Ansoff ’s Matrix #017
The Ansoff Matrix is a strategic planning tool that helps organisations determine their product and market growth strategy. The matrix was developed by Igor Ansoff and is based on four growth strategies:
- Market Penetration: This strategy involves increasing sales of existing products to existing markets.
- Market Development: This strategy involves expanding the market by selling existing products to new markets.
- Product Development: This strategy involves introducing new products to existing markets.
- Diversification: This strategy involves entering new markets with new products.
Applying Ansoff’s Matrix
To apply the Ansoff Matrix, you need to first define your company's current product(s) and market(s), and then determine the potential for growth in each area. After considering the risks and benefits of each strategy, you can choose the one that best aligns with your company's goals and resources.
Here are the steps to apply the Ansoff Matrix:
- Identify your current product(s) and market(s)
- Evaluate the potential for growth in each area
- Consider the risks and benefits of each strategy
- Choose the strategy that best aligns with your company's goals and resources
- Develop a plan to implement the chosen strategy, including specific tactics, resource allocation, and measurement criteria.
It's important to note that the Ansoff Matrix is a flexible tool and can be adapted to the specific needs and constraints of an organisation. Additionally, the growth strategies may not always be mutually exclusive and a company may pursue multiple strategies simultaneously.
Evaluating the Potential for Growth
To make sure we're making the most of the Ansoff Matrix, it's important to take a look at the potential for growth in each area. To help you out, here are some steps you can take to evaluate that potential:
- Market research: Conduct market research to understand the size and growth potential of existing and potential markets. This may involve researching market trends, customer needs and preferences, and the competitive landscape.
- SWOT analysis: Conduct a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis of the existing product(s) and market(s) to identify opportunities for growth.
- Customer feedback: Gather customer feedback to understand their perceptions of the existing product(s) and market(s). This may involve conducting surveys, focus groups, or one-on-one interviews.
- Sales data analysis: Analyse sales data to understand the performance of existing products and markets. This may involve analysing sales trends, customer behaviour, and market segments.To evaluate the market size and growth potential of a retail organisation, the following ratios can be used:
Market Share: It measures the percentage of the total market that a company serves. A high market share indicates that the company is well-positioned in its industry and is able to capture a significant portion of the market.
Sales Growth: It measures the increase in a company's sales over a specified period of time. A high sales growth rate indicates that the company is expanding its business and capturing a larger portion of the market.
Industry Trends: Analysis of the trends in the retail industry, including factors such as consumer spending patterns, competition, and technology advancements, can provide insight into the growth potential of a retail organisation. - Financial analysis: Conduct a financial analysis to understand the potential financial impact of each growth strategy. This may involve projecting sales, costs, and profits for each strategy. To evaluate the financial performance of a retail organisation, the following ratios can be used:
Gross Profit Margin: It measures the percentage of each sales dollar that exceeds the cost of goods sold. A high gross profit margin indicates that a company is efficient at managing costs and pricing its products effectively.
Operating Profit Margin: It measures the proportion of each sales dollar left after subtracting all operating expenses. A high operating profit margin indicates that a company is running its operations efficiently.
Return on Equity (ROE): It measures the return generated by the company's shareholders' investment. A high ROE indicates that the company is using its equity effectively to generate profits.
Debt-to-Equity Ratio: It measures the proportion of a company's funding that comes from debt compared to equity. A high debt-to-equity ratio indicates that the company has a higher degree of leverage and may be at a higher risk of default.
Inventory Turnover: It measures the speed at which a company sells and replaces its stock of goods. A high inventory turnover indicates that the company is efficiently managing its inventory and is able to sell its products quickly.
By considering these factors, you can gain a better understanding of the potential for growth in each area and make informed decisions about which strategy to pursue. It's important to keep in mind that these evaluations are not an exact science and may involve some level of subjectivity and uncertainty.
Consider the risks and benefits of each strategy
There are several methods for considering the risks and benefits of each strategy. Here are a few methods that can be used:
- Cost-Benefit Analysis: This method involves weighing the costs of each strategy against the potential benefits. This can help you determine the financial feasibility of each strategy and choose the one that offers the best return on investment.
- SWOT Analysis: You can conduct a SWOT analysis to evaluate the risks and benefits of each strategy. This involves identifying the strengths, weaknesses, opportunities, and threats associated with each strategy. The strengths and opportunities can help you understand the benefits of each strategy, while the weaknesses and threats can help you identify and mitigate potential risks.
- Risk Assessment Matrix: A risk assessment matrix can help you evaluate the likelihood and impact of potential risks associated with each strategy. This involves assigning a numerical score to the likelihood and impact of each risk and plotting them on a matrix. The risks can then be prioritised based on their position on the matrix.
- Decision Tree Analysis: This method involves creating a visual representation of the potential outcomes of each strategy and the factors that influence those outcomes. This can help you identify and weigh the risks and benefits of each strategy and make more informed decisions.
- Monte Carlo Simulation: Monte Carlo simulation is a statistical technique that can be used to model the uncertain future outcomes of each strategy. This can help you understand the range of potential outcomes and the likelihood of each one, and make more informed decisions.
By considering the risks and benefits of each strategy using one or more of these methods, you can make more informed decisions and increase the likelihood of success.
Example: Risk Assessment Matrix
A risk assessment matrix is a tool used to evaluate and prioritise potential risks associated with a project or decision. Here's how you can apply a risk assessment matrix:
- Identify the risks: The first step is to identify all the potential risks associated with the project or decision. This may involve brainstorming, reviewing past experience, and gathering input from stakeholders.
- Assess the likelihood and impact of each risk: For each risk, estimate the likelihood of it occurring and the impact it would have if it did occur. The likelihood can be rated on a scale of 1 to 5, with 1 being the least likely and 5 being the most likely. The impact can also be rated on a scale of 1 to 5, with 1 being the least impactful and 5 being the most impactful.
- Plot the risks on the matrix: Using the likelihood and impact ratings, plot each risk on the matrix. The matrix typically has four quadrants, with the x-axis representing the likelihood of the risk occurring and the y-axis representing the impact of the risk.
- Prioritise the risks: Based on the location of each risk on the matrix, prioritise the risks by assigning a priority level to each one. Risks in the upper-right quadrant (high likelihood and high impact) should be given the highest priority, while risks in the lower-left quadrant (low likelihood and low impact) should be given the lowest priority.
- Develop a risk management plan: For each high-priority risk, develop a risk management plan that includes specific steps to mitigate or avoid the risk. This may involve implementing contingency plans, allocating resources, or assigning roles and responsibilities.
By applying a risk assessment matrix, you can get a clearer picture of the potential risks associated with a project or decision and prioritise them based on their likelihood and impact. This can help you make more informed decisions and allocate resources more effectively to manage risk.
| Likelihood/Consequence | Low | Medium | High |
|---|---|---|---|
| Almost Certain (5) | 15 | 30 | 45 |
| Likely (4) | 10 | 20 | 30 |
| Possible (3) | 5 | 10 | 15 |
| Unlikely (2) | 2 | 4 | 6 |
| Rare (1) | 1 | 2 | 3 |
In this example, the rows represent the likelihood of a risk occurring, while the columns represent the consequences of the risk. The cells represent the risk rating, which is the product of the likelihood and consequence scores. The higher the risk rating, the more serious the risk.
To use this matrix, you would identify the risks associated with a particular project or activity, assign a likelihood score to each risk (e.g., almost certain, likely, possible, unlikely, or rare), and assign a consequence score to each risk (e.g., low, medium, or high). You would then multiply the likelihood and consequence scores to determine the risk rating for each risk. The risks with the highest risk ratings would be the ones that require the most attention and mitigation efforts.
For example, if a risk has a likelihood score of 3 (possible) and a consequence score of 2 (medium), its risk rating would be 6. If another risk has a likelihood score of 4 (likely) and a consequence score of 3 (high), its risk rating would be 12. In this case, the second risk would be considered more serious and require more attention and mitigation efforts.
Example 1: Digital Marketing
Assume that a company is launching a new social media campaign to promote a product. The company has identified the following risks associated with the campaign:
- Risk 1: Negative user comments and reviews on social media
- Risk 2: Inadequate budget allocation for the campaign
- Risk 3: Technical glitches or errors in the campaign
To assess these risks, the company can use the risk assessment matrix. The likelihood of each risk occurring and the consequences of each risk are assessed on a scale of 1 to 5 and 1 to 3, respectively.
| Risk | Likelihood | Consequence | Risk Rating |
|---|---|---|---|
| 1 | 4 (likely) | 2 (medium) | 8 |
| 2 | 3 (possible) | 3 (high) | 9 |
| 3 | 2 (unlikely) | 1 (low) | 2 |
Based on the risk rating, Risk 2 has the highest risk rating and is therefore the most serious risk. The company should allocate additional budget to mitigate this risk and ensure the success of the campaign.
Example 2: Retail
Assume that a retail company is planning to open a new store in a new market. The company has identified the following risks associated with the expansion:
- Risk 1: Low demand for the company's products in the new market
- Risk 2: High competition in the new market
- Risk 3: Inadequate budget allocation for the expansion
To assess these risks, the company can use the risk assessment matrix. The likelihood of each risk occurring and the consequences of each risk are assessed on a scale of 1 to 5 and 1 to 3, respectively.
| Risk | Likelihood | Consequence | Risk Rating |
|---|---|---|---|
| 1 | 3 (possible) | 3 (high) | 9 |
| 2 | 4 (likely) | 2 (medium) | 8 |
| 3 | 2 (unlikely) | 1 (low) | 2 |
Based on the risk rating, Risk 1 has the highest risk rating and is therefore the most serious risk. The company should conduct market research to assess the demand for their products in the new market and develop strategies to mitigate this risk. This may involve adapting their product offerings or marketing efforts to better meet the needs and preferences of the new market.
Choosing a Strategy
When comparing market penetration, market development, product development, and diversification, there are several key performance indicators (KPIs) that are commonly used such as:
Market Penetration:
- Market share: the percentage of the total market that your company's products or services represent
- Customer retention rate: the percentage of customers that continue to do business with your company over time
- Customer lifetime value: the total value of a customer's business with your company over the course of their relationship
- Revenue growth: the percentage increase in revenue over a specific period of time
Market Development:
- Customer acquisition cost: the cost of acquiring a new customer
- Conversion rate: the percentage of potential customers that become actual customers
- Market size: the total size of the potential market for your products or services
- Sales growth: the percentage increase in sales over a specific period of time
Product Development:
- New product success rate: the percentage of new products that are successfully launched and achieve their performance targets
- Time to market: the amount of time it takes to bring a new product to market
- Research and development (R&D) investment: the amount of money invested in developing new products
- Market demand: the level of demand for new products or services
Diversification:
- Revenue contribution: the percentage of total revenue that comes from new products or markets
- ROI: the return on investment for diversification activities
- Market share growth: the percentage increase in market share in new products or markets
- Customer satisfaction: the level of satisfaction of customers with new products or services
These KPIs can be used to measure the success of each strategy and make informed decisions about which strategy to pursue. It's important to note that the specific KPIs used may vary depending on the industry, company, and strategy being implemented.
How key performance indicators (KPIs) can suggest one option over another in Ansoff’s Matrix:
- Market Penetration vs. Market Development:
- Market share: If your company has a high market share in the existing market, but the market is not growing, this may suggest that market development is a better option. On the other hand, if your company has a low market share in the existing market, but the market is growing, market penetration may be the better option.
- Customer retention rate: If your company has a high customer retention rate, but the market is saturated, this may suggest that market development is a better option. If your company has a low customer retention rate, but the market is not saturated, market penetration may be the better option.
- Revenue growth: If your company's revenue growth is slowing down in the existing market, this may suggest that market development is a better option. If your company's revenue growth is strong in the existing market, market penetration may be the better option.
- Market Development vs. Product Development:
- Customer acquisition cost: If the cost of acquiring new customers in the existing market is high, this may suggest that product development is a better option. If the cost of acquiring new customers in the new market is low, market development may be the better option.
- Conversion rate: If the conversion rate in the existing market is low, this may suggest that product development is a better option. If the conversion rate in the new market is high, market development may be the better option.
- Market demand: If there is high demand for new products in the existing market, this may suggest that product development is a better option. If there is high demand for existing products in the new market, market development may be the better option.
- Product Development vs. Diversification:
- New product success rate: If your company has a strong track record of successfully launching new products, this may suggest that product development is a better option. If your company has a poor track record of launching new products, diversification may be the better option.
- ROI: If the potential return on investment for product development is high and the risks are relatively low, this may suggest that product development is a better option. If the potential return on investment for diversification is higher and the risks are manageable, diversification may be the better option.
- Market demand: If there is high demand for new products in the existing market and your company has the capabilities to meet that demand, product development may be the better option. If there is high demand for new products in new markets, diversification may be the better option.
- Market Penetration vs. Diversification:
- Customer retention rate: If your company has a high customer retention rate in the existing market, but the market is not growing and the risks associated with diversification are high, market penetration may be the better option. On the other hand, if your company has a low customer retention rate in the existing market and the potential for growth in new markets is high, diversification may be the better option.
- Revenue growth: If your company's revenue growth is slow in the existing market, but the potential for growth in new markets is uncertain, market penetration may be the better option. If your company's revenue growth is strong in the existing market and the potential for growth in new markets is high, diversification may be the better option.
- Market Development vs. Diversification:
- Conversion rate: If the conversion rate in the existing market is low and the potential for growth in new markets is high, diversification may be the better option. If the conversion rate in the new market is uncertain and the potential for growth in the existing market is high, market development may be the better option.
- Sales growth: If your company's sales growth is slow in the existing market and the potential for growth in new markets is high, diversification may be the better option. If your company's sales growth is strong in the existing market and the potential for growth in the new market is uncertain, market development may be the better option.
It's important to note that the KPIs used to suggest one option over another will depend on the specific circumstances of each company and market. The Ansoff Matrix provides a useful framework for evaluating the different options, but the specific KPIs used should be tailored to the company's goals, objectives, and industry.
Developing a plan for your chosen strategy
Once you have chosen a strategy, the next step is to develop a plan to implement it. Here are the key steps to developing a plan to implement your chosen strategy:
- Define specific tactics: Identify the specific steps or tactics that will be required to implement your strategy. This may involve creating a new product, entering a new market, or improving existing processes. Make sure these tactics are aligned with the overall strategy and support its goals and objectives.
- Allocate resources: Determine the resources that will be required to implement the tactics, including personnel, equipment, and funding. Ensure that the resources are adequate to support the implementation of the strategy and the achievement of its goals and objectives.
- Assign roles and responsibilities: Assign roles and responsibilities to individuals or teams for each of the tactics. This will help ensure that everyone knows what is expected of them and that the strategy is implemented effectively.
- Establish a timeline: Develop a timeline for the implementation of each tactic and the overall strategy. Make sure that the timeline is realistic and takes into account any dependencies between the tactics.
- Define measurement criteria: Establish criteria for measuring the success of the strategy and the tactics. This may involve setting specific performance targets or metrics, such as increased sales or improved customer satisfaction. The measurement criteria will help you evaluate the success of the strategy and determine if any adjustments are needed.
- Monitor and adjust the plan: Continuously monitor the implementation of the strategy and tactics, and make adjustments as needed. This may involve making changes to the tactics, allocating additional resources, or modifying the timeline.
The plan should be flexible and adaptable, allowing you to make changes as needed to respond to changing circumstances.
