Having an efficient long-term strategy is essential for businesses to expand and grow. Planning to expand and grow operations, however, is easier said than done which explains why 50% of small businesses fail within their first five years.
This high failure rate has led to business owners and analysts constantly developing and evolving theories to help combat the challenge.
One such theory is the Ansoff Matrix, developed by H. Igor Ansoff, which gives a good idea of how to grow your business while taking into account the risks. This can be used in combination with other qualitative business measures, such as SWOT analysis and Porter’s five forces, to properly analyze your business’s growth strategy.
The Ansoff Matrix consists of four main concepts: market penetration, market development, product development, and diversification.
In this article, we’ll look at the more commonly confused concepts – market development and product development – defining what they are and how they are different from one another.
What is Market Development?
Market development is the process of selling existing products in a new target market. This may consist of new promotion, distribution, pricing, or branding without the need to develop a new product.
Since market demands and market trends change, businesses may leverage market development to alter their products to suit a new audience. This can increase the reach of the business and help it to expand by capturing new markets.
A popular example of this is fast food chains like KFC and McDonald’s that originated in the U.S. but later expanded to other parts of the world. This required them to alter their advertising campaigns by hiring local influencers and creating ads to incorporate the local language and culture, although most of the products they offer are the same.
What is Product Development?
Product development is the process of creating a new product or service to satisfy the demands of the current market. Companies may use product development to increase their customer base and improve their competitiveness by creating products that cater to people’s needs and capture a larger market segment.
When a company develops new products to meet the needs of a new target market, this is known as diversification.
For example, when Mcdonald’s started their operations in India they introduced new items into their menu which were suited to the taste of the local people. This included items like the “McAloo Tikki Burger,” “Dosa Masala Burger,” and the “Spicy Paneer Wrap.”
Differences Between Market Development and Product Development
Market development and product development are two independent and unique concepts. Market development is a strategic approach to branching out to a new market to sell an existing product, whereas the latter involves creating a new product for an existing market.
According to H. Igor Ansoff, creator of the Ansoff Matrix of growth, the purpose of both processes is the same – to expand operations and achieve business growth.
The Ansoff Matrix helps visualize and evaluate the risks associated with growth initiatives by taking into account existing products and markets as well as the possibility of expanding into new ones.
Since both these growth strategies lie on different positions of the Ansoff Matrix, they have different risks and costs associated with them. Market development is a less risky option because it doesn’t require additional investment in R&D required to develop new products. Market development still requires a significant investment in market research to understand the needs and trends of the new target market.
Product development on the other hand is a riskier option since it requires businesses to create a new product altogether. This incurs higher costs, because significant investment needs to be made in R&D and product research.
Choosing between the two strategies may impact decisions on budget allocation, so businesses need to choose the strategy that best suits their long-term corporate goals.
Risks of Market Development and Product Development
No matter which business decision you make, there is bound to be an element of risk. Choosing between product development and market development largely depends on the business’s strengths and weaknesses, the competition, and market demographics. This is partly why the Ansoff Matrix is often used alongside other qualitative analysis techniques such as the SWOT analysis or Porter’s five forces.
Market Development Risks
Although product development is high-risk, market development strategies also require a significant investment.
Before expanding into a new market, businesses must determine whether existing products are capable of satisfying the needs of people in other markets. This requires serious investment in market research to reduce the risks.
Market research can’t be skipped over. Doing so can lead to serious consequences. For example, for cultural reasons, the McDonald’s menu in India doesn’t include any beef products.If McDonald’s had started selling beef products in India it could’ve led to massive backlash and a boycott against the fast food chain.
The amount of risk you’re willing to take should also depend on your business goals. Some businesses may be more aggressive than others and start opening multiple branches in other markets. Others may have a slower growth model where they open up a branch and gather findings about the local culture, people’s tastes, and other needs that could arise to get a competitive edge in the market and surmount market development challenges early on.
Product Development Risks
As faster-changing trends are shortening the lifespan of products and services, businesses need to engage in New Product Development (NPD) to stay relevant in the market and a step ahead of their competitors.
How well product development works for a company depends on its ability to innovate and create better products than its competition. A good example of this is Coca Cola. When they introduced their new vanilla flavor of Coke, they saw sales rise. Coca-Cola is a well-established brand and has substantial capital to invest in R&D and product research.
If the product development strategy fails though, businesses may see problems such as a loss of revenue and a poor brand image. Another less riskier approach to product development may be to acquire a competitor’s product as they have already made the investment and seen that it works.
This method is cost-effective in the long run and promises good results. An example of this is Meta which acquired popular social media companies such as Instagram and Whatsapp – two of their biggest competitors.
Summary of the Differences Between Market and Product Development
|The process of selling existing products to new market segments
|The process of creating and selling new products to an existing market
|High risk in places where there is strong local competition
|High risk in markets with strong competition that sells many products
|Less risk compared to product development
|Higher risk compared to market development
|Market research is the most significant investment
|R&D and product research are the most significant investments
Many business owners are confused about market development and product development because they think they mean the same thing. However, these two are different and unique concepts. A market development strategy consists of selling existing products to a new market whereas product development is the process of creating and selling new products to existing markets.
Although knowing the difference between the two can help you make well-informed decisions for your company, choosing the right growth initiative varies from business to business. Gaining success with these concepts depends on many factors such as the competition, budget, team capabilities, and business goals, which have to be considered before making any major decisions.