Growing a business is the process of improving some measure of a company’s success. A business can grow in terms of employees, customer base, international coverage, profits, but growth is most often determined in terms of revenues. There are different ways of growing a business. Igor Ansoff identified four strategies for growth and summarized them in the so called Ansoff Matrix. The Ansoff Matrix (also known as the Product/Market Expansion Grid) allows managers to quickly summarize these potential growth strategies and compare them to the risk associated with each one. The idea is that each time you move into a new quadrant (horizontally or vertically), risk increases. Each quadrant of the Ansoff Matrix will be elaborated on below.
Figure 1: Ansoff Matrix
Market Penetration: Existing Products in Existing Markets
Product Development: New Products in Existing Markets
Market Development: Existing Products in New Markets
Diversification: New Products in New Markets
Diversification strategies are about entering new markets with new products that are either related or completely unrelated to a company’s existing offering. Diversification in turn can be classified into three types of diversification strategies. Concentric/horizontal diversification (or related diversification) is about entering a new market with a new product that is somewhat related to a company’s existing product offering. Conglomerate diversification (or unrelated diversification) on the other hand is about entering a new market with a new product that is completely unrelated to a company’s existing offering. A great example of a conglomerate is Samsung, which is operating in businesses varying from computers, phones and refrigerators to chemicals, insurances and hotel chains. Finally. vertical diversification (or vertical integration) means moving backward or forward in the value chain by taking control over activities that used to be outsourced to third parties like suppliers, OEMs or distributors.
Ansoff Matrix In Sum
The Ansoff Matrix is a great framework to structure the options a company has in order to grow. Market Penetration is the least risky of all four and most common in day-to-day business. Diversification is the most risky since a company starts entering a completely new and unfamiliar market with a new and unfamiliar product. However, if a company manages to successfully enter several unrelated markets, it has the advantage of having a well-balanced product portfolio which actually decreases the total risk. In such a situation it is useful to work with frameworks like the GE/Mckinsey Matrix or the BCG Growth-Share Matrix.
Further Reading:
- Ansoff, I. (1957). Strategies for Diversification. Harvard Business Review.