Chapter 4: Introduction to Business Strategy

Differentiation (Generic competitive strategies)

The provision of a product or service which the industry as a whole believes to be unique. Product categorises 1) Breakthrough products - offer a radical performance advantage over competition perhaps at a very low price 2) Improved products - Better performance at a competitive price 3) Competitive products - A combination of price and performance How to differentiate - Build up a brand image - Give the product special features to make it stand out -Exploit other activities of the value chain like sales, service or marketing -Use IT to create new services or product features

Activities in the value chain

There are primary activities and support activities Primary activities 1) Inbound logistics - storing inputs to the production system 2) Operations - convert resource inputs into a final product 3) Outbounds logistics - packaging, warehousing, testing 4) Marketing and sales - Informing customers about the product, persuading them to buy it 5) Service - installing products, repairing them, upgrading them etc Support activities provide purchased inputs, human resources, technology and infrastructure functions to support the primary activities

The four S's (Static environment)

These four factors can be used to describe a static environment • Static - environmental change is low • Single - Product/market • Simple - technology • Safe In static situations there is often great value in studying the business's historic and current environment because change is very slow so the past becomes a good predictor of the future.

The bargaining power of suppliers

This depends on several factors 1) One or two dominant suppliers to the industry, able to charge monopoly or oligopoly prices 2) New entrants or substitute products to the supplier's industry 3) Other customers outside the industry and don't rely on the industry 4) The importance of the supplier's product 5) Specialised product 6) Switching costs for their customers would be high

External appraisal

This examines opportunities and threats - Profit making opportunities which can be exploited by the bushiness's strengths - Environmental threats like a recession, competitors etc, anything that the business needs to protect itself from For assessing opportunities the business must ask itself the following questions 1) What opportunities exist in the business environment? 2) What is the capability profile of competitors? Are they better placed to exploit these opportunities? 3) What is the company's comparative performance potential in this field of opportunity? For assessing threats they should answer the following questions 1) What threats might arise to the business or its environment? 2) How will competitors be affected? Opportunities and threats might relate to any or all the items covered in the PESTEL analysis plus those in the 5 forces analysis.

Boston consulting group (BCG) matrix definition

This is a method to look at the products/services the business is engaged in and the markets it services is to analyse. Assess a business's products in terms of cash generation and cash expenditure requirements. Products are categorised in terms of market growth rate and relative market share.

Michael porter's 5 force analysis

When looking at the competitive aspect of the task environment this is a useful model for that. These 5 competitive forces influence the state of competition in an industry as a whole. 1) New entrants 2) Customers 3) Substitutes 4) Suppliers 5) Competitors in the industry These determine the potential profit of the industry as a whole because of threats they represent, the bargaining power they hold, and the degree of rivalry that exists among current competitors in the industry.

External sources of power

1) Control over strategic resources - major suppliers, banks and shareholders can exert this form of power 2) Involvement in implementation - distribution outlets have greater knowledge of customer requirements than manufacturers and can dictate to manufacturers. 3) Knowledge and skills - subcontractors have power if they perform vital activities for a business 4) External links - Public services often consult a wide variety of external stakeholders i decision making and shareholders have an informal influence over the organisation 5) Legal rights - Government planning

Internal sources of power

1) Hierarchy - power over others via span of control 2) Influence/reputation - Informal power through referent power 3) Relative pay - Better paid employees such as directors and managers have more position power as a result 4) Control of strategic resources - trade unions when demand for output is high and labour is scarce 5) Knowledge skills - individuals deriving power from their specialist knowledge or skills 6) Environmental control - Finance and marketing staff may have a more detailed knowledge of the external environment than other functional staff 7) Strategic implementation involvement - the use of personal discretion in decision making can give some element of power

Hierarchy of objectives

1) Mission - mission statement 2) Strategic objectives - Corporate strategy 3) Goals=targets - financial/investment/competitive strategies 4) Strategies - business strategies 5) Plans and standards - Functional strategies -This is a top down approach formulating the final strategic plan

Support activities (value chain)

1) Procurement - acquire the resource inputs to the primary activities (purchase of materials, equipment) 2) HRM - recruiting, training, developing and rewarding people 3) Tech development - product design, improving processes and/or resource utilisation 4) Firm infrastructure - planning, finance, quality control (porter believed these to be crucial to an organisation's strategic capability.

Different aspects of the product

1) Product class/generic products - cars, washing machines, newspapers, 2) Product form - within a product class there are different forms that the product can take like a car can be a 5 seater or an 8 seater 3) Brand - the type of product form like a ford focus The product life cycle applies in differing degrees to each of the three aspects like a product class (car) can have a long maturity stage.

Factors that make a good mission statement

1) Purpose 2) Strategy 3) Values 4) policies and standards of behaviour

Internal appraisal (SWOT ANALYSIS)

1) Shortcomings in the business's present skills and resources 2) Strengths in its skills and resources which it should seek to exploit Content of the SWOT analysis 1) Marketing - Growth markets 2) Products and brands - product quality 3) Distribution/logistics - service standards 4) Research and development - Costs, benefits 5) Finance - investment returns 6) Plant and equipment/production - asset value 7) Raw material and finished inventory - sources of supply, storage capacity 8) Management and staff - age, skills, training, recruitment 9) Business management and organisation - leadership style, communication links, information system

Types of competitor

Philip Kotler listed 4 types of competitor depending on the relevant level at which the competitor operates. 1) Brand competitors: similar firms offering similar products (E.G, Mcdonalds vs KFC) 2) Industry competitors: having similar products but are different in other ways like geographical market, product range or distribution methods. (E.G, Amazon vs local retailer) 3) Generic competitors: Compete for the same disposable income with different products. (E.G , music store which sells CDs and DVDs and a book store on the opposite side of the road) 4) Form competitors: offer distinctly different products that satisfy the same needs. (Manufacturers of matches vs cigarette lighters)

SWOT analysis (Corporate analysis)

A business's strength, weaknesses, opportunities and threats are analysed using SWOT analysis. In relation to the internal and environmental (external) factors affecting an entity in order to establish its condition before preparation of the long term plan. It is not likely to produce a robust and workable strategy. The managers involved must have a more detailed and intimate understanding of the nature and implications of factors and to be 'realistic. The SWOT analysis is summarised on a cruciform chart

Ansoff's matrix: product/market strategies

A combination of a business's activities in current and new markets, with existing and new products can lead to four different competitive strategies for growth. 1) Existing products in current markets: pursue market penetration 2) Existing products in new markets: pursue market development 3)New products in current markets: pursue product development 4) New products in new markets: pursue diversification

Gap analysis

A comparison between an entity's desired future performance level and the expected performance of projects both planned and underway. The desired strategic objectives and what it would achieve if it carried on with no changes in strategy. Differences are classified in a way which aids the understanding of performance and which facilitates improvement. Gap analysis is based on two questions 1) What are the business objectives? 2) What would the business be expected to achieve if it did nothing and carried on with the way its going? New strategies should close this gap so the business can achieve its objectives. Profit gap is the difference between the target gap and profit forecast. New strategies have to be developed to close it.

The threat of substitute products (Porter's 5 force analysis)

A good/service produced by another industry which satisfies the same customer needs.

Potential entrant threat (Porter's 5 force analysis)

A new entrant will likely bring extra capacity and more competition. The strength of this threat is likely to vary from industry to industry depending on 1) The strength of barriers to entry which discourage new entrants 2) The likely response of existing competitors to the new entrant Entry barriers may be lowered by Changes in the environment Technological changes Novel distribution channels for products or services

Mintzberg's 5P's Strategy

Plan: Written document with targets and instructions Ploy: A move aim to get an advantage over a competitor Pattern: Consistency in what the business does Position: How does the business fit with its environment? Perspective: The business's way of looking at the world

Business external environment

Businesses exist within an environment which strongly influences what they do and whether they survive and develop. Strategic planners must take account of potential environmental impacts in order to produce plans that are realistic and achievable.

Feasibility of the strategy (SFA analysis)

Can the strategy 1) Is there enough money? 2) Is there the ability to deliver the goods/service specified in the strategy? 3) Can we deal with competitor responses? 4) Do we have access to technology, materials and resources? 5) Do we have enough time to implement the strategy? Strategies which do not make use of existing competencies and which therefore call for new competencies to acquired. Might not be as feasible. 1) Gaining competences via organic growth takes time 2) Acquiring new competencies can be costly

Strategic choice (Strategy Selection)

Choosing between generation and evaluation

Strategic choice (Strategic options generation)

Come up with new ideas, methods of growth, where to compete, how to compete in the market. Resource based strategies, positioning based strategies (porter's generic strategies, ansoff's product/market strategies)

Strategic decisions characteristics

Concern for the scope of the activities of the business Matching a business's activities to its capabilities and the environment in which it operates Resource allocation Based on the values and expectations of senior management Long term direction of the business They lead to change in the business

Levels of Strategy

Corporate Business Functional (Operational)

SFA Analysis

Corporate strategies that can fill up the gap (gap analysis) need to be evaluated under SFA analysis. 1) Suitability of the strategy 2) Feasibility of the strategy 3) Acceptability of the strategy

Breaking the strategy down

Corporate strategy is made of competitive, investment and financial strategies. They are then broken down into business and financial strategies. 1) Business strategies - How competitive advantage is gained by a particular SBU, and in particular how the marketing mix 2) Functional strategies - develop the business strategy for an SBU as it effects the finance function, marketing function, production/operations function and human resources function.

General environment

Covers all political, legal, economic, social/cultural, ecological and technological (PESTEL). These are influences in the countries a business operates in.

Legal factors

Criminal law Company law Employment law Health and safety law Data protection Environment Tax law

The bargaining power of customers (Porter's 5 force analysis)

Customers include the ultimate consumer and the buyers forming the distribution channel. Customers want better value for money. This could force down the profitability of suppliers. Just how strong the bargaining of customers is depends on several factors 1) How much the customer buys 2) How critical the product is to the customer's business 3) Switching costs 4) Whether the products are standard items or specialised 5) Customer profitability 6) Customer's ability to bypass the supplier or over take the supplier 7) Skills of the customer's purchasing staff or price awareness of consumers 8) Product quality to the customer

Suitability of the strategy (SFA analysis)

Does the strategy 1) Exploit strengths? 2) Rectify weaknesses? 3) Neutralise or deflect environmental threats? 4) Does it help the business seize opportunities?/ 5) Does it satisfy business objectives? 6) Fill the gap identified by gap analysis? 7) Generate/maintain competitive advantage? 8) Involve an acceptable level of risk?

Cost leadership (Generic competitive strategies)

Producing the at the lowest cost in the industry as a whole. Can compete freely on price in the marketing mix and can earn higher unit profits it it so chooses. How to be the cost leader 1) Set up production facilities to obtain economies of scale 2) Use latest technology 3)Improve productivity 4) Minimise overhead costs 5) Get favourable access to sources of supply 6) Relocate operations to cheaper countries

What does Strategy consider?

Long term whole organisation resources and external environment All stakeholders (internal and external) looks at how to gain a stable competitive advantage

Integrated supply chain management (SCM)

Optimising the activities of businesses working together to produce goods and services. A means by which the business aims to manage the chain from input resources to the consumer. It can involve the following aspects 1) Reduction in the number of suppliers and much closer partnership relationships 2) Reduction in customers served for the sake of focus and company concentration on high potential customers 3) Carefully designed distribution system

Static environment

Some businesses may exist in a slow environmental change like some farmers. Some business are even insulated from change by institutional factors so changes in the general environment won't affect that business.

Strategic management

Taking decisions about the scope of a business's activities The long term direction of the business The allocation of resources

Technological factors

Technology is always changing and it affects these activities •Type of products or services that are made and sold •The way in which products are made, equipment, new raw materials •The businesses are managed •Communications with external clients

Economic factors

An important influence at local and national level • GDP • Inflation • Interest rates • Tax levels • Government Spending • The business cycle • Productivity

Competitor analysis

Analyses the areas where the business does well and has a competitive advantage and those areas where the rivals are doing better. A business must define who its current competitors actually are like how coca cola competes with pepsi, all other soft drinks, tea and coffee etc. The fifth force of porter's 5 force analysis

Limiting factor (Key factor)

Anything that limits the activity of an entity. An entity seeks to optimise the benefit it obtains from the limiting factor. Once this factor has been identified the planner should 1) In the short term, make best use of resources available 2) Try to reduce the limitation in the long term

Strategic Choice

At the end of the strategic analysis/choice process, the business should have 3 types of strategy 1) Competitive Strategies Generic strategies for competitive advantage a business will pursue 2) Product market strategies: Determine where it competes and the direction of growth (which markets a business should leave or enter) 3) Institutional strategies: Determine the method of growth (relationships with other business)

Stakeholder mapping: Power and interest matrix

Aubrey l Mendelow mapped stakeholders on a matrix. This helps to define the type of relationship the business should seek with its stakeholders. When considering a potential strategy, the stakeholder should be placed in the appropriate quadrant. The quadrant they are placed in determines how they should be approached. • High power / high interest These players are found in segment D, strategy must be acceptable to them • High power/ low interest These must be treated with care while often passive, they are capable of moving to segment D, and the business should keep them satisfied. Large institutional shareholders should be here • Low power/high interest Don't have great ability to influence strategy, their views can be important in influencing more powerful stakeholders. They should be kept informed by education and communication. Community reps and charities may fall into segment B • Low power/low interest These can be directed, minimal effort is expended here

Pursue market development (Ansoff matrix)

Existing products in new markets 1) New geographical areas and export markets 2) Different package sizes for products 3) New distribution channels to attract new customers 4) Differential pricing policies to attract different types of customer and create new market segments

Market penetration (Ansoff matrix)

Existing products in current markets 1) Maintain or increase share of current markets with existing products through competitive pricing, advertising etc 2)Secure dominance of growth markets 3) Restructure a mature market by driving out competitors 4) Increase usage by existing customers

Porter's value chain

Gives a bird's eye view of the business and what it does. Competitive advantage arises out of the way in which businesses organise and perform activities in taking inputs from the environment, processing them, and selling them on at a selling price that is greater than the costs incurred.

Product life cycle

How a product demonstrates different characteristics of profit and investment over time. Analysing it enables a business to examine its portfolio of goods and services as a whole. Recognising different stages in a product's history 1) Introduction - A new product takes time to find acceptance by would be purchasers and there is slow growth in sales. The product for the time being a is 'loss maker' 2) Growth - If the product gains market acceptance, sales will eventually rise more sharply and the product will start to make profits. Competitors are attracted and as sales and production rise unit costs fall. 3) Maturity - Sales growth rates slow down and the product reaches a period of maturity which is probably the longest period of a successful product's life. Most products on the market will be at the mature stage of their life. Profits are good. 4) Decline - Eventually sales will begin to decline so that there is over capacity of production in the industry. Severe competition occurs and profits fall and some producers leave the market. Remaining producers seek to prolong the product life by modifying it.

Political influences

Influence which affects a business through a government which typically has a profound effect on a business. • Regulations • Government stability • Taxation policy • Social welfare policy • Government purchasing decisions • Entry barriers

Focus (Niche)/ (Generic competitive strategies)

Involves a restriction of activities to only part of the market (segment) through 1) Providing goods and/or services at lower cost in that segment 2) Providing a differentiated product or service to that segment (differentiation - focus) Doesn't serve the entire market with a single product. - A cost focus strategy: aim to be a cost leader in a particular segment - A differentiation - focus strategy: differentiation for a chosen segment

Porter's generic competitive strategy

Is a strategy on how to effectively close the profit gap. Taking action (offensive or defensive) to defend a position in the industry. Helps to cope with competitive forces and give a superior return on investment for the business. Michael porter holds that there are 3 generic competitive strategies. 1) Cost leadership 2) Differentiation 3) Focus

Acceptability of the strategy to stakeholders (SFA Analysis)

It is here that stakeholder analysis can be brought in. This relates to people's expectations of it. 1) Financial consideration - how far do alternative strategies contribute to meeting the dominant objective of increasing shareholder wealth 2) Customers - may object to a strategy if it means reducing service but they may have no choice 3) Government - a strategy involving a takeover may be prohibited under competition law. The environmental impact may cause key stakeholders to withhold consent. 4) The public - the environmental impact may cause key stakeholders to protest 5) Risk - different shareholders have different attitudes to risk

What is Strategy?

It is the direction of an organisation over the long term, which achieves advantages for the organisation through its configuration of resources within a changing environment.

Strategic objectives definition

The primary strategic objective in the case of a business is to make a profit for shareholders plus major objectives addressed to the shareholders.

BCG Matrix

Market growth depends on the conditions in the market Market share is assessed as a ratio, it is market share compared with the market share of the largest competitor. A market share greater than 1 indicates that the product or SBU is the market leader. Stars - They promise high future returns. In the short term these require capital expenditure in excess of the cash they generate. The strategy is to forgo short term earnings and profits to build market share (build) Cash cows - stars will become cash cows, these need very little capital expenditure and generate high levels of cash income. Cash cows can be used to finance the stars. The strategy is to maintain the market position or take max earnings in the short term at the expense of long term development if weak (harvest) Question marks - build or harvest, do the products justify considerable capital expenditure in the hope of increasing their market share or should they be allowed to die quietly as they are squeezed out of the expanding market. Dogs - These can be ex cash cows that have now fallen on hard times although they will show only a modest net cash outflow or even a modest net cash flow. They provide a poor return on investment. Release resources for use elsewhere (divest) A business portfolio of products should be balanced, with cash cows providing finance for stars and question marks, and a minimum of dogs.

Dynamic environments

Most businesses face environments characterised by rapid change and complexity. The four D's to describe a dynamic environment •Dynamic - The speed of environmental change appears to increase through time •Diverse - Many businesses are multi product and operate in many markets, increasingly international •Difficult - Because of the above factors analysis of the environment is not easy •Dangerous - because of above factors ignoring the environment can have serious consequences In dynamic environments the past is often a poor guide to the future

Pursue product development (ansoff matrix)

New products in current markets 1) Introduce new products to existing and new customers in current markets 2) Product development forces competitors to innovate 3) Newcomers to the market might be discouraged

Pursue diversification (ansoff matrix)

New products in new markets The business should have a clear idea about what it expects to gain from diversifying to new products and new markets at the same time. Growth - new products and new markets should be selected offering prospects for growth which the existing product market mix does not. Surplus - Funds not required for other expansion needs can be invested in diversification or they can be returned to shareholders

Environmental uncertainty

No business can predict the future with absolute certainty, strategic planning has to take place in the context of an uncertain future environment. Competitors may enter or leave markets, new technologies may be discovered, governments may charge. A business needs to think about how static or dynamic its future environment is likely to be.

Strategic Choice (Strategic options generation)

Normally each strategy has to be evaluated on the basis of SFA, Acceptability to stakeholders, suitability to the business operational circumstances. Stakeholder analysis and risk analysis

What aspect of the business should be analysed?

Once analysis of the external, general and task environment is done the business should then analyse itself (Internal environment) •Its resources and competencies, using a position and resource audit •Value chain •Supply chain •Its product and markets, using the product life cycle and the BCG matrix

Task environment

Relates to factors of particular relevance to the business, such as its competitors, customers and suppliers of resources.

Ecological factors

Resource inputs: Physical resources sustainability Waste output: managing efficiently Legislation: transports effects on the natural environment Government: pollution and recycling regulations Disasters: natural disasters Demand: environmentally friendly products Pressure groups: Green activities have huge influences

Rivalry amongst current competitors in the industry

Rivalry in an industry will affect the profitability of the industry as a whole. Competitive actions can take the form of price competition, advertising battles, sales promotion etc. Factors of intensity of competition 1) Market growth 2) Cost structure 3) Switching 4) Capacity 5) Uncertainty 6) Strategic importance 7) Exit barriers

Strategic analysis

Step 1: External analysis (analysing the environment of the business). Identify opportunities and threats in the business's external environment. (Uses PESTEL, porter's 5 forces analysis, industry life cycle and competitor analysis) Step 2: Internal Analysis (analysing the business) • Identify strengths, weaknesses, analyse the business's current resources (uses resource audit,value chain, BCG matrix, supply chain) Step 3: Corporate appraisal (combines steps 1 & 2). Uses SWOT analysis Step 4: Mission, goals and objectives (the business's rationale for existing, goals interpret the mission for different stakeholders. Goals are quantified embodiment of the mission) • Stakeholder analysis and mission statement Step 5: Gap analysis Compares outcomes of step 3 with 4 Uses gap analysis

The emergent approach stages

Strategic Analysis Strategic choice and implementation Review and control

Formal strategic planning (4 stages)

Strategic analysis Strategic choice Implementation of chosen strategies review and control

Strategic management criticism

Strategic management assumes that human activities are rational and logical which is often not the case since managers have psychological limitations. they do the best they can within the limits of their circumstances (bounded rationality). Produces prescriptive solutions for the long term which are rarely achieved since changes in the environment in the short term.

What is Business strategy?

Strategies for business units and individual markets. How to gain a sustainable advantages. How a particular market is approached.

What is Functional Strategy?

Strategies for the main functions within each SBU. Operations like finance, HRM and marketing strategies. How they effectively deliver the strategies made at the corporate and business level.

What is Corporate Strategy?

Strategies made at main board level for the business as a whole. they deal with the overall mission, expansion strategies, divestments, major investment decisions.

Resource based view

The business's strategic capabilities are the most important, because they explain differences between businesses and the superior performance of some over others. Strategies are developed on the unique capabilities of the business and opportunities should be sought to allow the business to exploit these capabilities to achieve competitive advantage.

Planning definition

The establishment of objectives and the formulation, evaluation and selection of the policies, strategies and tactics required to achieve them. Planning is made up of long term/strategic planning and short term/operational planning.

Positioning based view

The forces at work in an industry, sector or market are the most important factors for strategy, so strategy development is about identifying opportunities in the environment and developing strategic capability to take advantage of them.

Industry life cycle

This is popular in strategic management. Just as people are born, develop, mature, decline and die so too do products, businesses, markets and whole industries. The stages of the industry life cycle 1) Introduction - Newly invented product or service is made available for purchase 2) Growth - a period of rapid expansion of demand or activity as the industry finds a market 3) Maturity - a relatively stable period of time where there is little change in sales volumes year to year but competition increases 4) Decline - falling off in activity levels as businesses leave the industry and the industry ceases to exist or is absorbed into some other industry

Strategic implementation

This is the conversion of the strategies chosen into detailed plans or objectives for operating units Resource planning Operations planning Organisation structure and control systems

Emergent approach to the strategy process

This is the solution to the two issues outlined in the strategic management criticism. its done by Accepting the final goal is often unclear Adapting to human needs Evolving continuously It can hold the same degree of strategic analysis as the formal approach.

Position audit

To develop a strategic plan, an organisation's management must be aware of it's current position. part of the planning process which examines the current state of the business • Resources of tangible and intangible assets and finance • Competencies • Products, brands and markets • Operating systems like production and distribution • Internal organisation • Current results • Returns to shareholders

Making strategic decisions

To develop a strategy a business has to answer these questions What is it good at? How might the market change? How can customer satisfaction be delivered? What might prevent the plan from coming into being? What should be done to minimise risk? What actions should be followed?

Levels of plan

To implement the strategies 1) Strategic plan - embodies corporate strategy and strategic objectives. It sets out the general objective but is not very detailed 2)Business plan - for the business as a whole or for an SBU sets out the markets to be served. how the business/SBU will serve the markets and what finance is required 3) Operational plan - what is expected of each function in the business as a whole or an SBU based on relevant functional strategy, and how specific actions will be taken in order to meet that expectation. Budgets are prepared that set out the business's plan. A business has a variety of budgets at different levels of detail. The board of directors has a summarised or master budget for the whole entity that expresses the entire strategic plan, while separate functions in an SBU of that entity have detailed budgets for what each function needs to do to make sure the master budget is achieved.

Social factors

• Income distribution • Social mobility • Levels of education/ health • Size of production • Location • Age distribution

Resource audit factors (9 Ms model)

• Machinery • Make - up • Management • Management information • Markets • Materials • Men/women • Methods • Money Resource audit should go on to consider how well or how badly resources have been used and whether the business's systems are effective and efficient.

P.E.S.T.E.L (General environment analysis)

• Political factors • Economic factors • Social/demographic factors • Technological factors • Ecological factors • Legal factors The aim of 'PESTEL' is to identify factors which are currently affecting the business and those which are likely to become significant in the future. The business identifies key influences from all factors meaning key opportunities available to it in the external environment and key threats.

Ways in which a business can secure competitive advantage

•Inventing new or better ways to do activities •Combining activities in new or better ways •Managing the linkages in its own value chain to increase efficiency and reduce costs •Managing the linkages in the value system

Competitor reaction profile

•The laid back competitor, does not respond to moves by its competitors •The tiger competitor, responds aggressively to all opposing moves •The selective competitor, reacts to some threats in some markets but not to all •The stochastic competitor, is unpredictable