3.8.1 Flashcards
What is a strategy?
A strategy id a long term plan of how a business sets out to achieve its aims and objectives.
What is the strategic direction?
The strategic direction a business chooses determines the products it sells and the markets in which it operates.
What is a dynamic market?
Where products are continuously being improved. Most firms are in both a dynamic market with changing internal and external factors.
What is Ansoff’s matrix?
Ansoff’s matrix is a decision-making model for strategic planning that was developed by Igor Ansoff. The matrix sets out different strategic directions a firm may pursue. these consist of: Market and product
1 (least risk) - Existing market and existing product - Market penetration
2 - New market and existing product - Market development
3 - Existing market and new product - Product development
4 (most risk) - New market and new product - Diversification
It provides companies with strategic choices (Options) to move forward, each with different degrees of risk.
Ansoff’s matrix 1 - Market Penetration
The strategy to sell an existing product in an existing market is to promote higher sales in said market for said product.
The main aim is to boost brand loyalty and market share, which is done by modifying strategy e.g. spending on promotion.
This option has the lowest risk - the company knows the market and product already. However it is not the most beneficial for long-term success. Keeping that in mind, many companies can produce high returns for many years with a solid product.
This option is useful for firms in stable, predictable markets - e.g. Heinz baked beans.
Ansoff’s matrix 2 - Market development
Entering a new market with and existing product, maybe including a new location or new market segment.
The main aims include increasing sales and profit, increasing scales of operations and spreading risk.
This option is riskier than market penetration as the new market is not as well known. Other reasons of failure include lack of research, barriers to entry and rivals.
This is a long-term strategy.
Example - Kellogg’s diet - promoting their cereal to be eaten at different times of the day i.e. lunch and dinner
Ansoff’s matrix 3 - Product development
Targeting the same market, but with a new product.
The main aim is usually to keep up with developments in the market and to anticipate future trends.
Risks include an opportunity cost of R&D. Although the market is well-known, it does not mean the market will react to a new product predictably, meaning they still might not purchase and adopt the new product.
Being associating with an established brand increases products chance of success, and this option spreads the risks of a company over more than one product.
Ansoff’s matrix 4 - Diversification
Launching a new product in a new market. May increase their sales, profit and brand awareness, as well as spreading risk.
The most risky strategic direction in this matrix due to the lack of knowledge of both product and market, also meaning lots of R&D is required creating an opportunity cost.
This is a good strategy for those firms looking to escape difficult or declining markets.
Factors that impact the choice of strategic direction
- The level of risk involved, including the management and owners attitude towards risk
- The level of shareholder support
- The ability/skills of staff//the workforce
- How brand image could be affected
- Existing employee reactions - labour turnover, loss of skills etc.
- Availability of staff, assets, skills and their fit with the new direction
- Opportunity cost
- CCR and ethical factors
- Likely returns in sales and profit
