Strategic options Flashcards
Strategic planning and SWOT analysis
Issues identified from internal analysis and external analysis can be combined
using the SWOT technique.
SWOT analysis
SWOT analysis is a technique that can be used to perform a corporate
appraisal to evaluate the strategic position of the organisation.
Internal analysis
Strengths
Weaknesses
External analysis
Opportunities
Threats
Evaluate options
Weaknesses
Threats
Strategic impact of SWOT analysis
When evaluating a SWOT analysis there are a number of questions that can be
addressed.
Can the strengths of the organisation be matched to opportunities?
e.g. Current distribution channels may be used to launch new products
What weaknesses need to be addressed before pursuing opportunities?
e.g. New staff may need to be employed to overcome capacity constraints
Does the organisation have sufficient strengths to minimise threats?
e.g. Existing customer loyalty may reduce the impact of new competitors
Can the organisation’s weaknesses be converted into strengths?
e.g. Businesses with a narrow product range may become a niche seller
Can potential threats be converted into new opportunities?
e.g. ‘Budget range’ products could be introduced in times of economic decline
Gap analysis
The comparison between an entity’s ultimate objective and the
expected performance from projects, both planned and under way,
identifying means by which any identified difference or gap might be
filled.
Gab between: Desired
direction & Current forecast
When performing a gap analysis the following questions should be addressed:
Why does the gap exist?
What strategies can be chosen to ‘close the gap’?
Competitive positioning
Porter suggests that sustainable competitive advantage arises from
the selection of a generic strategy which best fits the organisation’s
environment (Porter’s 5 Forces) and then organising value-adding
activities (Value Chain Analysis) to support the chosen strategy.
Porter’s generic strategies
Cost leadership – seeking to be the lowest cost producer in the industry.
Differentiation – creating tangible and intangible product features that the
customer is willing to pay more for.
Focus – utilising either of the above in a narrow profile of market segments
(sometimes called niching).
Porter argues that organisations need to address two key questions:
Should the strategy be one of differentiation or cost leadership?
Should the scope be wide or narrow?
Porter’s generic strategies:Competitive
scope: Broad target
Basis of competition: Lower cost
Cost leadership
Porter’s generic strategies:Competitive
scope: Broad target
Basis of competition: Differentiation
Differentiation
Porter’s generic strategies:Competitive
scope: Narrow target
Basis of competition: Differentiation
Differentiation focus
Porter’s generic strategies:Competitive
scope: Narrow target
Basis of competition: Lower cost
Cost focus
Cost leadership strategy
Based upon a business organising itself to be the lowest cost producer.
How to achieve cost leadership
Economies of scale – e.g. Primark’s large stores
Seek cheaper sources of supply – e.g. budget supermarkets
Reduced labour cost – e.g. manufacturers who outsource overseas
Use value chain to identify and reduce non-key activities – e.g. Ryan Air
Potential benefits of cost leadership strategy
Business can earn higher profits by charging the same price as competitors.
Firm remains profitable in a price war.
Economies of scale create entry barriers
Risks of adopting a cost leadership strategy
Only room for one cost leader – no fallback position if the cost advantage is
eroded.
Cost advantage may be lost because of inflation, movements in exchange
rates, competitors using more modern manufacturing technology or cheap
overseas labour, etc.
Customers may prefer to pay extra for a better product
Differentiation strategy
Differentiation can be based on product features (actual) or creating/altering
consumer perception (perception).
How to become a differentiator
Strong branding – e.g. designer clothing
Product innovation – e.g. Apple, Dyson
Quality – e.g. M&S clothing
Product performance – e.g. BMW
Potential benefits of a differentiation strategy
Products command a premium price so higher margins.
Product has fewer perceived substitutes due to product uniqueness and brand
loyalty.
Therefore:
There is less direct competition.
Demand is less price sensitive (more inelastic).
Risks of adopting a differentiation strategy
Cheap copies.
Being out-differentiated.
Customers unwilling to pay the extra (e.g. in a recession).
Differentiating factors no longer valued by customers (e.g. due to changes in
fashion).
Focus (niche) strategy
Focusing on a segment of the market rather than the whole market.
How to achieve a focus strategy
Identify a segment of consumers/customers with similar needs.
Choose whether to adopt a differentiation or cost focus approach.
Develop products and services to meet the needs of the segment.
Develop a marketing strategy to specifically target the chosen segment.
Potential benefits of a focus strategy
Smaller segment and so smaller investment in marketing/production is required
to develop competitive advantage.
Less competition.
Entry is cheaper and easier.
Risks of adopting focus strategy
If the segment is too small then it may be difficult to achieve sufficient sales.
If the segment is too large then the large players may become interested.
Ansoff’s matrix
This matrix looks at growth by considering opportunities to sell more existing
products/develop new products and building market share in existing/new markets.
Products: Existing
Markets: Existing
Market penetration
More sales of existing
products to existing
markets
e.g. Sofa companies’ ‘Bank
holiday’ sales
Products: New
Markets: Existing
Product development
Developing new products for
existing markets
e.g. Gillette launched a range
of shaving products to
compliment razor sales
Products: New
Markets: New
Diversification
Developing new products for
new markets
e.g. BT Sport
Products: Existing
Markets: New
Market development
Finding new markets for
existing products
e.g. Trivial Pursuit junior
edition, Tesco stores in
Europe
How to achieve market penetration
Competitive pricing, advertising or sales promotion.
Improving competitive advantage through adjustments in the value chain.
Market penetration
Potential implications
Greater market strength and economies of scale.
Lack of diversification
How to achieve product development
Invest in research and development.
Existing distribution channels may be used.
Product development
Potential implications
The business should already have good knowledge of their customers.
Product failure may damage the brand.
How to achieve market development
New geographical markets or market segments.
Using new distribution channels (e.g. selling direct to consumers).
Market development
Potential implications
Market research may be needed to overcome lack of market knowledge.
Customer’s awareness may need to be generated in the new market.
Diversification
Diversification seeks growth in new markets, with new products in comparison to the
current position.
Diversification can take two main forms:
Related diversification (concentric diversification)
Unrelated diversification (conglomerate diversification).
Related diversification
Related diversification involves integrating activities in the supply
chain (vertical integration) or leveraging technologies or existing
competences (horizontal integration).
Vertical integration – forward (into the customer marketplace)
Current position Horizontal integration
Vertical integration – backward (into the existing supply chain)
-
Vertical integration (related diversification)
Vertical integration occurs when a company becomes its own supplier (backward) or
distributor (forward).
Benefits of vertical diversification
Economies of combined operations, e.g. proximity, reduced handling.
Economies of internal control and co-ordination, e.g. scheduling and coordinating operations should be better. Information about the market can be fed
back to the production companies.
Economies of avoiding the market – negotiation, packaging, advertising costs
are avoided.
Tap into technology – close knowledge of the upstream or downstream
operations can give a company valuable strategic advantages. For example,
pharmaceutical companies have undergone backwards integration into
research to discover multiple possible uses for chemicals/compounds.
Guaranteed demand/supply.
Horizontal integration (related diversification)
Involves a company utilising existing competences by entering into:
Complementary markets – e.g. Google’s acquisition of YouTube.
Competing markets – e.g. Honda motorcycles and cars.
Disadvantages of vertical diversification
(a) Increases the proportion of the firms operating costs that are fixed (increased
operating gearing). This is because if a firm purchases components externally
all the costs are variable. If the components are purchased internally part of the costs will be variable and part will be fixed.
(b) Reduced flexibility to change partners – if in-house supplier or customer
performs poorly or new products/technologies are developed outside the
business, not easy to switch to outsiders.
(c) **Capital investment needs **– vertical integration will consume capital resources
and must yield a return greater than, or equal to, the firm’s opportunity cost of
capital, adjusting for strategic considerations, for integration to be a good choice.
(d) Differing managerial requirements – skills transfer from one type of business
to another is not automatic.
Unrelated diversification (conglomerate diversification)
The characteristic of conglomerate diversification is that there is no common thread.
However, it is still possible to achieve synergies through:
Management skills – e.g. Virgin Group.
Brand name – e.g. Yamaha motorbikes and keyboards.
Advantages of unrelated diversification
Risk spreading: Diversified products and markets reduces variability of group
profits.
Can enter more attractive (more profitable) markets.
Can use surplus cash.
Utilise brand image in new markets.
Improve utilisation of central resources e.g. HR dept.
Disadvantages of unrelated diversification
Lack of management experience in new products/markets.
Failure in one market could damage brand.
Often bad for shareholders as there is a lack of synergies available.
