Referral to the Ansoff matrix is usually conducted in conjunction with a gap analysis assessment.
This process should follow the following steps:
1. Determine the objectives of the firm
2. Plot the sales that would occur if no changes are made
3. Determine which strategies are available for implementation from the matrix.
4. Plot the forecasted sales if an expansion strategy is followed then the diversification strategy forecasts
5. Determine the gap between this cumulative forecasted figure and the objectives
The firm has an option of four strategic directions to follow for growth
Ansoff Strategies
Market penetration is the simplest and first choice for most companies. They are already in the market with a current or existing product. Market penetration is an effort to increase company sales without departing from an original product-market strategy at the expense of competitors. The company will improve business performance by either increasing the volume of sales to its present customers or by finding new customers for present products.
Examples of growth in this area can include:
Increasing market share
Increasing product usage by – increasing the frequency of use, increasing the quantity used, finding new applications for current users
This strategy is the second option for most companies and is where the company attempts to adapt its present product line to new markets (or in Ansoff’s terminology – missions) This involves the identification of new potential users by extension of existing products. A firm having competencies or skills in marketing as its key driving force would follow an ‘increasing marketing newness’ path and would proceed on this vertical route.
Examples of growth include:
Expanding geographically
Targeting new segments of the market
This strategy is the third course of action and this strategy retains the present or existing market and develops products that have new and different characteristics so as to improve the performance of the market. A firm possessing competencies or skills in technology as its key driving force would follow an ‘increasing technological newness’ path and would proceed along this horizontal route.
Examples of growth in this area include:
Adding product features or product refinement
Expanding the product line
Developing a new generation product
Developing new products for the existing market (although product failures can be as high as 91% in some industries)
New product types include; new to the world products, new product lines, cost reductions, additions, repositioning, improvements, strategic products, and defensive products.
This is the final alternative to follow, if following the preceding strategies, does not result in the original objectives being met. This strategy is deemed the most risky of all the approaches as it signifies entry into new unknown territory. It calls for a simultaneous departure from the present product line and present market structure.
There are four underlying reasons why companies diversify: (Ansoff 1965)
1. Firms diversify when their objectives can no longer be met within the product-market scope defined by expansion.
2. Even if attractive expansion opportunities are still available and past objectives are being met, a firm may diversify because the retained cash exceeds the total expansion needs. (The pressure may be on the firm to invest money more profitably)
3. Even if current objectives are being met, the firm may diversify when diversification opportunities promise greater profitability than expansion opportunities. This may occur under several conditions
a. When diversification opportunities are sufficiently attractive to offset their inherently lower synergy
b. When the firm’s research and development organisation produces outstanding diversification by-products
c. When synergy is not an important consideration and therefore the synergy advantages of expansion over diversification are not important
4. Firms may continue to explore diversification when the available information is not reliable enough to permit a conclusive comparison between expansion and diversification
Ansoff has identified different forms of diversification and these are set out in the table below.
Horizontal Diversification – consists of moves within the economic environment of the diversifying firm and is complementary to the firm’s existing activities. Marketing synergy is strong as the firm continues to sell through established marketing channels.
Vertical Integration – This refers to the development of activities which involve the preceding or succeeding stages in the firm’s production process and is often more sensitive to instabilities and will offer less assurance of flexibility. A firm will be putting more eggs into the same end-product basket and vertical integration increases the firm’s dependence on a particular segment of economic demand. Synergy will be strong if technology is related
These two diversification strategies offer limited potential for objectives; they make a limited contribution to flexibility and stability and will contribute to the other objectives only if the present economic environment of the firm is healthy and growing.
Concentric Diversification – has a degree of common thread with the firm either through marketing or through technology or both. A concentric strategy, which matches a conglomerate one on economic prospects and on flexibility, will usually be more profitable and less risky because of synergy.
Conglomerate Diversification – there is no common thread with the firm but despite this many firms follow this conglomerate route. The difference between a conglomerate strategy and no strategy at all is that while a conglomerate strategy has no synergy component, it does have a product-market scope, a competitive advantage component and a set of clearly defined objectives.