November 2021 Paper 1
In terms of Ansoff’s matrix, is market penetration always a better strategic direction than
diversification? Justify your view. (25 Marks)
To a large extent I think that Market penetration is always a better strategic direction than diversification. Market penetration involves selling an existing product in existing markets. It carries a low risk as firms won't have to pay for research and development or market research. Firms using a strategic direction of market penetration will aim to get their current loyal customers to purchase more goods. Businesses will find it much easier to get current customers to purchase more goods than getting new customers to purchase goods as the current customers have already built a relationship with the business and therefor a business will aim to increase market share using a market penetration strategic direction. A firm may adopt a strategic direction of market penetration by opening new distribution channels. For example, Dominios, the pizza chain, has increased their use of E-commerce by selling their pizzas both instore and online. Increased use of distribution channels can increase potential sales. This can increase revenues and may potentially decrease average costs through Economies of scale as there are higher levels of output and this will help a business to achieve higher market share. Another way a business can follow a strategic direction of market penetration is by offering deals to the current market such as Buy one get one free and 10% discounts on certain products. These deals can increase the quantity and potentially may even attract customers who may want to try the product/s at a cheaper price. However, the success of market penetration depends on the internal finances of the business. A business must have enough finance to be able to open new distribution channels and constantly manage them to ensure operations can continue. Additionally, market penetration may not allow the business to achieve other objectives such as growth. Since there is low risk of this strategy there is also low reward and that should be considered by the business when selecting a strategic decision.
To a smaller extent I think that market penetration is not always a better strategic direction than diversification. Diversification involves selling a new product to a new market. It carries the highest risk out of the 4 strategic directions in Ansoff’s matrix as the firm will have to spend money on both research and development and market research, but high risk usually carries high reward. By successfully diversifying business can spread the risk across different markets and different products. A business can diversify by releasing new products in new markets. For example, Virgin expanded from selling music records to the telecommunications market by selling home broadband packages. The virgin group have also successfully diversified into the airline industry with Virgin Airlines. A business with an objective of growth and expansion may find it best that they follow a diversification strategic direction as they are able to expand and grow into new markets. If diversification is successful than the firm can benefit from high revenues and lowered risk. This is because the firm will have a larger market to target, and this means more potential for sales. However the success of diversification is dependent on the cash available to the business. Higher levels of cash will allow the firm to conduct suitable market research and then a suitable product fit for the demands of the customers within that market. Additionally the competition is the other markets may affect how successful diversification is for a business.
In my opinion I think that market penetration is not always a better strategic direction than
diversification. This is because there are certain scenarios where a business may not be looking to take on such a huge risk by expanding into a whole new market with a new product and instead they may want to continue to grow within their own market and attempt to become market leaders and only then choose to diversify. Even a market penetration strategy may not be successful as external factors such as the new laws being passed to regulate the market the business is operating in.It will also depend on the objectives a business has.Some business may prioritise ethical and social objectives whereas others may choose to profit maximise.A business should analyse both their internal and external environments before selecting a strategic decision but it must be noted that businesses can select both diversification and market penetration at once but a small business may not be able to do so successfully.