Ansoff Matrix – what actually is it?

What does the future look like for your company? "Growing" is certainly not a bad answer, but not all growth is the same. That's what Igor Ansoff thought in 1957 and developed the concept named after him. The Ansoff Matrix gives managing directors and managers the op­por­tu­ni­ty to better determine the type of growth. This rel­a­tive­ly simple tool can be used to keep an eye on a company's growth strategy.

Based on which in­no­va­tions – if any – come into question for you, different strate­gies can be defined.

Market de­vel­op­ment is different: This Ansoff strategy is the one to use if you want to continue with your existing product portfolio but want to take on new markets. This means, for example, expanding to another ge­o­graph­i­cal region or in­creas­ing the target group. In order to achieve effective growth with market de­vel­op­ment, a high marketing effort is required – even more than with market pen­e­tra­tion. Due to the high financial in­vest­ment, this strategy involves a certain risk.

If you establish yourself with a new product in an existing market, the growth strategy "product de­vel­op­ment" is applied. You have two different options: Either you develop a com­plete­ly new product for your target group or you produce a variant of a product that you are already selling.

If you respond to customer feedback, you can better adapt the new or modified product to the target group. The costs for this strategy are com­par­a­tive­ly high because the de­vel­op­ment of new products or services is expensive. There is a risk here too: you will only know if the in­no­va­tion has been suc­cess­ful after its release on the market.

It’s also possible to take on a com­plete­ly new market with a new product. This strategy involves the highest risk, but can also have the greatest success. In addition to increased sales, this strategy also enables you to develop new customer groups for your company. Di­ver­si­fi­ca­tion also helps to spread the risk: instead of focusing on a single product or on a specific market, this growth strategy gives you several driving forces for your success. This fourth strategy of the Ansoff Matrix can in turn be divided into three types. The choice of the right strategy depends on your will­ing­ness to take risks.

With this type of di­ver­si­fi­ca­tion, you expand your portfolio with an article that is similar to an existing product. This has the advantage that your company already has expertise in this area and that you can make the most of existing processes. The new products speak to new customer groups as well as those who’ve bought from you in the past. Compared to other di­ver­si­fi­ca­tion measures, hor­i­zon­tal di­ver­si­fi­ca­tion is quite low risk: You are in a field that you are already familiar with – this helps you to avoid making the wrong decisions.

Vertical di­ver­si­fi­ca­tion is less about expanding the product range than about expanding the value chain. For example, you can take over the dis­tri­b­u­tion of your goods yourself (forward in­te­gra­tion) or take further steps in the man­u­fac­tur­ing process into your own hands (backward in­te­gra­tion). This makes you less dependent on suppliers or dealers. The ad­di­tion­al services can also be resold to other customers. In order to set up new pro­duc­tion fa­cil­i­ties or shops, you have to invest a lot, which leads to an increased risk.

You take the greatest risk with lateral di­ver­si­fi­ca­tion: instead of con­cen­trat­ing on your existing business and expanding it, you go in a com­plete­ly new direction. With a com­plete­ly different product, which is dis­pro­por­tion­ate to the products already on offer, you are placing yourself in a new market. With this growth strategy, you are turning to a com­plete­ly new industry in which you do not yet have any expertise. This approach is as­so­ci­at­ed with high costs and it is difficult for en­tre­pre­neurs to work out whether the venture will be suc­cess­ful or not. This is why lateral di­ver­si­fi­ca­tion is only rec­om­mend­ed if your company can pick itself up again after failure.

In our example, we assume that there is a fic­ti­tious bakery, Tanya’s Treats, that wants to grow. We’ll go through one Ansoff strategy after another and show what steps the company has to take to grow. So far, the bakery has a location, but since it’s still a small company, Tanya’s Treats initially wants to take little risk and decides to penetrate the market first. For this reason, the managing director asks the sales staff on the sales floor to always point out other goods to customers. In addition, she wants to introduce regular discount actions, which will turn passers-by into regular customers. Neither the market nor the product range has expanded, but with clever marketing strate­gies the company can increase its sales.

To be able to grow further, the managing director now takes a further step and opens an ad­di­tion­al store in the neigh­bor­ing town. The same goods are sold there. The market de­vel­op­ment risk is somewhat higher because the company cannot foresee whether the offer will be just as well received in the new market. Once the new market is secured, the company can think about product de­vel­op­ment. In addition to the frosted cupcakes already on offer, the company is now also selling rainbow cookies. Since the entire existing in­fra­struc­ture is still being used, the managing director can keep the risk low. She can generate more turnover with a new or adapted product while main­tain­ing a constant market.

In the end, Tanya’s Treats has grown, conquered new markets, and expanded its product range. Now we have enough reserves to be able to take on even greater growth risks. For this reason, the managing director opts for di­ver­si­fi­ca­tion as a strategy – and initially for hor­i­zon­tal di­ver­si­fi­ca­tion, i.e. for expanding the range. She also decides to include pastel macarons in the range. Tanya’s Treats therefore in­tro­duces a new product to a new market, the market for coeliacs.

The next step for Tanya’s Treats is vertical di­ver­si­fi­ca­tion. The managing director wants to pursue both forward and backward in­te­gra­tion. Therefore, she decides to start her own farm with dairy cows and chickens for eggs in order to or­gan­i­cal­ly source her in­gre­di­ents. In addition, Tanya’s Treats also opens up its own café. This makes the business less dependent on the supplier and it also takes over a new dis­tri­b­u­tion channel for its own products.

Now it's time for lateral di­ver­si­fi­ca­tion: Tanya’s Treats’ managing director decides to man­u­fac­ture and sell watches as well in the future. The new product has no relation to the actual portfolio and also appeals to a new market. Although the managing director is taking a big risk, this is the only way to guarantee steady growth in the long term.

Although the Ansoff Matrix is one of the cor­ner­stones of growth planning, you have to be aware that it is firstly quite old and secondly quite simple. The model was developed in the 1950s and therefore also reflects the corporate strategy thinking back then. The Ansoff Matrix is based on only two factors: products and markets. The concept can be further split into groups: products are divided into existing, modified, and new ones, and the “market” factor is divided into the ge­o­graph­i­cal market and the target group. However, this more modern adap­ta­tion also leaves many factors out of the equation. For example, the product-market matrix com­plete­ly ignores the com­pe­ti­tion.

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