May 12th, 2012 Product / Market Grid
The product/market grid of Igor Ansoff is a model that has proven to be very useful in business unit strategy processes to determine business growth opportunities. The product/market grid has two dimensions: products and markets.
Over these 2 dimensions, four growth strategies can be formed:
- market penetration,
- market development,
- product development, and
Company strategies based on market penetration normally focus on changing incidental clients to regular clients, and regular client into heavy clients. Typical systems are volume discounts, bonus cards and customer relationship management.
Company strategies based on market development often try to lure clients away from competitors or introduce existing products in foreign markets or introduce new brand names in a market.
Company strategies based on product development often try to sell other products to (regular) clients. This can be accessories, add-ons, or completely new products. Often existing communication channels are leveraged.
Company strategies based on diversification are the most risky type of strategies. Often there is a credibility focus in the communication to explain why the company enters new markets with new products. This 4th quadrant (diversification) of the product/market grid can be further split up in four types:
- horizontal diversification (new product, current market)
- vertical diversification (move into firms supplier's or customer's business)
- concentric diversification (new product closely related to current product in new market)
- conglomerate diversification (new product in new market).
Although already decennia old, the product/market grid of Ansoff remains a valuable model for communication around business unit strategy processes and business growth.
Also known as the Product/Market Expansion Grid. For a whole variety of reasons, there are times when as an individual or in business you want or need to expand or change your field or market. In business, you might need to achieve economies of scale, make more money for investors, or gain national or even global recognition of their brand. As an individual, you may want to change company, or even career.
Having decided that you want to grow your business or career, you'll have hundreds of ideas about things you could do. For your business, this means new products, new markets, new channels, or new marketing campaigns. For your career, it means new skills, new roles, and even new industries.
Using a strategic approach, such as the Ansoff Model or Matrix, helps you evaluate your options and choose the one that suits your situation best, and gives you the best return on the potentially considerable investment that you'll need to make.
Understanding the Tool
The Ansoff Matrix was first published in the Harvard Business Review in 1957, and has given generations of marketers and small business leaders a quick and simple way to develop a strategic approach to growth.
Sometimes called the Product/Market Expansion Grid, it shows four growth options for business formed by matching up existing and new products and services with existing and new markets, as shown in Figure below.
The Matrix essentially shows the risk that a particular strategy will expose you to, the idea being that each time you move into a new quadrant (horizontally or vertically) you increase risk.
The Corporate Ansoff Matrix
Looking at it from a business perspective, staying with your existing product in your existing market is a low risk option: You know the product works, and the market holds few surprises for you.
However, you expose yourself to a whole new level of risk either moving into a new market with an existing product, or developing a new product for an existing market. The market may turn out to have radically different needs and dynamics than you thought, or the new product may just not work or sell.
And by moving two quadrants and targeting a new market with a new product, you increase your risk to yet another level!
Looking at it from a personal perspective, just staying where you are is (usually!) a low risk option.
Switching to a new role in the same company, or changing to a similar job with a company in the same industry is a higher risk option. And switching to a new role in a new industry has an even higher level of risk.
This is shown in figure below.
Interpret this according to your circumstances. For example, an accountant may find it easy to switch from one industry to another. But a salesman doing this might lose contacts that would take a while to rebuild.
Don't be too scared by risk – if you manage risk correctly (for example, by researching carefully, making contingency plans, arranging insurance, and suchlike) and "calculate" it well, then it can be well worth taking quite large risks.
How to Use the Tool
Use of the tool is straightforward:
Start by downloading either our free Corporate Ansoff or Personal Ansoff worksheet. Then plot the approaches you're considering on the matrix. The table below shows how you might classify different approaches.
Here, you're targeting new markets, or new areas of the market. You're trying to sell more of the same things to different people. Here you might:
Target different geographical markets at home or abroad
Use different sales channels, such as online or direct sales if you are currently selling through the trade
Target different groups of people, perhaps different age groups, genders or demographic profiles from your normal customers.
This strategy is risky: There's often little scope for using existing expertise or achieving economies of scale, because you are trying to sell completely different products or services to different customers
Its main advantage is that, should one business suffer from adverse circumstances, the other is unlikely to be affected.
With this approach, you're trying to sell more of the same things to the same people. Here you might:
Advertise, to encourage more people within your existing market to choose your product, or to use more of it
Introduce a loyalty scheme
Launch price or other special offer promotions
Increase your sales force activities, or
Buy a competitor company (particularly in mature markets)
Here, you're selling more things to the same people. Here you might:
Extend your product by producing different variants, or packaging existing products it in new ways
Develop related products or services (for example, a domestic plumbing company might add a tiling service after all, if they're plumbing in a new kitchen, most likely tiling will be needed!)
In a service industry, increase your time to market, customer service levels, or quality.
Manage risk appropriately. For example, if you're switching from one quadrant to another, make sure:
That you research the move carefully;
That you build the capabilities needed to succeed in the new quadrant;
That you've got plenty of resources to cover a possible thin period while you're developing and learning how to sell the new product, or are learning what makes the new market tick; and
That you have firstly thought through what you have to do if things don't work out, and that failure won't break you.
Some marketers use a nine-box grid for a more sophisticated analysis. This adds modified products between existing and new ones (for example, a different flavor of your existing pasta sauce rather than launching a soup), and expanded markets between existing and new ones (for example, opening another store in a nearby town, rather than going into online sales).
This is useful as it shows the difference between product extension and true product development, and also between market expansion and venturing into genuinely new markets (see Figure 3). However, be careful of the three options in grey, as they involve trying to do two things at once without the one benefit of a true diversification strategy (escaping a downturn in one product market).