Definition: The Ansoff Matrix is a tool used by firms to analyze and plan their strategies for growth. It allows firms to compare different product offerings and measure the impact each has on market demand. It also helps firms understand how changes to one product will affect demand for others.
Ansoff developed the Ansoff Matrix as a tool for improving financial planning for start-ups. The matrix is essentially a framework for analyzing market size, demand, supply, and product development potential. The approach has proven successful in helping many firms increase their revenues and market share at the early stages of new businesses while helping to minimize investments in ineffective or risky strategies.
The Ansoff matrix is a 4×4 matrix, each row representing one potential customer. Each column represents a different industry sector, with the top two members of each section being the top two targets for the respective industry.
The four strategies of the Ansoff Matrix
1. Market penetration strategy
A market penetration strategy is an attractive strategy when companies are looking to expand their market share, and the main aim is to increase their sales volume. A better penetration rate is achieved when a company focuses on creating various products with equally attractive features to attract different customers, thus increasing the chances of conversion. This strategy can also help a company grow its business by expanding into new markets and offering better products at competitive prices.
2. Product Development Strategy
To develop new products successfully, there must also be a strategy in place. This involves identifying what customers want from the firm and developing products that will satisfy these needs while also potentially attracting new customers. For an industry or company to grow, it must continually evolve within this framework, constantly responding to shifts in consumer preferences by either innovating or adjusting its product offerings accordingly. It is by continuously re-evaluating its product development strategy that companies can remain competitive and well-equipped to deal with any challenges that might arise from changing market conditions.
3. Market development strategy
A market development strategy is a series of steps that a company takes to develop its product in the market through attracting new businesses, enhancing its existing products, developing new ones, and directly or indirectly buying products in the market. Companies will often focus on developing certain features or components of their product to attract new customers and gain market share for it. Put simply; the Ansoff Market Development strategy requires three key ingredients. First, a firm must own its own proprietary technology. Second, the firm must identify potential consumers in the target markets who can be leveraged into developing new products and services. Finally, the firm must achieve profitability by satisfying its target consumers in the target markets without deviating too far from its existing business practices.
By creating unique products in this space, the firm enters into a completely new market, increasing its exposure to the consumers who are typically the first to adopt a new product. By doing this, they have a chance to gain a higher potential return on their capital invested. Diversification allows you to take more calculated risks, also optimizing for reward. Typically, choosing the right investments enable you to ride out market price changes and puts you in a position to profit more from appreciation in the long run. While this can be an excellent way to invest for the long run, in some instances, it leads to poor investment strategies and a high risk of missing out on particular opportunities.
While market penetration strategies offer the highest potential for long-term profitability, it’s the least risky because they give you a chance to earn extra money from existing customers. On the other hand, diversification has a higher risk of pulling your profit away from you over time. However, diversifying across numerous industries can help protect against falling prices and allow you to make small bets on new technologies, industries, or business models that emerge.