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#+date: 2019-12-03
#+title: The Ansoff Matrix
* Overview
As the world of business evolves, managers must approach business planning and
strategy with a contemporary mindset. According to Dess, McNamara, Eisner, and
Lee, managers must be willing to adapt to the modern business environment by
going beyond "'incremental management', whereby they view their job as making a
series of small, minor changes to improve the efficiency of the firm's
operations"[fn:1].
One reason that strategic management is crucial is because most businesses that
fail in the United States each year fail due to a lack of strategic focus or
direction[fn:2]. The rate of failure for businesses with poor strategies shows
that strategic planning and management are crucial to a business's strength and
longevity, injecting the critical factors of growth and direction into a
company's business plan.
One of the most significant strategic planning and management frameworks that
companies can use is the [[https://en.wikipedia.org/wiki/Ansoff_matrix][Ansoff Matrix]]. While this framework has unique purposes
and use-cases, it can effectively help an organization grow and
compete. Specifically, the Ansoff matrix is one of the most effective frameworks
for companies who want to focus on increasing sales revenue or
profitability[fn:3].
This framework uses a two-by-two figure to show the four strategic options for
companies to use in this framework: market penetration, market development,
product development, and diversification (see *Figure 1*). The x-axis of the
matrix focuses on the firm's markets and also determines if the firm is looking
to enter new markets or innovate in its current markets. The y-axis of the
matrix focuses on the firm's products and determines if the firm wants to pursue
strategies around their existing products or explore new products.
#+CAPTION: The Ansoff Matrix by JaisonAbeySabu, Own work, CC BY-SA 3.0
[[https://img.cleberg.net/blog/20191203-the-ansoff-matrix/ansoff_matrix-min.png]]
* Strategic Options
** Market Penetration
The most straightforward strategy in the Ansoff matrix is to focus on existing
products in existing markets, also known as market penetration[fn:3]. Companies
such as Coca-Cola have used market penetration successfully by investing a lot
of money to get further value out of their current markets. Coca-Cola does this
by introducing new features such as Christmas-themed bottles, personal names on
the bottles, and other marketing schemes.
** Market Development
Market development extends existing products into new markets in an attempt to
increase the number of buyers. One interesting way that Coca-Cola used this
strategy comes from the stigma that Diet Coke is a woman's drink[fn:4]. Coca-Cola
introduced Coca-Cola Zero, which contained the same nutritional content as Diet
Coke, but was packaged in a dark black can to appear more "manly"[fn:4].
** Product Development
Product development uses existing markets to introduce new products so that the
firm can better meet customer needs[fn:4]. The extreme end of diversification is
home to companies such as Johnson & Johnson, a healthcare company that has
developed a business portfolio of more than 60,000 different products[fn:5].
Johnson & Johnson's dedication to continuous diversification has led them to a
balance sheet rating of "AAA", industry recognition for diversification, and
increases in their investor dividends for 57 consecutive years[fn:6].
** Related Diversification
Diversification, the final strategy of the Ansoff Matrix, is more difficult than
the others since it involves exploring both new markets and new products.
Related diversification is a diversification strategy that closely relates to
the firm's core business. Coca-Cola's best example of related diversification is
its acquisition of Glaceau and Vitamin Water, which expanded their drinking
lines of business[fn:4].
** Unrelated Diversification
Unrelated diversification is a diversification strategy that does not really
relate to the firm's core business but still diversifies their business
portfolio. A good example of this would be a coffee company who has decided to
enter the market for bicycle sales. The main purpose of this strategy is to an
extremely diverse company that will not go bankrupt if one market goes through
difficult times. However, this requires a lot of independent skills and heavy
investments since the company most likely cannot easily transfer knowledge
between the markets they compete in.
* Requirements for Success
To use the Ansoff Matrix framework, managers need to formulate corporate goals
and objectives. Without goals and direction, management frameworks do not
present much practical utility. Further, the Ansoff Matrix requires the managers
involved to make tactical decisions and create a path for the company to take
toward their goals. Lastly, both the Ansoff Matrix needs to consider both
internal and external perspectives throughout the strategy formulation process.
One interesting probability is that companies will be using multiple strategic
planning and management frameworks at the same time. While this may sound like
it could crowd the management process, there are numerous reasons to do so. For
example, the Ansoff Matrix and the Balanced Scorecard are relatively popular,
and they cover entirely different parts of a company's strategy. Using the
results from the Balanced Scorecard could inform a company of the potential
product and market demands, such as from customer or supplier survey results,
to help the company determine which Ansoff Matrix strategy to pursue.
However, a combined approach at this level would require mature frameworks
and focused managers who are able to strategize at a high level.
Lastly, it should be noted that the author of the Ansoff matrix, Igor Ansoff,
often used the term [[https://en.wikipedia.org/wiki/Analysis_paralysis][paralysis by analysis]] to explain the mistake of companies
who overuse analysis and spend too much time planning. Companies need to
understand the utility of a strategic management framework while ensuring that
the company is poised to execute as efficiently as they have planned.
* Footnotes
[fn:1]: Dess, G. G., McNamara, G., Eisner, A. B., Lee, S. H. (2019). Strategic
management: Text & cases, ninth edition. New York, NY: McGraw-Hill Education.
[fn:2]: Juneja, P. (n.d.). Benefits of strategic management. Management Study
Guide. Retrieved from
https://www.managementstudyguide.com/strategic-management-benefits.htm.
[fn:3]: Meldrum M., McDonald M. (1995) The Ansoff matrix. In: Key Marketing
Concepts. London: Palgrave.
[fn:4]: Oakley, T. (2015). Coca-Cola: The Ansoff matrix. The Marketing Agenda.
Retrieved from
https://themarketingagenda.com/2015/03/28/coca-cola-ansoff-matrix/.
[fn:5]: Lemke, T. (2019). The most diversified companies in the stock market. The
balance. Retrieved from
https://www.thebalance.com/the-most-diversified-companies-in-the-stock-market-4169730.
[fn:6]: Johnson & Johnson. (2018). 2018 Investor Fact Sheet. [PDF file]. Retrieved
from
http://www.investor.jnj.com/\_document/2018-investor-fact-sheet-4-19'id=0000016a-5681-d475-a17f-d78db54a0000.
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