What is Ansoff Matrix?
Ansoff Matrix is defined as an enterprise growth planning method that aims to find new growth avenues. These growth avenues are located and analyzed based on the combination of four distinct attributes in a matrix layout; these attributes are existing products, new products, existing markets and new markets. It is a 2 by 2 matrix with 4 outcomes as growth strategies: market penetration, market development, product development / diversification.
Here is the layout of theAnsoff Matrix:
- Existing products: The existing products or services portfolio of the enterprise.
- New products: These are new products that the company plans to launch in existing and/or new markets.
- Existing markets: The existing markets where the existing products/ services are being targeted.
- New markets: The markets in which the company aspires to sell existing or new products.
On the X-axis lies products, that is, existing products and new products. On the Y-axis lies existings markets and new markets. The graphical layout of this growth matrix is such that the further away from point zero, the more increased risk the business will encounter. This is because the further away we move along the X or Y axis, the newer the products and markets.
The 4 Growth Strategies of Ansoff Matrix
Based on the above graph, here are the 4 key strategies derived from Ansoff Matrix:
- Market Penetration
Market penetration is the process of growing market share in the existing markets using the same products. This means focusing on marketing and advertising to drive growth. Often deeper market research into an already researched market may also help reveal consumer trends that can help with further penetration.
Another way to expand within the same market is to acquire a competition to your existing product bundle in the same market. This acquisition needs to be in the same line of offering, and does not diversify into newer products (not even related products) in this strategy.
- Market Development
Market development is the method of expanding to new markets using existing products. Here, market research needs to be conducted to understand the new markets and based on the conclusions the existing products are launched, marketed and sold.
Primary/secondary market research, marketing and media campaigns, and advertising become the key areas of organizational focus. Depending on the type of business, added manufacturing facilities, logistics and service stations/ centers may also be part of the plan.
- Product Development
This is an enterprise growth strategy in which existing markets are further exploited by launching newer products. This can happen either in the form of launching related products or a completely unrelated line of products. For example, a company owning a customer survey software may develop an employee survey version of the software and rebrand it as a new product. Such products often have a higher chance of being sold to some existing customers as well. This is a less risky alternative to investing in an unrelated product.
In case of product development involving a completely new line of products having no relation to the existing ones, the product may not have any market in existing customers. Such a product requires it’s own market research and promotions to sell, and is generally deemed to be of higher risk than launching related products.
- Product Diversification
Product diversification is the riskiest growth strategy among the the four derivations in Ansoff Matrix. In this strategy, new products are targeted in new markets. This means that new product research and market research needs to be conducted for feasibility and cost benefit, and if deemed viable, then the new products are developed or bought, to be marketed and sold in these regions. These products can once again be either related or unrelated to the existing product-lines, keeping in mind that unrelated product launches carry added risks.
Examples of Ansoff Matrix
Here are 3 examples that will walk you through the application of Ansoff Matrix across three most dominant types of products today, Software-as-a-service (SaaS), consumer goods and capital goods:
Example 1. Software-as-a-service (SaaS) company growth strategy
Market penetration: For a B2B software company, aiming to sell more of the same product in the same market- would typically involve online marketing, email marketing and to some extent, some cold calling. Software are best marketed online given the nature of the product.
Market development: When a SaaS product is being launched in a new market, the company will still need to take the route of market research to understand product demand. Market development for online products are easier since service and sales can be done remotely.
Since new products often require specialized marketing and sales pitches, the enterprise may decide to have seperate teams to market different product lines, often under the same leadership. This is particularly the case if the new market has a different language.
Product development: In this strategif approach, adding new products involve product and market research studies, followed by either in-house product development or purchasing another company that caters to the same market.
Since the new product will be sold in the same market, the company’s existing marketing team can simply add the new products to their portfolio to be marketed. In case of a company buy-out, the new product company’s marketing team may also be leveraged.
Diversification: Although this is the riskiest strategy, it is certainly less risky for a SaaS or internet based B2B company, where it takes considerably less investment to launch a new product in a new market. The research and marketing efforts can be done remotely and the product itself is virtual and available immediately for download and play.
The risk is even lower if the new market has the same language as the native one, which saves time in translation and translation related issues. If the new market shares similar cultures then the marketing team may even be able to reuse some of the material being used in the native market.
Example 2. Consumer goods company growth strategy
Market penetration: For a consumer goods company, deeper penetration means making the same products/ services physically available in more areas in the same market. Unlike a SaaS company, this means investment not just in marketing and sales, but also in production and physical distribution of the products. This can be achieved either through in-house production upgrades, logistics, warehouse and outlet expansion or through a franchise model or through 3rd party vendors in either or all aspects of expansion.
Market development: Market development for a consumer goods company once again includes expansion of operations into the new market using the same product line. The firm needs to first conduct market research among consumers and product feasibility tests. Then comes the actual work of producing the new product, manage logistics to make the new product available in the new market, setting up post-sales services and perhaps even office space for new employees if the geographic location is different and demands it.
Product development: New product development for consumer goods is a complex process involving physical sourcing of raw materials, workers, factory productions, marketing and sales. However, since the market is the same, less time will be required in product feasibility tests.
Diversification: A new consumer good product in a new market is indeed risky. Not only will the enterprise need to thoroughly research the new market for the new product, it will also have to deal with new material suppliers, human resource specialization in the new product, possibly new factories and expansion to new geographic regions. This requires significant investment and the stakes are often high. The enterprise’s management team therefore needs to conduct market research, cost-benefit, fit into overall enterprise strategy etc to ensure that the new product succeeds in the new market – if the launch is worth the risk.
Example 3. Capital goods company growth strategy
Market penetration: Capital good companies sell primarily to other businesses. Being B2B and in the same market with the same products requires less market research investment, as would be needed when sampling and surveying a large number of consumers. Furthermore, it makes it easier to expand through business referrals. Additional marketing and advertising strategy remains the same, but more aggressively targets the existing market with the same product line.
Market development: Expanding markets with the same product possesses similar challenges and opportunities as in the case of consumer goods. Considerable research needs to be conducted in the new market, followed by how the company wants to make the products available. This may involve simply logistics operations or opening new factories for production. Often companies when expanding to new markets choose not to increase investment risk by opening new production facilities, instead choosing to first test the product demand for a few years before making a large investment in production.
Product development: Unlike a SaaS company where a new product simply means a new software to be coded often by the existing team, new product development for capital goods involves new production lines. To facilitate this, the enterprise may choose to add capabilities to existing production locations or open new dedicated production facilities to manufacture the new product if there is no compatibility in the production process with existing products.
Market research requires the least investment here if the product is related to the products already in production, since it is to be sold in the same market. For example, an automobile ancillary manufacturing plant may already be producing steel ball-bearings and now may be expanding to steel rivets. Much of the melting process of the steel will be the same, with a change in the moulding process. The buyers may also be the same (automobile manufacturers) and require little investment in researching the scope of business as the enterprise sales leaders are already in touch with buyers of similar products used in the manufacturing of the final product, which is the automobile. A company can also cut through much competition in the new product space by selling to existing clients.
Diversification: To successfully launch a new B2B goods product in a new market, the enterprise needs to invest considerably in primary and/or secondary market research to fully understand the scope of penetration and competitiveness.
Before launching the product, if the new market is a new geographic location, the company may need to figure out logistics involving supplying to the new market, with HR considerations to set up service, marketing and sales teams for the region. New languages add to the complexity of selling the new product. Businesses may try to leverage existing business contacts or refers for the initial breakthrough needed before marketing results kicks-in.
If the product is related, it is easier to manage human resources since existing staff may take up additional work till the business can hire more employees. Furthermore, factory productions may be from the same unit if the related new product has manufacturing compatibility.
A completely new product in this space would most likely require a new production factory with more acute HR needs to fill critical positions to begin production and supply.
Benefits of Applying Ansoff Matrix
- Provides a framework for enterprise growth
Enterprise growth is not an accident, it is a matter of planning out areas of expansion and focusing on realistically achievable goals. Ansoff Matrix is a key tool in the hands of any company’s management struggling with growth plans. Even if a company has planned out a growth path, this tool is still a beneficial method to reevaluate and ensure the best growth strategy is chosen. This is after all the underlying theme that will drive the enterprise’s future.
- Helps optimize risk taking and risk management
The 4 strategies of Ansoff Matrix move from simple and least risky to complex and most risky, allowing the management team to pick the strategy that best suits their risk appetite. This may be the most important attribute of this method of plotting enterprise growth.
- Leverages existing company strengths
The Ansoff Matrix’s 4 strategies are not just an effective risk management tool, but also helps ensure that existing business strengths are leveraged. This of course is at its peak during the ‘market penetration’ approach, while decreasing steadily as we approach ‘diversification’.
Top 4 Best Practices while applying Ansoff Matrix in 2023
- Use one matrix per product
In case of multiple products, each may cater to a different market segment. For example, a survey software company may have two different products for customer feedback and employee feedback.
In such situations, the user of the matrix needs to ensure that only one matrix is used per product to avoid errors in judgement arising out of wrongly bundling products during analysis.
- Know your risk appetite
Ansoff Matrix uniquely combined growth strategy with risk management. Each strategy is riskier than the previous with rising growth potential in case of success. To pick the right strategy that will lead enterprise growth, the leaders need to be well calculated in risk appetite. This includes financial and accounting details and is key to ensure success in growth. A riskier strategy than what the enterprise wallet can bear, could lead to venture failures or worse, bankruptcy.
- Ensure accurate price projections
Drawing more from the previous point, the leadership team needs to ensure that the right pricing metrics are being used when projecting for a strategy’s cost. Cost overruns are often a result of poor price-projections while planning and could disrupt the strategy.
- Involve the right stakeholders
The planning process involving the 4 strategies of Ansoff Matrix requires business leaders to consult and involve the right stakeholders who will be involved in the operations regardless of which strategy is finally picked. These are people who are most accurately aware of ground realities. Furthermore, when the strategy is sealed, it is these team leaders and managers who will be leading the plan.