5 MIN READ
The Ansoff Matrix
Understanding the Risks of Different Options
(Also known as the Product/Market Expansion Grid)
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 opening up new markets, but how do you know which one will work best for your organization?
This is where you can use an approach like the Ansoff Matrix to think about the potential risks of each option, and to help you devise the most suitable plan for your situation.
Understanding the Tool
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." It has given generations of marketers and business leaders a quick and simple way to think about the risks of growth.
Sometimes called the Product/Market Expansion Grid, the Matrix (see figure 1, below) shows four strategies you can use to grow. 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
You can also use the Ansoff Matrix as a personal career planning tool. It can help you weigh up the risks of your career decisions, and choose the best option as a result. Learn more about this with our article on the Personal Ansoff Matrix.
The Corporate Ansoff Matrix
Let's examine each quadrant of the Matrix in more detail.
Market penetration, in the lower left quadrant, 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, in the lower right quadrant, is slightly more risky, because you're introducing a new product into your existing market.
With market development, in the upper left quadrant, 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, in the upper right quadrant, 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 Tool
It's fairly straightforward to use the Ansoff Matrix to weigh up the risks associated with a number of strategic options.
Step 1: Analyze Your Options
Download our free Corporate Ansoff Matrix Worksheet. Then plot the approaches you're considering on the Matrix. The table below helps you think about how you might classify different approaches.
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. Here 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:
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 ones you're most likely to face.
Step 3: Choose the Best Option
By now, you might have a sense of which option is right for you and your organization. You can make sure it really is the best one with one last step: use Decision Matrix Analysis to weigh up the different factors in each option, and make the best choice.
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).
However, 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
H. Igor Ansoff developed the Ansoff Matrix in 1957. It offers you a simple and useful way to think about growth.
The Matrix outlines four possible avenues for growth, which vary in risk:
- Market penetration.
- Product development.
- Market development.
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 most likely risks. This will help you make the best choice 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!