The basics of the Ansoff Matrix, the strategic planning model that describes business growth strategies, including what it is, when and how to use it.
The Ansoff Matrix is a lesser-known strategic planning model that describes business growth strategies. It focuses on whether growth is driven by new products, new markets, or both, and offers insight into how risky a given strategy might be. In this article, we'll look at the basics of the Ansoff Matrix, including what it is, when to use it, and how to use it.
What Is the Ansoff Matrix?
The Ansoff Matrix is a business development model that was first introduced by mathematician Igor Ansoff. The model is based on the assumption that there are two primary ways to grow a business: by selling new products (product development) or by targeting new markets (market development). By combining these two paths, the Ansoff Matrix offers four strategies for business growth:
- Market penetration — selling existing products to existing markets
- Market development — selling existing products to new markets
- Product development — selling new products to existing markets
- Diversification — selling new products to new markets
Let's look at each of these four approaches in-depth.
Market penetration
In the Ansoff Matrix, market penetration is a business growth strategy that involves increasing sales of existing products in existing markets. It's considered a low-risk growth strategy since it doesn't involve the development of new products or markets. Instead, market penetration revolves around improving existing products and their promotion strategies so as to unlock greater market share.
Market development
A slightly riskier business growth strategy in the matrix is market development. The goal of market development is to sell existing products in new markets. New markets can be geographic (e.g. new regions or countries) or demographic (e.g. new age groups). Another tactic in market development might be to sell consumer products to industrial markets, or vice versa. This strategy is considered somewhat risky since it involves venturing into new markets.
Product development
On the opposite corner of the Ansoff Matrix is product development. This growth strategy revolves around selling new products to existing markets. Once again, it's considered somewhat risky, since it usually involves significant investment into the development and rollout of new products. Other product development techniques include purchasing new brands or licensing another brand's products.
Diversification
The riskiest business growth strategy in the Ansoff Matrix is diversification. Diversification involves selling new products to new markets; as a result, diversification is both product and market development. In practice, this works out just as you'd expect — tactics for both product and market development are combined.
When to Use the Ansoff Matrix
The primary purpose of the Matrix is to categorize strategies for business growth. As a result, the model should be referenced when contemplating a new growth strategy. For some companies, this may be every few months; for others, it may be every few years.
How to Use the Ansoff Matrix
As with many other strategic planning tools, it can be difficult to know exactly how to use the Ansoff Matrix. This is because many of these tools —included the Matrix itself — are in fact models. There's no single way to use a model; instead, models simply offer a new perspective. In the case of the Ansoff Matrix, this is a perspective on business growth strategies, comparing the types of development (product or market) with the associated risk levels.
As a result, the Ansoff Matrix can be referenced whenever businesses are considering a change to their growth strategy. It encourages one to think about what kind of development should take place, and what magnitude of risk that is associated with.
Another way the Ansoff Matrix can be used is in analyzing a business' current growth strategy. For example, it can clarify how the strategy actually works, simply by determining its focus on product and market development.
SWOT Analysis and the Ansoff Matrix
SWOT analysis is a popular business analysis tool that looks at the Strengths, Weaknesses, Opportunities, and Threats affecting a business. There are several ways to combine the Ansoff Matrix with SWOT analysis, for example:
- SWOT analysis can help a business choose which quadrant of the Matrix to focus on, based on the business' Strengths and Weaknesses.
- The Ansoff Matrix can be used to determine the potential Threats to a business (which are a crucial part of the SWOT model), by understanding the risks of the business' growth strategy.
PESTLE Analysis and the Ansoff Matrix
PESTLE analysis is another well-known business analysis tool that can also be combined with the Ansoff Matrix. PESTLE stands for Political, Economic, Sociocultural, Technological, Legal, and Environmental, representing the six categories of factors that can impact a business. Yet again, either of these models can feed into the other:
- PESTLE analysis can be used to choose an effective growth strategy from the Matrix, by determining whether product or market development would be more effective based on external factors (e.g. Political).
- The Ansoff Matrix can be used to determine which factors in a PESTLE analysis are most important, based on a business' growth strategy.
Using the Ansoff Matrix with Other Tools
It's clear that the Ansoff Matrix can be combined with almost any business analysis tool to create unique insights. As in the case of SWOT and PESTLE analysis, the Matrix can both inform — and be informed by — other business analysis tools, depending on what the analyst already knows and what they are looking to find out.
Final Thoughts
The Ansoff Matrix is a simple model for business growth strategies. It divides growth strategies into four categories, depending on whether they involve product development, market development, neither of the above or both of the above. The model suggests that business growth without product or market development — also known as market penetration — is a lower risk strategy; on the other hand, growth with both product and market development — known as diversification — is a higher risk strategy. Product development and market development are the two other strategies that fall between these two, offering a middle-ground.
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