Chapter 7: Strategic Options

Question 1

What is the SWOT analysis?

Answer 1

Issues identified from internal analysis and external analysis can be combined using the SWOT technique.

SWOT analysis is a technique that can be used to perform a corporate appraisal to evaluate the strategic position of the organisation.

Question 2

What questions can you consider when evaluating a SWOT analysis?

Answer 2

 Can the strengths of the organisation be matched to opportunities?
e.g. Current distribution channels may be used to launch new products
 What weaknesses need to be addressed before pursuing opportunities?
e.g. New staff may need to be employed to overcome capacity constraints
 Does the organisation have sufficient strengths to minimise threats?
e.g. Existing customer loyalty may reduce the impact of new competitors
 Can the organisation’s weaknesses be converted into strengths?
e.g. Businesses with a narrow product range may become a niche seller
 Can potential threats be converted into new opportunities?
e.g. ‘Budget range’ products could be introduced in times of economic decline

Question 3

What is gap analysis?

Answer 3

The comparison between an entity’s ultimate objective and the expected performance from projects, both planned and under way, identifying means by which any identified difference or gap might be filled

Question 4

What questions should you ask when performing a gap analysis?

Answer 4

• Why does the gap exist?
• What strategies can be chosen to ‘close the gap’?

Question 5

Where does Porter suggest sustainable competitive advantage comes from?

Answer 5

Competitive positioning; Porter suggests that sustainable competitive advantage arises from the selection of a generic strategy which best fits the organisation’s environment (Porter’s 5 Forces) and then organising value-adding activities (Value Chain Analysis) to support the chosen strategy.

Question 6

What are Porter’s generic strategies?

Answer 6

• Cost leadership: seeking to be the lowest cost producer in the industry
• Differentiation: creating tangible and intangible product features that the customer is willing to pay more for
• Focus: utilising either of the above in a narrow profile of market segments (sometimes called niching)

Porter argues that organisations need to address two key questions:
- Should the strategy be one of differentiation or cost leadership?
- Should the scope be wide or narrow?

Question 7

What is cost leadership strategy?

Answer 7

Lower cost, broad target: based upon a business organising itself to be the lowest cost producer

Question 8

How do you achieve cost leadership?

Answer 8

 Economies of scale – e.g. Primark’s large stores
 Seek cheaper sources of supply – e.g. budget supermarkets
 Reduced labour cost – e.g. manufacturers who outsource overseas
 Use value chain to identify and reduce non key activities – e.g. Ryan Air

Question 9

What are the potential benefits of cost leadership strategy?

Answer 9

 Business can earn higher profits by charging the same price as competitors.
 Firm remains profitable in a price war.
 Economies of scale create entry barriers.

Question 10

What are the risks of adopting a cost leadership strategy?

Answer 10

 Only room for one cost leader – no fallback position if the cost advantage is eroded.
 Cost advantage may be lost because of inflation, movements in exchange rates, competitors using more modern manufacturing technology or cheap overseas labour, etc.
 Customers may prefer to pay extra for a better product.

Question 11

What is a differentiation strategy?

Answer 11

Differentiation, broad target: Differentiation can be based on product features (actual) or creating/altering
consumer perception (perception).

Question 12

How do you become a differentiator?

Answer 12

 Strong branding – e.g. designer clothing
 Product innovation – e.g. Apple, Dyson
 Quality – e.g. M&S clothing
 Product performance – e.g. BMW

Question 13

What are the potential benefits of a differentiation strategy?

Answer 13

 Products command a premium price so higher margins.
 Product has fewer perceived substitutes due to product uniqueness and brand loyalty.
Therefore:
 There is less direct competition.
 Demand is less price sensitive (more inelastic).

Question 14

What are the risks of adopting a differentiation strategy?

Answer 14

 Cheap copies.
 Being out differentiated.
 Customers unwilling to pay the extra (e.g. in a recession).
 Differentiating factors no longer valued by customers (e.g. due to changes in fashion).

Question 15

What is a focus (niche) strategy? How do you achieve this?

Answer 15

 Focusing on a segment of the market rather than the whole market.

How:
 Identify a segment of consumers/customers with similar needs.
 Choose whether to adopt a differentiation or cost focus approach.
 Develop products and services to meet the needs of the segment.
 Develop a marketing strategy to specifically target the chosen segment.

Question 16

What are the potential benefits of a focus strategy?

Answer 16

 Smaller segment and so smaller investment in marketing/production is required to develop competitive advantage.
 Less competition.
 Entry is cheaper and easier.

Question 17

What are the risks of adopting focus strategy?

Answer 17

 If the segment is too small then it may be difficult to achieve sufficient sales.
 If the segment is too large then the large players may become interested.

Question 18

What is Ansoff’s matrix?

Answer 18

This matrix looks at growth by considering opportunities to sell more existing products/develop new products and building market share in existing/new markets.

Question 19

What is market penetration? How do you achieve it and what are the potential risks?

Answer 19

• More sales of existing products to existing markets e.g. Sofa companies ‘Bank holiday’ sales

How:
 Competitive pricing, advertising or sales promotion.
 Improving competitive advantage through adjustments in the value chain.

Potential implications
 Greater market strength and economies of scale.
 Lack of diversification

Question 20

What is product development? How do you achieve it and what are the potential risks?

Answer 20

• Developing new products for existing markets e.g. Gillette launched a range of shaving products to compliment razor sales

How:
 Invest in research and development.
 Existing distribution channels may be used.

Potential implications:
 The business should already have good knowledge of their customers.
 Product failure may damage the brand.

Question 21

What is market development? How do you achieve it and what are the potential risks?

Answer 21

• Finding new markets for existing products e.g., Trivial Pursuit junior editions, Tesco stores in Europe

How:
 New geographical markets or market segments.
 Using new distribution channels (e.g. selling direct to consumers).

Potential Implications:
 Market research may be needed to overcome lack of market knowledge.
 Customer’s awareness may need to be generated in the new market.

Question 22

What is diversification?

Answer 22

• Developing new products for new markets

Diversification seeks growth in new markets, with new products in comparison to the current position.
Diversification can take two main forms:
 Related diversification (concentric diversification)
 Unrelated diversification (conglomerate diversification)

Question 23

What is related diversification?

Answer 23

Related diversification involves integrating activities in the supply chain (vertical integration) or leveraging technologies or existing competences (horizontal integration).

Vertical integration - forward (into the customer marketplace)
Vertical integration - backward (into the existing supply chain)

Question 24

What is Vertical integration (related diversification)? What are the benefits?

Answer 24

Vertical integration occurs when a company becomes its own supplier (backward) or distributor (forward).

 Economies of combined operations, e.g. proximity, reduced handling.
 Economies of internal control and co-ordination, e.g. scheduling and coordinating operations should be better. Information about the market can be fed back to the production companies.
 Economies of avoiding the market – negotiation, packaging, advertising costs are avoided.
 Tap into technology – close knowledge of the upstream or downstream operations can give a company valuable strategic advantages. For example, pharmaceutical companies have undergone backwards integration into research to discover multiple possible uses for chemicals/compounds.
 Guaranteed demand/supply.

Question 25

What are the disadvantages of vertical diversification?

Answer 25

(a) Increases the proportion of the firms operating costs that are fixed (increased operating gearing). This is because if a firm purchases components externally all the costs are variable. If the components are purchased internally part of the costs will be variable and part will be fixed.

(b) Reduced flexibility to change partners – if in-house supplier or customer performs poorly or new products/technologies are developed outside the business, not easy to switch to outsiders
.
(c) Capital investment needs – vertical integration will consume capital resources and must yield a return greater than, or equal to, the firm’s opportunity cost of capital, adjusting for strategic considerations, for integration to be a good choice.

(d) Differing managerial requirements – skills transfer from one type of business to another is not automatic.

Question 26

What is horizontal integration (related diversification)

Answer 26

Involves a company utilising existing competences by entering into:
 Complementary markets – e.g. Google’s acquisition of YouTube.
 Competing markets – e.g. Honda motorcycles and cars.

Question 27

What is Unrelated diversification (conglomerate diversification)?

Answer 27

The characteristic of conglomerate diversification is that there is no common thread.
However, it is still possible to achieve synergies through:
 Management skills – e.g. Virgin Group.
 Brand name – e.g. Yamaha motorbikes and keyboards.

Question 28

What are the advantages of unrelated diversification?

Answer 28

 Risk spreading: Diversified products and markets reduces variability of group
profits.
 Can enter more attractive (more profitable) markets.
 Can use surplus cash.
 Utilise brand image in new markets.
 Improve utilisation of central resources e.g. HR dept.

Question 29

What are the disadvantages of unrelated diversification?

Answer 29

 Lack of management experience in new products/markets.
 Failure in one market could damage brand.
 Often bad for shareholders as there is a lack of synergies available.