Business Plan

The product/market grid of Ansoff is a model that has proven to be very useful in business unit
strategy processes to determine business growth opportunities. The product/market grid has two
dimensions: products and markets.
Over these 2 dimensions, four growth strategies can be formed:
- market penetration,
- market development,
- product development, and
- diversification.
Market Penetration:
Company strategies based on market penetration normally focus on changing incidental clients to
regular clients, and regular client into heavy clients. Typical systems are volume discounts, bonus
cards and customer relationship management.
Market Development:
Company strategies based on market development often try to lure clients away from competitors
or introduce existing products in foreign markets or introduce new brand names in a market.
Product Development:
Company strategies based on product development often try to sell other products to (regular)
clients. This can be accessories, add-ons, or completely new products. Often existing
communication channels are leveraged.
Diversification:
Company strategies based on diversification are the most risky type of strategies. Often there is a
credibility focus in the communication to explain why the company enters new markets with new
products. This 4th quadrant (diversification) of the product/market grid can be further split up in
four types:
- horizontal diversification (new product, current market)
- vertical diversification (move into firms supplier's or customer's business)
- concentric diversification (new product closely related to current product in new market)
- conglomerate diversification (new product in new market).

Ansoff Product-Market Growth Matrix
Market penetration
Market penetration occurs when a company penetrates a market with its current products. It is
important to note that the market penetration strategy begins with the existing customers of the
organisation. This strategy is used by companies in order to increase sales without drifting from
the original product-market strategy (Ansoff, 1957). Companies often penetrate markets in one
of three ways: by gaining competitors customers, improving the product quality or level of
service, attracting non-users of the products or convincing current customers to use more of the
company's product, with the use of marketing communications tools like advertising etc.
(Ansoff, 1989, Lynch, 2003). This strategy is important for businesses because retaining existing
customers is cheaper than attracting new ones, which is why companies like BMW and Toyota
(Lynch, 2003), and banks like HSBC engage in relationship marketing activities to retain their
high lifetime value customers.
Product development
Another strategic option for an organisation is to develop new products. Product development
occurs when a company develops new products catering to the same market. Note that product
development refers to significant new product developments and not minor changes in an
existing product of the firm. The reasons that justify the use of this strategy include one or more
of the following: to utilise of excess production capacity, counter competitive entry, maintain the
company's reputation as a product innovator, exploit new technology, and to protect overall
market share (Lynch, 2003). Often one such strategy moves the company into markets and
towards customers that are currently not being catered for.
Market development
When a company follows the market development strategy, it moves beyond its immediate
customer base towards attracting new customers for its existing products. This strategy often
involves the sale of existing products in new international markets. This may entail exploration
of new segments of a market, new uses for the company's products and services, or new
geographical areas in order to entice new customers (Lynch, 2003). For example, Arm &
Hammer was able to attract new customers when existing consumers identified new uses of their
baking soda (Christensen et al, 2005).
Diversification
Diversification strategy is distinct in the sense that when a company diversifies, it essentially
moves out of its current products and markets into new areas. It is important to note that
diversification may be into related and unrelated areas. Related diversification may be in the
form of backward, forward, and horizontal integration. Backward integration takes place when
the company extends its activities towards its inputs such as suppliers of raw materials etc. in the
same business. Forward integration differs from backward integration, in that the company
extends its activities towards its outputs such as distribution etc. in the same business. Horizontal
integration takes place when a company moves into businesses that are related to its existing
activities (Lynch, 2003; Macmillan et al, 2000).
It is important to note that even unrelated diversification often has some synergy with the
original business of the company. The risk of one such manoeuvre is that detailed knowledge of
the key success factors may be limited to the company (Lynch, 2003). While diversified
businesses seem to grow faster in cases where diversification is unrelated, it is crucial to note
that the track record of diversification remains poor as in many cases diversifications have been
divested (Porter, 1987). Scholars have argued that related diversification is generally more
profitable (Macmillan et al, 2000; Pearson, 1999). Therefore, diversification is a high-risk
strategy as it involves taking a step into a territory where the parameters are unknown to the
company. The risks of diversification can be minimised by moving into related markets (Ansoff,
1989).

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The product/market grid of Ansoff is a model that has proven to be very useful in business unit

Over these 2 dimensions, four growth strategies can be formed:

- product development, and

- horizontal diversification (new product, current market)

- vertical diversification (move into firms supplier's or customer's business)

- conglomerate diversification (new product in new market).

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