What Is the Ansoff Matrix?

The matrix comes from the article "Strategies for Diversification", which H. Igor Ansoff published in the September-October 1957 issue of Harvard Business Review. Ansoff wrote that a business has four basic growth alternatives and set them out in a table that crosses product lines with markets.

The four paths, as the article defines them: - Market penetration: selling more without leaving the current product or market, either through more sales to present customers or through new customers for present products. - Market development: adapting the present product line, generally with some modification, to a new mission. - Product development: keeping the present mission and developing products with new characteristics that perform it better. - Diversification: leaving the present product line and the present market structure at the same time.

Ansoff described markets in terms of "missions" rather than customers: the job the product is meant to do. His example was a maker of passenger aircraft that adapts the model for cargo. The customer may be the same, but the mission is different, and that makes it market development.

A closer example, an online shop for coffee beans: - Market penetration: existing customers buy more often, for instance through a subscription. - Market development: the same coffee goes to offices or to another country. - Product development: customers who already buy coffee are offered grinders or capsules. - Diversification: a tea range for hotels and restaurants, with a different product, different customers and different logistics.

The starting point is an exact description of what the company already does: which products it sells and to which markets or needs. Without that baseline there is no way to tell what is new.

Next, you look for options in each of the four paths and assess them. Ansoff points out that in practice a business follows several paths at once. In his words, pursuing market penetration, market development and product development at the same time is usually a sign of a progressive, well-run business.

Diversification stands apart. The other three paths, Ansoff writes, are usually followed with the same technical, financial and merchandising resources as the original product line. Diversification generally requires new skills, new techniques and new facilities, and almost invariably leads to changes in the structure of the business that break with its past experience.

This is where the matrix gets misread: the four boxes are treated as four equivalent options. Each step away from what is known adds something the company has not mastered. In market penetration it knows both product and market. In market or product development, one of the two is new. In diversification, both are. Ansoff did not put a number on that risk, but his description places the last box further out than the others.

The confusion arises because diversification also spreads risk, and Ansoff says so. Among the reasons companies diversify he lists distributing risk, and one of the objectives he examines is stability: sales should fall less in a downturn. These are two different risks. A portfolio of several businesses can be more stable once they are running. The step of building a new business in a new market, on the other hand, does not rest on what the company already knows how to do. Ansoff describes it as a distinct break with past business experience, and it follows that it is the most uncertain of the four.

The matrix makes you say where growth is meant to come from before the budget is discussed. "Grow by a third" is a number. A strategy says where that growth comes from, for example from existing customers or from a new market with today's product, and each path calls for different work.

Each path connects to other tools. Market penetration can be worked on with fast growth hacking experiments on the existing funnel. Market development starts with segmentation: which new group has the need, and how do you reach it? A new product or a new market may require a review of brand positioning, so that the brand stays credible in the new area.

The BCG matrix answers a different question. It sorts the portfolio a company has today by market growth and relative share, and helps allocate cash. The Ansoff matrix looks ahead: which direction to take from there. The two complement each other. A question mark in the BCG matrix can grow through market penetration, and the cash from a cash cow can pay for product development.

The method has limits. It does not say how large the market in each path is or what it costs. Those figures have to be worked out separately. Most of Ansoff's article deals with how to choose between the options, using sales forecasts, objectives for growth and stability, and a return on investment measure.

• Describe the current product and market before filling in the boxes.
• Define the market by the need it serves, as Ansoff did with missions, not only by the type of customer.
• Assess each option by what the company would have to learn or buy to carry it out.
• Combine several paths rather than treating them as mutually exclusive alternatives.
• Separate the aim of stabilizing the portfolio from the risk of building the new business, and assess both.
• Work out market size and cost for each path with your own data before deciding.

• Treating the four boxes as options with the same risk.
• Justifying diversification only by risk spreading, without assessing what the company cannot do.
• Calling a new channel for the same customers with the same need a new market.
• Calling a variant that does not change what the customer gets a new product.
• Using the matrix as a list of ideas without market or cost figures.
• Confusing the Ansoff matrix with the BCG matrix, which sorts the current portfolio.