Unit 5 - Developing Strategy - Corporate, Competitive, Collaborative Strategy

Question 0

competitive strategy

Answer 0

Lionel Bourgeois (1986) competitive strategy discusses how a company seeks to compete, a decision he refers to as ‘domain navigation’. Competitive strategy follows this decision – having decided where to compete, competitive strategy focuses on how this may be done.

Question 1

What is corporate strategy?

Answer 1

Lionel Bourgeois (1986) Where a company seeks to compete, a decision B. Refers as Domain Selection Corporate strategy therefore occurs at a higher level than business or competitive strategy. It involves choices such as which industries, markets or segments an organisation should compete in, and whether and how an organisation should collaborate with another organisation.

Question 2

What is a corporate parent?

Answer 2

First, it will be useful to define what we mean by a ‘corporate parent’. A corporate parent is essentially the head office and the senior managers of an organisation. In a multi-business organisation this is very often a separate entity, while in a small or medium-sized enterprise (SME) it may be that the parent is the owner. Therefore, a corporate parent can be as few as one person in an SME, or it can be a very large organisation in itself. For example, when in 2004 the two corporate headquarters (HQ) staffs of Anglo-Dutch oil company Royal-Dutch Shell were merged, 200 HQ staff from the London office were relocated to Amsterdam to join their Dutch colleagues. Some corporate parents, therefore, are very large organisations in their own right.

Question 3

Describe Ansoff’s growth matrix?

Answer 3

Question 4

What does Ansoff suggest in his growth vectors?

Answer 4

• Market penetration identifies a direction for growth based on an organisation increasing the market share for its present product market, i.e., selling more of its existing products and services to its existing customers.
• Market development identifies new missions for the organisation’s products, i.e., selling its existing products or services to new customers.
• Product development creates new products to replace current ones, i.e., anticipating changes in existing customer needs and developing the appropriate products to meet those needs.
• Diversification is distinctive because it involves a situation where both products and missions are new to the organisation, i.e., the organisation moves into a completely new market and product area to that which it is used to competing in.

Question 5

What is market penetration?

Answer 5

Market penetration is an option that emphasises stability, at least in terms of the products or services provided or the markets served, but in Ansoff’s terms it also emphasises an attempt to increase the amount or value (or both) of the products or services sold as a means of achieving growth.

Question 6

What is market development?

Answer 6

In a market development strategy the organisation takes its existing products and services into new markets. These may be new geographic markets, or new segments of existing markets where an organisation may have identified previously unmet or unexpected customer need. Organisations may have different motivations for pursuing a market development strategy. For instance, this may be an appropriate way of securing a foothold in a sector that is currently small, or where the extent of demand is as yet unknown. Alternatively, it may take the form of a major launch of a well-established brand in a completely new area. Well-established companies may also seek to establish a presence in mature but profitable markets where they have no presence to date – for example Tesco, the UK grocery chain, entered the US market in November 2007 by creating the Fresh and Easy brand.

Question 7

What is product development?

Answer 7

Product or service development offers a strategic route to growth in areas where existing product ranges do not fully exploit all of the available opportunities, where there are advantages to offering a full range of products, or where the demand for a product or service is evolving.

Question 8

What is diversification in Ansoff’s growth matrix?

Answer 8

Diversification involves a situation where both products and missions are new to the firm, so that the firm moves into a completely new market and product area to that which it is used to competing in.

Question 9

What are economies of scope?

Answer 9

Economies of scope exist when using a resource across multiple activities uses less of that resource than when the activities are carried out independently (see for instance Grant, 2010, p. 409).

Question 10

Explain Hitt et all value creating strategy model?

Answer 10

Question 11

What is vertical integration?

Answer 11

Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to satisfy a common need.

Question 12

What is horizontal integration?

Answer 12

A consolidation of many firms that handle the same part of the production process.

Question 13

What is Forward vertical integration?

Answer 13

A company exhibits forward vertical integration when it controls distribution centers and retailers where its products are sold.

Question 14

What is Backward vertical integration?

Answer 14

A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, a car company may own a tyre company, a glass company, and a metal company.

Question 15

Name benefits of mergers&aquisitions?

Answer 15

There are many reasons why organisations consider M&A (Hitt et al., 2003):

• increased market power
• overcoming entry barriers
• reducing the cost of new product development
• increasing speed to market of new products
• lowering risks
• increased diversification
• avoiding excessive competition

Question 16

Describe Goshal’s organising framework?

Answer 16

Question 17

Describe the four types of international stragey?

Answer 17

Question 18

What is Multinationals (or multidomestic)?

Answer 18

Treat each country market as independent and best serviced by a subsidiary dedicated to meet its local needs and conditions.

Question 19

What are Global firms?

Answer 19

Emphasise worldwide strategies to benefit from operational scale. They are heavily centralised, with direction and control emanating mainly from central headquarters.

Question 20

What are International firms?

Answer 20

Copy from the centre to transfer and share knowledge around the various business units to allow the whole organisation to benefit from experience gained in any one part.

Question 21

What are Transnationals?

Answer 21

Generate and transfer knowledge and expertise both locally and centrally. Their distinguishing characteristic is the ability to learn from any part of the organisation.

Question 22

What is Markides’ Who, what, how Framework?

Answer 22

Who is the customer?

What is the value proposition that their organisation makes to its customer?

How does the organisation deliver that value proposition?

Question 23

Explain Porter’s original generic strategy matrix?

Answer 23

Question 24

What argument is Porter making regarding achieving cost leadership or differentiation?

Answer 24

Porter’s argument that organisations must follow one, and only one, generic strategy, or risk becoming ‘stuck in the middle’.

Question 25

What is cost leadership (Porter’s generic strategy matrix)?

Answer 25

The first generic strategy is that of overall cost leadership. Here the organisation sets out to be the lowest-cost producer in its industry, using any or all of a variety of sources of potential cost advantage (which we outline below) – we shall discuss cost leadership in NFP organisations separately. If a for-profit organisation can achieve and sustain cost leadership, Porter argues, then it will be an above-average performer in its industry provided it can command prices at the industry average, or increase overall sales volumes from lower prices. The effect of cost leadership as a competitive strategy is that it allows an organisation to price its goods or services at a level that is comparable with or lower than its competitors, yet achieve higher gross margins. Note that superior profits and advantage derive from lower cost, not price: being low-price but having high costs tends not to offer competitive advantage to an organisation. Pursuing a low-cost strategy does, however, give an organisation increased flexibility on the pricing strategies it can pursue. Furthermore, being the lowest-cost producer does not mean that the value package offered to customers is unimportant. The low-cost producer must offer a level of functionality and quality that is acceptable within its market sector or there may be no demand from consumers. The success of Japanese motorbike manufacturers like Honda and Suzuki in the US and UK markets in the 1970s, overtaking the existing US and UK market leaders, is usually attributed to their low-cost leadership over their competitors.

Question 26

Name drivers for cost leadership?

Answer 26

Grant (2010)

Question 27

What is the difference between cost leadership and cost effectiveness?

Answer 27

Porter (1985) identifies cost-effectiveness as an operational issue, while cost leadership is a strategic issue.

Question 28

What is differentiation (Porter’s generic strategy matrix)?

Answer 28

The second generic strategy is that of differentiation. Here an organisation seeks to portray itself as unique in its industry along one or more dimensions that it believes are valued by buyers. It selects attributes that buyers in an industry perceive as important and positions itself to meet those needs as fully as possible. The bases for potential differentiation are unique to each industry and each organisation. The differentiator is rewarded for its perceived uniqueness with the potential for charging a premium price (often needed to cover the considerable additional costs of differentiation). A firm that can achieve and sustain differentiation will be an above-average performer in its industry, provided its price premium exceeds the extra costs incurred in delivering the differentiation. The product or service must continue to be valued by the customer if the price premium is to be maintained. Of course, differentiators cannot ignore cost, since a poor cost position will erode any gains that result from a price premium and render their competitive advantage unsustainable.

Question 29

Name examples of differentiation drivers?

Answer 29

• Product features and product performance
• Complementary services
• Intensity of marketing activities
• Technology embodied in design and manufacture
• The quality of purchased inputs
• Procedures influencing the conduct of each of the activities
• The skill and experience of employees
• Location
• The degree of vertical integration

Question 30

What is a focus strategy?

Answer 30

This leaves us with the question of which competitive options are available for organisations not wishing to serve the broad market. Porter (1985) suggests they follow a ‘focus’ strategy in a specific market segment or segments, to the exclusion of other segments. By optimising its strategy for the target segment(s), the focuser seeks to achieve a competitive advantage by ‘out-focusing’ its broadly targeted competitors (i.e., to address more precisely customer needs in that specific segment than its competitors do). To achieve this option requires a clear appreciation of:

• where its focus is
• how narrow or broad a market segment or sector it must compete in.

A segment may be broadly defined by a very wide range of possible factors, including geographic coverage (e.g., organisations which operate in the Asia-Pacific area only), distribution channel (e.g., online only), or particular customer characteristics (e.g., age, gender, ethnicity or income group).

Question 31

What is Integrated cost leadership and differentiation?

Answer 31

This new strategic option could take either of two forms.

• First, an integrated approach may offer the consumer a differentiated product at a low price by focusing on keeping costs low. (low-cost differentiation)
• The option is available for organisations to differentiate products that have emerged from a low-cost process (differentiated low cost)

Question 32

What is Johnson’s testing and evaluating criterias?

Answer 32

suitability, feasibility and acceptability (sometimes shortened to SFA).

Question 33

What is meant with suitablity (Johnson)?

Answer 33

The suitability of a proposed strategy can be assessed by the extent to which it matches the needs identified from a strategic analysis. Such a test of suitability is sometimes regarded as a test of consistency with the environmental or resource analyses and their fit with the organisational objectives.

• First, the proposed strategy should be consistent with and fulfil the market KSFs that the organisation operates within, which, as we noted in Unit 2, are the minimum entry requirements of that particular market.
• Second, the proposed strategy should address the strategic problem or opportunity identified in the strategic analysis. Does it overcome an identified resource weakness or environmental threat?
• Third, the strategy should capitalise on the organisation’s identified resources and capabilities and the way they relate to external opportunities.
• Finally, the strategy should fit the organisation’s objectives, such as required rates of return on capital, profitability measures and other, non-financial, performance indicators. Increasingly, these objectives may also involve considerations of the organisation’s role in a wider context, including an acknowledgement of corporate social responsibility as discussed in Unit 4.

Suitability therefore requires a decision maker to assess the extent to which the strategic options fit with the organisation and the situation it finds itself in.

Question 34

What is meant with feasability (Johnson)?

Answer 34

The test of the feasibility of a proposed strategy will consider how well it would work in practice and how difficult it might be to achieve.

The questions to be asked include the following:

• Can the strategy be resourced? Even the most brilliant strategy cannot be implemented if, for example, the organisation’s financial position is too weak to raise the capital needed to begin implementation.
• Can the organisation actually achieve the required level of operational performance, say, in quality and service levels? Would a strategy aimed at reducing costs in manufacturing run into problems associated with inadequate managerial resources, insufficient numbers of trained staff, insufficient plant, or inadequate process and product technologies?
• How will the competition react and how will the organisation cope with that reaction? For example, a strategy to increase market share by reducing prices may lead to a fierce competitive reaction.

Feasibility therefore requires a decision maker to assess the extent to which the strategic options can be delivered by the organisation. There is no point in selecting an option that does not have the resources required to deliver it successfully. Having said that, this test should not be used as an excuse to avoid opportunities to identify gaps in resources, if as a consequence of successfully obtaining these resources the opportunity is created to pursue otherwise infeasible options. The test of feasibility should therefore also reflect an organisation’s ambition to the extent that the organisation should seek to stretch itself to achieve higher and more valuable performance levels.

Question 35

What is meant with acceptability (Johnson)?

Answer 35

The test of the acceptability of a possible option explores the issues of how the various organisational stakeholders might feel about the expected outcomes of the strategy – typically in terms of risk, profitability, reward, ethics and the effect on relationships. Meeting reasonable stakeholder expectations is clearly a crucial test for acceptability in a strategy.

Test questions include the following:

• What will be the financial or cost–benefit performance? Is there an unacceptable risk of endangering overall liquidity or affecting capital structure?
• Is there a risk that the organisation’s relationships with its stakeholders could be unacceptably affected? Is the proposal likely to upset employees, institutional shareholders, existing customers or clients, or governmental organisations?
• What is the effect of the proposed strategy on the internal systems and procedures? Even if feasible, will there be an unacceptable level of additional pressure on staff?

Acceptability therefore requires a decision maker to make a judgement about how well the decision will be greeted by the key stakeholders who will have an interest in the decision, and, by implication, an estimation of how the stakeholders’ responses (positive or negative) will be managed.

The three tests of suitability, feasibility and acceptability provide an initial set of screening tools for strategic choice. They prompt managers to be explicit about the underlying rationale behind proposed strategies and to assess the associated risks and uncertainties. You will be called on to use these tests in the residential school for this module, when you will be undertaking a group exercise on scenario planning. However, what they do not do is directly assess the financial implications of the options, and thus they tell us only half the story.

Question 36

How to test Business risk?

Answer 36

Types of financial risk analysis include the following:

• Cash flow analysis – a crucial measure because organisations can be profitable, but go bankrupt because of poor cash flow and liquidity. Strategies that offer long-term profitability may not generate cash immediately and hence may endanger the company’s existence.
• Break-even analysis – an approach that estimates the amount of sales/revenue generated that is required to cover the cost of the initial investment in the launch of the strategy. Is the resulting break-even revenue figure achievable or realistic?
• Company borrowing requirements – can the strategic option be accomplished within the current financial capabilities of the organisation, or will extra borrowing be required to finance the strategy? What impact will this extra gearing have, for example, on the share value of the organisation? Will pursuit of the strategic option leave the organisation open to hostile takeover?
• Financial ratio analysis – what impact will the strategic option have on the liquidity, asset management and stockholding of the organisation? Perhaps more tellingly, a financial ratio analysis of all major suppliers or customers could impact on the evaluation of strategic options. The possibility of bankruptcy in a major supplier could seriously undermine the attractiveness of a strategic option.
• Currency analysis – a major concern in evaluation of international strategic options.

Question 37

How to test Attractiveness to shareholders and stakeholders?

Answer 37

Such measures may include the following:

• Shareholder value added – how will the proposed strategic option contribute towards the aim of maximising the long-term cash flow of the business unit it affects?
• Cost–benefit analysis – a broader appraisal method that seeks to determine how a strategic decision will perform against a wider set of criteria than sales, profits or costs. Consequently, cost–benefit analysis has a tendency to be applied in situations where a broader range of stakeholder interests is being considered, rather than in instances where returning shareholder value is the principal concern. For example, the economic and social costs of building a new road or another runway at an airport may require the increased levels of noise and pollution for local residents to be balanced against transport costs to industry and to the domestic traveller.