3.8.1

Question 1

What is strategic direction?

Answer 1

involves a business choosing which markets it will operate in and which products it will provide

Question 2

Why is strategic direction important?

Answer 2

the external environment is constantly changing and businesses must develop and compete in areas that make the best use of their strengths and core

Question 3

What is the Ansoff matrix?

Answer 3

a strategic tool that businesses can use to help choose the market they wish to operate in and the products they will sell within that market. The model offers four distinct strategies based on the products’ degree of newness and the firm’s understanding/experience of the market.

Question 4

The Ansoff matrix provides a

Answer 4

useful framework, but there are always degrees of newness, and a decision might not fit nicely into one strategic option.

Question 5

What is market penetration?

Answer 5

involves a business increasing its market share in an existing market without the need for significant investment or risk

Question 6

Market penetration is a strategy to boost

Answer 6

sales of current products in the current market

Question 7

Possible approaches for market penetration:

Answer 7

• increase promotional activities
• change pricing model if product is price sensitive
• build brand image
• focus on increasing repeat purchase by developing customer loyalty
• incentivise customer affiliations

Question 8

Benefits of market penetration

Answer 8

• low risk
• product and market are familiar to the business
• limited investment required

Question 9

Limitations of market penetration

Answer 9

• possibly limited growth potential
• business becomes vulnerable if it does not innovate

Question 10

What is product development?

Answer 10

allows a business to introduce new products to a market to improve competitiveness, encourage repeat purchase and, therefore, customer loyalty.

Question 11

Product development develops

Answer 11

new products for existing customers

Question 12

Possible approaches for product development:

Answer 12

• conduct market research with existing customers to identity areas for improvement / innovation
• use product portfolio tools to manage product range, e.g.
  Boston Consulting Group Matrix
• divert funds into R&D and product development

Question 13

Benefits of product development

Answer 13

• familiar with customers
• builds on / innovates current products

Question 14

Limitations of product development

Answer 14

• product development takes time and can be expensive
• product cannibalisation

Question 15

What is market development?

Answer 15

allows a business to enter new customer markets with an existing product or slightly modified product, increasing sales potential.

Question 16

Market development takes

Answer 16

existing products into new market segments (demographic or geographic).

Question 17

Possible approaches for market development:

Answer 17

• use of penetration pricing to enter new market
• heavy promotion targeting new customers
• strategic alliance or takeover of a business already operating in the market
• develop new channels of distribution to reach new customers, such as an international agent

Question 18

Benefits of market development:

Answer 18

• potential for considerable
  growth
• no need for expensive product development

Question 19

Limitations of market development:

Answer 19

• limited understanding of new customers’ needs
• competing against established businesses

Question 20

What is diversification?

Answer 20

allows a business to utilise its core competencies to move into totally new areas of business, often by leveraging the value of its brand.

Question 21

Diversification offers

Answer 21

new products to new customers in a new market.

Question 22

Possible approaches for diversification:

Answer 22

• This strategy often applies to conglomerates with considerable financial power and economies of scale. This power might allow them to adopt such a strategy.
• Business may have a particular asset (such as a patent) that allows them to be competitive without having particular expertise.
• This strategy could be achieved through external growth - merger or a takeover.

Question 23

Benefits of diversification

Answer 23

• spreads the business risk by engaging in different markets
• business can utilise some of its core competencies and apply them to a new context

Question 24

Limitations of diversification

Answer 24

• can be extremely high risk
• no reputation or expertise in the market

Question 25

Factors to consider when choosing a strategy:

Answer 25

1. Risk aversion - the willingness of the owners/managers to take risks.
2. Core competencies - a business will look to choose a strategy that makes use of the strengths and advantages possessed by the business.
3. External environment -could new legislation in a market make a strategy less attractive?
4. Stakeholders - apart from financial returns a business will consider the impact of its strategy on its stakeholders.
5. The expected cost - product development and diversification are likely to be considerably more expensive than the other strategies.
6. Anticipated returns - a business will conduct investment appraisal in order to consider the potential reward of the strategy.