The Product Market Expansion Grid Explained
Created by the father of strategic management, Igor Ansoff, the Product Market Expansion Grid is known to be used by many Fortune 500 companies such as Philips, IBM and General Electric.
First an applied mathematician, then an economist, Ansoff later became a planning specialist (and eventually vice-president) for Lockheed where he gained experience in analyzing the complexities of business. From there he left to teach at the Carnegie Institute of Technology where he wrote “Corporate Strategy”, the first of many books that set him apart as one of the world’s most influential management thinkers.
Through his accomplished career and ground-breaking books, Igor Ansoff’s contributions to corporate strategic planning remain prominent in academia and beyond. The Product Market Expansion Grid is one such contribution to corporate strategic planning that can be used by any company looking to develop strategies to grow a business.
What is the Product Market Expansion Grid?
The Product Market Expansion Grid, also called the Ansoff Matrix, is a tool used to develop business growth strategies by examining the relationship between new and existing products, new and existing markets, and the risk associated with each possible relationship. The matrix aids growth plans through the introduction of existing or new products, in existing or new markets.
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The matrix is designed so that as a company plots it’s new and existing products and markets, the amount of risk associated with that strategy corresponds with its position on the grid. Developing a strategy with existing products and markets is low in risk, but with new products and markets risk increases.
What are the Product Market Expansion Grid Strategies?
The Product Market Expansion Grid offers four main suggested strategies: Market Penetration, Market Development, Product Development, and Diversification.
Market Penetration Strategy: Existing Products + Existing Markets = Low Risk
The Market Penetration Strategy creates growth by focusing on introducing current products to existing markets. In such instances, customers may be aware of a product but for some reason are not purchasing it. This strategy is typically used to achieve one or more of the following objectives.
- Increasing or growing the market share of current products with pricing strategies, promotions, advertising and an increase in sales efforts
- Securing dominance of growth markets by identifying which markets offer the best prospects for existing products
- Driving competitors out of a mature market with aggressive pricing and promotional campaigns
- Increasing usage of a product by existing customers through special offers and loyalty schemes
Market Development Strategy: Existing Products + New Markets = Some Risk
The Market Development Strategy creates growth through the introduction of current products to new markets. This strategy is used when a company has identified markets that were previously unidentified or when it wants to expand its market reach. Here too, there are a number of tactics to enter and develop a new market for existing products.
- Focus can be turned to new and untapped geographical areas
- New pricing procedures can be used to attract new target audiences
- New distribution channels can be created to offer products in new ways and to new customers
Product Development Strategy: New Products + Existing Markets = Some Risk
The Product Development Strategy is a growth tactic used when a company introduces new products into existing markets. A company would typically use this approach when current products are no longer selling. New competencies and skills may be required by the company to successfully develop products.
This strategy is likely to be more expensive than the market focused tactics and requires more time. Emphasis needs to be placed on a detailed analysis of customer needs, research and development, and early introduction to ensure products are first to market. The company can use the following methods to stimulate growth.
- Adding new features to existing products
- Innovative and new technologies can be added to products or used to improve products
Diversification Strategy: New Products + New Markets = High Risk
The Diversification Strategy is used when new products are introduced to new markets. Diversification is the most risky of all the approaches. This strategy requires the highest amount of investment of both time and resources.
While this approach is likely to be the most costly, diversification offers a company security and an advantage should it suffer in one sector of the business because it can then rely on another. Ansoff reinforces that this strategy will require the company to acquire new skills, techniques and possibly facilities. Good feasibility studies and research are key to ensure a winning approach.
There are three diversification strategies that an organisation can consider: concentric diversification, horizontal diversification, and conglomerate diversification.
- Concentric Diversification – leveraging a company’s core technical know-how to diversify its current products into new markets
- Horizontal Diversification – the introduction of products that are unrelated to a company’s core products to existing markets
- Conglomerate Diversification – the purchasing of another company in order to diversify
To better understand these three diversification strategies, consider the following example:
Through concentric diversification a company that manufactures glass jars for the food industry enters the construction market through the manufacturing of glass bricks.
Through horizontal diversification, the glass manufacturer sees the opportunity to offer specialized cement products with which to build glass brick walls.
And through conglomerate diversification, the glass manufacturing company will acquire the manufacturer of colored dies with which to color the glass it makes.
How to Use the Product Market Expansion Grid
To make the most of the Product Market Expansion Grid, you’ll need to understand where your best opportunities are given your current position, the amount of resources you can expend, and how much risk your company is capable of carrying.
While the grid is useful for understanding how to think of business growth options, it stops short of explaining what actions you should take. Once you have identified your position on the grid, what your internal capabilities are and how much risk you can take on, the next stop is to conduct market research. Adding in proper market research will transform this from a theory to information you can take action on.