Ch 7 Strategic Options and Choice

Question 1

What are the key decisions to make with regards to strategic analysis and choice?

Answer 1

1) Where to compete
2) how to compete
3) Which investment vehicle to use

Question 2

What are the typical model you could use for strategic options

Answer 2

Poters - generic strategies, look at competivie strategies
Ansoff - product / market matrix - directions for growth
BCG - growth / share matrix

Question 3

Discuss Porters Generic Strategy

Answer 3

• 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

Question 4

Outline each of Porters Generic Strategies

Answer 4

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

Question 5

Porters Generic Strategies - Cost Leadership . Discuss benefits and issues / care

Answer 5

• 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

Question 6

Porters Generic Strategies - Cost Leadership . Discuss how value chain analysis helps ?

Answer 6

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

Question 7

Porters Generic Strategies - Differentiation strategy. benefits

Answer 7

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

Question 8

Porters Generic Strategies - Differentiation strategy. How does value chain help

Answer 8

Helps
create superior products via activies 
- superior after sales service 
- augmenting / adding to the product
- packaging
- ensure innovation culture 
- brand

Question 9

Porters Generic Strategies - Focus strategy - Benefits and Requirements ?

Answer 9

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

Question 10

Porters Generic Strategies - Focus strategy. What does a good niche look like and where can it be done

Answer 10

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

Question 11

Limitations of generic strategies

Answer 11

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)

Question 12

Ansoff matrix used for analysing possible strategic direction for the organisation. Draw it

Answer 12

Draw image

Question 13

Ansoff matrix - Market Penetration. Outline Aim , how to and key notes

Answer 13

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

Question 14

Ansoff matrix - Market Development. Outline Aim , how to and key notes

Answer 14

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

Question 15

Ansoff matrix - Product Development - Aim / How / Key Ntoes

Answer 15

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

Question 16

Ansoff matrix - Diverisification . AIm , When to use and reasons

Answer 16

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

Question 17

Ansoff matrix - No need to choose one can do a number of choices. In any case what are its limitations

Answer 17

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

Question 18

Diversification can take two forms what are they

Answer 18

1) Related Diversification (concentric)

2) Unrelated diversification (conglometer)

Question 19

Related Diversification (concentric ) involves either growth into similar industries , forward into customer marketplace or backward into existing supply chain. What are the three type

Answer 19

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

Question 20

Related Diversification (concentric), vertical integration can ne backward (e.g taking over a supplier) or forward (customer takeover) What are they key considerations

Answer 20

Cost - cheaper in house or elsewhere
Quality - making in house can tailor to needs / use expertise and vice versa
Risk / Flexibility - outsourcing gives flexibility

Question 21

Related Diversification (concentric), vertical integration can ne backward (e.g taking over a supplier) or forward (customer takeover). What are the benefits

Answer 21

• 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

Question 22

Related Diversification (concentric), vertical integration can ne backward (e.g taking over a supplier) or forward (customer takeover). What are the costs

Answer 22

Increased op gearing 
increased fixed costs 
increased bus risk 
reduced flexibility to change partner etc
capital investment requirement 
dulled incentives 
differing managerial requirements

Question 23

Related Diversification (concentric), horizontal integration. what is it, and types and benefits of each type

Answer 23

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 !

Question 24

Unrelated Diversification (conglometer) What is it , what are benefits and issues

Answer 24

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

Question 25

BCG Matrix Draw it

Answer 25

Image draw

Question 26

BCG matrix. What are the steps, how to interpret relative market share and mareket growth rate

Answer 26

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%

Question 27

Using the BCG Matrix - what are the strategies

Answer 27

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

Question 28

Using the BCG Matrix - Cash Cows what strategy should you employ and considerations

Answer 28

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

Question 29

Using the BCG Matrix - Stars what strategy should you employ and considerations ?

Answer 29

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

Question 30

Using the BCG Matrix - Problem Children what strategy should you employ and considerations ?

Answer 30

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

Question 31

Using the BCG Matrix - Dogs what strategy should you employ and considerations ?

Answer 31

Strategy - Harvest / Divest

Considerations
Low MS in slow growth / declining market
No longer attractive may be dominated elsewhere
- MAY STILL BE PROFITABLE thoug h

Question 32

BCG recommenation for use of matrix and its limitation

Answer 32

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!

Question 33

Acquisitions refer to strategy to grow What are the benefitfs and issues

Answer 33

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

Question 34

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

Answer 34

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

Question 35

What are the options and considerations for international growth strategy

Answer 35

Options
Exporting strategy , overseas manufacturing , multinational , transnational

Considerations
exposure to risk / capital requirements / customer relationship / transport costs / ethical issues / cultural issues

Question 36

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 ?

Answer 36

1) Stakeholder Power
2) Information availability and reliability
3) historical experience
4) presentation of options - manner
5) other corporate experiences
6) Ftureexpecations

Question 37

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)

Answer 37

Suitability - fits strategic position
Feasibility - works in practise
Acceptability - risk / return in line with shareholder expectations ?
MUST FIT ALL THREE

Question 38

The basic approach to assessing viability (Johnson and Scholes) - Suitability - questions to ask ?

Answer 38

Strategic Fit ?
Will it cause issues elsewhere (e.g advantage of opps / build strenght / meet mission & objectives , fit other products

Question 39

The basic approach to assessing viability (Johnson and Scholes) - Feasibility - questions to ask ?

Answer 39

Can resources/ competencies be obtained ?
Can change be implemented ?
Other considerations
Raw mats / culural change / timescale / resistance / channel access / finance questions / IT reqs etc

Question 40

The basic approach to assessing viability (Johnson and Scholes) - Accessibility - questions to ask ?

Answer 40

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

Question 41

Tests of a winning strategy (evaluating )

Answer 41

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!)