Ansoff Matrix: A Guide to Market Expansion

Ansoff Matrix: A Guide to Market Expansion

Ansoff Matrix: What is it?

To plan and evaluate growth initiatives, management teams and analysts utilize the Ansoff Matrix, also known as the Product/Market Expansion Grid. By using the tool, stakeholders can visualize how different growth strategies differ in risk levels.

In 1957, Harvard Business Review published a matrix developed by business manager and mathematician Ansoff. In order to help assess the drivers of business growth more efficiently, businesses and industries often use the Ansoff Matrix along with other tools, such as PESTEL, SWOT, and Porter’s Five Forces.

Ansoff Matrix: An Overview

Globally, business schools teach the Ansoff Matrix. Management teams can visualize the levers they can pull when considering growth opportunities using this simple and intuitive tool. An X-axis shows Products, and an Y-axis shows Markets.

According to the Ansoff framework, markets have different meanings. It can also indicate a market segment (e.g., target market/demographic) or a geographical region (e.g., North American market).

As well as the level of risk associated with each growth strategy, the Matrix evaluates the relative attractiveness of existing products and markets versus new ones.

Ansoff Matrix Growth Strategy

A specific growth strategy corresponds to each box in the Matrix. Here they are:

1.     Market Penetration

An existing market can be expanded by selling existing products

2.     Market Development

New markets are targeted for existing products

3.     Product Development 

An existing market is targeted for the introduction of new products

4.     Diversification 

Incorporating entirely new products into a new market

Market Penetration

In terms of risk, market penetration is the least risky.

Management uses a market penetration strategy to increase sales of its existing products into markets they know and are familiar with. The following are typical execution strategies:

  • Streamlining distribution processes or increasing marketing efforts
  • By lowering prices in the market segment, new customers are attracted
  • Consolidating your position in the market by acquiring a competitor

Consider a retailer that sells consumer packaged goods. To secure additional shelf space, a large chain may amend its pricing for packaged food and pet food products to increase penetration.

Market Development

By avoiding significant investments in R&D and product development, market development is the second-least risky strategy. Management teams can use it to take existing products and expand them into new markets. A number of approaches are available, including:

  • Targeting a different segment of the market
  • Expansion into new markets (regional expansion)
  • Expanding internationally (internationalization)

Athleisure products sold by Lululemon are very popular in Asia Pacific, so the company decided to aggressively expand into the region. The fact that they’re selling a product with a proven roadmap makes it less risky to build advertising and logistics infrastructure in a foreign market.

Product Development

Businesses with a significant share of wallet within a certain market or target audience may seek to increase their share. As a play on brand loyalty, consider the following:

  • A new product is developed through R&D.
  • Producing and selling another firm’s products.
  • Branding a third-party white-label product to create a new offering.

Among women aged 28-35, hair care products that are produced and sold by beauty brands are popular among them. In an attempt to capitalize on their popularity and loyalty, they invest heavily in the production of a new line of hair care products.

Ansoff Matrix: Diversification Strategies

As a result of both product and market development, a diversification strategy is typically the most risky. A company may be less dependent on one product/market fit even though it is the most risky strategy.

There are generally two types of diversification strategies that a management team might consider:

1. Related Diversification 

Existing business and new product/market synergies can be realized where appropriate.

The production of leather car seats can be a side business for a manufacturer of leather shoes. Purchasing raw materials will almost certainly bring synergies, but R&D and production of the product itself will require substantial investments.

2. Unrelated Diversification 

Developing a new product or market is unlikely to result in any real synergies.

Using the leather shoe producer example again, let’s look at it in more detail. If management is interested in reducing its overall reliance on consumer discretionary high-end shoe sales (which are highly cyclical), it might consider investing heavily in a consumer packaged goods product.

Financial Analysis using the Ansoff Matrix

Financial analysis is generally thought of as a quantitative exercise, but this is not necessarily true. Although analysts must be able to analyze assets and liabilities, read 10K filings, and construct financial models, they also need to understand the drivers of business growth, since these will affect model assumptions in a variety of ways.

The skills of a world-class analyst include the ability to translate qualitative findings from SWOT and PESTEL analyses, the Ansoff Matrix, and Porter’s 5 Forces frameworks into assumptions for models.

Growth drivers are modeled effectively as part of high-quality due diligence, since they influence valuation estimates and credit metrics significantly.

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