The Ansoff Growth Matrix and its uses are explained in the following article. The four types of strategies and their associated risks are also discussed along with an example of each strategy.
What Is It?
The Ansoff Growth Matrix was created by Insor Ansoff. The purpose behind proposing the Ansoff Growth Matrix was to help businesses frame their product-based market entry strategies.The matrix classifies products based on existing and new products. It further classifies markets into existing markets and new markets. One of the main purposes of using Ansoff Growth Matrix by a firm is to mitigate its product positioning and market entry-based risks. Four different types of strategies can be adopted by a firm based on the classification of the products and the markets.
Market penetration strategy, according to Ansoff, carries the lowest risk in comparison to the other strategies. This strategy is termed to be the least risky because of its use by a firm to advertise existing products and lure its existing customers to buy more products/services from them. For example, a company could advertise to its existing customers the benefits of upgrading their club membership from regular to VIP. By doing so, the amount of time and effort spent on selling a VIP-based club membership is significantly reduced.
The market development strategy is significantly riskier in comparison to the Market Penetration Strategy. If a firm wants to acquire new customers and increase its market share, it will need to adopt the market development strategy. In this strategy, a firm does not sell new products to its new customers but just sells them its existing ones. For example, consider an electric car manufacturing company who has its base set up in Europe and opens a branch in Asia to increase the number of car sales and acquire new customers.
Most firms do not try to build new products and sell them in the existing markets unless the credibility of a firm is established with its existing customers. This type of strategy is used generally by the firms that are well established in the market and enjoy a significant market share in comparison to the new entrants in the market. If a new entrant adopts this strategy, then it takes a higher risk approach as it is highly likely to experience fall in the market share of its existing products by selling new ones. One example of this is an electric car manufacturing company based in Europe that wants to develop and sell electric bikes in its existing market, i.e. Europe.
This is the most risky strategy of all strategies in the Ansoff Matrix. The reason behind its higher risk is because of the risk it carries to diversify the market share due to development of new products and entry into new markets.The expenses in adopting this strategy are high as well, mainly due to the investment required in developing new products and also the additional advertising budget needed to sell them to both new and existing markets. For example, an electric car manufacturing company based in Europe may want to develop and sell electric bikes and electric cars in its existing market (Europe) as well as to a new market (Asia).