The Ansoff Growth matrix is a tool that helps business to decide their product and market growth strategy. Ansoff’s product/market growth matrix suggests that a firm’s chances to grow depend on the type of product (new or existing products) and the market it caters to (new or existing markets). The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the direction for the business strategy. These are described below:

a) Market Penetration (Same product – Same Market)

Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets. Market penetration seeks to achieve four main objectives:

  • Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to direct selling
  • Secure dominance of growing markets
  • Restructure a mature market by driving out competitors – this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors
  • Increase usage by existing customers – for example by introducing loyalty schemes

b) Market development (Same product – New Market)

Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets. There are many possible ways of approaching this strategy, including;

  • New geographical markets- for example, exporting the product to a new country
  • New product dimensions or packaging
  • New distribution channels
  • Different pricing policies to attract different customers or create new market segments

c) Product development (New product – Same Market)

Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.

d) Diversification (New product – New Market)

Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risky strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy it should have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.

Threat of New Entrants

New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include

Economies of scale
Capital / investment requirements
Customer switching costs
Access to industry distribution channels
The likelihood of retaliation from existing industry players.

Threat of Substitutes

The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:

Buyers’ willingness to substitute
The relative price and performance of substitutes
The costs of switching to substitutes

Bargaining Power of Suppliers

Suppliers are the businesses that supply materials & other products into the industry.

The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company’s profitability. If suppliers have high bargaining power over a company, then in theory the company’s industry is less attractive. The bargaining power of suppliers will be high when:

There are many buyers and few dominant suppliers
There are undifferentiated, highly valued products
Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)
Buyers do not threaten to integrate backwards into supply
The industry is not a key customer group to the suppliers

Bargaining Power of Buyers

Buyers are the people / organizations who create demand in an industry

The bargaining power of buyers is greater when

There are few dominant buyers and many sellers in the industry
Products are standardized
Buyers threaten to integrate backward into the industry
Suppliers do not threaten to integrate forward into the buyer’s industry
The industry is not a key supplying group for buyers

Intensity of Rivalry

The intensity of rivalry between competitors in an industry will depend on:

The structure of competition – for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader

The structure of industry costs – for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting

Degree of differentiation – industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry

Switching costs – rivalry is reduced where buyers have high switching costs – i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier

Strategic objectives – when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are “milking” profits in a mature industry, the degree of rivalry is less

Exit barriers – when barriers to leaving an industry are high (e.g. the cost of closing down factories) – then competitors tend to exhibit greater rivalry.

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