1) Explain the concept of the Ansoff’s product Market Expansion Grid. Include in your answers its usefulness, application and limitations.
This well known marketing tool was first published in the Harvard Business Review (1957) in an article called “Strategies for Diversification”. It is used by marketers who have objectives for growth. Ansoff’s matrix offers strategic choices to achieve the objectives. It is also a mostly used for growth strategies. There are four main categories for selection.
Market Penetration
Here we market our existing products to our existing customers. This means increasing our revenue by, for example, promoting the product, repositioning the brand, and so on. However, the product is not altered and we do not seek any new customers.
Market Development
Here we market our existing product range in a new market. This means that the product remains the same, but it is marketed to a new audience. Exporting the product, or marketing it in a new region, is examples of market development.
Product Development
This is a new product to be marketed to our existing customers. Here we develop and innovate new product offerings to replace existing ones. Such products are then marketed to our existing customers. This often happens with the auto markets where existing models are updated or replaced and then marketed to existing customers.
Diversification
This is where we market completely new products to new customers. There are two types of diversification, namely related and unrelated diversification. Related diversification means that we remain in a market or industry with which we are familiar. For example, a soup manufacturer diversifies into cake manufacture (1.e. the food industry). Unrelated diversification is where we have no previous industry or market experience. For example a soup manufacturer invests in a rail business.
Usefulness
It is important for analysts to acknowledge that different strategic options are suitable for companies operating in different types of industries and markets. No one strategic option for growth is appropriate for all types of companies at all times. The business environment, including competitive activity, also plays a key role in determining which strategic choice is most appropriate for a company. It is not possible to write a good Ansoff analysis without looking at the various factors in the business environment, which impact the choice of a firm’s strategic options. Market penetration, for example, may prove to be a wise strategy only when the overall market is growing. In a growing market, companies are often able to increase sales to existing and some new customers without increasing their relative market share. Note that companies with low market share in a growing market can make gains by attacking a competitor head on. For example, Burger King (relatively low market share) to an extent has been successful at attacking McDonald’s sales (relatively high market share). However, it is more difficult to reap benefits of market penetration strategy in a declining market. Note that each strategic option brings with it some inherent risks, which can be reduced through careful planning and implementing control mechanisms. Overall, market penetration strategy is a low risk strategy as the business parameters of product and market more or less remain the same. It is important to discuss the benefits and appropriateness of the strategic option for an organisation while mentioning the risks inherent with each strategic option.
While writing about the product development strategy, it is important to mention that it is often a part of the natural growth of organisations. Look for the reasons as to why the company selected the strategy and explain the reasons and implications. In many cases, innovation serves as the most important reason as it may present an opportunity to take market share from competitors or a threat to an existing product line. Product development strategy can in some cases be risky, as was the case of the New Coke. While customers liked the taste of the New Coke in the taste tests conducted by Coca Cola, customers of the brand favoured Classic Coke over the new product. Clearly remember the differences between market penetration and product development strategies, as it may be easy to confuse the two strategies if the analysis is not performed carefully.
Note that the core competency of a firm becomes crucial in case of the market development strategy. For example, Glaxo has been able to develop new markets for its anti-ulcer drugs by developing and marketing a lower-strength version of the drug in many countries that can be sold without prescription as a stomach remedy. Market development strategy, like other strategic options, entails certain risks also. McDonald’s entered a number of new markets in the wake of globalisation with its existing products. Due to the nature of the company’s products, McDonald’s had to make changes in the ingredients of its burgers in order to cater to the market.
It is imperative for analysts who are trying to identify the growth strategies or are formulating proposals for such strategies for a particular firm, that firms in today’s fiercely competitive business environment often pursue multiple strategies. In fact, most big businesses today pursue multiple strategies for growth at the same time in order to achieve their strategic objectives. For example, the two Internet incumbents of Amazon and E*Trade are both operating in a fast evolving, uncertain business environment and have pursued multiple and high-risk growth strategies, which include market development, product development and diversification strategies. Amazon focused more on the diversification strategy while E*Trade focused on market development. The differences in strategic choices in this case were due to the differences in the type of markets in which both companies operate. Notably Amazon operates in a wider retail setup while E*Trade operates in a narrower are of financial services retailing. Both companies chose product development as the second most preferred strategic option, which shows commitment to innovation in products and services. Another similarity that comes across in the analysis of the two incumbents is that the low risk strategy of market penetration was the least favourite option for both companies (Constantinides, 2004). Therefore, it is crucial to note that one firm may be pursuing multiple strategies and it is important to write about all the strategic options that the firm is pursuing.
A common mistake made while conducting Ansoff analysis is that analysts are not able to acknowledge how different growth strategies are suitable for companies operating in different types of markets, and how changes in business environment make the same company choose a different strategic option at stage time in its organisational life cycle. Perry (1987) identified product development and market development as appropriate growth strategies (Watts et al, 1998) for small and medium enterprises (SMEs). On the other hand, the IT bluehood of the corporate world, IBM, successfully follows the high-risk diversification strategy. Earlier, IBM followed a vertical integration strategy wherein it had entered new industries to strengthen the core business model. It also enjoyed backward vertical integration into the disk drive industry and forward vertical integration into the consulting services and computer software industries (Hill et al, 2007). IBM’s vertical integration was once widely considered a vital source of competitive advantage. However, due to the fiercely competitive business environment, IBM has been acquiring a large number of firms in the last few years and had more than 400 strategic alliances as of 2003 (Thompson et al, 2003). The diversification strategy is deemed as a high risk strategy but IBM has been successful due to business foresight and effective control mechanisms. Therefore, organisations change their strategic options in accordance with changes in competitive scenario, and it is important to mention the transition in the write up of Ansoff analysis.
Limitation
While Ansoff analysis helps in mapping the strategic options for companies, it is important to note that like all models, it has some limitations. By itself, the matrix can tell one part of the strategy story but it is imperative to look at other strategic models like SWOT analysis and PESTLE in order to view how the strategy of an organisation is formulating and might change in the course of its future. For example, the Ansoff analysis of Virgin Cola shows that the brand has been launched in the UK and USA using a market penetration strategy, which essentially reflects that the brand needs to increase its brand recognition (Vignali, 2001). The SWOT analysis conducted by Vignali (2001) showed an opportunity that Virgin Cola could explore diversification into new ranges of Virgin Cola products. PESTEL analysis of Virgin Cola showed that there was need to constantly evaluate the soft drinks industry in all countries, in order to reflect customer trends, thereby allowing the brand to gain market share and also predict trends faster than the competition. Therefore, the steps to be taken while conducting a strategic analysis of an organisation include SWOT analysis, PESTEL and Ansoff matrix as fundamental models of analyses, which should be used in conjunction and not in isolation, to view the complete strategic scenario. Also, recommendations made on the basis on only one of the models are not concrete and lack in depth.
The above is also supported by the example of M&S where the company was not able to keep up with the trends and suffered from decline in sales due to competitors like Next, which were relatively more aware of customer trends and needs. Marks and Spencer came up with the Per Una range of clothing in order to compete effectively and gained market share. M&S would not have been able to identify which strategy to opt for growth, if a PESTEL analysis was not conducted.
While the role of analysis in making strategic choices cannot be undermined, it is imperative to note that judgement plays a crucial role in making critical strategic choices that may change the future of the firm (Macmillan et al, 2000). Lastly, the use of Ansoff matrix as a marketing tool may not be really useful as the matrix is critical for analysing the strategic path that the brand may be following, and does not essentially identify marketing options.
