The Ansoff Matrix
Understanding the Risks of Different Strategic Options
(Also known as the Product/Market Expansion Grid)
© iStockphoto
IrochkaT
There are rewards and risks when devising new growth strategies.
Successful leaders understand that if their organization is to grow in the long term, they can't stick with a "business as usual" mindset, even when things are going well. They need to find new ways to increase profits and reach new customers.
There are numerous options available, such as developing new products or entering new or existing markets, but how do you know which one will work best for your organization?
In this article, we'll look at a model called the Ansoff Matrix which can help you to do just that by getting you to think about the potential risks of each option, and to devise the most suitable plan based on your situation.
What Is the Ansoff Matrix?
The Ansoff Matrix was developed by H. Igor Ansoff and first published in the Harvard Business Review in 1957, in an article titled "Strategies for Diversification." [1] It has given generations of marketers and business leaders a quick and simple way to think about the risks of growth.
Also known as the Corporate Ansoff Matrix and the Product/Market Expansion Grid, the Matrix (see figure 1, below) shows four strategies you can use to grow your business. It also helps you analyze the risks associated with each one. The idea is that each time you move into a new quadrant (horizontally or vertically), risk increases.
Figure 1: The Ansoff Matrix
Tip:
You can also use the Ansoff Matrix as a personal career planning tool. It can help you weigh up the risks of certain career decisions, and to choose the best option for you. Learn more about how to do this in our article, the Personal Ansoff Matrix.
The Four Quadrants of the Ansoff Matrix
Let's examine each quadrant of the Matrix in more detail.
- Market Penetration (lower left quadrant). This is the safest of the four options. Here, you focus on expanding sales of your existing product in your existing market: you know the product works, and the market holds few surprises for you.
- Product Development (lower right quadrant). This area is slightly more risky, because you're introducing a new product into your existing market.
- Market Development (upper left quadrant). Here, you're putting an existing product into an entirely new market. You can do this by finding a new use for the product, or by adding new features or benefits to it.
- Diversification (upper right quadrant). This is the riskiest of the four options, because you're introducing a new, unproven product into an entirely new market that you may not fully understand.
How to Use the Ansoff Matrix
Now, let's take a look at how you can use the Ansoff Matrix to weigh up the different risks involved when making strategic growth and marketing decisions:
Step 1: Analyze Your Options
Download our free Ansoff Matrix Worksheet. You can use this to plot the approaches you're considering on the Matrix. The table below helps you to think about how you might classify different approaches.
| Market Development | Diversification |
|---|---|
|
Here, you're targeting new markets, or new areas of your existing market. You're trying to sell more of the same things to different people. To do this you might:
|
This strategy is risky: there's often little scope for using existing expertise or for achieving economies of scale, because you are trying to sell completely different products or services to different customers Beyond the opportunity to expand your business, the main advantage of diversification is that, should one business suffer from adverse circumstances, another may not be affected. |
| Market Penetration | Product Development |
|
With this approach, you're trying to sell more of the same things to the same market. Here you might:
|
Here, you're selling different products to the same people, so you might:
|
Reprinted by permission of Harvard Business Review. From "Strategies for Diversification" by H. Igor Ansoff, 1957. Copyright © 1957 by the Harvard Business School Publishing Corporation; all rights reserved. [1]
Step 2: Manage Risks
Conduct a Risk Analysis to gain a better understanding of the dangers associated with each option. (If there are a lot of these, prioritize them using a Risk Impact/Probability Chart.) Then, create a contingency plan that addresses the risks you'll most likely face.
Step 3: Choose the Best Option
By now, you might have a sense of which option is right for you and your organization. But to double-check your findings use the Decision Matrix Analysis to weigh up the different factors you've brainstormed for each quadrant.
Using a Nine-Box Ansoff Matrix
Some marketers use a nine-box grid for a more sophisticated analysis. This puts "modified" products between existing and new ones (for example, a different flavor of your existing pasta sauce rather than launching a soup), and "expanded" markets between existing and new ones (for example, opening another store in a nearby town, rather than expanding internationally).
This is useful as it shows the difference between product extension and true product development, and also between market expansion and venturing into genuinely new markets (see figure 2, below).
Get the Free Newsletter
Learn essential career skills every week, plus get a bonus Essential Strategy Checklist, free!
Read our Privacy PolicyHowever, be careful of the three "options" in orange, as they involve trying to do two things at once without the one benefit of a true diversification strategy: completely escaping a downturn in a single-product market.
Figure 2: The Nine-Box Grid
Key Points
The Ansoff Matrix was originally developed by H. Igor Ansoff in 1957. It offers marketers a simple and effective way of weighing up the options and risks involved when taking new strategic decisions.
The Matrix outlines four possible avenues for growth, which vary in risk:
- Market Penetration.
- Product Development.
- Market Development.
- Diversification.
To use the Matrix, plot your options into the appropriate quadrant. Next, look at the risks associated with each one, and develop a contingency plan to address the ones that will most likely affect you. This will help you make informed and effective strategic marketing decisions for your organization.
This site teaches you the skills you need for a happy and successful career; and this is just one of many tools and resources that you'll find here at Mind Tools. Subscribe to our free newsletter, or join the Mind Tools Club and really supercharge your career!
The Ansoff Matrix was published 8th March, 2006 and last updated 24th September, 2021.
Yolande,
Mind Tools Team
The Ansoff Matrix can help you to measure the risk of specific strategies that you may want to implement in positioning yourself in the market.
To understand where you stand with respect to your competition, I would suggest using the Competitive Intelligence tools found here: https://www.mindtools.com/community/pages/article/newSTR_60.php
Once you've decided which strategies you feel would position you best, you can then determine the associated risk using the Ansoff Matrix.