3.8.1 Flashcards
What is strategic direction?
involves a business choosing which markets it will operate in and which products it will provide
Why is strategic direction important?
the external environment is constantly changing and businesses must develop and compete in areas that make the best use of their strengths and core
What is the Ansoff matrix?
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.
The Ansoff matrix provides a
useful framework, but there are always degrees of newness, and a decision might not fit nicely into one strategic option.
What is market penetration?
involves a business increasing its market share in an existing market without the need for significant investment or risk
Market penetration is a strategy to boost
sales of current products in the current market
Possible approaches for market penetration:
- 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
Benefits of market penetration
- low risk
- product and market are familiar to the business
- limited investment required
Limitations of market penetration
- possibly limited growth potential
- business becomes vulnerable if it does not innovate
What is product development?
allows a business to introduce new products to a market to improve competitiveness, encourage repeat purchase and, therefore, customer loyalty.
Product development develops
new products for existing customers
Possible approaches for product development:
- 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
Benefits of product development
- familiar with customers
- builds on / innovates current products
Limitations of product development
- product development takes time and can be expensive
- product cannibalisation
What is market development?
allows a business to enter new customer markets with an existing product or slightly modified product, increasing sales potential.
Market development takes
existing products into new market segments (demographic or geographic).
Possible approaches for market development:
- 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
Benefits of market development:
- potential for considerable
growth - no need for expensive product development
Limitations of market development:
- limited understanding of new customers’ needs
- competing against established businesses
What is diversification?
allows a business to utilise its core competencies to move into totally new areas of business, often by leveraging the value of its brand.
Diversification offers
new products to new customers in a new market.
Possible approaches for diversification:
- 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.
Benefits of diversification
- spreads the business risk by engaging in different markets
- business can utilise some of its core competencies and apply them to a new context
Limitations of diversification
- can be extremely high risk
- no reputation or expertise in the market
Factors to consider when choosing a strategy:
- Risk aversion - the willingness of the owners/managers to take risks.
- Core competencies - a business will look to choose a strategy that makes use of the strengths and advantages possessed by the business.
- External environment -could new legislation in a market make a strategy less attractive?
- Stakeholders - apart from financial returns a business will consider the impact of its strategy on its stakeholders.
- The expected cost - product development and diversification are likely to be considerably more expensive than the other strategies.
- Anticipated returns - a business will conduct investment appraisal in order to consider the potential reward of the strategy.
