Chapter 6 Alternative Strategies

Question 1

outline of ansoff growth matrix

Answer 1

+ there should be a link between the current products and markets and its future market and products and markets so that direction in which the entity is moving can be realized
+ Strategic direction of a company can move into new market for its products or to move into new products.

+ growth vector matrix or product mission matrix has four strategies
1. Market penetration Strategy
2. Market development Strategy
3. Product development Strategy
4. Diversification strategy

Question 2

explain Market penetration strategy

Answer 2

• selling more of its current products in its existing markets
• this strategy is sensible choice when the market growth is fast and companies can take advantage of rising sales demand
• it is more difficult to implement when the market has reached maturity or growing slowly
• a low risk strategy for growth because unless market is growing fast it should require the least amount of new investment.

Question 3

what are ways in which market penetration strategy can be implemented?

Answer 3

1. persuade the existing customers to use more of the products or service, increase total market sales demand
2. Persuade individuals who have not bought the product in the past to start buying and using the product. include advertising or special promotional offers
3. Persuade individuals to switch from buying the products of competitors. strategy has the obvious risk, competitors will retaliate with their own marketing initiatives to win customers.

Question 4

risks with market penetration strategy
strategy.

Answer 4

If the company fails to increase sales, its business will have no strategic direction, and will suffer from ‘strategic drift’.

A strategic choice of ‘doing nothing new’ is a high-risk choice, because competitors are likely to be much more innovative and competitive.

The strategies selected by major competitors might be a threat, particularly if there is a ‘war’ to win customers from each other.

Question 5

what is market development strategy and in what ways it can be pursued?

Answer 5

Market development involves opening up new markets for existing products. Kotler suggested that there are two ways of pursuing this strategy:

1. The entity can start to sell its products in new geographical markets (through regional, national or international expansion).
2. The entity can try to attract customers in new market segments, by offering slightly differentiated versions of its existing products, or by making them available through different distribution channels

Question 6

what is a product development strategy and what are the reasons that might compel a company to adopt this strategy?

Answer 6

the product development strategy is producing new products for existing markets.

there are several reasons for the company to adopt the product development strategy.

1. company has a strong brand name and can leverage that name to introduce new products
2. company has a strong R&D or product design dept
3. respond to the competitor’s strategic move to gain market with its new product.
4. Customer needs are changing.
5. company has to respond to the new technological developments
6. market has growth potential if new product is introduced.

Question 7

what are the disadvantages of product development strategy?

Answer 7

1. developing new products can be expensive.
2. a large proportion of new products are unsuccessful.

Question 8

explain diversification strategy

Answer 8

Diversification is a strategy of selling new products in new markets.

A distinction can be made between:
concentric diversification
conglomerate diversification

Question 9

Concentric diversification

Answer 9

the entity’s existing technological know-how and experience in a related but different product-market area.

quotes examples
dyson making washing machines
cross marketing (kingfishcher beer/airline)
charcoal starting women lineup

some concentric diversification has lower amount of business risk than others.

Question 10

what is conglomerate diversification

Answer 10

The aim of conglomerate diversification is to build a portfolio of different businesses. The reasoning behind this strategy might be as follows.

1. Diversification reduces risk.
2. Diversification will save costs and generate ‘synergy’.
3. An entrepreneurial management team

Question 11

what is the organic growth model and what are the advantages and disadvantages of the organic growth model?

Answer 11

the entity might grow its business with its own resources seeking to increase the sales and profits each year

advantages
1. control over rate of growth
2. able to focus on its core competencies
3. it can buy the labour it needs by recruiting new staff

disadvantages
1. limit to the rate of growth/ rival firms
2. increasing current capacity causes lead time hence customer demand may not be met
3. if diversification org will have to learn new skills
4. with internal growth entity needs to change its organization and management structures.

Question 12

outline of Greiner’s growth model

Answer 12

entity that grows in size goes through a series of changes as it gets bigger each change occurs in response to a ‘crisis’,

there are five phases in the life of an entity

Phase 1: Period of growth through creativity
Phase 2: Period of growth through the direction
Phase 3: Period of growth through delegation
Phase 4: Period of growth through coordination
Phase 5: Period of growth through collaboration

Question 13

explain the phase 1 of Greiner’s growth model.

Answer 13

Phase 1: Period of growth through creativity

The early years of a successful business entity are a period of creativity and innovation. The entity is probably managed in an entrepreneurial way, and it is producing new products that appeal to customers and developing new markets.

Over time, production becomes more organised. As the entity grows, the entrepreneurial method of management
and the existing organisation structure both become inefficient.
The organisation needs organisation and planning and control systems.

There is a crisis of leadership. Management must become more ‘professional’. The entity, therefore, introduces professional management, and it enters its next phase of growth.

Question 14

phase 2 of greiner’s growth model

Answer 14

phase 2: period of growth through direction.

there is a hierarchical management structure and control systems such as accounting systems, inventory control etc

problem
in hierarchical management structure is inefficient because top management has close control and does not understand the actual operations and local managers know much more about how the business in their area functions

There is a crisis of autonomy. The ‘tensions’ between senior management and local management grow. Until local managers are given more authority to make decisions for themselves, the entity will be managed inefficiently from the top

Question 15

explain phase 3 of greiner’s growth model

Answer 15

Phase 3: Period of growth through delegation

-more authority is delegated to local managers.
-organized in divisions
-central management receives reports from the division and division managers takes most of the decisions for the division
-central management concentrates on strategy and business expansion.

top management realize that they are losing their control and authority because local managers are becoming too powerful and unaccountable hence crisis of control occurs

so management change structure to avoid losing control.

Question 16

explain phase 4 of Greiner’s growth model

Answer 16

Phase 4: Period of growth through co-ordination.

sophisticated reporting systems enable the top management to monitor the local managers although the local managers have delegated authority to make decisions

the focus is now on

there is a coordination of activities of all different local operating divisions

consolidation of business

however, as the entity grows the reporting systems starts creating the bureaucratic culture This leads to a crisis of red tape –
with too much form-filling, report-writing and bureaucracy.

Question 17

explain phase 5 of Greiner’s growth model

Answer 17

Phase 5: Period of growth through collaboration.

To overcome the problems of red tape the head office management and local managers find ways to collaborate more constructively

more emphasis on team work and problem solving and less emphasis on formal reporting systems accountability. Participation in decision-making by more individuals is encouraged.

Question 18

what is integration and its types?

Answer 18

Integration is a term that means extending a business.
There are two main types of integration:
1. horizontal integration
2. vertical integration.

Horizontal integration.
With horizontal integration, an entity extends its business by obtaining a larger share
of its existing product markets. Typically, an entity might acquire one or more of its competitors.

Vertical integration.
With vertical integration, an entity extends its business by acquiring (or merging with)
another entity at a different stage in the supply chain. A strategy of vertical integration is usually a form of concentric diversification.

Vertical integration might be
1. Forward Integration
2. Backward integration

Question 19

Explain forward integration

Answer 19

With forward vertical integration, also called ‘downstream’ integration, an entity enters the product markets of its customers.
For example:
1. a manufacturer of tyres might go into the production of motor cars or motorcycles

2. a wholesaler (selling goods for resale to retailers) might go into the business of retailing itself
3. an entity specialising in oil and gas exploration might move into the market for oil and gas extraction

Question 20

Explain Backward integration

Answer 20

With backward vertical integration, also called ‘upstream’ integration an entity enters the product markets of its suppliers.

For example:
1. an entity specialising in oil and gas extraction might move into the market for oil and gas exploration

2. an entity operating a chain of cinemas might go into the market for film production
3. a shoe manufacturer might enter the market for leather production.

Question 21

describe the advantages of Vertical integration

Answer 21

The reasons given for forward or backward vertical integration might be as follows.

1. Backward integration gives an entity control over its source of supply.
2. Forward integration can give an entity control over its distribution channels.
3. Vertical integration allows an entity to extend its expertise and skills into related product markets.
4. Vertical integration makes it easier to find ways of reducing costs in the supply chain and adding value.
5. Vertical integration can help to differentiate the product. Backwards integration could aid in designing and making unique components; forward integration could help to sell products in a unique environment.

Question 22

Describe arguments against vertical integration.

Answer 22

1. Avoiding the discipline of the market. A cosy, relaxed relationship is likely to grow between, say, an in-house component manufacturer and producer of the finished product. The component manufacturer knows that the group company will almost certainly buy its components, and so there is little pressure
   for cost efficiency and innovation.
2. Other companies might turn out to be more successful than the one bought in by the group. For example, a rival component manufacturer makes a technical breakthrough so that their components are better
   and cheaper. It might be better on each purchasing occasion to have the pick of all manufacturers so that the best and most suitable cost-effective components can be bought.
3. Different management skills. If a manufacturer takes over a distribution chain, the skills needed to manage that will be quite different, and the company could easily mess things up.
4. Core business. The company should examine its value chain and distinctive competencies. These must be protected, and buying another company can mean management pays less attention to the areas of its business that matter.
5. Use of capital. Is buying, or setting up, a supplier or distributor really the best way for a company to use its capital?