“By searching out opportunities which match its strengths the firm can optimize the synergistic effects.”
– Igor Ansoff – Mathematician, Scientist & Creator of the Ansoff Matrix
The Ansoff Matrix is a high-level strategic growth framework to help companies navigate, orient, and think through their product and market growth strategy. Developed by Russian-American mathematician and economist, Igor Ansoff, the Ansoff Matrix offers four potential growth strategies: market penetration, product development, market development, and diversification. Many struggling companies are trying to take on too much and can find themselves with too many strategic initiatives across all four quadrants of the Ansoff Matrix. In many of these cases, it is time to take a step back and think through their growth strategy utilizing the Ansoff Matrix through the lens of opportunity cost.
The Four Growth Options of the Ansoff Matrix
The Ansoff Matrix is a simple 2×2 matrix with markets on the vertical dimension broken up into existing and new, and products/services on the horizontal dimension broken up into existing and new. Risk increases as you move up and over with the least risky growth strategy being increasing market penetration with existing products in existing markets and the riskiest strategy being diversifying with new products in new markets. Let’s go over the four growth options.
Market penetration is a constant strategy for most companies which focuses marketing, sales, and product development resources on increasing market share with existing products in existing markets. For companies with a strong value proposition and lower market share, this is typically the best growth option, since it minimizes opportunity costs and focuses scarce resources on a common goal. The strategic focus is on maximizing the ROI on the go-to-market strategy growing and optimizing the sales funnel through effective marketing and sales to the target customer segments. Furthermore, the product development team is focused on executing enhancements and features to existing products to improve the customer value proposition.
Companies that are growing nicely within their existing markets often take on developing a new market as a new layer of growth. They are very pragmatic about choosing which new markets to try and develop. The strategic calculus of prioritizing new markets focuses on the size and profitability of the new market, the strength of the value proposition of the company’s existing products/services versus the competition in the new market, and the potential customer, go-to-market, product/service, and operational synergies. Companies that succeed in developing new markets with existing products/services ensure the synergies are high by often choosing adjacent markets to their existing market where the target customers have many of the same needs as their existing target customers in their existing market.
Strong growth companies often create new products and services in their existing market to drive additional growth. They focus on ensuring that new products and services will have strong synergies with existing products and services, operations, and go-to-market. They often do extensive informal and formal research with their existing and potential target customers to scope out the new products and services’ value proposition, competitive differentiation, and go-to-market potential and strategies. They also ensure that the growth and profit potential given the risk and costs exceed other market penetration and market development strategies.
The diversification growth option should be relegated to large and established companies with significant market share in existing markets that have exhausted market development and product development growth options. There are significant risks and opportunity costs for companies that try to diversify into new markets with new products. Companies diversifying are essentially creating a new value proposition in a market they don’t have experience in often for target customers they are not familiar with. Companies that diversify too early are trying to essentially create a new company while trying to run the existing company. Many companies fail because they decide to diversify instead of harvesting significant synergies through market penetration, market development, and product development strategies. Diversification often takes significant capital, resources, time, and patience to bear fruit.
The Ansoff Matrix in Practice
Use the Ansoff Matrix to organize potential strategic initiatives you and your team are thinking about. Once you list out all of the potential initiatives on an Ansoff Matrix then debate where the big opportunities are across and within the four growth options. You can also use the Prioritization Matrix to help rank order strategic options by thinking through the benefit/value versus the cost/effort of the different options. As always, strategy is about focus, and the Ansoff Matrix is a good strategic framework to help focus a company’s scarce resources on the right growth opportunities.
Download the Free Ansoff Matrix Template
Download the free Ansoff Matrix PowerPoint Template to get you and your team going on organizing and prioritizing your growth initiatives.