What is the Ansoff Matrix?
The Ansoff Matrix, also known as the Product Market Matrix, is a strategic planning tool used by businesses to develop strategies for growth.
It was created by Igor Ansoff in 1957, and helps companies to decide how to grow, considering both new/existing products and new/existing markets, using four growth strategies:
- Market Penetration
- Market Development
- Product Development
- Diversification
Market Penetration
Market penetration focuses on increasing sales of existing products in existing markets.
The objective is to capture a larger share of the market by encouraging existing customers to buy more, or by attracting customers from competitors.
This can be achieved through competitive pricing, marketing campaigns, or optimising distribution channels to make products more accessible.
Market Development
Market development involves selling existing products in new markets.
This strategy involves reaching new geographic areas or customer segments that the company hasn’t previously served.
For example, a business might introduce its products in a new country, or target a different demographic group within an existing market.
Product Development
Product development focuses on creating new products to sell in existing markets.
This approach focuses on innovation and research and development of additional products to give the business a competitive edge over their rivals.
By introducing new features, improving product quality, or developing completely new offerings, a business can keep its existing customers engaged, while potentially attracting new ones.
Diversification
Diversification involves entering new markets with new products.
This strategy is the riskiest, because it requires both product and market development.
However, if successful, diversification can open up new revenue streams and reduce dependence on the company’s existing markets and products.
There are different types of diversification:
- Related Diversification: where the new market or product is connected to the existing business to some extent.
For example, a lawnmower manufacturer starts producing organic lawncare fertilisers.
- Unrelated Diversification: where the new market or product is entirely different from what the company currently does.
For example, an insurance company starts a line of luxury fashion accessories.
Examples of the Ansoff Matrix
Let’s now look at some real world examples of each of the growth strategies, using a coffee shop business.
Market Penetration
“Existing products in existing markets”
A coffee shop in a city increases its marketing efforts to attract more customers.
They offer discounts, launch loyalty programs, and boost their social media output to get more customers to buy their coffee.
Market Development
“Existing products in new markets”
The coffee shop decides to open new branches in neighbouring towns and cities.
By expanding to new locations, they reach new customers who have never tried their coffee before.
Product Development
“New products in existing markets”
The coffee shop introduces a new range of pastries and sandwiches to accompany their coffee offerings.
This new product line is aimed at attracting their existing customers who might want something to eat with their coffee.
Diversification
“New products in new markets”
The coffee shop starts selling coffee machines and accessories online.
This is a new product (coffee machines) in a new market (online retail), which is quite different from their traditional coffee shop business.
Advantages of the Ansoff Matrix
There are several advantages to using the Ansoff Matrix as a method to formulate growth strategies:
Simplicity
The matrix offers a simple way to think about different growth strategies using two variables, markets and products.
This provides businesses with a clear choice of either expanding their market presence or introducing new products, rather than having to consider a multitude of options.
Versatility
The Ansoff Matrix is very adaptable and can be applied across various industries, whether that is retail, technology, healthcare, or any other sector.
This versatility makes it easy for any business to apply regardless of the products or services they offer.
It’s also useful for businesses of all sizes. Whether it’s a small startup or a large corporation, the Ansoff Matrix is equally effective.
Strategic Insight
It encourages long-term strategic planning by encouraging businesses to consider both the current market and potential future markets, and also current products and potential future products.
This forward looking approach helps ensure that the business is always thinking about growth over the long term, and not just standing still in the present day.
Disadvantages of the Ansoff Matrix
Conversely, there are several disadvantages to using the Ansoff Matrix:
Oversimplified
While the Ansoff Matrix is easy to understand, its simplicity can be a downside.
It may oversimplify complex business situations, leaving out important details such as the operational, financial, and competitive challenges that come with each growth strategy.
This can lead to a lack of consideration for all of the variables involved in making a strategic decision.
Static
The matrix assumes a static business environment, and doesn’t take into account the fact that markets and industries are constantly changing, sometimes very rapidly.
This can make the strategies outlined in the matrix less relevant or effective over time.
It also fails to consider competition, and how competitors might react to a chosen strategy.
External Factors
The Ansoff Matrix doesn’t factor in any external influences such as macroeconomics, regulation, or technological changes that can impact the effectiveness of a growth plan.
Also, customer preferences and behaviours can change rapidly, but the matrix doesn’t take this into consideration.
Failing to consider how customer needs might evolve in the future can lead to strategies that don’t resonate with the target market, reducing their effectiveness.