Strategic Views

Ansoff Opportunity Matrix

The Ansoff Opportunity Matrix describes a company’s possible growth opportunities with current as well as new markets and products.

Learning Objectives

Demonstrate how the Ansoff Opportunity Matrix, using market and product data, creates growth strategies for corporations

Key Takeaways

Key Points

  • The four basic growth possibilities according the the Ansoff Matrix are market penetration, market development, product development, and diversification.
  • Each growth opportunity has a certain amount of risk. Diversification is considered the opportunity with the highest risk because it involves making time and money investments in things like new techniques, skills, and equipment.
  • Market penetration has the lowest risk but eventually the company will reach market saturation.
  • A company should decide whether to pursue market development or market penetration based on the organization’s strengths and competitor ‘s weaknesses.

Key Terms

  • market saturation: A situation in which a product has become distributed within a market to the fullest possible extent, leaving demand for the product at a minimum. The actual level of saturation can depend on consumer purchasing power, competition, prices, and technology.
  • diversification: A corporate strategy in which a company acquires or establishes a business other than that of its current product.
  • SWOT Analysis: A structured planning method used to evaluate the strengths, weaknesses, opportunities, and threats involved in a project or in a business venture.

Ansoff Opportunity Matrix

The Ansoff Opportunity Matrix was created by Igor Ansoff as a way to create growth strategies for corporations based on markets and products. According to Ansoff, there are four possible combinations:

An opportunity matrix that shows how a company can choose a growth strategy based on the type of market and product.

Ansoff Opportunity Matrix: Companies can choose their growth strategies based on the type of market they wish to pursue and the type of product they wish to propagate.

  1. Marketing penetration – This growth strategy uses current products and current markets with the goal to increase market share.
  2. Market development – This growth strategy uses existing products to capture new markets.
  3. Product development – This growth strategy uses new products in the existing market.
  4. Diversification – This strategy creates completely new opportunities for the company by creating new products and new markets.

A company should decide which strategy to use based on the strengths and weaknesses of the company and its competitors. Each strategy has a different level of risk, with market penetration having the lowest risk and diversification having the highest risk.

An opportunity matrix that shows probability and effect.

Opportunity Matrix: An opportunity matrix can be used by a company to identify opportunities.

Market Penetration

This occurs when a company infiltrates a market in which current products already exist. The best way to achieve this is by gaining the customers of competitors. Other ways include attracting non-users of your product or convincing current clients to use more of your product.

The penetration that brands and products have can be recorded by companies such as ACNielsen and TNS who offer panel measurement services to calculate this and other consumer measures. In these cases, penetration is given as a percentage of a country’s households who have bought that particular brand or product at least once within a defined period of time.

While market penetration may come with the lowest risk, at some point the company will reach market saturation with the current product and will have to switch to a new strategy, such as market development or product development.

Market Development

Market development targets non-buying customers in currently targeted segments. It also targets new customers in new segments in order to expand the potential market. New users can be defined as: new geographic, demographic, institutional, or psychographic segments. Another way is to expand sales through new uses for the product.

Before developing a new market, companies should think about the following: Is it profitable? Will it require the introduction of new or modified products? Is the customer and channel researched and understood?

If a company believes that their strength lies with their products and they believe their products would be enticing to new customers, then a company may want to use a market development strategy.

New Product Development

New product development is a process that has two parallel paths: one involves the idea generation, product design, and detail engineering; the other involves market research and marketing analysis. A product is a set of benefits offered for exchange and can be tangible (that is, something physical you can touch) or intangible (like a service, experience, or belief). Companies typically see new product development as the first stage in the overall strategic process of product life cycle management used to maintain or grow market share.

If a company believes that their strength lies with the customers, then they should consider a product development strategy.

Diversification

Diversification seeks to increase profitability through greater sales volume obtained from new products and new markets. At the business unit level, diversification is most likely to expand into a new segment of an industry that the business is already in. At the corporate level, it is generally via investing in a promising business outside of the scope of the existing business unit. Ansoff pointed out that a diversification strategy stands apart from the other three strategies.

The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques, and new facilities.

Because of the high risk involved with diversification, many marketing experts believe a company shouldn’t attempt diversification unless there is a high return on investment and their SWOT analysis makes them feel that they have a chance of succeeding in the new market with a new product.

BCG Matrix

The purpose of the BCG Matrix is to determine investment priorities for a company with a portfolio of products/BUs.

Learning Objectives

Demonstrate the criteria and use of the BCG Matrix

Key Takeaways

Key Points

  • According to the BCG Matrix, there are four different possible outcomes for a BU: cash cow, dog, question mark, or star.
  • According to the principles behind the BCG Matrix, as an industry grows, all business units become cows or dogs. Usually a BU will go from being a question mark, to a star, then a cow, and finally a dog.
  • Other possible uses for the BCG Matrix are determining relative market share and the market growth rate of a product line.

Key Terms

  • product life cycle: The process wherein a product is introduced to a market, grows in popularity, and is then removed as demand drops gradually to zero.

BCG Matrix

The BCG Matrix was created in 1970 by Bruce Henderson and the Boston Consulting Group. The purpose of the BCG Matrix is to determine investment priorities for a company with a portfolio of products/BUs. A scatter graph is used to show how a product/BU ranks according to market share and growth rates.

A BCG Matrix that shows possible investments based on relative market share and market growth. Possible investments are broken down as stars, question marks, cash cows, and dogs.

BCG Matrix: The BCG Matrix helps a company determine its investment priorities.

Four Outcomes

According to the BCG Matrix, there are four different possible states for a product/BU:

  • Cash Cow
  • Dog
  • Question Mark
  • Star

A cash cow is a product/BU that has high market share and is in a slow growing industry. It is bringing in way more money than is being invested in it and the main idea is to ride it out as long as possible. A company shouldn’t invest any more money in a cash cow because the industry cycle is at its end, but it is still a viable product/BU while the profits last.

A dog has a low market share in a mature industry. There is no room for growth so no more funds should be invested in the product or product/BU. If it is a BU, then the consensus is to sell it off.

A question mark is a product/BU growing rapidly in a growing industry. It is consuming vast amounts of financing at this point and creating a low rate of return. A question mark does have the potential to become a star, however, so it should be monitored to determine its growth potential.

A star has a high market share in a high growing industry. This is a product line or BU a company should focus its efforts on in the hopes that it will become a cash cow before the end of its life cycle. According to the principles behind the BCG Matrix, as an industry grows, all business units become cows or dogs. Usually a BU will go from being a question mark, to a star, then a cow, and finally a dog.

Other Uses for the BCG Matrix

Other possible uses for the BCG Matrix are determining relative market share and the market growth rate of a product line. The BCG Matrix can help determine where a product is in its product life cycle and if there is a possibility of growth for the market or product.

GE Approach

The GE / McKinsey matrix is a model used to assess the strength of a strategic business unit (SBU) of a corporation.

Learning Objectives

Review the definition of the GE Approach and its uses

Key Takeaways

Key Points

  • The GE matrix analyzes market attractiveness and competitive strength to determine the overall strength of an SBU.
  • External factors of market attractiveness that affect a business include market size, market growth, entry barriers, segmentation, and overall risk.
  • Internal factors of competitive strength include assets, competencies, brand strength, profit margins, innovation, and quality.
  • The GE matrix can also be used to determine if an organization should enter a market or if it should reposition a product line or brand within a market.

Key Terms

  • strategic business unit: A mid-sized business or a division of a corporation that has different strategies and objectives than its parent company.

GE Approach to Strategic Planning

The GE / McKinsey matrix is a model used to assess the strength of a strategic business unit (SBU) of a corporation. It analyzes market attractiveness and competitive strength to determine the overall strength of a SBU.

The GE Matrix is plotted in a two-dimensional, 3 x 3 grid. The Y-axis measures market attractiveness based on a high, medium, or low score. The X-axis measures business unit strength on a high, medium, or low score.

A matrix showing the Industry Attractiveness in a 3 by 3 box labeled "Low", "Medium", and "High" on each side. Dots of various sizes are placed around the boxes.

GE/McKinsey Matrix: The matrix shows market attractiveness and business strength.

Market Attractiveness

Market attractiveness deals with different external factors. These factors can include such things as market size, market growth rate, and market profitability. External factors that can affect market attractiveness also include pricing trends, competitive intensity, overall risk, and entry barriers. Other considerations regarding market attractiveness include what if any opportunities there are to differentiate products and services, demand variability, segmentation, distribution structure, and technology development.

Competitive Strength

Competitive strength focuses on internal factors and the ability of the SBU to overcome specific issues with the market and competitors. Different internal factors that need to be considered include assets and competencies, brand strength, market share, market share growth, and customer loyalty. Other factors that should be considered include relative cost position, profit margins, innovation, quality, financial resources, and management strength.

Uses for a GE Matrix

While the GE / McKinsey matrix was originally used to assess a SBU, corporations can use this for other purposes as well. It is a good way to determine if a company should enter a specific market. It is also a good way to assess how a company is doing in a specific market and if repositioning may be necessary to revive a faltering product line, brand, or organization.