1． What are the four product growth strategies according to the Ansoff matrix? Critically evaluate each of them with an appropriate example of each.
(1) Product strategies for growth: a useful way of looking at growth opportunities is offered by the Ansoff Matrix as it is a practical framework for thinking about how growth can be achieved through product strategy. It comprises four general approaches to sales growth: market penetration/expansion, product development, market development and diversification. Market penetration and expansion are strategies relating to growing exiting products in existing markets. Market penetration depends on winning competitors’ customers or buying competitors (thereby increasing market share). Defense of increased penetration may be through discouraging competitive entry. Market expansion may be through converting non-users to users or increasing usage rate. Although market share may not increase, sales growth is achieved through increasing market size.
Product development is a strategy for developing new products for existing markets. It has three variants: extending existing product lines (brand extensions) to give current customers greater choice; product replacement (updates of old products); and innovation (developing fundamentally different products). Market development is a strategy for taking existing products and marketing them in new markets. This may be through the promotion of new uses of existing products to new customers, or the marketing of existing products to new market segments (e.g. overseas markets). Diversification (entry into new markets) is a strategy for developing new products for new markets. It is the most risky of the four growth strategies but also potentially the most rewarding. (2) For example: market penetration (Cadbury Schweppes did by increasing expenditure by 87 percent over a four-year period); market expansion (Kellogg’s has targeted lapsed breakfast cereal users who rediscover the pleasure of eating cornflakes when feeding their children); product development (the development of the compact disc is an example); market development (Andy Thornton Ltd., an interior design business, successfully increased sales by entering Scandinavia and Germany, two geographic segments that provided new expansion opportunities for its services.); diversification (Sony’s move into 8 mm camcorders)
Ansoff Matrix ( can deal with new product)
In order to increase sales volume, Ansoff matrix provides a framework, by combining present product and new product, present market and new market into 2*2 matrixes, which are market penetration or expansion, product development, market development and diversification.
1. Existing product + existing market. The strategies for this matrix are market penetration or expansion. For penetration, the most basic way is to win competitor’s customers. This may be achieved by more effective use of promotion (compared with competitors) or distribution, or by cutting prices. Increasing promotional expenditure is another method of winning competitors’ customers, as Cadbury did by increasing expenditure by 87 per cent over a four-year period. Another way to win competitors’ customer is to buy competitors. The biggest advantage of this method is to capture customers immediately. Moreover, buying other rivals can also gain their limited resources and advanced skills and expertise.
However, it also has its disadvantages, such as high cost of capital and risk. In addition, in order to protect gained penetration, a company has to discourage new competitors to enter into market. Barriers can be created by cost advantages. For example, low labor cost. Highly differentiated products and high switching costs as well as displaying aggressive tendencies to retaliate play a role in repelling new entrants. As for expansion, there are two methods to boost sales. One is to convert non-user to user, another is to increase usage rate. For example, carnation entered the powdered coffee whitening market with coffee mate, a key success factor was its ability to persuade hitherto non-user of powdered whiteners to switch from milk.
2. New product + existing market. The strategy for this category is product development. It can be achieved by three ways. The first way is innovation. Both extend existing product lines for giving customers more choices and add new feature to trigger the trading up can increase sale volume. The second way is product replacement, which involves the replacement of old brands/models with new one. This is common in car industry and often involves an upgrading of the old model with a new replacement. The final one is replacement of an old product with a fundamentally different one, often based on technology change. The development of CD is an example.
3． Existing product + new market. The strategy is market development, which entail promotions of existing product to a new market, or existing product to a new segment. For instance, nylon is marketed as a replacement of silk, but expanded into shirt, carpet and so on. For new segment, Andy Thornton Ltd. Successfully increased sales by entering Scandinavia and Germany, two geographic segments that provided new expansion opportunities for its services.
4． New product + new market. The strategy for it is entering into new markets (diversification). This is the most risky option, especially when the entry strategy is not based on the core competences. However, it can also be the most rewarding, as exemplified by Honda’s move from motorcycles to cars and Sony’s move into 8mm camcorders.