3.8 Choosing strategic direction

Question 1

what is Strategic direction
what does it influence
how to set

Answer 1

is guided by the marketing strategy:

 It is the general path a business takes, based on its mission and achieving its objectives

 The strategic direction influences how a business’s strategy develops and affects all areas of the business

 To set: which markets to compete in, what products, which direction the business should grow in

Question 2

Factors influencing what markets to compete in and products to offer:

Answer 2

RTN

Question 3

Options for strategic growth:

Answer 3

Ansoff matrix- 4 different strategies that a business can use to grow- set the direction for growth & strategy development

Market penetration:
Product development:
Market development:
Diversification:

Question 4

Market penetration:

Answer 4

existing product, existing markets

 Trying to increase your market share in existing market using sales promotion, pricing strategies, advertising- works
best in a growth market not well in saturated markets.

 Choice to penetrate market further, consolidate present position, withdraw from market altogether or do nothing.
Low risk strategy due to knowledge and experience

 Less costs no R&D, research. Purpose to increase market share

 If you plan to divest or retrenchment= penetration

Question 5

Product development:

Answer 5

new products, existing market

issues: some form of market research to meet evolving needs

 Works best when market has good growth potential/ business has high market share, strong R&D/good CA. Makes
sense if you have brand loyalty, market leader, increase cash flow, effective team= lean design- price skimming –
higher profits`

 Product developing strategy is followed- involves substantial modifications to remain competitive

 Useful in competitive markets product differentiation. Need R&D funding with already established customers

Question 6

Market development:

Answer 6

existing products, new markets

 Extend products market into new areas. Market research- costs increase, doesn’t guarantee sales, cultural issues if
moving internationally

 Seeking new geographical territories (exploit same market segment in different country) , promoting new uses ,
entering new market segments

 Can be done through repositioning- focuses on different segment- research, adapt product, new advertising, and
promotion. New channels of distribution

 If core competency is product- better positioned

 Good strategy if a firm’s core competence are related to product than to its experience with a specific market
segment

 More risky than market penetration, not familiar with needs and wants of new markets.

 Good if you need to overcome domestic recession

Question 7

Diversification:

Answer 7

new product, new market

 Very risky strategy, involves moving into markets that the business may have no experience of
 Used when a business really needs to reduce dependence on product, high profits are likely, reduced risk
 High risk strategy requiring both product and market development and maybe outside core competences
 Organic growth: involve a move into new but related markets- vertical or horizontal integration
 Higher costs- r&d, market research

Question 8

Ansoffs matrix

Answer 8

is used to decide on a growth strategy:

 A tool for comparing the level of risk involved with the different growth strategies- helps managers to decide on a
direction

 Decision making tool for marketing planning and developing a suitable strategy

 Useful framework for analysing a range of strategic decision in relation to risks and rewards

Question 9

risk involved in ansoff matrix

Answer 9

 Product development is less risky than diversification –
works best for firms that already have a strong competitive
advantage
 Market penetration- least risky- most firms opt this

Question 10

+ve ansoffs matrix

Answer 10

 Doesn’t just lay out potential strategies for growth-
forces manager to think about the expected risks of
moving in a certain direction
 It forces market planners and management to think
about the expected risks of moving in a certain direction
 It lays out possible strategies for growth
 Discipline: it focuses the business
 Sets out aims and objectives
 Presentable to stakeholders
 Assessment of alternatives- shows opportunity cost
 Creates a risk aware culture
 Indicates level of risk and relevant risk

Question 11

-ve ansoffs matrix

Answer 11

 Fails to show that market development
and diversification strategies also tend to
require significant change in the day to day
workings of the company
 Oversimplifies options available for
growth. E.g. it might be a safe option to
diversify by moving into your suppliers
business, know there’s a guaranteed
market

 Does not take into account the activities
of external competitors

Question 12

Positioning strategies:

Answer 12

 Strategic positioning means choosing how to compete with other businesses in the market. Positioning strategy is
part of the marketing strategy- choice influences the general direction a business develops in and affects all areas
 Different positioning strategies work for different companies- strategy should play to the company’s strengths and
give them a competitive advantage- the wrong positioning strategy- result in failure
 Positioning strategy will be affected by state of the economy, reputation, resources, mission, legislation

Question 13

Competitive advantage:
what is it often gaind through
what does it allow
how can it be hard to mainta
and other limitation

Answer 13

If a business has a comp adv- customers see an advantage to buying its products compared to its competitors- often
gained through core competences

A competitive advantage distinguishes a company from its competitors= higher prices, more customers, and brand
loyalty. Establishing such an advantage is one of the most important goals of any company.
Holding onto your competitive advantage is hard- maintaining low cost production might be difficult.
Competitors can
lower their price or copy your unique features. Tastes change, changing economy- need to continuously monitor internal
and external factors

Question 14

Potter identified two types of competitive advantage:

Answer 14

Cost advantages:
Differentiation advantage:

Question 15

Cost advantages:

Answer 15

 A business can get a competitive advantage by selling a similar product at a lower cost than its rivals
 Low cost airlines use a no frills strategy to keep their costs at a minimum- cheaper airports, cut out travel agent fees

Question 16

Differentiation advantage:

Answer 16

 Selling better products at the same or a slightly higher price creates a competitive advantage
 Offering a product that consumers see as different from competitors products can make consumers think it’s
better. (product differentiation

Question 17

Porter suggested 3 generic strategies

Answer 17

to gain advantage Tool to help managers strategically position business in the
market – sustainable competitive advantage- above industry profitability

 These three strategies are competitive strategies based on the strengths of low costs and differentiation

Question 18

Cost leadership:
how to achieve

Answer 18

 Calls for the lowest cost of production for a given level of quality. big firms with large and efficient production
facilities, benefiting from economies of scale
 In price war, firm can maintain profitability while the competition suffers losses. If prices decline, firm can stay
profitable because of its low costs
 Patented technology= increase efficiency
 Increase control of supplier
 Same prices= produce for cheaper= higher profit margin- above industry profitability
 Difficulties- customers can perceive it’ll be low quality. Competitors will copy unless patent, economies of scale,
creating barriers to entry
1. High levels of productivity
2. High capacity utilisation
3. use of bargaining power to negotiate low prices
4. LEAN production
5. Access to wider and most important distribution channels

Question 19

Differentiation:
how to achieve

Answer 19

 Strategy requires product with unique attributes which consumers value, so that they perceive it to be better than
rival products= charge premium prices. PED= inelastic
 Businesses that are innovating, strong branding and offer quality benefit from this
 Risks include imitation by competitors and changes in consumer tastes

1. Superior product quality
2. Branding
3. Industry wide distribution
   across all major channels
4. Consistent promotional
   support

Question 20

differentiation choices

Answer 20

Choices
 Higher price= higher profit
 Or increase market share – offer better products than rivals at the same price
Requires – thorough awareness, appreciation of target market and what they value
 Knowledge of competitors
 Innovation, flexible organisation
 Requires investment in R &D , new tech and training

Question 21

+ve and -ve of differentiation strategy (porters)

Answer 21

Advantages- build customer loyalty
 Pass on cost increase
 Create a USP

Disadvantages:
 Finding ways that make it difficult to imitate
 Customers becoming more sophisticated
 Changing tastes

Question 22

Focus:,

Answer 22

 Focus strategy concentrated on niche market segments to achieve either cost advantage or differentiation
 Suits firms with fewer resources who can target markets with specific needs. A firm using this strategy usually has
loyal customers making it very hard for other firms to compete

Question 23

+ve and -ve of focus strategy

Answer 23

Advantages:
 Gives you a better understanding of customers and their needs
 Efficient allocation of resources
 Rapid response to change
 Customer loyalty
 Can reduce power of large firms

Disadvantages:
 Lower volumes… lower sales… less power
with suppliers
 Customer is less price sensitive – pass on
cost rise
 Risk of imitation

Question 24

Porters strategic matrix helps decide on a competitive strategy

Answer 24

RTN
 Porter’s matrix helps a business choose its positioning strategy based on its competitive advantage and its
market scope
 A business can place itself in a particular section depending on whether its aimed at a broad or narrow market
(niche) and whether it offers cheaper products than competitors or unique, quality products

Question 25

Porters 5 forces model of industry competition

Answer 25

Porter identified 5 factors that act together to determine the nature of competition within an industry:  Threat of new entrants to a market  Bargaining power of suppliers  Bargaining power of customers  Threat of substitute products  Degree of competitive rivalry

Question 26

Threat of new entrants

Answer 26

 They will gain market share and rivalry intensifies  The position of existing firms is stronger if there are barriers to entry  If BTE are low- threat of new entrants= high  Investment cost- high cost deters entry, large businesses only can compete  Economies of scale available to existing firms- lower unit costs makes it difficult for smaller newcomers to break into the market  Regulatory and legal restriction- patent protection  Product differentiation (including branding)- existing products with strong USP’s increase loyalty- hard to compete  Access to suppliers and distribution channels  Retaliation by established products- the threat of price war will act to discourage new entrants but note that competition law outlaws actions like predatory pricing

Question 27

Bargaining power of suppliers

Answer 27

If a firms suppliers have bargaining power they’ll:  Sell products at a higher price  Squeeze industry profits  If the supplier forces up the price paid for inputs, profits= reduced.

Question 28

Suppliers are in a powerful position if:

Answer 28

 Only a few large suppliers  Resource is scarce  Cost of switching to an alternative supplier is high  Product Is easy to distinguish and loyal customers are reluctant to switch  Supplier can threaten to integrate vertically  Customer is small and unimportant  There are no or few substitute resources available

Question 29

Power is determined by:

Answer 29

 Uniqueness of the input supplied- necessity to business  Number and size of firms supplying resources- a few large suppliers exert more power over market prices that many smaller supplier each with a small market share  Competition for the input from other industries- great comp= stronger position for supplier  Cost of switching to alt sources- business may be locked in. changing supplier may mean changing production process

Question 30

Bargaining power for customers:

Answer 30

Powerful customers- exert pressure to drive down prices, or increase the required quality for the same price, = reduce profits

Question 31

Factors determining bargaining power of customers:

Answer 31

 Number of customers- smaller= greater power  Size of their orders- larger= > bargaining power  Number of firms supplying the product- smaller alt suppliers, less opportunity for customers to shop around  Threat of integrating backwards- they will enjoy increased power  Cost of switching

Question 32

Threat of substitute product

Answer 32

The extent of the threat depends upon:  The extent to which the price and performance of the substitute can match the industry’s product  The willingness of customers to switch customer loyalty and switching costs If there is a threat from a rival product the firm will have to improve the performance of their products by reducing costs and therefore prices and by differentiation

Question 33

Overall degree of competitive rivalry:

Answer 33

If these intense rivalry it will encourage businesses to engage in  Price wars (competitive price reductions)  Investment in innovation and new products  Intensive promotion

Question 34

Several factors determine the degree of competition rivalry; the main ones are

Answer 34

 Number of competitors in the market  Market size and growth prospects- most intense in stagnating markets  Product differentiation and brand loyalty- greater loyalty= less intense the competition  Power of buyers and the availability of substitutes- if close substitutes are available- there’ll be intense competitive rivalry  Capacity utilisation- existence of spare capacity= intensifies competition  Cost structure of industry  Exit barriers- expensive to exit, firms will remain adding to intensity of comp

Question 35

Bowman’s strategic clock

Answer 35

shows pricing and differentiation strategies - Based on different combinations of price (low to high) and perceived added value or benefits (low to high). it shows that some positioning strategies are likely to be more successful than other A model that offers various options for strategic positioning in a market to gain a competitive position. The strategic options are based upon decisions about price and perceived value more detail

Question 36

Position one:

Answer 36

Low price, low added value  Massive volume- profit  Bargain basement strategy  Not a very comp position  Inferior goods = negative YED  Economies of scale – lower AVC

Question 37

Position two:

Answer 37

low price  Cost leadership- PGS  High volume- profit  Intense comp= price wars  Increase efficiency  Economies of scale

Question 38

Position three-

Answer 38

hybrid area;  modest prices, highly perceived added value  Good quality  Persuade customers there’s good added value through reasonable price and acceptable product differentiation- very effective positioning  Loyal customer base

Question 39

Position four:

Answer 39

differentiation  medium prices, highest PAValue  PGS- differentiation  Within mass markets  Branding, brand awareness and loyalty

Question 40

Position five:

Answer 40

high prices, high PAValue  Focused differentiation- one/ narrow segment  Corresponds to differentiation and focus section  Adopted by luxury brands by targeted segmentation= high PM

Question 41

Position 6,7,8 –

Answer 41

destined to fail unless monopoly  High price, average-low PAValue

Question 42

Influences on choice of positioning strategies

Answer 42

1. Competitors 2. Core competencies 3. External environment

Question 43

Main sources of sustainable competitive advantage:

Answer 43

 Innovation  Architecture- relationship with suppliers, customers  Reputation How can a company protect its comp adv- legally (patents), culture within the business, control over resources