As an entrepreneur, you’re likely seeking growth. Maybe you’re eyeing new products and services you could offer, or new customers who would love your brand if you entered their market.
If you’re looking for new growth initiatives—but also need to consider their risks—an Ansoff Matrix can help. This graphic strategic planning tool lets you assess opportunities to expand your business. Here’s how the Ansoff Matrix works and how to use one to plan your next big business endeavor.
What is the Ansoff Matrix?
The Ansoff Matrix is a strategic planning tool that helps business leaders analyze and plan their growth strategies by considering new or existing products, as well as new or existing markets. Visualized as a two by two grid, it features an x-axis for “products” and a y-axis for “markets.” Each of the four squares corresponds to one of four growth strategies: market penetration, market development, product development, and diversification.
By exploring these four different growth strategies, you can evaluate risks, assess new opportunities, and match your overall goals with sustainable growth initiatives.
Origins of the Ansoff Matrix
The matrix is named after Russian-American mathematician and business manager Igor Ansoff, who introduced the model in his 1957 article “Strategies for Diversification,” published in the Harvard Business Review.
Ansoff developed the framework while working as a corporate planner. His professional experiences convinced him that business managers needed a systematic way to evaluate growth options and their respective potential risks. By dividing the concept of growth into four strategies, he created a strategic planning tool that a diverse array of businesses could leverage.
How the Ansoff Matrix works
The Ansoff Matrix lays out four boxes in a two by two grid, each corresponding to a different growth strategy:
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Market penetration. The upper left box is dedicated to increasing sales of your current offerings to your current customer base. Because a market penetration strategy focuses on the same market you’re already serving, it’s usually the lowest-risk growth option.
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Market development. The lower left box covers introducing your current products to new customer segments and new geographical markets. It’s riskier than market penetration because it requires finding new customers in new geographic regions, but you still sell existing products and services.
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Product development. The upper right box involves creating new products or variations for existing customers. It’s a somewhat riskier business strategy, but it lets you tap into loyal customers from your current market.
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Diversification. The lower right box centers on a diversification strategy, where you introduce entirely new offerings in new markets. It’s the riskiest of all the strategies because you’re leveraging neither your existing customer base nor your existing product lines.
Here’s a simple way to read an Ansoff Matrix: Risk increases as you move diagonally from the top left (market penetration) to the bottom right (diversification), since strategies involving new products and new markets involve greater investment, uncertainty, and organizational change.
Conversely, risk decreases when you focus on existing products and markets, where you already have customer brand awareness and market research to leverage.
Growth strategies of the Ansoff Matrix
The four growth strategies of the Ansoff Matrix outline multiple paths to expand your existing business. Each path carries a different level of risk based on how much your growth strategy involves changing your product line and target customers.
A business may take on more risk in exchange for a potentially bigger reward, while another could be forced to make a risky pivot to survive. Conversely, a business that can afford to take a more measured approach may choose the strategy that represents the least amount of risk to its business operations.
Here’s a more detailed breakdown of each strategy:
Market penetration
Market penetration is the lowest-risk strategy, aiming to increase market share for your existing products within your existing markets. The goal of a market penetration strategy is to maximize sales among your current customers, or attract your competitors’ customers without changing your core products or venturing into new geographic regions.
For example, your online cosmetics store could launch a points-based rewards program to encourage existing customers to buy more frequently. Or, you could leverage email marketing and create a Buy One, Get One 50% Off flash sale that’s exclusive to your current email list. In both cases, your marketing strategy aims to sell more of your current products to your current customer base.
Market development
A market development strategy involves offering your existing products to new markets. Your goal is to cultivate a new market segment or new geographic market to sell your proven products using your existing resources.
Say you operate a women’s apparelecommerce boutique that sells only to US customers. While keeping the same products, you translate your entire website into Spanish and French, set up new local payment gateways, and start a targeted Instagram campaign to begin selling your existing clothing line to potential customers in Canada and Mexico—each a new geographic market for your business.
Product development
A product development strategy involves creating new products or significantly modifying existing ones to sell to your existing market. This requires a clear understanding of your current customer base. Perhaps you already have customer feedback from product surveys, along with sales ledgers that show which products have sold well and which haven’t. This data can inform a product development campaign and the promotional efforts that will come along with it.
Let’s say you have an online store that primarily sells boutique, custom-blended loose leaf tea to your existing market. You then introduce a new line of specialized tea infusers and electric tea kettles, which you market to the same people who already buy your teas. These new products help you carve out a new market segment without abandoning what’s arguably your most valuable asset: your existing customers.
Diversification
Diversification is the highest-risk strategy, involving introducing new products in new markets where your company may have little to no experience. In most cases, you would pursue a diversification strategy to spread risk across your portfolio (i.e., not be overinvested in one product or market) or to capitalize on entirely new high-growth opportunities.
When it comes to market expansion, there are two types of diversification:
1. Related diversification occurs when a company moves into a new industry or region that has important similarities or linkages with its current business. The goal is to achieve synergy, meaning the two business units can share resources, knowledge, or production capabilities. Think of an athletic shoe company that starts selling fitness trackers, leveraging its knowledge of the personal fitness space to market both products.
2. Unrelated diversification occurs when you move into a new industry that has no obvious connection or strategic fit with your current product line. For instance, imagine a car manufacturer that starts selling cologne. There’s no inherent synergy between building cars and making cologne. The reason to do it is purely financial: perhaps the car company has studied production and pricing strategies in the fragrance industry and decided there are excellent opportunities to break into a high-margin market.
Benefits of using the Ansoff Matrix
The Ansoff Matrix offers several clear benefits to strategic planning teams seeking business growth opportunities:
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Risk assessment. The Ansoff Matrix is a strategic tool that helps you visually quantify the level of risk for each prospective growth strategy, letting you choose a path that aligns with your risk tolerance.
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Resource allocation. By identifying the most promising and achievable strategies, the Ansoff Matrix can help you efficiently allocate your finite financial and human resources.
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Strategic communication. The simple, four-quadrant structure of an Ansoff Matrix makes it easy to discuss complex growth strategies with members of your organization.
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Alignment of goals. Using the Ansoff Matrix helps ensure that marketing, product, and sales strategies work toward the same objectives.
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Versatility. The Ansoff Matrix applies across industries, from startups to multinational corporations. You can launch your business as a one-person startup, scale over time, and still use Ansoff Matrixes to evaluate growth opportunities.
How to apply the Ansoff Matrix to your business
- Assess your current market position
- Examine selling your existing products in new markets
- Brainstorm new products for your existing customers
- Explore diversification options
- Prioritize your growth strategies
- Set a course of action
There’s more to using the Ansoff Matrix than just filling in the four boxes. Apply it as a strategic framework for studying market dynamics and systematically analyzing your growth options and their associated risks. Here’s how:
1. Assess your current market position
Analyze your existing products and current markets. Calculate your current market share and identify what you could do to increase sales with your current offerings—which would mean pursuing a market penetration strategy. Add your best ideas to the upper left box of the Ansoff Matrix.
2. Examine selling your existing products in new markets
Determine if your current products could appeal to new customer segments (e.g., different demographics or professionals in new industries) or new geographic regions. This requires market research to see if there is untapped demand for what you already sell. If this feels like a viable way to grow, you will pursue a market development strategy. Populate the bottom left box with these new opportunities.
3. Brainstorm new products for your existing customers
This step would launch you on a product development strategy. Leverage your knowledge of your current customers to identify related needs that your existing product line doesn’t meet. This involves surveying your current base and brainstorming new products or major features that would appeal to them. Add all promising product ideas to the upper-right box.
4. Explore diversification options
The boldest step to contemplate is offering new products to customers in new markets. Combine the work you’ve done in steps two and three to brainstorm viable ideas and add these to the lower right box. Be mindful of high financial and operational risks; only pursue options that show clear potential for a high return.
5.Prioritize your growth strategies
Decide which growth opportunity or opportunities align best with your business goals, timeline, and resources, starting with a lower-risk option if appropriate.
6. Set a course of action
Plan marketing campaigns, product launches, or new market entry strategies and assign responsibilities within your business or team to ensure execution. This final step sets out long-term initiatives to expand, whether via new markets, new products, or a combination of both.
Ansoff matrix FAQ
What is the Ansoff Matrix?
The Ansoff Matrix is a strategic management tool that helps businesses assess four distinct product and market growth strategies—market penetration, product development, market development, and diversification—based on whether the product and market already exist or are new.
What are the four quadrants of Ansoff’s matrix?
The four quadrants of Ansoff’s matrix are market penetration, market development, product development, and diversification.
What is the Ansoff Matrix mainly concerned with?
The Ansoff Matrix is mainly concerned with helping business managers identify and assess growth strategies. This might mean increasing sales to a current customer base, claiming new market share by launching new products, or introducing current products in different markets. Businesses can also pursue a diversification strategy by developing new products and releasing them in new markets.
What is the highest risk in Ansoff’s matrix?
The highest risk in Ansoff’s matrix is diversification, the category represented by the lower right-hand corner of Ansoff’s product market expansion grid.
