Theories of corporate strategy

Question 1

Define CORPORATE STRATEGY

Answer 1

Corporate strategy is the medium to long term plan that a business has chosen to follow in order to achieve its corporate objectives.

Question 2

What are the 4 theories of corporate strategy?

Answer 2

• Ansoff’s matrix
• Porter’s strategic matrix
• The Boston matrix
• The distinctive capabilities model

Question 3

Outline the features of Ansoff’s matrix

Answer 3

It was developed to help suggest different methods for growth. Each strategy has varying levels of risk and reward:

1. Market penetration - trying to sell more of the existing products to existing customers. Used to gain market share from competitors. Used by Coca-Cola, M&S, Heinz. (LOW RISK)
2. Market development - attracting new customers to buy existing products. Used when the current market is saturated or in decline. Businesses may enter into a new geographical range or use a new distribution channel. Used by Walmart and Starbucks. (MEDIUM RISK)
3. Product development - selling new and better products to existing customers. Exploits the current (loyal) customer base when there is competition. May help a business gain first mover advantage. Used by Toyota, Ford, Innocent and Dyson. (MEDIUM RISK)
4. Diversification - selling new products to new customers . It is used to achieve substantial growth and increase in profits. Allows for the spread of risk and will be very beneficial if successful. Used by BP, Samsung. (HIGH RISK).

Question 4

Define a COMPETITIVE ADVANTAGE

Answer 4

A competitive advantage is a feature of a business’ product that allows it to perform more successfully than others in the market.

Question 5

Outline the features of Porter’s strategic matrix

Answer 5

There are 4 corporate strategies that a business could follow, two for mass markets and two for niche markets:

1. Cost leadership - the business aims to be the lowest costs operator in the market. This could be done through lowering costs and not altering prices or lowering costs and reducing prices. E.g Toyota.
2. Differentiation - the business will make products or services more attractive and distinctive from competing products.The business will need close relationships with customers to find out what factors they place the most value on (quality, low price, branding, design, after-sales service etc). E.g. Mercedes, Apple, Dyson
3. Cost focus - the business seeks a lower costs advantage in a niche market. The product will be basic but acceptable to sufficient customers.
4. Differentiation focus - the business will focus on a niche market and try to offer something different within it, developing a close relationship with customers in the process.

Question 6

What is being ‘stuck in the middle’?

Answer 6

Porter stated that there were two overall corporate strategies: low cost operations and product uniqueness. If a company is neither, or tries to be both, its is said to be stuck in the middle. This exposes it to considerable competitive pressures and customers are not quite sure what the company stands for. Examples: Blackberry, M&S, Morrisons and BA.
IKEA is a good example of a company who have made being stuck in the middle work to their advantage.

Question 7

Outline the features of the Boston matrix.

Answer 7

It classifies a business’ products or services into four categories based on combinations of market growth and market share:

1. Stars - high market share in a fast growing market. A business needs to maintain this product and defend its position from potential rivals.
2. Question marks - low market share in a fast growing market. A business will need to invest in these products to ensure that market share increases and they turn into stars.
3. Cash cows - very high market share in a low growth market. A business will need to use the cash generated by these products to defend market share and promote question marks and stars.
4. Dogs - low market share in a low growth market. A business will need to cease production on these products or introduce an extension strategy.

Question 8

What are the advantages of the Boston matrix?

Answer 8

• Examines all the business’ products together
• A quick and easy way to make general decisions.
• Helps with marketing planning as it ensures that a balanced portfolio is created.

Question 9

What are the disadvantages of the Boston matrix?

Answer 9

• Tells the business very little about future prospects

- Strategies suggested by the Boston matrix may not suit all businesses

Question 10

Define DISTINCTIVE CAPABILITIES

Answer 10

Distinctive capabilities are the characteristics, resources, experience and skills, of a business which are better than its rivals and cannot be easily be copied.

Question 11

Outline the features of the distinctive capabilities model.

Answer 11

Professor John Kay suggested that distinctive capabilities revolve around 3 key ideas:
1. Architecture - the managerial skills that help build good relationships with staff, customers and suppliers. Branding and corporate culture are important.
2. Reputation - the product quality, customer experience, value for money and reliability. Technical and managerial skills are important.
3. Innovation - the ability of a business to relate well to its customers and provide them with new and improved products. Technical skills and market orientation are important.
Distinctive capabilities lead to competitive advantages and the more distinctive capabilities a business has, the more sustainable their competitive advantage.