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Ansoffs matrix

Ansoff demonstrates the choices of strategic


direction open to a firm in the form of a
matrix. (Refer next slide)
Market penetration
Price reductions
Spend more on advertising
Buy rivals
Modest product refinements
Competitive strategy
Product development
Investment in research and
development of additional products
Acquire rights to make new products
Buy in products and re-badge
Joint developments with other
companies who need access to the
firms distribution channels or
brands
Diversification
Related diversification
Unrelated diversification
Market development
New customer segments
New regions and areas of the
country
Foreign markets
Existing products New products
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Market penetration
This strategy increases the firms investment in
a product/market and so are generally only
used in markets which are growing, and hence
the investment may be recouped.
Product development
This involves extending the product range
available to the firms existing markets.
The critical factor to the success of this strategy is
the profitability of the customer group for which
the products are being developed.
Firms present competitive advantages in serving
the market must confer on to the new good.
These can include;
Established distribution channels
Brand which can credibly applied to the new product
Customer information that allows accurate targeting.
Market development
Here the firm develops through finding
another group of buyers for its products.
Market development Contd.
This strategy is more likely to be successful
where;
The firm has a unique product technology it can
leverage in the new market
The firm benefits from economies of scale if it
increases output
The new market is not too different from the one
it has experience of
The buyers in the market are intrinsically
profitable
Diversification
Here the firm is becoming involved in an entirely
new industry, or a different stage in the value
chain of its present industry.
1. Related diversification a relationship can be
seen between current and new business.
1. Concentric diversification Where a technical
similarity exists between the industries but the
marketing effort will need to be changed.
2. Vertical integration Where the company moves
along their value system.
Diversification Contd.
2. Unrelated diversification (Conglomerate
growth)
This is where N will expand their business into
a collection of businesses without any
relationship to one another.

Diversification Contd.
In vertical integration (say for example
backward integration), the reaction of
competitors will need to considered as there
will be a shift in the stakeholder groups as
follows.


Before backward integration After backward integration
Competitors

Suppliers

Customers
Previous competitors will become
our customer

Previous suppliers will become our
competitors

Previous customers will remain as
our customers
Diversification - Tradeoffs
Economies of scale company can benefit from
the overall size by producing particular products
in large quantities
Economies of scope company can benefit from
being able to share resources or link activities
between different products and markets
Learning by exploration
Exploitation improve process with the
experience
Dependency Company mitigates its dependency
on a particular product, customer, market or
technology
Diversification - Tradeoffs
Management attention the extent to which
senior management can continue to give
attention to a particular product whilst doing the
same thing to new products
Customer responsiveness How quickly can the
company respond to new and challenging
customer needs whilst responding to the existing
customers.
Overhead cost the extent to which these will
increase
Competition How competitors will react.
Using Ansoffs matrix in the exam
The student can say a particular strategy can
be classified as (e.g. product development)
according to Ansoffs matrix.
To apply Ansoffs matrix to your issue you
need to focus your argument on risk
(explained in next few slides) and the key
factors to ensure the success (explained in
previous slides) of that strategy.
Using Ansoffs matrix in the exam
For example you would comment that:
A product development strategy would result in
additional risk over and above a market
penetration strategy
A market development strategy will be more
successful the closer the characteristics of the
new markets are to existing markets
A product development strategy will be more
successful only if new product satisfies the critical
success factors required in existing markets.

Strategic development and risk
Developing a firm beyond its present
product/market space exposes it to a
combination of four sorts of risks.
Market risk
Product risk
Operational and managerial risk
Financial risk
1. Market risk
The firm has entered a new market where
established firms already operate.
Not correctly understanding the culture of the
market or the needs of the customer
High costs due to lack of economies of scale
Failure to be seen as credible by the buyers due to
lack of track record
Exposure to retaliation by established firms with
more entrenched positions
2. Product risk
The firm is involving itself in a new production
process which is already being conducted by
rival firms.
High production cost due to lack of experience
Initial quality problems or inferior products
Lack of established production infrastructure and
supply-chain
3. Operational and managerial risk
This is where the management will not be
able to run the new business properly.
Management will also be distracted from
running the original business effectively too.
4. Financial risk
Shareholders are generally suspicious of
radical departures (particularly
diversification) due to:
Product and market risk lead to volatile returns
Firm may need to write off substantial new net
assets if venture fails
Investment will reduce dividends and/or
necessitate new borrowing

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