With knowledge of the market, customers and their needs, you can take go-to-market decisions to expand your business through possible product market combinations.
Read this article about the traditional as well as the extended Ansoff Matrix.
The Ansoff Matrix was developed by Igor Ansoff and was originally published in the 1957 Harvard Business Review in his article “Strategies for Diversification”. The strategy tool has since then been taught at universities for business students and used in companies worldwide.
Ansoff suggested that effectively there are only two approaches to developing a growth strategy; by varying what is sold (product growth) and to whom it is sold (market growth). In combination with the Ansoff matrix described above, it offers four strategic options, each with a different level of risk.
Explore the four fields of the matrix and understand the growth opportunities it offers your company.
The first and most widely used growth strategy for companies in the Ansoff Matrix is the strategy of market penetration. It is about winning new market shares with an existing product. The company is trying to sell even more of its products to existing, new and customer competitors.
The aim of this strategy is to increase market share. The market penetration has a relatively low risk, but also small growth opportunities.
The so-called market penetration rate is used to estimate the potential and is calculated as follows:
Market penetration = (number of own customers / number of potential customers in the market) * 100
The lower the degree of market penetration, the greater the remaining growth potential for a company with the market penetration strategy.
The next strategy is to develop new markets with existing products. The new markets can be new countries and new target groups. Market development usually involves only minor changes to the product or products in order to adapt to the new markets.
Product development as a strategy takes place when a new product is introduced to an existing market with existing customers. This may be the case when replacing existing products or expanding the product range.
The advantage of product development is that customers and the market are already known to the company.
The last of the four strategies is mostly used by startups and start-up companies. Companies offer completely new products in new markets. Diversification thus offers the greatest potential for growth, but also the greatest risks to failure.
The diversification strategy is broken down into horizontal, vertical and lateral diversification according to the degree of risk appetite:
Horizontal diversification is the development of a new product which is still factually related to the previously offered product range.
With vertical diversification, a company deepens its commitment to sales-oriented actions (through so-called forward integration) and or the actual manufacturing process of its products (through backward integration).
In the lateral diversification strategy, companies are expanding into completely new markets, which have no material connection with the existing business.
Ansoff’s original product market matrix is a good foundation. However, she omits some possible intermediate areas. Therefore, the so-called extended or 9-field matrix is frequently used, which has the following additional fields:
• Market expansion
• Product modification or extension
• Limited diversification
• Partial diversification
In the market expansion , the company sells existing products in new geographic markets with the same target groups.
The product modification or extension closes the gap between market penetration and product development. Existing products are sold here with slight modifications in existing markets.
With limited diversification , the company markets customized products to new markets.
The partial diversification is the effect the development of completely new products for new markets or distribution of modified products for completely new target groups.
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8 Responses
Nice Introduction to the Ansoff Matrix
Hi Jacobs. Thanks for your feedback. Feel free to reach out if we can support you further on the topic.
Nice presentations and explanations – found it very useful as a starting point for our growth strategy.
Thanks for that wonderful feedback, Earl.
What steps are you taking for your growth strategy?
Best,
André
Dear Sir
First, thank you so much for this piece of content, i like how you expand the model from 4 to 9 growth strategies. (As you mentioned in your Article “product modification”?)
I went over Mr. Igor Ansoff original article “Strategies for Diversivication” as well as several articles across the Web, yet the concept of “Product line” , The concept of a “mission” (Product mission) and how to conduct his “Product – Market Strategy” Exhibit I. (In Ansoff’s Article, P 114) somehow still unclear, hence I would appreciate if you can give us an expenation with practical illustration. (PS – This piece of content will improve your website SEO as many of Ansoff’s followers (“Target Group”) have been seaching for the same needs.
Again, thank you for your time and efforts investwd in this article
Honest Regards
Shady
Shady,
Thank you for this great feedback. We’re currently working to improve on our contents.
Best,
André Wehr
Horizontal diversification is the development of a new product which is still factually related to the previously offered product range.
Could you expand on what aspects are considered to be said to be factually related to the previously offered product range?
I have always been a bit confused between the NEW products in product development quadrant and the NEW products in the Diversification quadrant of the classic matrix
Dear Sanjit, Thank you for the fantastic question. Maybe an example illustrates it the best:
A car manufacturer has so far limited itself entirely to producing small cars, let’s say in the lower price segment. However, market demand is also high in the mid-size car segment. Time and again, the manufacturer has to turn down customer inquiries from this mid-size segment, so that customers in the small car segment are also threatening to leave. As a result, the manufacturer decides to produce mid-size cars in order to be able to supply its customers with a full range of automotive products.
Best,
André