Some business success stories happen overnight. More often, a company that seemingly comes “out of the blue” to disrupt a product space or industry has strategized their way to the top, using tools to establish their market penetration strategy. Of course, growth always comes with risk, and any decision that has a long-term impact on an organization requires a thorough evaluation of both what’s possible—and what’s at stake.

For any company looking to move beyond “business as usual,” the Ansoff matrix is an invaluable tool to help analyze and manage risk and strategize growth opportunities. Here’s a deep-dive into what this effective strategic tool can do for your business.

What is the Ansoff growth matrix?

Developed in 1957 by H. Igor Ansoff, the Ansoff growth matrix offers a simple and useful way to think about product and market development strategy. By looking at ways to grow via existing products and new products, and in new or existing markets (customers), the matrix outlines four possible areas of opportunity for growth, which vary in risk:

• Market penetration
• Product development
• Market development
• Diversification

The benefits of the Ansoff matrix lie in its simple 2x2 matrix design and ability to quickly convey your company’s current state and potential risk factors. The matrix itself is quite self-explanatory, which makes it an effective tool to gain buy-in as a company collaboratively evaluates and moves from one quadrant of the matrix to another.

Selecting a product market growth strategy

To use the Ansoff growth matrix, you must first align around the business goal you’re trying to accomplish. Is your product new or existing? Are you trying to disrupt an existing space? Your approach—and the resulting risks—will depend largely on your company’s maturity, current state, and long-term roadmap. It also depends on how much risk you’re currently willing—or able—to take.

Start by plotting your strategic options into the appropriate quadrant. Next, look at the risks associated with each one, and develop a contingency plan to address the most likely risks. This risk analysis will help you make the best choice for your organization. Here’s a look at each strategic approach in the Ansoff matrix.

Market penetration

You’ve created a solid product. You’ve identified a market for it, and you’ve been able to demonstrate demand through consistent sales. That’s a great start, but how do you grow those sales and learn more about the customers using your product?

The market penetration quadrant of the Ansoff matrix helps you determine strategies to sell more of your existing products or services to your existing customer base through aggressive promotion and distribution. Using this strategy, the organization tries to increase its market share in its current market scenario.

Note: This approach does not involve expansion into new markets or product innovation. Rather, it maximizes on the value and capital of your existing product and customer base.

• Benefit: This strategy is low-risk as it leverages many of the company’s existing offerings.

• Drawback: Market penetration strategy is an inherently limited approach for long-term, high-growth companies. Ideally, a company will outgrow a market penetration strategy and will need to pursue a more ambitious strategic approach to continue growth.

Product development

Let’s say you’ve created a successful product and expanded into new markets. After a while, you may hit a point of market saturation, particularly if there isn’t a need for customers to repurchase or replenish your product on a regular basis. Perhaps your customer base loves your existing products and services so much that they’re demanding more from your company.

In these cases, you might consider creating new products and services, or expanding existing products or services, to meet those demands. Product development strategy is targeted at existing markets to achieve growth and involves extending the product range available to existing markets.

• Benefit: By paying attention to what’s already working and listening to consumer feedback, companies can develop products to directly meet customer needs to grow the business.

• Drawback: New product development is inherently risky. Additionally, new product development requires heavy upfront investment in new technologies or production strategies. Companies should also anticipate delays and increased costs.

Market development

Even the most successful lineup of products or services can hit a point of market saturation. In that case, the best strategic approach might be to expand into new markets (either users or geographies) using existing offerings.

However, it’s important to consider that a market development strategy may also need to include some level of product development as you adapt your offerings to meet the unique needs, or even legal requirements, of a new market or economy. Think about updated packaging, including any language translation.

There are several tools that can help a company strategically evaluate a market before entering it. The PEST analysis, which identifies the political, economic, social, and technological factors that might influence a market, and Porter’s Five Forces, a tool for analyzing a business’s competition, are two common approaches.

• Benefit: This strategy provides an alternative to risky and expensive product development strategies.

• Drawback: Market developers might lack the required knowledge and skills for making the necessary progress in an unfamiliar market with unfamiliar users.

Diversification

Diversification exists to some degree in every quadrant of the Ansoff matrix. But at times, an opportunity could be big or disruptive enough to bypass every other growth strategy and introduce a new product. In that case, companies should dive right into a pure diversification strategic approach. It is the riskiest strategy as it radically shifts the scope of the organization by entering completely new markets with completely new products.

• Benefit: Diversification presents a huge opportunity to tap into and own an underserved market or uniquely differentiate your company from the competition.

• Drawback: As it inherently embraces uncharted territory, a diversification strategy is the riskiest in the Ansoff matrix. Often, companies following this growth strategy must move ahead without existing industry knowledge or a roadmap for scaling the product or service to meet market demands.

How to use an Ansoff matrix

1. Outline your matrix

 

Now you can fill in the matrix with potential strategies you can adopt under each quadrant. These should be practical ways you can grow the company from each angle. For instance, in your Ansoff matrix example, you might write “implement a new loyalty scheme” under the market penetration ideas.  

2. Analyze your options 

Now you can fill in the matrix with potential strategies you can adopt under each quadrant. These should be practical ways you can grow the company from each angle. For instance, in your Ansoff matrix example, you might write “implement a new loyalty scheme” under the market penetration ideas.

3. Assess risk

Once you’ve filled in your matrix, analyze the risks associated with each idea (and quadrant). Some strategies are more inherently risky than others, but their potential reward may offset them.

4. Outline contingencies

When you understand the risks, you can plan for contingencies to mitigate and address them. Prioritize risks with the highest probability and potential impact. 

5. Choose your approach

With the options, risks, and contingency plans outlined, you can now select the best strategy for your business.

Using the nine-box Ansoff growth matrix

For more sophisticated marketers, the standard four-box Ansoff grid might feel too simplistic. After all, markets are rarely easily defined, and product development often involves numerous stages of testing and refinement.

For example, if you’re a tortilla chip company, you may just want to launch a new flavor rather than an entirely new product to your already satisfied customer base. If you’re a software company, a fine-tuned update to an existing capability might be a more valuable—and safer—bet than an entire product relaunch.

That’s why some marketers use a nine-box matrix for a more thorough analysis of their business’s current risks and opportunities. The nine-box matrix allows consideration for modified products, services, and markets between existing and new ones.

This matrix is useful as it shows the difference between product extension and true product development and also the difference between market expansion and venturing into genuinely new markets.

Grow your business with Lucidchart

The Ansoff matrix is one of the most widespread tools managers use in strategic planning for most organizations. It is easy to understand and allows decision-makers to visually represent the organization’s scope of work.

Lucidchart offers hundreds of strategic business templates like the fishbone diagram, to efficiently help teams anticipate and calculate risk throughout the product development process—and establish the right marketing mix for your business.