Igor Ansoff, the Russian-American applied mathematician, is known as the father of strategic management. Not only did his contributions help businesses develop growth strategies but they also helped them understand existing and new markets to truly master what growth means for a business.
The Ansoff Matrix or the Ansoff Model was developed by Igor Ansoff in 1957 and was published in the Harvard Business Review. The Ansoff Matrix defines product and market strategies that leaders must undertake for sustained competitiveness.
Considering the current state of business, as dynamic and fast-moving as it is, it’s not advisable to stick to the ‘one size fits all’ mindset’. It’s imperative businesses move to new, advanced and dynamic strategies to position themselves strongly in the market.
The Ansoff Matrix Analysis helps you do just that. The Ansoff Matrix theory enables informed decision-making in terms of building new products, expansion and exploring new markets.
Discover everything you need to know about the Ansoff Growth matrix and how it helps in strategic management.
What Is The Ansoff Matrix
The Ansoff Matrix is also known as the product/market expansion grid. It was created by Igor Ansoff to help senior leaders and executives come up with sound growth strategies for their business.
The Igor Ansoff Matrix is represented by four quadrants that are strategies to help your business grow by taking into account the risks involved. These four strategies are: Market penetration, product development, market development and diversification. The strategies in the Igor Ansoff Matrix are based on four factors: existing markets, existing products, new markets and new products. As you move from existing markets and products to new markets and products, you incur increasing risk.
For instance, say you want to diversify your products. This means you’ll enter a new market and launch or develop a new product. This is the highest risk your business will incur as per the Ansoff Matrix Analysis.
The Four Strategies Of The Ansoff Growth Matrix
Growth strategies like market penetration or diversification help you determine what’s profitable and what will lead to heavy losses. The Ansoff Growth Matrix will enable you to make decisions based on different levels of risk involved. You can either operate in an existing or new market. Based on the amount of risk you’re willing to take, your decisions will impact your business strategies.
Here are the four growth strategies or the four quadrants in the Ansoff Matrix analysis:
1. Existing Market, Existing Offering – Market Penetration
The first quadrant of the Ansoff Matrix represents market penetration. This is where businesses attempt to expand their operations using their existing products or offering within the same market they already operate in. This can be done in several ways. They can either sell more products or offer more services to a loyal customer base. Or they can devise strategies to find new customers in an existing market. The purpose is increased or higher sales without having to move out to new markets. Promotion, distribution and marketing are some ways to improve market penetration. Market penetration is the least risk growth strategy in the Ansoff Model.
2. New Market, Existing Offering – Market Development
The second growth strategy in the Ansoff model is market development. For a business, market development entails entering a new market with the same or existing product and offering. This requires little to no development effort. You may be trying to tap into new customer segments, expanding markets from wholesale to retail or vice versa. You could also be trying to enter foreign markets. If the new market offers a similar landscape and opportunity, it’ll be easier for your business to establish itself or find a growth path.
The buyers in the new market must have buying capacity for this to work. As the uncertainty grows in a new market, you’ll face slightly higher risk if you use this growth strategy.
3. Existing Market, New Offering – Product Development
There are times when businesses decide to expand their range to offer new products in an existing market. In the market they operate in, they already have a loyal or established customer base. It’s easier to experiment in tried and tested waters. Product development is the third growth strategy in the Ansoff Model. Businesses may invest in R&D efforts to develop new products.
You may even want to buy someone else’s product and rebrand it as yours. Sometimes, businesses enter into partnerships to sell a product, which helps both parties take advantage of branding, market standing and distribution channels. Product development is a riskier venture than market penetration even if it operates in an existing market. This is because you don’t have information on how successful your new offering or product will be.
4. New Market, New Offering – Diversification
The riskiest growth strategy in the Ansoff Growth Matrix is diversification. This is because you need to invest in product and market development. Businesses deciding to diversify means they’re developing new products to be distributed in a new, unfamiliar market. You have to invest heavily in research and development, studying your competition and evaluating your current offering. Not only are you moving market development but also product development—these are two quadrants combined. This is what makes diversification the riskiest growth strategy in the Ansoff Growth Matrix.
The Ansoff Matrix theory is a helpful way to analyze strengths, weaknesses, opportunities and threats of new products and markets. The Igor Ansoff Matrix can be used to understand existing markets and the growth opportunities within them.
How To Use The Ansoff Matrix
The Ansoff Model is a helpful tool for organizations to weigh risks before making growth strategy decisions. It offers four strategic options to businesses as discussed.
Here are the steps to use the Ansoff Matrix:
1. What Are Your Options?
The first step in the process is to analyze all the options available to you. For instance, do you want to go for market penetration? This would mean exploring how to expand your existing offering in the current market. Or do you want to diversify, or take a risk and enter a new market with a new offering? There are certain strategies you can use to analyze all four approaches such as a SWOT analysis or market segmentation that help you understand different customer segments. If you’re thinking of diversifying, you need to take into account the impact on your existing business as a result of the new business.
Ideally, the risk should be limited or it shouldn’t affect what you’re currently doing. Some ways to ensure successful market penetration are loyalty programs, sales offers, promotions, marketing strategies and using a Boston Consulting Group matrix to analyze which products you should invest in or discontinue.
2. Did You Calculate Your Risk?
A risk analysis is a must when deciding which growth strategy to pick. Risk analysis helps you understand the scope and scale of your actions. You may be looking at low or high risk depending on the market or offering. For instance, market development is higher risk than market penetration. But you may be prepared to take this risk. To determine whether you have the safety net you need, a risk analysis comes in handy.
The first step in a risk analysis is to identify your threats—exceeding your budget, technological advancement, policy changes, hostile political climate or even structural challenges like harmful work environments. There are ways to manage risk and these include sharing it with people, other organizations or others. A good example of risk sharing is insurance. Taking a leap means to accept the risk and sometimes, if you want to gain something, you’ll have to jump.
3. What’s The Best Option?
Once you analyze all your options and assess the risks involved, you’re ready to pick the best option. A decision matrix can help you come up with the best choices available to you. This involves listing all the options and rating them from bad to very good. You have to assess whether an option is more important than another and how. This gives you some perspective and helps you make decisions objectively. Assigning a level of importance is a great way to discard ideas that may appear good but aren’t urgent or relevant at the time. The purpose of this exercise is to assign a weightage to each option and choose the one with the highest score.
There are several other ways in which economists and experts use the Ansoff matrix. It’s not always the 4X4 grid that you see. It can be limiting and too restricted to simply have these four growth strategies on offer. Other ways include a nine-box matrix that adds options like partial diversification and limited diversification. Other factors within which these strategies operate are expanded markets and modified offerings.
Using The Ansoff Matrix To Excel
Did you know that you can use the Ansoff Matrix for simple, everyday decisions as well? Yes, it’s helpful even if you’re a small business owner or a professional! Harappa’s Practicing Excellence course will teach you how to use sophisticated frameworks like the Ansoff model to assess your strengths and weaknesses. Learn from our stellar faculty and discover ways to understand yourself and excel in whatever you do.
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