What is an Ansoff Matrix and how to use It (with examples)?
The Ansoff Matrix is a tool companies use to plan their growth. Looking at products and markets, it identifies four strategies for growth. Each strategy has its own risks and benefits and understanding the matrix can help you plan for growth. In this article, learn what the Ansoff Matrix is, how to use it and explore some example scenarios of the different strategies.
What is an Ansoff Matrix?
The Ansoff Matrix, also known as the product/market expansion grid, is a tool organisations use to plan and analyse strategies for growth. Each strategy for growth carries a different level of potential risk. When constructing the matrix, you plot new and existing products on one axis against new and existing markets on the other to define the following four growth strategy quadrants:
1. Market penetration
This is the lowest risk strategy of the four. It focuses on selling existing products into existing markets. Established market knowledge, relationships with consumers and established channels for sales make this strategy low risk. Market penetration is typically a viable option for growth if the market is growing or if a company has the means to secure business from competitors. Market penetration looks to achieve the following objectives:
maintain or increase the market share of current products, possibly through competitive pricing, marketing campaigns or more resources dedicated to sales
secure a dominant position in growing markets
restructure markets to reduce competition, possibly through aggressive marketing campaigns, pricing strategies to make the market unattractive to competitors or acquiring competitors
increase usage of products by existing customers, again through marketing and approaches such as loyalty schemes
As this strategy focuses on known products in known markets, businesses likely already have a good amount of information on customers and competitors. It's therefore unlikely that market penetration strategies require much investment in new market research.
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2. Product development
This strategy involves introducing a new product to an existing market. Companies may look to use this strategy when they have extensive knowledge and understanding of the market. This understanding of the market may allow them to identify gaps, highlighting customer needs that are not currently being met by existing products. The company can then produce innovative solutions to meet the needs of the market. Developing new products may require the company to modify existing products or even develop new competencies. Successful product development strategies focus on the following:
investment in research, development and innovation
detailed insight into the market and the needs of customers
being the first to introduce a product to meet new market needs
Product development strategies may be most appropriate to businesses when, to remain competitive, product diversification is key. Product development strategies may involve interaction with competitors, possibly through the acquisition of a competitor's product to merge resources and create a new product that better fits the identified market needs. Companies may also look to form strategic partnerships with competitors, gaining the mutual benefit of access to things like the other's established distribution channels or established brand recognition.
3. Market development
This is the name given to the growth strategy where a company looks to sell an existing product in a new market. Though again focusing on an existing product, the targeting of new markets introduces a greater level of risk than market penetration. A new market may mean selling in a new geographical region or targeting sales at new customer segments, for example. Market development strategies may focus on:
new distribution channels, such as moving to an e-commerce market
new product dimensions or packaging for the product in the new market
diverse pricing strategies to attract different customers and create a new market segment
Market development strategies may be most successful if the company owns some sort of proprietary technology that it can leverage in new markets. It may also work best if consumer behaviour in the new market is similar to that of consumers in the current market. This known quantity can help alleviate some of the risks inherent to market development.
This refers to the strategy of introducing new products into new markets. It carries the most potential risk of the four strategies as it requires both market and product development. It also offers the highest potential for increased revenue as it opens up entirely new revenue streams for a company. There are two types of diversification a company may employ:
Related diversification: This refers to diversification where there may be potential overlaps or synergies between the existing business activity and the new product or market. Related diversification can help reduce some of the risks of diversification.
Unrelated diversification: This is where there is no overlap or synergy between the existing business and the new venture. This is the riskiest diversification approach and likely involves greater market and product research investment.
For a business to adopt a diversification strategy, it likely has a clear idea of what it hopes to achieve from the strategy. The team members of the business also have probably taken the time to conduct a thorough, honest assessment of the risks. If they have prepared properly and have a good balance between risk and reward, diversification is a potentially highly lucrative growth strategy.
How to use the Ansoff Matrix
To use an Ansoff matrix in practice, you can follow these steps:
1. Understand the different strategies
The first step to using the Ansoff Matrix in practice is properly understanding the four segments. Make sure you are confident you are able to define everything involved with the different strategies. Ensure you know the key advantages, risks and investment needs associated with each so you can move forward with confidence as you apply the matrix and make your choice.
2. Look at your options
Plot an Ansoff Matrix and think about how you may apply each strategy to your company. Examine how each strategy is used to grow your specific company. Create specific scenarios for how you can implement market penetration, product development, market development or diversification strategies.
3. Assess and manage your risks
Conducting a thorough risk analysis can help you decide the best strategy for your business. Each growth strategy has its own associated risks, so make sure you properly identify and understand these. As you identify risks, try also to come up with strategies and contingency plans for how you may overcome these. Also, make an honest assessment of your risk tolerance. If you don't have a particularly high tolerance for risk, then you may be best opting for a market penetration growth strategy over-diversification, for example.
4. Choose your best growth strategy
Taking the time to properly evaluate your options and risks, you're likely now able to pick the best growth strategy for your business. Plotting your options on the matrix gives you the clarity to effectively see all the available options and what they may entail, removing the guesswork. You may then refer back to the matrix in the future when you're ready to expand and grow further.
Examples of the Ansoff Matrix
Here are a few example scenarios showing the four growth strategies of the matrix in action:
A telecommunications company may already exist on the market but wish to increase its revenue. Rather than raise their prices, they look to attract new customers. To do this, they employ a market penetration strategy of increasing their promotion and distribution activity, marketing an introductory price offer for new customers.
A car manufacturer team researches customer trends and notices that there is a move for people to be more environmentally conscious. They currently offer only petrol and diesel vehicles and anticipate that the changing preferences of customers may lead to them losing customers to competitors. They, therefore, invest in a product development strategy to develop electric cars to meet the changing needs of their existing market.
A clothing brand team has an established presence in Europe and North America but wishes to continue to expand globally. In particular, they wish to enter the Chinese market. They partner with Chinese manufacturers and distributors as part of a market development strategy to offer their existing products to a new market.
A software provider's team has a proven track record of providing quality cloud-based products to customers. They've established a strong brand and wish to leverage this to grow. They employ a diversification strategy to begin producing mobile phone hardware, entering a new market with their new product. The new mobile phones make use of some of their proprietary cloud software, with this related diversification strategy helping to reduce some of the risks.