IB Business Management SLTopic 6 — The Business Management ToolkitPaper 1 & 2Decision-making tool~10 min read
Using the Ansoff Matrix
Every growing business faces the same two questions: do we sell the products we already have, or new ones? And do we sell to the customers we already have, or new ones? Ansoff’s matrix takes those two questions, crosses them, and gives you four ways to grow — ranked from safe to frightening.
📚 What you need to know
Ansoff’s matrix is a tool for businesses with a growth objective.
It crosses two things: products (existing or new) and markets (existing or new).
That gives four strategies: market penetration, market development, product development, diversification.
Market penetration is the least risky because nothing is new.
Diversification is the most risky because both the product and the customer are new.
More risk usually means more potential reward — the matrix helps managers choose how much risk to take.
It says nothing about whether the business can afford the strategy. That is a real limitation.
The four boxes
Read the matrix by asking “what is new here?” If nothing is new you are in the safest box. If everything is new you are in the riskiest one.
The top-left box is home ground. Every step away from it means learning something the business does not already know.
Market penetration — the safe one
Same product, same customers, just more of it. Nothing has to be invented and nobody new has to be persuaded, which is exactly why it is the least risky option.
Encourage more regular use — a coffee shop loyalty card, a subscription.
Encourage heavier use — bigger pack sizes, meal deals.
Build brand loyalty so customers stop shopping around.
Take customers from rivals with promotion or price.
The catch is that growth is limited. If the market is already saturated, there is only so much more you can sell into it.
Market development — same product, new people
The product stays as it is; the business finds someone new to sell it to. That might mean a new country, a new type of customer, or a new place to sell.
New countries or regions — exporting to a neighbouring market.
New customer groups — selling to businesses as well as households.
New locations — putting a stall in a station or a partner’s shop.
Watch the word “new”. A firm that opens a second branch in the same town has not done market development — it is selling to the same kind of customer. That is still penetration.
Product development — new product, same people
Here the business already knows its customers and asks what else it could sell them. Because the customer relationship exists, it is less risky than diversification, but the new product can still flop.
New versions or upgrades of a product that already sells.
Redesigned packaging or new flavours and sizes.
Relaunching an old product at a useful time of year.
Diversification — both new at once
New product, new market. The business is learning two things at the same time, which is why it is the riskiest box on the matrix. It is also the box with the biggest potential reward, and it spreads risk across more than one market if it works.
Ansoff ranks risk, but it does not tell you which risk is worth taking. That judgement is yours, using the case study.
Worked examples
WE 1
Define the term “market development”
Define the term “market development”. [2]
Answer
Market development is a growth strategy in which a business sells its existing products ✓
to new customers or in new markets, such as a different country or customer group. ✓two halves: existing products, new market. Leave either out and it is one mark.
WE 2
Identify the strategy and justify it
Case study: Ferro Coffee roasts and sells coffee beans to 140 independent cafes in one country. Sales have been flat for two years because it already supplies most of the cafes in its region. It has $600,000 in retained profit and is considering three options: exporting its beans to cafes in a neighbouring country; launching a bagged retail range for supermarkets; or opening its own chain of coffee shops.
Identify the Ansoff strategy behind each of Ferro Coffee’s three options. [3]
Option 1 — exporting the same beans
Same product, new market → market developmentOption 2 — a bagged retail range for supermarkets
New product, new type of customer → diversificationOption 3 — opening its own coffee shops
New service, new customers → diversificationalways ask the two questions separately: is the product new? is the customer new?
WE 3
Explain one advantage and one disadvantage of diversification
Explain one advantage and one disadvantage to Ferro Coffee of pursuing a strategy of diversification. [4]
Advantage
Diversifying spreads risk across more than one market, so if cafe sales stay flat Ferro would still have supermarket revenue coming in rather than depending on 140 cafes. ✓✓
Disadvantage
It is the riskiest strategy because both the product and the customer are unfamiliar, and Ferro has never dealt with supermarket buyers, so its $600,000 could be spent learning a market it does not understand. ✓✓
the figure and the number of cafes are doing the application work here.
How useful is the Ansoff matrix?
Strength of the tool
Weakness of the tool
Simple and quick, so managers actually use it
It ignores cost — it never asks whether the firm can afford the option
Forces a conversation about risk before money is spent
Only four boxes, so real options get squeezed into the wrong one
Makes options comparable side by side
It says nothing about competitors, who will react
Works for any size of business
It gives no answer — managers still have to judge
Pair it with another tool. Ansoff tells you how risky an option is. A decision tree puts numbers on it, and a SWOT tells you whether the firm has the strengths to pull it off. Top answers mention that no single tool is enough.
💡 Exam tip
Ask the two questions separately. Is the product new to the firm? Is the customer new to the firm? Then read the box.
New to the business, not new to the world. A product that already exists elsewhere is still new if this firm has never sold it.
Always link risk to the firm’s finances. “Risky” means something different for a firm with $600,000 spare than for one with none.
Use the case study’s numbers — market size, cash available, existing customers — to justify your choice.
Recommend, do not describe. If asked which strategy, pick one and say why the alternatives are weaker.
Mention what the matrix leaves out in evaluation questions: cost, competitors, and management skill.
⚠ Common mix-up
Confusing market development with product development. Market development changes the customer; product development changes the product.
Calling a second branch in the same town “market development”. Same product, same kind of customer, so it is penetration.
Assuming diversification is always a bad idea. It is the riskiest, not the worst. It also spreads risk.
Saying penetration has no risk. It has the least, not none — a price war can still lose money.
Treating the matrix as the answer. It organises the options; the manager still chooses.
Forgetting cost. Ansoff never mentions money, so you have to bring it in from the case study.
Up next: Using STEEPLE Analysis — a closer look at the outside world that decides whether any of these growth plans will work.
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