Unit 7 Strategic Option Models: Benefits of Modelling
Unit 7 Strategic Option Models: Benefits of Modelling
Unit 7 Strategic Option Models: Benefits of Modelling
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.
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
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.
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.
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
1. Related 2. Unrelated
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.
Question Mark or
Star
Problem Child
Market Growth
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.
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.
Note:
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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.
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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?
3 key questions
1 2 3
Resources basic and unique Competencies threshold and core Implementation issues with regard to dealing with strategic change
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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.
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