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9609 · 8.2.2

Approaches to marketing strategy — practice questions

Practice and worked examples for 9609 Approaches to marketing strategy. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

UK energy drink brand dominates domestic gym market. Options: (A) deeper discounting in UK, (B) launch in Germany, (C) introduce protein bars to UK gyms, (D) buy a bottled water company. Classify using Ansoff and rank risk.

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A — Market penetration: Same product/market — lowest risk but margin erosion if price war.

B — Market development: Existing drink, new country — moderate risk (culture, regulation 6.1).

C — Product development: New product, same gym channel — moderate; uses existing relationships.

D — Diversification: New product category (water vs energy) — related diversification; moderate-high unless water firm unrelated.

Rank risk: A < B ≈ C < D (if unrelated acquisition).

Worked example 2

BeanThere plc is a coffee shop chain with 50 stores in Country A. Its annual revenue is $25 million with a net profit of $2.5 million. The board is considering three growth options:

  1. Market Penetration: Invest $1 million in a major store refurbishment programme and a new loyalty app. Forecasts suggest this will increase annual net profit by $250,000.
  2. Product Development: Invest $1.5 million in developing and launching a new range of premium sandwiches. Forecasts suggest this will generate $600,000 in additional annual net profit.
  3. Market Development: Invest $3 million to open 5 new stores in neighbouring Country B. Forecasts suggest these new stores will generate a combined annual net profit of $240,000.

Using the Payback Period investment appraisal method, analyse the options and recommend a strategy.

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Analysis using Ansoff Matrix and Payback Period

The Payback Period is calculated as: Payback Period=Initial InvestmentAnnual Net Cash Flow (or Profit)\text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Net Cash Flow (or Profit)}}

Option 1: Market Penetration This option focuses on increasing sales from existing customers in the existing market.

  • Strategy: Market Penetration (Lowest Risk)
  • Initial Investment: 1,000,0001,000,000
  • Annual Net Profit: 250,000250,000
  • Calculation: Payback=$1,000,000$250,000=4 years\text{Payback} = \frac{\text{\textdollar}1,000,000}{\text{\textdollar}250,000} = 4 \text{ years}

Option 2: Product Development This option involves creating a new product for the existing customer base.

  • Strategy: Product Development (Medium Risk)
  • Initial Investment: 1,500,0001,500,000
  • Annual Net Profit: 600,000600,000
  • Calculation: Payback=$1,500,000$600,000=2.5 years\text{Payback} = \frac{\text{\textdollar}1,500,000}{\text{\textdollar}600,000} = 2.5 \text{ years}

Option 3: Market Development This option takes the existing business model into a new geographical market.

  • Strategy: Market Development (Medium Risk)
  • Initial Investment: 3,000,0003,000,000
  • Annual Net Profit: 240,000240,000
  • Calculation: Payback=$3,000,000$240,000=12.5 years\text{Payback} = \frac{\text{\textdollar}3,000,000}{\text{\textdollar}240,000} = 12.5 \text{ years}

Recommendation: Based on the Payback Period, Option 2 (Product Development) is the most financially attractive, with the investment being paid back in just 2.5 years. Although it carries a medium level of risk according to Ansoff, the quick return suggests it is a viable and potentially very profitable strategy.

Option 1 (Market Penetration) is the safest but has a longer payback of 4 years. Option 3 (Market Development) has a very long payback period of 12.5 years, reflecting the high costs and initial lower profitability of entering a new country. This highlights the significant financial risks associated with market development, making it the least attractive option based on this metric.

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