ACCA

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• ACCA
• Strategic Business Planning Development
• Lecture 7
• Strategic Options

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Learning Outcomes
At the end of this lecture, you will

• Understand the meaning of Corporate Appraisal
• Be able to identify the categories of strategic
  choice using Porters generic strategies and
  Ansoffs growth vector
• Be able to distinguish between organic and other
  methods of growth
• Have been introduced to the marketing mix

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Corporate Appraisal

• A critical assessment of the strengths,
  weaknesses, opportunities and threats (SWOT
  analysis) in relation to the internal and
  environmental factors affecting an entity in
  order to establish its condition prior to the
  preparation of the long term plan

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SWOT Analysis

• Involves sizing-up a company's Internal
  strengthsand weaknesses and its External
  opportunities andthreats
• Is an easy tool for getting a quick overview of
  acompany's strategic position
• Is the basis for matching strategy to the
  firm'ssituation - to its internal strengths
  and weaknesses - to its external threats and
  opportunities

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SWOT Analysis
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SWOT Analysis
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Significance of a Company'sStrengths and
Weaknesses

• A company's strategy must be well-suited
  tocompany strengths, weaknesses, and
  competitivecapabilities
• to serve as the cornerstone of strategy
• to help build competitive advantage

Company strengths have the potential
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Significance of a Companys Strengths and
Weaknesses
A good strategy aims at correcting weaknesses
which can

• make the company vulnerable
• disqualify the company from pursuing an
  attractive opportunity
• put the company at a competitive disadvantage

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Strategic Management Principle
Successful strategists seek to exploit what a
company does best

• Its expertise
• Its strengths
• Its core competences
• Its strongest competitive capabilities

They shun strategies that place heavy demands on
the areas where the company is weakest or has
unproven ability
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Strategic Issues
Having a penetrating understanding of the
strategic issues a company faces is a
precondition for effective strategy-makingUnti
l strategists have a clear fix on the issues,
they are not ready to craft a strategy
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Question for Discussion

• In your view, what are key strengths and
  weaknesses of your organisation?
• What opportunities/threats do you perceive in the
  external environment?

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Gap Analysis
is a technique which attempts to analyse the
gap between the ultimate objective of the
entity and its extrapolated existing performance
by identifying the extent of the strategic tasks
and the ways in which the gap might be
closed The entitys strengths and weaknesses,
opportunities and threats are assessed and
possible actions, such as expansion of
production or other facilities, or the takeover
or merger with another corporate entity, are
reviewed
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Profit Gap and Product Market Strategy
Profit
Target profit

diversification
market penetration
product development
improve profits of current products, mkts
Projection
(forecast)
Year
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Gap Analysis

• ... is also used extensively in public sector
  planning, although in a somewhat different way.
  Here the strategic problem is often concerned
  with whether the future demands on a public
  service are likely to change to such an extent
  that the current resource provision will prove
  wholly inadequate
• This is particularly important when
  considering the statutory obligations of many
  public services such as hospitals, education or
  social services

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Categories of Strategic Choice

• How to compete
• Where to compete
• Method of growth

StrategicChoice
Directionof growth(Ansoff)(e.g.
withdraw,diversify)
How to compete(Porter)
Method ofgrowth(acquisitionvs. organic)
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Types of Competitive Advantage
Low Cost
CompetitiveAdvantage
Differentiation
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Generic Strategies
1. Overall Cost Leadership
2. Differentiation
3. Focus
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Porters Strategies
Strategic Advantage
Unique
Low Cost
Industry
Differentiation
CostLeadership
StrategicTarget
"Unique" Focus
"Low Cost" Focus
Segment
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Overall Cost Leadership
Low cost relative to competitors, through

• Construction of efficient-scale facilities
• Use of the latest technology
• Cost reductions from experience
• Tight cost and overhead control
• Avoidance of marginal customer accounts
• Cost minimisation in RD, service, sales force,
  advertising etc.

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Differentiation
Creating something that is perceived industry
wide as being unique Products can be
breakthrough, improved or competitive Approaches
include

• Design or brand image
• Technology
• Features
• Customer service

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Focus
On a particular buyer group, segment of the
product line, or geographic market

• Built around serving a particular target very
  well
• Each functional policy is developed with this in
  mind
• Firm is thus able to serve its narrow strategic
  target more effectively or efficiently than
  competitors who are competing more broadly

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Activity
Using Porters Generic Strategy framework, plot
the position of some of the key players in the
N.I. food retailing industry, i.e. Marks and
Spencer Tesco Sainsbury Dunnes Supervalu Spar Mac
e A small local grocers shop
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Other Requirements
GenericStrategy
Commonly RequiredSkills and Resources
Common OrganisationalRequirements
Tight cost control
Sustained capitalinvestment andaccess to capital
OverallCostLeadership
Frequent, detailedcontrol reports
Process engineeringskills
Structured org.and responsibilities
Intense supervisionof labour
Incentives basedon meeting strictquantitative
targets
Products designedfor ease in manufacture
Low-cost distributionsystem
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Other Requirements
GenericStrategy
Common OrganisationlRequirements
Commonly RequiredSkills and Resources
Strong marketing abilities
Differentiation
Strong coordinationamong functions inRD,
product develop-ment, and marketing
Product engineering
Creative flair
Strong capability inbasic research
Subjective measurementand incentives insteadof
quantitative measures
Corp. reputation forquality or
technologicalleadership
Long tradition in theindustry or unique
combination of skillsdrawn from otherbusinesses
Amenities to attracthighly skilled
labour,scientists, or creativepeople
Strong cooperationfrom channels
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Other Requirements
GenericStrategy
Commonly RequiredSkills and Resources
Common OrganisationalRequirements
Focus
Combination of theprevious policiesdirected at
theparticular strategictarget
Combination of theprevious policiesdirected at
theparticular strategictarget
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Stuck in the Middle

• Low Profitability
• Blurred corporate culture
• Conflicting organisational arrangements,motivatio
  n system

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Criticisms of the Generic Strategies

• Cost leadership
• Internal focus
• Only one firm
• Higher margins can be used for differentiation
• Differentiation
• Not always sold at a higher price
• Choice of competitor
• Source of differentiation

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PIMS - Market Position Boosts Profitability
50
45
40
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35
30
25
21
25
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ROI ()
20
13
15
10
31
91
5
0
16
31
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91
Relative Market Share ()
Profit Impact of Marketing Strategies
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Ansoff's Growth Vector
Products
Existing
New
MarketPenetration
Product Development
Existing
Markets
MarketDevelopment
New
Diversification
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Products
Existing
New
Market Penetration(for growth)Consolidation(mai
ntain position)withdrawal
Product Development
Existing
Markets
MarketDevelopment
Diversification
New
Product-Market areas
Related
Unrelated
(conglomeratediversification)
(vertical or horizontalintegration)
Financialreasons
Spreadrisk
Other
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Related Diversification
Development beyond the present product market,
but still within the broad confines of the
industry......it..therefore builds on the
assets or activities which the firm has
developed.

• Horizontal integration competitive or directly
  complementary activities e.g. a milk producer
  might acquire a
• bakery
• Vertical integration company becomes its own
  supplier (backward) or its own distributor
  (forward)

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Related Diversification Options for a
Manufacturer
BACKWARD INTEGRATION
Raw materials manufacture
Components manufacture
Machinery manufacture
Product/process research/design
Raw materials supply
Components supply
Machinery supply
Financing
Transport
HORIZONTAL INTEGRATION
Competitive products
Manufacturer
By-products
Complimentary products
FORWARD INTEGRATION
Repairs and servicing
Marketing information
Distribution outlets
Transport
Note Some companies will manufacture components
or semi-finished items. In those cases there
will be additional integration opportunities into
assembly or finished product manufacture.
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Some Reasons for Related Diversification

• Control of supplies (quantity, quality, price)
• Control of markets
• Access to information
• Cost savings
• Share of profits
• Building on core competences, technology
• Spreading risk
• Resource utilisation
• Creation of barriers to entry

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Unrelated (Conglomerate) Diversification

• Development beyond the present industry
• into products/markets which, at face value,
• may bear no close relation to the present
• product/market.

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Some Reasons for Unrelated Diversification

• Need to use excess cash or safeguard profits
• Better access to capital markets
• Exploiting underutilised resources/competences
• Escape from present business
• Spreading risk
• Even out cyclical effects in a given sector
• Benefit from synergistic effects
• No other way to grow
• Obtain cash
• Use of image and reputation

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Diversification and Synergy
Synergy 225

• Marketing synergy
• Operating synergy
• Investment synergy
• Management synergy
• Start-up synergy

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Conglomerate Diversification- Limitations

• Dilution of shareholders' earnings
• No synergy no competitive advantage
• Greater exposure to recession
• Interference by acquiring management
• Lack of common identity and purpose
• Total failure due to one business
• Lack of management experience in the
• business area

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Method of Growth

• Organic
• Acquisition
• Merger
• Joint ventures
• Strategic alliances
• Franchising

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Organic Growth

• Reasons
• Learning
• Innovation
• No suitable target for acquisition
• Can be planned more carefully
• More convenient
• Same style of management and corporate culture
  maintained
• Hidden or unforeseen losses less likely
• Economies of scale possible

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Problems with Organic Growth

• Time
• Barriers to entry
• Need to acquire resources independently
• May be too slow for dynamics of market

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Mergers and Acquisitions

• Merger joining of two separate companies to
  form a
• single company
• Acquisition purchase of a controlling interest
  in another
• company
• Reasons for Acquisition(which should be valid in
  terms of the strategic
• plan)
• Marketing advantages
• Production advantages
• Finance and management
• Riskspreading
• To retain independence
• Overcome barriers to entry

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Activity
Identify the reasons for acquisition/merger
between one or more national private companies
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Problems with Acquisitions and Mergers

• Cost
• Customers
• Incompatibility
• Asymmetric information
• Driven by personal goals
• Corporate financiers and banks
• Poor success record of acquisitions
• Organisations rarely take non-financial factors
  into account

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Joint Ventures and Alliances

• Joint venture - definition
• Attractive to small or risk-averse organisations
• Alliance - definition
• Long-term strategic alliances
• IS based alliances
• Licensing agreements - definition

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Joint Ventures/Alliances

• Advantages
• Share costs
• Cut risk
• Benefit from all sources of profit
• Close control
• Local knowledge (overseas joint venture
• Synergies
• Learning
• Technology
• Generates innovations
• Tests core competences
• Disadvantages
• Conflicts of interest
• Disagreements
• Withdrawal

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Making Alliances Work

• Proactive attitudes
• Trust
• Cultural sensitivity
• Inter-personal relationships
• Clear organisational arrangements
• Desire to learn (not substitute)
• Allow evolution

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Franchising

• Granting other firms the right to use systems and
  name
• Franchiser provides support including
• Management/staff training
• Procedures/instructions for service supply
• Central marketing
• Materials or products to sell on
• Examples of franchises?

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Advantages of Franchising

• Quicker business expansion
• Reduced risk as capital is provided by franchisee
• Control over activities of franchisee
• Reduced costs - franchise manager responsible for
  finance, staffing etc.

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Disadvantages of Franchising

• Franchisee pays for use of name/brand
• Reduced profits (shared with franchisee)
• Monitoring of franchisees service
• Risk of poor performance harming parent brand
  name/image
• Problems of protecting intellectual capital -
  franchisee may become competitor later
• Search for competent candidates
• Control issues

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Alternatives to Growth

• Nongrowth
• De (dirigistie) growth (particularly relevant
• to public sector and nationalised industries)
• Divestment rationalization get back
  to "core" business
• Demerger "unbundling
• Survival

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Strategy and Market Position

• Strategies for market leaders
• Strategies for market challengers
• Strategies for market followers
• Strategies for market nichers

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Marketing - The Four Ps

• Product
• Price
• Place
• Promotion

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Marketing Mix - Product

• Design
• Features
• Quality and reliability
• After-sales service
• Packaging
• Range - width and depth

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Marketing Mix - Place

• Channel
• Direct to customer
• Through an agent
• Through a wholesaler
• Through a retailer
• Logistics - product push
• - customer pull
• Direct distribution or the use of intermediaries?

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Marketing Mix - Price

• Economic influences
• Competitors prices
• Quality positioning
• Discounts
• Payment terms
• Trade-in allowances
• Product life cycle stage

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Pricing - Strategies

• As low as possible
• Premium pricing
• Follow the leader
• Discriminatory pricing
• Product-line pricing
• New product launch
• Penetration pricing
• Price skimming

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Marketing Mix - Promotion

• The AIDA principle
• Arouse Attention
• Generate Interest
• Inspire Desire
• Initiate Action

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The Promotional Mix

• Advertising
• Sales promotion
• Public relations
• Personal selling

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The Extended Marketing Mix

• People
• Processes
• Physical evidence