Strategic options

Question 1

Strategic planning and SWOT analysis

Answer 1

Issues identified from internal analysis and external analysis can be combined
using the SWOT technique.

Question 2

SWOT analysis

Answer 2

SWOT analysis is a technique that can be used to perform a corporate
appraisal to evaluate the strategic position of the organisation.

Internal analysis
Strengths
Weaknesses

External analysis
Opportunities
Threats

Evaluate options
Weaknesses
Threats

Question 3

Strategic impact of SWOT analysis

Answer 3

When evaluating a SWOT analysis there are a number of questions that can be
addressed.

 Can the strengths of the organisation be matched to opportunities?
e.g. Current distribution channels may be used to launch new products

 What weaknesses need to be addressed before pursuing opportunities?
e.g. New staff may need to be employed to overcome capacity constraints

 Does the organisation have sufficient strengths to minimise threats?
e.g. Existing customer loyalty may reduce the impact of new competitors

 Can the organisation’s weaknesses be converted into strengths?
e.g. Businesses with a narrow product range may become a niche seller

 Can potential threats be converted into new opportunities?
e.g. ‘Budget range’ products could be introduced in times of economic decline

Question 4

Gap analysis

Answer 4

The comparison between an entity’s ultimate objective and the
expected performance from projects, both planned and under way,
identifying means by which any identified difference or gap might be
filled.

Gab between: Desired
direction & Current forecast

Question 5

When performing a gap analysis the following questions should be addressed:

Answer 5

 Why does the gap exist?
 What strategies can be chosen to ‘close the gap’?

Question 6

Competitive positioning

Answer 6

Porter suggests that sustainable competitive advantage arises from
the selection of a generic strategy which best fits the organisation’s
environment (Porter’s 5 Forces) and then organising value-adding
activities (Value Chain Analysis) to support the chosen strategy.

Question 7

Porter’s generic strategies

Answer 7

Cost leadership – seeking to be the lowest cost producer in the industry.

Differentiation – creating tangible and intangible product features that the
customer is willing to pay more for.

Focus – utilising either of the above in a narrow profile of market segments
(sometimes called niching).

Question 8

Porter argues that organisations need to address two key questions:

Answer 8

 Should the strategy be one of differentiation or cost leadership?
 Should the scope be wide or narrow?

Question 9

Porter’s generic strategies:Competitive
scope: Broad target

Basis of competition: Lower cost

Answer 9

Cost leadership

Question 10

Porter’s generic strategies:Competitive
scope: Broad target

Basis of competition: Differentiation

Answer 10

Differentiation

Question 11

Porter’s generic strategies:Competitive
scope: Narrow target

Basis of competition: Differentiation

Answer 11

Differentiation focus

Question 12

Porter’s generic strategies:Competitive
scope: Narrow target

Basis of competition: Lower cost

Answer 12

Cost focus

Question 13

Cost leadership strategy

Answer 13

Based upon a business organising itself to be the lowest cost producer.

Question 14

How to achieve cost leadership

Answer 14

 Economies of scale – e.g. Primark’s large stores
 Seek cheaper sources of supply – e.g. budget supermarkets
 Reduced labour cost – e.g. manufacturers who outsource overseas
 Use value chain to identify and reduce non-key activities – e.g. Ryan Air

Question 15

Potential benefits of cost leadership strategy

Answer 15

 Business can earn higher profits by charging the same price as competitors.
 Firm remains profitable in a price war.
 Economies of scale create entry barriers

Question 16

Risks of adopting a cost leadership strategy

Answer 16

 Only room for one cost leader – no fallback position if the cost advantage is
eroded.
 Cost advantage may be lost because of inflation, movements in exchange
rates, competitors using more modern manufacturing technology or cheap
overseas labour, etc.
 Customers may prefer to pay extra for a better product

Question 17

Differentiation strategy

Answer 17

Differentiation can be based on product features (actual) or creating/altering
consumer perception (perception).

Question 18

How to become a differentiator

Answer 18

 Strong branding – e.g. designer clothing
 Product innovation – e.g. Apple, Dyson
 Quality – e.g. M&S clothing
 Product performance – e.g. BMW

Question 19

Potential benefits of a differentiation strategy

Answer 19

 Products command a premium price so higher margins.
 Product has fewer perceived substitutes due to product uniqueness and brand
loyalty.

Therefore:
 There is less direct competition.
 Demand is less price sensitive (more inelastic).

Question 20

Risks of adopting a differentiation strategy

Answer 20

 Cheap copies.
 Being out-differentiated.
 Customers unwilling to pay the extra (e.g. in a recession).
 Differentiating factors no longer valued by customers (e.g. due to changes in
fashion).

Question 21

Focus (niche) strategy

Answer 21

Focusing on a segment of the market rather than the whole market.

Question 22

How to achieve a focus strategy

Answer 22

 Identify a segment of consumers/customers with similar needs.
 Choose whether to adopt a differentiation or cost focus approach.
 Develop products and services to meet the needs of the segment.
 Develop a marketing strategy to specifically target the chosen segment.

Question 23

Potential benefits of a focus strategy

Answer 23

 Smaller segment and so smaller investment in marketing/production is required
to develop competitive advantage.
 Less competition.
 Entry is cheaper and easier.

Question 24

Risks of adopting focus strategy

Answer 24

 If the segment is too small then it may be difficult to achieve sufficient sales.
 If the segment is too large then the large players may become interested.

Question 25

Ansoff’s matrix

Answer 25

This matrix looks at growth by considering opportunities to sell more existing
products/develop new products and building market share in existing/new markets.

Products: Existing
Markets: Existing
Market penetration
More sales of existing
products to existing
markets
 e.g. Sofa companies’ ‘Bank
holiday’ sales

Products: New
Markets: Existing
Product development
 Developing new products for
existing markets
 e.g. Gillette launched a range
of shaving products to
compliment razor sales

Products: New
Markets: New
Diversification
 Developing new products for
new markets
 e.g. BT Sport

Products: Existing
Markets: New
Market development
 Finding new markets for
existing products
 e.g. Trivial Pursuit junior
edition, Tesco stores in
Europe

Question 26

How to achieve market penetration

Answer 26

 Competitive pricing, advertising or sales promotion.
 Improving competitive advantage through adjustments in the value chain.

Question 27

Market penetration
Potential implications

Answer 27

 Greater market strength and economies of scale.
 Lack of diversification

Question 28

How to achieve product development

Answer 28

 Invest in research and development.
 Existing distribution channels may be used.

Question 29

Product development
Potential implications

Answer 29

 The business should already have good knowledge of their customers.
 Product failure may damage the brand.

Question 30

How to achieve market development

Answer 30

 New geographical markets or market segments.
 Using new distribution channels (e.g. selling direct to consumers).

Question 31

Market development
Potential implications

Answer 31

 Market research may be needed to overcome lack of market knowledge.
 Customer’s awareness may need to be generated in the new market.

Question 32

Diversification

Answer 32

Diversification seeks growth in new markets, with new products in comparison to the
current position.

Question 33

Diversification can take two main forms:

Answer 33

 Related diversification (concentric diversification)
 Unrelated diversification (conglomerate diversification).

Question 34

Related diversification

Answer 34

Related diversification involves integrating activities in the supply
chain (vertical integration) or leveraging technologies or existing
competences (horizontal integration).

Vertical integration – forward (into the customer marketplace)
Current position Horizontal integration
Vertical integration – backward (into the existing supply chain)

-

Question 35

Vertical integration (related diversification)

Answer 35

Vertical integration occurs when a company becomes its own supplier (backward) or
distributor (forward).

Question 36

Benefits of vertical diversification

Answer 36

 Economies of combined operations, e.g. proximity, reduced handling.
 Economies of internal control and co-ordination, e.g. scheduling and coordinating operations should be better. Information about the market can be fed
back to the production companies.
 Economies of avoiding the market – negotiation, packaging, advertising costs
are avoided.
 Tap into technology – close knowledge of the upstream or downstream
operations can give a company valuable strategic advantages. For example,
pharmaceutical companies have undergone backwards integration into
research to discover multiple possible uses for chemicals/compounds.
 Guaranteed demand/supply.

Question 36

Horizontal integration (related diversification)

Answer 36

Involves a company utilising existing competences by entering into:
 Complementary markets – e.g. Google’s acquisition of YouTube.
 Competing markets – e.g. Honda motorcycles and cars.

Question 36

Disadvantages of vertical diversification

Answer 36

(a) Increases the proportion of the firms operating costs that are fixed (increased
operating gearing). This is because if a firm purchases components externally
all the costs are variable. If the components are purchased internally part of the costs will be variable and part will be fixed.

(b) Reduced flexibility to change partners – if in-house supplier or customer
performs poorly or new products/technologies are developed outside the
business, not easy to switch to outsiders.

(c) **Capital investment needs **– vertical integration will consume capital resources
and must yield a return greater than, or equal to, the firm’s opportunity cost of
capital, adjusting for strategic considerations, for integration to be a good choice.

(d) Differing managerial requirements – skills transfer from one type of business
to another is not automatic.

Question 37

Unrelated diversification (conglomerate diversification)

Answer 37

The characteristic of conglomerate diversification is that there is no common thread.
However, it is still possible to achieve synergies through:
 Management skills – e.g. Virgin Group.
 Brand name – e.g. Yamaha motorbikes and keyboards.

Question 38

Advantages of unrelated diversification

Answer 38

 Risk spreading: Diversified products and markets reduces variability of group
profits.
 Can enter more attractive (more profitable) markets.
 Can use surplus cash.
 Utilise brand image in new markets.
 Improve utilisation of central resources e.g. HR dept.

Question 39

Disadvantages of unrelated diversification

Answer 39

 Lack of management experience in new products/markets.
 Failure in one market could damage brand.
 Often bad for shareholders as there is a lack of synergies available.