3.8.1 Choosing Strategic Direction

Question 1

Strategic direction involves? Why is it important

Answer 1

Which markets it will operate in and which products it will provide. Important because external environment is constantly changing and businesses must develop and compete in areas that make the best use of its strengths.

Question 2

What does the Ansoff matrix allow a business to do

Answer 2

A strategic tool business can use to choose the market they wish to operate in and the products they sell within that market.

Question 3

What are the four strategic options for the Ansoff matrix

Answer 3

Market penetration
Product development
Market development
Diversification

Question 4

What does market penetration involve

Answer 4

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

Question 5

Possible approaches for market penetration

Answer 5

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

Question 6

Benefits and limitations of market penetration

Answer 6

Benefits:

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

Limitations:

• possibly limited growth potential
• businesses become vulnerable if it does not innovate

Question 7

What does product development involve

Answer 7

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

Question 8

Possible approaches for product development

Answer 8

• considering market research with existing customers to identify areas for improvement/innovation
• use product portfolio tools to manage product range e.g Boston Matrix
• Divert funds into r&d and product development

Question 9

Benefits and limitations of product development??

Answer 9

Benefits:

• familiar with customers
• builds on / innovates current products

Limitations:

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

Question 10

What does market development allow fora business to do

Answer 10

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

Question 11

Possible approaches for market development

Answer 11

• use of penetration pricing to enter new markets
• 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 international agents

Question 12

Benefits and drawbacks of market development

Answer 12

Benefits:

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

Limitations:

• limited understanding of new customer needs
• competing against established businesses

Question 13

What does diversification allow a business to do

Answer 13

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 14

Possible approaches for diversification

Answer 14

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

Question 15

Benefits and limitations of diversification

Answer 15

Benefits:

• spreads the businesses risk by engaging in different markets
• businesses can utilise its core competencies and apply them to a new contract

Limitations:
Can be extremely high risk
No reputation or expertise in the new market

Question 16

State four factors to take into account when choosing a strategy

Answer 16

Expected cost - product development and diversification likely to cost more than the other two

Risk aversion - the willingness of the owners/managers to take risk

Anticipated returns - business will conduct investment appraisal in order to consider potential reward for the strategy

Stakeholders - apart from financial returns business wil consider the impact of its strategy on stakeholders

Question 17

When might diversification be a sustainable approach

Answer 17

• when a business is large and has considerable economies of scale
• when a business has a strong brand image and trusted in various markets or there is the opportunity to merge or take over a business which it wishes to diversify into