Penetration Strategy

Ansoff Matrix’s market penetration strategy is, perhaps, the safest choice. Here, companies grow their businesses by further exploring an existing market with existing products.

The goal is to reach customers that have not been influenced by the brand’s marketing message yet, upsell to current clients, and increase the sales of the products that are already familiar to the audience.

How to apply the market penetration strategy:

This approach involves the least resources and the least financial investment and thus may have the highest ROI. What can compromise this is if the company has already gained a substantial market share. If this is the case, expansion opportunities will be limited due to the low capacity of the remaining market.

The formula to calculate your current rate is simple. Divide your existing client number by the total of potential clients in the marketplace, and multiply by 100. The result shows what percentage of the audience is already in your network. The lower the number, the higher the chances of penetrating the remaining market space.

Degree of Market Penetration Formula

For example, if you have 40 customers, and estimate that there are 400 potential clients who may be interested in your products, this means that you are covering only 10% of your current market, and this strategy is great for you.

However, if your customers are 380, you’ve already capitalized on 95% of the market. Therefore, this strategy has little to offer to your company.

Market Development Strategy

The Ansoff Matrix’s market development strategy involves moderate risk with substantial expansion potential. Here, companies aim to grow by introducing their existing products to new markets that they have not done business with yet.

The goal is to find new customers who match the same profiles as your existing ones, but who were out of range until now, or to identify new segments that can benefit from your products and services.

While, by default, the strategy states that you are targeting new people with the same solutions, minor changes to the product are acceptable if they may make it more appealing to the new audience.

How to apply the market development strategy:

  • Expand on international markets or in other local regions.
  • Build an online strategy for a brick-and-mortar business.
  • Add a new segment to your existing customer cohorts.
  • Explore the B2B potential of a B2C solution.

Depending on the type of products you are working with and the approach you choose, this strategy may involve different levels of financial investment (like rebranding, repacking, multilingual adaptation, etc.)

Also, as with any other business endeavor, it’s advisable to conduct market research and evaluate how the new audience may accept your product. This will reduce the risk and might provide additional insights about how to market your product and increase sales.

tiktok

A market development example we are all familiar with is TikTok. The social media platform was originally developed for the Chinese market in 2016 under the name Douyin, and in 2017 successfully expanded globally rebranded as TikTok for its international version.

Product Development Strategy

The Ansoff Matrix’s product development strategy involves high risk and companies need to carefully consider their actions before pursuing any opportunities.

Here, a business tries to grow its capital by producing new solutions to its existing market. The goal is to upsell to your current client base by providing product upgrades. You can also work on completely new solutions that match your customer’s needs.

How to apply the market development strategy:

  • Invest in researching and developing new innovative solutions.
  • Conduct voice of the customer research to identify new opportunities.
  • Find ways to upgrade your current product with new features and add ons.
  • Design new products that compliment your existing ones.
  • Acquire companies that have already developed solutions that may interest your audience.

Product development involves massive investments in human resources, time, and money. To minimize the risks, it should be backed with data-driven decision-making techniques and solid information. Companies should identify the needs and preferences of their market to match the planned new solutions. Otherwise, the outcome may be catastrophic.

netflix

A good example of product development expansion is Netflix. The company started by making original series, then proceeded with featured movies – a similar yet different product, and has recently announced that it is embarking into the gaming industry.

Diversification Strategy

The Ansoff Matrix’s diversification strategy is the most complicated and the riskiest of the four. In it, the company enters a new market with a new solution.

The goal here is to capitalize on completely different customers, bring in profits from new sources, and/or reduce the expenses from outsourced activities by doing them in-house.

Depending on the way companies approach the strategy, there can be three types of diversification:

  • Horizontal diversification (related diversification). The company enters a new market with a solution that is new and different but is somewhat related to their area of expertise.

By expanding your product range, you can minimize the dependency on the market’s demand for your original solution. Furthermore, you will not be completely out of your depth with the new product/s as they match your area of expertise, which makes the risk relatively moderate.

For example, if you are in the website development business and you start building mobile apps, both your audience and your product will be new. However, your new endeavor will be close enough to what you are currently doing to be considered a safe choice because you already have the skills. Your new audience is more likely to find you reliable because you’ve already shown your quality in a relatively similar niche.

  • Vertical diversification. In this case, the company takes on implementing activities that it used to outsource to third-party companies – like, production, distribution, support, sales, etc.

For example, if you are working with a marketing agency, but suddenly want to build a marketing department and hire experts to do this in-house, this is vertical diversification.

The benefit of this approach is that you minimize dependency on outside factors that are otherwise out of your control, can cost you extra and may reduce the quality of your service.

The risk comes from the fact that you have to learn a set of completely new skills and manage processes that you are not familiar with, and this may cost you time, money, and resources. Also, if not implemented properly, the changes may affect your whole operation’s success.

  • Lateral diversification (unrelated diversification). Companies may decide to step into a completely new market with a completely new product that is unrelated to the company’s current profile.

This type of approach is supposed to minimize their dependency both on the changes in the market and the demand for the products they currently deliver.

It’s a high-risk strategy because there are many variables involved and, if the brand is well-known, potential customers may be confused by the change of course and be suspicious of the company’s ability to manage this new type of product.

All types of diversification are risky because they take you out of your comfort zone and present challenges that may cost you a lot of the risk is not well-calculated.

However, when done strategically and with enough preliminary research, this strategy can deliver the highest ROI and ensure your company’s growth and stability.

An interesting example of the diversification strategy is Peugeot’s development over the years. The company started out as a steel foundry in 1810 and has been manufacturing practically anything from corsets, kitchenware, and sawing machines, to bicycles, and cars.

Bottom Line

Whether your best solution is to explore a new market or to plunge further into the existing one, to build new products, or to improve on what you are already good at, there is always a way to grow your operation.

The Ansoff Matrix is a powerful tool that managers and marketers can use to identify the most prominent strategy for a business’ future development. And while all changes involve some level of risk, when it is a calculated one and all decisions are backed with solid data, you can proceed with confidence.

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