The Definition of The Ansoff Matrix
The Ansoff Matrix which is also called the Product/Market Expansion Grid is a tool employed by businesses to examine, prepare, and plot their growth strategies. The matrix demonstrates four strategies that can be applied to help a firm grow. Furthermore, It analyzes the risk correlated with each strategy.
What is the Primary Benefit of Applying it?
- Classifies risk-levels of a company’s growth strategies.
- It allows marketers to examine the risk associated while driving in a strategic direction.
- It provides an estimation of all reasonable options and opportunity costs.
- It provides the level of risk.
- It is an easy-to-use tool.
Two Dimensions and Four Ways of The Ansoff Matrix
Analyzes growth strategies over two dimensions: market and product. Based on these two dimensions, the company can formulate its growth in 4 different ways:
- With existing products in existing markets: Market Penetration (bottom-left)
- With new products in existing markets: Product Development (bottom-right)
- With existing products in new markets: Market Development (upper-left)
- With new products in new markets: Diversification (upper-right)
An Ansoff Matrix, risk of growth strategy increases by either moving right or up.
How to Apply The Ansoff Matrix
“New” always creates “risk” because it inherits unknowns by definition.
Growth strategy with the least unknown is growing with existing products in existing markets, Market Penetration. If there still is an opportunity in the current situation, the safest way of growth for a company is trying to increase its market share.
However, if existing products have plateaued, there remain 2 ways of formulating growth strategy: Expanding to new markets with existing products (Market Development) or launching a new product(s) in existing markets (Product Development). Then, how to decide which strategic way to choose?
In order to make a decision, two alternatives should be compared in terms of cost and benefit:
- Which alternative is ‘easier’: developing a new product or entering into a new market?
- Which alternative enables ‘better’ growth: new product or new market?
The first question is generally easier to answer but to provide a solid answer for the second one company should gather comprehensive data and make an intense analysis.
Lastly, the strategic option with the highest risk is Diversification, entering a new market with a new product(s). Before deciding on Diversification, the company has to say “yes” to all four questions below:
- Have existing products reached their full potential in all possible markets?
- Has the company developed and launched all possible products in existing markets?
- Has the company clearly identified the unmet need in the new market?
- Has the company confirmed that the new product will meet the unmet need in the new market?
Ansoff Matrix was conceptualized by H. Igor Ansoff in 1957 and published in Harvard Business Review. It is also known as the Product/Market Expansion Grid.
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