UNIT 7 STRATEGIC OPTION MODELS

Once the position has been identified, the organisation will be aware of the environments and the current strategic capability of the organisation. So the questions is What should we do now to enable us to have the best chance of achieving our objectives? In other words, which strategy should we follow? The selection of the strategy to follow will involve many people within the organisation and the final strategy selected will be focused upon to varying extents by external stakeholders.

THE STRATEGIC MODELS

There are several models that you must be familiar with. Porter Ansoff BCG Generic Strategies; Product/Market Matrix; Growth/Share Matrix.

These three are starting points for option generation. There is also a procedure for evaluating strategic options and we should be familiar with this also. Johnson & Scholes - The viability model.

Benefits of modelling
These models provide a useful starting point for the discursive process as they initiate discussion amongst the management teams They are well-known and as such have credibility. This results in their easy application with minimal resistance They generate options that can be used in the debate and allow comparison They can in some instances be linked to each other to enhance the analysis

Limitations of modelling
They are simplistic and as such may not reflect the real world Given their prominence in management education, undue emphasis tends to be placed upon them and there is a tendency at times to think that the models will provide a solution They are dated and were produced when environments were very different. They tend to suggest that strategic choice is a straightforward process and perhaps fail to reflect the modern strategies that can be deployed

PORTERS GENERIC STRATEGIES

Porter suggests that competitive advantage arises from the selection of a generic strategy which best fits the organisation's environment and then organising value-adding activities to support the chosen strategy. Competitive Strategic scope Broad scope Targets whole market Narrow scope Targets one segment Cost leadership being the lowest cost producer. Cost leadership Focus Stance Differentiation

Differentiation creating a customer perception that the product is superior to that of competitors so that a premium can be charged i.e. that it is different.

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? - HOW Should the scope be wide or narrow? - WHERE

He argues that organisations can run the risk of trying to satisfy all and end up being stuck in the middle and satisfy none properly. He suggested that early on, a decision needs to be made as to the generic nature of the strategic direction.

Cost leadership strategy

Based upon a business organising itself to be the lowest cost producer. It seeks to achieve the lowest average total costs. Benefits: Business can earn higher profits by charging the same price as competitors or even moving to undercut where demand is elastic Lets company build defence against price attack Allows price penetration entry strategy into new markets; Enhances barriers to entry

Attainment depends upon arranging activities so as to: Achieve economies of scale by high-volume sales allowing fixed costs to be spread over a wider production base Use high -volume purchasing to obtain discounts for bulk purchase Locating in areas where cost advantage exists or government aid is possible Obtaining learning and experience curve benefits. Reduce costs by copying rather than originating designs, using cheaper materials and other cheaper resources, producing products with no frills, reducing labour costs and increasing labour productivity

Differentiation strategy
This is based upon the idea of persuading customers that a product is superior to that offered by the competition. Differentiation can be based on product features or creating/altering consumer perception. Differentiation can also be based upon process as well as product. It is usually used to justify a higher price.

Benefits: Products command a premium price so higher margins. Demand becomes less price elastic and so avoids costly competitor price wars. Life cycle extends as branding becomes possible hence strengthening the barriers to entry.

Focus strategy
This is aimed at a segment of the market rather than the whole market. A particular group of consumers are identified with similar needs, possibly based upon age, sex, lifestyle, income or geography and then the company will either differentiate or cost focus in that area. Benefits: Smaller segment and so smaller investment in marketing operations Allows specialisation Less competition Entry is cheaper and easier.

If done properly can avoid confrontation and competition yet still be profitable. The attractiveness of the market niche is influenced by the following: The niche must be large enough in terms of potential buyers; The niche must have growth potential and predictability; The niche must be of negligible interest to major competitors; The firm must have strategic capability to enable effective service of the niche.

ANSOFF AND THE GROWTH STRATEGIES

The Product Market Growth Framework
This is a commonly-used model for analysing the possible strategic directions that an organisation can follow. Hence useful in areas of strategic choice Products Existing Markets Existing Market penetration Product development New

New

Market development

Diversification

Market penetration Increasing market share in existing markets utilising existing products. Market development Entering new markets and segments using existing products. Product development Developing new products to serve existing markets. Diversification Developing new products to serve new markets.

Market penetration
The main aim is to increase market share using existing products within existing markets. Data and information should already have been captured making this the least risky option. Couple this with the experience of the markets and products and knowledge should be present. Approach: First, attempt to stimulate usage by existing customers new uses advertising / promotions / sponsorships / quantity discounts

Then attempt to attract non-users and competitor customers via Pricing / Promotion and advertising / Process redesign e.g. Internet/E- commerce

Considered when: Overall market is growing so not saturated Competitors leaving or weak Strong brand presence by your company with established reputation; Strong marketing capabilities exist within your company.

Market development
This aims to increase sales by taking the present product to new markets (or new segments). Entering new markets or segments may require the development of new competencies which serve the particular needs of customers in those segments. E.g. cultural awareness / linguistic skills. Movement into overseas markets often quoted as good example as the organisation will need to build new competencies when entering international markets.

Approach Add geographical areas regional and national Add demographic areas age and sex New distribution channels

Key notes Product modifications may be needed Advertising in different media and in different ways Research primary research at this point given significance of the investment Strong marketing ability needed usually coupled with established brand backing e.g. Coca Cola.

Product development
This focuses on the development of new products for existing markets. It offers the advantage of dealing with known customer/consumer bases. May aim to develop: New product features Create different quality versions. Develop product extensions

Company needs to be innovative and strong in the area of R&D and have an established, reliable marketing database. Constant innovation allows for the developing sophistication of consumers and customers and ensures that any product-related competitive advantage is maintained.

Diversification
This involves taking new products to new markets the riskiest option?

Critics argue that it is madness to take resources away from known markets and products only to allocate them to businesses that the company essentially knows nothing about. This risk has to be compensated for by higher reward which may or may not exist.

Brand stretching ability is often seen as being the critical success factor for successful diversification. The new business and its strategy may well have teething problems with its implementation and this may damage brand reputation. Thus there is significant risk.

Reasons suggested for diversification: Objectives can no longer be met in known markets possibly due to a change in the external environment restricting the business in some way Company has excess cash and powerful shareholders. Possible to brand stretch and benefit from past advertising and promotion in other SBUs; Diversification promises greater returns and can spread risk by removing the dependency on one product Power base increases as presence in more markets - buying power Efficiency gains spreading costs Greater use of distribution systems and corporate resources such as research and development, market research, finance and HR leading to synergies. Referred to as stretching corporate parenting capabilities

Synergy the idea that value can be added by combination of units. The value of the whole being greater than the value of the individual parts

Diversification can take two main forms:

1. Related 2. Unrelated

Related diversification (concentric diversification)

Growth into similar industries where there is some linkage growth beyond current markets and products

Vertical Integration Backward a company seeks to operate in markets in which it currently obtains its resources. E.g. a supermarket producing some of the products its buys the benefit would arise from greater control over resource quality and /or ensuring availability of supply. Forward a company seeks to move into activities which are concerned with a companys outputs, e.g. a brewery establishing its own chain of pubs and offlicences. This would see the company seeking to control the interface with the customer / consumer.

Horizontal Integration Involves a company entering into complementary or competing markets E.g. Honda motorcycles and cars.

Unrelated diversification (conglomerate diversification)

Completely new areas with which the business shares no common ground and so seen as the last of the growth strategies. More risk from going into unknown markets and products BUT could argue that you are spreading the risk by not remaining exposed in one area e.g. Benetton Taken when serious restrictions evident in existing markets and products or when growth opportunities appear in other areas Possible economies of scale again Greater spread of the overall portfolio risk Opportunity for return exists and there is nothing else to do with the resources. The company may need to be seen as an aggressive organisation and may embark on this course of action in order to appease powerful stakeholder groups.

BOSTON CONSULTING GROUP (BCG)

The Product Portfolio

Boston Consulting Group Growth / Share Matrix
High

Question Mark or

Star

Problem Child

Market Growth

Cash User Cash Generator Cash Cows

Cash User Cash Neutral Dog

Low High Low

Market Share
Developed originally to assist managers in identifying cash flow requirements of different businesses within the portfolio and to help to decide whether change in the mix of businesses is required. It can be used for a single company with multiple products equally as well. A broad portfolio indicates that a business has a presence in a wide range of products and market sectors this may or may not be a good thing! The BCG seeks to identify how different product strategies can be developed the assist the company as a whole.

Four main steps:

1 2

Divide the company into SBUs strategic business units Allocate into the matrix based upon the two criteria. Each product will be represented by a dot on the grid. The larger the dot, the greater the relative importance of the product. Assess the prospects of each SBU and compare against others in the matrix. Look for balance or passage of the products. Develop strategies for each SBU given their location upon the grid.

3 4

Classification Criteria
The model uses two criteria.

Relative market share

This seeks to relate the market share of our SBU in relation to the market share of our largest rival. This will be expressed as a multiple. BCG suggests that market share gives a company cost advantages from economies of scale and learning effects. Thus market share is seen as a strategic asset of sorts. The dividing line is set at 1 - A figure of 4 suggests that SBU share is four times greater than the nearest rival. 0.1 suggests that the SBU is 10% of the sector leader. This is something that can be improved upon by management action and strategy and can be used as a performance measure.

Market growth rate

This represents the growth rate of the market sector concerned. Management often have to react to this as it is difficult to influence High growth industries offer a more favourable competitive environment and better longterm prospects than slow-growth industries. The dividing line is set at 10% though this is often modified to high growth and low growth

The possible strategies

The model suggests that appropriate strategies would be: Hold invest sufficient amounts to keep the current position. A holding or consolidation strategy Build invest to increase market share Harvest reduces the investment over time. Allows the business to slowly contract whilst extricating as much cash as possible Divest sale or closure to earn disposal proceeds

Note:

Harvesting vs. Divesting

Harvesting allows a slow closure option which can minimise the adverse publicity that may be associated with a shut down decision. Cash can be earned during the slowing down but disposal proceeds will be minimal as a result. This is because there is nothing much to sell at the end of the harvest. Divesting sees disposal proceeds but foregoes the cash flows from a harvest run down and runs the risk of adverse publicity.

Cash cows hold, build or harvest

High market share in a low-growth market - Usually a cash generator and profitable. Often cost leaders as economies of scale usually earned. Likely that at one time the cash cow was a Star and has now been subject to declining growth. Low growth implies a lack of opportunity and therefore the capital requirements are low. Fixed asset investment not required, hence cash surplus. Cash from this area can be used to support other products in their development. Defensive strategy often adopted to protect the position. This may involve reinvesting to protect position.

Stars hold, divest or build

High market share in high growth areas usually market leader; Offer attractive long-term prospects may one day become a cash cow; Absorb large amounts of cash from investment needs as fixed asset investment required to sustain growth. Cash also required fending off competition during the growth stage. New areas and likely to be attacked advertising required in both defensive and offensive style.

Question marks build, harvest or divest

Low market share in high growth industries Opportunity exists in these areas from the high growth but we are not doing well. May need to invest heavily to secure/grow market share Potential to become a star if successful change managed Investment required machines and expertise but degree of uncertainty as to exactly what is needed. Careful consideration required dispose or attempt to repair. Sometimes known as the problem children they need to be caught early to ensure that they don't become problem adults Will usually absorb substantial management time and may not be successfully developed. Thus risk present.

Dogs build, harvest or divest

Low market share in a low growth market To cultivate would require cost and substantial risk Often divested only question is then the speed of the divestment Could be niched small segment but focused product ensures success Over time a resurgence possible and new life cycle started May require investment just to keep product in portfolio, especially if the company is offering a one stop shop or is using the product as a loss leader.

10

BCG recommendations
Cash cow cash flows to be used to support stars and develop question marks Cash cows to be defended Stars to be managed to ensure that market share is maintained and cash cow status achieved. Weak uncertain question marks should be divested to reduce demands on cash Dogs should be divested, harvested or niched If portfolio is unbalanced, consider acquisitions and divestments to secure a balance Harvesting reduces damage of sudden divestment but reduces the value at eventual disposal. A quick sale now may produce larger proceeds; SBUs to have tailored strategies to suit circumstance.

Limitations
Simplistic only considers two variables Connection between market share and cost savings is not strong low market share companies use low-share technology and can have lower production costs e.g. Morgan Cars Cash cows do not always generate cash Sometimes investment required just to remain competitive to defend itself! Fail to consider value creation the management of a diverse portfolio can create value by sharing competencies across SBUs, sharing resources to reap economies of scale or by achieving superior governance. BCG would divert investment away from the cash cows and dogs and fails to consider the benefit of offering the full range and the concept of loss leaders.

11

THE VIABILITY OF STRATEGY

Johnson, Scholes & Whittington A basic approach
Once strategic options have been generated, it will be necessary to undertake analysis in order to decide which option should be selected. In order to assess viability we should consider three areas: S F A Suitability Feasibility Acceptability

Suitability
Is the proposed strategy a suitable response to environmental events and trends? Do we have strategic fit? You should consider whether the proposed course of action fits with the existing environments. Will it sit well with the current company image and brand?

3 key questions

1 2 3

Will it meet organisational objectives? financial & non-financial Will it take advantage of opportunities? Will it build on our strengths?

Feasibility will it work?

Can the necessary resources and competencies be obtained and the required changes implemented? Any new strategy will require change of some kind and this is likely to meet resistance from some quarters. We will need to question whether the company concerned has the strategic capability to pursue the course of action concerned.

3 key questions

1 2 3

Resources basic and unique Competencies threshold and core Implementation issues with regard to dealing with strategic change

12

Considerations should cover What is the basis for competitive advantage? Is it sustainable? Cultural change required and potential resistance Resource availability ownership and access Distribution channel access Finance: How much is needed? Where will it come from? What options exist? What will the impact be on our financial position and performance?

Acceptability
Any proposed strategy will need to be acceptable to the stakeholders of the organisation. All stakeholders will need to be considered relative to their power the more powerful the stakeholder group, the greater the influence they will have and the more the strategist will have to consider their views. Are there any potential areas of conflict? Some areas for consideration: A new strategy usually involves some internal changes and due consideration will need to be given to the staff who may have to confront different work practices. Resistance is likely. Financiers often have required rates of return and liquidity positions. Owners may well have non-financial requirements of their investment. They may prefer to have less risk and accept a lower reward as the inevitable cost. They could require that all actions conform to their cultural expectations e.g. Anita Roddick at the Body Shop. Customers, consumers and suppliers may also have required standards that must be met by the company, Local and national governments may have some concerns about any strategic proposals with regard to legality and political implications, Dont forget the public and their ability to form into pressure groups. Ethical considerations may need to be included in the evaluation.

13