How we change what others think, feel, believe and do
The Ansoff Matrix
The Ansoff Matrix is a tool to help market and product strategy.
The Ansoff Matrix offers four strategies, based on whether to stay in the current market, to stay with current products, or to change one or both of these.
Market penetration simply means selling more into the current market. This is typically a default strategy in that if you do nothing else, you will still have to sell existing products into the current marketplace. It is a 'devil you know' strategy in that it seems unlikely that new information will be needed.
Two sub-strategies here are to sell harder and to appeal to more people within the current marketplace.
Market penetration is a good strategy when the market is relatively open, when there are few serious competitors or when it is growing at a rate that offers plenty of opportunity. It is not a good move when the market is saturated, when competition is fierce, when margins are thin and where the opportunity for profit is otherwise hampered.
The typical response to a saturating market is to bring out a new product. As you know your existing customer base in your current market, then it should be reasonably easy to come up with products that they are likely to buy.
Two sub-strategies here are to update existing products or to develop new products.
The easiest action is enhancements and development of current products (especially including features that customers have asked for). A more challenging move is to take advantage of new insights and technological developments to come up with a competitive product that existing customers will buy, perhaps even to replace the products they have already bought from you.
Product development is important when new technologies are available and competitors are also innovating (and there is a serious risk of being left behind).
Market development takes current products into new markets. Two sub-strategies here are to re-segment current markets and to enter entirely new geographies, including foreign markets. In any case, new market development is often very costly and bears the risk of market misunderstanding leading to significant under-selling.
When markets grow, a point comes when fragmenting segments is a sensible move as sub-segments become economic propositions, for example where you may sell old products at lower prices into market sub-segments at new and lower price points in order to extend the product life while making space at the higher end for more recent products.
Entering new markets can be difficult when it means competing against existing incumbents who will not take kindly to having a new competitors. If you have similar products you may have difficulty in persuading customers that it is worth switching to you (you may, for example, need to establish a new price point).
Entering foreign markets requires understanding the many forces that affect any company there, from local culture to possible government intervention and protectionism. It also will require translation of all language elements, from marketing literature to embedded language within products (such as software). Marketing may also need to be very different, appealing to local motivators and general style.
The most expensive strategy of all is where you develop new products for new markets and combines the difficulties of Product Development and Market Development strategies. Not only are there costs for understanding the market, but these must be translated into creating products that will suit and sell into the market. Failure in diversification not only would cost a lot, it would result in a large stock of products that could not be sold elsewhere.
Diversification can be highly successful when entering undeveloped markets, although Market Development may be considered as a lower-cost option first. Sometimes, however, conditions are so different in the target market that new products development is necessary.
In some ways, start-up companies always have a 'diversification' strategy as they are affected by costs of new product development as well as trying to break into the marketplace.
Ansoff, I. (1957). Strategies for Diversification, Harvard Business Review, 35, 5 (Sep-Oct), 113-124