Ansoff Matrix
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rajisumaBUSINESS LEVEL STRATEGIES
• Michael Porter, a professor at Harvard Business School, is widely
regarded as the Father of Corporate Strategy.
• According to Porter, there are three types of business-level strategy
any organization can pursue to gain an advantage over its
competitors.
• These are Cost Leadership, Differentiation and Focus.
• At a high level, each strategy is defined as follows:
• Cost Leadership
Organizations that pursue Cost Leadership gain a competitive advantage by
reducing operating costs to a level below the industry average. Business owners
then pass these savings on to their customers with low-priced merchandise or
services, or maintain average pricing to increase their profit margin.
• Differentiation
Companies that leverage a Differentiation business-level strategy win market
share and defend higher pricing by offering unique product or service features
that are valued by their customers.
• Focus
Focus strategies involve achieving Cost Leadership or Differentiation within
niche markets in ways broadly-focused players can not.
• So which strategy is right for your business?
• The answer to that question is found in the needs of your customer and the
capabilities of your business.
• Before pursuing a business-level strategy, ask yourself:
• Do my customers value cost savings or product quality and brand prestige?
• Does my business have the resources and capabilities to lead the marketplace
in terms of cost or product/service quality?
• The answers to these questions will help you decide which business-level
strategy is right for your business.
Cost Leadership Strategy
• The cost leadership strategy advocates gaining competitive advantage due to
the lowest cost of production of a product or service.
• Lowest cost need not mean lowest price. Costs are removed from every link of
the value chain- including production, marketing, and wastages and so on.
• The product could still be priced at competitive parity (same prices as others),
but because of the lower cost of production, the company would be able to
sustain itself even through lean times and invest more into the business all
throughout.
• A misconception about this strategy is that returns are lower. That is not the
case.
• To maintain above-average returns and provide the lowest price, the
organization must focus on internal efficiencies continually.
• Common mechanisms to drive down costs include:
Establishing rigid cost controls.
Building state-of-the-art facilities to produce at scale at a low cost.
• To be effective, this strategy requires your product or service to be
standardized.
• It’s important to note that companies that are successful in achieving Cost
Leadership typically have substantial capital to invest in technology, efficient
logistics and low costs when it comes to materials and labor.
How to achieve cost leadership?
• Accurate demand forecasting and high capacity utilization
• Attaining economies of scale that leads to lower per unit cost of
product/service
• High level of standardization of products and offering uniform service
packages using mass production techniques that yields lower per unit costs.
• Aiming at the average customer makes it possible to offer a generalized set of
utility in a product/service to cover greater number of customers.
• Investments in cost saving technologies can help an organization squeeze
every extra paisa out of the cost making the product / service competitive in
the market.
• Withholding differentiation till it becomes absolutely necessary is another way
to realise cost based competitiveness.
Conditions under which cost leadership is used
Not every condition under which markets operate is conducive to using the cost
leadership business strategies.
• The markets for the product/service operate in such a way that price-based
competition is vigorous in making cost an important factor.
• The product /service is standardised and its consumption takes place in such a
manner that differentiation is superfluous (more than required).
• The buyers may be large and possess significant bargaining power to negotiate
a price reduction from the suppling organisation.
Conditions under which cost leadership is used
• There is less customer loyalty and the cost of switching from one seller to
another is low. This is seen in case of commodities or products that are highly
standardized.
• There might be few ways available for differentiation to take place.
Alternatively, whatever, ways for differentiation are possible do not matter
much to the customers.
Cost leadership strategies work best when the product/service features are such
that buyers are price-sensitive and base their purchase decision primarily on
price.
Benefits associated with cost leadership strategy
• The benefits are discussed in the context of the Porter’s five-force model:
Rivalry: Cost advantage is the best insurance against the industry competition.
Cost leadership means you can still make a profit even after your competitors
have competed away their profit.
Suppliers: Powerful suppliers possess higher bargaining power to negotiate
price increase for inputs. Cost leaders can absorb bigger cost increases before
those costs need to be passed on.
Benefits associated with cost leadership strategy
Buyers: In a competitive market, powerful customers can force you to sell
products at a lower and lower price. However, this can force your competitors
to exit the market. If this happens, then your customers lose their buying
power, and you end up in a monopoly position.
New entrants: By operating at scale and with a continuous focus on cost
reduction, you create a barrier to new entrants.
Substitutes: By selling at the lowest cost you can build loyal customers.
Risks faced under cost leadership strategy
• Cost advantage is temporary or short lived. It does not remain for long as
competitors can always imitate the cost reduction techniques easily.
Duplication of cost reduction techniques makes the position of cost leader
vulnerable from competitive threats.
• Cost leadership is obviously not a market-friendly approach. Often, severe cost
reduction can dilute customer focus and limit experimentation with product
attributes. This creates a situation where cost reduction is done for its own sake
and the interests of the customers are ignored.
Risks faced under cost leadership strategy
• Depending upon the industry structure, sometimes less efficient producers may
not choose to remain in the market owing to the competitive dominance of the
cost leader. In such a situation, the scope of the product/service may get
reduced affecting even the cost leader adversely.
• Technological shifts are a great threat to the cost leader as these may change
the ground rules on which an industry operates.
Example: New players may adopt a technically superior and cheaper process of
producing a product while the older players may be left with an obsolete
technology that proves to be costlier.
Examples
• The TPS system developed by the Toyota Motor Company. The TPS system aims
to cut costs throughout the company, but Toyota cars are still priced at almost
the same levels as American or other Japanese cars.
• Amazon is an example of a business using a cost leadership strategy.
It focuses on attracting a large number of customers. It keeps prices
low by using its vast buying power to buy products cheaply. This is then
combined with no physical stores and state of the art distribution facilities to
pass these savings on to consumers but still keep margins high.
ANSOFF MATRIX
• Growing a business is the process of improving some measure of a company's
success. There are two ways to grow
• Bring new product / launch new product
Example: HUL – Soaps (Lux, Pears, etc)
• Bring same product to new market.
Example : iPhone, Wall-mart, Haldiram products, Cadbury, Kurkure
• Igor Ansoff identified four strategies for growth and summarized them in the
so called Ansoff Matrix.
• The Ansoff Matrix (also known as the Product/Market Expansion Grid) allows
managers to quickly summarize these potential growth strategies and
compare them to the risk associated with each one.
• The idea is that each time you move into a new quadrant (horizontally or
vertically), risk increases. Each quadrant of the Ansoff Matrix will be
elaborated on below.
Market Penetration: Existing Products in Existing Markets
• Market Penetration is about selling more of the company’s existing products to
existing markets.
• To penetrate and grow the customer base in the existing market, a
company may cut prices, little change in its product, improve its distribution
network, invest more in marketing and increase existing production capacity.
Example: Cadbury, Kurkure, Lays, Nano Awesome
Product Development: New Products in Existing Markets
• Product Development is about developing and selling new products to existing
markets.
• Companies could for example make some modifications in the existing products
to give increased value to the customers for their purchase or develop and
launch new products alongside a company’s existing product offering.
Example: Samsung Mobiles, Pharmaceutical companies
Market Development: Existing Products in New Markets
• Market Development is about selling more of the company’s existing products
to new markets.
• This strategy is about reaching new customer segments or expanding
internationally by targeting new geographic areas.
• If a company’s product is doing exceptionally well in one market, why not try
to enter a new market with the same products?
Example: IKEA, iPhone, Walmart, Patanjali products
Diversification: New Products in New Markets
• Diversification strategies are about entering new markets with new products that are either related
or completely unrelated to a company’s existing offering.
• Concentric/horizontal diversification (or related diversification) is about entering a new market with
a new product that is somewhat related to a company’s existing product offering.
• Conglomerate diversification (or unrelated diversification) on the other hand is about entering a
new market with a new product that is completely unrelated to a company’s existing offering. A great
example of a conglomerate is Samsung, which is operating in businesses varying from computers,
phones and refrigerators to chemicals, insurances and hotel chains.
• Finally. vertical diversification (or vertical integration) means moving backward or forward in the
value chain by taking control over activities that used to be outsourced to third parties like suppliers,
OEMs or distributors.
Example: UB Group (Kingfisher), Godrej Poultry, Reliance Group, TATA Group, ITC Group.
• The Ansoff Matrix is a great framework to structure the options a company has in
order to grow. Market Penetration is the least risky of all four and most common in
day-to-day business.
• Diversification is the most risky since a company starts entering a completely new