Ansoff’s matrix and product market grid

Ansoff’s product/market grid provides a disciplined way to define the scope and direction of a company’s development in the market. It distinguishes two connected decisions: portfolio strategy, which establishes where the firm intends to compete, and competitive strategy, which defines how it will succeed there.

When to use it

The appropriate route to corporate growth depends on the risk the organisation can accept, its current portfolio of products and markets, and whether it intends to build around existing or new offers and customers. Systematic planning begins with a clear view of the distance between today’s position and the desired future one. The product/market grid and the later Ansoff cube help managers describe that gap and identify possible growth directions.

Ansoff identified four interdependent components of portfolio strategy that define the intended scope:

1. The geographical growth vector
2. Competitive advantage
3. Synergy
4. Strategic flexibility.

The Ansoff cube expresses the geographical growth vector by connecting the organisation’s present scope with the scope it wants to occupy.

Competitive advantage must both make the chosen destination attainable and sustain the journey towards it. That advantage might arise from a core competence, protected technology or after-sales service that competitors cannot match.

Synergy asks how the firm’s competencies reinforce one another. Effective combinations can create economies of scale and strengthen its position against competitors.

Strategic flexibility limits the damage from unforeseen events by avoiding commitments and organisational “ballast” that unnecessarily constrain the firm’s response.

These components cannot be maximised independently. Improving one may weaken another; extracting the greatest possible synergy, for example, often reduces flexibility by increasing interdependence. Selecting strategic objectives is therefore an exercise in balancing competing benefits.

Origins

Igor Ansoff introduced the product/market framework in his nineteen fifty-seven Harvard Business Review article “Strategies for Diversification” and developed it further in Corporate Strategy (nineteen sixty-five). In the original grid, portfolio objectives were expressed as a growth vector leading towards the firm’s future scope. His later work replaced that two-dimensional formulation with a geographical growth vector that added a third dimension and described strategic scope more realistically.

What it is

Portfolio strategy sets the objective for each product–market combination—the points on the horizon. Competitive strategy selects the route by which the organisation will reach them.

In the original grid, the portfolio objective is a growth vector that describes the desired business scope using two dimensions: products and markets.

Ansoff subsequently replaced that vector with a three-dimensional geographical growth vector. A firm can define its intended scope through:

• market need, such as personal transportation or amplification of electrical signals;
• product or service technology, such as integrated-circuit technology;
• market geography, such as particular regions or countries.

Together, the dimensions create a cube containing many possible strategic positions. At one extreme, a company continues to meet familiar needs in current regions with established technologies. At the other, it uses new technologies to address new needs in unfamiliar regions.

How to use it

Begin by mapping the organisation’s present product–market combinations and the competitive advantage attached to each. Then define the desired future scope as a geographical growth vector within the Ansoff cube.

Test whether that destination and direction are feasible. Compare the scale and nature of the proposed growth with the firm’s distinctive advantages and core competencies. The organisation needs capabilities that make the scope possible and continue to differentiate it once it arrives.

Next, identify or create synergies. An aggressive synergy strategy exploits an outstanding competence the firm already possesses; a defensive strategy develops or acquires a competence that the intended scope requires.

Finally, build strategic flexibility. External flexibility comes from diversifying geographies, needs and technologies so that a shock in one strategic business area cannot severely damage the whole firm. Internal flexibility comes from relying on resources and capabilities that can be transferred readily to another use.

Three archetypes offer a useful shortcut for thinking about strategic priorities:

• An operating company emphasises synergy and a relatively narrow geographical growth vector. Its R&D or physical-asset investments often have long lead times and cannot easily be reversed, so it must anticipate change and reduce the probability of costly mistakes. Core competencies commonly provide the organising centre for synergy.
• A conglomerate firm places greater weight on flexibility. Rather than seeking a common synergy or growth vector, it maintains enough diversity to withstand strategic surprises or discontinuities affecting one or more subsidiaries.
• An investment fund can concentrate almost entirely on flexibility through widely diversified holdings. Because it rarely possesses deep operating knowledge of every industry, it is less able to pursue a specific competitive advantage within each one.

Real organisations seldom match these pure forms. Synergistic companies integrate to different degrees; one corporation may behave like a conglomerate in one area and exploit common capabilities in another. Some investment firms also develop genuine industry expertise. Each organisation must therefore determine the portfolio objectives appropriate to its own combination of characteristics.

Once the destination is clear, adopt a competitive strategy that defines the distinctive path towards it. The original product/market grid identifies four generic directions:

• Market penetration (current product/current market): increase share by selling more existing products or services in markets already served.
• Market development (current product/new market): take the current offer to new markets.
• Product development (new product/current market): create products or services that replace or complement existing offers for present customers.
• Diversification (new product/new market): introduce new offers into new markets.

The diversification quadrant can be divided further according to how far the product and market differ from the existing business:

• Vertical integration: move into, or acquire, activities performed by suppliers or customers to secure the supply or use of the firm’s products and services.
• Horizontal diversification: introduce technologically unrelated products to current markets.
• Concentric diversification: take products closely related to the existing offer into current or new markets.
• Conglomerate diversification: enter new markets with entirely new, technologically unrelated products.

Several routes can lead to the same destination, and generic labels cannot reveal which one will create the greatest benefit for a particular firm. The organisation must choose both its own portfolio objectives and the competitive approach suited to reaching them.

Final analysis

Despite its age, Ansoff’s framework remains widely used. The original product/market grid still provides a clear vocabulary for describing opportunities and options, making it an effective starting point for deeper analysis and strategic dialogue.

Equally important is Ansoff’s willingness to revise his own influential idea. After more than two decades of experience, he concluded that the celebrated two-dimensional grid did not capture enough of strategic reality and proposed a richer approach to corporate strategy. Reading the wider body of his work also reveals how many contemporary management tools draw on concepts he introduced.

Top practical tip

Map current product–market combinations and the competitive advantage of each before selecting a growth direction. A future scope is meaningful only in relation to a well-understood starting point.

Top pitfall

Do not assume the four quadrants are equally feasible. The grid does not test market attractiveness, competitive response, capability requirements or economics, while uncertainty generally increases with distance from familiar products and markets.

Further reading

Ansoff H.I. (1984) Implanting Strategic Management. Englewood Cliffs: Prentice Hall.

Ansoff, H.I. (1987) Corporate Strategy (revised edition). London: Penguin Books.

Ansoff, H.I. (1988) New Corporate Strategy. New York: John Wiley and Sons.