Chapter 7 Strategic options Flashcards
1.1 Strategic planning and SWOT analysis
Issues identified from internal analysis and external analysis can be combined using SWOT analysis. SWOT is a technique that can be used to perform a corporate appraisal to evaluate the strategic position of the organisation. Internal analysis is the strength and weaknesses, the external analysis is the opportunities and threats.
1.2 Strategic impact of SWOT analysis
When evaluating a SWOT analysis there are a number of questions which can be addressed:
- Can the strengths of an organisation be matched to opportunities?
- What weaknesses need to be addressed before pursuing opportunities?
- Does the organisation have sufficient strengths to minimise threats?
- Can the organisation’s weaknesses be converted into strengths?
- Can potential threats be converted into new opportunities?
2.1 GAP analysis
The comparison between an entity’s ultimate objective and the expected performance from projects (both planned and under way), identifying by which can identified difference or gap might be filled. When performing an analysis, the following questions should be addressed:
- Why does the gap exist?
- What strategies can be chosen to close the gap?
3.1 Competitive positioning
Porter suggests sustainable competitive advantage arises from the selection of a generic strategy which best fits the organisation’s environment and then organising value-adding activities to support the chosen strategy. The generic strategies include:
- Cost leadership: seeking to be 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
Organisations should address if the strategy should be differentiation or cost leadership and wide or narrow. Basis of competition:
- Cost leadership: lower cost and broad target
- Cost focus: lower cost and narrow target
- Differentiation: broad target and differentiation
- Differentiation focus: narrow target and differentiation
3.2 Cost leadership strategy
This is based on a business organising itself to be the lowest cost producer. This can be achieved via economies of scale, seeking cheaper sources of supply, reduced labour cost and using the value chain to identify and reduce non key activities.
The benefits include higher profits by charging the same price as competitors, the firm remains profitable in a price war and economies of scale create entry barriers. The risks include the market only having one room for one cost leader, the cost advantage could be lost due to inflation, exchange rates and competitors using modern technology and customers may prefer to pay extra for a better product.
3.3 Differentiation strategy
Differentiation can be based on product features or creating/ altering consumer perception. Strong branding, product innovation, quality and product performance are all key areas to becoming a differentiator. The benefits of a differentiation strategy include products commanding a premium price so higher margins and product has fewer perceived substitutes due to product uniqueness and brand loyalty. Therefore, there is less direct competition and demand is less price sensitive.
The risks include cheap copies, being out-differentiated, customers unwilling to pay the extra and differentiating factors no longer valued by customers.
3.4 Focus (niche) strategy
this focuses on a segment of the market rather than the whole market. This is achieved by identifying 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 and develop a marketing strategy to specifically target the chosen segment.
The potential benefits include smaller segment and so smaller investment in marketing/production is required to develop competitive advantage, less competition and entry is cheaper and easier.
The risks of the strategy if the segment is too small then it may be difficult to achieve sufficient sales and if the segment is too large then the large players may become interested.
4.1 Directions for growth – Ansoff’s matrix
Market penetration: this is an existing product in an existing market. This is more sales of existing products to existing markets; examples include bank holiday sales.
Product development: this is a new product in an existing market. This is about developing new products for existing markets.
Market development: existing product in a new market. This is finding new markets for existing products, for examples Tesco stores in Europe.
Diversification: new product in a new market.
4.2 Market penetration
Penetration is achieved by competitive pricing, advertising or sales promotion. Also, by improving competitive advantage through adjustments in the value chain. The implications can be lack of diversification, greater market strength and economies of scale.
4.3 Product development
This is achieved via investing in research and development and existing distribution channels may be used. The implications are the business should already have good knowledge of their customers and product failure may damage the brand.
4.4 Market development
Achieved via new geographical markets or market segments and using new distribution channels. The implications include market research needed to overcome lack of market knowledge and customer’s awareness may need to be generated in the new market.
4.5 Diversification
This seeks growth in new markets, with new products in comparison to the current position. Diversification takes two forms: related diversification (concentric) and unrelated diversification (conglomerate).
4.6 Related diversification
Related diversification involves integrating activities in the supply chain (vertical integration) or leveraging technologies or existing competences (horizontal integration). Vertical integration occurs when a company becomes its own supplier (backward) or distributor (forward). The benefits of vertical diversification include:
- Economies of combined operations
- Economies of internal control and co-ordination: scheduling and co-ordinating operations should be better, information about the market can be fed back to the production companies
- Economies of avoiding the market: negotiation, packaging and advertising costs are avoided
- Technology: close knowledge of upstream or downstream operations gives a company strategic advantage
- Guaranteed demand/supply
The disadvantages of vertical diversification include
- Increases the proportion of the firms operating costs that are fixed. As if the 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
- 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
- Capital investment needs: vertical integration consumes capital resources and must yield a greater return, or equal to the firm’s opportunity cost of capital.
- Differing managerial requirements: skills transfer from one type of business to another is not automatic
Horizontal integration involves a company utilising existing competences by entering into complementary markets or competing markets.
4.9 Unrelated diversification
The characteristic is that there is no common thread. It is still possible to achieve synergies through management skills and brand name. The advantages include risk spreading (diversified products or markets reduces variability of group profits), can enter more attractive markets, can use surplus cash, utilise brand image in new markets and improve utilisation of central resources.
The disadvantages include lack of management experience in new products/markets, failure in one market could damage brand and it is often bad for shareholders as there is a lack of synergies available.
