When you are struggling with strategic planning for business growth, knowing what the Ansoff Matrix is and how it works can mean the difference between failure and success. Remember the words of Abraham Lincoln:
“The best way to predict the future is to create it.”
Ansoff’s matrix allows you to do that.
This guide, including examples and practical application, will help you understand what the Ansoff matrix is and how it works and, most importantly, provide you with the most useful insights for integrating this valuable tool into your startup’s marketing strategy.
What is the Ansoff Matrix?
The first fundamental question we need to answer, of course, is: what is the Ansoff Matrix?
As already mentioned, this is a very useful tool for strategic planning in marketing because it clearly and immediately shows the growth possibilities of a business. In concrete terms, it is a theoretical model developed in 1957 by Igor Ansoff, which is also called the product-market matrix because it consists of two variables: products (existing and new) and markets (existing and new).
To understand how Ansoff’s matrix works you need to know that the intersection of the variables just mentioned gives rise to four different strategies, each of which involves a greater or lesser commitment in terms of business skills and economic resources.
Quadrant 1 of the Ansoff matrix (generated by the intersection of the existing products and existing markets variables) is what is called “market penetration“. This is the typical scenario for most companies, since it involves offering an existing product or service within an existing market. The best strategy in this case is to try to win over competitors’ customers, either by offering lower prices or by taking advantage of advertising campaigns.
Quadrant 2 (new products, existing markets) is concerned with “product development“. In this scenario, a company already established in a market decides to launch a new product, either to maintain its leading role in the competitive environment in which it operates or to redefine the rules of the very market in which it finds itself.
Quadrant 3 of Ansoff’s matrix (existing products, new markets) is the “market development” quadrant: in this case, a company exports an existing product to a market in another consumer segment, either in terms of industry or geographic context. Compared to the previous strategy, you should know that this is a move considered less risky.
Quadrant 4 (new products, new markets) is what is called “diversification and integrated development“: the scenario is that of a company seeking new markets, not yet served, to inaugurate a new business, not necessarily related to the one already developed. This is the strategy with the highest rate of risk and the highest investment, but it is also the one that, if carried out successfully, is likely to offer the best results.
The advantages and limitations of the product-market matrix
Ansoff’s matrix, also known as the market product matrix, has the great merit of helping to plan and evaluate corporate growth strategies in a potential market or existing one, highlighting the risks associated with them. Not only that, thanks to a well-structured approach, it provides precise and clear indications of strengths and existing resources to be leveraged, while also identifying areas on which to strategically focus one’s attentions. Another of the advantages of the Ansoff matrix, then, lies in the fact that, however structured, it is a very flexible and versatile tool that can be used for both short-term and long-term strategic planning.
The benefits that the Ansoff matrix offers, then, are many, but you need to keep in mind that to make the most of them, you also need to consider its limitations. While helping to identify the risk associated with different growth initiatives, for example, the Ansoff matrix does not take into account the “reward” that can be obtained by successfully implementing those strategies. We will see in the next few lines how to overcome this drawback.
Ansoff matrix, Ansoff grid and Marketing
It must be clear to you by now that the Ansoff matrix can provide you with very valuable information about your startup from a marketing perspective. That data alone, however, risks being of little use or, even, misleading. To get the full picture and be able to better plan your most effective growth initiatives, it is essential to complete other analyses and use other tactics and research as well.
How to integrate Ansoff’s matrix with other strategic planning tools
By providing an overview of possible growth opportunities and their associated risks, Ansoff’s matrix can help your startup identify the strategy most likely to succeed based on its current position in the market. By focusing on risks, however, this tool, as mentioned, tells you nothing about the rewards that the strategies under consideration are likely to offer, regardless.
The advice, therefore, is to use the market product matrix only after completing a thorough analysis of your startup, resorting specifically, to other strategic planning tools such as the SWOT analysis and Porter’s Five Forces analysis.
Ansoff matrix and innovation: Stimulating growth through new products and markets.
If you have followed the explanation of the structure of Ansoff’s matrix carefully, you will remember that if you want to stimulate growth through new products or new markets, you need to refer to quadrants 2 (“product development”), 3 (“market development”) and 4 (“diversification and integrated development”).
The strategy of developing a new product in an existing market is usually adopted by companies that know their target environment very well and know what consumers want and seek. Often, this strategy is preceded by market analyses that have had particularly positive results.
You can put this strategy into practice in two ways: by investing in research and development to design new products or by forming partnerships with other companies to access their distribution channels. Practical examples of “product development” strategies can be found in the automotive sector, where more and more hybrid or electric cars are being produced in line with new consumer needs.
The strategy of entering a new market with an existing product (“market development”) is generally most successfully adopted by companies that have proprietary technologies protected by patents and not available elsewhere. It is also more likely to be successful if the characteristics of consumers in the new market do not differ greatly from those in the existing market.
If you want to adopt this strategy, you have several options: you can target a different market segment or expand regionally, nationally or internationally. A practical example of the latter strategy is Starbucks, which originated in the United States of America and has now spread throughout the world.
Finally, quadrant 4 of Ansoff’s matrix identifies the strategy of diversification: as mentioned, it is the riskier one, because it involves launching a new product in a new market and the company, often, knows little about the context and has no guarantee that the product will be positively received by consumers.
If you decide to take this step, you have two paths: exploit synergies between your current and future business (e.g., by developing related products) or proceed in the absence of such synergies (unrelated diversification is, of course, the riskier). Having said the risks, you should know that the diversification strategy has, however, also positive sides: for example, it makes you more immune to market crises because two totally different markets are unlikely to face a negative period at the same time.
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