Why read this? : The Ansoff matrix shows there’s 4 different ways to grow your business. Learn the pros and cons of each, with real-life examples. We also share a case study where a business uses the Ansoff matrix to find new growth ideas. Read this to learn how to use the Ansoff matrix in your innovation planning process.
Businesses need to grow. But where does growth come from?
It’s a 2 x 2 matrix which shows growth comes from products and / or markets.
Products are what you sell. In this context, that covers both physical products and services. Product growth comes from :-
- selling more of your existing products (to existing or new customers).
- selling new products (to existing or new customers).
- selling more to your existing customers (existing or new products).
- selling to new customer segments (existing or new products).
The Ansoff matrix combines these product/market and existing/new choices to give you 4 growth options :-
- market penetration.
- market development.
- product development.
With market penetration, you prioritise existing customers and existing markets. This plays to your strengths as you focus on what you know best. Your goal is to grow by increasing market share in your current category. That usually involves adjusting your 4Ps marketing mix i.e. – product, price, place and promotion.
You can grow by improving your existing product, for example. You still meet the same basic need, but you add extra features and benefits. These are normally about improving the quality, performance or appeal of your product.
Quality improvements usually affect the reliability, durability or premiumness of the product. It doesn’t break as often. It lasts longer. Or it looks and feels better than the existing version.
For example, adding longer lasting batteries to electronics products. Longer warranties for high ticket items. Better quality ingredients or production methods for food and drink products.
You grow by getting more customers to buy the improved quality product, or by charging a higher price for it.
Performance improvement improves the way your product functions.
To work, the target audience need to see (and want) the value of the improvement.
Your phone or computer gets more storage or a faster processor. Your vacuum cleaner has more suction power. Something changes in how the product performs.
You grow by customers switching to you from competitors, or existing customers upgrading.
Finally, you can alter the product’s design to increase the appeal of the product.
These are usually about style rather than functionality. You change what the product looks like, rather than what it does.
It happens a lot with technology products, for example.
Laptops get fancier keyboards and lighting to make them look more appealing.
Price, place and promotion
You can also use price, place and promotion for market penetration.
Take price, for example.
You cut your price (temporarily or permanently) and (usually) more customers buy. If your percentage growth in customers is higher than the discount, sales go up. You grow.
Or you raise the price to grow sales, if you have many loyal customers who you know won’t switch.
Then there’s place. Where you sell. The better your availability, the more you sell. Customers can’t buy your product, if they can’t find it.
So you get listed by retailers who don’t currently stock you. You increase your share of shelf, or put up more display units in existing retailers. You could even set up your own online store to give customers more places to buy (though there’s both benefits and challenges to that approach).
And finally of course, there’s promotion. This is normally driven by marketing communications. It’s the advertising, media and PR which help build awareness. It’s how your website creates an engaging customer experience. And it’s how your CRM program builds customer loyalty.
Another market penetration option is acquisition. You buy a competitor. Your new combined business has a larger share of the market.
The pros and cons of market penetration
Compared to other ways to grow, market penetration is generally seen as low risk. You work with products and markets you know. That existing knowledge of how the category works reduces risk. It’s the unknown and untested which adds risk.
With market penetration, you’ve already got category research, experience and ideas. You’re less likely to make mistakes. It’s the growth option most businesses choose because it feels like a safe choice.
However, there are risks. They’re just less obvious ones. So for example, you potentially limit the size of your growth. You can only really grow by taking share from competitors. If your share is already high, there’s less new share to go for.
There’s also a risk of complacency. Customer needs change over time, and a disruptive innovation might come along and catch you out. If you only focus on “more of the same”, you never come up with anything that’s new and breakthrough. Playing it too safe now can you put you at risk in the future.
With market development, you look for new markets for existing products. There’s 2 main options :-
- geographic expansion.
- new segments.
Geographic growth expands the reach of your brand to new districts, cities, regions or countries.
There’s lots of new customers to go for. Which sounds attractive, right?
But it’s not easy to go into new markets. And the further away you go from your home base, the more challenging it can be.
You don’t know the customers in those new markets. And they don’t know you.
You need to build brand awareness. That takes time and lots of media spend. And there’s no guarantee customers in these new markets will like your brand more than local rivals.
You also have to factor in cultural influences on buying decisions, especially with export sales. Customers in other countries will have different attitudes, beliefs and experiences to those in your home market.
There’s many examples of brands getting this wrong.
For example, there’s selling the Chevrolet Nova in Spanish-speaking countries where “no va” means “doesn’t go”. (though apparently this story is a bit of a myth).
Or the Tide washing detergent advertising which showed 3 images. A woman holding dirty clothes on the left. Washing machine in the middle. And clean clothes on the right.
But when the ads ran in Arabic speaking countries, customers were confused. You read Arabic right to left. So customers thought clean clothes went in, and the washing machine made them dirty. (we couldn’t verify the truth of this one, but it makes the point anyway – be aware of culture).
The other market development growth option is new customer segments for your existing product.
Segmentation research often gives you multiple segments. You can grow by going after a new one.
A new demographic or occasion, for example. Or you go after a different psychographic driver. (see examples in our behavioural science article).
You look for new needs or wants your current product already solves.
For example, there’s the well-known origin story of Post-It Notes. They started out as just a low-tack adhesive.
But one of the 3M engineers working on the project realised they worked really well as a place marker in books. And from that initial thought the idea for post-it notes grew into what we know them as today. They found a new market for an existing product.
The pros and cons of market development
The big plus of new markets is the size of the opportunity. You start from zero. Anything you sell is growth.
But as we’ve shown, there can be a lot of risk. There’s lots of unknowns. It takes money and time to grow in markets where customers don’t know you.
New customer understanding. Changes to your marketing mix. Getting your competitive strategy right to stand out from existing brands. You face these challenges with all innovation, but they’re magnified when you sell in new markets.
There’s often lots of trial and error with new markets. What works in your existing market won’t always work well elsewhere. That can be tough. You need a strong breakthrough culture, and lots of resilience.
Product development creates entirely new products. It’s different from the product improvement approach we covered earlier.
In the Ansoff matrix, product development is a more disruptive innovation approach.
In his book, the Innovators Dilemma, Professor Clayton Christensen makes a distinction between sustaining innovation and disruptive innovation.
Sustaining innovation improves existing products. It’s the market penetration approach we covered earlier. Upgrades to existing features and benefits for existing customers. But the basic nature of the product itself doesn’t change.
But disruptive innovation changes the nature of the product. It appeals to a new need or want. Or it radically changes how a need or want is met. It makes existing products look out of date.
Product development focusses more on this disruptive approach.
Christensen’s book uses the example of the market for computer hard drives in the 1970s and 80s to show the difference between sustaining and disruptive.
Businesses following a sustaining innovation approach focussed on increasing the storage capability of existing hard drives. (a product improvement).
But disruptive innovation companies instead focussed on creating smaller hard drives (a product development). These smaller drives could fit in much smaller devices. Larger hard-drives soon looked out of date. The disruptive companies gained market share at the expense of the sustaining ones.
Disruptive innovation example - Netflix
The way we watch movies at home is another example of disruptive innovation. In the past, you went to video stores like Blockbuster to rent a physical copy of a movie. No-one does that now.
Disruptive innovation from streaming services like Netflix and Amazon Prime have changed the way we get movies at home.
Now it’s all available at the press of a button. You don’t even need to get off the couch to see the latest movies. That’s disruptive product development.
The balancing act of innovation
There’s a balancing act between sustaining and disruptive innovation. The innovator’s dilemma is when to give up the short-term benefits of sustaining innovation and go after the long-term benefits of disruptive.
Your sustaining innovation helps you hit your immediate sales targets. It feels relatively safe. Customers know your products and already buy them.
Disruptive innovation feels more risky. It doesn’t always work out. But the upsides when it works are huge. It’s about deciding when the time is right to make the switch.
There are many examples of brands who left it too late. Look at Nokia and Blackberry, for example.
They dominated the mobile phone market in the 1990s and early 2000s. But their focus was on product improvements to the phone technology. They delivered sustaining innovation and went for market penetration.
And then along came the Apple iPhone in 2007. It was a product development. In essence, a small portable computer which also took calls. It was more than a phone and made previous mobile phones look old-fashioned.
Nokia and Blackberry were unprepared. And it cost them dearly. You barely hear of them these days. That’s the risk if you don’t consider what product development in the Ansoff matrix means for your business.
The pros and cons of product development
Product development works best for strong brands with lots of loyal customers. Customers believe in the brand purpose and values so they trust new products when that brand stretches into new areas. The iPhone took off because Apple was a strong brand with loyal customers.
The challenge is how far away from your current offer you can go before customers think it’s too far. This brand stretch can be tricky. Go too far and customers won’t get it. You could even harm the image of your core brand and products if you get it wrong.
For example, many industry pundits said Porsche were crazy when they launched their Cayenne SUV model.
They said it would damage their sports car image. It was too far of a stretch. And yet, 20 years later, the Porsche brand is as strong as ever. And the Cayenne is one of their most popular models.
On the other hand, look at Amazon and Google’s relative lack of success in mobile phones. They’re undeniably strong brands in their existing categories. But that hasn’t helped them stretch into a new category. That shows you product development can be hard for everyone.
The final Ansoff matrix growth option is diversification. Here, you go after both new products AND new markets. It’s a double whammy of newness.
It’s high risk, but also potentially high reward. It runs separately to whatever you currently make and whoever you currently sell to.
Translate existing purpose into new direction
That’s not to say however there can’t be some connection back to the original purpose of the business. It’s often about pivoting a core expertise to fit a new market opportunity.
You see it happen a lot in the technology sector. For example, Twitter was originally a podcasting platform. Flickr was a role playing game. Instagram was a check-in app.
In each of these cases, they diversified when they found a new segment need coming out of their existing offer.
These companies were all small and agile enough to offer new products to new markets. They pivoted.
However, not all of these pivots work out. You only really hear about the ones which do. But if it works out for you, there’s a huge size of prize.
Diversification through acquisition
The other option for diversification option is acquisition. But rather than buy a competitor, you buy a business that’s growing in a completely different category.
For example, when Unilever bought out Dollar Shave Club. Though they had health and beauty products, they had no share of the subscription category. Buying Dollar Shave Club gave them diversified access to new products and markets.
These types of deal often happen when the acquiring company reviews its overall purpose.
For example, in the early 2000s, French dairy giant Danone re-aligned itself to focus on health. They sold off their (unhealthy) biscuits division. And they diversified by buying Numico, the Dutch (healthy) infant formula and medical products business.
The pros and cons of diversification
Diversification is high risk. Most businesses don’t deal well with risk, so it’s the least common growth option. But for those who do take the risk and succeed, there are many benefits.
They break new ground. They gain first-mover advantage. They’re top of mind when customers think about that category. As new customers enter the category, they get more than their fair share.
Growth can be rapid and sustained if the new category takes off.
But there’s always the risk it won’t work. That new customers won’t join the category and demand will never come. There’s the most amount of unknowns to manage. There’s a lot of scope for things to go wrong. That’s why it usually takes a lot of bravery to diversify. Most business don’t.
Case study example : Sydney Pizza Company
So that’s the theory of the Ansoff matrix. Let’s see how it works in practice.
Let’s imagine we’re the new manager of a pizza restaurant based in Sydney. (the same one from our Six Hats article).
The owner’s challenged us to come up with ideas on how to grow the business. Doesn’t matter where it comes from as long as the business grows.
Having just read a great article on the Ansoff matrix, we think about how it can help up come up with growth ideas.
We start with market penetration. What would that look like? Well, for this business, it’d mean getting more pizza buyers in our area to buy more pizza from us.
How could we do that? Product improvements could be a good place to start. New pizza toppings, for example. Offering more choice to appeal to more pizza buyers.
What about price discounts? When there’s less demand midweek, for example. We could grow by offering a 2-for-the-price-of-1 deal on Tuesdays and Wednesdays, for example.
These are all improvements to our existing marketing mix to drive market penetration.
Next, what about market development? What would that look like for our pizza business?
Well, as per the example in our market attractiveness article, that could be extending deliveries to neighbouring suburbs.
We’d grow by selling existing products (pizzas) to new markets (other suburbs). Of course, we’d need to advertise in those areas too. And there’d be competitors to think about.
We could also start selling other products beyond pizza. For example, pasta and sauces.
We’d do product development to create these new products and advertise them to existing customers.
They’d obviously have to be of similar quality to our pizzas. But existing customers would get the connection between pizza and other Italian food. It’s not much of a stretch.
Other cuisines might be too much of a stretch though. Offering curries or burritos would confuse customers. The only way that might work is by going back to market penetration, and using them as pizza toppings to improve our existing product range.
Finally, as an out of the (pizza) box option, we could push the idea of “Italian cooking” harder. We could diversify into new areas.
We could offer Italian cooking classes, for example. Or publish an Italian recipe book.
Existing customers might like it. But there’s potentially lots of new customers and segments in those categories too.
Customers who like to learn how to cook, and customers who like to cook at home. Those would be new markets for us.
Those would be diversification growth opportunities which wouldn’t fit the other options in the Ansoff matrix. They’d be more risky (as we don’t know those categories). But any sales would be entirely new growth.
A portfolio lens on the Ansoff matrix
So far, we’ve talked about each Ansoff matrix growth option as a separate strategy.
But depending on how your business works, they don’t have to be separate.
You could have a portfolio approach to different growth options. Which you use depends on how soon you want to see growth, and how much risk you’re willing to take.
Short-term – market penetration
Having some ‘market penetration’ projects in your marketing innovation portfolio gives you a few safer bets. They’re more more likely to generate a short-term return. This keeps cash flow and profit ticking over. You can have a lot of small penetration projects running.
Mid-term – product and market development
Both market and product development have a more mid-term return. They come with more risk and development costs. But when they pay off, they typically drive higher growth than market penetration. You usually just want a few of these.
Long-term – diversification
Diversification comes with the most risk of all. But when it works, it also has the highest rewards. It’s usually a long-term play, because it takes time to create totally new products for totally new markets. You generally do these one at a time.
Conclusion - Ansoff Matrix
For such a simple model, the Ansoff matrix packs a powerful strategic thinking punch.
You make choices.
Is growth coming from products, markets or both? What’s your approach to risk? Play it safe with your existing products and markets? Or go for bigger rewards with more risk by stretching into new products or markets?
Innovation’s never easy. It’s full of complex challenges. The Ansoff matrix helps you through some of those challenges. Knowing where growth will come from helps you focus on how you’re going to drive it.