Product Strategy Tools - Ansoff's Product-Market Matrix

Overview

Igor Ansoff created a simple 2x2 matrix to illustrate the different potential strategies that a business can utilize in order to grow. The grid consists of products - existing and new - and markets - also existing and new i.e.

Ansoff Matrix

	Existing Products	New Products
Existing Markets	Market Penetration	Product Development
New Markets	Market Development	Diversification

The matrix illustrates the growth strategies enabled by each combination of product and market. For example, a business can undertake a 'market penetration' strategy my focusing its efforts on their existing products and selling into their existing markets. Alternatively, the business might adopt a 'product development' growth strategy by developing new product to sell into existing markets (i.e. to existing customers). This strategy is sometimes referred to as a 'whitespace' strategy. The other possible growth strategies are selling the existing products into new (usually adjacent) markets - the 'market development' strategy - or a 'diversification' strategy of creating new products and selling into new markets (i.e. new customers).

This latter strategy (diversification) is sometimes referred to as the 'quadrant of death' as it is the most difficult growth strategy to pull off. The rewards of a successful execution of a diversification strategy are potentially huge, but the risks of following this strategy are significantly higher than those of the other three growth strategies.

In fact, the risk of failure increases as you move away from existing products and existing markets. Developing a new market and a new set of customers involves risk as does developing new products for an existing market (and an existing set of customers). However, the least risky strategy of market penetration also has limits - a market can become saturated and the only way to continue to grow market share is to take customers away from competitors - any sales person will tell you that this is typically a high cost-low return type of sales engagement unless you have a clear competitive advantage (price, features, etc.) over the other products in the market. Therefore, a market penetration strategy will eventually run its course and the business will be forced to look at one of the other growth strategies to maintain its growth momentum.

Uses of the Ansoff Product-Market Matrix

The Ansoff matrix is an excellent tool for evaluating the various growth strategies that are available to a company. It is possible that some of these growth strategies might not be viable at any given moment, but at least the business decision makers are aware of the possibilities. This also helps to focus the strategy discussion to illuminate the potential risks of any one of these strategies. It is often easy to adopt an accidental growth strategy without fully understanding the risks and costs associated with this strategy - for example, Sales might find one or two customers in an adjacent market which have a need for your products. Allowing Sales to follow these opportunities might result in a Market Development growth strategy without fully understanding the needs of this adjacent market and its potential value to the company. Using Ansoff's matrix will highlight that Sales are (perhaps inadvertently) suggesting a new strategy without having anyone fully analyze the opportunities and risks of this strategy.

My Experience with the Ansoff Product-Market Matrix

I have frequently used Ansoff's matrix in discussions with my product managers to help focus their thoughts around product growth strategies. Like most product managers, they get excited about the possibilities of growing their product's footprint and expanding into new markets - or they might have ideas about new products that we can sell to existing customers. Either way, I find the Ansoff matrix a good tool to ground their thoughts in reality. By showing them the matrix and asking them where in the grid their product idea puts us, I can get them to start thinking about the bigger strategic picture. For example, if a product manager sees an opportunity to sell his or her product into a new market, they Ansoff matrix can help them think about what this means e.g.

• How good of a fit is the product into that market? Is it a widespread fit? Or just one or two customers?
• What is the potential size of the market opportunity? Is it worth pursuing?
• Who are the customers in this market that we would be selling to? Is the Sales team equiped to sell to these customers? (e.g. a direct sales team focused on large enterprise multi-million dollar deals is not set up to then sell high volume, low cost products to the consumer market)
• Do we know how to position our products in this new market?
• Who are the competitors and how do we stack up against them?
• And so on...

These questions are not intended to dissuade the product manager from the merits of their idea. They are merely intended to make them focus on the impact and reality of their proposal before we move ahead with it. Having the Ansoff matrix helps the product manager understand the scope of their proposal and then starts the discussion about whether this is a practical and viable strategy to pursue.