Ansoff Growth Matrix – SKCI Business Strategy Tool
The Ansoff Growth Matrix, sometimes called the Product/Market Expansion Grid, was developed by the applied mathematician Igor Ansoff and first published in the Harvard Business Review in 1957. The grid shows four growth alternatives, which allows you to compare strategies associated with New products versus Current products and New Markets versus Current markets. The grid is an effective way of comparing these varying strategies and the amount of risk related to them.
When To Use The Ansoff Matrix
While developing strategy for your business you may have a lot of options that you want to pursue. But for many reasons, such as financial resources, time constraints and the need to focus, you can’t pursue all the options. Once you have established your goals, you can use the Ansoff Growth Matrix to compare your options for growth. This comparison will clarify which options are most feasible for your organisation and highlight what risks are involved.
While you may be using the matrix as part of a strategy overhaul, it is also useful to return to it over time. When the business or its environment changes, the matrix can provide clarity on the logic behind strategic decisions and act as a guide for where you may want to go next.
How To Use The Ansoff Matrix
The matrix is a relatively simple tool and relies on you filling in the table with an honest assessment of your organisation in mind. Start with your current products/services and their current markets. From there, list the potential benefits of moving into new markets or producing new products.
The four growth strategies that come from the matrix are:
- Market Penetration: By keeping the same product in the same market, you are looking to grow sales within familiar territory. This is the safest option but is limited for long term growth.
- Product Development: Launching a new product in the same market brings medium high levels of risk. You know your customer base and may have brand loyalty, but the product is unproven and may come with high costs.
- Market Development: Expanding into a new market with your existing product, maybe relying on a secondary use of your product or by changing it slightly to appeal to new users. This is also medium risk as you are familiar with your product but not the new market.
- Diversify: A new product in a new market can be a very beguiling option as there is a chance of high revenue. But it comes with a lot of risk as you are trialling a new product in an unfamiliar market.
Throughout the process, it is helpful to keep referring back to the SWOT analysis for the organisation. An ideal strategy would turn your organisation’s weaknesses into a strength and create an opportunity from a threat.
If you can address the organization’s weak points at this stage in your strategy development, you will be ensuring a more solid footing as you move forward into the growth process.
Of course, this matrix can be done by one person, but it is often useful to do it as part of a group discussion. This can bring in differing perspectives from across the business and highlight the viability of the strategies.
The questions below may help spark discussion:
- What are the opportunities and threats in entering new markets or developing new products?
- Is the risk of product development too high?
- Are there financial benefits to market penetration?
- How does growth align with our other goals and values?
Now that you have an accurate picture of your options, it is time to decide on a growth strategy. By weighing up the short-term risk of each strategy with the potential advantages it represents in the long term, you can elect the best option for your organization at the time. It may be tempting to pursue a high-risk option, or perhaps more than one at one time, but remember that you can always come back to a different growth strategy in the future when you have the resources to develop it to its fullest.
Let’s look at the example of NewTechNow, an imaginary B2B software and hardware company that we have seen in previous examples.
Now that the advantages and disadvantages are clearly laid out, NewTechNow needs to prioritize strategy.
Market Penetration is normally the lowest risk option. However, in this example, we can see that their sales growth could be limited.
Typically, companies will then look at Market Development and Product Development as they offer good revenue without high risk. In this example, NewTechNow might want to prioritise Market Development by ramping up sales activities outside Europe (the Euro-focus was identified as a weakness in the SWOT analysis performed), as well as identifying other types of customer for the product (this was identified as an opportunity in the SWOT analysis).
Given the company’s strong IP, Product Development would seem to be the “default option”. But the higher revenue potential from Market Development will encourage the company to focus on this in the short term. The challenge will be to maintain the underlying long-term commitment to Product Leadership while management attention is distracted by moving into new markets. This short-term shift in focus should ultimately be beneficial provided the organisation doesn’t lose sight of it’s USP as a product leader.
The final option of Diversification is often superficially attractive (so much potential in so many markets), however it is also by far the riskiest. In this example, the risk is compounded by the relatively low revenue potential for the product and market that NewTechNow has identified.
How Does This Fit Into The 5KQ Strategy Framework?
SKCI’s unique 5 Key Question (5KQ) strategy framework gives our clients an effective way of managing strategy development. Ansoff’s Matrix falls under both question two, ‘Where do we want to go?’, and question three, ‘What are we going to do (differently)?’. But it is most effective when used as an answer for question three.
Our framework allows you to ask the right questions at the right time and provides a clear structure for the development of your strategy. As you will have already gathered insight into your organization in the previous steps, Ansoff’s Growth Matrix will enable you to clearly see the advantages and disadvantages of the growth alternatives. This allows you to decide the high-level activities that your organization needs if you are to achieve your Goals, and ultimately answer the question, what are we going to do (differently)?
Additional Strategy resources, including blank worksheets in PowerPoint and Word format, are available from the SKCI Strategy Hub.