Chapter 4 Introduction to business strategy Flashcards
1.1 What is strategy
Strategy is the direction and scope of an organisation over the long term, which achieves the advantage for the organisation through its configuration of resources within a changing environment, to meet the needs of the markets and fulfil stakeholder expectations. It considers the longer term, it considers the whole organisation, it considers the resources and external environment, it considers all stakeholders and looks how to gain a sustainable competitive advantage.
1.2 Levels of strategy
- Corporate strategy: strategies determined at main board level for the business as a whole
- Business strategies: strategies for strategic business units and individual markets
- Functional (operational strategies): strategies for the main functions within each SBU
2.1 Approaches to strategy
A strategic plan is a statement of long-term goals along with a definition of the strategies and policies which will ensure achievement of these goals. The main stages to a traditional approach to strategic planning as strategic analysis (current position), strategic choice (selection of strategic option), strategy implementation and review and control.
The full formal approach is external or internal analysis, corporate appraisal, mission and objectives, GAP, strategic choice, and strategy implementation.
3.1 External analysis
This looks at factors outside the business which can present opportunities or threats. The external environment can be analysed using a PESTEL analysis. A business needs to think about how static or dynamic its future environment is likely to be. Static environment are slow change, single product or market, simple technology, and safe environment. Dynamic environments are changes, diverse product or market, difficult environment, and dangers to stand still.
Historic performance in a static environment can be used to predict the future, this is poor guidance for a dynamic environment.
3.2 PESTLE analysis
- Political: potential issues are taxation policy, government spending and foreign trade regulations
- Economic: potential issues are economic growth, exchange and interest rates and inflation
- Social and demographic: potential issues are attitudes and fashions, population demographics and income distribution
- Technological: potential issues are new products, improved production methods and rate of obsolescence
- Legal: potential issues are industry regulations, competition legislation and employment law
- Ecological: potential issues are sustainability, pollution, and climate change
3.4 Porter’s five forces analysis
Five forces can be used to assess an industry in terms of long run profitability. These are threat of new entrants, bargaining power of suppliers, threat of substitutes, bargaining power of customers and competitive rivalry.
3.5 Competitor analysis
A competitor analysis is used to show the competitive rivalry in an industry. This identifies who the competitors are and the likeliness to react to the organisation’s strategies. The four types of competitor are (according to Kotler):
- Brand: similar size with similar products
- Industry: similar products but different markets or distribution methods
- Form: distinctly different products that satisfy the same need
- Generic: different products but compete for same disposable income
There are four reaction profiles which are laid back (no response), tiger (respond aggressively to all competitor moves), selective (reacts to some threats but not others) and stochastic (difficult to predict when or how they will react).
4.1 Internal analysis – resource audit
This looks at factors inside the business which comprises the business’s strengths and weaknesses.
A resource audit analyses the tangible and intangible resources available to the business. The 9Ms model identifies the resources the business has and what needs addressing to achieve CSFs. The 9Ms are men, machines, money, material, markets, make up, management, methods, and MIS.
4.2 Porter’s value chain analysis
Value chain analysis is used to analyse the sequences of business activities which add value to products. This is measured by the different between the cost of activities and sales revenue. Non-value adding activities can also be identified and reduced or eliminated.
4.3 Product life cycle
This analysis is the application of life cycle theory to a product or service. It is usually in the form of a diagram including the headings of development, introduction, growth, maturity, and decline. It includes two lines being sales and cash flow over time.
4.4 BCG matrix
This analyses the balance of a business’s product portfolio based on a combination of market growth and market share. Each product’s position has implications:
- Star: high market growth, high market share. The product is under constant threat from new entrants requiring the business to continue to build often resulting in a cash neutral position
- Question mark: low market share, high market growth. The business must decide whether to harvest or build by injecting further finance resulting in a negative cash flow
- Cash cow: high market share, low market growth. Reduced threat from new entrants, business hold their position or just harvest resulting in positive cash flow
- Dog: low market share, low market growth. Business must decide whether to divest or hold position in the short-term if modest positive cash flows are being made
5.1 Corporate appraisal – SWOT analysis
Issues identified from internal or external analysis can be combined using a SWOT technique, this is used to perform a corporate appraisal to evaluate the strategic position. Internal analyses are on strengths and weaknesses. External analysis is on opportunities and threats.
6.1 Stakeholder analysis
Strategies should be consistent with the organisations mission and objectives. To formulate objectives an organisation may need to analyse stakeholders, with stakeholder mapping. Mendelow’s power interest stakeholder matrix is used. Stakeholders have four types:
- Low level of interest and low power: minimal effort can be directed
- Low level of interest and high power: keep satisfied
- High level of interest and low power: keep informed
- High level of interest and high power: key players, need participation
7.1 Strategic choice
The business needs to choose how to compete (Porter’s generic strategies) and how to grow (Ansoff’s matrix).
Porter suggested a sustainable advantage is achieved by finding a position that competitors find hard to replicate. He argues organisations need to address if the strategy should be one of differentiation or cost leadership and should the scope be broad or narrow.
Cost leadership: achieving a lower cost base than rival allows the business to reduce prices. Can be achieved through economics of scale (large stores), seek cheaper sources of supply and reduced labour cost.
Differentiation: standing out from competitors due to product features or customer perception. Achieved through strong branding, product innovation, quality, and product performance.
Focus strategy: specialising on a defined market segment or segments. Identify a segment with similar needs, choose whether to adopt a differentiation or cost focus approach and develop the marketing mix to meet the needs of the segment.
7.2 Ansoff’s matrix
The matrix looks at growth by considering opportunities to sell more existing products/develop new products and building market share in existing/new markets.
- Market penetration: existing products with existing markets.
- Product development: new product with existing markets
- Market development: existing product with new market
- Diversification: new product in a new market
