The Ansoff Matrix is a model that depicts four strategies that have proven to be the most common ways organizations grow. It consists of four quadrants along two dimensions. These dimensions are the key to understanding and using the matrix, as they help prescribe actions necessary to attempt implementing the growth initiatives. In fact, a commonly used name for the matrix is the Product-Market Growth Matrix.
Products and Markets are the dimensions. Here we will adapt the original matrix and substitute Products with Services. Each dimension, or axis, is further separated into two parts—Current and New. The resulting quadrants are thus “current services/current markets,” “current services/new markets,” “new services/current markets,” and “new services/new markets.”
Let’s look more closely at each quadrant, and the classic growth strategy associated with it.
Current Services, Current Markets
Strategy: Market Penetration
Typical examples of growth initiatives:
- Increase market share
- Increase service usage
- Frequency of use
- Quantity used
- New applications
Market penetration strategies are the least risky, compared to the other three strategies in the matrix. This is usually the first growth strategy most firms attempt. Essentially, you are continuing to do what you’re good at doing, and serving the same and/or similar customers that you already understand. However, as the market becomes saturated, the risk level rises, because you will be battling other firms who do not want to lose market share. This scenario will lead firms to seek further growth from one or more of the other strategies.
Current Services, New Markets
Strategy: Market Development
Typical examples of growth initiatives:
- Find new segments in the same geographic area
- Expand existing services to customers in new geographic areas
Market development strategies tend to be riskier than market penetration strategies and similar in risk level to service development strategies. Market development depends on a firm’s capability to expand distribution beyond where it currently does. Two examples of such capability: a) how much capital the firm has available to invest in expanding its operations and b) marketing research expertise within the firm that can help identify the new segments’ needs.
New Services, Current Markets
Strategy: Service Development
Typical examples of growth initiatives:
- Change existing services to add value for customers
- Create new services for current customers
Service development can be riskier than market development , though both of these growth options involve uncertainty and thus more risk than market penetration. Uncertainty can stem from the high percentage of new products/services that fail to meet customer expectations, resulting in investments with little or no profits. The risk level versus that of market development depends on the firm’s culture (i.e., is it geared toward innovation), its R&D expertise, and, as noted above, its market research prowess.
New Services, New Markets
Strategy: Diversification
Typical examples of growth initiatives:
- Acquisition
- Joint Venture
- Vertical Integration
This is the riskiest of the four strategies, in most cases. That is because it combines the risk of not understanding customer needs in new markets and the risk of the challenges inherent in new product or service development. Also, an acquisition or a joint venture (two common diversification initiatives) can result in a “clash of cultures” between firms, leading to subpar results.
Using the Ansoff Matrix
To make the matrix a useful tool for planning, first record past growth initiatives and those initiatives you are currently implementing in the appropriate cells. You must include certain details associated with these efforts in order to accurately evaluate them. These details should include:
- the name of the strategic initiative
- when a strategic initiative was implemented
- where a strategic initiative was implemented
This information allows you to describe how your company grew in the past and how it is currently growing. Ideas for new initiatives can then be discussed and developed based on your record of success. These can then be placed in the appropriate quadrant, helping you to visualize how you plan to keep growing.
For example, imagine your organization made an acquisition (a classic diversification initiative) in a particular year. You then added locations for the acquired business in one or more later years. The latter growth initiative could be either market penetration or market development, depending on other details of the growth effort. Planning for the future might entail coming up with innovations for services not currently offered in those markets (service development) or acquisition of a firm(s) with similar characteristics to the acquired firm (diversification).