Chapter 7: Strategic Options Flashcards
What is the SWOT analysis?
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.
What questions can you consider when evaluating a SWOT analysis?
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
What is gap analysis?
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
What questions should you ask when performing a gap analysis?
- Why does the gap exist?
- What strategies can be chosen to ‘close the gap’?
Where does Porter suggest sustainable competitive advantage comes from?
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.
What are Porter’s generic strategies?
- 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?
What is cost leadership strategy?
Lower cost, broad target: based upon a business organising itself to be the lowest cost producer
How do you achieve cost leadership?
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
What are the potential benefits of cost leadership strategy?
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.
What are the risks of adopting a cost leadership strategy?
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.
What is a differentiation strategy?
Differentiation, broad target: Differentiation can be based on product features (actual) or creating/altering
consumer perception (perception).
How do you become a differentiator?
Strong branding – e.g. designer clothing
Product innovation – e.g. Apple, Dyson
Quality – e.g. M&S clothing
Product performance – e.g. BMW
What are the potential benefits of a differentiation strategy?
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).
What are the risks of adopting a differentiation strategy?
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).
What is a focus (niche) strategy? How do you achieve this?
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.
What are the potential benefits of a focus strategy?
Smaller segment and so smaller investment in marketing/production is required to develop competitive advantage.
Less competition.
Entry is cheaper and easier.
What are the risks of adopting focus strategy?
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.
What is Ansoff’s matrix?
This matrix looks at growth by considering opportunities to sell more existing products/develop new products and building market share in existing/new markets.
What is market penetration? How do you achieve it and what are the potential risks?
- 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
What is product development? How do you achieve it and what are the potential risks?
- 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.
What is market development? How do you achieve it and what are the potential risks?
- 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.
What is diversification?
- 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)
What is related diversification?
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)
What is Vertical integration (related diversification)? What are the benefits?
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.
