IB Business Management HLTopic 6 — The Business Management ToolkitPapers 1, 2 & 3Planning tool~9 min read
Using the Ansoff Matrix
Every growing business is asking the same two questions: are we selling the same thing or something new, and are we selling to the same people or to new people? Ansoff turns those two questions into four strategies, lined up from safest to riskiest.
📘 What you need to know
Ansoff’s matrix uses two axes: product (existing or new) and market (existing or new).
That gives four growth strategies: market penetration, market development, product development, diversification.
Risk rises as you move away from what you already know. Penetration is safest, diversification is riskiest.
Riskier strategies usually need more finance and take longer to pay back.
The matrix is about growth direction, not about whether the business should grow at all.
Common exam job: place a proposed strategy in the right box, then judge whether the risk is worth it for that business.
The four boxes
Start from where the business is standing today. Its current products, sold to its current customers, sit in the top-left corner. Every move away from that corner adds something the business does not yet understand.
Notice the colours. Green, amber, amber, red is the fastest way to remember the risk order without learning a list.
What each strategy actually looks like
Strategy
What the business does
Typical actions
Market penetration
Squeezes more sales out of the customers and products it already has
Loyalty cards, price cuts, more advertising, bigger pack sizes
Market development
Takes the same product somewhere new
Export abroad, sell to businesses as well as families, open in a new city
Product development
Gives its existing customers something new to buy
New flavours, upgraded models, add-on services, seasonal ranges
Diversification
New product and new customers at the same time
A coffee chain launching a clothing line, a supermarket selling insurance
Two of these boxes ask you to learn one new thing. Diversification asks you to learn two at once, which is exactly why it fails most often. If a case study business is short of cash, the bottom-right box is almost always the wrong recommendation.
Why risk rises as you move away
Risk here is not a vague feeling. It has a cause you can write down.
Existing product, existing market: the business already has the recipe, the staff, the machines and the customer data. Almost nothing is a guess.
Change the market: the product still works, but tastes, laws, competitors and payment habits are all unknown.
Change the product: the customers are known, but the business must design, test, source and make something it has never made.
Change both: no experience on either side, so forecasts are guesses stacked on guesses. Costs are highest and payback is slowest.
Risk is not the same as bad. A business in a shrinking market may have to diversify because staying put is the real danger. Judgement means weighing the risk of moving against the risk of standing still.
Worked examples
WORKED EXAMPLE
Casa Verde runs eight guest houses in one mountain region and sells hiking holidays to domestic tourists. It is considering opening guest houses in a neighbouring country. Identify the Ansoff strategy and explain why. [3 marks]
Step 1: is the product new?No. It is the same hiking guest house offer.Step 2: is the market new?Yes. A different country means new customers and new rules.Step 3: name it and apply itSame product, new market, so this is market development [1]. Casa Verde keeps the offer it already knows how to run [1], but must learn new licensing rules and new tourist habits, which is why the risk is medium rather than low [1].Market developmentalways answer “new or existing?” twice before naming the box
WORKED EXAMPLE
Casa Verde is also considering launching its own brand of outdoor clothing sold online worldwide. Explain one advantage and one disadvantage of this strategy. [4 marks]
Step 1: place itNew product and new market, so diversification.Step 2: advantage, appliedIt spreads Casa Verde’s risk across two unrelated income streams [1], so a bad season for mountain tourism would no longer wipe out all of its revenue [1].Step 3: disadvantage, appliedCasa Verde has no experience of manufacturing or online retail [1], so it would need new suppliers, new staff and heavy start-up finance before earning a single sale [1].4 marksnaming the box first makes both halves easier to write
Judging the choice
For a 10-mark question you are not asked to describe Ansoff. You are asked which box this business should choose. Weigh these up:
Factor
Pushes towards low risk
Pushes towards high risk
Finance
Little spare cash or heavy debt
Strong cash reserves or easy borrowing
Current market
Still growing, room to gain share
Saturated or shrinking
Skills
Narrow, specialist team
Broad experience, past launches went well
Owners’ aims
Steady income, low stress
Fast growth, willing to lose money early
Competition
Few strong rivals at home
Rivals already copying the product
🧩 How to answer an Ansoff question
Ask twice. New product? New market? That fixes the box.
Name the strategy using the exact term. Do not say “expansion”.
Say why the risk level is what it is, in terms of this business.
Bring in a constraint from the case study: cash, staff, time, rivals.
Judge. Recommend one box and say what would have to be true for you to change your mind.
💡 Exam tips
The matrix only shows direction. It never tells you the size of the reward, so pair it with a decision tree or investment appraisal if the question allows.
“New market” can mean a new country, a new age group, or selling business-to-business instead of to consumers. Read carefully.
A new flavour of an existing product is product development, not diversification.
Mention time. Penetration can start next month; diversification may take years to break even.
Link back to the business’s objectives. Growth for its own sake is not a reason.
If asked to evaluate the tool itself, attack the fact that the four boxes are crude: real strategies often sit between two of them.
⚠ Common mix-ups
Calling any growth “diversification”. Only new product and new market counts.
Confusing market development with product development. Ask which one changed: the thing, or the people.
Saying penetration means charging a low price. That is penetration pricing, a different idea.
Treating low risk as always best. In a dying market it is the slowest way to fail.
Forgetting finance. Every move away from the top-left corner costs money the business may not have.
Describing all four boxes when the question asked about one. It burns time and earns nothing.
Up next: Using STEEPLE Analysis — before you choose a direction, you need a proper look at the outside world. STEEPLE is how you fill the opportunities and threats boxes with real evidence.
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