Chapter vi: Other elements of strategic choice
Chapter learning objectives
Upon completion of this chapter you lot will exist able to:
- analyse, in a scenario, the evolution directions bachelor to an organization using Ansoff Matrix and a TOWS matrix
- use the Ansoff matrix to develop growth strategies for a business organisation
- explicate the use of the success criteria of suitability, acceptability and feasibility in appraising a chosen strategy.
1 Introduction
This affiliate examines other means in which organisations can grow.This will extend strategic pick beyond competitive strategies and willoften mean looking at new products and markets.
The affiliate closes with a discussion on how strategies should be evaluated â€" this is a key exam area.
2 SWOT (TOWS) analysis and strategic direction
Introduction
Strategic direction should 'fit' the results of the swot analysis.Used in this style a SWOT analysis is sometimes referred to as a TOWSmatrix.
Examples of the use of the TOWS matrix
Illustration â€" SWOT (TOWS) analysis & strategic direction
(1)A company has a prestigious make name and is wondering whether or not to enter a new emerging foreign market.
Proposition: (SO) the prestigious make name is a strength andthe emerging marketplace is an opportunity. The company could make use of thebrand proper name past adopting a differentiation or focused differentiationstrategy.
(2)A company has a poor distribution network, but wants to start exporting to lucrative overseas markets.
Proposition: (WO) Collaboration with a company that has a gooddistribution network might overcome the weakness so as to make use ofthe opportunity.
(3)A company is facing new competitionfrom cheap overseas manufacturers. The company has a long-standingreputation for proficient quality products.
Suggestions: (ST) The company could motion towards adifferentiation strategy to endeavor to brand use of its reputation forquality to counter the competitive threat. This might non work if theimports were also of good quality and cheaper. Perhaps relocatingmanufacturing abroad would give a low cost-base but retain the strengthof the company's reputation.
(4)A company has old product lines and is facing dynamic competition from new producers.
Proposition: (WT) The virtually difficult scenario to bargain with asnothing is going right â€" weaknesses and threats combined.Repositioning itself might help and then that the company was seen equally a sellerof more traditional goods. Spending on new pattern and products wouldhelp to eradicate the weakness.
Examination your understanding 1
Mobius Ltd is an engineering company and has a reputation forhigh-quality production of circuitous metallic pieces to strict deadlines. Ithas recently been suffering falling sales because composite materials,such as carbon fibre, have been able to supervene upon many metal components.
Required:
Using a TOWS/SWOT assay, what are the firm's options?
3 Ansoff'south matrix
Introduction
Ansoff's matrix is a very useful tool and can be used in nearly everyscenario. Information technology neatly summarises many of the strategic options facingorganisations.ÂÂ
The matrix
Mostly, adventure increases from quadrant A to quadrant D (chance in quadrants B and C probably about equal).
More details on the strategies in Ansoff's matrix
Market place penetration â€" existing markets and products
This is a strategy by which a company seeks to increase the salesof its nowadays products in its existing markets. It is aimed atincreased usage past methods such as recipes on tins and packets,attracting customers by offers and cost reductions and by attractingnew users. The advertising for Guinness has been trying to attractyounger drinkers, rather than its traditional older drinkers. Annotation thelink hither with a problem child/star production.
Methods of growth might include the following.
- Build market place share â€" particularly suitable if the overall market is growing. The business concern might use discounting, increased advertising, etc.
- Develop niches â€" target growth in a range of targeted niches inside the manufacture, building up overall marketplace share. This may exist particularly suitable if the organisation is small compared to competitors.
- Hold marketplace share â€" especially if the market place is reducing.
- Withdrawal â€" seek withdrawal of other companies, through, for example, using economies of scale to lower costs and make other firms uncompetitive.
The ease with which a business concern can pursue a policy of marketpenetration will depend on the nature of the marketplace and the position ofcompetitors. When the overall market is growing it may exist easier forcompanies with a small market place share to improve quality or productivityand increase marketplace activity rather than in static markets, where it canbe much more than difficult to achieve. The lessons of the experience curvestress the difficulty of market penetration in mature markets where thecost structure of the market leaders should prevent the entry ofcompetitors with lower market place share.
Market penetration strategy would be contemplated for the following reasons.
- When the overall market is growing, or can be induced to grow, it may be relatively easy for companies entering the market, or those wishing to gain market share, to do so relatively apace. (Some companies established in the market may be unable or unwilling to invest resources in an attempt to grow to meet the new demand.) In dissimilarity, market penetration in static, or failing, markets can exist much more hard to achieve.
- Market place penetration strategy would be forced on a visitor that is determined to confine its interests to its existing product/market area but is unwilling to permit a refuse in sales, even though the overall market is declining.
- If other companies are leaving the market place for whatever reasons, penetration could bear witness piece of cake â€" although the adept sense of the strategy may be in doubt.
- An arrangement that holds a potent market position, and is able to use its experience and competences to obtain strong distinctive competitive advantages, may notice information technology relatively like shooting fish in a barrel to penetrate the market.
- A marketplace penetration strategy requires a relatively lower level of investment with a corresponding reduction in risk and senior management involvement.
Opportunities for improving business organisation performance inside theexisting design of trading will more often than not fall under the followingheadings.
- Advert and promotion to increase the volume of sales into existing markets.
- Improved selling and distribution methods to improve the service offered and possibly to rationalise the market coverage.
- Modifications to products or to packaging in guild to improve and broaden their appeal, and ideally to reduce costs. Some rationalisation of products may be involved.
- Improvements in productivity to make a greater volume of products available without a disproportionate increase in costs. This may involve the modification or rationalisation of production methods.
- Changes in selling price, which tin be increased if the market is relatively inflexible, or reduced in order to attain a proportionately college volume of sales.
Fifty-fifty though market place penetration is seen every bit the to the lowest degree risky ofAnsoff's options, information technology should non be assumed that take a chance is always depression. WhenYamaha attempted to proceeds share over Honda, it provoked a retaliationthat left Yamaha in a worse position than before. The instance shouldserve to remind us that Ansoff'south strategies still require a competitiveadvantage to be effective (a indicate Ansoff made many times, only i thatis oft forgotten).
Product evolution â€" existing markets and new production
This strategy has the aim of increasing sales by developingproducts for a visitor'south existing market place. For our purposes, new-productdevelopment is a generic term that encompasses the evolution ofinnovative new products and the modification and improvement of existingproducts. By adopting this strategy the company could:
- develop new product features through attempting to adapt, modify, magnify, substitute, rearrange, reverse or combine existing features
- create different quality versions of the product
- develop additional models and sizes.
A visitor might bear witness a preference for product development strategy for the following reasons:
(a)information technology holds a high relative share ofthe market, has a potent make presence and enjoys distinctivecompetitive advantages in the market
(b)at that place is growth potential in the market
(c)the irresolute needs of its customersdemand new products. Continuous product innovation is often the onlyway to preclude product obsolescence
(d)it needs to react to technological developments
(east)the company is peculiarly strong in R&D
(f)the company has a stiff organization structure based on product divisions
(g)for offensive or defensive motives, for instance responding to competitive innovations in the market.
However, product development strategy does have its downside andthere are strong reasons why it might non exist advisable for a company.For example, the process of creating a wide production line is expensiveand potentially unprofitable, and it carries considerable investmentrisk. Empirical inquiry reveals that companies enjoying loftier marketshare may benefit in turn a profit terms from relatively high levels of R&Dexpenditure, while companies in weak market positions with loftier R&Dexpenditure fare badly.
In that location are reasons why new-production evolution is becoming increasingly difficult to accomplish:
(a)in some industries there is a shortage of new product ideas
(b)increasing market differentiationcauses market segments to narrow with the event that low volumes reduceprofit potential that in turn increases the risk of the investmentinvolved
(c)a visitor typically has to developmany product ideas in order to produce ane expert ane. This makes newproduct development very costly
(d)even when a product is successfulit might still suffer a brusk life cycle with rivals quick to 'copycat'in the market merely with their ain innovations and improvements
(e)there is a high take chances of production failure.
Success frequently depends upon stretching a brand further than the marketplace is willing to take it.
Marketplace development â€" existing products and new markets
Market development strategy has the aim of increasing sales byrepositioning nowadays products to new markets. (Notation: this strategy isalso referred to as 'market creation'.)
Kotler suggests that in that location are two possibilities:
(a)the company tin can open additional geographical markets through regional, national or international expansion
(b)the company can attempt to attractother market segments through developing product versions that appeal tothese segments, entering new channels of distribution, or advertisingin other media.
For example, during 1992 Kellogg undertook a major television andpromotion campaign to reposition Kellogg'southward Cornflakes (traditionallyregarded as a breakfast cereal) to provide afternoon and evening meals.In the same mode, the malt drink Horlicks had previously repositionedfrom a once-a-twenty-four hour period product ('a nighttime repast') to become a through-the-day'relaxing drink' for young professionals. This was non successful. Onthe other manus, Lucozade has successfully moved its brand from a productassociated with infirmity to a sports-related product.
Market place development strategy would be contemplated for the following reasons:
(a)the company identifies potentialopportunities for market development including the possibilities ofrepositioning, exploiting new uses for the product or spreading into newgeographical areas
(b)the company'southward resource arestructured to produce a particular product or product line and it wouldbe very costly to switch technologies
(c)the visitor's distinctivecompetence lies with the product and it also has strong marketingcompetence (Coca-Cola provides a good case of a company that pursuesmarket development strategies, equally does the fast-food eatery chain ofMcDonalds.)
Test your understanding 2
Describe how Porter'south Generic Strategies and Ansoff's Matrix can be used when generating strategies.
Explicate the limitations of the two models.
Related diversification
There are two types of related diversification:
- vertical integration
- horizontal diversification (sometimes known as concentric diversification).
Vertical integration
Taking over a supplier (backwards vertical integration) or customer (forwards vertical integration).
Horizontal diversification
Horizontal diversification refers to development into activitiesthat are competitive with, or direct complementary to, a company'spresent activities. There are three cases.
(a)Competitive products. Taking over acompetitor tin can have obvious benefits, leading eventually towardsachieving a monopoly. Autonomously from active competition, a competitor mayoffer advantages such as completing geographical coverage.
(b)Complementary products. Forexample, a manufacturer of household vacuum cleaners could makecommercial cleaners. A full production range can be presented to the marketand there may well exist benefits to be reaped from having many of thecomponents common between the different ranges.
(c)By-products. For example, a buttermanufacturer discovering increased demand for skimmed milk. Generally,income from by-products is a windfall: any you get is counted, at leastinitially, every bit a bonus.
Illustration 1 â€" Horizontal diversification
Airline (SAS) owning a hotel business â€" horizontal diversification with obvious opportunities for cross selling
Rezidor SAS Hospitality is a wholly endemic hotel group subsidiary ofthe Stockholm-based SAS Group, an airline. The hotel group currentlyoperates 248 hotels in 47 countries with well-nigh l,000 rooms either inoperation or nether evolution. Information technology aims to have 700 hotels across itsdifferent brands by 2012. Rezidor SAS manages selected Carlson brands(such as Radisson, Park Inn, Regent and Country Inn) in Europe, theMiddle East and Africa.
Unrelated/conglomerate diversification
- Diversifying into completely unrelated businesses.
- Not clear where added value comes from â€" except if an ailing business is turned round.
- Often leads to loss of shareholder value.
Conglomerate diversification
Diversification
Growth by diversification â€" new products and new markets
Diversification is the deployment of a company's resources into newproducts and new markets. The company thus becomes involved inactivities that differ from those in which it is currently involved.Diversification strategy means the company selectively changes theproduct lines, client targets and perchance its manufacturing anddistribution arrangements.
The term 'diversification' really covers a range of different techniques.
- Conglomerate diversification â€" a firm moves into markets that are unrelated to its existing technologies and products to build up a portfolio of businesses. Sometimes this is because the company has developed skills in turnaround or brand management, and can buy an ailing company very cheaply and quickly create value. Hanson have accomplished great things in this manner, based upon a nucleus of around 500 people. On other occasions, a company might use conglomerate diversification if it believes it has no real futurity in its existing product market place domain. Finally, many entrepreneurial leaders motility in and out of markets simply because of opportunities â€" Virgin existence a good instance.
- Horizontal diversification â€" synergy is highest in the example of horizontal diversification, especially if the technology is related, but the disadvantage is that fiddling additional flexibility is provided. This blazon of strategy affects all parts of the value chain since fixed costs tin exist spread over an increased number of units. Most diversification strategies are of this blazon. The strategy is undertaken when a company extends its activities into products and markets in which information technology already possesses necessary expertise. For example, a manufacturer of televisions branching into the manufacture of DVD recorders, camcorders and hullo-fi equipment.
- Vertical integration â€" a house buys up different parts of the wider value system.
Forward integration â€" moving towards the consumer â€" control of distribution, e.g. drinks manufacturers buying public houses.
Backward integration â€" moving abroad from the consumer â€" command of supplier, due east.g. beer brewers ownership hop growers.
Many manufacturers observe item specialist component suppliersare achieving higher returns than they are, and buy into the market. Indifficult markets information technology might be necessary to own distributors or retailoutlets to place the product before a customer.
Suppose that a visitor currently manufactures cars. If the companywere to buy a chain of machine dealers, this would represent forwardintegration since it is moving towards the final consumer. If thecompany were to buy a manufacturer of car components (headlights,windscreens, etc.), this would represent backward integration. A goodway to understand when a vertical integration strategy should beconsidered and how information technology should be evaluated is to consider its possiblebenefits and costs:
Examination your understanding 3
Hash out the advantages and disadvantages for the M Company, aclothes manufacturer, in integrating frontward past buying upward a chain ofretail outlets and integrating backwards by ownership a visitor thatmanufactures material.
4 Strategy evaluation
Introduction
Johnson, Scholes and Whittington argue that for a strategy to exist successful it must satisfy three criteria:
- Suitability â€" whether the options are acceptable responses to the house's cess of its strategic position.
- Acceptability â€" considers whether the options encounter and are consistent with the business firm'south objectives and are acceptable to the stakeholders.
- Feasibility â€" assesses whether the arrangement has the resources it needs to carry out the strategy.
This criteria can exist applied to any strategy determination such as thecompetitive strategies assessed in the previous chapter, the growthstrategies assessed in this chapter, or even the methods of developmentconsidered in the side by side chapter.
Further caption on each exam
Suitability
Suitability is a useful criterion for screening strategies, asking the following questions most strategic options:
- Does the strategy exploit the company strengths, such equally providing work for skilled craftsmen or environmental opportunities, e.g. helping to establish the organization in new growth sectors of the market?
- How far does the strategy overcome the difficulties identified in the assay? For instance, is the strategy likely to improve the system'south competitive continuing, solve the company'due south liquidity problems or decrease dependence on a particular supplier?
- Does the option fit in with the organisation'due south purposes? For example, would the strategy achieve profit targets or growth expectations, or would it retain control for an owner-manager?
Acceptability
Acceptability is essentially nigh assessing risk and return and isstrongly related to stakeholders' expectations. The issue of'adequate to whom?' thus requires the analysis to be idea throughcarefully. Some of the questions that will help identify the likelyconsequences of whatsoever strategy are equally follows:
- How volition the strategy bear upon shareholder wealth? Assessing this could involve calculations relating to NPV, SVA or EVA.
- How will the organization perform in profitability terms? The parallel in the public sector would be price/benefit assessment.
- How volition the financial risk (e.g. liquidity) change?
- What event volition it take on capital construction (gearing or share ownership)?
- Will the function of whatsoever section, group or private alter significantly?
- Will the system's relationship with outside stakeholders, eastward.g. suppliers, authorities, unions, customers need to alter?
- Will the strategy exist acceptable in the organisation's environment, e.g. higher levels of noise?
Feasibility
Assesses whether the organisation has the resources it needs to bear out the strategy.
Factors that should be considered tin be summarised nether the M-word model.
- Machinery. What demands volition the strategy make on production? Do we have sufficient spare capacity? Exercise we need new production systems to give lower cost/ameliorate quality/more flexibility/etc?
- Direction. Is existing direction sufficiently skilled to carry out the strategy.
- Coin. How much finance is needed and when? Tin nosotros raise this? Is the cash menses feasible?
- Manpower. What demands volition the strategy make on human resources? How many employees are needed, what skills will they need and when do we need them? Exercise we already have the right people or is at that place a gap? Tin the gap be filled by recruitment, retraining, etc?
- Markets. Is our existing make proper name stiff enough for the strategy to piece of work? Will new brand names accept to be established? What marketplace share is needed for success â€" how quickly tin can this be achieved?
- Materials. What demands will the strategy make on our relationships with suppliers. Are changes in quality needed?
- Brand-up. Is the existing organisational structure adequate or will it need to be changed?
Test your understanding four
Sarah Wu has prepare and run her ain bookstore for five years. Shefaces niggling local contest and has fabricated strong financial returnsfrom the store. She now has $15,000 available for investment and plansto open up up a 2d store in a nearby town which currently does not havea bookstore.
Her friend, Misah, has just returned from completing a universitycourse and has suggested that Sarah should instead invest in a websitefor her shop. He has said that this will allow Sarah to sell her booksworldwide and brand a much quicker return on her investment that the newstore opening.
Required:
Evaluate Misah's strategy.
five Chapter summary
Test your understanding answers
Test your agreement 1
The visitor's strengths are:
- good quality control
- practiced project management (strict deadlines are met)
- competence with metalwork
- high engineering ability.
The threat arises from metal components being replaced by composite ones.
The company is in the ST segment and needs to examine strategiesthat use strengths to overcome or avoid threats. Possible strategies forMobius Ltd are:
- become even better known for metalwork. Some competitors will withdraw from the market as sales fall leaving more than scope for Mobius Ltd. Presumably non all metallic components will be replaced past composites
- capitalise on its engineering, quality control and project direction strengths â€" possibly by branching into consultancy
- develop competence in manufacturing from composites â€" the engineering, quality control and project management abilities that Mobius Ltd has should make this easier.
Test your understanding 2
Porter was concerned with a firm's power to generate acompetitive advantage. He classified the possible strategies for doingso into 3 'generic' categories:
- cost leadership;
- differentiation;
- focus.
An organisation wishing to generate strategies could use this every bit a framework for producing and evaluating options:
- toll leadership tin can exist pursued through improved efficiency, increased automation, economies of calibration, etc.;
- differentiation can be pursued by real modifications to products or services, or past creating a perception of such differences by constructive branding and advertising;
- focus can relate to specialisms in client blazon, geographical location, product features, quality, etc.
Organisations wishing to develop strategies can utilise Ansoff'sMatrix, which categorises existing and new markets and products, tofocus on different combinations of products and markets:
- Staying with existing products and existing markets, but aiming to increase marketplace penetration (as well equally internal efficiency).
- Developing new products to be targeted at the existing markets.
- Opening upwards new markets for existing products â€" market development.
- Developing new products and aiming at new markets â€" potentially the riskiest arroyo.
Both of these models can be productive sources of generatingstrategies, and each provides a useful framework for evaluation ofalternatives. But each as well suffers from limitations.
Porter's model implies that all the buyers in a market have perfectknowledge of all the products available to buy. If this were true, thena firm that benefits from no competitive advantage would attract nobuyers and would be doomed. In practice, the knowledge of buyers islimited and firms tin can prosper despite an absenteeism of competitiveadvantage.
Ansoff'due south model depends upon a simplistic division of strategicfactors into product factors and market place factor. Although this can helpmanagers to focus on the different aspects of a trouble, the truth isthat these factors are linked.
Both models also imply that a business firm will focus on one strategy tothe exclusion of others. In reality, a firm can pursue a number ofdifferent strategic objectives at the same fourth dimension.
Test your understanding three
In that location are several reasons why M might pursue forward integration.It will be easier for a chain of retail outlets to differentiate itsclothes from those of its competitors through branding. This gives anopportunity for higher margins to be earned. The M Visitor can produceclothes as the shops need them (JIT), leading to reductions ininventory levels. They will also have a guaranteed customer for itsoutput.
There are likewise reasons against this grade of action. The reactionof the customers that the Yard Company presently supplies may be hostile.If they stop stocking M Company'south products, will the chain of retailoutlets be able to sell enough to comprehend this fall in demand? What is thelikely effect of the increased costs of distributing clothes to theshops, rather than to the depots of electric current customers?
A strategy of backward integration into the supply chain would givethe M Company a defended supplier with both guaranteed quality andprice. The material could be manufactured when required by M Company,leading to lower inventory levels.
The downside to this form of action is that, if alternativecheaper suppliers get bachelor, the K Company volition not be able touse them, since it will be committed.
There are as well arguments against integration generally, whether forwards or backwards.
Being successful may require unlike skills from those presentlypossessed by the company. For example, M Company may know footling aboutretailing or fabric manufacturing. To be successful, it will take tostretch its current competencies to encompass these areas.
In addition, at that place may be a very different focus for each of thebusinesses. For example, the chain of retail outlets may well besuccessful if information technology can differentiate its products from those of itscompetitors using innovative colours and material, while the clothmanufacturer is probable to be successful by keeping its costs low byusing basic materials and standardised colours. It will be difficult forthe M Company to maintain both of these at the same time.
Examination your understanding 4
Johnson, Scholes and Whittington's tests will be used to evaluate the strategy:
Feasibility
A website may be inexpensive to gear up and gaining a web presence isrelatively easy. Just designing the site and maintaining it will needtechnical expertise which Sarah is unlikely to possess.
Selling internationally will also require internationaldistribution networks that Sarah volition not possess. She may exist able tooutsource distribution, only the costs of this are likely to outweigh anybenefits.
Therefore, this strategy may non be a feasible one for Sarah.
Acceptability
As a pocket-size, owner-managed concern, Sarah is likely to be riskaverse and may well want to focus on the area that she is comfortablewith. She may decide that international expansion is as well risky anddifficult to control and lack the conviction necessary to run thebusiness successfully.
She is therefore unlikely to detect the strategy to be acceptable.
Suitability
In that location are already worldwide book selling companies on the internetsuch every bit Amazon. They are likely to accept built upward a reputation and supplychain that Sarah cannot overcome. They will also have economies ofscale which enable them to sell books at a lower price than Sarah wouldfind possible and therefore Sarah's website would struggle to proceeds anycompetitive advantage against these rivals.
Therefore the strategy is also unsuitable.
Overall
This is not a valid strategy for Sarah to pursue and she should instead evaluate the market place evolution opportunity further.
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Final modified at 5/25/2012 12:55 PM by System Business relationship (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
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