Four ideas for 2027: The Station Road shop is open, and Lena and Marco are planning the bakery's next step. Four ideas are on the table.
Each one would grow Lena's Bakery Ltd. But each grows it in a different direction, and some are far riskier than others.
The four ideas
A loyalty card
Every tenth loaf free, so that more of the town buys its bread at Lena's rather than at Brightmart's supermarkets.
A gluten-free loaf
Customers already ask for gluten-free bread about 15 times a week. Priti is testing a loaf for them.
A shop in Dunmore
The same loaves, in a town where nobody has bought Lena's bread before.
A pizza van at summer festivals
Marco's idea: hot pizza, sold to festival crowds around the region.
Every idea gives an answer to two questions.
Is the product one Lena's already sells, or a new one?
Are the customers people Lena's already sells to, or new ones?
Two questions with two answers each make a grid of four boxes, one way to grow in each. This grid is the Ansoff matrix, named after Igor Ansoff, who drew it in 1957. It does not pick the best idea. It shows which kind of growth each idea is, and how much risk comes with it.
The Ansoff matrix: products across the top, markets down the side. Risk rises towards the bottom right, where both are new.
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What counts as a market: Here a market means a group of customers. A new market can be a new place, like a new town or country, or a new kind of customer, like online shoppers instead of people who walk into the shop.
New to the business, not to the world: What matters is whether the business has sold to these people before, not whether the town or the product is new to the world.
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The loyalty card changes nothing about the loaves and nothing about the town. It tries to sell more of the same bread to the same town, partly by winning shoppers from Brightmart.
The town's bread money: Of every $100 the town spends on bread, $12 goes to Lena's and $45 to Brightmart.
Market penetration: Selling more of the existing products in the existing market is market penetration. It usually means a bigger share of that market (market share). It is done with promotion, loyalty schemes, lower prices, or more shops in the same area.
A new shop is not always a new market: A fifth shop on the other side of the same town sells the same loaves to the same town. That is still market penetration, even though the shop is new.
The Dunmore shop is different: Dunmore's shoppers have never bought from Lena's. Ask who the customers are, not whether the building is new.
The gluten-free loaf is new, but it is for the people already at the counter: the regulars who keep asking for one.
Selling new products to the existing market is product development. A new product can be something never sold before, or a new version of an old one: a new flavour, size or recipe. The customers stay the same; what they are offered changes.
Market penetration
- Existing product, existing market
- Lena's: the loyalty card, to sell more of the same loaves in the same town
- Done by promotion, loyalty schemes, lower prices or more shops nearby
- Lowest risk: Lena's knows the loaves and knows the customers
- What can go wrong: Brightmart hits back with a price cut, or the town simply buys no more bread
Product development
- New product, existing market
- Lena's: the gluten-free loaf, for regulars who already ask for one
- Done by designing new products or new versions for the same customers
- Medium risk: the customers are known, the product is not
- What can go wrong: the loaf fails in testing, costs too much to make, or sells less than asked for
Same customers, so less to learn: Both routes sell to people Lena's already knows: what they like, what they pay, when they come in.
Market penetration adds nothing new at all. Product development adds one new thing, the product, and that is where its extra risk comes from.
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The Dunmore shop would sell the loaves Lena's already bakes, to shoppers who have never tried them.
Selling existing products in a new market is market development. The product stays the same; the customers are new to the business.
Where a new market can come from
A new town or region
The same loaves in a shop in Dunmore.
A new country
The same crackers sold through a shop or distributor abroad, where Lena's has never traded.
A new kind of customer
The crackers Lena's sells to cafés in the town, offered on its website to shoppers across the country (a new market segment).
The pizza van changes both answers. Pizza is a product Lena's has never made to sell, and festival crowds are people it has never sold to.
Selling new products in new markets is diversification. Nothing the business knows about its customers, and little it knows about its product, carries straight across.
Market development
- Existing product, new market
- Lena's: the same loaves in a shop in Dunmore
- Done by selling in a new town or country, or to a new kind of customer
- Medium risk: the product is known, the customers are not
- What can go wrong: Dunmore prefers its own bakers, or its shoppers will not pay $3 a loaf
Diversification
- New product, new market
- Lena's: the pizza van at summer festivals
- Done by launching a new product for customers the business has never served
- Highest risk: neither the product nor the customers are known
- What can go wrong: the pizza is not good enough, the crowds do not come, and the van sits idle
Diversification needs two new things: Selling the gluten-free loaf in the shops is not diversification: the customers are the same. Selling the same loaves in Dunmore, or in another country, is not diversification either: the product is the same.
Only when the product and the market are both new is it diversification.
Risk grows with what you do not know: Risk is the chance that the plan fails and the money spent on it is lost.
Each step away from the top-left box adds something Lena's does not know yet
- Market penetration. Adds nothing.
- Product development. Adds one unknown.
- Market development. Adds one unknown.
- Diversification. Adds two.
| Lena's idea | Route | What Lena's does not know yet | Risk |
|---|---|---|---|
| Loyalty card | Market penetration | Only how Brightmart will respond | Lowest |
| Gluten-free loaf | Product development | Whether Priti can make it well and cheaply, and how many will sell | Medium |
| Dunmore shop | Market development | Whether Dunmore's shoppers want Lena's bread, and who the rivals there are | Medium |
| Pizza van | Diversification | Both: how to make and sell pizza, and who buys food at festivals | Highest |
Why does the unknown make it riskier? Because experience is what lets a business predict what will happen. Lena's can guess how many loaves a loyalty card will add, because it has years of sales in the town. It has no such record for pizza at a festival. The riskier routes also tend to need more money before the first sale: a new shop, new equipment, new staff.
One thing cuts the other way. Once a diversification has worked, the business earns from two different markets, so one bad year in bread no longer hits everything (spreading risk). The step is the riskiest; the result can make the whole business less exposed.
Growth by buying or partnering sits on the same grid
Goldcrust buys a rival bakery chain at home
More of the same bread to the same country's shoppers: market penetration.
Goldcrust buys a chilled-sandwich maker
A new product for the people already in its bakeries: product development.
Goldcrust buys a chain in a country with no Goldcrust shops
The same bread for customers it has never served: market development.
Goldcrust buys a coffee-machine maker
Machines sold to offices and cafés: a new product and a new market, so diversification.
Place it, then say why: A takeover, a merger or an alliance (1.5.2) is placed exactly like any other plan: ask what product it sells and to whom.
Then name the route and give the reason in the case's own words: this product, these customers.
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How this comes up: The Ansoff matrix comes up in short questions, and in longer case questions about growth options.
How it is asked
- Define a route. One of the four, for two marks.
- Explain a strategy. Use the Ansoff matrix to explain the growth strategy a named business is using, for two marks, or two of its strategies, for four.
- Longer case questions. About growth options. The first move is always the same: place each option in its box and say how risky it is.
The pattern, for each strategy
- Name the route. Market penetration, product development, market development or diversification.
- Show the product. Is it one the business already sells, or a new one? Use the case's words: the same loaves, a gluten-free loaf.
- Show the market. Are these customers it already serves, or new ones? Name them: the town's shoppers, Dunmore's shoppers.
- Add the risk if the question asks for it. One new thing is medium risk; two new things are the highest.
Two traps: A name with no reason. 'Market development' on its own is half the answer. The other half is the product and the market, shown from the case.
New country, same product. Selling the same product abroad is market development, not diversification. Diversification needs a new product as well.
Using the Ansoff matrix, explain two of Lena's Bakery's growth strategies.
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