Chapter 5 - Business Strategies

Question 1

Outline/Explain/Discuss steps in developing a strategy

Answer 1

• Environmental scanning of the business environments by application of SWOT analysis/PESTLE/Porter’s Five Forces model.
• Formulate strategies to meet objectives
  
  • Implement strategies using action plan
  • Evaluation of strategies/Compare the expected performance with the actual performance.

Question 2

Outline/Describe/Explain/Discuss the strategic management process

Answer 2

• Step1: Review the vision statement.
• Step2: Analyse/Re-examine mission statement.
• Step3: Conduct an analysis using models such as PESTLE/PORTER’S/SWOT.
• Step4: Formulate a strategy such as a defensive/retrenchment strategy.
• Step5: Implement a strategy, using a template such as an action plan.
• Step6: Control/Evaluate/Monitor the implemented strategy to identify gaps/deviations in implementation.
• Step7: Take corrective action to ensure goals/objectives are met

Question 3

Types of Business Strategies

Answer 3

1. Integration
2. Intensive
3. Diversification
4. Devensive

Question 4

Describe the intensive strategy

Answer 4

Market penetration

Market development

Product development

Question 5

Describe the integeration strategy

Answer 5

Forward

Backward

Horizontal

Question 6

Describe the diversification strategy

Answer 6

Concentric

Horizontal

Conglomerate

Question 7

Describe the defensive strategy

Answer 7

Retrenchment

Divestiture

Liquidation

Question 8

Describe forward vertical integration strategy

Answer 8

Description

The business merge with its distributers. i.e. House of Coffees entered into an agreement with certain hotel groups to replace their coffee shops with the brand name House of Coffees

(Cutting out the middle man)

A business is combined with its buyers

Takes control of its own marketing and distribution

• A business has complete control over manufacturing and selling its goods
• A business is better equipped to deal with shortages of supply
• Increased difficulty for a new business to enter the market as an existing business can ensure that it has sole access to the resource
• A business must perform functions it has never done before, like marketing and distribution
• A business may need to acquire new infrastructure to perform new functions

Question 9

Describe vertical backward integration

Answer 9

A business is combined with its suppliers

In doing so, a business ceases to be dependent on a supplier

i.e. An apple juice manufacturer acquired its own apple farm

Same as Forward Vertical Integration

Question 10

Describe horisonal integration

Answer 10

Description

Involves the incorporation of businesses in the same field. This strategy can reduce the threat of competition and acquire complementary or substitute goods

• Provides consumers with greater product selection
• Wider product selection draws in more consumers
• More consumers result in an increase in sales and profit
• Reduces the risk of competition cause by suppliers of similar goods (competitors), substitute goods and complementary goods
• Acquiring a business is expensive
• Can lead to the formation of monopolies
• Monopolies may result in consumers having less choice
• Monopolies are often associated with high prices
• Employees from the acquired business may lose their jobs

Question 11

Describe market penetration - intensive strategy

Answer 11

• Businesses use aggressive marketing campaigns, e.g. low prices, to
• attract competitors’ clients/attempt to persuade consumers that are already buying their products to continue supporting them.
• Increase the market share of existing products/Promote new products that have become well established.
• Reduce prices to increase sales.

Question 12

Discuss market development intensive strategy

Answer 12

• A process of exploring/finding/searching new markets for existing products.
• Businesses sell their existing products to new markets.

Example: Finding new markets in other towns and cities

Question 13

Discuss product development intensive strategy

Answer 13

• Businesses generate new ideas and develop a new product or service.
• The introduction of a new product or service into existing markets.
• Example: A cell phone manufacturer designs a new phone that can also be used to make internet phone calls.

Question 14

Describe concentric diversification strategy

Answer 14

• The business adds a new product or service that is related to the existing products and which will appeal to new consumers.
• Occurs when a business wants to increase its product range and markets.

Question 15

Describe horisontal diversification

Answer 15

• The business adds new products or services that are unrelated to existing products, but which may appeal to existing customers.
• Occurs when a business acquires or merges with a business that is at the same production stage, but may offer a different product

Question 16

Describe conglomerate diversification

Answer 16

• The business adds new products or services that are unrelated to existing products which may appeal to new groups of customers.

Conglomerate diversification means that a business grows into new products, services and markets

Question 17

Describe the retrenchment defensive strategy

Answer 17

• Terminating the employment contracts of employees for operational reasons.
• Decreasing the number of product lines/Closing certain departments may result in some workers becoming redundant.

Question 18

Discuss divestiture defensive strategy

Answer 18

• The business disposes/sells some assets/divisions that are no longer profitable/ productive.
• Unproductive assets are sold to pay off debts/reduce operational costs.

Question 19

Discuss liquidation defensive strategy

Answer 19

• All assets are sold to pay creditors due to a lack of capital/cash flow.
• Selling the entire business in order to pay all liabilities/close down the business

Question 20

Apply the following industrial analysis tool to analyse the challenges of the business environment:

o SWOT analysis

Answer 20

SWOT analysis

Strengths

It is positive and within the control of the business.

Weaknesses

It is negative but within the control of the business.

Opportunities

It is positive, and not within the control of the business.

Threats

It is negative, but not within the control of the business.

Question 21

Apply the following industrial analysis tools to analyse the challenges of the business environment:

o Porter’s Five Forces model

Answer 21

Threat of a new entrant

New businesses entering a market bring new competition to the market, and utilise scarce resources. New entrants are ta threat, and businesses should put barriers up to deter entry. A barriers such as low-cost price can make it difficult for new entrants to gain access to distribution channels

Competitive rivalry

Businesses use strategies such as cost strategies, differentiation strategies and defensive and offensive strategies to counteract these forces.

Threat of substitute products or services

This happens when competitors offer a different product with the same quality and performance at a lower price. The threat of substitution is strong, especially if the switching cost for the customer is low. Businesses must put barriers to prevent this.

Bargaining power of suppliers

This is when the supplier has the monopoly in the market. i.e. the paper industry in South Africa. The few suppliers can prescribe to the buyers what the smallest acceptable order to them will be as well as the price.

Power of buyers

This is when the buyer can bargain for a price in their favour. i.e. when a buyer buys a large portion of the supplier’s stock and the seller don’t want to lose the big customer

Question 22

Apply the following industrial analysis tool to analyse the challenges of the business environment:

PESTLE analysis

Answer 22

Political -Trade agreements that prevent imports

Econimical - High inflation/interest rates

• Social - Low income of customers
• Technology- Keeping up with the latest technology
• LegalPaying fines for non-compliance to Acts
• Environment - Harmfulness of products/processes to the customers and environment

Question 23

Outline/Explain/Recommend activities/steps in strategy evaluation

Answer 23

• Examine the underlying basis of a business strategy.
• Formulate strategies to meet objectives favourably.
• Implement strategies using action plans.
• Look forward and backwards into the implementation process.
• Compare the expected performance with the actual performance.
• Measure business performance in order to determine the reasons for deviations and analyse these reasons.
• Take corrective action so that deviations may be corrected.
• Set specific dates for control and follow up.
• Draw up a table of the advantages and disadvantages of a strategy.
• Decide on the desired outcome.
• Consider the impact of the strategic implementation in the internal and external environments of the business.

Question 24

Positives of the strategies

Answer 24

Effectiveness (positives) of each type of business strategy

Integration strategies

• Ensure supplies and business has more control over the final prices of products.
• Eliminate competitors.
• Increase the profitability by not making use of a supplier/distributor.

Intensive strategies

• Increased market share reduces the business’s vulnerability to actions of competitors.
• Control over prices may increase/improve.
• Increase in sales/income and profitability.
• Improved service delivery may positively impact/increase sales
• Decrease in price could influence customers to buy more products.

Diversification strategies

• Diversification is not risky because the business is already familiar with its existing product/customers.
• Sales would increase by adding the new/existing products to new/existing markets.
• The business will be highly competitive√ by adding the new/existing products it would increase the target market.
• The business’s present channels of distribution can be used to market the new/existing products to current/new customers.

Defensive strategies

• Decrease expenses of the business.
• Increase productivity by focusing on the activities that are profitable.
• Companies in financial difficulty may apply for business rescue to avoid liquidation.