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Strategic Management > Chapter 6: The directions for strategic development > Flashcards

Chapter 6: The directions for strategic development Flashcards

1
Q

DEFINING THE SCOPE OF THE FIRM

A

= the choice of the range of products and markets in which a firm wishes to compete.

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2
Q

Scope: according to ABELL model: according to 3 dimensions:

A
  • Product functions
  • Customer groups
  • Technologies used
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3
Q

Based on ABELL’s model, a firm defines its field of operations through 2 variables:

A
  • Scope: of functions, of customers, of technologies – quantitative nature
  • Differentiation between segments – qualitative nature
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4
Q

Concept of firm growth: increases in size of variables such as:

A
  • Assets
  • Sales
  • Profits
  • Headcount.
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5
Q

Growth is important to the definition of the strategy because:

A
  • Means health, vitality, strength for the firm.
  • Must follow environment and sustain their positioning within
  • Firm’s managers are related to this and will seek to boost this.
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6
Q

Concept of strategic development: broader than previous:

A
  • Development of scope
  • AND development of future of firm.
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7
Q

Strategic decisions depend on 2 issues:

A
  • Development direction: decision on modifying or not its scope (CHAPTER 6)
  • Development method: how to fulfil the goal set in the choosing of the direction. (CHAPTER 7)
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8
Q

DIRECTIONS FOR DEVELOPMENT

A

Ansoff

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9
Q

Development strategies can be identified according to:

A
  • Definition of scope
  • Or composition of the business portfolio
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10
Q

Development strategies can be identified while taking into consideration 4 criteria:

A
  • Whether or not strategy changes scope of the firm
  • Whether or not strategy implies growth
  • Whether or not operations continue with the same products and in the same markets
  • Whether or not new products and markets accessed are related to the traditional ones, and what the type of relationship is
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11
Q

Strategies or directions for development include:

A
  • Consolidation (mature/declining industries)
  • Expansion (maintaining current situation: for growth; may mean a change in scope)
  • Diversification: related (has got something to do with previous activities of the firm) or unrelated (means growth AND change in scope) quest for synergies can mean diversification. Can be management/marketing strategies between different activities.
  • Vertical integration: backward or forward (means growth AND change in scope)
  • Restructuring (means change in scope)
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12
Q

Regarding the horizontal/product scope: a firm can decide:

A
  • Consolidation, expansion: remains specialised
  • Related or unrelated diversification: enlarge its business portfolio
  • Restructure: reduce its portfolio
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13
Q

Regarding the vertical scope:

A

the firm can increase or decrease the degree of vertical integration

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14
Q

Regarding the geographic scope:

A

the firm can expand or cut back on its operations

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15
Q

EXPANSION STRATEGY

A

involves the enlargement or exploitation of a firm’s traditional products and markets.

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16
Q

3 main expansion strategies exist:

A
  • Market penetration
  • Product development
  • Market development
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17
Q

MARKET PENETRATION

A

Used for the purpose of increasing its volume of sales.

How?

  • By targeting its present customers: making them use product more frequently, or replacing it more quickly, or using more of it in quantity.
  • Or by looking for new customers.

No change to the scope of the firm.

May be achieved through: advertising campaigns, promotions, price reductions, etc.

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18
Q

Market penetration is the right strategy in these circumstances:

A
  • When industry is expanding rapidly
  • When industry has reached maturity
  • In declining industries
  • Competitors with smaller shares: can steadily grow because not considered serious rivals.
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19
Q

PRODUCT DEVELOPMENT

A

Purpose is to remain in the current market while developing product.

May be achieved by: technological innovation, specification.

Used to better attend customer’s needs.

20
Q

Product development is the right strategy in these circumstances:

A
  • When product life-cycles are very short
  • When customer’s needs are diverse or changing
  • When a firm is proficient in R&D
21
Q

MARKET DEVELOPMENT

A

Used to introduce its traditional products into new markets.

22
Q

3 different kinds of new markets for a firm:

A
  • New segments (different criteria: type of customer, income, distribution channel…)
  • New applications: for current product, but with new functions
  • New geographic areas: local, regional, national, international.
23
Q

Market development is the right strategy in these circumstances:

A
  • New distribution channels that are high quality, reliable, reasonable cost
  • Firm already efficient and performing well in current market, now seeking to enter new one
  • Production facilities underused in current market, need to find other for better exploitation of them
24
Q

FIRM DIVERSIFICATION

A

A firm simultaneously adds new products to new markets.

Firm changes its scope through this expansion.

Means firm is now competitive in new environments.

Diversification implies: new knowledge, new techniques, new premises, changes to structure, management, etc.

25
Q

Diversification means: risk. So why do it?
Firms diversify for offensive and defensive reasons, and because of:

A
  • General environment (legal, political, economic),
  • Specific environment (industry’s characteristics, basic competitive force),
  • Diversifying firm’s own traits and performance (low return from core business).
26
Q

Main reasons firms use diversification strategy:

A
  • Reduction in overall risk: spreading business
  • Saturation of the traditional market
  • Resources and capabilities surplus
  • Investment opportunities
  • Generation of synergies= interrelations between activities, resulting in overall performance of the businesses is better than the sum of each one separately. 4 types of synergies:
    1. Marketing: advertising, brand, distribution channels, etc.
    2. Operating: product and process, better use of equipment, sharing experience, etc.
    3. Financial: assets, investments, financial resources, etc.
    4. Managerial: exploitation of competence, capabilities, experience of top managers.
  • Other reasons include: diversification window (technology pushes to change), image diversification (firm can want to enhance or uphold its image in society)
27
Q

2 different kinds of diversification:

A
  • Related= when there are shared resources across businesses, similar distribution channels, common markets, shared technologies= any attempt to exploit production factors.
  • Unrelated= break with the current situation= no relation with new product or new market.
28
Q

RELATED DIVERSIFICATION STRATEGY: RUMELT distinguishes 2 kinds:

A
  • Related constrained diversification: businesses interrelated by one core competence
  • Related linked diversification: related by at least one other activity, but not necessarily to the core asset.
29
Q

Reasons for related diversification: generation of synergies across the various businesses: 2 ways:

A
  • Sharing the resources and capabilities: because they can be underused or with no limits on their capacity for use.
  • Transferring knowledge and/or capabilities from one business to another.
30
Q

Core competence

A

Knowledge and capabilities associated with a firm’s technical and economic aspects.

31
Q

dominant logic

A

Related diversification is successful also because of the existence of a dominant logic in the business.

32
Q

Synergies

A

shared activities/knowledge= reinforcing a firm’s competitive position.

33
Q

Risks of related diversification: costs. 3 kinds:

A
  • Cost of coordination: number and variety of businesses, mechanisms adopted.
  • Cost of compromising: repercussions must be shared as well as common sales.
  • Cost of inflexibility.
34
Q

UNRELATED/CONGLOMERATE DIVERSIFICATION STRATEGY

A

no relation at all with firm’s traditional activity.

35
Q

Reasons for unrelated diversification:

A
  • Reduction in the firm’s overall risk
  • In search of higher earnings
  • Better assignment of financial resources: better channeling the possible surplus
  • Management targets: only when there are no clear growth opportunities
36
Q

Risks of unrelated diversification:

A
  • Absence of synergies across businesses
  • Specific new competences are only obtained with time and experience
  • Dispersion of interest
  • Difficulties of managing and coordinating
  • Overcome entry barriers into new industry
37
Q

VERTICAL INTEGRATION

A
  • Involves a firm’s entry into activities related to the full production cycle of a product/service.
  • When a firm becomes its own supplier: integration = backward or upstream
  • When a firm becomes its own customer: integration = forward or downstream.
  • Vertical integration: present in every firm. But different: suitable level of integration for each one.
38
Q

Reasons for vertical integration:

A
  • Cost-cutting
  • Stronger strategic position/improved competitive position
39
Q
  • Cost-cutting
A
  1. Economies of scope: better use of resources
  2. Reduction in intermediate stock à meaning n°3: removal of intermediate processes
  3. Streamlined production process
  4. Elimination of transaction costs
  5. Assuming supplier/customer margin
40
Q
  • Stronger strategic position/improved competitive position
A
  1. Access to supply factors
  2. Guaranteed outlet for products
  3. Reinforced differentiation strategy
  4. Protection of advanced technology
  5. Market power
  6. Price manipulation/”price squeezing”
  7. Creation of entry barriers: difficult to overcome for non-integrated firms
41
Q

Risks of vertical integration

A
  • Firm’s overall risk increases: everything connected so everything affected.
  • Raises an industry’s exit barriers
  • Lack of flexibility
  • Reduces the capacity for introducing separate innovations
  • Margin of suppliers or customers replaced is not assumed automatically
  • Production stages non efficient
  • Organizational complexity
42
Q

RESTRUCTURING THE BUSINESS PORTFOLIO

A

modification or redefinition of the scope of the firm with the possible withdrawal from at least one of its business.

43
Q

Growth doesn’t mean better performance, growth can lead to:

A

Business problem

  • One or more businesses in the portfolio with losses = performance decrease

Structure problem

  • One or more businesses can generate value BUT no synergies =over diversification of the business portfolio
  • Overall structure of portfolio not logical. Making it difficult to create synergies.
44
Q

BUSINESS/CORPORATE RESTRUCTURING: Reason: business poor performance. Withdraw or recover/restructure?

A

Most common causes:

  • Inefficient managing
  • Fast growth
  • Inappropriate competitive strategy
  • High internal costs
  • Appearance of new competitors
  • Unexpected changes in demand.

Generally business’s poor performance means financial borrowing.

45
Q

Measures can be adopted:

A
  • Changing management
  • Redefining competitive strategy
  • Sale of certain assets
  • Redefining debt: fire workers, HR, cost controls, etc.

-> BUT could mean business is shit, meaning withdrawal is necessary.

46
Q

PORTFOLIO RESTRUCTURING: Main reasons for restructuring, i.e. withdrawing from a business:

A
  • Over diversification
  • Appearance of major competitors
  • Management problems
47
Q

3 strategies for withdrawing (retirer) a business from the portfolio:

A
  1. sale: best option.
  2. harvest: stopping all investment and exploiting any remaining opportunity: second best option
  3. winding-up: end to all operations and sales of any remaining assets: risk of bankruptcy if managers try to hold on à least attractive option.

Strategic Management (7 decks)

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