A common tool used within marketing was developed by Igor Ansoff in 1957. He suggested that a business has the potential to grow by using one of four strategies. These strategies involve making the most of existing markets and products, introducing new products, or entering new target markets.
Ansoff's four growth strategies are depicted in the matrix below
1. Market Penetration
This involves increasing sales of an existing product and penetrating the market further by promoting the product heavily or reducing prices to increase sales. This strategy has the lowest risk strategy as the firm knows the product and the market. Market penetration is often used by supermarkets and large retail chains.
2. Product Development
The business introduces new products into existing markets with the aim of selling the new product to existing customer groups. For example Microsoft with their Xbox2 game console introduced the Kinect, an add on that allows customers to play without the use of a controller, much like the Nintendo Wii. This is an example of a new product which simply needs to be added onto the existing model aimed at the existing market. Product Development is a medium risk strategy as the business is familiar with the market.
3. Market Development
Under a market development strategy a firm sells existing products to new markets. For example a sandwich shop which is doing well in one area, expands and opens another sandwich shop in a different region. Through market development our sandwich shop has the potential to become a national chain. There are different ways to define new markets including different locations for sales to aiming products at different customer groups (age, background, interests, income).
Diversification involves selling new products to new markets. For example if a business which usually sells food to families, decides it would like to sell cars to single men it would be diversifying. Diversification is a high risk strategy as the business is unfamiliar with the product and the target market. However as it also has the potential to produce the highest rewards many businesses are prepared to take the risk.
Ansoff's matrix enables businesses to decide growth strategy based on products and the markets that the products are aimed at. Under the matrix they have the option to stick with the markets and products they know (market penetration) or change either their market involvement (market extension) or the product (product development). For those prepared to take risks for potentially larger rewards there is the option of diversification into new products and markets.