What is the Ansoff Matrix in business strategy?
This is a strategic plan for business growth based upon the method or manner of growth the firm pursues. It was developed by Prof. Igor Ansoff in 1957. It proposes that firm grow by offering new products (value propositions), entering new markets for their value proposition, or some combination of the two. While the matrix focuses upon product firms, the logic can be applied equally to service or information firms. The matrix breaks down the business objectives into four quadrants: market penetration, market development, product development, and diversification. Each of these approaches is a unique growth strategy for the firm.
- Market Penetration – This regards a firms ability to increase its market share with existing products (or services) in the current market. The core strategy behind this objective is increasing customer awareness through marketing and business development efforts. The firm must adjust operations to utilize or act upon existing skills, knowledge, or resources to achieve this objective. Growth through this strategy will wain as competitors enter the market, which approaches an equilibrium between supply and demand.
- Market Development – Market development happens when a firm seeks to grow by entering a new market with an existing product. As part of this strategy, the firm must overcome barriers to entry into the market. Often, this will require accessing additional resources or developing new skills or knowledge. This must allow the firm to alter or develop its core competency to meet the demands of this market. Imagine a firm seeking to serve customers in another part of the country or another part of the world.
- Product Development – Product development involves developing a new product (or value proposition) and beginning to offer that product in an existing market. That is, the firm is already a market participant and seeks to introduce a new or different product into that market. This strategy requires innovations through product research and development. The new product might be developed internally or develop and then licensed or purchased by the market entrant. The new product must grow the total business of the firm without diminishing or canabalizing a significant amount of its existing sales or revenue. This means growing marginal revenue without increasing variable costs. Further, the firm must develop a strategy to effectively introduce produce in a manner that employs its existing resources, knowledge, and skills. Resources might include brand image, suppliers, and customer goodwill. Knowledge and skills may involve any ability along the value chain.
- Diversification – Diversification is when a firm expands its product offering by introducing a new product into a market in which it is not currently a participant. This is a bold growth strategy, as it requires the development of the new product as well as accessing or developing existing resources, knowledge, and skills in a manner that meets the demands of the new market. It will inevitably require a firm to alter or develop new core competencies to meet these demands. Often, this strategy does not result in immediate growth in profit for the firm (and can result in immediate loses). This can be difficult for firms that do not have adequate resources (financial and human) to weather these demand. Firms with adequate capital and a strong brand awareness are generally most capable of executing this strategy effectively.
Note: The Ansoff Matrix is frequently modified to include nine quadrants. It differentiates between existing, new, and modified products within existing, expanded, and new markets.
Diagram of Ansoff Matrix
The following diagram is a visual representation of the concept:
Evaluating Each Strategy
Managers must use all available information and the litany of tools to identify a strategy that best works with the existing and potential resources, skills, and knowledge of the firm. The various tools for evaluating markets and internal abilities is discussed throughout our strategy lectures.