Product/Market Expansion Matrix

A framework to help executives, senior managers and marketers devise strategies for future growth

Ansoff Matrix

1. Background

THE Ansoff Matrix (referred to by some commentators as the Product/Market Expansion Grid) was developed by a Russian-American mathematician named Igor Ansoff, and first explained in his 1957 Harvard Business Review article entitled Strategies for Diversification.

2. Benefits of the Ansoff Matrix

The Ansoff Matrix is particularly useful for strategic planning because it provides a framework to help executives, senior managers and marketers devise strategies for future growth.

By aiding clear thinking about growth strategy, the Ansoff Matrix can help an organisation avoid key risks such as:

  1. Overlooking available growth strategies;
  2. Misunderstanding the implications of pursuing a particular strategy; or
  3. Selecting an inappropriate strategy given the firm’s diversification objectives.

3. The Ansoff Matrix Explained

The Ansoff Matrix can help a firm devise a product-market growth strategy by focusing on four growth alternatives: Market Penetration, Market Development, Product Development, and Diversification.

Ansoff Matrix

What is a Product-Market Growth Strategy?

A product-market strategy is a description of a firm’s products and target markets. While this may sound straightforward, it can be difficult to clearly delineate a target market since it can be defined very broadly (e.g. the transport market) or very narrowly (e.g. domestic air transport in America for cost-conscious business travellers).

In general, a market should not be defined too broadly (or too narrowly) since a key purpose of market definition is to allow a firm to develop strategy and make decisions.

In his 1957 paper, Ansoff defined a product-market strategy as “a joint statement of a product line and the corresponding set of missions which the products are designed to fulfil.” For example, one of Apple’s product missions might be to provide consumers with easy-to-use digital technology, and another mission might be to provide fashion accessories for Yuppies and young people.

The Four Growth Alternatives

The four alternative growth strategies are:

  1. Market Penetration: a strategy to increase sales without departing from the original product-market strategy. This involves increasing sales to existing customers and finding new customers for existing products.
  2. Market Development: a strategy to sell existing products to new markets (normally with some modifications). Ansoff described this as a strategy “to adapt [the] present product line … to new missions.” For example, Boeing might adapt an existing model of passenger aircraft and sell it for cargo transportation.
  3. Product Development: a strategy to sell new products, with new or altered features, to existing markets. Ansoff described this as a strategy to develop products with “new and different characteristics such as will improve the performance of the [existing] mission.” For example, Boeing might develop a new aircraft design which offers improved fuel economy.
  4. Diversification: a strategy to develop new products for new markets, which can either be related to the current business (e.g. vertical integration or horizontal diversification) or unrelated (e.g. lateral diversification).

Each of the above strategies represents a different path that a firm can take to pursue growth. However, in practice, a firm will often implement more than one strategy at the same time. As Ansoff notes, “a simultaneous pursuit of market penetration, market development, and product development is usually a sign of a progressive, well-run business and may be essential to survival in the face of economic competition.”

4. Selecting a Strategy

Selecting a growth strategy is a three-step process. Firstly, set out all of the available strategies. Secondly, apply qualitative criteria to short list the most favourable few alternatives. And finally, apply a return on investment hurdle to narrow the options still further.

Consider the discussion below for a summary of the issues and various situations in which it may make sense for a firm to select a particular growth strategy.

4.1 Selecting Market Penetration

Market Penetration carries the least implementation risk since a firm is focusing on its existing products and existing markets, and so should be able to leverage its existing resources and capabilities.

Pursuing this strategy is likely to make sense if the firm has a strong competitive advantage, or if the overall size of the market is growing or can be induced to grow.

4.2 Selecting Market Development

Market Development carries more implementation risk than Market Penetration because a firm is expanding into new markets.

Market Development

Companies that have successfully pursued this strategy include Coca-Cola and McDonalds, and it may make sense where:

  • the firm’s core competencies relate to its existing products and it has a strong marketing team;
  • the firm can identify opportunities for market development including chances to reposition the brand, exploit new uses for the product, or expand into new geographical regions; and
  • the firm’s resources are organised to produce particular products and changing the production technology would be costly.

4.3 Selecting Product Development

Product Development carries more implementation risk than Market Penetration because the firm is developing new products.

Companies that have successfully pursued this strategy include 3M, P&G and Unilever, and it may make sense where:

  • the firm understands the needs of its customers, and identifies an opportunity to sell new products to satisfy changing needs;
  • the firm operates in a competitive market where continuous product innovation is necessary to prevent product obsolescence or commoditisation;
  • the firm has large market share and a strong brand;
  • the firm’s products benefit from network effects, and new products can gain a significant edge by being first to market;
  • the firm operates in a market with strong growth potential;
  • the firm identifies opportunities to commercialise new technology; and
  • the firm has a strong R&D team.

4.4 Selecting Diversification

Diversification carries the most implementation risk since a firm is simultaneously developing new products and entering new markets, and may be operating entirely outside its circle of competence.

Diversification can enable a firm to achieve three main objectives: growth, stability, and flexibility. And the specific strategies that a firm employs will differ depending on which of these goals the firm is pursuing.

There are three primary kinds of diversification that a firm might undertake:

  1. Vertical Integration: the firm expands its business to different points in the supply chain;
  2. Horizontal Diversification: the firm adds new products that may be unrelated to existing products but are likely to appeal to existing customers. For example, Amazon sells clothes, jewellery and various other products through its online bookstore. Since the new products can be sold through existing distribution channels, Amazon benefits from revenue and cost synergies; and
  3. Lateral Diversification: the firm adds new products that are unrelated to existing products and are likely to appeal to completely different customers. While lateral diversification has little relationship with the firm’s current business, the firm might adopt this strategy in order to:
    • improve profitability by entering a lucrative industry;
    • develop resources and capabilities in a potential new “growth industry”;
    • poach top management or key talent;
    • compensate for technological obsolescence;
    • expand the firm’s revenue base so as to improve its perception in the capital markets and make it easier to borrow money;
    • increase strategic flexibility in an uncertain business environment; or
    • reduce risk by spreading the firm’s activities across multiple products and markets, and thereby decrease its vulnerability to negative Black Swans and unfavourable events like economic downturns, increased competitive rivalry, improved supplier or buyer bargaining power, better-quality substitutes, or reduced barriers to entry.

5. Implementing a Strategy

Consider the suggestions below on how to implement each growth strategy.

5.1 Implementing Market Penetration

Market Penetration involves increasing sales of existing products to existing markets, and could be pursued in the following ways:

  • Increasing advertising to promote the product or reposition the brand;
  • Offering special promotions (e.g. 2 for 1, or Buy One Get One Free);
  • Introducing customer loyalty schemes;
  • Improving the quality or size of the sales force;
  • Modifying the products or product packaging in order to broaden their appeal;
  • Improving the distribution channels in order to reach more customers within existing markets;
  • Targeting a market niche in order to grow sales and build overall market share (this approach makes sense if the firm is small compared to its competitors);
  • Acquiring a competitor (this approach makes sense in mature markets where the size of the overall market is not growing);
  • Changing product pricing; if demand is relatively inelastic, then it might be possible to raise prices without a big drop in sales. Alternatively, prices can be lowered to increase the quantity sold; and
  • Improving operational efficiency so that increased sales can be achieved without a proportional increase in costs (this could be attained through economies of scale and product rationalisation).

5.2 Implementing Market Development

Market Development involves selling existing products to new markets, or new market segments, and could be pursued in the following ways:

  • Marketing products in new locations in order to expand regionally, nationally or internationally;
  • Advertising through different media in order to reach different customers;
  • Utilising new distribution channels to reach new market segments, for example building an online store; and
  • Modifying the pricing policy, products or product packaging in order to appeal to different customer demographics.

5.3 Implementing Product Development 

Product Development involves selling new products to existing markets, and could be pursued in the following ways:

  • Developing new products through R&D;
  • Acquiring a competitor;
  • Forming a joint venture or strategic alliance with a complementary firm;
  • Licensing new technologies;
  • Distributing products manufactured by other firms;
  • Extending an existing product by producing different versions; for example, Apple has recently released the iPhone 5C and 5S;
  • Packaging existing products in new ways; for example, Apple has recently re-released the iPhone 5 in a range of colourful cases and called it the iPhone 5C; and
  • Finding new products that can be sold to existing customers; for example, an online bookstore might develop an e-reader (let’s called it the Kindle) and add a long list of unrelated products to the online bookstore. After all, if customers are willing to buy books on the Internet then they are probably willing to buy other things as well.

5.4 Implementing Diversification

Diversification involves selling new products to new markets, and can be pursued by simultaneously adopting the tactics suggested above for Market Development and Product Development.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Understanding the Product

WHETHER you are entering a new market, launching a new product, growing market share, developing a pricing strategy or managing costs, you will want to understand the products that you are dealing with.

Here are 9 things to think about when trying to understand a product.

1. Identify the product

What is the product? What does it do?

For example, News Corporation produces newspapers, magazines, film, television and cable.

2. Advantages

What’s special about the product? Why do people buy it? Why is it useful?

For example, News Corporation provides people with media brands that they know and trust, and media content which keeps them entertained and informed.

3. Disadvantages

What are the disadvantages of the product? Are there any side-effects?

For example, MySpace is a social networking platform that caters for musicians but does not offer a community building platform which encourages trusted connections and privacy protection. Facebook and LinkedIn have done a better job of protecting user privacy and encouraging meaningful connections.

4. Differentiation

Is the product a commodity or is it a differentiated from other offerings?

For example, Fox has produced an animated sitcom known as “The Simpsons”; one of a kind.

5. Malleability

Can we change the product?

Our ability to change a product will depend, in part, on how narrowly we define the product. If your product is “blue ball-point pens” then you will have limited ability to change the product. However, if your product is “small plastic products” then you can change the colour of the pen (red, green, purple), the type of pen (ballpoint, rollerball, fountain, felt tip) or even the type of plastic product (stapler, cigarette lighter, highlighter).

6. Legal protection

Is the product protected by copyright, trade mark, or patent?

For example, Fox has protected any information, text, files, images, video, sounds, musical works, works of authorship, applications, and any other materials or content relating to “The Simpsons” by using copyright, trademark, patent and other laws.

7. Complimentary goods

What is happening to the complimentary goods? If the market for complimentary goods is suffering, this will affect the product.

For example, if our product is the SUV Hummer and the price of petrol (gas) has doubled then that will negatively affect the value of our product in the mind of consumers.

8. Product lifecycle

Where is the product in its product lifecycle?

9. Packaging

What does the product include?

For example, if the product is an annual hard copy newspaper subscription, does that include online access?

Product Life Cycle Model

The Product Life Cycle Model can be used to analyse the maturity stage of products and industries

Product life cycle

1. Background

THE idea of the Product Life Cycle was first developed in 1965 by Theodore Levitt in an article entitled “Exploit the Product Life Cycle” published in the Harvard Business Review on 1 November 1965.

2. Benefit of the Product Life Cycle model

For a business, having a growing and sustainable revenue stream from product sales is important for the stability and success of its operations. The Product Life Cycle model can be used by consultants and managers to analyse the maturity stage of products and industries. Understanding which stage a product is in provides information about expected future sales growth, and the kinds of strategies that should be implemented.

3. Product Life Cycle model

product_life_cycle_2

The “Product Life Cycle” is the name given to the stages through which a product passes over time. The classic Product Life Cycle has four stages:

  1. Introduction,
  2. Growth,
  3. Maturity, and
  4. Decline.

3.1 Introduction

At the market introduction stage the size of the market, sales volumes and sales growth are small. A product will also normally be subject to little or no competition. The primary goal in the introduction stage is to establish a market and build consumer demand for the product.

There may be substantial costs incurred in getting a product to the market introduction stage. Substantial research and development costs may have been incurred, for example, thinking of the product idea, developing the technology, determining the product features and quality level, establishing sufficient manufacturing capacity, preparing the product branding, ensuring trade mark protection, etc. Marketing costs may be high in order to test the market, launch and promote the product, develop a market for the product, and set up distribution channels.

The market introduction stage is likely to be a period of low or negative profits. As such, it is important that products are carefully monitored to ensure that sales volumes start to grow. If a product fails to become profitable it may need to be abandoned.

Some of the considerations in the introduction stage include:

  • Product development: research and development of the basic technology and product concept, determining the product features and quality level.
  • Pricing: should penetration pricing or a skimming price strategy be used? A skimming price strategy might be appropriate where there are very few competitors.
  • Distribution: distribution might be quite selective until consumer acceptance of the product can be achieved.
  • Promotion: marketing efforts are aimed at early adopters, and seek to build product awareness and to educate potential consumers about the product.

3.2 Growth

If the public gains awareness of a product and consumers come to understand the benefits of the product and accept it then a company can expect a period of rapid sales growth, enter the “Growth Stage”. In the Growth Stage, a company will try to build brand loyalty and increase market share.

Profits are driven by increased sales volume (due to growth in market share as well as an increase in the size of the overall market). Profits might also be driven by cost reductions gained from economies of scale, and perhaps more favourable market prices. Competition in the Growth Stage remains low, although new competitors are expected to enter the market. When competitors enter the market a company might be subject to price competition and increase its marketing expenditure.

Some of the considerations in the Growth Stage include:

  • Product improvement: product quality might be improved, additional features and support services added, and packaging updated.
  • Pricing: if consumer demand is high the price might be maintained at a high level.
  • Distribution: distribution channels might be added as consumer demand increases.
  • Promotion: promotion is aimed at a broader audience. A company might spend a lot of resources on promotion during the Growth Stage to build brand loyalty.

3.3 Maturity

When a product reaches maturity, sales growth slows and sales volume eventually peaks and stabilises. This is the stage during which the market as a whole makes the most profit. A company’s primary objective at this point is to defend market share while maximising profit.

In this stage, prices tend to drop due to increased competition. A company’s fixed costs are low because it is has well established production and distribution. Since brand awareness is strong, marketing expenditure might be reduced, although increased marketing expenditure might be needed to retain market share and fight increasing competition. Expenditure on research and development is likely to be restricted to product modification and improvement, and perhaps research into improved production efficiency and product quality.

Some considerations for the mature product market include:

  • Product differentiation: increased competition in the mature product market means that a company must find ways to differentiate its product from that of competitors. Strong branding is one way to do this.
  • Pricing: prices may be reduced because of increased competition. Firms in the market should be careful not to start a price war.
  • Distribution: distribution intensifies and incentives may be offered to encourage preference to be given over competing products.
  • Promotion: promotion will focus on emphasising product differences and creating/maintaining a strong brand.

3.4 Decline

A product enters into decline when sales and profits start to fall. The market for that product shrinks which reduces the amount of profit available to the firms in the industry. A decline might occur because the market has become saturated, the product has become obsolete, or customer tastes have changed.

A company might try to stimulate growth by changing their pricing strategy, but ultimately the product will have to be re-designed, or replaced. High-cost and low market share firms will be forced to exit the industry.

As sales decline, a company has three strategy options:

  • Hold: maintain production and add new features and find new uses for the product. Reduce the cost of manufacturing (e.g. move manufacturing to a low cost jurisdiction). Consider whether there are new markets in which the product might be sold.
  • Harvest: continue to offer the product, reduce marketing expenditure, and sell possibly to a loyal niche segment of the market.
  • Divest: Discontinue production, and liquidate the remaining inventory or sell the product to another firm.

Some considerations for a declining market include:

  • Product consolidation: the number of products may be reduced, and surviving products rejuvenated.
  • Price: prices may be lowered to liquidate inventory, or maintained for continued products.
  • Distribution: distribution becomes more selective. Channels that are no longer profitable are phased out.
  • Promotion: Expenditure on promotion is reduced for products subject to the Harvest and Divest strategies.

4. Criticisms

The Product Life Cycle is useful for monitoring sales results over time and comparing them to products with a similar life cycle. However, the Product Life Cycle model is by no means a perfect tool. Products often do not follow a defined life cycle, not all products go through each stage, and it is not always easy to tell which stage a product is in at any one time. Consequently, the life cycle concept is not well-suited for the forecasting of product sales.

The length of each stage will vary depending on the product and the marketing strategies employed. A Product Life Cycle may be as short as a few months for a fad or as long as a century or more for a product like petrol cars. In many markets the product life cycle is longer than the planning cycle of the organisations involved. Major products often hold their position for several decades or more, indeed, Coca-Cola was introduced in 1886 and is still the leading brand of cola.

The Product Life Cycle is only one of many considerations that a company must bear in mind. The product life cycle of many modern products is shrinking, while the operating life for many of these products is lengthening. For example, the operating life of durable goods like household appliances has increased substantially. As a result, a company that produces these products must take their market life and service life into account when planning.

Some critics have argued that the Product Life Cycle may become self-fulfilling. For example, if sales peak and then decline a manager may conclude that a product is on the decline and cut back on marketing, thus precipitating a further decline.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]