D. Making strategic choices Flashcards
What are value drivers?
activities or features that enhance the percevied value of a product or service by customers and which therefore create value for the producer
can be tangible or intangible
what is Porter’s value chain?
means by which the activities within and around the organisation are identified and then related to the assessment of competitive strength
What are the primary activities?
involved in the physical creation of the product, its transfer to the buyer and any after-sales service.
5 categories:
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and sales
- Service
what are the support activities?
each of the primary activities are linked to support activities
4 areas:
- Infrastructure
- Human resource management
- Technology development
- Procurement
what can the value chain be used for?
- give managers a deeper understanding of precisely what their organisation does
- identify the key processes within the business that add value to the end customer-strategies can then be created to enhance and protect these
- identify the processes that do not add value to the customer. These could then be eliminated, saving the organisation time and money
what are the benefits of integration?
- economies of combined operations
- economies of internal control and coordination
- economies of avoiding the market
- tap into technology, close knowledge of upstream and downstream operations can give a company valuable strategic advantages
- safeguarding proprietary knowledge
- assured supply and demand
- reduction in bargaining power of suppliers and customers:two of Porter’s forces on a firm are customer and supplier 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 needed
- cut off from suppliers and customers
- dulled incentives, can lead to inefficiencies
- differing managerial requirements
what are the 3 cases of complementary horizontal diversification?
competetive products
complementary products
by-products
what are the advantages of unrelated diversification?
occurs when options are limited
only way to grow
may be seen as aggressive
reduces overall risk if more diversified
even unrelated markets may have some synergies
what are the disadvantaged of unrelated (conglomerate) diversification?
more risk for the organisation if they adopt strategy as they are launching a new, unproven product into a market that they have little experience or knowledge of . significantly increases the chances of failure, can be eliminated to a degree by acquiring an existing business in the new target market
for many larger organisations, there will be little gain to shareholders. Shareholders re already likely to hold a diverse portfolio of investments, meaning that they have already diversified away much of their risk
diversification by one of the companies that they own shares in will therefore do little to help them
attempting to operate in new industries may mean that management lose focus on the core markets that the company currently operates within, could lead to reduced returns for the organisation as a whole
what are the disadvantaged of unrelated (conglomerate) diversification?
more risk for the organisation if they adopt strategy as they are launching a new, unproven product into a market that they have little experience or knowledge of . significantly increases the chances of failure, can be eliminated to a degree by acquiring an existing business in the new target market
for many larger organisations, there will be little gain to shareholders. Shareholders re already likely to hold a diverse portfolio of investments, meaning that they have already diversified away much of their risk
diversification by one of the companies that they own shares in will therefore do little to help them
attempting to operate in new industries may mean that management lose focus on the core markets that the company currently operates within, could lead to reduced returns for the organisation as a whole
Why was the BCG Portfolio theory originally developed?
to assist managers in identifying cash flow requirements of different businesses or products within their organisations portfolio and to help to decide whether change in the mix of businesses is required
broad portfolio indicates that there is a wide range of presence
what are the 4 main steps of using the BCG matrix?
1) divide the company into SBUs
2) allocate into the matrix
3) assess the prospects of each SBU and compare against others in the matrix
4) develop strategic objectives for each SBU
hat is relative market share?
the 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 EOS and learning effects
dividing line set at 1
4 suggests that SBU share is 4x greater than nearest rival
what is market growth rate?
represents the growth rate of the market sector concerned
high-growth industries offer a more favourable competitive environment an better long-term prospects than slow-growth industries
dividing line is set at 10%
how are SBU entered onto the BCG matrix?
as dots with circles around the dots denoting the revenue relative to total corporate turnover
bigger the circle, more significant the unit
what are the appropritate strategies on the BCG matrix?
BUILD: increase investment in the product in an attempt to boost its market share
HOLD: adopt strategies to keep the product in current quadrant e.g. advertising or promotion
HARVEST: reduce investment in the product in order to maximise the net cash return from the product to the business
DIVEST: disposal/closure of the product in order to release any cash currently tied up within it
Why should you hold or harvest in a cash cow?
high market share in low-growth market
usually at maturity stage of life cycle
strongly profit and cash generating but no longer attractive for new entrants
harvest to maximise cash flows by keeping investment to a minimum where possible while trying to maintain the product and prevent it from entering decline for as long as possible
why should you hold or build in stars quadrant?
have high market share in an attractive, high-growth market
likely at growth stage of life cycle
could one day become cash cows when market growth slows
rarely generate significant cash flows but have high level of sales
must spend alot to beat off competition and try to get new customers
sustain the level of growth in the market
adopt ‘build’ strategy involving heavy investment to keep attracting new customers
why should you build of divest in question marks/problem child quadrant?
have low market share in an attractive, rapidly growing market
growth/introduction stage of life cycle
opportunity for significant development of question marks but also high risk of failure given low market share-may fail to grow and not become a star
management adopts a ‘double or quits’ approach to question marks:if good chance of success, they will adopt a build strategy and try to grow market share through heavy investment in expansion, marketing an promotion. If not confident in the future success of the product, they may choose to divest, exiting the market
risky so will absorb substantial management time and cash and may not be successfully developed
why should dogs be harvested or divested?
have low market share of a slow growing market
decline stage of life cycle
making small profits or losses and will be fairly cash neutral
little point in trying to grow market share so divest
may still be profitable
public sector dogs hard to divest so will need to reinvest
harvest strategy would be adopted, keeping costs low and maximising what little profit or cash flow can be made from the product
what are BCG recommendations?
- balanced portfolio
- less attractive parts of the portfolio may be divested-in particular dog products and question that the management lacks confidence in
what are the limitations of BCG?
- simplistic-only considers two variables
- connection between market share and cost savings is not strong-low-market share companies use low-share technology and can have lower production costs
- cash cows do not always generate cash-cash cows may still require substantial cash investment just to remain competitive and defend their market share
- fail to consider value creation-the management of a diverse portfolio can create value by sharing competencies across SBUs, sharing resources to reap EOS or by achieving superior governance. BCG would divert investment away from the cash cows and dogs and fails to consider the benefit of offering the full range and the concept of ‘loss leaders’
- over emphasis on being the market leader-many companies have products that are not market leaders but which are highly profitable
what is an acquisition?
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 is a merger?
business combinations that result from the creation of a new reporting entity formed of the combining parties
what is organic growth?
growth through internally generated projects, such as increased output, customer base expansion, or new product development
How did Sainsburys implement organic growth?
increased number of edge of town supermarkets it operated by identifying suitable locations, applying for planning permission, building premises and then opening for trade
increased range of products in store
branched out into convenience stories
what are the features of an acquisition/merger?
rapidly access to resources fewer barriers to entry less competitor reactions cultural problems in the new merged business can block competitors help restructure the operating environment relative P/E ratio asset valuations
what are the features of organic growth?
can be cheaper
easier to control/spread out the costs
arguably less risk
often relatively slow
what is syngery?
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 disadvantages of a merger/acquisition?
cultural mismatch differences 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 considerations in any joint arrangements?
- sharing of costs
- sharing of benefits
- sharing of risks
- ownership of resources
- control/decision making
what is a joint venture?
jointly owned separate entity
assets are formally integrated and jointly owned
what is a joint venture a useful approach for?
sharing cost
sharing risk
sharing expertise
what is a strategic alliance?
working together with another organisation for mutual benefit
can allow participants to achieve critical mass, benefit from other participants’ skills and can allow skill transfer between participants
what is the technical difference between a strategic alliance and a joint venture?
whether or not a new, independent business entity is formed
usually preliminary step to a joint venture or an acquisition
can take many forms, from a loose informal agreement to a formal joint venture
include partnerships, joint ventures and contracting out services to outside suppliers
what are the 7 characteristics of a well-structured alliance?
strategic synergy: more strength when combined than they have independently
positioning opportunity: at least one of the companies should be able to gain a leadership position
limiter resource availability: a potentially good partner will have strengths that complement weaknesses of the other partner. One of the partners could not do this alone
less risk: forming the alliance reduces the risk of the venture
co-operative spirit: both companies must want to do this and be willing to co-operate fully
clarity of purpose: results, milestones, methods and resource commitments must be clearly understood
win-win: the structure, risks, operations and rewards must be fairly apportioned among members
what is franchising?
selling the right to exploit a business brand for a capital sum and a share of the profits
How does afranchise work?
- pays the franchisor an initial capital sum and thereafter the franchisee pays the franchisor a share of profits or royalties
- the franchisor provides marketing, research and development, advice and support
- franchisor normally provides the goods for resale
- franchisor imposes strict rules and control to protect its brand and reputation
- franchisee buys into a successful formula, so risk is much lower
- franchisor gains capital as the number of franchisees grows
- franchisor’s head office can stay small as there is considerable delegation/decentralisation to the franchisees
what is licensing?
selling the right to exploit an invention or resource in return for a share of the proceeds
what is outsourcing?
contracting out aspects of the work of the organisation, previously done in-house to specialist providers. Almost any activity can be outsourced-examples include information technology or payroll
why might a divestment occur?
- SBU no longer fits with the existing group, may wish to focus on core competences
- 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 if redundancy and wind-up costs are considered
- parent company may need to improve its liquidity position
- may be a belief that the individual parts of the business are worth more than the whole when shares are selling at less than their potential value
- MBO is one way a divestment can occur
When growing internationally, what strategies can a business adopt?
exporting strategy
overseas manufacture
multinational:co-ordinate their value-adding activities across national boundaries
transnational:nation-less firms that have no home country, largely theoretical
what should be considered when deciding whether to expand abroad?
exposure to risk
need for capital investment: lower if an exporting strategy is used
customer relationships
transportation costs:cost of shipping
ethical issues:labour laws
cultural issues:languages, customs
What is the final selection of a strategy be a function of?
1) relative stakeholder power and their personal characteristics
2) information available and perceived reliability
3) historical experience
4) presentation of options-manner
5) other corporate experiences
6) expectations for the future
7) objectives ordering and perceived ordering-there will be a significant political involvement at this stage
According to J&S, which 3 criteria should potential strategies be evaluated against?
suitability: concerned with whether the strategy addresses the circumstances in which an organisation is operating-its strategic position
feasibility: concerned with whether the strategy could be made to work in practice and as such looks at more detailed practicalities of strategic capability
acceptability: is concerned with the expected performance outcomes (such as return or risk) of a strategy and the extent to which these would be in line with the expectations of stakeholders
MUST meet all 3 of these criteria to be accepted
what does suitability look at in strategy selection?
does the strategy fit the organisation’s circumstances
-does it meet mission and objectives
-will is build on our strengths
will it take advantage of oppurtunities
where would suitability fit within Ansoff’s matrix?
a market development strategy would ‘fit’ where:
- channels of distribution are available
- a business has a strong marketing presence
- an unsaturated markets exist
- spare production capacity exists
- economies of scale are possible
where would a product development strategy fit within Ansoff’s matrix?
- brand reputation is high
- brand is transportable
- strong research capabilities exist
where would a market penetration strategy fit in Ansoff’s matrix?
- current markets are not saturated
- present customers are weak
- competitors are wark
- spare production capacity exists
where would a consolidation strategy fit in the Ansoff’s matrix?
where:
- there is a lack of funding
- owners do not want to grow
- human resources not available
- any king of restraining factor exists
where would a diversification strategy fit in the Ansoff’s matrix?
- there is strong brand presence
- significant resources are available to enable the development of new competencies
- market research base is reliable and competent
what is an example of Gucci’s strategy not being suitable?
targeted less affluent consumers with lower-priced goods and stretched its brand
sales soared
but high-priced, high-margin segment sales plummeted as traditional buyers became disillusioned by the fact that Gucci was now worn by many people thus removing the exclusivity of the product
what is the feasibility part of strategy selection?
does the organisation have the necessary resources and skills to undertake the strategy being proposed?
key questions
1) resources - basic and unique
2) competences-threshold and core
3) implementation issues with regard to dealing with strategic change
what should feasibility considerations cover?
- cultural change required and realism of change
- timescales
- potential resistance
- raw materials availability
- distribution channel access
- marketing requirementes
- It requirements and skills
- finance:how much is needed, where will it come from, what options exist, what will the impact be on our financial position and performance
what is the acceptability factor of strategic selection?
does the strategy meet the needs of key stakeholders?
will they be happy with the proposal?
what are some areas of consideration for the acceptability part of strategy selection?
- a new strategy usually involves some internal changes and due consideration will need to be given to the staff who may have to confront different work practices. Resistance is likely.
- financiers often have required rates of return and liquidity positions
- owners may well have non-financial requirements of their investment:prefer less risk and accept lower return as the inevitable cost
- customers, consumers and suppliers may also have required standards that must be met by the company
- local and national governments may have some concerns about any strategic proposals with regard to legality and political implications
- public and their ability to form into ‘pressure groups’: ethical considerations
what are some other considerations of a winning strategy other than the SAF approach?
competitive advantage:
- what is it?
- how long can it last?
performance measurement
what does Thompson pose as the strategic management principle?
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
which parts of the SAF approach will management accountants contribute to in particular?
acceptability and feasibility
acceptability aspect of returns to stakeholders that management accountants can contribute to?
cash flow forecasts NPV analysis ROCE valuation of real options shareholder value analysis economic value added cost/benefit analysis ratio analysis
acceptability aspect of risk that management accountants can contribute to?
sensitivity
break-even
ratio analysis
expected values
feasibility aspect of resources that management accountants can contribute to?
cash flow forecast to identify funding needs
budgeting resource requirements
ability to raise finance needed
working capital implications
foreign exchange implications
