What is the Ansoff Matrix?
The Ansoff Matrix, also called the Product/Market Expansion Grid, is a tool used by firms to analyze and plan their strategies for growth. The matrix shows four strategies that can be used to help a firm grow and also analyzes the risk associated with each strategy. Learn more about strategy in CFI’s Business Strategy Course.
Understanding the Ansoff Matrix
The matrix was developed by applied mathematician and business manager H. Igor Ansoff and was published in the Harvard Business Review in 1957. The Ansoff Matrix’s helped many marketers and leaders understand the risks of growing their business.
The four strategies of the Ansoff Matrix are:
- Market Penetration: It focuses on increasing sales of existing products to an existing market.
- Product Development: It focuses on introducing new products to an existing market.
- Market Development: Its strategy focuses on entering a new market using existing products.
- Diversification: It focuses on entering a new market with the introduction of new products.
Of the four strategies, market penetration is the least risky while diversification is the riskiest.
The Ansoff Matrix: Market Penetration
In a market penetration strategy, the firm uses its products in the existing market. In other words, a firm is aiming to increase its market share with a market penetration strategy.
The market penetration strategy can be done in a number of ways:
- Decreasing prices to attract existing or new customers
- Increasing promotion and distribution efforts
- Acquiring a competitor in the same marketplace
For example, telecommunication companies all cater to the same market and employ a market penetration strategy by offering introductory prices and increasing their promotion and distribution efforts.
The Ansoff Matrix: Product Development
In a product development strategy, the firm develops a new product to cater to the existing market. The move typically involves extensive research and development and expansion of the product range. The product strategy development strategy is employed when firms have a strong understanding of their current market and are able to provide innovative solutions to meet the needs of the existing market.
The product development strategy can be done in a number of ways:
- Investing in R&D to develop new products to cater to the existing market
- Acquiring a competitor’s product and merging resources to create a new product that better meets the need of the existing market
- Strategic partnerships with other firms to gain access to each partner’s distribution channels or brand
For example, automotive companies are creating electric cars to meet the changing needs of their existing market. Current market consumers in the automobile market are becoming more environmentally conscious.
The Ansoff Matrix: Market Development
In a market development strategy, the firm enters a new market with their existing product(s). In this context, expanding into new markets may mean expanding into new geographies, customer segments, regions, etc. The market development strategy is most successful if (1) the firm owns proprietary technology that it can leverage into new markets, (2) consumers in the new market are profitable (i.e., they possess disposable income), and (3) consumer behavior in the new markets does not deviate too far from the existing markets.
The market development strategy can be done in a number of ways:
- Catering to a different customer segment
- Entering into a new domestic market (expanding regionally)
- Entering into a foreign market (expanding internationally)
For example, sporting companies such as Nike and Adidas recently entered the Chinese market for expansion. The two firms are offering the same products to a new demographic.
Learn more about strategy in CFI’s Business Strategy Course.
The Ansoff Matrix: Diversification
In a market development strategy, the firm enters a new market with a new product. Although such a strategy is the riskiest, as market and product development is required, the risk can be mitigated through related diversification.
There are two types of diversification a firm can employ:
1. Related diversification: There are potential synergies to be realized between the existing business and the new product/market.
For example, a leather shoe producer that starts a line of leather wallets or accessories is pursuing a related diversification strategy.
2. Unrelated diversification: There are no potential synergies to be realized between the existing business and the new product/market.
For example, a leather shoe producer that starts manufacturing phones is pursuing an unrelated diversification strategy.
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