Ansoff Matrix – Meaning, Strategies, Uses and Examples

Published by: Hitesh Bhasin

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What is the Ansoff Matrix?

In today’s environment, every company needs to think beyond the status quo and chalk out growth strategies to sustain the business. This entails looking at several options based on the current bandwidth and resources of the company. The growth options are very well laid out by an applied mathematician Igor Ansoff; in a tool created by him known as Ansoff Matrix.

Published in the Harvard Business Review in 1957, the Ansoff matrix enables entrepreneurs and business managers to conceive growth strategies for the firm. Ansoff Matrix offers 4 growth alternatives that businesses can opt for depending on the availability of resources and risk-taking capacity.

How to Use the Tool

The 4×4 Ansoff Matrix also knows as the product market expansion grid has four major dimensions; markets (new and existing) and products (new and existing). The X-axis represents the option of new and existing products and the Y-axis represents new and existing markets. Through the combination of these four dimensions, the Ansoff matrix offers four growth strategies.

Ansoff matrix four growth strategies

 

Ansoff Matrix Strategies

Let’s understand each of the four growth strategies briefly along with a real-world example of the company Tesla:

 

1. Market Penetration

Market Penetration entails growing the sales of existing products in the existing markets. This growth strategy involves less risk compared to other alternatives. The rationale is to milk the current market with the same product offerings. It means selling more of the same product to the same customer. Market Penetration works well when there is positive market growth.

Market Penetration can be achieved in the following ways:

  • Increase promotional activities to gain more visibility in the market.
  • A short-term decrease in prices of products to draw more customers.
  • Adopting the inorganic route by acquiring a competitor in the existing market.

Example – Tesla

Tesla’s existing product line includes the Model S, Model Y, Model X, and Model 3. The company enjoys a cult status and elevated brand loyalty. But the company still has a long way to go in terms of tapping the entire electric vehicles market. This can be evidenced by the fact that in April 2021, Tesla’s market share in the global EV market was a mere 11%.

2. Product Development

Product Development entails launching new products and offerings in the existing market. This strategy involves extending the current product line in the market. The rationale behind product development is to leverage the success and awareness of the earlier products launched in the same market.

Product Development warrants the following strategies:

  • The company needs to invest in R&D to devise new products and offerings
  • Take the approach of a strategic alliance with a firm in the same market. Thus gaining access to competing products and technical know-how.
  • The best option would be to acquire a competitor and rebrands its product line for the existing market.

Example – Tesla

Tesla’s upcoming pipeline of new products includes the Tesla Cybertruck, Tesla Semi Truck, and the New Roadster.

3. Market Development

Market Development involves entering new markets with an existing business. Entering a new market entails entering a new geographical region or country. The market development approach works well when the new market has some similarities with the existing (home) market. The rationale behind the market development strategy is to enjoy economies of scale.

Market Development works well when

  • The customer segment is similar and there is less effort required in market research.
  • The macro-environment in the new geographical market presents similar opportunities and risks just like the existing or home market.
  • The company has the bandwidth to cater to the demand in the new market.

Example – Tesla

In early 2021, Tesla confirmed that it has entered the Indian market with plans to set up a manufacturing location. The location will act as a base for the Indian as well as nearby markets.

4. Diversification

Diversification entails entering new markets with new products and offerings. Diversification strategy is the riskiest among all strategies mentioned above. Diversification involves entering an unchartered territory which necessitates the technical know-how of a new product and a new market.

Diversification involves two broad approaches

Related Diversification

As the name goes, this type of diversification involves leveraging the existing product/market know-how. This would entail some level of synergy between the firm’s existing strategy and new strategy (diversification)

Example – Tesla

Tesla manufactures and distributes electric vehicles which warrants a good understanding of high-end batteries used in these vehicles. So it makes perfect sense for Tesla to diversify and sell solar energy generation systems and battery energy storage products to residential, commercial, and industrial customers.

Unrelated Diversification

This involves tapping an entirely different and unrelated market. This move would involve launching a new product or acquiring a firm in a completely different industry.

Example – Tesla

Elon Musk’s venture SpaceX fits the bill of an unrelated diversification from an electric maker to an aerospace manufacturer, space transportation services, and communications company. Founded in 2002, SpaceX aims to achieve the process of colonization of Mars.

Uses of Ansoff Matrix

The Ansoff matrix is a useful tool for companies to plan their growth strategies. Global brands such as Walmart, IKEA, Mcdonalds, Domino’s, Apple, etc have at some point in time exhibited one of the four strategies. For instance: Apple exhibits the market development strategy where it sells the same products in different markets.

Mcdonald already has a base in more than 100 countries. This allows the brand to enter the existing market with a new product thus exhibiting the product development strategy.

Conclusion

Each of the four strategies laid by Igor Ansoff offers some level of risks and opportunities. Market Penetration suits well for companies that have a moderate risk-taking capacity whilst have a steady product line-up. Product development works well for companies that have a risk-taking appetite in terms of launching a new business in the same market.

The risks increase as the firm tries to expand into new markets which entails the strategies of market development and diversification. The former has relatively less risk compared to the latter strategy.

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Article by:

Hitesh Bhasin

Hitesh Bhasin is the CEO of Digiaide and his vision is to make business knowledge accessible to everyone.