8. Business Strategy Flashcards
What factors influence Business strategies?
Resources available
All business resources are finite. Limited resources force a business to choose which strategies to proceed
with, and which to drop or scale back.
Strengths of the business
If a business has proven capabilities in certain areas, it is often advisable to apply these strengths when developing future strategies. A long-term plan that takes a business away from a proven area of operation may require business skills and experience that it does not have. In addition, the expansion of the business may be best achieved if some underperforming areas (or non-core businesses) are sold off.
Competitive environment
Competitors’ actions are a major constraint on business strategy. Innovations by competitors may be difficult to copy or better. All businesses operate in a competitive environment to a greater or lesser degree. Competition makes firms to operate more efficient to stay afloat.
Objectives
Maximising returns to shareholders might not be the central objective of the business if it aims for the triple bottom line approach to corporate objectives. If a business has a clear social responsibility objective, it will pursue different strategies from those of a business that is focusing solely on shareholder returns.
Three stages of strategic management
1. Strategic analysis: assessing the current position of the company in relation to its market, competitors and the external environment.
2. Strategic choice: taking important long-term decisions that will push the business towards the objectives set.
3. Strategic implementation: allocating sufficient resources to put decisions into effect, and evaluating success.
Strategic analysis
Strategic analysis is about looking in detail at a business’s current position, what is happening to it now and what might happen to it in the future. Then managers can make sure that their long-term plans or strategy for the business fit in with this external analysis.
Strategic analysis tries to find answers to three key questions:
1. Where is the business now?
2. How might the business be affected by what is happening, or likely to happen?
3. How could the business respond to these likely changes?
Strategic choice
After potential strategies have been identified through strategic analysis, strategic choice is the next stage. Strategic choice analyses the benefits and limitations of different strategic options and decides between them. Successful strategic choices have to be challenging enough to gain competitive advantage. They must also be achievable and affordable within the resources available. There are techniques available to assist managers in making strategic choices, but judgement, experience and skill are also very important.
Strategic implementation
Without successful strategic implementation, there can be no effective change within an organisation. Implementing a major strategic change is a very important cross-functional management task. It involves ensuring that all the following factors are in place:
* an appropriate organisational structure to deal with the change
* adequate resources to make the change happen
* well-motivated staff who want the change to happen successfully
* leadership style and organisational culture that allow change to be implemented with wide-ranging
support
* control and review systems to monitor the firm’s progress towards the desired final objectives.
Strategy and tactics
Strategic management is the highest level of managerial activity. It is undertaken by, or at least closely supervised by, the chief executive officer and approved by the board of directors.
Tactics, on the other hand, are concerned with making smaller scale decisions aimed at reaching more limited and measurable goals, which themselves are part of the longer-term strategic aim. It is important to be clear about the distinction between tactics and strategies
Difference between strategic decisions and tactical decisions
Strategic decisions are long term.
Tactical decisions are short to medium term.
The decision is difficult to reverse once made as departments will have committed resources to it.
The decision is reversible, but there may still be costs involved.
It is taken by directors and/or senior managers.
It is taken by less senior managers and subordinates with delegated authority.
It is cross-functional and will involve all major departments of the business.
The impact of tactical decisions is often only on one department.
Blue ocean strategy
The basis of this approach to developing business strategy is to stop competing and start creating. This means not focusing strategies on existing markets with several or many competitors. Instead, it means finding and developing uncontested markets. This involves being creative and original with strategies that other businesses have not yet adopted. These uncontested market spaces are newly created markets or market segments that have no close competitors.
The key to exceptional business success, the theorists suggest, is to redefine the terms of competition and move into the blue ocean, where you have the water to yourself. The goal of these strategies is not to beat the competition, but to make the competition irrelevant.
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Raise: What factors, such as quality or customer service, could be raised above the industry’s
standard? -
Reduce: What factors, such as costly competitive advertising, were a result of competing against
other businesses, and which of these can be reduced? -
Eliminate: Which factors that the business has used to compete against rivals could be eliminated
altogether? - Create : Which factors should be created that the industry has never offered before?
Differences between red ocean and blue ocean strategies
Red - Compete in existing markets
Blue - Create uncontested markets to enter
Red - ‘Out-compete’ the competition
Blue - Make the competition irrelevant
Red - Exploit existing demand
Blue - Create and exploit new demand
Red - High value to customer = high costs to business
Blue - High value to customer but low cost to business
Red - Product differentiation or low cost
Blue - Product differentiation and low cost
Scenario Planning
* Benefits
- It forces managers to consider the main risks and uncertainties that affect their business.
- Managers have to develop a range of strategies to deal with different scenarios
- It makes managers adopt a flexible approach as different scenarios will require different strategies.
Scenario Planning
* Limitations
- Managers try to consider too many uncertainties and become confused by the range of possible scenarios
- In contrast, some managers might only focus on one possible future scenario and be unprepared for others.
- It will be less effective if only short-term risks are considered. Looking far into the future can lead to more creative strategies.
SWOT analysis
1. Strengths: These are the internal factors about a business that are its current real advantages. They could be used as a basis for developing a competitive advantage.
experienced management, product patents, loyal workforce
2. Weaknesses: These are the internal business factors about a business that are viewed as disadvantages.
a poorly trained workforce, limited production capacity and ageing equipment
3. Opportunities: These are the potential areas for expansion of the business and future profits. export markets expanding faster than domestic
markets, and lower interest rates increasing consumer demand.
4. Threats: analyses the business and economic environment, market conditions and the strength of competitors.
New competitors entering the market, globalisation driving down prices
Evaluation of SWOT analysis
SWOT helps managers assess the most likely successful future strategies and the constraints on them. A business may stand a good chance of developing a competitive advantage by identifying a good match between its strengths and potential opportunities. In many cases, a business may need to overcome a weakness in order to take advantage of a potential opportunity.
Subjectivity is often a limitation of a SWOT analysis. Different managers would not necessarily agree on their assessment of the company they work for. It is not a quantitative form of assessment so the cost of correcting a weakness cannot be compared with the potential profit from pursuing an opportunity. SWOT should be used as a management guide for future strategies, not as a specific guide for future action. Part of the value of the process of SWOT analysis is the greater understanding that senior managers gain about their business from the focus that the SWOT analysis provides.
PEST analysis
It focuses on analysing the macro environment in which a business operates. The macro environment means the wide ranging and major factors that could influence the future strategies of a business. The four key areas covered by it are clearly external to the business and beyond its control. They are considered as being either opportunities or threats. PEST is complementary to SWOT, not an alternative.
P = political (and legal) factors;
E = economic factors;
S = social factors;
T = technological factors.
Evaluation of PEST analysis
Any significant new business strategy should be preceded by a detailed analysis of the wider environment in which the strategy has to operate and be successful. The use of PEST analysis formalises this process. The results of the analysis should be an important part of developing strategies for the future. Once completed, PEST analysis does not just stop. It may need to be constantly updated and reviewed, especially in a rapidly changing wider environment. For multinational businesses, or for a business considering foreign expansion for the first time, it will be important to undertake PEST analysis for each country in which it operates
Porter’s five forces analysis
1. Barries to entry - the ease with which other firms can join the industry and compete with existing businesses.
This threat of entry is greatest when:
* economies of scale are low in the industry
* the technology needed to enter the industry is relatively cheap
* distribution channels are easy to access (e.g. retail shops are not owned by existing manufacturers in the industry)
* there are no legal or patent restrictions on entry
2. The power of buyers - the power that customers have over the producing industry.
Buyers are powerful when:
* there are many undifferentiated small supplying firms (e.g. many small farmers supplying milk or chickens to supermarkets)
* the cost of switching suppliers is low
* buyers can realistically and easily buy from other suppliers.
3. The power of supplier
Powerful supplier are:
* the cost of switching is high (e.g. from Microsoft computers to Macs)
* the brand being sold is very powerful and well-known (e.g. Cadbury’s chocolate or Nike shoes)
* suppliers could realistically threaten to open their own forward-integration operations (e.g. coffee suppliers open their own cafés)
4. The threat of substitutes - In Porter’s model, the idea of substitute products does not mean alternatives in the same industry, such as Toyota for Honda cars. It refers to substitute products in other industries. For instance, the demand for aluminium for cans is partly affected by the price of glass for bottling and the price of plastic for containers. These are substitutes for aluminium, but they are not rivals in the same industry.
Threats of substitution will exist when:
* New technology makes other options available, such as satellite TV instead of traditional antenna
reception.
* Price competition forces customers to consider alternatives. For example, lower bus fares might
make some travellers switch from rail transport.
* Any significant new product leads to a switch in consumer spending. For example, increasing
spending on mobile (cell) phones by young people reduces the available cash they have to spend on
clothes
5. Competitive rivalry - this is the key part of this analysis. It sums up the most important factors that determine the level of competition or rivalry in an industry. It is based on the other four forces.
Competitive rivalry is most likely to be high where:
* it is cheap and easy for new firms to enter an industry
* there is a threat from substitute products
* suppliers have much power
* buyers have much power.
How to apply Porter’s five force analysis
- It helps businesses decide whether to enter an industry or not. It provides insight into the potential profitability of markets. Is it better to enter a highly competitive market or not?
- By analysing the existing markets, decisions may be taken regarding:
1. whether to stay in these markets in future if they are becoming more competitive
2. how to reduce competitive rivalry in these markets and increase potential profitability. - With the knowledge gained of the competitive forces, businesses can develop strategies that might improve their own competitive position
Evaluation of the five forces model
The benefit of Porter’s model is that it enables managers to think about the current competitive structure of their industry in a logical way. It is usually regarded as a good starting point for the development of business strategy.
However, it is sometimes criticised because:
* It is static analysis that examines an industry at just one moment in time. Many industries are changing very rapidly due to globalisation and technological changes.
* The model can become very complex when trying to use it to analyse many modern industries with joint ventures, multiple product groups and different market segments within the same industry. They will each have their own competitive forces.
Developing core competencies
A business might be particularly good at a certain activity and it might have competence in this activity. However, this does not necessarily make it a core competence if it is not exceptional or if it is easy to copy. A computer assembly business might be very efficient and produce computers at low cost, but if it depends on easily available and cheap bought-in components from suppliers, this is not a core competence. It does not make the business very different from many other computer assembly firms.
Developing a core competence, according to Prahalad and Hamel, depends on integrating multiple technologies and product skills. Some of these may already exist in the business. It does not necessarily mean spending huge amounts on R&D, but patented production processes, such as Pilkington’s float glass
process, may give a core competence. If a management team can effectively bring together designers, production specialists and IT experts into a team to develop new and different competencies, then these may become differentiated and core competencies. Two excellent business examples are:
* the development of Philips’s expertise in optical media
* Sony’s ability to miniaturise electronic components, which led to many core products.
* A desserts producing company developing a new type of souce which can be used to make new types of end products with unique flavour
The Ansoff matrix
The Ansoff matrix shows the two main variables in a strategic marketing decision are:
* the market in which the business is going to operate
* the product(s) it plans to sell.
In terms of the market, managers have two options:
* to remain in the existing market
* to enter new ones.
In terms of the product, the two options are:
* selling existing products
* developing new ones.
Market penetration
Samsung has reduced the European prices of its range of 4k TVs by up to €1 200. This was in response to price cuts by other manufacturers, but Samsung’s reductions were largely an attempt to increase market share. Market penetration is the least risky of all four possible strategies in the Ansoff matrix, because there are fewer unknowns – the market and product parameters both remain the same.
Product development
The launch of Diet Pepsi took an existing product, developed it into a slightly different version and sold it in the soft drinks market where Pepsi was already available. Product development often involves innovation
Market development
Market development could include exporting goods to overseas markets or selling to a new market segment.
Diversification
Tata Industries in India is another good example of a very diversified business, manufacturing a huge range of products, from steel and cars to tea bags. Related diversification (e.g. backward or forward vertical integration in the same industry) can be less risky than unrelated diversification, which takes the business into a completely different industry. As the diversification strategy involves new challenges in both markets and products, it is the riskiest of the four strategies. It may also be a strategy that is outside the core competencies of the firm. However, diversification may be a possible option if the high risk is balanced out by the chance of high profits. Another advantage of diversification is the potential to gain a foothold in an expanding industry.
Evaluation of the Ansoff matrix
By identifying the different strategic areas for business expansion, the matrix allows to analyse the degree of risk associated with each area. Managers can then apply decision-making techniques to assess the costs, potential gains and risks associated with all options.
It only considers two main factors in the strategic analysis of a business’s options. It is important to also consider SWOT and PEST analysis in order to give a more complete picture. Recommendations based purely on the Ansoff matrix would lack important environmental evidence.
The matrix does not suggest detailed marketing options. If a market development strategy is used by a business, the matrix does not indicate in which market and with which of the existing products. Further research and analysis will be needed to supply answers to these questions
Force-field analysis
The technique of force-field analysis, first developed by Kurt Lewin, involves looking at all of the forces for and against a decision. It weighs up the potential advantages and disadvantages of a decision before a choice is made. The main purpose of the technique is to give managers an insight that will allow them to strengthen the forces supporting a decision, and reduce the forces that oppose it.
Decision tree
represents four main features of a business decision
* all of the options open to a manager
* the different possible outcomes resulting from these options
* the chances of these outcomes occurring
* the economic returns from these outcomes.
Constructing decision tree
- It is constructed from left to right.
- Each branch of the tree represents an option together with a range of consequences or outcomes and the chances of these occurring.
- Decision points (decision nodes) are denoted by a square.
- A circle (chance node) shows that a range of outcomes may result from a decision.
- Probabilities are shown alongside each of these possible outcomes. These probabilities are numerical values that measure the chance of an outcome occurring.
- The economic returns are the expected financial gains or losses of a particular outcome.
Decision tree
* Advantages
- They force the decision-maker to consider all of the options and variables related to a decision.
- They put these on an easy-to-follow diagram, which allows for numerical considerations of risk and economic returns to be included.
- The approach encourages logical thinking and discussion among managers.
Decision tree
* Disadvantage
- Accuracy of the data used. Estimated economic returns may be quite accurate when they concern projects where experience has been gained from similar decisions. In other cases, they may be based on forecasts of market demand or estimates of the most likely financial outcome. The possible inaccuracy of this data makes the results of decision-tree analysis no more than a useful guide for managers.
- Probabilities of events occurring may be based on past data, but circumstances may change. For example, what was a successful launch of a new store last year may not be repeated in another location if the competition has opened a shop there first.
- Decision trees aid the decision-making process, but they cannot replace either the consideration of
risk or the impact of non-numerical, qualitative factors on a decision. The latter could include the impact on the environment, the attitude of the workforce or the approach to risk taken by the managers and owners of the business. There may be a preference for fairly certain but low returns, rather than taking risks to earn much greater rewards. - The expected values are average returns, assuming that the outcomes occur more than once. With any single, one-off decision, the average will not, in fact, be the final result. Decision trees allow a quantitative consideration of future risks to be made but they do not eliminate those risks.
