Ch 7 Strategic Options and Choice Flashcards
What are the key decisions to make with regards to strategic analysis and choice?
1) Where to compete
2) how to compete
3) Which investment vehicle to use
What are the typical model you could use for strategic options
Poters - generic strategies, look at competivie strategies
Ansoff - product / market matrix - directions for growth
BCG - growth / share matrix
Discuss Porters Generic Strategy
- Suggested COMPETIVE ADVANTAGE comes from selecting a strategy that best suits the environment then doing value adding activities to support it.
- Strategy could be Broad in Scope with cost leadership or differentiation competive stance
- Or narrow in scopre with a focused competitive stance
Outline each of Porters Generic Strategies
Cost Leadership - Be lowest cost producer , but not inferior product (comparable but made more efficiciently)
Differentiation - percpetation that product is superior - so perhaps charge a premium price
Focus - eithe cost leadership / differentiation in a narrow profile (niching).
- —- Two questions need answering (porter)
1) Shout strategy be diffe or cost / 2) narro or broad scope
Porters Generic Strategies - Cost Leadership . Discuss benefits and issues / care
- Be lowest cost producer , but not inferior product (comparable but made more efficiciently)
Benefits
- Higher profits if sold at same price
- build defence against price wars
- Increase barriers
- Access new market segments
- Price penetration strategies
Issues
- Care need to avoid price war
- care not to suggest inferior product
Porters Generic Strategies - Cost Leadership . Discuss how value chain analysis helps ?
Key to identifying cost savings
- reduce cost copying not reinventing, cheaper mats, labour etc
- Achieve EoS
- high volume purchasing
- location in cost saving areas
- Learning and experience curve benefits
Porters Generic Strategies - Differentiation strategy. benefits
Based on persuading customers they have a superior product via featuree / brand dev / or processes etc and as such justiry charging a higher price
- Premium
- demand becomes less elastic
- Life cycle may extend
Porters Generic Strategies - Differentiation strategy. How does value chain help
Helps create superior products via activies - superior after sales service - augmenting / adding to the product - packaging - ensure innovation culture - brand
Porters Generic Strategies - Focus strategy - Benefits and Requirements ?
Benefits
Cheaper entry / less competition / alllows specialisation / smaller investmetn in marketing
Requirements
ID segment properly / ensure segment in large enough id customer needs / good competitor analysis
Porters Generic Strategies - Focus strategy. What does a good niche look like and where can it be done
Can be done - location type of user , product line , quality , price, size of customer, features etc
A good niche had;
- large enough / small comp interest / growth potential / company must have strategic capability
Limitations of generic strategies
View of avoid getting stuck in the middle too limited many companies have hybrids!
Cost leadership may not bring comp advantage -create price war
Differentiation may not always command high price might get higher volume (effecively cost leader objective)
Ansoff matrix used for analysing possible strategic direction for the organisation. Draw it
Draw image
Ansoff matrix - Market Penetration. Outline Aim , how to and key notes
Aim - increase ms with existing product and existing market
How
1) stimute usage with existing customers (ads promotion etc)
2) non users via pricing / promotion, process redesign
Notes / when
- Market is growing / M is not saturated / strong marketing team / competior leaving or weak / strong brand presence
Ansoff matrix - Market Development. Outline Aim , how to and key notes
aim - existing product to new market
How ? look at geo areas / demographic / distribution channels
Notes
May need new competencies (e.g language) / product change might be needed / if company is set up for one product costly to switch / marketing ability needed
Ansoff matrix - Product Development - Aim / How / Key Ntoes
Aim - dev new products for existing markets
How - dev product big nature / different quality versions
Key - Need to be innovative and good and R&D
Ansoff matrix - Diverisification . AIm , When to use and reasons
Aim new product new markets
When
market is saturated / or product has ended its life cycle
Reasons For / when
- Objs no longer achievable
- Excess cash and strong shareholders
- can brand stretch
- if diversifying guarantees bigger returns and lower risk
- synergies (e.g R&D)
Reason against
new bus and strategy may have teething problems - risk reputation
Ansoff matrix - No need to choose one can do a number of choices. In any case what are its limitations
1) Too simple - doesnt look at ext environment (need Pest / Porters etc)
2) Focus on Growht - No all want to grow (some defend /survive etc)
3) Decisions are subjective - bad strategy could still fail
Diversification can take two forms what are they
1) Related Diversification (concentric)
2) Unrelated diversification (conglometer)
Related Diversification (concentric ) involves either growth into similar industries , forward into customer marketplace or backward into existing supply chain. What are the three type
1) Vertical backward - operating in market where already obtain resources e.g supoermarket produces own goods
2) Vertical Forward - move into customer base e.g shampoo buys barber franchise
3) Horizontal - enter competing / complementary markets
Related Diversification (concentric), vertical integration can ne backward (e.g taking over a supplier) or forward (customer takeover) What are they key considerations
Cost - cheaper in house or elsewhere
Quality - making in house can tailor to needs / use expertise and vice versa
Risk / Flexibility - outsourcing gives flexibility
Related Diversification (concentric), vertical integration can ne backward (e.g taking over a supplier) or forward (customer takeover). What are the benefits
- Economics of combined ops
- eco of combined control
- eco of avoid market (negotation/ package / ads)
- tech advantage / IP protect
- assured supply and demand
- ability to differentiate
Related Diversification (concentric), vertical integration can ne backward (e.g taking over a supplier) or forward (customer takeover). What are the costs
Increased op gearing increased fixed costs increased bus risk reduced flexibility to change partner etc capital investment requirement dulled incentives differing managerial requirements
Related Diversification (concentric), horizontal integration. what is it, and types and benefits of each type
What - Dev of activities that are competitive / complementary
a) competitive - e.g take can benefit e.g monopoly
b) Complimentary - full range offered / synergies
c) By Products - windfall potential !
Unrelated Diversification (conglometer) What is it , what are benefits and issues
What - New market or industry
Benefits - Reduce overall risk , synergies , when no tother opps available
Issues - More risk , may be little to gain for shareholders , mgmt may lose focus
BCG Matrix Draw it
Image draw
BCG matrix. What are the steps, how to interpret relative market share and mareket growth rate
Steps
- Divide co in SBU’s
- Allocate into Matrix
- Assess each and compare
- develop strategic options for each
Relative Market Share
Ratio of MS to that of target rival
Dividing line is set a 1 High MS = market leader so figure of 4 suggeest SBU is 4x bigger than greatest rival 0.1 SBU is 10% of sector leader
Relative Growth rate
- Represents growth rate - high growthr rate suggest better competive environment
- Dividing line set @ 10%
Using the BCG Matrix - what are the strategies
Hold - keep in quadrant
Build =- increase investment in product to boost MS
Harvest - reduce inv in order to max cash return
Divest - disposal / closure to release cash tied up
Using the BCG Matrix - Cash Cows what strategy should you employ and considerations
Strategy - Hold or Harvest
Considerations
- SBUs have high MS in low growth market (may have reached maturity stage)
- Strong profit and cash generating
- Low growth market (may not be attractive for new entrants) or investment (therefore cap reqs are low a defense strategies cheap)
- Profits can be used elsewhere
Using the BCG Matrix - Stars what strategy should you employ and considerations ?
Strategy - Hold or Build
consideration
High MS in high growth market
Leader so attractive LT prospects (may become cash cow)
- not cash generating as competive market may require ongoing investment / ads to compete
- Build strategy typical
Using the BCG Matrix - Problem Children what strategy should you employ and considerations ?
Strategy - Build / Divest
Low MS in attractive market
- may be at growth / intro stage in life cycle
- opportunity for development
- however low MS - risk of failure
- Double down or out decision required
- Risky - time / cash may not succeed
Using the BCG Matrix - Dogs what strategy should you employ and considerations ?
Strategy - Harvest / Divest
Considerations
Low MS in slow growth / declining market
No longer attractive may be dominated elsewhere
- MAY STILL BE PROFITABLE thoug h
BCG recommenation for use of matrix and its limitation
recommendation (beige)
is portfolio in balance (need cash cows)
- less attractive producst should divest
Limitations
Simple as only two variables
Cash cows do not always generate cash
failure to consider value creation (loss leaders / synergies etc)
Over emphasis on leader - can be small and profitable too!
Acquisitions refer to strategy to grow What are the benefitfs and issues
Benefits
access to resource/ less reaction from competitors / help restructure ops / avoid barriers / block competitor / P/E ratio / asset valuation
Issues
Risk / lower ROCE / Differen in mgr salaries / cultural mismatch / might be more expensive
Joint Methods for expansion include JV/ alliances / licence / outsourcing. Where key considerations include sharing of cost, risk / benefits, ownership of resources, control> Focus on Alliance. 1) What is it 2) Steps 3) 7 Characteristics of an Alliance
1) What is it?
Corporarate business activity
2) Steps
Allocate ownwership , responsibility, fin risk and rewards to each member.
Preserve seperate entity / autonomy
3) 7 Characteristics of a well structured Alliance
Synergy (more strength)
Positioning opp - might gain leadership position
Limited resource availability - strenght compliment each other
Coop Spirit - both must WANT it
Clarity of Purpose - result and milestones must be clear
Win- win - Both must benefit
What are the options and considerations for international growth strategy
Options
Exporting strategy , overseas manufacturing , multinational , transnational
Considerations
exposure to risk / capital requirements / customer relationship / transport costs / ethical issues / cultural issues
When evaluating strategies need to have strategic fit with environement internal / external so ability to assess viability lies with reliability of the position audit. What is selection down to ?
1) Stakeholder Power
2) Information availability and reliability
3) historical experience
4) presentation of options - manner
5) other corporate experiences
6) Ftureexpecations
When evaluating strategies need to have strategic fit with environement internal / external so ability to assess viability lies with reliability of the position audit. What is the basic approach to assessing viability (Johnson and Scholes)
Suitability - fits strategic position
Feasibility - works in practise
Acceptability - risk / return in line with shareholder expectations ?
MUST FIT ALL THREE
The basic approach to assessing viability (Johnson and Scholes) - Suitability - questions to ask ?
Strategic Fit ?
Will it cause issues elsewhere (e.g advantage of opps / build strenght / meet mission & objectives , fit other products
The basic approach to assessing viability (Johnson and Scholes) - Feasibility - questions to ask ?
Can resources/ competencies be obtained ?
Can change be implemented ?
Other considerations
Raw mats / culural change / timescale / resistance / channel access / finance questions / IT reqs etc
The basic approach to assessing viability (Johnson and Scholes) - Accessibility - questions to ask ?
Need to be accepted by shareholder in terms of risk and return
Consideations
Staff / Owner requirements (may be non fin) / finance requirements / customer reqs/ gov reqs
USE NPV and REAL OPTIONS for STRATEGIC NPV
Tests of a winning strategy (evaluating )
1) Comp Advantage - what is it ? How long will it last
2) Does the performance measurement system show predictated improvement ? (how long will it last!)
