This guide will teach you how to use The Ansoff Matrix to help you make decisions and determine a strategy for your business.
Igor Ansoff developed a matrix over 50 years ago that is still commonly used today by businesses and education institutes to help make decisions and pick a strategy. That’s obviously a good matrix!
What is the Ansoff Matrix?
The Ansoff Matrix (sometimes referred to as the Strategic Opportunity Matrix) is a strategic planning framework to help businesses develop and decide upon strategies for their growth. It’s designed to effectively provide four strategic options and highlight the levels of risk associated to those for the business.
It works as a 2×2, housing four generic strategies that can be applied to your business, highlighting a default risk level for each one. It’s also known as the Product/Marketing Expansion Grid.
This quick video guide will tell you everything you need to know to about the framework – what it is, why it’s so useful, how to use it and what to do with the ideas and insights it will give you.
What are its advantages?
There are a number of advantages including:
- An easy way to guide discussion of options
- Helpful to classify your strategic choices and evaluate risk
- It can be used as a company tool or individual departments, such as Marketing
- It’s quick and simple to understand
- It has a growth mindset and is designed to help businesses focus and develop
- Highlights risk and ensures it’s discussed
What are its limitations?
As with every framework, there are some limitations to Ansoff Matrix such as:
- It’s very simple to the extent that a lot of extra thought is required
- It doesn’t capture some of the detail of your market research or position, eg competitors
- While risk is measured, reward is not factored into the tool
- Can’t be used on it’s own to decide your strategic direction
What are the four strategies of an Ansoff Matrix?
The four strategies are:
- Market Penetration: Selling more of your existing business to existing customers or existing markets
- Product Development: Developing your existing product and/or service
- Market Development: Entering new markets
- Diversification: Entering new markets with new products and/or services
What is Market Penetration?
The Market Penetration strategy is about focusing on your existing business, your current product or service, and your current segmentation. If you’re picking this strategy then you’re objective is market share growth.
Some considerations may include:
- What’s your current market share and can it sustain growth?
- How will you continue growth? Price decrease? Partnerships?
- Are there competitors that you can acquire or work with?
- Are other plays in the market moving or focusing, how well are they doing?
This approach sometimes is viewed as just doing “more of the same”, which is perhaps unfair. If you’ve got a successful niche and there’s significant growth in your market, then it’s a sensible decision to continue to focus and reap the rewards.
Read more about the Market Penetration Strategy.
What is Market Development?
The Market Development strategy is taking your existing products or services into new marketplaces, both geographic or customers. For example, you might want to move from the UK and begin selling to the US, or you might decide that your product or service would be fantastic for a completely different type of customer.
The market growth potential of this strategy is significant, but it requires you to pick the right market to enter and history is littered with examples of companies not getting it right.
Some considerations include:
- Can you rapidly scale your product or service?
- Is your industry similar across countries?
- What is the competitive landscape like in your new market?
- What is your current segment of customers and who is similar?
- How will it impact your internal teams (e.g. Marketing)?
- What’s the new market size?
What is Product Development?
The Product Development strategy is the one often associated with Innovation, even though Innovation can sit in many places in your strategy – see 4Ps of Innovation. It’s where a business decides to develop new products or services targeting the existing customer market.
This strategy has a mix of growth alternatives by new business and growth by upselling existing customers, and the advantage that if done successfully means cross selling can occur between the products. A good example of this is SalesForce with their CRM and then their sister product FinancialForce.
- How will you sustain innovation without derailing your existing business?
- Are there obvious gaps in products or services that competitors offer?
- What do your customers tell you? Is there demand for a particular service or product?
- How can your current product be altered within the 4Ps of Innovation?
- Can you acquire a product or white label a product with your brand?
- Can you partner with businesses to provide services or become a channel partner?
- How can you open your innovation ideas up to the whole company – it could be informal hack days, a formal stage gate approach, or a mix.
What is Diversification?
Arguably the trickiest of all four is the diversification strategy – this is where a business moves into a new market and creates a new product or service, at the same time! There’s more to get right with this strategy but many examples of success. Wrigley started off selling soap, only moving into chewing gum when a free promotion proved gum was more popular than soap.
There are many failures too. Did you know Cosmopolitan (magazine) launched a brand of Yoghurt?
Some considerations to ask yourself on this strategy choice…
- How can you diversify, is there a product or service that is related to your current offering?
- What framework will you use to test the ideas and concepts?
- What level of risk and investment can you tolerate?
- How strong are the competition in your new market?
- What is the overall goal?
- What is the potential return?
- How do your current strengths and weaknesses align to the needs of the new offering?
What are the risk levels of each strategy?
The framework suggests the following:
- Diversification High Risk
- Product Development Medium Risk
- Market Development Medium Risk
- Market Penetration Low Risk
Crucially though, the framework doesn’t take into account the detail of your situation. For example, it may be for you Market Development has quick wins with low risk, while your current market may be saturated with little growth.
Ultimately use the risk levels as a guide around generic difficulty, rather than specific risk.
What preparation should be done before using an Ansoff Matrix?
This framework isn’t like SWOT Analysis, PESTLE Analysis, etc – it’s much more a guide to discussion. You don’t complete the framework, you use it to debate potential strategies and list them out. So in that sense, no preparation is required.
However, you’ll get significantly more out of the framework is you circulate it round in advance and have some thoughts about…
- Potential innovation
- Potential marketplaces
- Your current performance
- Your current market share
- Your competitor activity
- Your customer feedback
Who invented the Ansoff Matrix?
It was created by H. Igor Ansoff in 1957 as part of a research paper he published called Strategies for Diversification.
What is the difference between the Ansoff Matrix and the Strategic Opportunity Matrix?
Nothing – they are two names for the same matrix!
How often should a company use the Ansoff Matrix?
Every time a strategy or direction is evaluated, it’s worth keeping this framework in mind as a broad way to classify your behaviour, and a manner to suggest alternatives.