Strategic choice (08)

Question 1

What is Strategic choice?

Answer 1

Strategic choice is concerned with the identification of different strategic options and deciding between them.

Good strategic choice allows a business to gain competitive advantage, and is
achievable within the resource capabilities of the business.

Strategic choice could be classified into business-level strategy and corporate-level strategy.

Question 2

What is a Business-Level Strategy?

Answer 2

Business-level strategy determines the strategic position of a business in its quest for competitive advantage when competing in a single industry or product market.

It focuses on how a business should compete against competitors.

The choice of business-level strategy includes differentiation and cost leadership.

Question 3

What is Differentiation?

Answer 3

A differentiation strategy seeks to create higher value for customers than the value
competitors create, by delivering goods or services with unique features while
keeping costs at similar levels, allowing the business to charge higher prices to its
customers.

The goal of differentiation strategy is to increase the perceived value of goods or services that competitors cannot match, so that customers are willing to pay a higher price.

In a differentiation strategy, the focus of competition is on non-price attributes, and very often is the unique selling proposition of the product.

Managers that adopt the differentiation strategy would leverage on value drivers,
essentially elements that increase the value of a product by improving customers’
perception and resulting in competitive advantage.

Common value drivers include product features, customer service, customisation and complements.

Question 4

What are Product Features?

Answer 4

Product features are part of product attributes in the marketing mix. A business can
improve its product features, thereby increasing the perceived value of the good or
service offered. Adding unique product attributes allow businesses to turn
commodity products into differentiated products, thus able to command a premium
price.

For example in the kitchenware industry, Happycall follows a differentiation
strategy, highlighting product features. Happycall differentiates its cooking pots by
adopting hard-anodising to create corrosion-resistance in its cooking pots. This
ensures that its cooking pots are durable and easy to clean.

Question 5

What is Customer Service?

Answer 5

A business can increase the perceived value of its product offering by focusing on
customer service.

For example, hot pot restaurant chain Hai Di Lao is famed for its exceptional customer service. As average wait time to enter the restaurant is at least an hour, diners are provided with free manicure and hand massage services, games, and a variety of snacks and drinks as they wait. Once diners sit by the hot pot table,
they are provided with full sized aprons to prevent clothes from staining and zip lock
bags to protect their phones. Occasionally, they might be entertained by servers with performances such as the noodle dance.

Exemplary customer service could be achieved through effective recruitment,
training and deployment of employees. The provision of appropriate incentives to
motivate employees is also important.

In Hai Di Lao’s case, employee incentive schemes are designed to support its focus on service excellence. Customer satisfaction and employee satisfaction are key indicators to management
performance, while frontline service staff are given the authority to do whatever
makes the customers happy, including paying the meals for the customers on behalf
of the restaurant without the involvement of the manager. Haidilao only promotes
from within, and employees take customer service seriously because it will reflect
on their career growth.

Question 6

What is Customisation?

Answer 6

Customisation refers to providing consumers with options to personalise the
product to their preference before the purchase. This could be from choosing
colours to features, and allow a business to differentiate their offering from
competitors.

For example, Singapore-based car parallel importer Carle allows its
customers to customise their cars beyond the basics such as interior seats and
colour to include options such as body kits, two tone colour spray and after market
exhaust system. Hence, customers who purchased their vehicle from Carle are likely
to end up driving a car that is distinctively different from other cars, even if the
model is the same.

Question 7

What are Complements?

Answer 7

A complement is a product or competency that adds value to the original product
when the two are used in tandem.

Complements increase demand for the primary product, thus enhancing profit
potential for the business.

The goods usually have little to no value when consumed alone.

But when combined with the original products, it adds to the overall value of the offering e.g iphone & the apps.

Question 8

Evaluation of Differentiation strategy?

Answer 8

A well-executed differentiation strategy allows a business to command a premium
price and reduces rivalry among competitors.

A successful differentiation strategy is likely to be based on a unique product feature, or an intangible resource such as a reputation for customer service.

A competitor would need to improve the product features as well as establish similar reputation to gain market share.

Competitors will find this time-consuming and costly, and at times impossible to replicate.

The viability of a differentiated strategy is undermined when the focus of competition shifts to price instead of value-creating features.

This can happen when differentiated products become commoditized and an acceptable standard of
quality has emerged across competitors.

For example, although the iPhone was a highly differentiated product when it first launched in 2007, touch-based screens and other once-innovative features are now standard in smartphones.

Question 9

What is a Cost leadership strategy?

Answer 9

A cost leadership strategy seeks to create similar value to customers by producing goods or services at a lower cost than competitors, enabling the business to offer lower prices to customers.

The goal of cost leadership is to reduce cost below that of competitors, while offering adequate value.

In a cost leadership strategy, the focus of competition is on lowest possible price, which offering acceptable value.

Managers that adopt cost leadership strategy will manipulate cost drivers,
essentially items that determine the cost behaviour within business activities.

The most important cost drivers that managers can manipulate to keep their costs low are cost of input factors, economies of scale, outsourcing and off-shoring.

Question 10

MORE OF COST OF INPUT FACTORS ARE IN NOTES PG 4 (albeit it is self explanatory)

Question 11

What is Economies of Scale?

Answer 11

Economies of scale refers to the reduction in the average costs of production for a business as a result of an increase in the scale of operations.

Economies of scale could be reaped by spreading fixed costs over a larger output, or via full capacity utilisation.

Question 12

What is Outsourcing?

Answer 12

Outsourcing refers to the use of external service providers to undertake part of the operation process, instead of carrying it out within the business using its own
internal resources.

Question 13

What is Offshoring?

Answer 13

Offshoring refers to the relocation of a business function, process or department to another country.

Question 14

Evaluation of Cost leadership strategy?

Answer 14

A business becomes a cost leader by obtaining the lowest cost position in the industry while offering acceptable value, and thus is protected from competitors by virtue of having the lowest cost.

If a price war starts, the cost leader would survive because all competitors would be driven out as profit margin diminishes.

Since reaping economies of scale is important to reaching a low cost position, the cost leader is likely to already attain a large market share.

Cost leadership is risky if a new competitor with new and relevant expertise enters the market, and the low cost leader are required to learn new capabilities.

In the case of hyper mart retail chain Walmart that adopts cost leadership strategy, when Amazon first started and leveraged on e-commerce to become a powerful substitute
and threat to brick and mortar retail outlets, Walmart lost significant market share before reinventing itself to also sell online.

Hence, it is possible for competitors to beat the cost leader by adopting the same business strategy, but more effectively.

Question 15

What is Corporate-Level Strategy?

Answer 15

Corporate-level strategies comprises the decisions that management makes and the actions they take in the quest for competitive advantage in several industries and markets simultaneously.

It focuses on where to compete and addresses the desire for growth. The choice of corporate-level strategy includes vertical integration and
diversification.

Question 16

What is Vertical Integration?

Answer 16

A business could grow externally by merging or taking over another business.

Vertical integration involves merging or taking over another business in the same industry but at a different stage of business activity.

Vertical integration can be categorised into backward and forward integration.

Question 17

What is Backward Vertical Integration?

Answer 17

Backward vertical integration involves moving ownership of business activities upwards towards suppliers.

It involves integrating with a supplier of the existing business in the same industry.

An example of backward vertical integration would be a car manufacturer buying over a component supplier such as a tyre
manufacturer.

Question 18

What are the advantages of backward vertical integration?

Answer 18

The following are advantages of backward vertical integration:

 Business has better control over quality, price and delivery times of supplies

 It encourages the business to conduct research and development to improve quality of supplies of components

 Business may now control supplies of materials to competitors

Question 19

What are the disadvantages of backward vertical integration?

Answer 19

The following are disadvantages of backward vertical integration:

 The business may lack the expertise and experience in managing a supplier

 The supplying business may become complacent due to having a guaranteed customer

Question 20

What are some possible impacts on stakeholders as a result of vertical integration?

Answer 20

The following are some possible impact on stakeholders as a result of vertical

integration:
 Employees may have greater career opportunities as they could now work in the supplying business as well

 Customers may obtain improved quality and more innovative products, however, their choice may become limited due to control over supplies to competitors

Question 21

What is Forward vertical integration?

Answer 21

Forward vertical integration involves moving ownership of business activities downwards towards customers.

It involves integrating with a customer of the existing business in the same industry.

An example of forward vertical integration would be a car manufacturer moving into car retail, repairs and servicing.

Question 22

What are the advantages of Forward integration?

Answer 22

The following are advantages of forward integration:
 The business is now able to control the promotion and pricing of its own
products
 The business has a secure outlet for its products, and products of competitors may be excluded

Question 23

What are the disadvantages of Forward integration?

Answer 23

The following are disadvantages of forward vertical integration:
 The government and consumers may suspect uncompetitive behaviour and react negatively
 The business may lack the expertise and experience to manage the business activities of the customer it acquires

Question 24

What are the possible impacts on stakeholders as a result of vertical integration?

Answer 24

The following are some possible impact on stakeholders as a result of vertical
integration:
 Employees may have greater job security as the business has secure distribution channels
 Customers may resent the lack of competition in the retail outlet due to the withdrawal of competitor products

Question 25

What is Diversification?

Answer 25

Diversification involves increasing the variety of goods and services the business offers, or the markets and geographical locations in which it competes in. Diversification can be related or unrelated.

Question 26

What is Related diversification?

Answer 26

Related diversification involves expanding into products or markets with relationships to existing business activity, and includes product and geographic diversification.

Question 27

What is Unrelated diversification?

Answer 27

Unrelated diversification involves diversifying into products and markets with no relationship to existing business activity. Industry diversification is a form of unrelated diversification.

Question 28

What is Product diversification?

Answer 28

Product diversification involves a business increasing its range of product offerings in the market, by launching new products. This is also referred to as product development in Ansoff Matrix

Question 29

Why would Product diversification be expensive and risky?

Answer 29

Product diversification can be expensive and risky for businesses due to the following reasons: 1) New strategic capabilities. Product diversification requires businesses to acquire new but unfamiliar processes or technologies. Success is likely to depend on a willingness to acquire new technological capabilities, to engage in organisational restructuring and new marketing capabilities to manage customer perceptions. 2) Project management risk. Projects involving product diversification are subjected to risk of delays and increased costs, if the new product is complex or if the specifications of the new product are different from the original core product of the business.

Question 30

What is Geographic diversification?

Answer 30

Geographic diversification involves the business entering a market in a new country or region with its existing product line. This is also referred to as market development in Ansoff Matrix

Question 31

Note: It is critical that geographic diversification strategies be based on products that meet the needs and wants of the new market. Typically, it will entail some modification in terms of packaging or service. Strategies based on simply offloading goods or services in its traditional state are likely to fail. In terms of strategic capabilities, businesses often lack the right marketing skills and brands to make progress in a new market with unfamiliar customers. On the management side, the challenge is in coordinating between different customers and geographies, which might all have different needs or preferences.

Question 32

What is Industry diversification?

Answer 32

Industry diversification, also known as conglomerate diversification, involves a business entering a new industry entirely different from its current business activity. This is also simply referred to as diversification in Ansoff Matrix

Question 33

Note: Industry diversification can create value as the business may benefit from being part of a larger group. This may allow consumers to have greater confidence in the goods and services produced by the business than before, and the larger size may also reduce costs of finance. However, critics have pointed out that a business with diversified operations and activities is unable to synergise and work together to create value, as compared to these operations and activities being run as independent businesses. There is also concern that the top management at headquarters may not possess the full knowledge and expertise across the diversified industries to be able to make the best strategic decisions.

Question 34

In pursuing a diversification strategy, what should a business consider?

Answer 34

In pursuing the diversification strategy, a business should consider the following: 1) Economies of scale. For diversification to enhance the performance of a business, it must lead to economies of scale and a reduction in costs. A business that decides on product or geographic diversification should benefit from an improvement in productivity and efficiency. This could be in the case where new technology are purchased and leveraged upon to manufacture new products, or employees becoming more motivated at the prospect of working on a new project or in another country. For product diversification in particular, fixed costs should be spread over a larger output, resulting in lower average costs. 2) Restructuring. Restructuring is the process of reorganising and divesting resources to refocus the business in order to leverage on its core competencies more effectively. When a business decides to adopt diversification strategy, it is also likely to phase out ‘dog’ products from the BCG Matrix , so as to free up and divest resources into new products, markets or industries. These resources include manpower where there is a need to recruit new employees to work in new markets or industries, train and develop existing employees so that they could be redeployed to work on new products, or retrenchment if employees working on ‘dog’ products cannot be redeployed. There might also be a need to redesign the organisational structure of the business when it diversifies, to either a divisional or matrix structure. 3) Internal capital markets. Diversification strategies would usually require large sums of capital to implement, and a business would need to depend on both internal sources of finance, mainly retained earnings, as well as long-term external sources of finance such as equity and bonds. A business is more likely to diversify successfully if it does an efficient job of tapping on its retained earnings through effective budgeting. If a business has significant retained earnings and strong cash flow, it is likely to have a strong credit rating and thus able to assess external sources of finance at lower costs, such as the ability to negotiate for a lower interest rate with banks and financial institutions. 4) Marketing strategy. When a business diversifies into a new product, geographical location or industry, it will need to conduct the necessary market research, segmentation, targeting and positioning. Following that, the business would need to create a new marketing mix. Product and industrial diversification would require a new pricing, promotion and distribution strategy as the product is an entirely new one. In the case of geographic diversification, even though the product is likely to remain unchanged, the new customer base might have different purchasing behaviour, which requires the marketing mix to be modified.

Question 35

SUMMARY

Answer 35

In summary, the following are covered in this topic: 1. Strategic choice is concerned with the identification of different strategic options and deciding between them and could be classified into business-level strategy and corporate-level strategy. 2. Business-level strategy focuses on how a business should compete against competitors, and includes differentiation and cost leadership. 3. A differentiation strategy seeks to create higher value for customers than the value competitors create, allowing the business to charge higher prices. 4. The differentiation strategy leverages on value drivers such as product features, customer service, customisation and complements. 5. A cost leadership strategy seeks to create similar value to customers by producing goods or services at a lower cost, resulting in lower prices offered. 6. Businesses can keep costs low by manipulating cost drivers such as cost of input factors, economies of scale, outsourcing and off-shoring. 7. Corporate-level strategies comprises the decisions to achieve competitive advantage in several industries and markets simultaneously , and includes vertical integration and diversification. 8. Vertical integration involves merging or taking over another business in the same industry but at a different stage of business activity and can be categorised into backward and forward integration. 9. Backward vertical integration involves moving ownership of business activities upwards towards suppliers, while forward vertical integration involves moving ownership of business activities downwards towards customers. 10. Diversification involves increasing the variety of goods and services the business offers, or the markets and geographic locations in which it competes in, and can be categorised into product, geographic and industry diversification.