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's present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff's matrix is shown below:
Ansoff Matrix Existing Products Existing Markets New Products
Ansoff's matrix provides four different growth strategies:
• • • •
Market Penetration - the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. Market Development - the firm seeks growth by targeting its existing products to new market segments. Product Development - the firms develops new products targeted to its existing market segments. Diversification - the firm grows by diversifying into new businesses by developing new products for new markets.
However. Similar to the case of new market development. The development of new markets for the product may be a good strategy if the firm's core competencies are related more to the specific product than to its experience with a specific market segment. new product development carries more risk than simply attempting to increase market share. market penetration has limits. Other advantages of diversification include the potential to gain a foothold in an attractive industry and the reduction of overall business portfolio risk. A product development strategy may be appropriate if the firm's strengths are related to its specific customers rather than to the specific product itself. a market development strategy typically has more risk than a market penetration strategy. . However. In a growing market. Because the firm is expanding into a new market. In this situation. simply maintaining market share will result in growth. and there may exist opportunities to increase market share if competitors reach capacity limits. diversification may be a reasonable choice if the high risk is compensated by the chance of a high rate of return.Selecting a Product-Market Growth Strategy The market penetration strategy is the least risky since it leverages many of the firm's existing resources and capabilities. Market development options include the pursuit of additional market segments or geographical regions. Diversification is the most risky of the four growth strategies since it requires both product and market development and may be outside the core competencies of the firm. this quadrant of the matrix has been referred to by some as the "suicide cell". it can leverage its strengths by developing a new product targeted to its existing customers. In fact. and once the market approaches saturation another strategy must be pursued if the firm is to continue to grow.
DIVERSIFICATION Diversification strategies are used to expand firms' operations by adding markets. Synergy may be achieved by combining firms with complementary marketing. Strategic fit in operations could result in synergy by the combination of operating units to improve overall efficiency. concern is given to achieving marketing or production synergy with conglomerate diversification. Many organizations pursue one or more types of growth strategies. The goal of such diversification is to achieve strategic fit. or stages of production to the existing business. Combining two units so that duplicate equipment or research and development are eliminated would improve overall efficiency. operating. Quantity discounts through combined ordering would be another possible way to achieve operating synergy. Firms sometimes attempt to stabilize earnings by diversifying into businesses with different seasonal or cyclical sales patterns. services. synergy is the ability of two or more parts of an organization to achieve greater total effectiveness together than would be experienced if the efforts of the independent parts were summed. Even if profits remain stable or decline. Growth strategies involve a significant increase in performance objectives (usually sales or market share) beyond past levels of performance. into feed for livestock. For example. an increase in sales satisfies many people. Concentric Diversification Concentric diversification occurs when a firm adds related products or markets. Little. Conglomerate Diversification Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its current line of business. breweries have been able to convert grain. Diversification is a form of growth strategy. In essence. financial. Yet another way to improve efficiency is to diversify into an area that can use by-products from existing operations. but the primary purpose of conglomerate diversification is improved profitability of the acquiring firm. products. Financial synergy may be obtained by combining a firm with strong financial resources but limited growth opportunities with a company having great market potential but weak financial resources. One of the most common reasons for pursuing a conglomerate growth strategy is that opportunities in a firm's current line of business are limited. or management efforts. Synergy may result through the application of management expertise or financial resources. The purpose of diversification is to allow the company to enter lines of business that are different from current operations. One of the primary reasons is the view held by many investors and executives that "bigger is better." Growth in sales is often used as a measure of performance. Finding an attractive investment opportunity requires the firm to consider alternatives in other types of business. if any. a by-product of the fermentation process. The assumption is often made that if sales increase. . profits will eventually follow. Strategic fit allows an organization to achieve synergy.
Conglomerate growth may be effective if the new area has growth opportunities greater than those available in the existing line of business. Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in administrative problems associated with operating unrelated businesses.. For example. In both cases. Executives from the conglomerate will have to become involved in the operations of the new enterprise at some point. Avon's primary line of business has been the selling of cosmetics door-to-door. Without some knowledge of the new industry. An alternative form of horizontal integration that Avon has also undertaken is selling its products by mail order (e.. Decision-making may become slower due to longer review periods and complicated reporting systems. . combined performance may deteriorate because of controls placed on the individual units by the parent conglomerate.Firms may also pursue a conglomerate diversification strategy as a means of increasing the firm's growth rate. Caution must also be exercised in entering businesses with seemingly promising opportunities. the combined performance of the individual units will probably not exceed the performance of the units operating independently. Managers from different divisions may have different backgrounds and may be unable to work together effectively. especially if the management team lacks experience or skill in the new line of business.g. Without adequate experience or skills (Management Synergy) the new business may become a poor performer. As discussed earlier. growth in sales may make the company more attractive to investors. Even if the new business is initially successful. Horizontal Diversification. Avon's move to market jewelry through its door-to-door sales force involved marketing new products through existing channels of distribution. clothing. plastic products) and through retail stores (e. problems will eventually occur. Horizontal integration occurs when a firm enters a new business (either related or unrelated) at the same stage of production as its current operations. Growth may also increase the power and prestige of the firm's executives. Tiffany's). Without some form of strategic fit.g. In fact. a firm may be unable to accurately evaluate the industry's potential. Avon is still at the retail stage of the production process.