Ch.7 - Strategic options

Question 1

What is corporate appraisal?

Answer 1

• evaluating strategic position of the organisation

Question 2

How can you perform corporate appraisal?

Answer 2

• using SWOT analysis (strengths, weaknesses, opportunities, threats)
• using gap analysis (the comparison between the entity’s ultimate objective and the expected performance)

Question 3

How can you assess competitive positioning of the firm?

Answer 3

• using Porter’s generic strategies

Question 4

What are Porter’s generic strategies?

Answer 4

1. cost leadership
2. differentiation
3. focus

Question 5

What is cost leadership?

Answer 5

– obtained through economies of scale, cheaper sources of supply, reduced labour cost

o Benefits – higher profits, remains profitable in a price war, create entry barriers
o Risks – only room for one cost leader, cost advantage may be lost due to inflation, movements in exchange rates…, customer may prefer to pay extra for better product

Question 6

What is differentiation?

Answer 6

– obtained through strong branding, product innovation, quality, product performance

o Benefits – higher margins, fewer perceived substitutes and brand loyalty, demand is less price sensitive (inelastic)
o Risks – cheap copies, out-differentiated, customers unwilling to pay extra, differentiating factors no longer valued by customers (changes in fashion)

Question 7

What is focus strategy?

Answer 7

– specialising on clearly defined market segment(s) and choosing whether to adopt a differentiation of cost focus approach

o Benefits – smaller investment is required, less competition, entry is cheaper and easier
o Risks – is segment is too small, may be difficult to achieve sufficient sales, if segment is too large, then large players will become interested

Question 8

How can you analyse potential growth strategies of the organisation?

Answer 8

• using Ansoff’s matrix between products (new and existing and markets (new and existing) (market penetration, product development, market development, diversification)
• using Lynch’ expansion matrix between internal development (home or abroad) and external development/expansion (home or abroad)

Question 9

What are types of diversification?

Answer 9

1. related
   a) vertical
   b) horizontal
2. unrelated

Question 10

What is related diversification?

Answer 10

– integrating activities in the supply chain (vertical) or leveraging technologies or existing competencies (horizontal)

1. Vertical – company becomes its own supplier (backward) or distributor (forward)
   - Benefits – combined operations, internal control and co-ordination, economies of avoiding the market (negotiation, packaging, advertising), guaranteed demand/supply
   - Risks – increased proportion of fixed costs, reduced flexibility to change partners, capital investment needs, differing managerial requirements (skill transfer)
2. Horizontal – utilising existing competencies by entering into complementary markets (Google and YouTube) or competing markets (Honda motorcycles and cars)

Question 11

What is unrelated diversification?

Answer 11

– no common thread, possible to achieve synergies through management skills and brand name

  - Benefits – risk spreading, can enter more attractive markets, use surplus cash, utilise brand image, utilise central resources (e.g. HR)
  - Risks – lack of management experience in new products/markets, failure could damage brand, often bad for shareholders as there is lack of synergies