Applying the Ansoff Matrix: Four Growth Directions for Small Firms

Why growth needs a direction

Many businesses grow without consciously choosing a direction. A customer asks for a new service, an employee knows someone in another city, a competitor gives up. Each of these opportunities may be good. Together, however, they rarely form a line, and after a few years the business is in several markets with several services without enough strength anywhere for real excellence.

This piece asks: which growth direction suits a small or mid-sized business, and how useful is the Ansoff matrix for deciding? To answer it, we first present the model, then review what research knows about the four directions, weigh two readings of the matrix, and finally arrive at a rule for the sequence.

Growth without direction is a sum of opportunities, not a strategy.

The mental model: Ansoff's product-market matrix

Igor Ansoff, a Russian-born American mathematician and manager, published an essay on diversification strategies in the Harvard Business Review in 1957. In it, he sorted growth options by two simple questions: does the company offer existing or new products, and does it address existing or new markets? The two questions produce four fields. Puyt, Antoniou, and Caputo (2024) describe Ansoff as one of the founders of strategic management; his 1965 book “Corporate Strategy” is regarded as one of the field's early standard works.

The core of the model lies in an observation about risk. The further a company moves away from the familiar, the less it can draw on existing knowledge, existing customers, and existing reputation. Market penetration uses everything that is there. Diversification requires mastering a new service and winning new customers at the same time. Ansoff himself therefore considered diversification the most demanding direction, even though it offers opportunities the others do not.

The four directions in detail

Market penetration: more of the existing

Market penetration means selling more of the existing services in the existing markets. It happens in three ways: existing customers buy more or more often, competitors' customers switch, or previous non-buyers in the target group are won over. For most small businesses, this is the most obvious route. How to grow with existing customers is described in the guide growing existing customers.

Market development: the existing for new customers

Market development means taking existing services into new markets: into a new region, to a new customer group, or through a new sales channel. The service is proven, the market is not. How to proceed step by step is shown in the guide expanding into a new region.

Service development: the new for existing customers

Service development means offering new services to existing customers. The market is known, the service is not. This is also where cross-selling belongs, covered in the guide cross-selling for service providers. Before a new service costs a lot, a test with a few customers is worthwhile, as described in the guide testing a new service.

Diversification: the new for new customers

Diversification means entering new markets with new services. It can happen through the business's own efforts or by buying another business. What to look out for in small acquisitions is described in the analysis growth through acquisition. For a small business, diversification is rarely the first step, but sometimes the right one when its traditional market is shrinking.

What research shows about the four directions

Studies comparing all four directions in small and mid-sized companies are rare. A recent one comes from Yao and Wang (2026). Through a market research provider, they surveyed managers of Chinese manufacturing companies with fewer than 1,000 employees operating in international markets. Of 420 questionnaires, 276 were usable. They measured how strongly the companies pursued each of the four directions and how that related to two kinds of success: financial performance, such as return on investment, and strategic performance, such as market share, customer satisfaction, and brand awareness.

The result fits the logic of the model, though not in every detail. Market penetration came out positive on both dimensions, diversification negative on both. In between lies a tension: new markets brought money in the short term but weakened the strategic position, presumably because effort was spread thin. New products strengthened the position but initially cost returns, because development ties up money. The authors explain the findings with the scarce resources of small companies: the more capital, knowledge, and management attention a direction demands at once, the more likely it exceeds what the business can handle.

The limits of the study are clear. The sample was not randomly drawn, all data come from respondents' self-reports, and it is a one-time survey that shows associations but not causes. It also concerns manufacturing companies with foreign business. For a trades business or a domestic service provider, the transfer is an assessment, not a certainty.

Two readings: map or straitjacket?

The first reading sees the matrix as a map. It forces you to name, for every growth idea, what is new about it, and so makes the risk visible. Anyone who says they want to take heat pumps into a new region immediately sees that they have to learn two things at once. The matrix is a very good tool for this, precisely because it is so simple.

The second reading considers the matrix a straitjacket. In reality, businesses rarely pursue a direction in pure form. They combine, experiment, and adapt. A thesis based on interviews in 14 small Swedish companies came to exactly this finding: the businesses used elements of the classic directions but combined them not in a fixed order but according to opportunity, resources, and positioning (Pousette and Shafipour 2026). This fits the distinction by Mintzberg and Waters (1985) between deliberate and emergent strategy, which also plays a role in the guide the annual strategy check.

I consider both readings correct, but for different purposes. As a description of what businesses do, the matrix is too neat. As a test for a single idea, its simplicity is unmatched. The matrix does not say what a business should do. It says how much novelty it takes on with a decision.

The One-Axis Rule: in what order to grow?

From the model and the findings, a simple rule can be derived that I call the One-Axis Rule: change only one axis at a time. If you enter a new market, do it with a proven service. If you introduce a new service, do it first with customers who know you. Only when a new service or a new market has become part of the existing business is the next axis moved.

1. Exhaust penetration

   First check how much growth lies in the existing business. How large your own market really is can be roughly estimated with the guide estimating market size. If your share is small, this is the cheapest route.

2. Choose one axis

   If the existing business is not enough, decide on a new service or a new market, not both. Choose the axis on which you have the bigger lead: do you know your customers better, or your service?

3. Prove it on a small scale

   Test the new direction with a few customers or in a limited area, with metrics set in advance and a date for the decision.

4. Make it part of the base

   Only when the new direction stands on its own, meaning customers come back and processes are in place, does it count as existing business. From there, the next axis may be moved.

The rule has an exception. If the traditional market is clearly shrinking, diversification may be the only option. Then it applies all the more: better a related new service for a related new market than a leap into the completely unfamiliar. Whether a new market beyond price competition can be opened up is discussed in the essay on Blue Ocean thinking for small businesses.

Limits of the matrix

Three limitations belong to every application. First, the matrix knows only two levels, existing and new. In reality, a neighboring region is less new than another country, and a related service less new than an unfamiliar one. Anyone using the matrix should therefore grade “new.”

Second, the matrix does not answer whether a market is attractive. A familiar market can be saturated, a new one can be growing. So it replaces neither competitive analysis nor estimating demand. Third, the few studies covering all four directions come mainly from manufacturing companies in emerging economies. For small service providers in Germany, there is hardly any reliable data on this.

• For every growth idea, it is stated whether the service, the market, or both are new.
• “New” is graded: related, adjacent, or unfamiliar.
• Only one axis is moved at a time.
• Every new direction has a test with metrics and a decision date.
• Market size and competition are roughly estimated before the decision.

Conclusion: which growth direction suits a small business?

To answer the guiding question: for most small and mid-sized businesses, market penetration is the first and cheapest direction, followed by service development or market development, depending on where the business has the bigger lead. Diversification is the riskiest direction and should only be chosen when the traditional business no longer offers a future. The available research supports this order, albeit with data from a different setting.

The Ansoff matrix is useful for this as a testing tool, not as a roadmap. It does not show where a business should grow. It shows how much novelty it takes on with every decision, and with scarce resources, that is the question most often overlooked.