3.8 Choosing strategic direction

Question 1

Ansoff’s Matrix - MARKET PENETRATION

Answer 1

Involves developing strategies to boost sales of existing products into existing markets.

The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.

Question 2

Ansoff’s Matrix - MARKET PENETRATION OBJECTIVES

Answer 2

FOUR MAIN OBJECTIVES OF MARKET PENETRATION

1) Maintain or increase the market share of current products –> e.g. this can be achieved through advertising or sales promotion

4) Increase usage by existing customers – for example by introducing loyalty schemes

Question 3

Ansoff’s Matrix - MARKET DEVELOPMENT

Answer 3

Involves offering existing products but targeting new market segments

This can be done through:
1) new geographical markets
2) new demographic –> attracting different customers

Market development is more risky as business needs to know:
- needs of customers in the new market
- existing competitors in this new market

Question 4

Ansoff’s Matrix - PRODUCT DEVELOPMENT

Answer 4

Involves developing new products for existing customers through differentiation e.g. new modified products or a USP

This means a business will need to:
1) invest in R&D and innovation
2) grasp a detailed insight into customer needs

Question 5

Ansoff’s Matrix - DIVERSIFICATION

Answer 5

Involves offering new products into new markets

Much more risky strategy because business is moving into new markets with little to no experience

Question 6

Porter’s Generic Strategies

Answer 6

Differentiation and cost leadership are ways to gain a competitive advantage (which is greater value either through lower prices or greater benefits)

BROAD - cost leadership and differentiation

NARROW - cost focus and differentiation focus

Question 7

Porter’s Generic Strategies - IMPORTANCE OF COST LEADERSHIP (broad target)

Answer 7

Involves achieving lower costs than rivals in the same industry

IMPORTANCE OF COST LEADERSHIP
1) if selling prices are similar, then the lowest cost operator will enjoy highest profits
2) lowest cost operator can also offer lowest prices –> gain market share

Question 8

Porter’s Generic Strategies - how is cost leadership achieved?

Answer 8

Economies of scale (cost advantages when production becomes efficient) can be achieved –> by increasing production as costs will be spread over more units therefore lowering costs

Lean production (reducing waste whilst still ensuring quality)

High capacity utilisation

Question 9

Porter’s Generic Strategies - DIFFERENTIATION (broad target)

Answer 9

Offering a product that is distinctly different from competition which has benefits that customers value

Question 10

Porter’s Generic Strategies - how is differentiation achieved?

Answer 10

Superior product quality

Branding - brand loyalty & customer recognition

Sustained promotion - often dominated by advertising or sponsorships etc.

Question 11

Bowman’s Strategic Clock

Answer 11

A model that explores the options for a how a product should be positioned to give it the most competitive position in a market

Question 12

Bowman’s Strategic Clock - 1) LOW PRICE & LOW VALUE ADDED

Answer 12

Not a very competitive position –> product isn’t differentiated and customer perceives very little value, despite their being a low price

Bargain basement strategy –> only way to remain competitive is to stay as cheap as possible

Question 13

Bowman’s Strategic Clock - 2) LOW PRICE

Answer 13

Strategy of cost minimisation is required for this to be successful

Profit margins on each product is low BUT high volume of output can generate high profits

Competition is usually intense - often involving price wars

Question 14

Bowman’s Strategic Clock - 3) HYBRID

Answer 14

Low price but has some differentiation

Aim is to persuade customers that there is good added value through reasonable price and some differentiation

Question 15

Bowman’s Strategic Clock - 4) DIFFERENTIATION

Answer 15

Aims to offer customers highest level of perceived added value

Strong brand awareness, quality & loyalty plays a key role allowing a premium price to be charged

Question 16

Bowman’s Strategic Clock - 5) FOCUSED DIFFERENTIATION

Answer 16

Highest price levels where customers buy the product because of high perceived value

Adopted by luxury brands who aim to achieve premium prices by highly targeted segmentation and promotion

Leads to high profit margins

Question 17

Bowman’s Strategic Clock - 6) RISKY HIGH MARGINS

Answer 17

High risk –> high prices charged without any added value

Uncompetitive strategy –> customers will find another business that provides added value for similar or lower price

Question 18

Bowman’s Strategic Clock - 7) MONOPOLY PRICING

Answer 18

When there is only one business offering the product

No alternative products so business doesn’t care about added value as customer has to buy it or they don’t

Monopolies are tightly regulated therefore they are limited to setting extortionate prices

Question 19

Bowman’s Strategic Clock - 8) LOSS OF MARKET SHARE

Answer 19

Setting a middle range or standard price for a product with lower perceived value

Uncompetitive strategy

Question 20

Competitive Advantage - ADVANTAGES

Answer 20

A competitive advantage occurs when a business offers greater value to its customer either through lower prices or added value

Contributes to higher profit margins

Helps attract more customers frequently

Helps maintain brand loyalty

Training of employees, full capacity utilisation, lean production all lead to lower unit costs

Question 21

Competitive Advantage - DISADVANTAGES

Answer 21

Competitors are able to copy unless the business gets a patent –> could lead to a loss in market share

If one business has a competitive advantage, rivals will want to copy thus ultimately removing the advantage as a whole