The Ansoff Matrix: origins and examples

The idea of sustained company growth is the holy grail that most managers and executive leaders chase throughout their careers. Making one successful product is definitely an achievement, but the climb rarely stops at this singular business milestone. Often when a business hits a certain level of maturity in any given industry, they need to begin looking at new avenues of growth.

Take Google, which was already flourishing in the late 2000s with its search engine technologies and other products concerning its services. By then, Google knew that they needed to diversify their offerings to gain entry into possibly large growth in the online video streaming market. They ended up paying $1.65b for YouTube in their acquisition of the platform. This is but a fraction now of the value they brought in, totalling $28.8b in revenue this past 2021.

The question, then, is how did Google know which direction to take their company? Of all the things that Google could have done, acquiring a user-content-focused platform was likely not in the minds of those in the market. In this article, we will look at the Ansoff Matrix, a useful strategic planning tool, and how this framework can help us understand the decisions behind Google’s behemoth of an acquisition. 

What is the Ansoff Matrix?

The Ansoff Matrix is what is known to managers as a strategic planning tool, essentially an easy-to-understand and sometimes visually represented framework that allows you to plot different variables and data points relevant to your context to achieve a potential better analysis of the situation.

The Ansoff Matrix is concerned with the prospects of product and market development, analyzing different factors in a business to better understand the proper growth strategy to undertake.

Ansoff Matrix vs Other Strategic Planning Tools

The Ansoff Matrix can be better understood as a hybrid model that focuses more on the internal capabilities and direction of a company, with some influence based on the external market status being observed.

This differs from other strategic planning tools such as Porter’s 5 Forces, which focuses directly on the industry’s different dimensions of competitiveness. This tool falls more in line with other frameworks like the Resource-Based-View, which better identifies the different resources available to the firm and analyzes their capacity for competitive advantage.

Using the Ansoff Matrix should be done with the consideration that it will likely not capture the full picture but rather play a role in developing a more informed decision when used in parallel with other strategic planning tools.

History of the Ansoff Matrix

The Ansoff Matrix was actually first developed by applied mathematician and business strategist Igor Ansoff, whose work was introduced to the wider business environment through an article shared by HBR called “The Firm of the Future”.

His simple two-by-two matrix is focused on “a joint statement of a product line and the corresponding set of missions which the products are designed to fulfill”. The Ansoff Matrix was meant to utilize the dimensions of products and markets to better guide business leaders on the proper strategy implementation, given specific information regarding these two dimensions.

The Different Parts of the Ansoff Matrix

Something you’ll see a lot when it comes to strategic planning tools is how strategic experts seem to enjoy using the two-by-two matrix. This standard has been seen in the famous BCG matrix as well as different visual representations of the generic strategy model.

As such, the Ansoff Matrix utilizes the same two-by-two matrix for its ease in showing the relationship between two variables. In this case, the variables in question are the products and markets relevant to the firm’s strategic discussion. Depending on the overarching goals of a company, these two dimensions can be measured as either “Existing” or “New”. Different combinations of existing or new products and markets provide a specific output strategy in response, falling into one of four quadrants: Market Development, Diversification, Market Penetration, and Product Development.

1 - Market Development

The first quadrant deals with strategies relating to a certain company’s existing products being introduced to new markets. This essentially means that the company is looking to enter some sort of new market in a specific capacity, either through new geographies, demographics, or behavioral target groups.

Utilizing this tactic requires insight based on your product’s uses as well as its ability to be integrated into a new audience. This commonly occurs in companies achieving a specific level of growth that indicates they can have the potential in reaching international audiences. Coca-cola, for example, is a leader in market development with its ability to tailor its marketing and product for uses in specific countries and demographics. The company itself notes on their company website that its international expansion was key to Coca-cola being the “global brand it is today”.

Of course, it’s only natural that a company like Coca-cola would seek expansion towards new countries once they realized the strength of their business domestically. Recognizing the goal of market development helped Coca-cola focus its efforts on establishing the proper organizational structures to support this growth through the “foreign department” in New York during the 1920s. They then established rigorous guidelines on how and where their product was made and distributed, signing bottling agreements and even utilizing “traveling labs” to ensure quality wherever they set up shop.

The exact steps of the market development will vary from company to company, industry to industry. Look for the key establishing requirements to set a foothold within a specific target audience as well as insights that can help you understand consumer behavior in relation to your products or services.

2 - Diversification

Diversification is one of the many buzzwords thrown around business spaces that unfortunately get greatly misunderstood most of the time. While the overarching meaning of diversification is to spread out your portfolio to include distinct assets, its practice varies greatly given the context in which it is applied. For the purposes of our analysis using an Ansoff Matrix, we will look towards what Diversification means in terms of organizational growth, the riskiest out of the four quadrants.

As our matrix shows, diversification occurs when your organization looks towards developing both new products and new audiences completely different from the current portfolio that the company currently manages. It can be difficult to identify a specific product that can reliably diversify your company’s offerings, as many products and services in today’s market can be considered complementary or substitutes of one another. Our earlier example regarding Google is a great example of diversification, as it dealt with an acquisition of a platform that was keenly distinct from its current portfolio of products.

A useful tool to use here can be borrowed from the school of economics, where you can study cross-price elasticity (the relationship between one’s price regarding another). If the price of one good remains static despite changes in the price of another, then you can verifiably consider the product to be distinct and diverse from the current product used as a comparison.

There are also three critical tests you can utilize to better assess whether the diversification will be beneficial to your business. First is the attractiveness test, which has to do with the overall market potential that the prospective product operates. You can analyze the attractiveness of this new industry you’re looking to enter through Porter’s 5 Forces analysis, one of the earlier strategic tools we mentioned that could further enrich your analysis.

Next is the cost-benefit analysis, which deals with value creation versus the prospective costs that the product will incur. Different industries evaluate businesses to different standards, though profitability ratios based on the product’s financial performance can help analyze whether the cost of acquiring the product is worth its potential value. Last is the better-off test, which focuses on the possible competitive advantage that your company stands to gain from this diversification, either through tangible or intangible means.

3 - Market Penetration

If you have both an existing product and are looking to improve our performance in your current commercial market, then your focus based on the Ansoff Matrix should be on Market Penetration. Often business leaders looking at their products at this stage will argue whether retention of their current customers or acquisitions of new ones within the market will better serve them. While some may lean towards retention as a “cheaper” method of improving market performance, it’s market penetration via customer acquisition that ends up better developing a brand’s growth within an existing market.

Ehrenberg-Bass, a marketing research firm based in South Australia, is a key proponent of market penetration as a way to develop a brand in relation to others competing for the same space. Additional research indicates that the focus on strategies relating to market penetration has indirect benefits to customer retention as well, solving two existing marketing strategies in one.

Costco is a good example of a company that utilizes strong customer acquisition strategies that in turn translate to customer retention programs. Their membership card requirement for store entry is fairly affordable at a low annual fee and allows them to continue leveraging the same members with promotional events and targeted advertisements.

4 - Product Development

Lastly, the fourth and final quadrant on the Ansoff Matrix deals with product development This is the most novel approach to growth that a company can endeavor towards as it’s essentially building an entirely distinct product from the ground up while simultaneously looking towards growth opportunities

Here, innovation frameworks might be useful in developing a product idea and creating systematic plans to achieve it. One framework that might be useful here is the double diamond method, which utilizes different stages of divergent and convergent thinking to better generate lateral thinking around a particular opportunity point.

Netflix is a disruptor in the current media market now thanks to a product development strategy they managed through their online video streaming platform. Streaming was already present in the market but was largely used in different ways by a distinct consumer audience. Netflix developed one of the first scalable systems to allow seamless video streaming to a movie and entertainment-inclined audience at a fixed monthly rate, where it was an innovation in an existing market.

Product development will require material insights from your intended target audience market while finding opportune moments in the same industry that provides the best alignment of available technologies and resources.

Benefits and Drawbacks of the Ansoff Matrix

The Ansoff Matrix remains a relatively simple but focused tool in getting your organization geared towards a specific strategy based on future growth plans. Important here then is the eventual mission and future state that the organization sees itself in, as well as respective timelines to better get a sense of the feasibility of a given strategy.

This is where the Ansoff Matrix reaches the limit of its capabilities, as it doesn’t take into account other factors that affect product and market interactions. Competitor movements are largely static in this model, so a separate analysis of the competitive landscape is necessary to avoid being affected in unforeseen ways. Moreover, it lacks a comprehensive review of the resources available to the firm, and only considers a top-line analysis of the current product portfolio and how the general market environment. As such, the Ansoff Matrix will provide much more benefit when used in conjunction with other frameworks that can better round out a strategic approach for your company.

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