Ansoff Growth Matrix – Four Ways To Grow A Business

by Paul Simister on September 5, 2011

The Ansoff Growth Matrix is also known as the Ansoff Product-Market Growth matrix or the Four Ways To Grow A Business model.

This is not to be confused with the Three Ways To Grow A Business model from marketing consultant Jay Abraham which is another, more tactical way to think through business growth issues. It has its strategic uses when thinking about your business model and how you can generate profit from the opportunity.

What is the Ansoff Growth Matrix?

It first appeared in the Harvard Business Review in 1957 and was created by strategist Igor Ansoff to help management teams to focus on the options for business growth.

In common with other popular strategy models, it is build around a two by two matrix.

  • current products or new products
    .
  • current markets or new markets

The Four Growth Options Of The Ansoff Growth Matrix

  • Market penetration strategy – current products and current markets
    .
  • Product development strategy – new products and current markets
    .
  • Market development strategy – current products and new markets
    .
  • Diversification – new products and new markets

These are best seen in a diagram.

Ansoff Growth MatrixOption 1 In The Ansoff Growth Strategy Matrix – Market Penetration

Market penetration strategy is the preferred route to growth for many businesses because it appears safe.

Focus is on selling more of the existing products to:

  1. Existing customers
    .
  2. Customers similar to your existing customers who are buying from your competitors
    .
  3. Customers similar to your existing customers who should be buying buying the product because they have a clear need but aren’t doing so.

The emphasis is on increasing market share through more marketing promotions, more effective marketing and by strengthening the offer by creating more customer value.

This market penetration option within Ansoff’s growth matrix uses existing resources and capabilities and can be thought of as “business as usual but on steroids”.

The downsides of the market penetration strategy are:

  1. If you already have a high market share, the opportunities for growth may be limited. Some markets (and customers) naturally limit the share of the leading player because they feature the concentration of market power.
    .
  2. Aggressive market penetration strategies will increase competitive rivalries in the industry and may provoke a price war of similar competitive battle which damages industry profitability. To make significant increases in market share, the business must be willing to drive competitors out of the market.
    .
  3. Increasing exposure to one product-market segment can make the business more vulnerable to future changes in competition because of the “all the eggs in one basket” problem.
    .
  4. The business may become complacent and ignore opportunities and threats from new products and service solutions to the customers’ underlying problems which are made possible through technological advances.

Option 2 In The Ansoff Growth Matrix – Product Development

In product development, businesses continue to focus on the needs of current customers and the wider customer market they represent  but they seek to understand their underlying needs and wants better so they can see opportunities for new products:

  1. To replace existing products with something better
    .
  2. To provide complementary products that customers need to buy before, during or after purchase of the main product sold by the business.
    .
  3. To sell other products the customer buys as a way to strengthen or leverage the relationship and to provide added convenience. Think “one stop shop”.

New products in the product development option of the Ansoff Growth Matrix don’t need to be “bleeding edge” new developments to the world although they can be. The business can work with existing supplier businesses with established resources and capabilities and offer them new routes to market.

This option in the Ansoff Growth matrix suits businesses following a customer intimacy strategy in the three value disciplines. It allows a broader definition of the business. Remember marketing myopia and the idea that you can change focus from the railroad industry to the transportation industry as focus remains on the underlying customer need.

The danger lies in its exposure to one type of customer so the business must actively scan the economic environment, look for potential problems and be ready to take proactive steps to respond to any serious risks. Businesses exposed to the property market for example have had a very tough time since the 2008 financial crash.

You may attract new competitors into your market as a respond to you offering the products they traditionally sell. Competition has shifted up a level from coexistence selling your specific products to active competition selling the same broader range.

Option 3 In the Ansoff Growth Strategy Matrix – Market Development

The third option suggested by Ansoff is to take the current products and find new markets for them.

There are different ways to do this

  1. Opening up previously excluded market segments through pricing policies e.g. discounts for students and old age pensioners at theatres.
    .
  2. New marketing and distribution channels. Making a product available on the Internet with the necessary search engine optimisation means that anyone looking can find it, rather than rely on your marketing message to reach them by convention means. The supermarkets sell financial services to people who wouldn’t contact a broker or agent.
    .
  3. Entering new geographic markets by moving from local to regional to national and finally international. This may require the business to acquire new capabilities including exporting, understanding different cultures and language skills.

The strength of this option from the Ansoff Growth matrix is that it puts the pressure on the marketing and sales functions of the business and leaves the operations/supply side to concentrate on what it does best.

Some product development may be inevitable as there are few global products that don’t make any concessions to local market needs. Success depends on being able to identify the best markets to develop which offer a genuine opportunity and where you have an effective competitive advantage. It also requires knowing which markets to avoid either because they are too difficult, too different or risk competitive reaction.

Again your action to expand your market may attract the attention of competitors who currently only trade in zones where you don’t.

Option 4 In The Ansoff Growth Matrix – Diversification

This option is the most controversial since diversification involves taking new products to new customers.

There are three levels of diversification:

  1. Diversification into related markets – while the customers and products are both new, there is a logic about the move that makes sense to the outside world.
    .
  2. Diversification into unrelated markets using existing resources and capabilities – while the customers and products are different, they all rely on the existing strengths of the business. Metal fabricators and plastic extrusion manufacturers are able to move across markets and produce custom designed products relatively easily because customers are buying access to the core competences.
    .
  3. Diversification into unrelated markets which require new resources and capabilities.

Diversification is the most risky growth strategy in Ansoff’s growth matrix and especially if it requires the development of new resources and capabilities. It has even been referred to as the “suicide cell”.

The big advantage of diversification is that while each move is risky, if it is successful it reduces the overall risk of the business to factors outside of the control of the business like the wider economic environment, climate change etc. It may also make the business much less seasonal – think bikinis and other swimwear for the summer, umbrellas for the spring and autumn and heavy overcoats for the winter.

It may also help the business to move away from industries that are unattractive because they are super-competitive or in long term decline to fast growing, new markets.

How To Use The Ansoff Growth Matrix

There are two ways to use the Ansoff Growth Matrix

  1. As a tool for brainstorming to help identify possible strategic options
    .
  2. As a tool for assessing preferred strategic options to check for some kind of balance. there aren’t right or wrong answers but you might be shocked to discover that all six growth strategies you intend to follow fall into the diversification box.

Developments To The Ansoff Growth Matrix

The original matrix developed by Ansoff was the simple 2 x 2 matrix presented above.

Ansoff later refined the matrix into a 3 dimensional version by adding geography.

Others have turned the matrix from 2×2 into 3×3 by introducing middle categories for expanded markets and modified products to give more flexibility to the tool. This allows shading from ” a little different” to “very different”.

Reflections On The Ansoff Matrix

The Ansoff Growth Matrix is a popular and useful strategy model for identifying growth options.

It doesn’t help you to evaluate which opportunities are worth pursuing and which should be rejected. It’s therefore a starting point and not the end.

Yes it can help you to identify opportunities to include in your SWOT Analysis but each needs to be carefully vetted to make sure it’s a potential source of cash and profit and not a drain.

Some opportunities can be quickly rejected but for the possibles, you should look in more detail at the product-market to identify the key success factors. I recommend you use a tool like the SPACE Analysis to check that you are in a strong position which is suitable for an aggressive growth strategy.

The Ansoff Growth Matrix And The Six Step Profit Formula

I use the Six Step Profit Formula to help keep strategic planning focused on what really increases profit in a business.

The Ansoff Growth matrix is useful for helping you to focus on step one, finding the starving crowds. With a hungry market, business is comparatively easy but it gets much more difficult if no one has an urgent need or desire for what you sell.

The new products to the existing market square in the Ansoff matrix also helps you with step 5, persuading your customers to buy more from you more often.

A Video On The Ansoff Growth Matrix

Here is an interesting video on the Ansoff Growth Matrix and the risks involved in the strategy for growing the business by Professor Malcolm McDonald, Professor of Marketing at Cranford University School of Management.

Paul Simister is a business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of the ebook The Six Steps Profit Formula.

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