Chapter 8 - Strategic options and choice Flashcards
What are the three strategic questions to consider?
Where to compete?
How to compete?
Which investment vehicle to use?
What are the three strategic models?
Porter - generic strategies - looks at competitive strategy
Ansoff - Product/market matrix - directions for growth
Boston Consulting Group (BCG) - growth/share matrix
What are the benefits of strategic models?
Models provide a useful starting point
Well known
Generate options that can be used in the debate and allow comparison
In some instances linked to each other to enhance the analysis
Can be used simply or developed into more complicate applications
What are the limitations of strategic models?
Simplistic
Tendency at times to think the model will provide a solution
Date and produced when environments were very different
Serve as a good basis for analysis, but are not perfect and do not apply to every situation
What are the three strategies according to Porter?
Cost leadership
Differentiation
Focus
What is a cost leadership strategy?
Business organises itself to be the lowest cost producer
What are the potential benefits of adopting a cost leadership strategy?
Business can earn higher profits
Lets company build defence against price wars
Allows price pentrations entry strategy into new markets
Enhances barriers to entry
Develops new market segments
What is the differentiation strategy?
Based upon the idea of persuading customers that a product is superior to that offered by the competition
What are the benefits of adopting a differentiation strategy?
Products command premium price
Demand becomes less price elastic and so avoids costly competitor price wars
Life cycle extends as branding becomes possible
What is a focus strategy?
Aimed at a segment of the market rather than the whole market
What are the benefits of adopting a focus strategy?
Smaller segment and so smaller investment in market operations
Allows specialisation
Less competition
Entry cheaper and easier
What are the limitations of Porter’s generic strategies?
If business attempts to adopt more than one then will become ‘stuck in the middle’
Cost leadership in itself may not give competitive advantages
Differentiation may not lead to a business being able to command a high price for its goods
What is included in Ansoff model?
Market penetration
Product development
Market development
Diversification
What is the aim of market penetration?
Increase market share using existing products within existing markets
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 exist within your company
What is the aim of market development?
Increase sales by taking the present products to new markets
What is the approach to market development?
Add geographical areas
Add demographic areas
New distribution channels
What are the key things to note with market development?
Slight product modifications may be needed
Advertising in different media and in different ways
Research
Company is structure to produce one product and high switching costs exist for transfer to other product types
Strong marketing ability is needed
What is product development?
Focuses on development of new products for existing markets
What is diversification?
New products to new markets
What are the reasons for diversification?
Objectives can no longer be met in known markets
Company has excess cash and powerful shareholders
Possible to ‘brand stretch’ and benefit from past advertising and promotion
Diversification promises greater returns and can spread risk by removing dependency on one product
Greater use of distribution systems
What are the limitations of Ansoff’s matrix?
Seen as being too simplistic as it fails to take account of external environment
Focuses on ways that the organisation can grow
Any decisions made by management using the matrix is subjective
What is related diversification?
Growth into similar industries
Growth forward into customer marketplace
Growth backward into existing supply chain: Vertical backward, Vertical forward, Horizontal
What is vertical integration?
Taking over a supplier or customer
What is the benefits of intergration?
Economies of combined operations
Tap into technology
Assured supply and demand
Reduction in bargaining power
Enhanced ability to differentiate
Defend against ‘lock out’
What are the costs of integration?
Increased operating gearing
Reduced flexibility to change partners
Capital investment needs
Cut off from suppliers and customers
Dulled incentives
Differing managerial requirements
What is horizontal diversification?
Development into activities that are competitive with, or directly complementary to, a company’s present activities
What is conglomerate diversification?
Business expands into completely new markets or industries with which the business shares no common ground
What are the four categories in the product portfolio theory - Boston Consulting Group?
Cash Neutral - Star
Cash User - Question Mark
Cash Generator - Cash Cow
Cash Neutral - Dog
What are the four main steps using the BCG matrix?
- Divide company into SBU’s
- Allocate into matrix
- Assess prospect of each SBU and compare against others in the matrix
- Develop strategic objectives for each SBU
What are the four appropriate strategies that the BCG model suggests?
Hold - adopt strategies to keep in current quadrant
Build - Increase investment to boost market share
Harvest - Reduce investment to maximise net cash return
Divest - Closure of product to release cash tied up
If we are a cash cow what do we do?
Hold or Harvest
High market share in a low growth market. They have reached ‘maturity’ stage of their life cycle.
If we are a star what do we do?
Hold or build
High market share in an attractive high growth market. Most likely in ‘growth’ stage.
If we are a question mark what do we do?
Build or divest
Low market share in attractive growing market. May be in ‘growth’ or ‘introduction’ stage.
If we are dogs what do we do?
Harvest or divest
Low market share of a slow growing market. Most likely in ‘decline’ stage
What are the limitations of the BCG model?
Simplistic
Connection between market share and cost savings is not strong
Cash cows do not alway generate cash
Fail to consider value creation
Over-emphasis on being market leader
What is an acquisition?
Corporate action in which company buys most, if not all, of the target company’s ownership stakes in order to assume control of the target firm
What is a merger?
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?
Advantage of a firm gained by having existing resources which are compatible with new products or markets that the company is developing
What are some methods of joint development?
JV
Strategic alliances
Franchising
Licenses
Outsorcing
What are the key considerations of a joint arrangement?
Sharing of costs
Sharing of benefits
Sharing of risks
Ownership of resources
Control/decision making
What is a JV?
Seperate business entity whose shares are owned by two or more business entities.
Sharing costs, risks and expertise
What is a strategic alliance?
Cooperative business activity, formed by two or more seperate organisations for strategic purposes, that allocates ownership, operational responsibilities, financial risks, and rewards to each member, while preserving their seperate identity
What are the seven characteristics of a well-structured alliance?
Strategic synergy
Positioning opportunity
Limited resource available
Less risk
Co-operative spirit
Clarity of purpose
Win-win
What is franchising?
Purchasing of the righ 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, previously done in-house, to specialist providers
When may divestment occur?
SBU no longer fits with existing group
SBU too small and not warrant management attention
Selling SBU as going concern may be cheaper alternative
Parent company may need to improve liquidity
Belief that individual parts of the business are worth more than the whole
What three criteria can potential strategies be evaluated against according to Johnson and Scholes?
Suitability
Feasibility
Acceptability
What is suitability?
Concerned with whether the strategy addresses the circumstances in which an organisation is operating
What is feasibility?
Concerned with whether the strategy could be made to work in practice
What is acceptability?
Concerned with expected performance outcomes of strategy and whether they would be in line with stakeholder expectations
What strategic management principle does Thompson pose?
The more a strategy fits the enterprise’s external and internal situation, builds sustainable competitive advantage and improves company performance, the more it qualifies as a winner
