Ansoff matrix

What it means

The Ansoff matrix is a simple tool for planning growth. It sorts options into four boxes depending on whether a company sells existing or new products, in existing or new markets. Each box represents a different strategy with a different level of risk.

Market penetration means selling more of the same to the same customers, for example through price or marketing, and is the least risky. Market development takes an existing product to new customers or new countries. Product development offers current customers something new.

Diversification, a new product in a new market, is the riskiest because the company has experience of neither. The matrix is therefore often used together with a SWOT analysis and the BCG matrix to set growth ambitions against the company’s strengths and its portfolio.

How it works in practice

When preparing a business plan or a loan application, the matrix helps clarify where growth is supposed to come from. Banks and investors ask whether the plan builds on proven customers or on an entirely new market, and they rate the risk accordingly.

Each route has different financial consequences. Developing a market abroad raises questions of VAT, a permanent establishment and currency risk, while product development means investment in R&D and possibly the R&D super-deduction. We go through these links with the client before they decide.

For the chosen route a go-to-market strategy is then prepared: to whom, at what price and through which channels. The matrix is the start of the thinking, not a finished plan, and its value lies in forcing a company to name what it does not know.

What to watch out for

Companies often underestimate the risk of diversification. A new product for new customers needs different skills, different people and often a different business model, and funding it from the cash of the core business can endanger the part of the company that has worked so far.

The second mistake is pursuing all four strategies at once. A small company lacks the capacity to push deeper into its home market, expand abroad and develop a new product at the same time. Priorities and risk management matter more than a long list of opportunities.