Business Growth Strategy: How an Ansoff Matrix can help plan and evaluate business growth initiatives
What is the Ansoff Matrix?
The Ansoff Matrix is a strategic tool companies can use to evaluate growth strategies. Also referred to as the Product/Market Expansion Grid, it was developed by mathematician H. Igor Ansoff and was published in the Harvard Business Review in 1957. It has since been adopted and taught in business schools globally.
Every company aspires to grow.
The Ansoff Matrix outlines four growth strategies and assesses the risks for your business.
How to explain the Ansoff matrix
Ansoff determined that there are two ways to approach a growth strategy:
- Adjust your product/service offering, or
- Adjust the market you operate in
Depending on your approach, you'll fall into one of the four quadrants.
The tool allows you to evaluate the relative attractiveness of growth strategies.
The Ansoff 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.
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 or alternatively, it could be a specific customer segment, such as a target market or type of demographic.
Ansoff Matrix and the Four Growth options
Each quadrant of the Ansoff Matrix corresponds to a specific growth strategy. These strategies are:
- Market Penetration – Increasing sales of existing products into an existing market
- Market Development – Increasing sales 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 of the Ansoff Matrix
Market Penetration: Existing Products in Existing Markets
Market penetration is where you engage in selling more of your existing products into markets that you are already familiar with, and have existing relationships.
This is the safest option.
Examples of market penetration strategies are:
- Acquiring a competitor that operates in the same market
- Driving up marketing efforts in your current market
- Increasing the number of stores/retailers in your existing regions
- Cutting prices to attract new customers within the market segment
- Expanding distribution networks to access a bigger share of the market
Market Development: Existing Products in New Markets
Market Development involves selling more of the company’s existing products to new markets.
A new market can be:
- International and/ or geographic (new customers in new regions or countries)
- A new customer segment (this can be demographic, behavioural, or psychological)
As the product/service has already been tested in one market, it may not require significant investment in R&D or product development. You are selling a product with a proven roadmap. However, it will get the best outcomes when your team has been able to draw on existing audience insights, sales trends and gained familiarity with the new markets.
Examples of market development strategies 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. IKEA is a great example, the business strategy over the past few decades has been to become one of the biggest furniture retailers in the world.
- Targeting new industry verticals
- Taking your bricks and mortar business online
Product Development: New Products in Existing Markets
Here you have an existing market or target audience, and you’d like to get a greater share of wallet from that customer base.
For example, you may have a software platform that you can modify to give increased value to customers, or you are considering launching new products alongside your existing product offering.
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
This strategy is the most risky: there's often little scope for using existing expertise or for achieving economies of scale, because you are trying to sell completely different products or services to different customers.
Beyond the opportunity to expand your business, the main advantage of diversification is that, should one business suffer from adverse circumstances, another may not be affected.
Companies will generally use a diversification strategy for three main reasons. They need to:
- Mitigate market risk
- Protect their business from the competition
- Increase their profits and variety of products stocked
Making the decision to diversify requires a lot of analysis work, and while success stories abound — such as General Electric, Disney, Apple and 3M — there are many that have failed.
There are two kinds of diversification: related and unrelated. The latter involves businesses entering markets in which they have no related resources. However, the more that businesses move away from their core competencies, the greater the chance of problems emerging.
Although diversification can build on existing success, at other times it has proven imperative to a company’s survival. Consumer trends can change quickly; new technologies often emerge out of nowhere to disrupt entire industries. The most resilient firms foresee these changes and embrace them before their core offering becomes obsolete.
While the success stories of huge global conglomerates may make diversification a tempting growth proposition, there are also other ways for businesses to enter untapped markets. Creating partnerships with companies in target industries is a less risky approach. MasterCard is a great example, recent partnerships with fintech companies like Emburse and InComm Payments have helped the company fend off tech upstarts like Stripe and Brex that allow companies to bypass traditional payment processing systems.
How the Ansoff matrix can be used in business for strategy and growth
The Ansoff Matrix is a simple tool that can be used for strategic planning. It enables you to weigh up the risk of your proposed growth strategies and make the most informed decisions about which avenue to pursue. Of course, it’s not the magic bullet for everything. While it’s a simple initial way to consider strategies, pairing it with complementary tools such as SWOT, Competitor Analysis, PESTEL, Decision Making Matrix can be really effective. Some businesses find it useful to do the Ansoff Matrix exercise more regularly, especially if there is lots of movement in their industry. A successful strategy should help your business grow and succeed, and that’s what the Ansoff Matrix does best.
Download our Ansoff Matrix Summary
Use this handy summary to start considering your growth strategies. Share it with your team and get started!
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