Chapter 5 - Selecting an Appropriate Business Strategy

Question 1

1.
Corporate Strategy

Answer 1

Many companies consist of a number of different business units, and the highest level in these organizations is referred to as corporate strategy.

Business strategy relates to a single business unit which is essentially a revenue stream with a cost base attached to a group of assets.
Corporate strategy considers individual business units together and not separately.
A corporate parent has no direct link with buyers and competitors.

Question 2

1.1
Strategic Rationale
Three approaches or Strategic Rationales to Value Creation.

Answer 2

1.1.1 - Portfolio Managers:
These provide a service to investors by applying financial disciplines by purchasing undervalued companies and then improve their value and performance.

1.1.2 - Synergy Managers:
These pursues the benefits of synergy by aiming to achieve high efficiency in the shared use of resources and competences.

1.1.3 Parental Developers:
The parental developer adds value to its SBUs by deploying its own specific competences to aid them in their operations and development.

Question 3

2.
Business Unit Strategy: Generic Strategies

Answer 3

Business unit competitive strategy involves a choice between being Cost Leadership, Differentiation or Focus.

(Michael Porter 1980) - Strategy definitions:

Cost Leadership: Lowest cost producer in the industry as a whole.

Differentiation: Making the product different from competitors’ products in some way.

Focus: Specializing on a particular segment of the market.
- Providing goods and or services at lower cost is referred to as Cost-Focus.
- Providing a differentiated product or service is called Differentiation-Focus.

• Competitive advantage is anything which gives one organization an edge over its rivals.

Question 4

2.1.1
Cost Leadership

Answer 4

By producing at the lowest cost, the manufacturer can compete on price with every other producer in the industry, and earn the higher unit profits, if the manufacturer so chooses.

How to achieve overall cost leadership.
a) Set up production facilities to enjoy Economies of Scale.
b) Use latest technology to reduce costs.
c) Exploit the learning curve in order to produce more items than all competitors so as to achieve lower average costs.
d) Concentrate on enhancing or improving productivity.
e) Minimize overhead costs.
f) Get favorable access to sources of supply.

DIFFERENTIATION
According to Porter 1980, products may be divided into three categories so as to gain competitive advantage:
a) Breakthrough products offer a radical performance advantage over competition, at drastically lower prices.
b) Improved Products are similar to competitors products but are obviously superior in terms of better performance at a competitive price.
c) Competitive Products derive their appeal from a particular compromise of cost and performance.

How to Differentiate
a) Build up a brand image.
b) Give the product special features.
c) Exploit other activities of the value Chain.

2.1.3
FOCUS or NICHE STRATEGY
A firm concentrate on one or more segment or niche of the market and does not try to serve the entire market with a single product.

a) A Cost Focus Strategy: aims to be a cost leader for a particular segment. Eg clothes and printing.

b) A Differentiation Focus Strategy: pursues differentiation for a chosen segment. Eg luxury goods.

Question 5

2.2
The Strategy Clock

Answer 5

The Strategic Clock by Bowman and Faulkner 1995 develops Porter’s 1980 theory, analyzing strategies in terms of Price on the X axis and Perceived Value Added on the Y axis.
Each position on the Clock has its own critical success factors.

Eight Positions on the Clock
1 - No Frills: Attract customers who are price conscious ie prices are very low.
2 - Low Price: Attract customers who are price conscious ie prices are very low.
3 - Hybrid: High Perceived Added Value and Low price.
4 - Differentiation: Attract customers who require customized products.
5 - Focuses Differentiation: Attract customers who require customized products
6, 7& 8 - Strategies Destined for Ultimate Failure: ie prices will be too high and medium added value.

Question 6

2.4.1
Price Based Strategies
Strategies Position 1 and 2 on the Clock.

Answer 6

A No Frills strategy is used for price-concious customers and where competition is low as well as where customers switching costs are low. It can be used as a market penetration strategy. Eg fast jet airlines where the prices will be low but customer service will be limited.
A low price strategy offers better value than competitors.

Question 7

2.4.2
Differentiation Strategies
The Strategy Clock Positions: 1,2&3.

Answer 7

Differentiation can be created in three ways:
a) Product Features
b) Marketing, including powerful brand promotion.
c) Core Competences.

Position 3, the Hybrid Strategy seeks both Differentiation and lower price than competitors.
Position 4, Differentiation requires accurate market intelligence so that the strategic customers and their preferences are clearly identified. In addition to the above, competitors and their likely responses must also be identified. The chosen basis for Differentiation must be difficult to imitate.
Position 5, Focused Differentiation: seeks a high price premium in return for a high degree of Differentiation. This strategy concentrate on a restricted market segment.

Question 8

2.4.3
Failure Strategies
Position 6, 7 & 8

Answer 8

Johnson et al 2005 highlights that, Positions 6, 7 and 8 are likely to result in failure.

Question 9

3.
Sustaining Competitive Advantage

Answer 9

Different policies are required to sustain Price-based and Differentiation Strategies.

Question 10

3.1
Sustaining price-based strategy

Answer 10

a) Low margins can be sustained, by increased volumes.
b) A Cost Leader can operate at a price advantage, but must constantly and aggressively drive down all of their costs.
c) A Cost Leader with extensive financial resources can win a war.
d) A No Frills Strategy can succeed in the long term by aiming at a segment that particularly appreciates low price.

Question 11

3.2
Sustaining Differentiation

Answer 11

The Difference in the product must be valued by customers and be difficult to imitate.

Question 12

3.3
Lock-in

Answer 12

Lock-in is achieved in a market when a company’s product becomes the industry standard.
Direct competitors are reduced to minor niches and compatibility with the Industry Standard becomes a Prerequisite for complementary products. Microsoft has achieved this position in the market for PC operating systems and is only challenged by Linux which is a free product.

Question 13

3.4
Strategy and Hypercompetition

Answer 13

Hyper-Competition is constant competitive change created by frequent, boldly aggressive competitive moves that makes it impossible to create lasting competitive advantage.

Question 14

3.4.4
Principles of Hypercompetitive Strategy

Answer 14

a) Pre-empt imitation and remain unpredictable by competing in new ways. Destroy current advantages and develop new ones.
b) To attack Competitors’ weaknesses is to provoke them to overcome them.
c) A series of small moves disguises the strategy and provides succession of temporary advantages.
d) Misleading signals of Strategic intent can be used to confuse.

Question 15

3.5

Answer 15

a) Buyers and Sellers may collaborate to ensure high quality, share the cost of research.
b) Collaborate of say small retailers increases buying power so that they can buy in large quantities.
c) Collaborate by suppliers on marketing and research and development can build barriers to entry and against Substitutes.
d) Collaboration is the best way to obtain entry into a foreign market. One can partner a local person to do business with in a foreign country.

Question 16

4.
Product-market Strategy

Answer 16

Product-market strategy involves determining which products should be sold in which markets, by Market Penetration, Market Development, Product Development and Product Diversification.

Product-Market Mix: Refers to Product and Services a firm sells and the market it sells them to.

Question 17

4.2
Product-Market Mix
Market Options Matrix

Answer 17

Market Penetration: Current Products and Current Markets - 4 things.
a) Maintain or increase its share of current markets with current products through competitive pricing, or sales promotion.
b) Secure dominance of growth markets.
c) Restructure a mature market by driving out competitors.
d) Increase usage by existing customers.

Question 18

4.2.2
Consolidation

Answer 18

Maintaining current market share is appropriate when the firm is a market leader and when availability of funds is limited.
High product quality is important for a consolidation strategy to succeed.

Question 19

4.2.3
Market Development: Current Products and New Markets

Answer 19

Market Development is the process by which the firm seeks New Markets for its Current Products. This approach to strategy is also low in risk since it also requires little capital investment.

Possible Approaches:

a) New Geographical areas and Export Markets.
b) Different Package Sizes for food and other domestic items, so that those who buy in small quantities and bulk are catered for.
c) New Distribution channels to attract new customers.
d) Differential pricing policies to attract different types of customer and create new market segments.

Question 20

4.2.1
Market Penetration: Current Products and Current Markets

Answer 20

Market Penetration is the process by which firms introduce Current Products into the current. This strategy requires no capital investment and is low risk.

4 approaches can be used:
a) Maintain or increase it’s current markets with current products through competitive pricing and sales promotion.
b) Secure dominance of growth markets.
c) Restructure a mature market by driving out competitors.
d) Increase usage by existing customers.

Question 21

4.2.4
Product Development: New Products and Current Markets.

Answer 21

Product Development is the launch of New Products in Existing or Current Markets.
It is a very risk strategy and it requires major investment.

4 Approaches can be used:
a) The company can exploit its existing or current marketing arrangements such as promotional methods and distribution channels at low cost.
b) The company should already have a good knowledge of its customers and their wants and habits.
c) Competitors will be forced to respond.
d) The cost of entry to the market will go up.

Question 22

4.2.5
Product Diversification: New Products and New Markets

Answer 22

Product Diversification is when a firm launches New Products for New Markets.
It is a high risk strategy and requires deployment of new competences.

2 Approaches can be used:
a) Growth. New products and New Markets should be selected which offers prospects for growth.
b) Investing Surplus funds are not required for other expansion needs.

Question 23

4.2.6
Obtaining Synergy

Answer 23

Synergy justifies Diversification and produces a better rate of return than would be achieved by the same resources used independently.

Question 24

4.3
Product and Market Diversification.
Three reasons why Diversification may be advantageous

Answer 24

1) Economies of Scope as opposed to Economies of Scale may result from the greater use of underutilized resources.
These benefits are called synergies.

4 Forms of Synergies:
1) Marketing Synergy - Extending use of Marketing facilities like distribution channels and sales staff by different business units.
b) Operating Synergy - better use of the same offices or warehouses for different businesses units.
c) Investment Synergy - Wider use of Fixed units. Eg using the same plant for a different business unit.
d) Management Synergy - Management skills easily transferred to other operations.

2) Corporate Management skills may be extended across a range of unrelated businesses, and is a kind of Synergy.

3) Diversification can increase market power via cross subsidisation.

Question 25

4.3
Three Questionable Reasons - Justification for a policy of Diversification:

Answer 25

a) Response to environmental changes undertaken to protect existing shareholder value, by responding to the emergence of new and threatening technology developments.

b) Risk Spreading by coming up with other portfolios.

c) Expectations of Powerful Stakeholders, can lead to inappropriate strategies.

Question 26

4.4
Related Diversification

Answer 26

Related Diversification is Strategy development beyond current products and markets but within the capabilities or value network of the Organization.

A value network isa set of connections between organizations and/or individuals interacting with each other to benefit the entire group. A value network allows members to buy and sell products as well as share information.

The argument of Synergies is often used to justify related Diversification.

Horizontal Intergration makes use of current capabilities to develop activities that are complementary to a company’s current activities, eg a TV company that also moves into film production.

Vertical Integration occurs when a company expands backwards or forwards within its existing value network and thus becomes its own supplier or distributor.

Backward Integration occurs when a milk processing company acquires its own dairy farm and stop buying raw milk from independent suppliers.

Forward Integration occurs when say a manufacturer of say cloth begins to manufacturer shirts instead of supplying to other shirt manufacturers.

Question 27

4.4.1
Advantages of Vertical Integration

Answer 27

a) A secure supply of components or materials, hence lower supplier bargaining power.
b) Stronger relationships with the final consumer of the product.
c) A share of the profits at all stages of the value network.
d) More effective pursuit of a differentiation strategy.
e) Creation of barriers to entry.

Question 28

4.4.2
Disadvantages of Vertical Integration

Answer 28

a) Overconcentration .
b) The firm fails to benefit from Economies of Scale or technical advances.

Question 29

4.5
Unrelated Diversification

Answer 29

Unrelated Diversification is the development of products or services beyond the current capabilities or value network.
It produces the type of a company known as a Conglomerate.

Question 30

4.5
Advantages of Conglomerate

Answer 30

a) Risk spreading by entering new products into new markets which compensate for failure of current products and markets.

b) Improved Profit opportunities.
c) Escape from a declining market.
d) Use the company’s image and reputation in one market to develop into another.

Question 31

4.5
Disadvantages of Conglomerate Diversification

Answer 31

a) Lack of common identity and purpose in a Conglomerate organization.

b) Failure in one business is likely to drag down the rest, as it will eat up resources.
c) Lack of Management Experience, eg Japanese steel companies have tried to venture into personal computers but without success.

Question 32

4.7
International Trade and Globalization
Ohmae’s five Cs

Answer 32

Ohmae 1999 suggests that they are five reasons why companies are moving towards the Global stage.

a) Customers
b) Company
c) Competitions
d) Currency
e) Country - Multiple locations enable a company to exploit both absolute and comparative advantage.

Question 33

4.8
International Market Selection

Answer 33

Firms must first establish objectives when making decisions to enter other markets.

Objectives examples:
a) What proportion of total sales will be to other countries?
b) What are the longer term objectives?
c) Will it enter one or many markets? However it is advisable to enter few countries at first.
d) What type of countries should it enter, taking into account environmental factors, political factors, language used etc.

Question 34

4.8
Categories of Risks in International Trade

Answer 34

a) Political Risk relates to factors as diverse as wars, nationalization, etc.
b) Business Risk meaning the business idea itself might be flawed or wrong and destined to fail.
c) Currency Risk due to volatility of exchange rates for some foreign currencies.
d) Profit repatriation Risk because some governments make it hard to repatriate profits.

Question 35

4.9
Modes of entry to foreign markets
4.10 - Exporting

Answer 35

There are three ways of entering foreign markets:

4.10 - Exporting is when goods are made at home but sold abroad.
Exports can be divided into two:

4.10.2 - Indirect Exports
This is when a firm’s goods are sold abroad by other organizations who have better market knowledge about the foreign country.
a) Export houses are firm’s which facilitate Exporting on behalf of the producer.
b) Specialist Export management firms which are paid on commission.
c) Buying offices of foreign stores and governments.
d) Complementary Exporting occurs when a producing organization uses its own established international marketing channels to market the products of another producer.

4.10.3 - Direct Export
Direct Export occurs when the producing organization itself performs the Export tasks. Sales are made directly to overseas customers.

a) Sales to final or end user.
b) Overseas Export agent who earns a commission.
c) Company branch offices abroad.

Question 36

4.11
Overseas Production

Answer 36

A firm can manufacture it’s products overseas.
Benefits of overseas production
a) A better understanding of the overseas customers.
b) Economies of Scale in large markets.
c) Production costs are lower in some countries than at home.
d) Lower storage and transportation costs.
e) Overcomes the effects of tariff and non-tariff barriers.
f) Manufacture in the overseas market may help win orders from the public sector.

Question 37

4.11.1
Contract Manufacture

Answer 37

Licensing an overseas manufacturer avoids the cost and problems of setting up overseas.

Advantages of Contract Manufacturer:
- No need to invest in Plant overseas.
- Lower risk associated with currency fluctuations.
- Risk of asset expropriation is minimized.
- Control of Marketing is retained by the contractor or original manufacturer.
- Lower transport and production costs.

Question 38

4.11.1
Disadvantages of Contract Manufacturer

Answer 38

a) Quality control problems in manufacturing may arise.
b) Suitable overseas manufacturers are hard to identify.
c) The need to train the Contractee or overseas producer’s personnel.

Question 39

4.11.2
Joint Ventures

Answer 39

A Joint Venture is a partnership with a local or indigenous firm that will in turn provides local knowledge quickly.

Question 40

4.12
Choice of Market Entry Mode

Answer 40

a) Among firms in the same Industry
b) According to the market
c) Over time.

Question 41

4.13
Maintaining a Balanced Portfolio

Answer 41

A Corporate parent of any type will have to make decisions about acquiring, nurturing, and disposing of Business Units.

Four major Strategies can be pursued with respect to Products, Market Segments, and indeed SBUs.

BHHD Four major Strategies:

a) Build. - A Build Strategy for goes short term earnings and Profits in order to increase market Share.

b) Hold. - A Hold Strategy seeks to maintain the current position.

c) Harvest. - A Harvesting Strategy seeks short term earnings and profits at the expense of long-term development.

d) Divest. - A Divest Strategy reduces negative Cashflow and releases resources for use elsewhere.

Question 42

4.13
Tools that Help the Corporate Company to manage its portfolio of SBUs.

Answer 42

a) Balance- in relation to markets and corporate needs.

b) Attractiveness- in terms of profitability and growth.

c) Strategic Fit - in terms of potential Synergy and potential capability.

• The balance and Attractiveness criteria are addressed by a range of matrix based tools.
• Strategic Fit is the subject of a single model:
  The Ashridge Portfolio Display by (Goold and Campbell 1994)

Question 43

4.14
The Boston Matrix (BCG)

Answer 43

The Boston Consulting Group (BCG) (Henderson 1970) assesses businesses in terms of potential Cash generation and Cash expenditure requirements.

The BCG Matrix classifies Business Units in terms of their capacity for Growth within the Market and the Market’s capacity for growth as a whole (Henderson 1970).

SBUs are categorized in terms of Market Growth Rate and Relative Market Share.

Market Share: One entity’s sale of a product or service in a specified market, expressed as a percentage of total sales by all entities offering that product or service.

a) Assessing the rate of Market growth as high or low depends on the conditions on the market. High market growth rate can indicate good opportunities for profitable operations.

b) Relative Market Share: is assessed as a ratio where the SBU’s market share is compared with the market share of the largest competitor.
Thus a Relative market share that is greater than Unit indicates that the SBU is the market Leader.

BCG Matrix pairings:
Stars: High Market Growth and High Relative Market Share.
Top Left box.

Question Marks: High Market Growth and Low Relative Market Share.
Top Right box.

Cash Cows: Low Market Growth and High Relative Market Share.
Bottom Left box.

Dogs: Low Market Growth and Low Relative Market Share.
Bottom Right box.

• The portfolio should be balanced by having Cash Cows providing finance for Stars and Question Marks, and a minimum to dogs.

a) Stars requires capital expenditure in excess of the cash they generate so that they can grow, thus use the Build strategy.

b) With time Stars will become Cash Cows which need very little Capital Expenditure since they are mature Markets hence stable.
Use the Hold Strategy or Harvest if weak.

c) Question Marks must be assessed for growth before more Capital expenditure is spent on them or alternatively they are allowed to die quietly.
Use the Build or Harvest strategy.

d) Dogs: may be Cash Cows that have now fallen on hard times. However they may be useful either to complete a product range or keep competitors out.
So Use the Divest or Hold Strategy.

Question 44

4.15
The Ashridge Portfolio Display

Answer 44

The Ashridge Model (Goold and Campbell 1994) assesses the benefit SBUs can derive from a Corporate parent playing the parental developer role.
The Ashridge Portfolio Display (Goold and Campbell 1994) is concerned with strategic fit, that is the role of the corporate parent and the suitability of the range of SBUs it manages.

The Model can be approached from two directions:

a) Corporate Parents should build portfolios of businesses that they can develop effectively.

b) Corporate Parents should seek to build parenting skills that are relevant to their portfolios.

Coherence of Corporation variables:
a) Feel: The degree of fit between the parent’s skills, resources and other characteristics and the SBUs .

b) Benefit: The degree of fit between the opportunities the SBUs present for parenting and the parent’s skills resources and other characteristics.

Question 45

4.15
The Ashridge Portfolio Display Model

Answer 45

Top Side = Benefit: (Fit between SBU opportunities and parental skills etc)

Left Hand Side = Feel: (Fit between SBU CSFs and parental skills etc)

Ballast Businesses:
High Feel and Low Benefit.
Top Left Hand box.
These are well understood by the parent, but need little assistance.

Heartland Businesses:
High Feel and High Benefit
Top Right Hand box.
These can Benefit from the attention of the parent without risk of harm from unsuitable developments.

Alien Businesses:
Low Feel and Low Benefit
Bottom Left Hand box.
These have no place in the portfolio because the parent does not have the skills and resources required to help them.

Value Trap Businesses:
Low Feel and High Benefit
Bottom Right Hand box.
These should only be retained if they can be moved into the Heartland by acquiring new skills and resources for the parent.

Question 46

5.0
Marketing Strategy

Answer 46

Segments: Segments are groups of customers with similar needs that can be targeted with a distinctly positioned marketing mix.

Question 47

5.1
Corporate and Marketing Strategy

Answer 47

1) Process: Set Objectives
Corporate Strategy: Set for the organization as a whole.
Marketing Strategy: Set for Products and Markets.

2) Process: Internal Appraisal
Corporate Strategy: Review the effectiveness internally of the organization.
Marketing Strategy: A Review of Marketing activities internally.

3) Process: External Appraisal
Corporate Strategy: Review PESTEL on the whole organization.
Marketing Strategy: Review environmental factors that affect, customers, products and markets.

4) Process: Gaps
Corporate Strategy: Closing the gap between current objectives and focused objectives.
Marketing Strategy: Improve on Markets that are not doing well, focus on growth.

5) Process: Strategy
Corporate Strategy: Develop strategies to fill in the gap. Eg diversify.
Marketing Strategy: Come up with a plan to achieve the objectives by a) specifying resources to be allocated to Marketing b) Applying the resources to the marketing concept.
c) Identify target markets and customers needs.
d) Plan products to satisfy market needs.
e) Organize resources to match products and customers.

6) Process: Implementation
Corporate Strategy: Implementation dedicated to departments of the business.
Marketing Strategy: The plans must be put into Action. Eg advertising space to be bought in newspapers.

7) Process: Control
Corporate Strategy: Results are reviewed and the process starts again.
Marketing Strategy: Has the organization achieved it’s marketing share of objectives.

Question 48

5.2
Strategic Marketing Plan

Answer 48

According to Kotler the Marketing Plan is as follows:

1) Section: The Executive Summary
Content: This is the finalized planning document with a summary of the main goals and recommendations.

2) Section: Situational Analysis
Content: This consists of a SWOT Analysis and forecasts.

3) Section: Objectives and Goals
Content: What the firm needs to achieve in market share, bottom line profits and returns.

4) Section: Marketing Strategy
Content: This considers selecting target markets, the Marketing Mix and Marketing expenditure.

5) Section: Strategic Marketing Plan
Content: a) 3 to 5 or more years long.
b) Define scope of product and market activities.
c) Match the activities of the organization to it’s competences.

6) Section: Tactical Marketing Plan
Content: a) 1 year time horizon.
b) Generally based on existing products and existing markets.
c) Concerned with Marketing mix issues.

7) Section: Action Plan
Content: How to achieve the strategies.
a) The Marketing mix strategy -
Product, Price, Place, Promotion, People, Processes, Physical Evidence.
b) The Mix Strategy may vary for each segment.

8) Section: Budgets
Content: These budgets are derived from the action program.

9) Section: Controls
Content: These will be set up to monitor the progress of the plan and the budget.

Question 49

5.3
The Marketing Mix

Answer 49

The Marketing Mix is a set controllable variables and their levels that the firm uses to influence the target market. These variables are the 4 Ps.

Question 50

5.3.1
Product

Answer 50

A Product is a good or Sevice that satisfies a need or a want.
It is nor a thing with features but a package with benefits. This is what is being sold and is a solution to a problem.

Basis of choosing a Product
a) Customer value. - Is the customer’s estimate of how far a Product/ Service goes towards satisfying his needs.
b) Every Product has a price, the customer makes a trade off between the expenditure and the value offered.
c) According to Kotler a customer must feel he or she gets a better deal from buying an item than any of the alternatives.

Question 51

5.3.2
Place

Answer 51

Place deals with how the Product is distributed to reach its customers.
a) Channel:
Where are products sold. Eg Supermarkets, Corner Shops, etc

b) Logistis:
The location of warehouses and efficiency of the distribution system.

Key distribution Issues:.
1) Product Push: The firm directs its efforts to distributors to get them to stock the product.

2) Customer Pull: The firm persuades customers to demand the product from retailers and distributors.

Question 52

5.3.3
Promotion

Answer 52

Promotion is the element of the mix over which the marketing department has most control.

Acronym: AIDA, it summaries the aims of Promotion.

A - arouse Attention.
I - generate Interest.
D - inspire Desire.
A - intiate Action.

Marketing communication which lets the public know the product or service are:
a) Advertising (Newspapers, Billboards, TVs, Radio, Direct Mail and Internet )
b) Sales Promotion (Discounts, Coupons, Special Displays)
c) Direct selling by sales personnel.
d) Public relations.

Question 53

5.3.4
Price

Answer 53

The Price element of the marketing mix directly brings revenue.
Factors that influence Price.
1) Economic influences - supply and demand, Price and income elasticities.
2) Competitors prices.
3) Quality connotations.
4) Discounts - These can make the product attractive to distributors.
5) Trade-In Allowances.
6) The stage in the product Lifecycle eg Penetration pricing, skiming pricing.

Penetration Pricing is charging a low price to achieve early market share.

Skimming Pricing is charging high prices early to rip maximum profits.

Question 54

5.3.5
The extended Marketing Mix

Answer 54

This is also known as the Service Marketing mix because it is specifically relevant to the marketing of services rather than physical products.
That is:
People,
Processes,
Physical Evidence.

Question 55

5.3.6
People

Answer 55

Service is inseparable to the service provider.
Frontline staff must be selected, trained and motivated with particular attention to customer care and public relations.

Question 56

5.3.7
Processes

Answer 56

Efficient processes can become a marketing advantage on their own. Eg sophisticated ticketing system for airlines. Efficient order processing eg fast food outlets.

Issues to be considered include:
a) Policies particularly with regards to Ethical dealings.
b) Procedures for efficiency and standardization.
c) Automation and computerization of processes.
d) Queueing and waiting times.
e) Information gathering, processing and communication times.
f) Capacity Management matching supply to demand.
g) Accessibility of facilities, premises, personnel and services.

Question 57

5.3.8
Physical Evidence

Answer 57

Services are Intangible, there is no physical substance to them or evidence of ownership.
Issues of intangibility and ownership can be tackled by making available a physical symbol or representation of the services eg tickets, or certificates of attainment.
Physical Evidence of service may also be incorporated into the design and specifications of the service, eg decor, colour scheme, noise level, fragrance and general ambiance in a hotel.

Question 58

5.4
Market Segmentation

Answer 58

According to Kotler Market Segmentation is the subdivision of a market into distinct and increasingly homogeneous sub groups of customers, where any sub group can conceivably be selected as a target market to be met with a distinct marketing mix.

Two elements of Market Segmentation:
a) The total market consists of different groups of consumers. Each group consists of people with common needs and preferences.

b) Each Market Segment can become a target market for a firm requiring a unique marketing mix.

Question 59

5.4
Market Segmentation is Relevant to a Focus Strategy.

Answer 59

1) Analyse and describe market Segments.

2) Test Segments for commercial validity.

3) Choose a competitive Segmentation strategy.

4) Develop a Market Position or Product positioning strategy.

Steps in Segmentation Targeting and positioning identified by Kotler.

SEGMENTATION: Step 1 and 2

Step 1: Identify Segmentation variables and segment the market.

Step 2: Develop segment profiles

TARGETING: Step 3 and 4

Step 3: Evaluate the Attractiveness of each segment.

Step 4: Select the target Segments.

POSITIONING: Step 5 and 6

Step 5: Identify positioning concepts for each target segment.

Step 6: Select, Develop and communicate the chosen concept.

Question 60

5.5
Identifying Segments

Answer 60

Bases of Market Segmentation
1) Geography - Location.
2) Social Class - Poor or Middle Class.
3) Level of Education.
4) Personal Wealth
5) Lifestyle - Slay queens
6) Behavior - For example action.

Question 61

5.6
Segmentation of the Industrial Markets

Answer 61

1) Geographic Location - Some industries are clustered in a certain location.

2) Type of Business - Service or Manufacturing.

3) Use of Product - classication depending on use.

4) Type of Organization - Tailor make the product or service according to the type of industry.

5) Size of the Organization - The procedures are different for small and large organizations.

Question 62

5.7
Segment Validity

Answer 62

1) Criteria: Can the Segment be measured?
Comment: We can define the Segment but it can be hard to measure.

2) Criteria: Is the Segment big enough
Comment : The market must be nig enough for it to be profitable.

3) Criteria: Can the Segment be reached?
Comment: There has to be a way of getting to the customers.

4) Criteria: Do Segments respond differently?
Comment: There is no point in distinguishing them from each other if they respond the same.

5) Can the Segment be reached profitably?
Comment: Do the identified customer needs cost less to satisfy, than the revenue they earn.

Question 63

5.8
Segment Attractiveness

Answer 63

A Segment might be valid and potentially profitable but is it potentially attractive?

1) A Segment which has high barriers to entry might cost more to enter but will be less vulnerable to competitors.

2) There should be a viable relationship between the firm and the customer for the Segment to be attractive, ie relationship marketing.

Question 64

5.9
Approaches to target markets.
1) Undifferentiated Marketing
2) Concentrated Marketing
3) Differentiated Marketing

Answer 64

1) Undifferentiated Marketing produce a single product and hope to get as many customers to buy it ignoring Segmentation totally. Eg salt!

2) Concentrated Marketing - The company attempts to produce the ideal product for a single segment of the market.

3) Differentiated Marketing - The company attempts to introduce several product versions each aimed at a different market segment.

Question 65

6.
Strategy and Market Position

Answer 65

Strategy is influenced by the market position of the business, ie Market Leader, Market Challenger or Nicher.

Question 66

6.1
Strategies for Market Leaders

Answer 66

Gilligan and Wilson 2009 note that a Company which is a Market Leader may try to do three things:
a) Expand the total market: by seeking increased usage levels; and new uses and users.

b) Protect the current market share: Do continuous product innovation.

c) Expand market share: enhance product Attractiveness by increasing promotion, aggressive pricing and improved distribution.

Question 67

6.2
Strategies for Market Challengers

Answer 67

Gilligan and Wilson 2009 note that market challengers seek to build market share in the hope of eventually overtaking the existing leader.

Question 68

6.3
Strategies for Market followers

Answer 68

Gilligan and Wilson 2009 refer to this approach as a me-too strategy which is based on the Leader’s approach. To be profitable, the follower should compete in the most appropriate segments, maintain it’s customer base and ensure that it’s turnover grows.

Question 69

6.4
Strategies for Nichers

Answer 69

Gilligan and Wilson 2009 note that avoiding competition by niching is a profitable strategy for small firms generally and for larger organizations where competition is intense.
The key to niching is specialization.

Considerations for Market Nichers:
1) Serving a single niche can be risk, a sudden change in the market can lead to rapid decline.
So multiple niching can overcome this.

2) The chosen market must have some growth potential, while being uninteresting to major competitors.

3) The firm must be able to serve it’s customers to gain enough good will to fend off any attacks.

4) It must be possible to build up enough size to be profitable.

Question 70

6.5
Suitability, Feasibility and Acceptability

Answer 70

Johnson et al 2005 states that Strategies are evaluated according to their Suitability to firm’s strategic situation, their Feasibility in terms of resources and competences and their Acceptability to key stakeholder groups eg Shareholders.

Question 71

6.5.1
Suitability

Answer 71

Suitability relates to the strategic logic of the strategy and the strategy should satisfy the following requirements:
a) Exploit strength, ie unique resources and core competences.
b) Rectify an organization’s weaknesses.
c) Neutralize environmental threats.
d) Help the firm to seize opportunities.
e) Satisfy the goals of the organization.
f) Fill the gap identified by the gap analysis.
g) Generate/Maintain competitive advantage.
h) Involve an acceptable level of risk.
i) Suite the politics and corporate culture.

Question 72

6.5.1
Suitability.
Life cycle/ Portfolio Matrix

Answer 72

Competitive Position- Industry Stages
1) Dominant Embryonic
- Fast grow,
- Start up

2) Dominant. Growth
- Fast grow
- Attain Cost
- Leadership
- Renew
- Defend Position.

3) Dominant. Mature
- Defend Position
- Attain Cost
- Leadership
- Renew
- Fast grow

4) Dominant. Ageing
- Defend Position
- Focus
- Renew
- Grow with Industry

Question 73

6.5.1
Suitability
Competitive Position

Answer 73

a) A Dominant Position allows the company to exert influence over the behavior of competitors.
b) A Strong Position gives considerable freedom of choice over strategy.
c) A Favorable Position arises in a fragmented market, often when the company has strengths to exploit.
d) A Tenable Position is vulnerable to competition and profitability may depend on specialization.
e) A Weak Position arises from inability to compete effectively.

Question 74

6.5.2
Feasibility

Answer 74

Feasibility asks whether the Strategy can be implemented and in particular if the organization has adequate Strategic Capability.
In addition the organization also needs to assess whether it has the ability to deal with the likely responses that competitors will make and enough time to implement the strategy.
We can use the Ms Model Framework here as well.

Machinery - Does the organization have enough machinery?

Make-up
Management
Markets
Materials.
Money
Methods
Men and Women .

Strategies which do not make use of existing competences might not be feasible.

Question 75

6.5.3
Acceptability

Answer 75

The Acceptability of a strategy depends on expected performance outcomes and the extent to which these are acceptable to stakeholders.
Considerations for Acceptability:
a) Financial considerations:
Strategies will be evaluated by considering how far they contribute to meeting the Dominant objective of increasing Shareholder wealth.
Financial Indicators to be considered:
1) ROI
2) Profits
3) Growth
4) EPS
5) Cashflow
6) Price or Earnings
7) Market Capitalization
8) Cost benefit Analysis

Profitability Analysis includes focure
ROCE, Payback period and NPV.

b) Customers:
May objective to a strategy if it means reducing service but sometimes they have no choice.
c) Banks:
Are interested in the implications of cash resources, and debt levels.

d) Government:
A strategy involving a takeover may be prohibited under competition legislation.

e) The public:
The environment impact may cause key stakeholders to protest.

f) Risk:
Different Shareholders have different attitudes to risk.

Cost Benefit Analysis may be an appropriate approach to Acceptability where Intangible effects are more important.

Question 76

6.6
Sustainability

Answer 76

This indicates that a firm should aim to adopt strategies which will deliver long-term competitive advantage.

Question 77

6.7
Strategy Selection

Answer 77

Formal Evaluation of imposed strategy.
The first role of formal evaluation is to assess the degree of risk inherent in the imposed strategy.
1) In a medium term program it is important to reduce the risk.
2) Secondly techniques such as scenario planning can be used to establish contingency plans in case the imposed strategy leads to unacceptably low performance.

Question 78

7.
Growth
7.1 - Organic Growth

Answer 78

Organic growth is achieved through the development of internal resources.

Question 79

7.1.1
8 Reasons for pursuing organic growth

Answer 79

a) Learning: When developing new products, the firm gains understanding of the market and the products.

b) Innovation: It might be the only sensible way to pursue genuine technological innovation and exploit it.

c) There is no suitable target for acquisition.

d) Organic growth can be planned more meticulously and offers offers little disruption.

e) It is often more convincing for managers as organic growth is financed internally with no need to raise extra money.

f) The same style of management and corporate culture can be maintained.

g) Hidden and unforseen losses can be are less likely with organic growth than with Acquisitions.

h) Economies of Scale: These can be achieved from more efficient use of central head office functions.eg Finance, Purchasing, Personnel and Management Services.

i)

Question 80

7.1.2
Problems with Organic Growth.

Answer 80

1) Time: Sometimes it takes a long time to descend a learning curve.

2) Barriers to entry may be hard to overcome.

3) A firm will have to acquire the resources independently.

4) Organic growth may be too small for the dynamics of the market.

Question 81

7.2
Acquisitions and Mergers
7.2.1 - The Purpose of Acquisitions (6)

Answer 81

a) Marketing Advantage:
Buy a new product range, buy a market presence, unify sales departments to rationalise distribution and advertising.
Eliminate competition to protect an existing market.

b) Production Advantages:
Gain a higher utilization of production facilities.
Buy in technologies, intellectual property and skills.
Obtain greater Production capacity, safeguard future supplies of raw materials, improve purchasing by buying in bulk.

c) Finance and Management:
Buy a high quality Management team, Obtain cash resources if the acquired company was very liquid.
Gain undervalued assets or surplus assets and Obtain tax advantages.

d) Risk Spreading

e) Independence:
A company threatened by a takeover might takeover another company so that it becomes a more expensive target for the predator company.

f) Overcome Barriers to entry.
Acquired company can be improved with the extra resources and better management.

Question 82

7.2.2
Problems with Acquisitions and Mergers (8)

Answer 82

1) Cost: They might be too expensive.

2) Customers: Customers of the target company might resent a sudden takeover,(Kuvenga) and consider to ho to other suppliers.

3) Incompatibility: In general there might be a problem of assimilating new products, Customers, suppliers, markets, employees and systems of operations.

4) Asymmetric information highlights the fact that the Acquisitions market for companies is rarely efficient.

5) Driven by personal goals of the acquiring company’s managers, as a form of sport.

6) Corporate financers and banks have a stake in the acquisition process as they can charge fees for advice.

7) Poor success record of acquisition: Takeovers benefit the shareholders of the acquired company often more than the acquirer.

8) Firms rarely take into account non-financial factors. Purchasers often fail to carry out a full management audit of the acquisition target.

Question 83

7.3
Better off Tests

Answer 83

Porter 1987 suggests that one of the key issues behind Acquisitions should be in realizing Synergies between the existing company and the new acquisition.

Potential Acquisitions should be assessed against three below tests:
a) Better test: Will the company being acquired be better off after the acquisition.?

b) Attractiveness test: Is the target industry structurally attractive?

c) Cost of entry: The cost of the acquisition must not capitalise all future profits from that acquisition or market. In other words will the future cash flows be greater than the amounts used to acquire it?

Question 84

7.4
Joint Ventures

Answer 84

Joint Ventures are another way by which companies can cooperate.
1) Consortia: Organizations cooperate on specific business areas such as purchasing or research.

2) Joint Ventures: Two firms or more join forces for manufacturing, financial and marketing purposes and each has a share in equity and management, ie
a) Share costs - Joint Ventures are especially attractive to smaller risk averseve firms.
b) Cut risk - A Joint Venture can reduce the risk of government intervention.
c) Participating enterprises benefit from all sources of profit.
d) Close control over marketing and other operations.
e) Overseas Joint Ventures provide local knowledge quickly.
f) Synergies: One firm’s production expertise can be supplemented by the others’ marketing and distribution facilities.

3) A Licensing Agreement- It is a commercial contract where by the licencer gives something of value to the licensee in exchange for certain performances and payments.
The Licenser receives a royalty.
The Licencer may also provide rights to produce a patent product or trademark.

4) Subcontracting is also a type of alliance.

Question 85

7.4.1
Disadvantages of Joint Ventures

Answer 85

a) Conflicts of Interest between the different parties.
b) Disagreements may arise over profit shares, amounts invested, the management of joint ventures and the marketing strategy.
c) One partner may wish to withdraw from the arrangement.
d) There may be a temptation to neglect Core Competences.

Question 86

7.5
Franchising

Answer 86

Is a method of expanding the business on less capital than would otherwise be possible.

Question 87

7.5
Franchising.
How does the franchiser and franchisee provides different inputs to the business.

Answer 87

Franchiser - Sage
a) Name and any goodwill associated with it.
b) Systems and business methods, business strategy and managerial know how.
c) Support services, such as advertising, training research and development and site decoration.

Franchisee: Kilapunch
a) Capital, Personal involvement and local market knowledge.
b) Payment to the Franchiser for rights and support services.
c) Responsibilities for the day to day running and ultimate profitability of the franchise.

Question 88

7.5.1
Advantages of Franchising

Answer 88

a) Reduces capital requirements.

b) Reduces managerial resources required because the franchisee only supply the staff required for day to day running of their operations.

c) Improves return on promotional expenditure through speed of growth.
Franchising provides quicker access to capital and managerial resources, hence allowing a firm to expand more quickly, which in turn should allow companies to achieve a favorable return on their promotional campaigns.

d) Benefits of Specialisation. Franchising provides an effective way of reducing costs because each party concentrates on their core areas, and increases their efficiency in those areas.

e) Low Head Office Costs.
The franchiser only needs a small number of head office staff because some operational responsibilities are taken on board by the franchisees.

f) Reduced Supervision costs: The franchiser will have much lower Supervision costs because the franchisees takes care of the Supervision of their own shops or offices.

g) Risk Management:
When opening new shops or offices in New locations, a company does not know the chances of success in those new markets. Under Franchising, if a new shop or office in a different, country or town fails, the franchisees bears the brunt of the failure.

Question 89

7.5.2
Disadvantages of Franchising

Answer 89

a) Profits are shared: The franchisees receives the revenue in full for the product or service and pay the franchiser the amount that will be less the commission.

b) The search for competent candidates is both costly and time consuming for the franchisees.

c) Control over franchisees, at times it’s difficult to control the activities of the franchisees especially if they become too many and global.

d) Risk to Reputation: Some Franchisees may provide inferior goods or services or even become unethical which can damage the brand.

e) Potential for conflict:
Conflict of interest may arise if say the franchisees decide to work in bad faith by trying to earn more money by say selling pirated software to customers in cases like say Quickbooks Accounting Software which can also damage the franchiser brand.

Question 90

7.6
Strategic Alliances

Answer 90

Some firms enter long-term strategic alliances with others for a variety of reasons.
a) Sharing Development Costs of a particular technology.
b) The regulatory environment prohibits takeovers.
c) Complementary markets or technology.
d) Learning: Alliances can also be a learning exercise where each partner learns from each other.
e) Technology: Alliances provides funds for new technology and expensive research projects, which provide opportunities and spread risks.
f) The alliance itself can generate innovations.
g) The alliance can involve testing the firm’s core competences, which can result in improvements.
h) Regulation may prevent takeovers.

Question 91

7.6.1
Choosing Alliance Partners
Hooley et al 2008 Factors to consider for Alliances:

Answer 91

a) Drivers - What drives the alliance? What benefits are offered by the collaboration?

b) Partners- Which Partners should be chosen?

c) Facilitators- Does the external environment favors a partnership?

d) Components- Activities and Components in the Network.

e) Effectiveness- Does the previous history of the Alliances generate good results?

f) Market Orientation- Alliance Partners may not have the same commitment to the end user.

Question 92

8.
Managing Strategic Change

Answer 92

Change should be planned and managed effectively.

Question 93

8.1
Types of Change

Answer 93

Johnson et al 2005 quoting Balogun and Hope Hailey 2008, analyse change on two axis:

a) Scope of Change - X Axis
It is the extent of change, ie the measure of Scope is whether or not we should replace the existing paradigm.

b) Nature of Change - Y Axis
It may be incremental and built on existing methods and approaches or it may require a big bang approach, if rapid response is required as in times of crises.

1) Nature of Change: Incremental
Scope of Change: Realignment
Adaptation: Is the most common type of change, it proceeds step by step and does not require development of a new paradigm.

2) Nature of Change: Big bang
Scope of Change: Realignment
Reconstruction: This requires rapid response action in response to a long-term decline in performance and can be undertaken within an existing paradigm.

3) Nature of Change: Incremental
Scope of Change: Transformation
Evolution: Is an incremental process that leads to a new paradigm. It may arise from learning processes.

4) Nature of Change: Big bang
Scope of Change: Transformation
Revolution: Is rapid and wide ranging response to extreme pressures for change. A long period of Strategic drift may lead to a crisis that can only be dealt with in this way..

Question 94

8.2
Turn around

Answer 94

A turnaround Strategy is applied when there is a need for rapid and extensive change in order to achieve cost reduction and revenue generation in the case of business terminal decline and threat of closure or takeover.

Question 95

8.2.
Seven elements of a Turn around strategy by Johnson et al 2005

Answer 95

8.2.1: Crisis stabilization
Emphasizes on reducing direct costs and improving productivity, this can be more effective than reducing overheads.
a) Measures to increase revenue are:
- Tailor marketing mix to key market Segments, review pricing policies to maximize revenue, focus activities on target market segments, exploit revenue opportunities if related to target markets, invest in growth areas.

b) Measures to reduce Costs:
Cut cost of labour and senior management, improve productivity, ensure clear marketing focus on target market Segments, financial controls, strict cash management controls, reduce inventory, cut unprofitable products and services.

8.2.2 - Management Changes:
Management is likely to change because old management allowed the situation to deteriorate, experience of turnaround management may be required, managers brought in from outside will not be prisoners of the old paradigm and a directive approach to change management will be required.

8.2.3 - Communication with Stakeholders:
A Stakeholder analysis should be carried out so that the various Stakeholder groups can be informed and managed appropriately.

8.2.4 - Attention to Target Markets:
A clear focus on appropriate target market Segments is essential.
The firm must become customer oriented to ensure flow of marketing information.

8.2.5 - Concentration of Effort:
Resources should be concentrated on the best opportunities to create value.

8.2.6 - Financial Restructuring:
This may involve trading out of insolvency, even when the business is more or less solvent, capital Restructuring may be required, both to provide cash for investment and to reduce cash outflows.

8.2.7 - Prioritization:
The eventual success of a turnaround strategy depends in part on management’s ability to prioritize necessary activities.

Question 96

8.3
Changing Routines

Answer 96

Routines are the wider ways of doing things that are typical of the organization and the habitual behavior that members of the organization display.
When a top-down program is introduced there must be careful identification of critical success factors and the competences they demand.
Furthermore when change is to be introduced, in a less directed way, change agency may focus on Routines extending existing ways of doing things towards what is required and then bend the rules of the game when enough stakeholder support has been created.
Johnson at el 2005.

Question 97

8.4
Culture and Change

Answer 97

The cultural web Johnson et al 2005 can be used as a tool to come up with the desired strategic change by facilitating comparison between the current position and the desired future outcome.

Question 98

8.5
Forceffield Analysis

Answer 98

Forcefield analysis consists of the identification of factors that promote and hinder change.
Promoting forces should be exploited and the effect of hindering forces reduced.

Driving Forces for Change from top:
a) A requirement of new legislation.

b) Professional commitment to controlling the organization.

c) Requirement to report to external agencies.

d) A concern for quality.

Restraining Forces of Resistance from the top:
a) Cynicism about change .

b) Existing systems are sufficient.

c) Trade union concern over effects on jobs and working conditions.

d) Complexity of producing such reviews.

e) Cost of carrying out reviews.

In between the Driving forces and the Restraining forces is the Current state or position, and after the Restraining Forces lies the Ideal position where we want to head to.

Question 99

8.5
How can we apply the forcefield analysis idea?

Answer 99

DLDDIM

a) Define the problem in terms of the current situation and the desired future state.

b) List the forces supporting and opposing the desired change and assess both the strength and the importance of each one.

c) Draw the forcefield diagram.

d) Decide how to strengthen or weaken the more important forces as appropriate and agree with those concerned. Weakening might be achieved by:
Persuasion, Participation, Coercion, or Bargaining.
While Strengthening might be achieved by a marketing or education campaign.

e) Identify the resources needed.

f) Make an action plan including event timing, milestones and responsibilities.