The short answer
The Ansoff Matrix is a classic tool for planning business growth. It maps four strategies, market penetration, market development, product development and diversification, across existing and new products and markets, each with a different level of risk. Used well, it helps you weigh growth options and choose the right one for your business.
Key takeaways
- Four growth strategies, four risk levels: from low-risk market penetration to high-risk diversification.
- Grow by changing product or market: or, at the riskiest, both at once.
- Market penetration is safest: sell more of what you have to the customers you already serve.
- Diversification is riskiest: new products in new markets, with little existing expertise to lean on.
- Pair it with other tools: the matrix is a starting framework, not a complete strategy.
As a business owner, you're constantly seeking ways to grow your company. With numerous strategies available, determining the best approach can be overwhelming.
Enter the Ansoff Growth Matrix, a time-tested and proven tool for business growth.Let's explore what the Ansoff Matrix is, how it works, and how it can benefit your business growth strategy.
What is the Ansoff Matrix?
The Ansoff Matrix, also known as the Product and Market Expansion Grid, is a strategic tool companies use to evaluate growth planning and strategies. Developed by mathematician H. Igor Ansoff and published in the Harvard Business Review in 1957, it has since been widely adopted and taught in business schools globally.
Every company aspires to grow.
The Ansoff Matrix outlines four strategies for growth and assesses the risks for your business.
How to Explain the Ansoff Matrix
Ansoff determined that there are two ways to approach growth opportunities:
- Adjust your product/service offering, or
- Adjust the market you operate in.
Your chosen approach will place you in one of four quadrants. The Ansoff Matrix helps you evaluate the relative attractiveness of different growth strategies, enabling you to devise an effective plan.
The Matrix is simply represented as four quadrants that sit within an X and Y-axis. The quadrants are labelled Market Penetration, Market Development, Product Development and Diversification. Each quadrant has a different level of risk and reward. By understanding the level of risk in each quadrant, businesses can develop appropriate risk management strategies to minimise the impact of these risks.Markets (Existing and New) can have a few different meanings. For example, a market may be a certain geography or region e.g. the Australian market, the North American market etc. Alternatively, it could be a specific customer segment, such as a target market or type of demographic.
The Four Growth Strategies of the Ansoff Matrix
Each quadrant of the Ansoff Matrix representing a distinct market opportunity. These opportunities align with the following Ansoff Matrix growth strategies:
- Market Penetration – Increasing sales of existing products into an existing market.
- Market Development – Increasing sales of existing products into new markets.
- Product Development – Introducing new products to an existing market.
- Diversification – The concept of entering a new market with altogether new products.
Understanding the Four Growth Options
Market Penetration: Existing Products in Existing Markets
(Lowest risk)
Market penetration involves selling more of your successful products in markets where you already have familiarity and existing relationships.
Examples of market penetration strategies are:
- Enhancing marketing strategies in your current market.
- Expanding the number of stores/retailers in your existing regions.
- Reducing prices to attract new customers within the market segment.
- Broadening distribution networks to access a larger market share.
- Acquiring a competitor that operates in the same market.
Market Development: Existing Products in New Markets
(Medium risk)
Market Development involves introducing the company's existing products to new markets.
A new market expansion can take two forms:
- International and/ or geographic (new customers in new regions or countries).
- A new customer segment (this can be demographic, behavioural, or psychological).
Since the product/service has already been tested in one market, your R&D process and marketing efforts may require less investment, as you're selling a product with a proven track record. However, better outcomes are achieved when your team draws on insights from the existing customer base, analyses sales trends, and gains familiarity with the new markets before expansion.
Examples of market development strategy include:
- Acquiring a company that offers same/similar products or services in a new geographic market.
- Acquiring a company that gives you access to a new customer base, for example you may offer architecture services to the commercial market, but you want to acquire a firm that has a stronghold in the government sector.
- Regional or international expansion of your business. ALDI, for example has expanded to over 12,000 stores worldwide.
- Targeting new industry verticals.
- Taking your bricks and mortar business online.
Product Development: New Products in Existing Markets
(Medium Risk)
In this strategy, you aim to increase your share of wallet from customers in an existing market or target audience.
For example, you might modify a software platform to provide increased value to customers or launch new products and services alongside your existing offerings.
Other examples of product development strategies include:
- Investing in R&D to develop a new product.
- Acquiring the rights to produce and sell another firm’s product(s).
- Creating a new offering by branding a white-label product that’s produced by a third party.
Diversification: New Products in New Markets
(Riskiest strategy)
Diversification is a high-risk strategy: there's often limited scope for using existing expertise or achieving economies of scale, as you're attempting to sell entirely different product lines or services to new customers.Beyond the opportunity to expand your business, the main advantage of diversification is risk mitigation, if one business suffers from adverse circumstances, another may remain unaffected.Companies generally employ a diversification strategy for three main reasons:
- To mitigate market risk.
- To protect their business from the competition.
- To increase their profits and expand.
The decision to diversify requires extensive analysis. While success stories abound, such as General Electric, Disney, Apple, and 3M, many attempts have failed.There are two types of diversification: related and unrelated. Unrelated diversification involves businesses entering markets where they have no related resources. The further businesses move from their core competencies, the greater the risk of problems arising.While diversification strategies can build on existing success, they sometimes prove crucial for a company's survival. Consumer trends can shift rapidly, and new technologies often emerge unexpectedly, disrupting entire industries. The most resilient firms anticipate these changes and embrace them before their core offerings become obsolete.Although the success stories of global conglomerates may make diversification an appealing growth proposition, there are other ways for businesses to enter untapped markets. Creating partnerships with companies in target industries is a less risky approach. MasterCard exemplifies this strategy; recent partnerships with fintech companies have enabled them to expand into B2B cross-border initiatives.
How the Ansoff Matrix Can Be Used For Strategic Planning and Company Growth
This straightforward tool is valuable for your next strategic planning session. It offers an effective way to weigh the risks of proposed growth alternatives and make informed decisions. While it's not a cure-all, the Ansoff Matrix provides a simple initial framework for considering expansion, risk analysis, and market scenarios. For comprehensive strategic planning, consider pairing it with complementary tools such as SWOT analysis, Competitor Analysis, PESTEL analysis, and Decision-Making Matrices.Many businesses find it beneficial to revisit the Ansoff Matrix with their team during annual strategy sessions, especially in industries experiencing significant changes. As the business landscape continues to evolve, the Ansoff Matrix remains a reliable ally in your pursuit of strategic growth, helping you stay ahead of the curve.
Related reading on business growth:
Frequently asked questions
What is the Ansoff Matrix?
The Ansoff Matrix, also called the Product and Market Expansion Grid, is a strategic planning tool that maps four growth strategies across existing and new products and markets: market penetration, market development, product development and diversification. Developed by Igor Ansoff in 1957, it helps businesses weigh the risk of different growth options.
What are the four Ansoff Matrix strategies?
Market penetration (existing products in existing markets, lowest risk), market development (existing products in new markets), product development (new products in existing markets), and diversification (new products in new markets, highest risk). Each carries a different balance of risk and reward.
Which Ansoff strategy is the riskiest?
Diversification, entering a new market with entirely new products, is the riskiest, because there is little scope to draw on existing expertise or economies of scale. Its main benefit is risk spreading: if one part of the business struggles, another may be unaffected.
How do you use the Ansoff Matrix?
Use it in a strategic planning session to weigh the risk and attractiveness of different growth options, placing each idea in one of the four quadrants. It works best paired with complementary tools like SWOT, competitor analysis and PESTEL, and revisited with your team as the market changes.
