Chapter 8: Strategic options and choice Flashcards by Lauren Tracey

What are the three key levels of strategy to consider as part of strategic choice?

Where to compete?
How to compete?
Which investment vehicle to use?

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What are the the three strategic models to be familiar with?

Porter - generic strategies - looks at competitive strategy
Ansoff - product/market matrix - directions for growth
Boston Consulting Group (BCG) - growth/share matrix

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What are the benefits of the strategic models?

Provide a useful starting point for the discursive process as they initiate discussion amongth management
Well known and as such have credibility
Generate options that can be used in the debate and allow comparison
Can be linked to each other to enhance the analysis
Used simply or be developed into more complicated applications

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What are the limitations of strategic models?

Simplistic - most are two-by-two models
Undue emphasis tends to be placed upon them
Dated and were produced when environments were very different
Not perfect and do not apply to every situation

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What is cost leadership?

Being the lowest cost producer

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What is differentiation?

Creating a customer perception that the product is superior to that of competitors so that a premium can be charged

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What is Focus?

Utitilising either cost leadership or differentiation in a narrow profile of market segments sometimes called niching

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What is the cost leadership strategy based on?

Business organising itself to be the lowest-cost producer

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What are the potential benefits of the cost leadership strategy?

Business can earn higher profits by charging the same price as competitors or even moving to undercut where demand is elastic
Lets a company build defence against price wars
Allows price penetration entry strategy into new markets
Enhances barriers to entry
Develops new market segments

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What can cutting prices to below those of rivals trigger?

Damaging price war

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What is the differentiation strategy?

Based upon the idea of persuading customers that a product is superior to that offered by the competition

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What are the benefits of the differentiation strategy?

Products command a premium price so higher margins
Demand below less price elastic and so avoids costly competitor price wars
Life cycle extends as branding becomes possible

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How can value chain analysis identify the points at which the benefits of differentiation strategy be acheived?

Creating products which are superior to competitors by virtue of design, technology, performance
Offering superior after-sales service by superior distribution
Creating brand strength
Augmenting the product
Packaging the product
Ensuring an innovative culture exists within the company

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What is a focus strategy?

Aimed at a segment of the market rather than the whole market.
Possibly based upon age, gender, lifestyle, income or geography

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What are the benefits of focus strategy?

Smaller segments and so smaller investment in marketing operations
Allows specialisation
Less competition
Entry is cheaper and easier

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What is required for the focus strategy?

Reliable segment identification
Consumer/customer needs to be reliably identifies
Segment to be sufficiently large to enable a return to be earned in the long run
Competition analysis
Direct focus of product to consumer needs

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How can niching be done via specialisation?

Location
Type of end user
Product or product line
Quality
Price
Size of customer
Product feature

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What influences the attractiveness of the market niche?

Niche must be large enough in terms of potential buyers
Niche must have growth potential and predictability
Niche must be negligible interest to major competitors
Firm must have strategic capability to enable effective service of the niche

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According to Ansoff if we have an existing product in an existing market what is the best strategy?

Market penetration

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According to Ansoff if we have an new product in an existing market what is the best strategy?

Product development

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According to Ansoff if we have an existing product in an new market what is the best strategy?

Market development

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According to Ansoff if we have an new product in an new market what is the best strategy?

Diversification

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What is the aim of market penetration?

Increase market share using existing products within existing markets

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How do we stimulate usage by existing customers in market penetration?

New uses of advertising
Promotions, sponsorships
Quantity discounts

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How do we attract non-users and competitor customers in market penetration?

Price
Promotion and advertising
Process redesign

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When is market penetration considered?

Overall market is growing
Market not saturated
Competitors leaving or weak
Strong brand presence by your company with established reputation
Strong marketing capabilities within your company

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What is the aim of market development?

Increase sales by taking the present product to new markets

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What approach should we take with market development?

Add geographical areas - regional and national
Add demographic areas - age and sex
New distribution channels

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What are some key notes to do with market development?

Sligh product modifications may be needed
Advertising in different media and in different ways
Research
Company is structured to produce one product and high switching costs exist for transfer to other product types
Strong marketing ability is needed

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What does product development focus on?

Development of new products for existing markets

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What is the approach to product development?

Develop product features of a significant nature
Create different quality versions

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What are the key notes of product development?

Company needs to be innovative and strong in the area of R&D and have an established, reliable marketing database
Constant innovation allows for the developing sophistication of consumers and customers
Ensures that any product related competitive advantage is maintained

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What is the approach to diversification?

New products to new markets

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What are the key things to note in diversification?

Appropriate when exisiting markets are saturated
Goes through periods of being in and out of favour
Debate is always continuing as to whether this is a good strategic option

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What is often seen as being the CSF for successful diversification?

Brand stretching ability

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What is usually seen as the riskiest of the growth strategies suggested by Ansoff?

Diversification as the business has no experience of the market or the product that it is planning to sell

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What are the two main forms that diversification can take?

Related diversification (concentric diversification)
Unrelated Diversitication (conglomerate diversification)

What is related diversification?

Growth into similar industries
Growth forward into the customer marketplace
Growth into the existing supply chain.

What is vertical backwards within related diversification?

A company seeks to operate in markets in which it currently obtains its resources

What is vertical forward within related diversification?

A company seeks to move into its customer base

What is horizontal within related diversification?

Involves a company entering into complementary or competing markets

What is vertical integration?

Taking over a supplier or customer

What are the key issues that relate to vertical integration?

Cost
Quality
Risk/Flexibility

What is horizontal diversification?

Refers to development into activities that are competitive with, or directly complementary to, a company’s present activities

What are the three cases of horizontal diversification?

Competitive products
Complementary products
By-products

What is unrelated diversification?

Occurs when a business expands into completely new markets or industries with which the business currently shares no common ground

What are the advantages of unrelated diversification?

Occurs when there are limited opportunities in current market
May be only way for business to grow
Opportunity for return
Reduces the organisations overall risk

What are the disadvantages of unrelated diversification?

Increased risk of failure
Little gain to shareholders
Management lose focus on the core markets that the company operates within
Could lead to reduced returns as a whole

If there is high market growth and high relative market share what is it according to the produce portfolio theory (BCG)?

Star - cash neutral

If there is low market growth and high relative market share what is it according to the produce portfolio theory (BCG)?

Cash cows - cash generator

If there is high market growth and low relative market share what is it according to the produce portfolio theory (BCG)?

Question mark - Cash user

If there is low market growth and low relative market share what is it according to the produce portfolio theory (BCG)?

Dog - Cash neutral

What was the product portfolio theory orginally developed for?

Assist managers in identifying cash flow requirements of different businesses or products within their organisation’s portfolio and to help to decide whether change in the mix of businesses is required

What are the four steps that are required to use the BCG matrix?

Divide the company into SBUs
Allocate into the matrix
Assess the prospects of each SBU and compare against others in the matrix
Develop strategic objectives for each SBU

What is the relative market share?

Ratio of SBU market share to that of largest rival in the market sector.
BCG suggests that market share gives a company cost advantages from economies of scale and learning effects

What is the market growth rate?

Represents the growth rate of the market sector concerned.

What does the BCG model suggest the appropraite strategies are?

Hold - Adopt strategies to keep the product in its current quadrant
Build - Increase investment in the product
Harvest - reduce investment to maximise net cash return from the product
Divest - disposal/closure of the product in order to release any cash

What are cash cows in the BCG model?

Hold or harvest
Products have a high market share in a low-growth market
Usually reached maturity stage of their life cycle
Usually stongly profit and cash generated
Market leaders with relatively high sales
Capital requirements are low for the cash cow
Maximising cash flows by keeping investement to a minimum

What are stars in the BCG model?

Hold or build
High market share in an attractive, high-growth market
Offer attractive long-term prospects and if maintained could one day become a cash cow
Rarely generate significant amounts of cash or profits for the company
Operate in an attractive, high growth market
Company required to spend large amounts of money to beat off competitor attack strategies
Require high level of capital investment

What are question marks in the BCG model?

Low market share in an attractive, rapidly growing market
‘growth’ or ‘introduction’ stage of life cycle
Management adopts a ‘double or quits’ approach
Try to grow market share through heavy investment in expansion, marketing and promotion

What are dogs in the BCG model?

Low market share of a slow growing market
Product may be in ‘decline’ stage
Could be a question mark that never successfully grew
Making small profits or losses and will be cash neutral
Little point for business to try and grow
Would require significant cost and risk to invest
May be used as a loss leader to attract customers

What are some methods of growth?

Acquisitions
Mergers
Organic growth

What is an acquisition?

Refers to a corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume control of the target firm

What are mergers?

Business combinations that result from the creation of a new reporting entity formed from the combining parties

What is organic growth?

Growth through internally generated projects, such as increased output, customer base expansion, or new product development

What is a synergy?

The advantage to a firm gained by having existing resources which are compatible with new products or markets that the company is developing

What are the advantages of acquisitions over organic growth?

High speed access to resources
Avoid barriers to entry
Less reaction from competitors
Can block a competitor
Can help restructure the operating environment
Relative price/earning ratio
Asset valuation

What are the disadvantages of acquisitions over organic growth?

Acquistion may be more costly than internal growth because owners of the acquired company will have to be paid for the risk already taken
Bound to be cultural mismatch between the organisations
Different in managers salaries
Disposal of assets
Risk
Reduction in ROCE

What are some joint development methods?

Joint venture
Strategic alliances
Franchising
Licenses
Outsourcing

What are the key consideration in any joint arrangement?

Sharing of costs
Sharing of benefits
Sharing of risks
Ownership of resources
Control/decision making

What is a joint venture?

Business entity whose shares are owned by two or more business entities. Assets are jointly owned

What is a strategic alliance?

Cooperative business activity, formed by two or more seperate organisations for strategic purposes, that allocates ownerships, operational responsibilities, financial risk, and rewards to each member

What are the seven characteristics of a well-structured alliance?

Strategic synergy
Positioning opportunity
Limited resource availability
Less risk
Co-operative spirit
Clarity of purpose
Win-win

What is franchising?

Purchase of the right to exploit a business brand in return for a capital sum and a share of profits or turnover

What is licensing?

Right to exploit an invention or resource in return for a share of proceeds

What is outsourcing?

Contracting out aspects of the work of the organisation

When may divestment occur?

SBU no longer fits with existing group
SBU may be too small and not warrant the management attention given to it
Selling the SBU as a going concern may be a cheaper alternative to putting it into liquidation
Parent company may need to improve its liquidity position
An MBO (management buy out) is one way a divestment can occur

What are the different possible strategies that we can adopt when deciding whether to expand abroad?

Exporting strategy
Overseas manufacture
Multinational
Transnational

What is an exporting strategy?

Firm sells products made in its home country to buyers abroad

What is multinational?

Firms co-ordinate their value adding activities across national boundaries

What is transnational?

‘Nation-less’ firms that have no ‘home’ country

What should be considered when deciding which approach to take if expanding abroad?

Exposure to risk
Need for capital investment
Customer relationships
Transportation costs
Ethical issues
Cultural issues

What are the three criterias that Johnson and Scholes suggests that potential strategies can be evaluated against?

Suitability
Feasibility
Acceptability

Where would a market development strategy ‘fit’?

Channels of distribution are available
Business has a strong marketing presence
Products are superior to competitors
Unsaturated markets exist
Spare production capacity exists
Economies of scale are possible

Where would a product development strategy ‘fit’?

Brand reputation is high
Brand is transportable
Strong research capabilities exist

Where would a market penetration strategy ‘fit’?

Current markets are not saturated
Present customers will rebuy
Competitors are weak
Spare production capacity exists

Where would a consolidation strategy ‘fit’?

Lack of funding
Owners do not want to grow
HR not available
Any kind of restraining factor exists

Where would a diversification strategy ‘fit’?

Strong brand presence
Significant resources are available to enable the development of new competencies
Market research base is reliable and competent

What consideration should we consider with feasibility?

Cultural change required and realism of change
Timescales
Potential resistance
Raw materials availability
Human resource availability
Distribution channel access
Marketing requirements
IT requirements and skills
Finance

What areas should we consider with acceptability?

Staff
Financiers
Owners
Customers, consumers and suppliers
Governments
Public

What is the strategic management principle that Thompson poses?

The more a strategy fits the enterprise’s external and internal situation, builds competitive advantage and improves company performance, the more it qualifies as a winner

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Chapter 8: Strategic options and choice Flashcards

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