D. Making strategic choices

Question 1

What are value drivers?

Answer 1

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

Question 2

what is Porter’s value chain?

Answer 2

means by which the activities within and around the organisation are identified and then related to the assessment of competitive strength

Question 3

What are the primary activities?

Answer 3

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

Question 4

what are the support activities?

Answer 4

each of the primary activities are linked to support activities

4 areas:

• Infrastructure
• Human resource management
• Technology development
• Procurement

Question 5

what can the value chain be used for?

Answer 5

• 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

Question 6

what are the benefits of integration?

Answer 6

• 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’

Question 7

what are the costs of integration?

Answer 7

• 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

Question 8

what are the 3 cases of complementary horizontal diversification?

Answer 8

competetive products

complementary products

by-products

Question 9

what are the advantages of unrelated diversification?

Answer 9

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

Question 10

what are the disadvantaged of unrelated (conglomerate) diversification?

Answer 10

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

Question 11

what are the disadvantaged of unrelated (conglomerate) diversification?

Answer 11

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

Question 12

Why was the BCG Portfolio theory originally developed?

Answer 12

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

Question 13

what are the 4 main steps of using the BCG matrix?

Answer 13

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

Question 14

hat is relative market share?

Answer 14

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

Question 15

what is market growth rate?

Answer 15

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%

Question 16

how are SBU entered onto the BCG matrix?

Answer 16

as dots with circles around the dots denoting the revenue relative to total corporate turnover

bigger the circle, more significant the unit

Question 17

what are the appropritate strategies on the BCG matrix?

Answer 17

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

Question 18

Why should you hold or harvest in a cash cow?

Answer 18

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

Question 19

why should you hold or build in stars quadrant?

Answer 19

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

Question 20

why should you build of divest in question marks/problem child quadrant?

Answer 20

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

Question 21

why should dogs be harvested or divested?

Answer 21

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

Question 22

what are BCG recommendations?

Answer 22

• balanced portfolio
• less attractive parts of the portfolio may be divested-in particular dog products and question that the management lacks confidence in

Question 23

what are the limitations of BCG?

Answer 23

• 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

Question 24

what is an acquisition?

Answer 24

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

Question 25

what is a merger?

Answer 25

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

Question 26

what is organic growth?

Answer 26

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

Question 27

How did Sainsburys implement organic growth?

Answer 27

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

Question 28

what are the features of an acquisition/merger?

Answer 28

``` 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 ```

Question 29

what are the features of organic growth?

Answer 29

can be cheaper easier to control/spread out the costs arguably less risk often relatively slow

Question 30

what is syngery?

Answer 30

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

Question 31

what are the disadvantages of a merger/acquisition?

Answer 31

``` cultural mismatch differences in managers' salaries disposal of assets risk reduction in ROCE ```

Question 32

what are some joint development methods?

Answer 32

- joint venture - strategic alliances - franchising - licenses - outsourcing

Question 33

what are the key considerations in any joint arrangements?

Answer 33

- sharing of costs - sharing of benefits - sharing of risks - ownership of resources - control/decision making

Question 34

what is a joint venture?

Answer 34

jointly owned separate entity assets are formally integrated and jointly owned

Question 35

what is a joint venture a useful approach for?

Answer 35

sharing cost sharing risk sharing expertise

Question 36

what is a strategic alliance?

Answer 36

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

Question 37

what is the technical difference between a strategic alliance and a joint venture?

Answer 37

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

Question 38

what are the 7 characteristics of a well-structured alliance?

Answer 38

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

Question 39

what is franchising?

Answer 39

selling the right to exploit a business brand for a capital sum and a share of the profits

Question 40

How does afranchise work?

Answer 40

- 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

Question 41

what is licensing?

Answer 41

selling the right to exploit an invention or resource in return for a share of the proceeds

Question 42

what is outsourcing?

Answer 42

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

Question 43

why might a divestment occur?

Answer 43

- 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

Question 44

When growing internationally, what strategies can a business adopt?

Answer 44

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

Question 45

what should be considered when deciding whether to expand abroad?

Answer 45

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

Question 46

What is the final selection of a strategy be a function of?

Answer 46

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

Question 47

According to J&S, which 3 criteria should potential strategies be evaluated against?

Answer 47

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

Question 48

what does suitability look at in strategy selection?

Answer 48

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

Question 49

where would suitability fit within Ansoff's matrix?

Answer 49

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

Question 50

where would a product development strategy fit within Ansoff's matrix?

Answer 50

- brand reputation is high - brand is transportable - strong research capabilities exist

Question 51

where would a market penetration strategy fit in Ansoff's matrix?

Answer 51

- current markets are not saturated - present customers are weak - competitors are wark - spare production capacity exists

Question 52

where would a consolidation strategy fit in the Ansoff's matrix?

Answer 52

where: - there is a lack of funding - owners do not want to grow - human resources not available - any king of restraining factor exists

Question 53

where would a diversification strategy fit in the Ansoff's matrix?

Answer 53

- there is strong brand presence - significant resources are available to enable the development of new competencies - market research base is reliable and competent

Question 54

what is an example of Gucci's strategy not being suitable?

Answer 54

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

Question 55

what is the feasibility part of strategy selection?

Answer 55

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

Question 56

what should feasibility considerations cover?

Answer 56

- 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

Question 57

what is the acceptability factor of strategic selection?

Answer 57

does the strategy meet the needs of key stakeholders? will they be happy with the proposal?

Question 58

what are some areas of consideration for the acceptability part of strategy selection?

Answer 58

- 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

Question 59

what are some other considerations of a winning strategy other than the SAF approach?

Answer 59

competitive advantage: - what is it? - how long can it last? performance measurement

Question 60

what does Thompson pose as the strategic management principle?

Answer 60

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

Question 61

which parts of the SAF approach will management accountants contribute to in particular?

Answer 61

acceptability and feasibility

Question 62

acceptability aspect of returns to stakeholders that management accountants can contribute to?

Answer 62

``` cash flow forecasts NPV analysis ROCE valuation of real options shareholder value analysis economic value added cost/benefit analysis ratio analysis ```

Question 63

acceptability aspect of risk that management accountants can contribute to?

Answer 63

sensitivity break-even ratio analysis expected values

Question 64

feasibility aspect of resources that management accountants can contribute to?

Answer 64

cash flow forecast to identify funding needs budgeting resource requirements ability to raise finance needed working capital implications foreign exchange implications