Strategic choice (08)

Question 1

What is Business-level strategy?

Answer 1

Business-level strategy determines the strategic position of a business in its quest for CA when competing in a single industry or product market.

Question 2

What affects the choice of business-level strategy?

Answer 2

-Differentiation
-Cost leadership

Question 3

What is Differentiation?

Answer 3

A differentiation strategy seeks to create higher value for customers than the value competitors create, by delivering goods or services with unique features while keeping costs at similar levels, allowing the business to charge higher prices to its customers.

Question 4

What is the goal of differentiation strategy?

Answer 4

To increase the perceived value of goods or service that competitors cannot match, so that customers are willing to pay a higher price

Question 5

Note:
In a differentiation strategy, the focus of competition is on non-price attributes, and very often is the unique selling proposition of the product

Question 6

What are value drivers?

Answer 6

essentially elements that increase the value of a product by improving customers’ perception and resulting in competitive advantage.

Question 7

What are some common value drives?

Answer 7

• Product features
• Customer service
• Customisations
• Complements

Question 8

Note:
Exemplary customer service could be achieved through effective recruitment, training and deployment of employees.

The provision of appropriate incentives to motivate employees is also important.

Customer satisfaction and employee satisfaction are key indicators to management performance,

Question 9

What is Customisation?

Answer 9

Customisation refers to providing consumers with options to personalise the product to their preference before the purchase.

This could be from choosing
colours to features, and allow a business to differentiate their offering from competitors.

Question 10

What are Complements?

Answer 10

A complement is a product or competency that adds value to the original product when the two are used in tandem.

Complements increase demand for the primary product, thus enhancing profit potential for the business.

Question 11

What is a Cost leadership strategy?

Answer 11

A cost leadership strategy seeks to create similar value to customers by producing goods or services at a lower cost than competitors, enabling the business to offer lower prices to customers.

Question 12

Note:

The goal of cost leadership is to reduce cost below that of competitors, while offering adequate value.

In a cost leadership strategy, the focus of competition is on lowest possible price, which offering acceptable value.

Answer 12

Managers that adopt cost leadership strategy will manipulate cost drivers,
essentially items that determine the cost behaviour within business activities.

Question 13

What are the most important cost drivers managers can manipulate to keep their costs low?

Answer 13

• Cost of factor input
• economies of scale
• outsourcing and offshoring

Question 14

What are Corporate level strategies?

Answer 14

It focuses on where to compete and addresses the desire for growth.

The choice of corporate-level strategy includes vertical integration and
diversification.

Question 15

What is Vertical integration?

Answer 15

Vertical integration involves merging or taking over another business in the same industry but at a different stage of business activity.

Vertical integration can be categorised into backward and forward integration.

Question 16

What is Backward vertical integration?

Answer 16

It involves integrating with a supplier of the existing business in the same industry.

An example of backward vertical integration would be a car manufacturer buying over a component supplier such as a tyre
manufacturer.

Question 17

What are the advantages of backward vertical integration?

Answer 17

• Business has better control over quality, price and delivery times of supplies
• It encourages the business to conduct research and development to improve
  quality of supplies of components
• Business may now control supplies of materials to competitors

Question 18

What are the disadvantages of backward vertical integration?

Answer 18

• The business may lack the expertise and experience in managing a supplier
• The supplying business may become complacent due to having a guaranteed
  customer

Question 19

What are some possible impact on stakeholders as a result of vertical integration?

Answer 19

• Employees may have greater career opportunities as they could now work in the supplying business as well
• Customers may obtain improved quality and more innovative products, however, their choice may become limited due to control over supplies to competitors

Question 20

What is forward vertical integration?

Answer 20

It involves integrating with a customer of the existing business in the same industry.

An example of forward vertical integration would be a car manufacturer moving into car retail, repairs and servicing.

Question 21

What are the advantages of forward integration?

Answer 21

• The business is now able to control the promotion and pricing of its own
  products
• The business has a secure outlet for its products, and products of competitors may be excluded

Question 22

What are the disadvantages of forward vertical integration?

Answer 22

• The government and consumers may suspect uncompetitive behaviour and react negatively
• The business may lack the expertise and experience to manage the business activities of the customer it acquires

Question 23

What are the possible impacts of forward vertical integration to stakeholders?

Answer 23

• Employees may have greater job security as the business has secure distribution channels
• Customers may resent the lack of competition in the retail outlet due to the withdrawal of competitor products

Question 24

What is Diversification?

Answer 24

Diversification involves increasing the variety of goods and services the business offers, or the markets and geographical locations in which it competes in.

Question 25

What are Related Diversifications?

Answer 25

Related diversification involves
expanding into products or markets with relationships to existing business activity, and includes product and geographic diversification.

Question 26

What are Unrelated Diversifications?

Answer 26

Unrelated diversification
involves diversifying into products and markets with no relationship to existing business activity.

Industry diversification is a form of unrelated diversification.

Question 27

What is Product Diversification?

Answer 27

Product diversification involves a business increasing its range of product offerings in the market, by launching new products.

This is also referred to as product
development in Ansoff Matrix

Question 28

Why would Product Diversification be expensive and risky for businesses?

Answer 28

-NEW STRATEGIC CAPABILITIES:

Product diversification requires businesses to acquire new but unfamiliar processes or technologies. Success is likely to depend on a willingness to acquire new technological capabilities, to engage in organisational restructuring and new marketing capabilities to manage customer perceptions.

-PROJECT MANAGEMENT RISK:

Projects involving product diversification are subjected to
risk of delays and increased costs, if the new product is complex or if the
specifications of the new product are different from the original core product of the business.

Question 29

What is Geographic diversification?

Answer 29

Geographic diversification involves the business entering a market in a new country or region with its existing product line.

This is also referred to as market
development in Ansoff Matrix

Question 30

What is Industry diversification?

Answer 30

Industry diversification, also known as conglomerate diversification, involves a business entering a new industry entirely different from its current business activity.

This is also simply referred to as diversification in Ansoff Matrix

Question 31

Note:

Industry diversification can create value as the business may benefit from being part of a larger group.

This may allow consumers to have greater confidence in the goods
and services produced by the business than before,

and the larger size may also reduce costs of finance.

Answer 31

However, critics have pointed out that a business with diversified operations and activities is unable to synergise and work together to
create value, as compared to these operations and activities being run as
independent businesses.

There is also concern that the top management at headquarters may not possess the full knowledge and expertise across the diversified industries to be able to make the best strategic decisions.

Question 32

What should a business consider when pursuing the diversification strategy?

Answer 32

-ECONOMIES OF SCALE:

For diversification to enhance the performance of a business, it must lead to economies of scale and a reduction in costs.

A business that decides on product or geographic diversification should benefit from an improvement in productivity and efficiency.

This could be in the case where new technology are purchased and leveraged upon to manufacture new products, or employees becoming more motivated at the prospect of working on a new project or in another country.

-RESTRUCTURING:

Restructuring is the process of reorganising and divesting
resources to refocus the business in order to leverage on its core competencies more effectively.

When a business decides to adopt diversification strategy, it is
also likely to phase out ‘dog’ products from the BCG Matrix, so as to free up and divest resources into new
products, markets or industries.

These resources include manpower where there is a need to recruit new employees to work in new markets or industries, train and develop existing employees so that they could be redeployed to work on new products, or retrenchment if employees working on ‘dog’ products cannot be redeployed.

-INTERNAL CAPITAL MARKETS:

Diversification strategies would usually require large sums of capital to implement, and a business would need to depend on both internal sources of finance, mainly retained earnings, as well as long-term external sources of finance such as equity and bonds.

-MARKETING STRATEGY:

Question 33

SUMMARY

Answer 33

In summary, the following are covered in this topic:

1. Strategic choice is concerned with the identification of different strategic options and deciding between them and could be classified into business-level strategy and corporate-level strategy.
2. Business-level strategy focuses on how a business should compete against competitors, and includes differentiation and cost leadership.
3. A differentiation strategy seeks to create higher value for customers than the value competitors create, allowing the business to charge higher prices.
4. The differentiation strategy leverages on value drivers such as product features, customer service, customisation and complements.
5. A cost leadership strategy seeks to create similar value to customers by
   producing goods or services at a lower cost, resulting in lower prices offered.
6. Businesses can keep costs low by manipulating cost drivers such as cost of input factors, economies of scale, outsourcing and off-shoring.
7. Corporate-level strategies comprises the decisions to achieve competitive advantage in several industries and markets simultaneously , and includes
   vertical integration and diversification.
8. Vertical integration involves merging or taking over another business in the same industry but at a different stage of business activity and can be categorised
   into backward and forward integration.
9. Backward vertical integration involves moving ownership of business activities upwards towards suppliers, while forward vertical integration involves moving
   ownership of business activities downwards towards customers.
10. Diversification involves increasing the variety of goods and services the business offers, or the markets and geographic locations in which it competes in, and can be categorised into product, geographic and industry diversification.