Ansoff Matrix: What is it and How to apply to your business
In the current development era, grasping product development and market expansion strategies is essential for businesses. But how to know which strategy is the best direction for your organization? The Ansoff matrix will be a great tool to help set the direction of development through the marketing strategy planning model for each business.
1. What is Ansoff Matrix?
The Ansoff Matrix is a tool created in 1957 by Russian-American Igor Ansoff (mathematician and business manager) and used by companies and organizations to strategize to increase their business.
The Ansoff Matrix, also known as the product and market expansion grid, the model is based on the assumption that there are two main ways to grow a business: by selling new products (product development) or by targeting new markets (market development). In particular, the tool helps people understand the risks associated with different expansion plans.
2. Four strategies of the Ansoff matrix
Market penetration:
This is considered a low-risk growth strategy as it does not involve the development of new products or markets. Instead, market penetration revolves around improving existing products and their promotion strategies to expand to a larger market share. Typical execution strategies include:
- Enhance marketing efforts or streamline distribution processes
- Discounts to attract new customers in the market segment
- Acquiring competitors in the same market
Brands such as Coca-Cola, Pepsi & Heineken spend much of their marketing budget on market penetration. In addition, they also utilize their distribution channels by making attractive deals with various distributors, such as supermarkets, restaurants, bars, etc.
Market development:
Market development is one business growth strategy with a moderate risk level in the matrix. The goal of market development is to sell existing products in new markets. This strategy can be implemented in several ways, such as:
- Cater to a different customer segment or target demographic
- Entering a new domestic market (regional expansion)
- Entering foreign markets (international expansion)
For example, sports companies like Nike and Adidas have recently entered the Chinese market to expand. The two companies are offering similar products to a new demographic.
Product development:
This growth strategy revolves around selling new products to existing markets. Again, it is considered risky, as it often involves significant investment in developing and launching new products. Other product development techniques include:
- Invest in R&D to develop a brand new product.
- Obtain the right to manufacture and sell another company’s product.
- Create new products by branding a white-label product manufactured by a third party.
Coca-Cola launched Cherry Coke in 1985 – the company’s first expansion beyond the original recipe. The product was Coca-Cola’s strategic response to small-scale competitors who had identified a profitable opportunity to add cherry syrup to Coca-Cola and resell it. In addition, the company has successfully launched other flavor variations, including lemon, lime, and vanilla.
Diversification:
The riskiest business growth strategy in the Ansoff Matrix is diversification. Diversification involves selling new products to new markets, product diversification and market development.
In general, there are two types of diversification strategies that the management team can consider:
- Relevant diversification: A potential synergy between the existing business and the new product/market can be made.
An example is a leather shoe manufacturer that also decides to produce leather car seats. There will likely be synergies in the sourcing of raw materials, but the product and manufacturing process will require significant investment in research and production.
- Irrelevant Diversification: A synergy between the existing business and the new product/market.
Let’s go back to the example of a leather shoe manufacturer. A company’s management diversifies into the luxury shoe market to survive. As a result, they may choose to invest extensively in packaged consumer goods products.
3. Why is the Ansoff matrix necessary for businesses?
The Ansoff Matrix is a framework to help companies know which of the four strategic directions they must take to develop their business successfully. It is often used during the strategic development phase of the marketing planning process.
From the matrix, management in the company will determine the most appropriate strategies. Then they come up with the tactics they should use in their following marketing activities. They can apply many techniques to reach different markets.
Vinamilk succeeds when applying the Ansoff matrix
Vinamilk is currently the leading enterprise in the industry of producing and trading milk and dairy products and related equipment and machinery, accounting for more than 75% of the dairy market share in Vietnam, with revenue exceeding 60 trillion VND. VND ( 2021). Applying the Ansoff matrix to analyze Vinamilk’s business strategy shows that:
- Market penetration: Vinamilk expanded distribution with 125,000 points of sale across 64 provinces and cities in the country. In addition, it is also exported to countries such as Australia, Cambodia, Iraq, the Philippines, and the United States. Use the AIDA model to attract customers and increase PR activities.
- Market development: Besides the main products of fresh milk, condensed milk, powdered milk, and yogurt, vinamlik has launched new product lines, such as ice cream, nut milk, juice, etc., to diversify the target audience and market segment.
- Product development: Vinamilk creates more diversified products in the existing market, such as fresh milk with flavors of strawberry, chocolate, and orange, rich in calcium, no sugar, etc.
- Diversification: In addition to developing the existing market, Vinamilk also creates more in the field of auto transport business, real estate, securities investment, opening a clinic, etc.
6. Conclusion
So through the article, we have an overview of the Ansoff matrix. As well as better understand the strategies included in the Ansoff matrix and how the Ansoff matrix works in today’s businesses. Building a specific Ansoff matrix will help companies to develop sales and better future development orientation.
