cmc/cleberg.net

  1#+date:        [2019-12-03 Tue 00:00:00]
  2#+title:       The Ansoff Matrix
  3#+description: A detailed description of the Ansoff Matrix business model.
  4#+slug:        the-ansoff-matrix
  5#+filetags:    :audit:
  6
  7* Overview
  8
  9As the world of business evolves, managers must approach business planning and
 10strategy with a contemporary mindset. According to Dess, McNamara, Eisner, and
 11Lee, managers must be willing to adapt to the modern business environment by
 12going beyond "'incremental management', whereby they view their job as making a
 13series of small, minor changes to improve the efficiency of the firm's
 14operations"(2019).
 15
 16One reason that strategic management is crucial is because most businesses that
 17fail in the United States each year fail due to a lack of strategic focus or
 18direction(2019). The rate of failure for businesses with poor strategies shows
 19that strategic planning and management are crucial to a business's strength and
 20longevity, injecting the critical factors of growth and direction into a
 21company's business plan.
 22
 23One of the most significant strategic planning and management frameworks that
 24companies can use is the [[https://en.wikipedia.org/wiki/Ansoff_matrix][Ansoff Matrix]]. While this framework has unique purposes
 25and use-cases, it can effectively help an organization grow and compete.
 26Specifically, the Ansoff matrix is one of the most effective frameworks for
 27companies who want to focus on increasing sales revenue or profitability(2019).
 28
 29This framework uses a two-by-two figure to show the four strategic options for
 30companies to use in this framework: market penetration, market development,
 31product development, and diversification (see *Figure 1*). The x-axis of the
 32matrix focuses on the firm's markets and also determines if the firm is looking
 33to enter new markets or innovate in its current markets. The y-axis of the
 34matrix focuses on the firm's products and determines if the firm wants to pursue
 35strategies around their existing products or explore new products.
 36
 37* Strategic Options
 38
 39** Market Penetration
 40
 41The most straightforward strategy in the Ansoff matrix is to focus on existing
 42products in existing markets, also known as market penetration(2019). Companies
 43such as Coca-Cola have used market penetration successfully by investing a lot
 44of money to get further value out of their current markets. Coca-Cola does this
 45by introducing new features such as Christmas-themed bottles, personal names on
 46the bottles, and other marketing schemes.
 47
 48** Market Development
 49
 50Market development extends existing products into new markets in an attempt to
 51increase the number of buyers. One interesting way that Coca-Cola used this
 52strategy comes from the stigma that Diet Coke is a woman's drink(2019).
 53Coca-Cola introduced Coca-Cola Zero, which contained the same nutritional
 54content as Diet Coke, but the company packaged it in a dark black can to appear
 55more "manly" (2019).
 56
 57** Product Development
 58
 59Product development uses existing markets to introduce new products so that the
 60firm can better meet customer needs(2019). The extreme end of diversification is
 61home to companies such as Johnson & Johnson, a healthcare company that has
 62developed a business portfolio of more than 60,000 different products(2019).
 63Johnson & Johnson's dedication to continuous diversification has led them to a
 64balance sheet rating of "AAA", industry recognition for diversification, and
 65increases in their investor dividends for 57 consecutive years(2019).
 66
 67** Related Diversification
 68
 69Diversification, the final strategy of the Ansoff Matrix, is more difficult than
 70the others since it involves exploring both new markets and new products.
 71Related diversification is a diversification strategy that closely relates to
 72the firm's core business. Coca-Cola's best example of related diversification is
 73its acquisition of Glaceau and Vitamin Water, which expanded their drinking
 74lines of business(2019).
 75
 76** Unrelated Diversification
 77
 78Unrelated diversification is a diversification strategy that does not really
 79relate to the firm's core business but still diversifies their business
 80portfolio. A good example of this would be a coffee company who has decided to
 81enter the market for bicycle sales. The main purpose of this strategy is to a
 82diverse company that will not go bankrupt if one market goes through difficult
 83times. However, this requires a lot of independent skills and heavy investments
 84since the company most likely cannot easily transfer knowledge between the
 85markets they compete in.
 86
 87* Requirements for Success
 88
 89To use the Ansoff Matrix framework, managers need to formulate corporate goals
 90and objectives. Without goals and direction, management frameworks do not
 91present much practical utility. Further, the Ansoff Matrix requires the managers
 92involved to make tactical decisions and create a path for the company to take
 93toward their goals. Lastly, both the Ansoff Matrix needs to consider both
 94internal and external perspectives throughout the strategy formulation process.
 95
 96One interesting probability is that companies will be using multiple strategic
 97planning and management frameworks at the same time. While this may sound like
 98it could crowd the management process, there are numerous reasons to do so. For
 99example, the Ansoff Matrix and the Balanced Scorecard are popular, and they
100cover entirely different parts of a company's strategy. Using the results from
101the Balanced Scorecard could inform a company of the potential product and
102market demands, such as from customer or supplier survey results, to help the
103company determine which Ansoff Matrix strategy to pursue. However, a combined
104approach at this level would require mature frameworks and focused managers who
105are able to strategize at a high level.
106
107Lastly, please note that the author of the Ansoff matrix, Igor Ansoff,
108often used the term [[https://en.wikipedia.org/wiki/Analysis_paralysis][paralysis by analysis]] to explain the mistake of companies
109who overuse analysis and spend too much time planning. Companies need to
110understand the utility of a strategic management framework while ensuring that
111the company is poised to execute as efficiently as they have planned.