The Ansoff Matrix is a key business strategy tool that was first published in the Harvard Business Review. It is taught in business schools to MBA students and used throughout the business world. It’s an analytical framework that helps businesses develop strategies to tackle new market opportunities.
It was developed by the famous management consultant Igor Ansoff in his article “Strategies for Diversification” published in 1961. The Ansoff Matrix has been used by businesses for decades, and it can also be useful for smaller businesses looking to grow their operations and revenues.
What is the Ansoff Matrix?
The Ansoff matrix is a strategic planning tool used to determine the best growth strategy for a business. It’s a 2-by-2 grid that helps you determine if your business should adjust products or markets. Smaller businesses can also use the matrix to help them determine which areas or product lines they should focus their efforts on.
Ansoff identified that there were only two ways to develop a growth strategy; by altering what is offered (product growth) or to whom it is provided (market growth). The Ansoff Matrix provides four strategic options, each with a different degree of risk. Let's now examine them one by one.
The four quadrants of the Ansoff Matrix
Let's examine each quadrant of the Matrix in more detail.
Market Penetration: This is the safest of the four options. Here, you focus on expanding sales of your existing product in your existing market. You know the product works, and the market holds few surprises for you.
Product Development: This area is slightly riskier, because you're introducing a new product into your existing market.
Market Development: Here, you're putting an existing product into an entirely new market. You can do this by finding a new use for the product, or by adding new features or benefits to it.
Diversification: This is the riskiest of the four options, because you're introducing a new, unproven product into an entirely new market that you may not fully understand.
Because the company is venturing into a new, unfamiliar market with a new product, diversification is seen as the riskiest strategy of all four but it might also have the greatest rewards.
This might involve creating new products or services, investing in new technologies, or acquiring and merging with other businesses. If your business is already established and successful, diversification may be a good strategy to help you grow your revenues.
However, you need to be careful not to spread your resources too thin by going too heavily into a wide number of different product lines. If you are considering diversification, you should first determine if you have the resources to expand into new product lines. You may want to consider hiring new employees with different skill sets if you need to expand your offerings.
Diversification can also help you get out of a down market or if your industry is declining. You may be able to expand into a new product line to help your business stay afloat until the industry recovers.
This strategy is 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.
There are two types of diversification:
Related diversification: Related diversification is when a company's new offerings complement the products they already produce. For example, a company that builds computers may then make a device that hides computer cords from sight.
Unrelated diversification: Unrelated diversification is when a company's new offerings are outside of its known capabilities. For example, if a company has been making notepads and pens for 10 years but then decides to produce reusable water bottles.
Case example: In 2007, Coca-Cola spent $4.1 billion to acquire Glaceau, including its health drink brand Vitamin water. With a year-on-year decline in sales of carbonated soft drinks like Coca-Cola, the brand anticipated the drinks market to head towards a less-sugary future, so jumped on board the growing health drink sector.
Market Development strategy
Using this strategy to enter new markets with existing products is considered riskier than market penetration.
This is typically done by expanding your supply chain or distribution to reach new customers. You may also want to consider building new sales or service offices in other locations.
This type of growth strategy may be appropriate for your business if you want to expand your operations but don’t want to get into another line of business. For example, if you’re a marketing agency and want to expand beyond your local customers, you could do so by expanding your operations to new countries.
You may also want to consider this strategy if your industry is declining in one region but is growing in other parts of the world. This strategy can be helpful if you want to stay in your industry but avoid a declining market.
Here, you're targeting new markets, or new areas of your existing market. You're trying to sell more of the same things to different people.
To do this you might:
Establish different customer segments
Appeal to foreign markets
Expand customer base to different parts of the market
Case example: The launch of Coke Zero in 2005 was a classic example of this – its concept being identical to Diet Coke; the great taste of Coca Cola but with zero sugar and low calories. Diet Coke was launched more than 30 years ago, and whilst more females drink it every day than any other soft drink brand, it came to light that young men shied away from it due to its consequential perception of being a woman’s drink. With its shiny black can and polar opposite advertising campaigns, Coke Zero has successfully generated a more masculine appeal.
Market Penetration strategy
Ansoff defines market penetration as the lowest risk strategy for companies that want to sell their existing products to existing customers.
Market penetration is the strategy of increasing your sales in a specific geographic market. This could involve growing your sales force, improving your marketing, or improving your product offerings. You may also want to consider lowering your price or improving your customer service to compete in this market.
With this approach, you're trying to sell more of the same things to the same market. Here you might:
Ramp up promotional strategies including sales and specials
Merge with or acquire a competitor in the same market
Make product improvements to appeal to more customers
Case example: Due to the incredible strength of Coca Cola’s brand, the company has been able to utilize market penetration on an annual basis by creating an association between Coca Cola & Christmas, such as through the infamous Coca Cola Christmas advertisements, which helped boost sales during the festive period.
Product Development strategy
Product development involves creating new products or services for existing markets. This could entail researching new trends and creating products to meet those demands. You may also want to consider re-designing existing products to make them more appealing to customers.
This growth strategy may be appropriate if your business sells products that aren’t meeting customer needs. This strategy may be helpful if your industry is declining or if you want to focus your business on a specific product or service line.
Here, you're selling different products to the same people, so you might:
Extend your product by producing different variants, or repackage existing products.
Develop new products or services
In a service industry, shorten your time to market, or improve customer service or quality
Partner with another company to offer an additional product or increase distribution
Buy the rights from a company to produce and sell their product
Use budget dollars to research what the market needs and develop products that will fill a void in their customers' lives
Case example: Coca-Cola launched Cherry Coke in 1985 – the company’s first extension beyond its original recipe. This product was Coca Cola’s strategic response to small-scale competitors who identified a profitable opportunity to add cherry-flavoured syrup to Coca Cola & resell it. The company has since gone on to successfully launch other flavoured variants including lime, lemon and vanilla.
How to use the Ansoff Matrix
To make an informed strategic decision, follow these steps.
Step 1: Analyse your options
Use the matrix to plot the approaches you are considering. Mindtools provide these points to think about when classifying your approaches
Step 2: Analyse risks
Conduct a risk analysis to gain an understanding of the risks associated with each option. Prioritise them then form a plan to avoid, eliminate, mitigate, or transfer them.
Step 3: Choose the best option
Discuss with your team and any other key stakeholders to decide on which option is right for your business.
From this example you can see that the lowest risk strategy for McDonald's is to sell more Happy Meals because it uses an existing, known product in an existing, known market - it just sells more of the product.
The strategy with the greatest risk would be introducing a new clothing range because it is a new, unknown product, into a new, unknown market.
McDonald's sells more Happy Meals with a Disney movie promotion
McDonald's introduces McCafe
McDonald's opens restaurants in China
McDonald's introduces a line of children's clothing to Antarctica
Applying the Ansoff Matrix to your career
You can also employ the matrix to decide between four career paths:
Functional skill development
The Ansoff Matrix provides a framework for assessing risk by allowing you to map your options against it.
Starting at Expert Development, the risk of each choice increases as you move either horizontally or vertically through the matrix.
Building Expertise in your current role is a relatively low-risk option, as you're simply expanding your functional skills while shifting functions and learning new skills to apply to a new role in your existing organization.
When you switch industries, you have to apply your existing skills to a new field, which can be dangerous. Developing entirely new skills and entering a new industry at the same time is the most hazardous of all because you can't benefit from your previous knowledge and experience.
The Ansoff Matrix can help you to understand the risks associated with your career choices. Thinking about these risks, developing a plan for dealing with them, and selecting the best option for your situation are all things that you can do better after studying the Ansoff Matrix.
The Ansoff matrix is a strategic planning tool that can help businesses determine the best growth strategy for their specific situation. The Ansoff Matrix is employed during the planning phase of marketing strategy to identify which overarching strategies the firm should employ and which tactics should be utilised in marketing activity.
Diversification helps businesses expand into new product lines, market development helps businesses expand into new geographic markets, market penetration helps businesses increase sales in a specific geographic market, and product development creates new products or services.
This is an important tool to consider if you’re looking to grow your business. It can help you identify which growth strategies might be best for you and help you create an action plan for making those strategies a reality.