Relative Risk of Product Development and Market Development for a UK Business Wanting to Increase Sales Growth | AQA Q22, Paper 1 2018
Last updated 27 Oct 2020
Here is a suggested response to the 25-mark question on the relative risk of product development as compared with market development for a UK business wanting to increase sales growth (AQA A-Level Business Paper 1 in 2018)
Any business growth strategy involves risk. The key issue for a UK business wanting to achieve higher sales growth is the degree of risk it is prepared to accept, and which strategies are likely to involve the most acceptable risk for the situation the business is in.
For many businesses in the UK new product development (NPD) might be considered a relatively low-risk growth strategy. NPD involves offering new products to existing customers and it is a logical extension of Ansoff’s strategy of market penetration. As businesses like Apple and Samsung have shown with their strong flow of NPD, a business may have existing customers who may be interested in an updated or improved version of a product they already buy. This might encourage existing customers to spend more on a better product or one with different uses, thereby helping overall sales to grow in a market which has slow growth overall. Similarly, if customers are brand loyal, they may be attracted by a brand extension from the original product to a related, but different product in a faster-growing market segment. The beauty of trying to sell more to existing customers is that, provided that are happy, they are more likely to buy, more likely to be loyal and even to recommend a product to others. Therefore, a strategy of NPD gives existing customers more reasons to buy and may allow a business to widen its customer base. Of course, there is no guarantee that NPD will be successful. Many new product ideas fail before they even reach the market and a UK business that does not have a track record of successful NPD may find it hard to suddenly start launching products that customers demand. Similarly, the extent of the risk involved will be influenced by how much the business wants to invest in NPD. If it involves a substantial use of business resources (e.g. finance, capacity, management time) then the risk increases compared to a less ambitious plan.
How does market development compare to NPD in terms of risk? Ansoff categorises market development as involving selling existing products to new markets (customers). This strategy can be done in various ways, which makes it harder to determine the overall risk involved. For example, the UK business might try to grow into a new international market. However, there are several ways of doing this ranging from a relatively low-risk method of exporting directly to a much higher risk method of setting up an operation in the target country or entering into a joint venture or takeover of a business there. So, for market development that involves new geographical markets, the risk involved is significantly affected by the chosen method. To take another situation, market development might involve the UK business using new UK distribution channels in order to reach a different segment of the overall market (e.g. moving from just selling direct to customers to also selling via distributors who supply the new segment). Provided the potential conflicts that usually arise from multi-channel distribution can be managed, this sounds like a relatively low-risk growth strategy. The distributors might be able to provide the business with substantially higher sales (although at lower gross margin) for relatively little investment and risk, although that would depend to a large extent on the business’ existing products being adapted and accepted by customers in the new segment.
As argued above, both NPD and market development involve risk. It is impossible to avoid. But which is riskier? In reality, the risks for a business are likely to be pretty similar and as such, a strategy of NPD carries no more or less of a risk than market development. The risk of NPD is mainly affected by the ability of the business to develop products that existing customers will want and what the impact would be on existing sales. If sales of new products simply replace those of existing sales, then the objective of sales growth is unlikely to be achieved and the investment may not be worth the risk. By contrast, market development involves a different type of risk – whether the business can find a way to sell existing products into markets where customers are likely to have different needs and wants. This strategy can be tried in a relatively low-risk way (e.g. exporting) although the results achieved might not be enough to achieve the sales growth objective. Ansoff himself may have the answer to the question posed. He put product development and market development in opposite quadrants of his matrix. So even Ansoff might have concluded that, in terms of risk of both strategies, it is a draw!