Chap - 6 Strategic Options

chapter 6
Strategic options
Contents
Introduction
Examination context
Topic List
1
Rational planning model revisited
Corporate appraisal (SWOT analysis)
Gap analysis
Generic competitive strategies: how to

compete
Product-market strategy: direction of growth
Other strategies
Summary and Self-test

Answers to Self-test
Answers to Interactive questions
The Institute of Chartered Accountants in England and Wales, March 2009
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Business strategy
Introduction
Learning objectives
Identify and describe, in a given scenario, the alternative strategies available to a business
Explain, using information provided, how to position particular products and services in a
market to maximise competitive advantage
Tick off
Specific syllabus references for this chapter are: 1c, 2b.
Practical significance
Management cannot expect to deliver commercial success by carrying on doing the same things year after
year. The business environment changes, competitive pressures intensify and customers' needs change.
Strategic options, even simply cost-cutting, must be generated and decisions taken.
Stop and think

Consider two firms with which you are familiar. One can be the one you work for.
What have they done in the past that has made a difference to their competitive position today?
What are they intending to do in the future?
What things did they consider doing and then not carry on with?
Those are the strategic options.
Working context
Client's future prospects will depend on the strategic options they develop. The risks they run will also be
influenced by these.
Syllabus links
The basic concepts of competitive strategy and strategic growth were covered in your Business and Finance
paper. Here they are considered further and applied to scenario problems of the sort you may face in your
examination.
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STRATEGIC OPTIONS
Examination context
Exam requirements
This chapter looks at various models which can assist an organisation in developing its products and
markets and in choosing strategies for competitive advantage. In the exam these models can be used to
assess the strategies already identified in the question or as a way of generating strategic options for the
business. Either way, the concepts of SWOT analysis, Porter's generic strategy model and Ansoff's growth
matrix are fundamental knowledge for the Business Strategy exam.
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Business strategy
1 Rational planning model revisited

Section overview
1.1
The development of strategic options involves the final three steps of the rational model
Choices involve understanding the present situation, identifying gaps, and developing potential ways to
deal with this.
The rational model

Chapter 1 introduced the rational model.
EXTERNAL
ANALYSIS
INTERNAL
ANALYSIS
CORPORATE
APPRAISAL
MISSION AND
OBJECTIVES
REVIEW AND
CONTROL
STRATEGIC
ANALYSIS
GAP
STRATEGIC
CHOICE
STRATEGIC
CHOICE
STRATEGY
IMPLEMENTATION
STRATEGY
IMPLEMENTATION
The present chapter considers three of the stages:
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Corporate appraisal: Combining assessment of environment (Chapters 3 and 4) with assessment of

resources, competences and capabilities (Chapter 5) to help management identify the strategic
position of the business and its forecast performance.
Gap analysis: Management compare forecast performance with the strategic objectives of the
business to identify where strategic adjustments are needed to deliver planned performance.
Strategic option development: Management generate and evaluate strategic options to close the
planning gap identified.
STRATEGIC OPTIONS
1.2
Three strategic choices: overview

Johnson, Scholes and Whittington (Exploring Corporate Strategy) identify three distinct groups of strategic
options. Strategic choice requires that management makes choices under each of the following:
Competitive strategy: The way that the firm will seek to win customers and secure profitability
against rivals. This is covered in the present chapter and continued in Chapter 7 where marketing
strategy is discussed.
Product/market strategy: The decision on what products to offer over the coming years and the
markets to be served This is covered in section 5 of this chapter and again continued in Chapter 7.
Development strategy: The decision on how to gain access to the chosen products and markets.
Discussion of this choice is reserved until Chapter 10.
Worked example: Virgin group

The following extracts from the Virgin Website (2007) illustrate the way this international consumer goods
and services corporation applies the 'three strategic choices' approach.
'Competitive strategy
Virgin one of the most respected brands in Britain is now becoming the first global brand name of the
21st century. We are involved in planes, trains, finance, soft drinks, music, mobile phones, holidays, wines,
publishing, space tourism, cosmetics the lot! What ties all these businesses together are the values of our
brand and the attitude of our people.
We have created over 200 companies worldwide, employing over 35,000 people. Our annual total revenues
around the world exceed 4 billion (US$7.2 billion).
All the markets in which Virgin operates tend to have features in common: they are typically markets where
the customer has been ripped off or under-served, where there is confusion and/or where the competition
is complacent.
In these markets, Virgin is able to break into the market and shake it up. Our role is to be the consumer
champion, and we do this by delivering to our brand values, which are:
Value for money
Simple, honest and transparent pricing not necessarily the cheapest on the market.
e.g. Virgin Blue Australia low cost airlines with transparent pricing.
Good quality
High standards, attention to detail, being honest and delivering on promises.
e.g. Virgin Atlantic Upper Class Suite limousine service, lounge, large flat bed on board, freedom menu
etc.
Innovation
Challenging convention with big and little product/service ideas; innovative, modern and stylish design.
e.g. Virgin Trains new Pendolino fast tilting train with shop, radio, digital seat reservations and new sleek
design.
Brilliant customer service
Friendly, human and relaxed; professional but uncorporate.
e.g. Virgin Mobile UK which has won awards for its customer service, treats its customers as individuals,
and pays out staff bonuses according to customer satisfaction survey results.
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Business strategy
Competitively challenging
Sticking two fingers up to the establishment and fighting the big boys usually with a bit of humour.
e.g. Virgin Atlantic successfully captured the public spirit by taking on BA's dirty tricks openly and winning.
Later, advertising messages such as BA Don't Give A Shiatsu both mocked BA and delivered a positive
message about the airline's service.
Fun
Every company in the world takes itself seriously so we think it's important that we provide the public and
our customers with a bit of entertainment.
e.g. VAA [Virgin Atlantic Airways] erected a sign over the BA-sponsored, late finishing London Eye saying:
BA Can't Get It Up. Virgin Cola's launch in USA saw Richard [Branson: entrepreneurial founder and
chairman of Virgin] drive a tank down 5th Avenue and then 'blow up' the Coke sign in Times Square,
mocking the 'cola wars'.
Product/market strategy
Travel and tourism
Leisure and pleasure
Social and environment
e.g.
e.g.
e.g.
Virgin Atlantic
V Festival
Virgin Fuels
Virgin Balloon Flights
V2 Music
Virgin Unite
Virgin Holidays
Virgin Experience Days
Virgin Earth
Virgin Trains
Virgin Spa
Shopping
Media and
telecommunications
Finance and money
e.g.
e.g.
Virgin Money
Virgin Books
Virgin Mobile
Virgin Digital
Virgin Media
Virgin Drinks
Virgin Radio
Virgin Megastore
Development strategy
We draw on talented people from throughout the group. New ventures are often steered by people
seconded from other parts of Virgin, who bring with them the trademark management style, skills and
experience. We frequently create partnerships with others to combine skills, knowledge, market presence
and so on.
Once a Virgin company is up and running, several factors contribute to making it a success. The power of
the Virgin name; Richard Branson's personal reputation; our unrivalled network of friends, contacts and
partners; the Virgin management style; the way talent is empowered to flourish within the group. To some
traditionalists, these may not seem hard headed enough. To them, the fact that Virgin has minimal
management layers, no bureaucracy, a tiny board and no massive global HQ is an anathema.
Our companies are part of a family rather than a hierarchy. They are empowered to run their own affairs,
yet other companies help one another, and solutions to problems come from all kinds of sources. In a sense
we are a community, with shared ideas, values, interests and goals. The proof of our success is real and
tangible.
Exploring the activities of our companies through this web site demonstrates that success, and that it is not
about having a strong business promise, it is about keeping it!
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STRATEGIC OPTIONS
Although the Virgin group is a family of businesses with a shared brand, all of the companies run
independently. Often the companies are set up as joint ventures with other partners, so they all have
different shareholders and boards.'
2 Corporate appraisal (SWOT analysis)

Section overview
2.1
Before dreaming up options management needs to take stock of the present position of the business.
A SWOT analysis is an important technique for visualising the situation and is drawn from the
environmental assessment and internal appraisal already conducted.
Role of corporate appraisal

A complete awareness of the organisation's environment and its internal capacities is necessary for a
rational consideration of future strategy, but it is not sufficient. The threads must be drawn together so
that potential strategies may be developed and assessed. The most common way of doing this is to analyse
the factors into strengths, weaknesses, opportunities and threats. Strengths and weaknesses are
diagnosed by the internal analysis, opportunities and threats by the environmental analysis.
Here are some examples of questions that might be asked to assess an organisation's opportunities and
threats.
Opportunities
What opportunities exist in the business environment?

What is their inherent profit-making potential?
What is the organisation's ability to exploit the worthwhile opportunities?
Threats
What threats might arise?

How will competitors be affected?
How will the company be affected?
The opportunities and threats might arise from the PEST and competitive factors.
2.2
Bringing them together the cruciform chart

Effective SWOT analysis does not simply require a categorisation of information, it also requires some
evaluation of the relative importance of the various factors under consideration.
A cruciform chart (literally 'cross form') can be drafted on a flip-chart by the person facilitating the strategy
discussions. Its benefits are:
Limitations on space restricts management to focusing on the big points
Allows mapping of connections between points (see below)
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Business strategy
Match strengths with market opportunities

Strengths which do not match any available opportunity are of limited use while opportunities which
do not have any matching strengths are of little immediate value.
Conversion
This requires the development of strategies which will convert weaknesses into strengths in order to
take advantage of some particular opportunity, or converting threats into opportunities which can
then be matched by existing strengths.
Interactive question 1: Hall Faull Downes Ltd
[Difficulty level: Intermediate]
Hall Faull Downes Ltd has been in business for 25 years, during which time profits have risen by an average
of 3% per annum, although there have been peaks and troughs in profitability due to the ups and downs of
trade in the customers' industry. The increase in profits until five years ago was the result of increasing sales
in a buoyant market, but more recently, the total market has become somewhat smaller and Hall Faull
Downes has only increased sales and profits as a result of improving its market share.
The company produces components for manufacturers in the engineering industry.
In recent years, the company has developed many new products and currently has 40 items in its range
compared to 24 only five years ago. Over the same five year period, the number of customers has fallen
from 20 to nine, two of whom together account for 60% of the company's sales.
Give your appraisal of the company's future, and use a SWOT analysis to suggest what it is probably doing
wrong.
See Answer at the end of this chapter.
2.3
Weirich's TOWS matrix

Weirich, one of the earliest writers on corporate appraisal, originally spoke in terms of a TOWS matrix in
order to emphasise the importance of threats and opportunities. It has several benefits:
210
It provides a clear set of steps to move from SWOT to the formulation of strategic options.
It makes management aware of the need for defensive strategies (WT) in addition to strategies to
grasp opportunities.
STRATEGIC OPTIONS
Strengths
Weaknesses
Opportunities
SO Strategies
WO Strategies
Threats
ST Strategies
WT Strategies
Note that this is therefore an inherently positioning approach to strategy. A further important element of
Weirich's discussion was his categorisation of strategic options:
SO strategies employ strengths to seize opportunities.

ST strategies employ strengths to counter or avoid threats.
WO strategies address weaknesses so as to be able to exploit opportunities.
WT strategies are defensive, aiming to avoid threats and the impact of weaknesses.
One useful impact of this analysis is that the four groups of strategies tend to relate well to different time
horizons. SO strategies may be expected to produce good short-term results, while WO strategies are likely
to take much longer to show results. ST and WT strategies are more probably relevant to the medium term.
Interactive question 2: Fleetrail
[Difficulty level: Exam standard]
Fleetrail Ltd is a wholly-owned subsidiary of Twenty-first Century Transport Ltd ('TCT'). TCT is a major
Stock Exchange listed holding company whose other subsidiaries are involved in passenger transport,
notably scheduled express coach services linking various UK cities, and scheduled airlines operating both
within the UK and between certain UK cities and destinations in several European Union countries.
Fleetrail Ltd was created to bid for the franchise to operate passenger trains on the main line between
London and Norington, a major UK provincial city ('the route'). The bid was successful and the franchise
became effective from 1 April 1997 to last for seven years. The route represents the only practical rail link
between London and Norington and intermediate stations along the route.
Under the terms of the franchise contract the UK government paid Fleetrail Ltd a subsidy of CU200 million
for the year ended 31 March 1998. Subsidies in subsequent years will reduce in annual equally-sized steps,
such that by the year ending 31 March 2004 Fleetrail Ltd will receive a subsidy of only CU35 million. The
franchise contract specifies that Fleetrail Ltd is not allowed to reduce services or increase prices in real
terms, relative to the pre-1 April 1997 levels, without incurring significant financial penalties.
Fleetrail Ltd has to pay Railtrack Ltd, the company which owns the railway lines and stations on the route, a
rental based on the usage of those lines. This rental is a matter of periodic negotiation between Fleetrail Ltd
and Railtrack Ltd, but the government-appointed regulator will intervene and set the price where
agreement is not reached.
Under the terms of the franchise the rolling stock (carriages and locomotives) used on the route are to be
leased from one of the three competing leasing companies. The leasing companies lease rolling stock out to
train operators, including Fleetrail Ltd. These companies will also acquire new rolling stock in due course,
according to the needs of their customers.
In the year ended 31 March 1997, the last year under British Rail management, ticket sales totalled CU90
million and the route attracted a subsidy of CU250 million. During Fleetrail Ltd's first year operating costs
were roughly met by the total of ticket sales and the CU200 million subsidy. The route currently employs
4,000 staff, nearly all of whom were 'inherited' by Fleetrail Ltd.
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Business strategy
Requirements
(a)
As far as the information given in the question will allow, undertake an analysis of the strengths,
weaknesses, opportunities and threats (SWOT analysis) of Fleetrail Ltd. Each point raised must be
explained and justified as to why it is seen as a strength, weakness, opportunity or threat. You should
provide some indication of the importance of each point which you make.
(b) Indicate what additional information you would need to obtain, and why you need it, to enable you to
complete your SWOT analysis of Fleetrail Ltd.
(c)
Having carried out the SWOT analysis, how would the management of Fleetrail Ltd use it to proceed
to the formulation of a suitable strategy? (You are not required to identify a suitable strategy for the
company.)
3 Gap analysis
Section overview
3.1
Gap analysis helps management visualise the ground to be made up between their intentions for the
performance of the business and its forecast performance without new initiatives (strategies).
There are three groups of strategies to help close the shortfall of performance (gap): improve
efficiency, develop new market and products, and diversify.
Overview of gap analysis

Gap analysis compares two things:
The organisation's targets for achievement over the planning period
What the organisation would be expected to achieve if it carried on in the current way with the
same products and selling to the same markets, with no major changes to operations. This is called an
F0 forecast, by Argenti.
Definition
Gap analysis: The comparison between an entity's ultimate objective and the expected performance from
projects both planned and under way, identifying means by which any identified difference, or gap, might be filled.
Strategic
objective
Strategic objective (F1)

Planning gap
Forecast (F0)
Current
position
Time
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STRATEGIC OPTIONS
3.2
Strategies to fill the gap

The planning gap may originate from a number of causes:
Ambitious objectives being set by management (or imposed on management by investors)

Underperformance of existing product portfolio (e.g. maturity stage approaching)
Difficult environment (e.g. industry or economic slow-down)
The gap could be filled by new product-market growth strategies. For example a management team wishing
to increase profitability might consider:
Efficiency strategies: reduce the costs of present products and economise on the assets used.
Expansion strategies: develop new products and/or new markets.
Diversification strategies: enter new industries which have better profit and growth prospects.
These are illustrated below.
Gaps can also be closed by the simple expedient of setting the objectives lower. Most writers on strategy
regard this remedy as an unacceptable admission of defeat by management.
4 Generic competitive strategies: how to compete

Section overview
4.1
Firms must position themselves well in two markets: the market for their products; and in the stock
market.
Porter's concept of competitive advantage states that such positioning can be achieved only in three
mutually exclusive ways: cost leadership, differentiation and focus.
Competitive advantage
Competitive advantage is anything which gives one organisation an edge over its rivals.
In the 1960s and 1970s this tended to be interpreted solely in terms of the marketing concept of providing
the customer with superior benefits and so winning sales.
Porter widened the concept of competitive advantage in 1980 by stating that competitive advantage is the
consequence of a successful competitive strategy:
Competitive strategy means 'taking offensive or defensive actions to create a dependable position in an
industry, to cope successfully with ... competitive forces and thereby yield a superior return on investment
for the firm. Firms have discovered many different approaches to this end, and the best strategy for a given
firm is ultimately a unique construction reflecting its particular circumstances'. (Porter)
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Business strategy
Note that Porter defines competitive advantage in terms of 'superior return on investment' rather than
simply superior sales or higher sales revenue.
4.2
The choice of competitive strategy

Porter argued that selecting and implementing one of these strategies is the only way to effectively counter
the industry forces identified in his Five Forces model.
The diagram below summarises his argument.
Cost leader
Stuck in the
middle
Differentiator
High
Low
High
profit
profit
profit
Lower costs
Higher costs
Higher costs
Competitive pressures will increase as a market ages so that once the mature stage of the industry is
reached only two competitive strategies will deliver competitive advantage (i.e. superior ROI).
Low cost: A firm following this strategy will withstand the shrinking margins better and so, as rivals
fall away, may be left as a major player with enhanced power against the power of suppliers and
buyers.
Differentiation: A firm presenting itself as a superior provider may escape price pressure by avoiding
straight-forward price comparisons with rivals.
A stuck in the middle strategy is one where the firm has sought to attract many segments at different
price points and so is seen as not being as differentiated as the market leader but, perhaps because of the
costs of serving the differentiated segment, not able to make good profits at the cost leader's prices.
Worked example: Porsche

A study by B&D Forecast released in German newspaper Welt am Sonntag earlier this week revealed that
Porsche, one of the most prestigious names in the automotive industry, is by far the most profitable
automaker on a vehicle by vehicle basis. Porsche makes an unheard of 21,799 profit on each car it sells!
This isn't to say that Porsche is making 21,799 ($28,247 USD) straight up on every vehicle it makes, but
rather that it earns variable profits, with some more (Cayenne Turbo S) and some less (Boxster). To see
just how badly Porsche blows other automakers out of the water, have a look at these figures. BMW makes
2,475 ($3,207) for each car it sells a handsome figure, no question. Toyota pulls in an average of 1,684
($2,182), while Audi makes 1,580 ($2,047). Daimler Chrysler (including Mercedes-Benz and Smart) makes
708 ($917), and VW makes just 332 ($430) per vehicle. The study, which looked at the company's
finances over 2005-2006 financial year, also revealed that Porsche sold 97,000 units and had a record gain of
2.11 billion ($2.73 bn) before taxes.
Source: American Auto Press January 2007
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STRATEGIC OPTIONS
In 1995 the German luxury car maker Porsche was widely regarded as being on the car industry casualty
list. Its dependence on the US market exposed it badly to the recession following the stock market crash of
1987.
It responded by launching two new cars:
The Porsche Boxster a 2-seater car selling at a lower price point than its war-horse car, the 911 but
still at a significant premium to other 2-seaters such as the Mazda MX5 and Rover's MGF
The Cayenne a sports utility vehicle aimed at family markets to rival the success of the Range Rover
and Shogun SUVs but again at a substantial price premium to them
German wages are 6 to 7 times higher than other parts of Eastern Europe. Unlike other makers, including
BMW, VAG and Daimler-Benz, Ferrari, Lamborghini, and Aston Martin, it decided to retain the bulk of its
manufacturing in its home country and built a substantial plant at Leipzig, Eastern Germany, in order to
retain the 'Made in Germany' imprimatur.
In 2006/07 Porsche purchased 30.9% of Volkswagen Audi Group (VAG) to prevent it falling into the hands
of corporate raiders and opening the possibility that Porsche would lose the benefit of close supply chain
and technology sharing links with VAG. In the previous decade VAG had expanded beyond its VW (midmarket cars and vans) and Audi (premium cars) ranges to acquire a portfolio of cars brands including
exclusive niche brands Bentley and Bugatti, and budget brands Seat and Skoda.
Comparing the average profit per car between Porsche and VAG seems to underline Porter's distinction
between differentiation and stuck in the middle competitive strategies.
4.3
Porter's three generic strategies

Illustrated in the diagram below:
4.3.1
Competitive basis
Broad
Low cost
Differentiation
Cost leadership
Differentiation
Cost focus
Differentiation focus
Competitive
scope
Narrow
4.3.2
Cost leadership
A cost leadership strategy seeks to achieve the position of lowest-cost producer in the industry as a whole.
By producing at the lowest cost, the manufacturer can compete on price with every other producer in the
industry, and earn the higher unit profits, if the manufacturer so chooses.
How to achieve overall cost leadership
(a)
Set up production facilities to obtain economies of scale.
(b) Use the latest technology to reduce costs and/or enhance productivity (or use cheap labour if
available).
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Business strategy
(c)
In high technology industries, and in industries depending on labour skills for product design and
production methods, exploit the learning curve effect. By producing more items than any other
competitor, a firm can benefit more from the learning curve, and achieve lower average costs.
(d) Concentrate on improving productivity.

(e)
Minimise overhead costs.
(f)
Get favourable access to sources of supply.
(g)
Use value chain to streamline activities and reduce non-value adding activities (see Chapter 5).
Classic examples of companies pursuing cost leadership are Black and Decker and South West Airlines.
Large out-of-town stores specialising in one particular category of product are able to secure cost
leadership by economies of scale over other retailers. Such shops have been called category killers; an
example is Toys R Us.
Worked example: Watermark

Watermark is a supplier of catering and other services to airlines. It had a good six months in the first half
of 20X5, with revenue increasing from CU30.5m to CU35.2m and profits rising from CU1.6m to CU2.4m.
John Caulcutt, the CEO, declared that the company's business was, in essence, finding savings in the airlines'
supply chain: 'we can sell the savings to our clients and keep some of it for ourselves'.
4.3.3
Differentiation
A differentiation strategy assumes that competitive advantage can be gained through particular
characteristics of a firm's products.
How to differentiate
(a)
Build up a brand image (e.g. Pepsi's blue cans are supposed to offer different 'psychic benefits' to
Coke's red ones).
(b) Give the product special features to make it stand out (e.g. Russell Hobbs' Millennium kettle
incorporated a new kind of element, which boils water faster).
(c)
4.3.4
Exploit other activities of the value chain (see Chapter 5).
Generic strategies and the Five Forces

Advantages
Competitive
force
216
Cost leadership
Differentiation
New entrants
Economies of scale
raise entry
barriers
Brand loyalty and

perceived
uniqueness are
entry barriers
Substitutes
Firm is not so
vulnerable as its
less cost-effective
competitors to the
threat of
substitutes
Customer loyalty
is a weapon
against substitutes
Disadvantages
Cost leadership
Differentiation
STRATEGIC OPTIONS
Advantages
Competitive
force
Disadvantages
Cost leadership
Differentiation
Customers cannot
drive down prices
further than the
next most efficient
competitor
Customers have
no comparable
alternative
Suppliers
Flexibility to deal
with cost
increases
Higher margins
can offset
vulnerability to
supplier price rises
Increase in input
costs can reduce
price advantages
Industry rivalry
Firm remains
profitable when
rivals go under
through excessive
price competition
Unique features
reduce direct
competition
Technological
change will require
capital investment,
or make
production
cheaper for
competitors
Customers
Cost leadership
Differentiation
Customers may
no longer need
the differentiating
factor
Brand loyalty
should lower price
sensitivity
Sooner or later
customers
become price
sensitive
Imitation narrows
differentiation
Competitors learn
via imitation
Cost concerns
ignore product
design or
marketing issues
4.3.5
Focus (or niche) strategy

In a focus strategy, a firm concentrates its attention on one or more particular segments or niches of the
market, and does not try to serve the entire market with a single product.
Porter suggests that a focus strategy can achieve competitive advantage when 'broad-scope' businesses fall
into one of two errors:
Underperformance occurs when a product does not fully meet the needs of a segment and offers the
opportunity for a differentiation focus player.
Overperformance gives a segment more than it really wants and provides an opportunity for a cost
focus player.
Advantages
A niche is more secure and a firm can insulate itself from competition.
The firm does not spread itself too thinly.
Both cost leadership and differentiation require superior performance life is easier in a niche, where
there may be little or no competition.
Drawbacks of a focus strategy
The firm sacrifices economies of scale which would be gained by serving a wider market.
Competitors can move into the segment, with increased resources (e.g. the Japanese moved into the
US luxury car market, to compete with Mercedes and BMW).
The segment's needs may eventually become less distinct from the main market.
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Business strategy
Worked example: Microsoft

As discussed in a worked example in Chapter 5, Microsoft Corporation's success is largely attributed to its
operating systems and, in particular, the Windows environment it has developed. Windows has undergone
four significant step changes of version in the past 15 years: the original Windows 3.1, Windows 98,
Windows XP, and Windows Vista. Developers have designed each successive version on the premise that
the PC user wishes to turn their machine into a one-stop communication and entertainment device and to
work seamlessly between material on the local drive of their machine and other available resources on-line
and also able to present documents, show moving pictures and also play sound files. It must also have its
own security system. Therefore more and more features are bundled in that previously were bought
separately from other providers.
The flagship Microsoft application is Microsoft Office. This too has moved through iterations premised on
the belief that users wish to manage their knowledge across many platforms from printed page to spoken
word and Internet page.
During the past few years Microsoft has lost ground to two specific applications:
Linux a stand-alone operating system developed from Unix systems used on super-computers
Firefox a stand-alone Internet browser.
Both have the advantages of being free to download (but of course to do so the user has probably already
bought Windows and has Microsoft's IE browser). Both are 'open source coding' which means that users
are a community and contribute to improving the programmes. The main attractions claimed by supporters
of the systems seem to be their superior operational performance i.e. differentiation.
4.4
Conceptual difficulties with generic strategy

In practice, it is rarely simple to draw hard and fast distinctions between the generic strategies as there are
conceptual problems underlying them.
Cost leadership
Internal focus: Cost refers to internal measures, rather than the market demand. It can be used
to gain market share: but it is the market share which is important, not cost leadership as
such.
Only one firm: If cost leadership applies cross the whole industry, only one firm will pursue this
strategy successfully. However, the position is not clear-cut.
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More than one firm might aspire to cost leadership, especially in dynamic markets where
new technologies are frequently introduced.
The boundary between cost leadership and cost focus might be blurred.
Firms competing market-wide might have different competences or advantages that confer
cost leadership in different segments.
Higher margins can be used for differentiation: Having low costs does not mean you have
to charge lower prices or compete on price. A cost leader can choose to 'invest higher margins
in R&D or marketing'. Being a cost leader arguably gives producers more freedom to choose
other competitive strategies.
Differentiation: Porter assumes that a differentiated product will always be sold at a higher price.
However, a differentiated product may be sold at the same price as competing products in
order to increase market share.
Choice of competitor. Differentiation from whom? Who are the competitors? Do they serve
other market segments? Do they compete on the same basis?
STRATEGIC OPTIONS
Source of differentiation. This can include all aspects of the firm's offer, not only the product.
Restaurants aim to create an atmosphere or 'ambience', as well as serving food of good quality.
Focus probably has fewer conceptual difficulties, as it ties in very neatly with ideas of market segmentation.
In practice most companies pursue this strategy to some extent, by designing products/services to meet the
needs of particular target markets.
4.5
Bowman's strategic clock

Porter's basic concept of generic strategies has been the subject of further discussion. Bowman's clock
model was developed from surveys of practising managers attending MBA programmes who were asked to
describe the competitive strategies being followed by their own firms.
The strategy clock
Perceived added value
High
Low
Hybrid
3
Differentiation
4
Focused
differentiation
5
Low
price2
1
No frills
Low
7
8
Price
Strategies
destined
for ultimate
failure
High
4.5.1 Price-based strategies
Strategies 1 and 2 are price-based strategies.
4.5.2
A no frills strategy (1) is aimed at the most price-conscious and can only succeed if this segment of
the market is sufficiently large. This strategy may be used for market entry, to gain experience and
build volume. This was done by Japanese car manufacturers in the 1960s.
A low price strategy (2) offers better value than competitors. This can lead to price war and reduced
margins for all. Porter's generic strategy of cost leadership is appropriate to a firm adopting this
strategy.
Differentiation strategies
Strategies 3, 4 and 5 are all differentiation strategies. Each one represents a different trade-off between
market share (with its cost advantages) and margin (with its direct impact on profit). Differentiation can be
created in three ways.
Product features
Marketing, including powerful brand promotion
Core competences
The pursuit of any differentiation strategy requires detailed and accurate market intelligence. The
customers and their preferences must be clearly identified, as must the competition and their likely
responses. The chosen basis for differentiation should be inherently difficult to imitate, and will probably
need to be developed over time.
The hybrid strategy (3) seeks both differentiation and a lower price than competitors. The cost base must
be low enough to permit reduced prices and reinvestment to maintain differentiation. This strategy may be
more advantageous than differentiation alone under certain circumstances.
If it leads to growth in market share

If differentiation rests on core competences and costs can be reduced elsewhere
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Business strategy
If a low price approach is suited to a particular market segment

Where it is used as a market entry strategy
The basic differentiation strategy (4) comes in two variants, depending on whether a price premium is
charged or a competitive price is accepted in order to build market share.
A strategy of focused differentiation seeks a high price premium in return for a high degree of
differentiation. This implies concentration on a well defined and probably quite restricted market segment.
Coherence of offer will be very important under these circumstances. Johnson, Scholes and Whittington
give the example of a department store offering a range of products to a variety of customer types but
failing to differentiate such matters as premises, dcor and staff according to the particular segment served.
4.5.3
Failure strategies
Combinations 6, 7 and 8 are likely to result in failure as there is little perceived added value to compensate
for the premium on price.
Interactive question 3: EuroFoods
EuroFoods is a French-German consumer products group with a revenue of CU8 billion a year at 20X2
retail prices. One of EuroFoods' activities is the manufacture of ice-cream.
Medley is an American company. It has worldwide sales of CU5 billion a year and these come mainly from
chocolate products. Three years ago Medley started to diversify. It did this by selling a new product, icecream, in one of its existing markets, Europe. Although Medley had no prior experience of ice-cream, it
believed that it could exploit its existing expertise in food products, marketing and distribution in this new
area.
The European ice-cream industry revenue is CU6 billion at 20X2 retail prices.
Market share
EuroFoods
Medley
Local producers*
%
60
10
30
100
* These are defined as manufacturers who sell within only one European country.
Distribution has always been a very important aspect of the food industry. However, it is particularly so in
the ice-cream business. This is because the product must be kept refrigerated from factory to shop, and
also whilst it is stored in the shop.
Many of the shops which sell EuroFoods' ice-cream are small businesses and the freezer which is required
for storage is a costly item for them to buy. EuroFoods has therefore developed a scheme whereby it will
install and maintain such a freezer in these shops. The shop owner does not have to pay for the freezer.
The only condition which EuroFoods imposes is that the freezer must be used exclusively for the sales of its
products.
EuroFoods believes that this arrangement has worked well for everybody in the past. EuroFoods'
expenditures on the freezers have ensured that its products have reached the consumer in good condition
and also enabled it to simplify inventory control. It has also played a part in building its market dominance
by enabling shops which otherwise would not be able to do so, to sell its products.
The European ice-cream business
The peak time of year for sales of ice-cream in Europe is from mid-June to mid-August. These summer sales
are deemed 'impulse' sales by the trade and are traditionally made from small retail outlets where
EuroFoods tends to have its exclusive arrangements. The other sort of sale is the 'take-home', which are
purchases made in larger quantities at supermarkets. These outlets do not have exclusive agreements with
EuroFoods.
Analysis of European ice-cream sales in 20X2 is as follows.
Volume
220
Value
Return on sales Profit before tax
STRATEGIC OPTIONS
Impulse sales
Take-home sales
Total
%
40
60
100
CU billion
4
2
6
CU billion
0.48
0.12
Medley
Medley would like to obtain its future growth from the 'impulse' sector of the market. It owns 14,000 nonexclusive freezer cabinets, mainly in the UK. However, it is costly to maintain these to sell the eight
products which constitute its product range. Another problem is that in many cases small shops have room
for only one freezer and this has often already been supplied by EuroFoods. As Medley's UK managing
director said: 'It means only big competitors with a full range of products can enter the market'.
Medley would like to be able to place its products in the freezers provided by EuroFoods. However, when
it tried to do this two years ago in Spain, EuroFoods was successful in a legal action to prevent this.
Medley has now complained to the European Union that EuroFoods' exclusive freezer arrangements
restrict competition and are unfair.
You are presently working for Thunderclap Newman, a merchant bank, as a business analyst in its
Confectionery Division.
Requirement
Write a report to the head of the Confectionery Division of your bank, which
(a)
Identifies strategies which lead to competitive advantage.
(b) Makes recommendations to both companies on their possible future strategy options if the EU
decides that exclusive freezer arrangements are:
Anti-competitive and, in future, freezers should be available to any manufacturer
Not anti-competitive and EuroFoods can continue to protect the use of its freezers.
You should include a general explanation of how a firm may attain a competitive advantage.
Note: A billion equals one thousand million.
5 Product-market strategy: direction of growth

Section overview
5.1
The second strategic choice, outlined in section 1 above, is which products and markets to serve.
Ansoff classifies the choices on a matrix into market penetration, product development, market
development and diversification.
Each strategy has its particular benefits and drawbacks.
Product-market growth matrix

Ansoff drew up a growth vector matrix, describing how a combination of a firm's activities in current
and new markets, with existing and new products can lead to growth.
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Business strategy
5.2
Growth vectors
Ansoff identifies four directions (or vectors) of growth available to the business. Unlike Porter's generic
strategies, where only one should be followed, management can pursue all four of Ansoff's vectors if it
wishes to.
5.2.1
Market penetration
The firm seeks to do four things:
Maintain or to increase its share of current markets with current products, e.g. through
competitive pricing, advertising, sales promotion
Secure dominance of growth markets
Restructure a mature market by driving out competitors
Increase usage by existing customers (e.g. airmiles, loyalty cards)
The ease with which a company can pursue this strategy depends on its market and its competitors. If the
market is growing it may be relatively easy to gain share. However if markets are static (mature) it is not.
5.2.2
Market development: present products and new markets

There are many possible approaches. Here are some examples.
New geographical areas and export markets (e.g. a radio station building a new transmitter to
reach a new audience).
Different package sizes for food and other domestic items so that both those who buy in bulk and
those who buy in small quantities are catered for.
New distribution channels to attract new customers (e.g. organic food sold in supermarkets not
just specialist shops, Internet sales).
Differential pricing policies to attract different types of customer and create new market
segments. For example, travel companies have developed a market for cheap long-stay winter breaks
in warmer countries for retired couples.
This strategy is likely to be more successful, the closer the characteristics of the new market are to existing
markets (or segments).
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STRATEGIC OPTIONS
5.2.3
Product development: new products and present markets

This has several advantages.
5.2.4
The company can exploit its existing marketing arrangements such as promotional methods and
distribution channels at low cost.
The company should already have good knowledge of its customers and their wants and habits.
Competitors will be forced to respond.
The cost of entry to the market will go up.
Diversification: new products and new markets

Diversification occurs when a company decides to make new products for new markets. It should
have a clear idea about what it expects to gain from diversification.
Growth: New products and new markets should be selected which offer prospects for growth which
the existing product-market mix does not.
Investing surplus funds not required for other expansion needs, bearing in mind that the funds could
be returned to shareholders. Diversification is a high risk strategy, having many of the characteristics
of a new business start-up. It is likely to require the deployment of new competences.
Because of the extent of the change, diversification normally involves more risk than the other strategies.
5.3
Types of diversification
Ansoff identifies two classes of diversification:
1.
Related diversification: Integrating activities in the supply chain or leveraging technologies or

competences.
2.
Conglomerate diversification: The development of a portfolio of businesses with no commercial

similarity or links between them.
Vertical integration forward
Conglomerate diversification
Current position
Horizontal integration
Vertical integration backward
5.3.1
Related diversification
Horizontal integration is development into activities which are competitive with or directly
complementary to a company's present activities.
Competitive products: Taking over a competitor can have obvious benefits, leading eventually
towards achieving a monopoly. Apart from active competition, a competitor may offer advantages such
as completing geographical coverage.
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Business strategy
Complementary products: For example, a manufacturer of household vacuum cleaners moving

into commercial cleaners. A full product range can be presented to the market and there may well be
benefits from having many of the components common between the different ranges.
By-products: For example, a butter manufacturer discovering increased demand for skimmed milk.
Generally, income from by-products is a windfall to be counted, at least initially, as a bonus.
Vertical integration occurs when a company becomes its own supplier (backward) or distributor
forward).
Backward integration: taking over responsibility for upstream processes e.g. a clothing
retailer producing or designing its own clothes.
Forward integration: taking over responsibility for downstream processes e.g. an electrical
goods retailer setting up its own installation, servicing and repairs service.
Advantages of vertical integration
A secure supply of components or materials, hence lower supplier bargaining power
Stronger relationships with the final consumer of the product
A share of the profits at all stages of the value chain
More effective pursuit of a differentiation strategy
Creation of barriers to entry
Disadvantages of vertical integration
5.3.2
Over-concentration: A company places 'more eggs in the same end-market basket' (Ansoff).
Such a policy is fairly inflexible, more sensitive to instabilities and increases the firm's dependence
on a particular aspect of economic demand.
The firm fails to benefit from any economies of scale or technical advances in the
industry into which it has diversified. This is why, in the publishing industry, most printing is
subcontracted to specialist printing firms, who can work machinery to capacity by doing work for
many firms.
Conglomerate diversification
Not very unfashionable in the USA and Europe where its financial returns have been disappointing,
however, it has been a key strategy for companies in Asia, particularly South Korea.
Conglomerates
The characteristic of conglomerate (or unrelated) diversification is that there is no common thread,
and the only synergy lies with the management skills. Outstanding management seems to be the key to
success as a conglomerate, and in the case of large conglomerates they are indeed able, because of
their size and diversity, to attract high-calibre managers with wide experience.
Two major types of conglomerate can be identified. The financial conglomerate provides a flow of
funds to each segment of its operation, exercises control and is the ultimate risk taker. In theory it
undertakes strategic planning but does not participate in operating decisions. The managerial
conglomerate extends this approach by providing managerial counsel and interaction on operating
decisions, on the assumption that general management skills can be transferred to almost any
environment.
Advantages of conglomerate diversification
224
Risk-spreading: Entering new products into new markets offers protection against the failure of
current products and markets.
High profit opportunities: An improvement of the overall profitability and flexibility of the
firm through acquisition in industries which have better economic characteristics than those of the
acquiring firms.
Escape from the present business.
STRATEGIC OPTIONS
Better access to capital markets.
No other way to grow.
Use surplus cash.
Exploit under-utilised resources.
Obtain cash, or other financial advantages (such as accumulated tax losses).
Use a company's image and reputation in one market to develop into another where corporate
image and reputation could be vital ingredients for success.
The example of Virgin Group above may be an example of conglomerate diversification.

Disadvantages of conglomerate diversification
The dilution of shareholders' earnings if diversification is into growth industries with high P/E
ratios.
Lack of a common identity and purpose in a conglomerate organisation. A conglomerate will

only be successful if it has a high quality of management and financial ability at central headquarters,
where the diverse operations are brought together.
Failure in one of the businesses will drag down the rest, as it will eat up resources.
Lack of management experience: Japanese steel companies have diversified into areas completely
unrelated to steel such as personal computers, with limited success.
Poor for shareholders: Shareholders can spread risk quite easily, simply by buying a diverse
portfolio of shares. They do not need management to do it for them.
The methods by which Ansoff's growth strategies can be implemented (e.g. organic growth, acquisition
etc) will be considered in Chapter 10.
Interactive question 4: Blue Jeans Group
Note: Assume that the current date is March 20X9.

The Blue Jeans Group was floated in March 20X4 on the Alternative Investment Market with a capitalisation
of over CU22 million. The company was founded eleven years earlier by three Kenyan Asian brothers who
began their venture with a stall on the King's Road market.
Eight years prior to flotation, the business had been built up to such an extent that the brothers were
forced to choose between the wholesaling and retailing arms of their operation. In the event, they decided
to focus their effort on the faster-growing wholesaling activities. The capital released by the sale of the retail
outlets was then used to purchase a warehouse near to the King's Road to stock the garments. It was at
this time that the decision was taken to develop Blue Jeans as the brand name for the range of jeans and
fully co-ordinated casual wear in which they were trading.
When the brothers began their wholesaling operations, the rapid growth in the market for jeans meant that
their largest competitors had full order books and were not in a position to satisfy market demand.
Therefore there was plenty of 'market room' for a company like Blue Jeans. The brothers decided to
concentrate their effort initially on smaller retailers, since many of these were not being adequately sourced
by the larger (mainly US) manufacturers.
Eventually contracts were obtained with John Lewis and the Burton Group, among others. The small
retailer was not ignored but, as Blue Jeans grew, it was forced to direct its efforts towards the more
established shops rather than market traders.
Manufacturing sourcing policy
In the first instance Blue Jeans turned to Hong Kong to obtain the larger quantities which it required for its
expanding business. It generally takes seven or eight months for a new manufacturing unit to attain the
standards which are demanded by Blue Jeans. Around 90 per cent of the company's orders are now
produced in Hong Kong. Blue Jeans considers that its policy of contracting out the manufacture of its
garments has generally been successful. However, recent delays in producing new styles of jeans from new
patterns have caused problems.
225
Business strategy
Currently Blue Jeans is radically restyling part of the BSCO brand and hopes to take the market by surprise.
A contract to produce the first batch of 5,000 pairs of the new design is about to be awarded. Two
competing tenders are being considered.
Supplier A An existing Hong Kong based supplier, offering to deliver the garments in three to six
months' time at a cost of CU10 per pair payable on delivery.
Supplier B A new supplier to Blue Jeans, which in the past has worked almost entirely for one of its
smaller competitors. Supplier B is offering to produce the jeans at CU9 per pair payable in
advance. It will deliver in nine months and will pay a penalty fee of CU0.50 per garment per
month for any late deliveries.
On only one occasion has Blue Jeans become involved in the manufacture of its own garments. The
outcome of which was near disastrous. The experience led the brothers to make two important policy
decisions.
First, they decided not to go into manufacturing themselves but to concentrate on buying and selling.
Secondly, they decided to stick with experienced manufacturers and not to attempt to obtain too great a
degree of manufacturing process innovation. Recent changes in textile industry technology, e.g. flexible
manufacturing, JIT, etc, have led one of the brothers to question this approach.
Product market strategy
During the past decade considerable changes have taken place in the jeans market. Therefore flexibility and
ability to respond to fairly rapid changes in fashion are an essential component of the ability of a company,
such as Blue Jeans, to survive in the jeans business.
The current jeans product strategy of Blue Jeans is based upon a portfolio of four brand names, each of
which has its distinctive appeal and identity. First, there is the Blue Jeans brand itself. This is the original
brand and is the leader in the group's international activities. The Blue Jeans brand, which is targeted at
fashion-conscious men and women in the 15-25 age bracket, consists of two main elements. There are basic
denim jeans which are offered on an all the year round basis and there is a casual collection offered on a
seasonal basis. The jeans brand is from time to time strengthened by the addition of jeans-related products.
These have included footwear, marketed under licence, leather jackets and a range of accessories such as
belts and watches. It is envisaged that bags, holdalls and grips will also be introduced.
The Big Stuff Company brand (BSCO) is more 'classical' leisurewear with more contemporary fashions. The
BSCO brand is aimed at both men and women in the 16-25 age group. The Buffalo brand, which was
designed in Bordeaux initially for the French market, has its own distinctive French flavour. Moreover, its
sales are biased heavily towards women, although it caters for both sexes in the 16-24 age group. By
contrast, Hardcore is tough and masculine, based upon a traditional 'macho' image. Since it was introduced
it has developed its own clearly defined niche within the men's jeans market namely the 16-35 age group.
Company financing
The development of Blue Jeans during its early years was reflected in a steady expansion in its revenue and
profitability. However, five years on, losses were incurred due to a number of unfortunate events. By the
20X2/X3 financial year profitability had recovered and had reached a total of almost CU1 million. In order
to maintain growth in March 20X4 five and a half million shares, representing almost one quarter of the
group's equity, were sold at 100p on the Stock Exchange. This sale raised over CU5m for investment
purposes.
Since the floatation of the Blue Jeans Group in March 20X4, the company has gone from strength to
strength, with average sales growth being roughly 50 per cent per annum. (The Appendix contains Blue
Jeans' financial details). Turnover in the year ending 31 March 20X9 is expected to be over CU100 million
with profits of over CU10m. The brothers are keen to maintain this record of sales growth, while at the
same time providing the highest possible returns to their shareholders.
The jeans market
During 20X4 a revival in the jeans market occurred, stimulated by Levi's successful reintroduction of its five
pocket, fly button 501 jeans. This development, backed by a heavy advertising campaign, may be seen in
terms of a more general appeal to nostalgia in society which was prevalent at that time. A craze for stone-
226
STRATEGIC OPTIONS
washed jeans also helped to boost sales temporarily. However, this fad had fizzled out by 20X7, by which
time overall sales were again static.
A more important trend during the mid to late 20X0s was for the jeans market to become increasingly
fashion conscious. Traditionally the style of jeans has changed relatively slowly and manufacturers have
relied on making standardised products at high volume. This has tended to accentuate the importance of
production economies of scale.
Jeans market 20X6
United States (490m pairs)
Levi Strauss 24%
Lee 14%
Wrangler 10%
Guess 3%
Others 49%
Europe (180m pairs)

Levi Strauss 11%
Wrangler 3%
Lee 2%
Lee Cooper 2%
Blue Jeans 2%
Others 80%
More recently, rapid changes in style have required companies to exhibit greater flexibility. Designer jean
companies, such as Blue Jeans, have generally done well. Of the major manufacturers, Levi and Lee have
prospered. By contrast, Wrangler and Lee Cooper have suffered from their 'cowboy' and 'old fashioned'
images respectively.
In an attempt to reverse the adverse trend, Wrangler initiated a major TV advertising campaign. This
followed an expansion of such activity by Levi and Blue Jeans. Each of the campaigns had one factor in
common targeting of adolescents, the chief consumer of jeans.
A common feature of the strategic response of the major manufacturers to their business environment has
been a decision to withdraw from manufacturing and source their output from contract manufacturers in
the Far East. The unquestioned European leader in this respect has been Blue Jeans.
APPENDIX
Blue Jeans Ltd financial details
Blue Jeans: Five year trading summary
Revenue
Profit on ordinary activities before taxation
Taxation
Profit on ordinary activities after taxation
Minority interests
Earnings per share
20X8
CU'000
97,461
12,756
5,019
7,737
240
7,497
31.9p
20X7
CU'000
72,241
8,399
2,867
5,532
180
5,352
22.8p
20X6
CU'000
50,242
5,905
2,010
3,895
160
3,735
15.9p
20X5
CU'000
31,113
4,208
1,718
2,490
47
2,443
10.4p
20X4
CU'000
19,906
2,633
1,177
1,456
36
1,420
7.8p
Requirements
(a)
Outline the factors Blue Jeans should consider in awarding the contract to produce the first batch of
the new style BSCO jeans.
(b) As a management consultant, prepare a memorandum to the managing director which

(i)
Performs a corporate appraisal of Blue Jeans at March 20X9.
(ii)
Analyses its future strategy options. In discussing future strategy options, the memorandum
should deal, inter alia, with vertical integration, market development and product.
227
Business strategy
6 Other strategies
Section overview
6.1
The growth strategies identified by Ansoff involve essentially successful business divisions.
Where divisions are less successful there are strategic choices involving letting them go.
Withdrawal
Withdrawal may be an appropriate strategy under certain circumstances.
Products may simply disappear when they reach the end of their life cycles.
Underperforming products may be weeded out.
Sale of subsidiary businesses for reasons of corporate strategy, such as finance, change of objectives,
lack of strategic fit.
Sale of assets to raise funds and release other resources.
Exit barriers may make this difficult and/or costly.
Cost barriers include redundancy costs, termination penalties on leases and other contracts, and the
difficulty of selling assets.
Managers might fail to grasp the idea of decision-relevant costs ('we've spent all this money, so we
must go on').
Political barriers include government attitudes. Defence is an example.
Marketing considerations may delay withdrawal. A product might be a loss-leader for others, or might
contribute to the company's reputation for its breadth of coverage.
Psychology. Managers hate to admit failure, and there might be a desire to avoid embarrassment.
People might wrongly assume that carrying on is a low risk strategy.
Worked example: Plastics at GE

The following extract [from The Economist, January 2007] illustrates the importance of the industry lifecycle
on investment and divestment decisions.
'When General Electric's legendary boss Jack Welch first joined the firm, he worked in an office on Plastics
Avenue. Mr Welch's talent for management was noticed when, as head of the Plastics Division, he doubled
its size in three years. But today plastics is a low growth commodity business. As if to prove that Jack
Welch's successor, Jeffrey Immelt, has put the plastics division up for sale.
The sale is Mr Immelt's latest attempt to please shareholders who have been strikingly unenthusiastic since
he took charge in 2001. Mr Immelt has promised to return more money to the shareholders. He has been
shuffling GE's portfolio to boost growth. In a string of deals worth over $100 billion so far, GE has bought
fast-growing firms in health care, biosciences and Hispanic entertainment and sold its under-performing
industrial materials, insurance and motors businesses.'
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STRATEGIC OPTIONS
6.2
Divestment and demerger

Divestment and demerger have become more common as companies seek to reverse the diversification
strategies they once pursued. There are several reasons for this.
To rationalise a business as a result of a strategic appraisal, perhaps as a result of portfolio analysis,

where a lack of fit has been identified. Another reason might be to free up management time to
concentrate on core competences and synergies.
To sell off subsidiary companies at a profit, perhaps as an exit route after managing a turn-round or as
a management defence strategy to avoid a potential take-over of the whole company.
To allow market valuation to reflect growth and income prospects. Where a low growth, steady
income operation exists alongside a potentially high growth new venture, the joint P/E is likely to be
too high for the cash cow and too low for the star. The danger is that a predator will take over the
whole operation and split the business in two, allowing each part to settle at its own level.
Satisfy investors: diversified conglomerates are unfashionable. Modern investment thinking is that
investors prefer to provide their own portfolio diversification.
To raise funds to invest elsewhere or to reduce debt.
Worked example: Philips

Philips, the Dutch manufacturer of consumer electronics, divested some non-core businesses in order to
concentrate on core businesses as a strategy for improving profitability. It sold its production of white
goods (large kitchen appliances) to an American firm, Whirlpool. There was overcapacity in the market.
Philips was suffering from declining profitability and did not have the resources to invest in all its product
ranges.
Demerger can realise underlying asset values in terms of share valuation. ICI's demerger of its attractive
pharmaceuticals business led to the shares in the two demerged companies trading at a higher combined
valuation than those of the original single firm.
Worked example: Unilever

Unilever chose to focus on 400 of its brands with the greatest potential. It switched resources away from
the remaining 1,200, either by disposing of them as they had no future, harvesting them and allowing them
to decline over time, or for a third group simply stopping their marketing so that they became more
profitable.
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Business strategy
Summary and Self-test
Summary
230
STRATEGIC OPTIONS
Self-test
Answer the following questions.
1
Define corporate appraisal.
How can it be used to guide strategy formulation?
What is gap analysis?
What is required for a successful cost leadership strategy?
How do you differentiate?
Draw Ansoff's growth vector diagram
Explain two alternative strategies for existing products or markets that can be pursued.
Explain how a producer of natural spring water could attempt to gain a competitive advantage over its
rivals giving specific examples.
If a tennis racquet manufacturer began selling a line of tennis clothing, what sort of growth would this
be in terms of Ansoff's matrix? Suggest two ways in which such development could be achieved.
10
Hannafords Dairy Ltd

Hannaford's Dairy Ltd (Hannafords), operates a 'door step' fresh milk delivery service. The company is
one of your firm's clients. Recently the directors have been concerned about the company's future.
This is partly because the directors intend to sell the company for the maximum value, and retire, in
about five years' time. You have been asked to assess the current position and make recommendations
for the future strategic direction of the company. The company's stated objective is 'to provide the
best possible service to our customers.'
Hannafords was formed in the early 1960s by two brothers when they inherited a 'door step' milk
delivery business from their father. Immediately before the father's death the business had amounted
to three 'milk rounds' which the father and the two sons carried out. The relatively small amount of
administrative work had been undertaken by the father. The business operated from a yard on the
outskirts of Mungla, a substantial town in the far south west of Bangladesh.
Hannafords expanded steadily until the early 1980s, by which time it employed 25 full-time rounds
staff. This was achieved because of four factors.
(1)
(2)
(3)
(4)
Some expansion of the permanent population of Mungla

By expanding Hannafords' geographical range to the villages surrounding the town
An expanding tourist trade in the area
A positive attitude to 'marketing'.
As an example of the marketing effort, the arrival of a new residents into the area is reported back by
the member of the rounds staff concerned. One of the directors immediately visits the potential
customer with an introductory gift, usually a bottle of milk and a bunch of flowers, and attempts to
obtain a regular milk order. Similar methods are used to persuade existing residents to place orders
for delivered milk.
By the mid-1980s Hannafords had a monopoly of door-step delivery in the Mungla area. A
combination of losing market share to Hannafords and the town's relative remoteness had discouraged
the national door-step suppliers. What little locally-based competition there once was had gone out of
business.
Supplies of milk come from a bottling plant, owned by one of the national dairy companies, which is
located 50 miles from Mungla. The bottlers deliver nightly, except Saturday nights, to Hannafords'
depot. Hannafords deliver daily, except on Sundays.
Hannafords bought and developed a site, for use as a depot, on the then recently established Mungla
Trading Estate in 1970. This was financed by a secured loan which the company paid off in 1985. The
depot comprises a cold store, a parking area for the delivery vans, a delivery van maintenance shop
and an office.
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Business strategy
Profits after adjusting for inflation, have fallen since the early 1980s. Volumes have slipped by about a
third, compared with a decline of about 50% for door-step deliveries nationally over the same period.
New customers are increasingly difficult to find, despite a continuing policy of encouraging them. Many
existing customers tend to have less milk delivered. A sufficient profit has been made to enable the
directors to enjoy a reasonable income compared with their needs, but only by raising prices.
Currently Hannafords charges 40 pence for a standard pint, delivered. This is fairly typical of door-step
delivery charges around Bangladesh. The Mungla supermarket, which is located in the centre of town,
charges 26 pence a pint and other local stores charge between 35 pence and 40 pence.
Currently, Hannafords employs 15 full-time rounds staff, a van maintenance mechanic, a
secretary/bookkeeper and the two directors. Hannafords is regarded locally as a good employer. The
company pays good salaries and the directors have always taken a 'paternalistic' approach to the
employees. Regular employment opportunities in the area are few. Rounds staff are expected to, and
generally do, give customers a friendly, cheerful and helpful service.
The two brothers continue to be the only shareholders and directors, and comprise the only level of
management. One of the directors devotes most of his time to dealing with the supplier and with
issues connected with the rounds. The other director looks after administrative matters, such as the
accounts and personnel issues. Both directors undertake rounds to cover for sickness and holidays.
Requirements
(a)
Comment on the company's stated objective ('to provide the best possible service to our
customers') as a basis for establishing a corporate strategy.
(2 marks)
(b) As far as the information given in the question will allow, undertake an analysis of the strengths,
weaknesses, opportunities and threats (SWOT analysis) of the company.
You should explain each point you make and provide some indication of the importance which
you attach to each.
Indicate what additional information you would need to obtain and why you need it, to enable
you to complete your SWOT analysis.
(16 marks)
(c)
Indicate how the resources of the company could form the basis of its future strategy. (6 marks)
(24 marks)
11
Kraun Shipping Ltd

Kraun Shipping Ltd ('KShipping') is a major UK listed company which has four wholly-owned
subsidiaries: Kraun Ports Ltd ('KPorts'), Kraun Logistics Ltd ('KLogistics'), Kraun Ferries Ltd
('KFerries') and Kraun Cruises Ltd ('KCruises').
KCruises is the fourth largest ocean cruise company in the world, operating 15 cruise liners and
holding a 15% share of the market. Currently the board of KShipping is considering whether to accept
a CU2,600 million cash offer for KCruises from the market leader in the ocean cruise industry,
Feyestar Cruise Corporation ('Feyestar'), a US based company which controls 30% of the market.
However, two other strategies are being considered by the KShipping board: first, to form a strategic
alliance between KCruises and the cruise industry's second largest operator, Windees Cruise
Corporation ('Windees'); and, second, float KCruises, issuing shares pro rata to the existing investors
in KShipping. This latter policy would leave it entirely up to shareholders to decide whether to accept
the bid from Feyestar or, alternatively, to opt for an effective merger with Windees or to retain
KCruises's independent existence.
The industry background
Although the market for ocean cruise holidays only accounts for 5% of the world tourist industry, it is
one of the fastest growing sectors. Throughout the past decade the number of cruise passengers
carried increased by between 10% and 15% each year. Because of this rapidly increasing demand, the
major cruise holiday operators are aiming to increase their capacity by 60% between 2006 and 2011,
expanding the number of berths available from 195,000 to nearly 315,000. As a result, in the spring of
2006 orders had been placed for the construction of no fewer than 60 new liners, worth some
CU14,000 million.
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STRATEGIC OPTIONS
Currently there are four major ocean cruise operators, together accounting for 90% of the holidays
sold. The largest is Feyestar, with a 30% share of the market, followed by Windees with 25%. A third
company has a 20% share of the market, and KCruises controls 15%. The Big Four have grown both
organically and by acquisition, and consequently the number of small independent operators in the
industry has declined. Moreover, some companies which have tried to break into the industry, offering
new destinations and/or selling direct rather than through travel agents, have found the going tough,
generally selling out to the larger operators after surviving for only one or two years. The large
cruising companies have also tried to entrench their positions by forging alliances with travel agents
and the large holiday companies which operate at the international level.
No less than two thirds of all cruise passengers are North American, reflecting the fact that cash-rich
early retirees nowadays actively seek out leisure opportunities. The next largest market is the UK,
although British nationals taking ocean cruising holidays only account for around 8.5% of the world
total. The most popular destination by far is the Caribbean, accounting for 45% of all cruise holidays
taken, followed by Mediterranean cruises, which account for another 12.5%. Other increasingly
popular destinations are Alaska, the Pacific coast of Central America, and Northern Europe and the
Baltic. Efforts are being made to develop new holiday cruises based in Brazil and Singapore.
Risk exposure in the industry is relatively high as capacity is more or less fixed in the short term, and
the interval between ordering and commissioning a new cruise liner is 2-3 years. On the other hand,
demand for cruising holidays can decline sharply when there is an economic recession.
The company profile
Even before the bid from Feyestar for KCruises, the board of KShipping had been considering trying to
focus more on its three UK-based core activities: ports, ferries and logistics. An analysis of its activities
over the past five years shows the following:
Years ending 31 December
Revenue
Ports, ferries and logistics
Cruise holidays
Net profit
Cruise holidays
Net assets
Cruise holidays
2003
CUm
2004
CUm
2005
CUm
2006
CUm
2007 (projected)
CUm
2,650
820
3,470
2,600
975
3,255
2,280
1,110
3,710
2,820
1,275
4,095
2,795
1,325
4,120
225
110
335
120
135
255
220
165
385
100
145
245
90
150
240
3,850
855
4,705
4,030
1,050
5,080
4,160
1,325
5,485
3,850
1,910
5,760
3,960
1,470
5,430
The board meeting

At a recent board meeting the chief executive officer (CEO) of KShipping suggested that Feyestar's
CU2,600 million offer for KCruises undervalued the latter by some CU550 million. It appeared that
Feyestar was assuming a 4% per annum growth rate in projected earnings for 2007 of CU150 million,
which seemed to be on the low side. However, if Feyestar were to acquire KCruises, it would have to
pay Windees CU200 million in compensation for terminating an existing (but limited) joint venture
arrangement between KCruises and Windees.
The chairman felt that, as KShipping was a public listed company, it was necessary to consider the
relative advantages and disadvantages of each of the three strategic options (take-over of KCruises or
even KShipping by Feyestar; forming a much closer strategic alliance between KCruises and Windees;
demerging KCruises from the KShipping group and floating it on the Stock Exchange). In particular, he
wanted an appraisal of the competitive environment in the ocean cruising industry, KShipping's core
competences, the generic strategies facing the group, and how growth might be best achieved.
The finance director of KShipping was concerned that risk exposure would be significantly increased
if the much closer strategic alliance between KCruises and Windees went through. This was because
the group would be more heavily committed to ocean cruising, most of whose passengers were North
233
Business strategy
American. Moreover, there would be further exposure to foreign exchange risk insofar as orders for
new cruise liners had been placed with overseas shipyards.
Requirement
As an assistant to the finance director, prepare a memorandum for the board which briefly examines
each of the following matters:
The competitive environment in the ocean cruising industry, using an appropriate analytical
framework such as Porter's 5 forces model.
How the competitive advantage enjoyed by KShipping might be assessed (e.g. by analysing the
group's core competences).
How growth might be best achieved by KShipping.
The impact on the risk exposure of the KShipping group if the much closer strategic alliance with
Windees were to go through.
(33 marks)
Note: Ignore taxation.

12
Juniper Ltd
Juniper Ltd retails middle-of-the range women's wear through a chain of 200 shops located in the UK.
The clothes sold carry their own labels and those of other fashion houses. The company's financial
year ended on 31 January, and the following are key statistics relating to its operations over the past
six years.
Number of shops
Employees
Revenue (CUm)
Pre-tax profit
(CUm)
20X2
235
5,600
360
36
20X3
240
5,400
380
4
20X4
230
5,200
400
45
20X5
220
5,000
420
38
20X6
200
4,800
440
22
20X7
200
4,600
460
18
The history of the company

Juniper Ltd was founded 25 years ago and, after a successful flotation on the stock market 10 years
ago, the business continued to expand rapidly. However, its share of the middle-of-the-range women's
wear market is still relatively small. Management accounts for the first quarter of 20X7/X8 have shown
a further reduced profit. The board has recently met to consider various strategies which could turn
round the company.
The industry profile
At the top end of the market are the fashion houses, which concentrate on design and promote
themselves through magazines. Their designs are adapted for wider distribution through so-called
'diffusion label' collections, and these are sold with accessories through chains of department stores.
There they compete with other labels targeted at niche markets and which are owned by textile
manufacturers or by independent non-manufacturing (and generally smaller) listed companies. Some of
the latter sell through their own stand-alone retail outlets, as well as through shops-within-shops.
At another level are 'mass brands', each catering for a slightly different segment of the market (e.g.
depending on customers' ages, incomes and sizes) or offering specific lines (e.g. maternity, leisure, or
sports wear). Some of these clothes are sold via specialist chains owned by large companies or by
smaller independents. There are also clothing department stores which carry a broad range of lines. A
feature of the industry is the considerable variation in the ways in which the different companies
operate. Some chains concentrate on women's clothing and offer only one format. Others have a
standard format but sell both men's and women's clothing. Yet others comprise chains of different
types of shop, each catering for a niche market. Several groups supplement their high street trade by
selling via catalogues, and department stores clearly combine selling clothes with other activities,
although some of the fashion-oriented companies focus on a very narrow range of complementary
products (e.g. on soft furnishings and interior design).
The diversity of approach is reflected by the fact that the size of different companies varies
considerably. There are some small privately-owned local outfitters, catering for the needs of a
particular clientele. Conversely, there are the specialist chains run by privately-owned groups or by
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STRATEGIC OPTIONS
relatively small listed companies. Further up the scale are medium-sized companies, while at the top
end are the largest groups which operate department stores.
Few of the fashion retailers manufacture their own clothes, preferring to be able to switch suppliers
and exercise buyer power as much as possible. Consequently vertical integration is not generally
regarded as a helpful attribute. However, perhaps the main problem facing clothing retailers is the fact
that there are few barriers to entry. Partly because of this they are forever jockeying for position in an
intensely competitive industry, and profit records tend to be highly volatile. A relative advantage,
brought about by innovation, can soon be lost, and there have been numerous examples over the
years of smaller (but listed) textile manufacturers and fashion retailers collapsing. Equally, several of
the larger companies have had to be turned round with radical shake-ups in the ways in which they are
organised and run. It is therefore necessary to maintain as much flexibility as possible to respond
rapidly to changes both in consumer tastes and in the competitive environment.
The options facing Juniper Ltd
At the recent board meeting called to review performance for the three months ended on 30 April
20X7, the company's sales director argued that pre-tax contribution per square foot was too low and
that what was needed was an increase in sales volume. This could only be secured by carrying more
lines and by cutting prices. If necessary this would have to be achieved by moving down-market and
selling cheaper lines to a more broadly based clientele. The finance director disagreed. She took the
view that it might well be better to develop the company's existing niche in the market place and try
to increase margins.
The design and purchasing director tended to agree with the finance director. In particular, she was of
the opinion that a high profile designer should be commissioned to come up with a new collection, and
that the clothes should be strongly marketed by employment supermodels to promote them in
advertisements in the leading fashion magazines. At the same time it was desirable to freshen up the
format of the shops.
The chairman felt that various other options should be considered by the board. One possibility was
to link up with a US fashion chain, and one American company in particular had already shown interest
in such an association. Another option was to develop different fashion lines using new labels which
would appeal to customers not attracted by the company's present range of clothes. Other
possibilities included closing some of the stand-alone retail outlets and opening up more shops-withinshops, selling men's clothes alongside women's fashions, selling more accessories, or even a limited
range of soft furnishings, developing a mail order business, and integrating vertically by manufacturing
clothes.
In view of the difference in views among board members, it was decided to commission a preliminary
report reviewing the strategic options open to the company.
Requirement
As an outside consultant, prepare briefing notes for the board of Juniper Ltd which examines and
evaluates each of the strategic options open to it. The notes should deal only with the following
options.
Moving downmarket, cutting margins and increasing sales volume
Moving upmarket with a new designer collection, increasing margins, and changing the format of
the shops
Linking up with an overseas fashion retailer
Extending the range of clothes sold by introducing new labels
Switching to shop-within-shop retail outlets
Diversifying (e.g. into men's clothing, fashion accessories, soft furnishings, mail order, etc)
Integrating vertically by manufacturing clothes.
(33 marks)
Now, go back to the Learning Objectives in the Introduction. If you are satisfied that you have achieved
these objectives, please tick them off.
235
Business strategy
Answers to Self-test
1
A critical appraisal of strengths, weaknesses, opportunities and threats.
Match strengths with market opportunities; convert weaknesses into strengths and threats into
opportunities.
Comparison of the objective with the outcomes of already-planned activities.
Economies of scale; latest technology; learning curve effect; improved productivity; minimised
overhead costs; favourable access to sources of supply.
Build brand image; create special features in the product; exploit the value chain.
Using the BCG matrix, one of four strategies can be pursued for each product.
(a)
Building market share: This is an appropriate strategy if

(i)
Market growth rate is high
(ii)
The product is in its growth stage (of the product life cycle).
Such a strategy is appropriate for stars and some (if not all) problem children but requires
considerable cash to fund high marketing expenditure.
This strategy involves heavy advertising, discounted pricing and intensive use of promotional
techniques.
(b) Holding market share: This is appropriate where both the product and market are mature, as in
the case of cash cows, but could be applied to some stars.
Holding is achieved by ensuring that advertising expenditure and prices are comparable to those
of competitors.
(c)
Harvesting: This strategy allows market share to decline, thus allowing the company to maximise
its short-term earnings.
It could be applied to the problem children which the firm does not wish to or does not have the
resources to turn into stars.
Harvesting is typically achieved by cutting marketing expenditure and/or raising prices.
(d) Withdrawal: This is an appropriate strategy where the product has a lower than viable market
share with no realistic hope of an improvement typically applicable to dogs.
The product is in an unattractive market, and there is thus little purpose in improving market.
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STRATEGIC OPTIONS
Product differentiation:
Advertising campaign to stress health giving properties

Package in fancy glass bottles
Label the bottle using more stylish design.
Cost leadership:
Use plastic bottles

Bring prices per litre down below competitors
Sell in multi-packs to increase volume.
Product development sales of a new and different product are made but to the same (original)
market or customer base.
This could be achieved by:
10
Buying in tennis clothing made by another manufacturer and re-badging it.

Developing their own range of clothes from scratch.
Entering into a strategic alliance with a clothes manufacturer to develop the range together.
Hannafords Dairy Ltd

(a)
Objective
Objectives need to provide a practical basis for the establishment of a strategy.
Hannafords' objective 'to provide the best possible service to our customers' lacks most of
the elements in 'SMART', an often-used technique for evaluating objectives.
Specific. 'Best possible service' is rather vague and needs expansion into more specific areas, e.g.
all deliveries by 8 am.
Measurable. There is no readily available scale on which to measure whether 'the best service'
has been given.
Achievable. It is hard to say whether the objective is achievable given the comments on
specific/measurable above.
Relevant. The objective is very relevant if the business is to survive in the face of increased
competition from supermarkets.
Timescale. No timescale is mentioned but is not perhaps necessary. Given the way the
objective is expressed and the current position of Hannafords (see (b) below), it is probably a
day-to-day objective!
(b) SWOT analysis

This analysis looks at the immediate strengths and weaknesses of the company itself and the
opportunities and threats presented by the environment in which it operates.
(i)
Strengths of Hannafords
(1) The main strength of the company is its monopoly of milk delivery in a fairly isolated
area.
(2) It has a good reputation locally so that even with a price more than 50% above that of
the supermarket, it is losing business more slowly than the industry average.
Other, less significant strengths include the following.
(3) It has no loans outstanding and owns its premises.
(4) It has a reputation for being a good employer with good wages, and the staff respond
to this.
(5) The directors have shown some skill in marketing.
237
Business strategy
(ii)
Weaknesses of Hannafords
(1) A significant weakness is the reliance on one source, owned by a national dairy.
Although it would seem unlikely the dairy would withdraw supplies, it may be able to
force price increases on Hannafords.
(iii) Threats
(1) A significant threat is in relying on one product (doorstep delivery of milk) with
reducing sales in a declining market. If it continues to decline this will not be a
sustainable position.
(2) Another main threat is that posed by the supermarket and town shops which undercut
on price by up to 35%.
(3) A less immediate threat is that the cultural acceptance of the milkman is being
gradually eroded, so that for many people all their grocery shopping, including milk, is
done at the supermarket. The milkman is therefore not considered.
(iv) Opportunities
(1) The most important opportunity presented is to take advantage of the company's
position as the only doorstep delivery operation by diversifying into other products.
(2) A further significant opportunity is to cut the cost base by only delivering every other
day. This would require careful handling to ensure it had customer support but would
allow for a halving of the delivery fleet. Given the company's employment reputation
this may have to be achieved through normal turnover of staff, unless other
opportunities for the workforce can be found.
Other, less significant, opportunities include the following.
(3) Free or cheap 'cool boxes' for keeping the milk fresh when people are at work all day.
(4) Carrying advertisements on the milk floats or on the milk bottles.
(5) Considering diversifying into cheese production, which could be marketed to tourists
both through local shops and on the milk rounds.
Additional information
In order to complete the SWOT analysis it would be useful to have the following information.
(i)
The financial statements of the last three years and budgets for the next year, in order to
assess its financial strength and cash reserves. This will give an idea of the timeframe within
which any changes have to be made.
(ii)
How close is the nearest rival to assess the likelihood of the monopoly position being
threatened.
(iii) An analysis of past prices from the dairy to see whether it tries to impose price increases
regularly.
(iv) The relative remoteness of the outlying villages and the public transport facilities. This
would be to assess the usefulness to those without cars of Hannafords offering other
products on their deliveries.
(v)
A market survey of the likely customer reaction to deliveries on alternate days.
(vi) The demand for local advertising.

(vii) The location of any other cheese makers and their proximity.
238
STRATEGIC OPTIONS
(c)
Resources and strategy

It is important for the company to identify its core competencies from which it can develop its
strategies. These appear to be as follows.
Competitive architecture
Internal: Good (paternalistic) relationships with staff.
External: Losing customers at a slower rate than national experience so there appears to be
some degree of customer loyalty.
Reputation
Good in terms of home deliveries as it has established a monopoly position. Service regarded
as friendly, cheerful and helpful.
Innovative ability
Marketing innovation, e.g. flowers for new customers.
Ownership of strategic assets
Monopoly on doorstep deliveries.
Based on these core competencies possible strategies to improve profits are to use the delivery
network to expand the product range, e.g. fruit drinks, milk drinks, fruit, vegetables, and
fresh/frozen meats. Alternatively or in addition the network could be used for deliveries of a
different nature, e.g. mail, parcels, prescriptions (particularly for the elderly), dry cleaning, etc.
11
Kraun Shipping Ltd

Memorandum
To
The Board of Kraun Shipping Ltd
From
AN Assistant
Date
Today
Subject Competition and strategy

Despite the rapid growth in demand for ocean cruising holidays, barriers to entry in the industry are
significant.
A major factor is the amount of financial and other resources needed to run a fleet of ocean liners in
order to provide a comprehensive range of cruise holidays. In particular, large amounts of money are
required to pay for new liners. Moreover, the fact that there is a lengthy time interval between the
date when an order is placed with a shipyard and the delivery of the vessel indicates that the shipping
companies need to have sufficient working capital funds to bridge the gap before revenues are
generated.
This lag also exposes shipping companies to considerable risk. This is compounded by the fact that,
although demand for ocean cruising holidays has been growing at an annual rate of between 10% and
15%, the situation could be adversely affected in the short term if there is an economic recession.
The latter is a matter of considerable concern, given the high ratio of fixed to variable operating costs.
These factors help to explain the high 'concentration ratio' in the industry, where the four largest
ocean cruise operators together account for 90% of the holidays sold.
It is also worth noting that economies of scale are significant, which is presumably the main reason
why the Big Four have grown both organically and through a series of acquisitions.
Another potential barrier to entry is the degree to which cruise companies have vertically integrated
with travel companies, by forging close alliances with them in order to sell their holidays.
However, all these threats to competitors will ultimately depend on the extent to which the
competition authorities in the EU, UK and US are prepared to tolerate them.
239
Business strategy
Rivalry amongst competitors
Rivalry between the major ocean cruise operators is fierce. Given the fact that in the short-term
capacity is fixed, it is necessary to maximise revenues, and this can best be achieved by adopting
discriminatory pricing policies.
This is done by making special offers for each cruise that is undertaken, the aim being to maximize
contribution over the year as a whole.
The result is aggressive marketing, trying to induce travel agencies to promote the cruises of a
particular company.
This is generally backed up by more general advertising campaigns, and by devising new cruise routes
and packages (e.g. for 4-5 days, rather than a fortnight) likely to appeal to certain types of customer.
Power of buyers
Although many holidaymakers book their cruises independently, some of the cruise holiday capacity is
sold en bloc to travel agents.
Given that the travel agent industry itself is fairly highly concentrated, it is important that the cruise
companies are large enough on their own to bargain on a more-or-less even footing with the agencies,
especially as ocean cruising holidays only account for about 5% of all holidays booked.
A factor that has to be borne in mind is that two thirds of customers come from North America, the
next largest market being western Europe.
Power of suppliers
The main suppliers are shipyards, port authorities, suppliers of provisions, and the crews operating the
cruise vessels.
From the viewpoint of the large ocean cruising companies, there are a sufficient number of shipyards
around the world with spare capacity to make their bargaining position relatively strong when placing
orders for new liners. This is despite the fact that in recent years orders worth CU14,000m have been
placed for no fewer than 60 new vessels to be delivered between 2006 and 2011.
The position with respect to port authorities is rather more complex, as each destination is unique.
Consequently, if a cruise is advertised to visit (say) Alexandria, the shipping company has little option
but to pay the port fees. The only freedom it has is to offer a different itinerary, so that everything
depends on whether or not in the holidaymakers' view there is a close substitute for a given
destination.
Usually there will be a number of different suppliers from which provisions can be purchased, so their
bargaining power is relatively weak.
Usually a shipping company will not find it difficult to recruit seamen, especially as it can look abroad
to find them and so avoid problems that might arise from having to deal with a unionised workforce.
The same will largely be true of the cabin crew, cooks and ships' officers. More problematic, however,
may be cabaret artists, especially those with established reputations and easily recognisable names.
Substitute products
Clearly there are many different types of cruise, depending on the duration, destination, quality of
accommodation, and season.
As a result, cruise companies are constantly trying to produce new venues and packages,
differentiating their products and pricing competitively.
More generally, there are many other types of holidays that customers can take, with ocean cruises
accounting for only around 5% of all packages offered.
A particularly close substitute is the river cruise, demand for which has been growing rapidly in recent
years.
240
STRATEGIC OPTIONS
How the competitive advantage enjoyed by KShipping might be assessed

The starting point in establishing a company's 'competitive advantage' is usually 'value chain analysis'.
This requires a distinction between primary and support activities.
The former are concerned with the creation or delivery of the product, and comprise 'inbound
logistics', 'transforming operations', 'outbound logistics', 'marketing and sales' and 'service activities'.
Support activities comprise 'procurement' (i.e. the processes for acquiring resource inputs),
'technology development' (i.e. R&D and product design),'human resource management' and
'infrastructure'.
In the case of KShipping, it is necessary to apply this framework to each key activity (ports, ferries,
logistics, and cruise holidays).
In this way it should be possible to identify clearly those activities, or components of activities, that
appear to be adding value and those that do not.
This should pinpoint on the one hand those operations that are complementary and where there are
synergies, and on the other those where there are few if any linkages.
The next step in the analysis is to identify the company's 'core competences', i.e. those skills which
critically underpin its competitive advantage.
From the recent performance of the two divisions, it is clear that the ocean cruising operations are
growing far more rapidly than the more traditional transport activities (ports, ferries and logistics).
However, to obtain the full picture it is appropriate to examine the core competences relating to each
activity.
This can be done by analysing 'cost efficiency' for each component operation, which requires
measurement of the level of resources needed to create a given level of output.
This means identifying economies of scale, determining whether supply costs are being minimised, and
whether advantage is being taken of learning processes.
The effectiveness of each component operation must then be assessed, 'effectiveness' being a measure
of the level of value that can be created from a given level of resources.
This does not only relate to minimising costs, but captures other factors which give rise to customer
satisfaction. Core competences in separate activities may provide competitive advantage for a
company, but nevertheless may come to be imitated by rivals.
Core competences are likely to be more robust and difficult to imitate if they relate to internal
'linkages' within the value chain and external 'linkages' into the supply and distribution chains (e.g.
reflecting vertical integration).
Management of these 'linkages' provides 'leverage' and performance levels that are difficult to match. It
seems fairly clear that there are 'linkages' in the value chains relating to ports, ferries and logistics,
reflected in the fact that these activities are embraced by a single, integrated division.
These are likely to be robust to the extent that the specific skills involved are 'owned' by KShipping
and cannot easily be copied.
However, the downside is that there are probably some 'key rigidities' (i.e. activities that are deeply
embedded and difficult to change), which greatly reduce the flexibility of the organisation, preventing it
from adapting where necessary.
With respect to the cruise holiday division, there should again be 'linkages' in the value chain, which
are again 'robust' to the extent that the specific skills involved are 'owned' by the KCruises subsidiary
and cannot easily be copied.
What is fairly clear is that there are few linkages between KShipping's two divisions and, given that
they are pursuing different growth paths, there would seem to be much for divorcing the two, enabling
KCruises to focus more clearly on its strategic objectives.
241
Business strategy
How growth might best be achieved by KShipping
The competitive advantage enjoyed by KShipping over its rivals can also be analysed in terms of two
generic strategies, 'cost leadership' and 'differentiation'.
The former arises where a business attempts to become the lowest cost producer in an industry for a
given standard of product, enabling it to undercut rivals by lowering prices.
Such cost advantages usually arise from economies of scale and learning effects. However, cost
advantages can be eroded by changes in exchange parities, inflation, technological change, and the
development by rivals of superior products or services.
By contrast, 'differentiation' is where a company offers a better quality product or service than its
rivals, and customers are prepared to pay for this.
Such a competitive advantage can be undermined, however, if rivals produce superior differentiated
products or services where customers are no longer prepared to pay premium prices, or where the
costs of differentiation (e.g. branding and advertising) are too high.
'Cost leadership' and 'differentiation' may be implemented by a company if it does not attempt to
dominate the whole industry, but instead chooses to 'focus' on a particular buyer group, market
segment, or on specific products.
The different ways in which a company can grow can be analysed using the (modified) Ansoff matrix, as
follows.
PRODUCT OR SERVICES
Existing
Existing
PROTECT/BUILDING
* Withdrawal
* Consolidation
* Market penetration
New
PRODUCT DEVELOPMENT
* On existing competences
* With new competences
MARKETS
New
MARKET DEVELOPMENT
* New segment
* New territories
* New uses
DIVERSIFICATION
* On existing competences
* With new competences
Essentially the argument is that a company can expand either by developing its existing activities, or by
developing new products or services. In the former case it can either increase it share in existing
markets or enter new markets (e.g. by expanding abroad).
Both options will normally require a considerable investment in marketing. Alternatively, a company
can develop new products or services, in which case it is likely to have to undertake R&D in order to
innovate.
Some forms of expansion effectively involve diversification (e.g. by broadening the product portfolio or
by widening the markets into which goods and services are sold).
Expansion can also be achieved either by internal, organic growth; or by merging or acquiring existing
companies. (An alternative to the latter is to forge a strategic alliance with a rival.)
The acquisition/merger route will secure a more rapid entry into a market, but the assets and skills
acquired, together with the advantage of avoiding a slow build-up in a market, are benefits that will be
reflected in the price paid when acquiring a 'mature' business.
With respect to KShipping, it is fairly clear that it its various activities must be analysed separately to
see how best they might grow.
At the overall level, however, the board appears to favour a 'divestment' strategy: i.e. the complete
reverse of an 'acquisition' policy. Such a view may well be justified if there is a lack of strategic fit
242
STRATEGIC OPTIONS
between different component parts of the business and there is 'negative synergy' between them. It
may also be that the presence of a business no longer closely related to other parts of a group may
distract managers so that they do not focus on key matters.
Another reason may be that the group as a whole needs the cash to invest in 'core' activities (although
that does not seem to be the case here, as there is a proposal to distribute the proceeds if KCruises is
sold off).
From the policies endorsed by the board of KShipping, it may be inferred that it is their view that
KCruises will grow most rapidly if it combines with one of the other main ocean cruising operators.
This suggests that they perceive significant synergies in such a combination, and it appears that the
boards of Feyestar and Windees take a similar view.
Presumably significant cost savings are expected from operating cruise liners and selling cruise holidays
on a larger scale, thus establishing a 'cost leadership' advantage over rival cruising companies. By
contrast, the KShipping board presumably does not expect the ports, ferries and logistics sector to
grow in the same way.
This can be inferred from the fact that they do not propose reinvesting any proceeds from selling off
KCruises in expanding the remaining activities of KShipping, either by increased capital expenditure or
by acquiring other companies operating in the ports, ferries and logistics sector.
The impact on the risk exposure of the KShipping group if the strategic alliance with
Windees goes through
(a)
Strategic alliance
The overall impact on the risk exposure of the KShipping group if the strategic alliance with
Windees goes through should be minimal.
This is because KCruises will retain its nominal independence and will still be controlled by the
KShipping group.
The main benefit should be that the enlarged ocean cruising group will be able to operate more
efficiently, in particular reducing its fixed costs. There should therefore be a marginal benefit in
lowering gearing. One of the benefits of going for a much closer 'joint venture' relationship is that
the two participating companies will nominally retain their independence. This means that there
is less of a threat that there will be a reference to the Competition Commission (and/or its US
and EU counterparts).
Profits from the holiday business, depending on discretionary consumer expenditure, are likely to
be far more volatile that those in the transport sector, falling sharply in a recession, but growing
rapidly when national economies are prospering.
It is also perhaps worth noting that the cruise industry is subject to considerable foreign
exchange risk. This is partly because around two thirds of cruise customers are from North
America, but it is also because new ships are built in a variety of countries.
However, some of the foreign exchange risk will be offset as fuel is priced in US dollars, and the
most popular cruise venues are in the Caribbean and elsewhere in the Western Hemisphere.
(b) Sale or flotation

By contrast, the impact on the risk exposure of the KShipping group will be considerable if the
KCruises subsidiary is sold to Feyestar or if it is floated as a separate company. If KCruises is
floated off, the position of existing shareholders should not be greatly affected, so long as they do
not sell their KCruises shares.
243
Business strategy
12
Juniper Ltd
Briefing notes
To
Board of directors, Juniper Ltd
From
AB Consultants
Date
Today
Subject The strategic options available to Juniper Ltd

1
Evaluation of options
Each strategic option has been evaluated in terms of its suitability, acceptability and feasibility for
Juniper.
1.1 Moving downmarket
The sales director's proposal involves Juniper lowering its prices to enhance sales volume
and, therefore, market share. To do this Juniper will need to reduce its costs as much as
possible, for example by
Switching to cheaper suppliers, using the buying power Juniper possesses
Further reduction in staffing levels (continuing the trend over recent years) to
minimise wage costs
Closing more outlets, possibly relocating to cheaper sites or as shop-within-shop retail

outlets (see section 1.5)
Striving for economies of scale increased volumes could help
Attempting to achieve 'critical mass'.
(a)
Advantages
Juniper can attempt to position itself in direct competition with small local
outfitters to utilise fully its comparative size advantage to undercut them.
Focuses more on costs (contribution margin has decreased from 21.7% in

20X5/X6 to 20.9% in 20X6/X7) to ensure cost increases are passed on to
customers.
Cheap to implement, which is important in a period of capital rationing.
Feasible to achieve relatively quickly, so 'stopping the rot' that has occurred
over recent years.
(b) Disadvantages
244
A least-cost strategy is risky in that price wars can occur. Juniper would struggle
if up against larger department stores.
If the desired sales volume is not achieved, the lower margins may result in
fixed costs not being covered.
Some flexibility (e.g. the ability to lower prices) has been lost flexibility has
been proved to be crucial in your industry.
STRATEGIC OPTIONS
1.2 Moving upmarket

This differentiation strategy will place Juniper in competition with the big fashion houses.
(a)
Advantages
High margin goods means that a lower volume need be sold to cover fixed
costs.
If the strategy is successful, it will provide a well-publicised spring-board for

future growth from its middle of the road market thus giving greater
competitive advantage.
(b) Disadvantages
Juniper will be in a highly competitive market segment, competing with the

much larger more established fashion houses.
The initial costs will be high (new shop format, marketing, etc) at a time of
shortage of funds.
Increased operating gearing will arise, since fixed costs will inevitably become
greater.
Higher business risk due to the inherent nature of the fashion industry, leading
to worrying volatility in earnings.
This is a short-term strategy consideration must be given to what action will

be taken after the first collection.
This strategy will not happen quickly at a time when Juniper needs to turn
things around.
1.3 Linking up with an overseas fashion retailer

This strategy may be implemented quickly due to the interest of the American company.
Juniper should only proceed with the joint venture if the company is compatible with Juniper
and if there are no other more suitable foreign retailers.
(a)
Advantages
Minimal investment is required, since the American company is already up and

running.
This strategy allows Juniper to learn about the American market in a low risk
way.
If the two companies are compatible, there will be opportunity for synergy to
occur.
(b) Disadvantages
Dealing with overseas markets has the following risks.
Foreign exchange risk on inter-company transactions
Cultural risk Juniper and the American company will have different
working practices, expectations, etc
Political risk America's political situation is different from that of the UK
Litigation is much more prevalent in America.
Entering into a joint venture has the following problems.
Disagreements can occur over operational decisions
Equitable calculation of profit share necessary.
245
Business strategy
1.4 Extending product range
The intention here is to increase revenue by attracting new customers and launching new
products.
(a)
Advantages
Diversifying in this way reduces the dependence on the current market

segment, of which Juniper has only a small market share.
Increases the flexibility (a necessity) of Juniper.
Potential big returns if new customers take to the range.
Since this is an extension of what Juniper is currently doing, its existing

expertise can be utilised, thus increasing efficiency.
By using 'buyer power' it should be easy for Juniper to find suitable suppliers.
(b) Disadvantages
Large initial costs (e.g. market research, design, marketing new lines) at a time
of poor cash flow.
Riskiness of entering new market segments against similar-sized (or larger!)

rivals.
Juniper will be increasing the number of product lines at a time when much of
the rest of the industry is cutting its product range to reduce costs.
1.5 Switching to shop-within-shop retail outlets

By switching to such outlets Juniper will be forced to close some of its existing shops.
(a)
Advantages
The closure of shops will result in good positive cash flows, boosting the
company's liquidity.
Shop-within-shop outlets attract new customers who shop in the department

stores but would not go to Juniper's outlets.
Juniper will be indirectly advertised by the department store's national

reputation.
Closure of retail outlets will lessen fixed costs, thus reducing operating gearing.
The industry has recently seen many companies reducing the number of stand
alone shops; Juniper will be doing likewise.
(b) Disadvantages
246
Currently the companies who have shop-within-shop outlets are small listed
companies, like Juniper; therefore, this strategy will place Juniper in direct
competition with similar companies which will intensify the rivalry and have an
adverse effect on returns.
Costs are likely to be high, both initially and the continued payments Juniper will
have to make to the department stores.
There may be a loss of independence due to imposition by the stores.
Some custom will undoubtedly be lost by closing existing outlets; the extra
return generated by being a shop-within-shop outlet will have to make up for
this.
This strategy may take time to implement, a commodity that Juniper does not
have.
STRATEGIC OPTIONS
1.6 Diversifying
The diversifying strategies suggested are examples of horizontal integration; namely,
diversifying into complementary products. Advantages and disadvantages are as follows.
(a)
Advantages
By diversifying into other market segments, risk is reduced by the portfolio

effect.
Such a diversification strategy is a growing market and has proved successful

with other clothing companies, e.g. Next.
Juniper will differentiate itself from some of its competitors, thus yielding
greater competitive advantage.
Flexibility is increased.
(b) Disadvantages
Juniper has no experience of retailing these items and so there is an element of

risk of uncertainty.
Differentiating in this way will increase operating gearing and staff costs, neither
of which is desirable in the clothing industry.
Initial costs of market research and advertising will be high.
Selling clothes and selling other items require different business skills; Juniper
must ensure that both are managed correctly to maximise potential earnings.
1.7 Integrating vertically by manufacturing clothes

This strategy should not be considered. It has been shown that flexibility and the exercising
of buyer power are fundamental to success. Such a strategy would reduce both of these
qualities.
2
Conclusion
The key issues facing Juniper are
Worsening financial performance

Fierce competition
Little competitive advantage over its rivals
Shortage of funds.
It is clear that Juniper must improve its current position, and the adoption of one or more of
these projects is critical.
The proposed strategies carry differing levels of risk and set-up costs. The preferred choices of
the board will depend on their attitude towards the former and ability to fund the latter.
Assuming the board is risk averse and has limited funds, a combination of moving downmarket
(1.1) and switching to shop-within-shop outlets (1.5) would be the most appropriate strategy to
pursue.
247
Business strategy
Answers to Interactive questions
Answer to Interactive question 1

A general interpretation of the facts as given might be sketched as follows.
(a)
Objectives: The company has no declared objectives. Profits have risen by 3% per annum in the past,
which has failed to keep pace with inflation but may have been a satisfactory rate of increase in the
current conditions of the industry. Even so, stronger growth is indicated in the future.
(b)
Strengths
Weaknesses
Many new products developed.
Products may be reaching the end of their life

and entering decline.
Marketing success in increasing market share.
New product life cycles may be shorter.

Reduction in customers.
Excessive reliance on a few customers.
Doubtful whether profit record is
satisfactory.
Threats
Opportunities
Possible decline in the end-product.
None identified.
Smaller end-product market will restrict

future sales prospects for Hall Faull Downes.
(c)
Strengths: The growth in company sales in the last five years has been as a result of increasing the
market share in a declining market. This success may be the result of the following.
Research and development spending
Good product development programmes
Extending the product range to suit changing customer needs
Marketing skills
Long-term supply contracts with customers
Cheap pricing policy
Product quality and reliable service
(d) Weaknesses:
(i)
The products may be custom-made for customers so that they provide little or no opportunity
for market development.
(ii)
Products might have a shorter life cycle than in the past, in view of the declining total market
demand.
(iii) Excessive reliance on two major customers leaves the company exposed to the dangers of losing
their custom.
248
(e)
Threats: There may be a decline in the end-market for the customers' product so that the customer
demands for the company's own products will also fall.
(f)
Opportunities: No opportunities have been identified, but in view of the situation as described, new
strategies for the longer term would appear to be essential.
STRATEGIC OPTIONS
(g)
Conclusions: The company does not appear to be planning beyond the short-term, or is reacting to
the business environment in a piecemeal fashion. A strategic planning programme should be
introduced.
(h) Recommendations: The company must look for new opportunities in the longer-term.
(i)
In the short term, current strengths must be exploited to continue to increase market share in
existing markets and product development programmes should also continue.
(ii)
In the longer term, the company must diversify into new markets or into new products and new
markets. Diversification opportunities should be sought with a view to exploiting any competitive
advantage or synergy that might be achievable.
(iii) The company should use its strengths (whether in R&D, production skills or marketing expertise)
in exploiting any identifiable opportunities.
(iv) Objectives need to be quantified in order to assess the extent to which new long-term strategies
are required.

(a)
SWOT analysis
Strengths
Fleetrail Ltd's main strength is that it has a monopoly position on the train route between
Norington and London. This reduces the pressure to cut fares to be competitive.
TCT has the ability to offer through tickets involving rail, coach and air travel. As part of the
group Fleetrail Ltd can benefit from this, though at present this strength does not appear to be
capitalised upon.
Fleetrail Ltd can also benefit from TCT's expertise in running transport companies.
Fleetrail Ltd is part of a listed group making finance easier to raise. This could become
increasingly important as subsidies are reduced.
Government subsidies which give Fleetrail Ltd time to reorganise. These are crucial at the
moment but will reduce over the next six years.
Weaknesses
A major weakness of Fleetrail Ltd is that it has inherited the practises and culture of British Rail.
Thus the 4,000 staff may still have a public sector mind set, and view change with suspicion.
Without the subsidies the company is making a substantial loss. There is an urgent need to
increase revenue and reduce costs.
The franchise prevents Fleetrail Ltd from closing uneconomic lines, making it harder for the
company to break even.
Similarly, the franchise agreement restricts Fleetrail Ltd's ability to raise prices again, reducing the
options open to the company as subsidies fall.
Unless the Government regulator intervenes Fleetrail Ltd is vulnerable to Railtrack Ltd exploiting
its monopoly position.
Fleetrail Ltd has little power over the suppliers of rolling stock to insist that newer units become
available sooner. Thus Fleetrail Ltd will have to continue to try to win customers while suffering
delays and breakdowns.
All the weaknesses are significant.
249
Business strategy
Opportunities
Rationalise cost by downsizing the workforce. This is a significant opportunity as there are likely
to be many inefficiencies in the inherited work system.
The Government is keen to persuade people to use public transport rather than drive
everywhere. Linked to this Fleetrail Ltd has a major opportunity to win customers.
If successful Fleetrail Ltd could bid for other franchises in seven years' time.
Fleetrail Ltd could work together with other TCT companies to provide a more comprehensive,
integrated service. This is unlikely as yet to be a priority for the directors.
Threats
The inherited trade union will be strong. Any attempt to reduce the workforce may be met by
strikes and other resistance a major threat.
The main threat facing the firm is that the subsidies will be reduced by around CU30 million per
annum. Fleetrail Ltd will have to see a major improvement in revenue and a fall in costs to avoid
losing money rapidly.
Even if Fleetrail Ltd were to make a success of the route it could still lose the franchise in seven
years' time again a major threat.
(b) Additional information

The following additional information would be useful.
250
Information
Use
Demographic analysis of Norington and the

surrounding area
To ascertain the potential demand for

commuters to London
Details of rival coach firms offering transport

to London
To help understand the competition for

price setting, etc
Nearness of motorways, frequency of traffic

jams and trends in road usage
To see if the road system is becoming overloaded as this will encourage people to
switch to rail
More details from the Government on their

Integrated Transport System especially
regarding tolls, taxes on car use, etc
To anticipate likely demand for rail travel

and probable time scales for change.
Detailed analysis of staff their skills age,

salary levels
To see how many staff could be lost, etc

through retirement and natural wastage.
Also to calculate likely redundancy costs
Operational statistics from successful rail

companies in Europe
To identify key areas of inefficiency
People's reasons for not using the train

market research could be performed to ask
them
To identify critical areas where change is

necessary
STRATEGIC OPTIONS
(c)
Use of SWOT to formulate suitable strategy

Having carried out the SWOT analysis the management should proceed as follows.
(1) Assess the SWOT analysis to clarify key strategic issues.
(2) Analyse stakeholder expectations and formulate objectives for the firm.
(3) Decide which markets should be targeted more, e.g. commuters to London or through tickets
for holiday makers.
(4) Decide upon a competitive strategy should Fleetrail Ltd try to win business by offering a low
cost service or a better one?
(5) Decide upon a time scale for change, e.g. if staff numbers are to be reduced, then how many and
when?
(6) This can then be summarised by setting out a five-year plan.

Report
To
Head of Confectionery
From
Business Analyst
Date
Today
Subject EuroFoods and Medley the international ice-cream market

1
Terms of reference
This report outlines the strategy options for EuroFoods and Medley under the alternative scenarios
resulting from the pending EU decision on exclusive freezer arrangement.
Competitive advantage
There are a number of different 'generic' strategies which lead to competitive advantage for a firm's
products, and these were identified by Michael Porter of the Harvard Business School.
High volume/low cost (overall cost leadership)

The cost of manufacture of the product is reduced to the lowest level in the market, thus leading
to increased margins. The firm is also able to engage in price wars more effectively than its
competitors.
Differentiation
Significant differences are developed in the quality, features and marketing of the product.
Customers are therefore willing to pay a higher price, or the market might fragment altogether,
leading to total domination of a niche.
Focus
Either of the above strategies can be combined with a greater or lesser degree of concentration
on a smaller number of potential customers. Use of a focus strategy may defeat competitors
using either of the two strategies above, but targeting a wide market. It will also be important in
devising strategies for EuroFoods and Medley to consider the effects of the competitive forces in
the marketplace.
Scenario 1 EU decision outlaws exclusive freezer arrangements

This decision will have a profound impact on the ice-cream market throughout Europe, as it will
directly threaten the 'strong supplier' status of EuroFoods in the impulse market. An indication of how
significant this might be can be gained from some analysis of the market data.
251
Business strategy
Current position
% of European market
Impulse sales
Take-home sales
Volume
Revenue
Profit
40
60
100
67
33
100
80
20
100
It is not clear from the data given exactly what share EuroFoods has of the impulse sales market, but it
is unlikely to be less than its 60% overall share of the market, due to the competitive advantage gained
from its exclusive freezer arrangements. Indeed, the commentary suggests EuroFoods to be 'dominant'
in this lucrative market segment. The outcome of an EU judgement in favour of Medley would
therefore be to remove a significant entry barrier the control of distribution.
3.1 EuroFoods' strategic options
The threat of new entrants to the market must be considered by EuroFoods as significant when
forming a competitive strategy to take account of this scenario. Ideally, the entry barrier to the
impulse sector formerly provided by the exclusive freezer arrangement must be replaced by
another of equal effectiveness.
It would appear that the greatest current advantage that EuroFoods possesses in the EU impulse
sales market, with the exception of the exclusive freezer arrangement, is its scale of production
and established position as market leader.
This suggests that barriers to entry are available in the areas of economies of scale and the
experience effect, both of which should lower the cost of production. It seems clear that an
'overall cost leadership' strategy may well be open to EuroFoods, which would enable superprofit to be taken.
This profit could be reserved for a future price war, but it is more likely that Medley will
continue with its current differentiation strategy. It seems more apposite to recommend that
EuroFoods invest heavily in product development and marketing in order to produce, brand and
place cheaper products which directly compete with the more exclusive and higher-priced
Medley brands.
3.2 Medley's strategic options
The removal of exclusive freezer arrangements by the EU will present Medley with a major
opportunity for growth. Although there will be a cost impact, as Medley will have to negotiate a
fee for the use of the EuroFoods freezers, this will be far less significant than the removal of a
major entry barrier.
The EU is likely to view a punitive fee strategy by EuroFoods as being similarly anticompetitive.
The strength of Medley seems to lie in its ability to demand a higher price by differentiation of
the product. As the basic product is the same (ice-cream), this is probably by the use of brand
names carried over from the chocolate products.
The profit earned in this way must be reinvested in widening the distribution network into
outlets previously dominated by EuroFoods, and in reinforcing the transfer of brand image to
maintain the margin, while generating additional sales.
Due to the recent heavy capital investment in the European factory, it is unlikely that Medley can
compete under an overall cost leadership strategy, which is the likeliest option for EuroFoods
anyway. Maintaining the focus on the impulse sales segment seems preferable to attempting to
compete in the take-home market which yields far lower margins.
4
Scenario 2 Exclusive freezer arrangements remain

This represents a continuation of the current market conditions, which suggests that EuroFoods will
find it easier to maintain its dominance of the market. However, Medley has already achieved a 10%
market share with a new product and further penetration is likely.
252
STRATEGIC OPTIONS
4.1 EuroFoods' strategic options

EuroFoods must continue to exploit its competitive advantage in the impulse segment by entering
into more exclusive freezer arrangements in areas of Europe not significantly penetrated.
In the take-home sector, however, EuroFoods is very vulnerable to attack even though margins
are lower and branding is probably less significant.
EuroFoods may like to consider supplying major supermarket chains with a low-price 'clone' of
the Medley product, possibly under an own brand. This should be supported actively by the
supermarkets which will devote more freezer space and force Medley out of the segment.
The cost advantages of EuroFoods will ensure that Medley cannot compete without a significant
subsidy from the other (non ice-cream) areas of the business.
4.2 Medley's strategic options
If the exclusive freezer arrangements are to continue, Medley must continue its differentiationfocus strategy by supporting the brand in the impulse segment.
Significant capital expenditure will be required to supply and maintain freezers in competition
with EuroFoods, and many small retailers will be unable to provide space for both.
Medley will have to examine opportunities for alternative retail methods which are less expensive
and more attractive to the retailers.
It may be possible, for example, to invest in the development of smaller freezers which could be
placed on the counter. This would require Medley to limit the number of lines on offer (possibly
to the one existing line) to make the best use of the limited display space and avoid stock-outs or
heavier distribution costs due to more frequent deliveries.
In the take-home segment, the exclusive freezer arrangements do not apply, and Medley has an
opportunity to penetrate the market with multi-buy packs of the same branded product.
However, the brand will have to be heavily supported by advertising to guard against copies from
EuroFoods. It may be possible to widen the range of lines using other Medley brand names, if the
impulse sale segment seems out of reach.
Medley cannot rely on retailers breaking the exclusive freezer arrangement with EuroFoods, but
can make it known that it will supply non-exclusive freezers if retailers have problems with
EuroFoods. This strategy may backfire if EuroFoods refuses to supply retailers which break the
agreement.
5
Conclusions and recommendations

It can be seen that the decision in the EU is fundamental to the strategy formulation of both
companies. The strategies recommended can be summarised as follows.
Decision pro-Medley
Decision anti-Medley
Overall cost leadership and

product development
Maintain entry barriers ownbranded clones
Medley impulse
Differentiation focus
Differentiation focus/branding
Medley take-home
n/a
Branding, advertising new

products
EuroFoods impulse
EuroFoods take-home
253
Business strategy

The Blue Jeans Group
(a)
Choice of supplier
Many factors should be taken into account in selecting a supplier. The main considerations are the
following.
Cost
Supplier A is more expensive but is paid on delivery. Once penalty payments are incurred B
becomes even cheaper.
Delivery
The importance of prompt delivery needs to be considered. Delivery by B is very late whilst A's
is earlier but uncertain. Late delivery by B may save cost but it could lead to a loss in profits.
Delivery dates quoted on both tenders could be considered to be unacceptably long.
Quality
Supplier B is new to Blue Jeans and may fail to meet the required quality standard.
Reliability
Supplier B is new to Blue Jeans and two significant risks are involved.
(i)
Credit risk payment is in advance and Blue Jeans are therefore carrying the credit risk.
(ii)
Security there is some danger that the design of the new jeans may be 'leaked' to
Supplier B's existing customers.
In conclusion, Supplier A appears the safer option but delivery dates need to be renegotiated. It
would probably be better to test Supplier B on a less important order before allowing it to work
on new designs.
(b) Memorandum
To
Board of Directors, Blue Jeans Ltd
From
A Consultant
Date
March 20X9
Subject Strategic position of Blue Jeans Ltd and future strategy options
1
254
Current strategic position
The current financial position of the firm is strong in terms of profit and sales growth. EPS
has shown a dramatic increase. Its past profit problems now appear to be resolved. No
information is available on liquidity and financial structure and it is necessary to examine
these areas before making a final recommendation.
It has a range of products aimed at particular market segments and a 'designer image which
is important in the current market for jeans. It has a clearly focused strategy based on
product differentiation.
Its share of the European market is low (20X6) and it appears to have no stake in the large
US market. However, in Europe it is of similar size to most other companies, apart from
Levi Strauss. The jeans market is currently static and intense competition can be expected.
Competition from other leisurewear manufacturers (e.g. track suits, etc) is also possible.
It is currently supplied almost exclusively from Hong Kong. This could well have cost
advantages, but several problems are apparent.
STRATEGIC OPTIONS
(1) The unstable political situation in Hong Kong could eventually threaten supplies.
(2) Exchange rate changes could lead to uncertainty over costs of products to be sold in
the European market.
(3) A danger of forward integration by existing suppliers also exists.
(4) Long lines of supply and a long lead time in bringing new suppliers up to the required
quality standard may hamper Blue Jeans' ability to exhibit the greater flexibility needed
to cope with rapid changes of style. Changes in production technology may now be
increasing the attractiveness of in-house manufacturing.
Little information is available as to Blue Jeans' existing customer base and detailed
information will be required before a final recommendation can be made.
Future strategy options

2.1 Introduction
The objectives of the firm are expressed in terms of sales and profits. To a certain extent
these two factors are in conflict as sales can often be increased at the expense of profit
although this has not appeared to be a problem in the past. Maintaining past growth in both
these areas is a considerable task in the face of a static market for jeans, and unless Blue
Jeans can make advances in market share, a gap between objectives and actual performance
is likely to develop if it simply continues with its existing strategy.
2.2 Options
The options for future strategy can be thought of under four headings.
Diversification moving into new areas
Product development selling new products to existing customers
Market development selling existing products in new markets
Market penetration/internal efficiency growth in sales and profits by increasing share
of existing market, and/or reducing cost.
2.3 Diversification
Blue Jeans has no experience of diversification into totally different product markets so
this possibility is discounted.
Horizontal diversification is a possibility, involving the takeover of an existing

competitor. Two existing competitors (Lee and Wrangler) are currently experiencing
difficulties due to their old fashioned image and could be potential targets. They would
both provide footholds in the US market and possibly allow Blue Jeans to generate
economies of scale. However, on the evidence available both of these companies are
considerably larger than Blue Jeans (see US market share) which could make any
takeover difficult (but not impossible).
Vertical integration. Two possibilities exist here.

(i)
Forward integration into retail. Given the nature of jeans retailing this seems
unlikely, however, more detail on existing customers is required before this can
be ruled out.
(ii)
Backward integration into manufacture. Although previous attempts have been

unsuccessful, this does not mean that the strategy should be dismissed out of
hand. It is investigated in detail in the next section.
2.4 Establishment of a manufacturing facility
Advantages
(i)
Savings in transportation costs, search costs, etc.
(ii)
Improved quality.
255
Business strategy
(iii) Greater flexibility in design and manufacture if features such as flexible
manufacturing, JIT, etc are introduced.
(iv) More rapid response to changes in styles.
(v)
'Secrecy' of new designs is also maintained.
(vi) Avoidance of exchange risk if manufactured in UK. (Exchange risk on exports

would still exist.)
Disadvantages
(i)
Blue Jeans will carry the 'volume risk' of manufacture. If demand falls it will still
have to cover its fixed manufacturing costs.
(ii)
Subcontracted suppliers, due to their experience or location, may offer cost

advantages.
2.5 Product development
Some attempts have already been made to broaden Blue Jeans' product range by the
addition of jeans-related products.
This trend could be continued by the introduction of other products such as

sportswear or similarly related products, which could be sold through existing
distributors. Careful analysis of the demand for these new products would be required.
Significant marketing expenditure could be required to promote these products.
The possibility of on-line sales should be investigated. This would avoid the need to
find new distributors.
2.6 Market development
Blue Jeans' coverage of the European market should be reviewed. Information is only
available on France and the UK. Other countries, including Eastern Europe states
should be investigated.
Blue Jeans has no stake in the US market which in 20X6 was three times larger than
the UK.
Licensing of the Blue Jeans name to manufacturers in other countries could be

considered, although this could detract from quality and hamper any export drive at a
later date.
Online sales could enable Blue Jeans to enter new markets/market segments without
the necessity of a physical presence. This could be a first step before any overseas
expansion is considered.
2.7 Market penetration
256
The situation in the jeans market appears to be changing from one requiring high
volume at low cost to one of product differentiation.
Blue Jeans should therefore continue to differentiate its product through advertising
and aiming at particular market segments. New brands for new segments could be
introduced. Online sales/website may encourage loyalty and repeat purchases.
Cost reduction is of course important but this should not be at the expense of the
policy of differentiation. This will be a major consideration in the decision to establish
manufacturing facilities. The increased flexibility of own manufacture and the ability to
introduce new products rapidly may outweigh the benefits of reduced cost and risk
from out-sourcing. Alternatively the internet could be used to seek new supplies and
reduce costs.
STRATEGIC OPTIONS
Conclusions
The recent financial performance of Blue Jeans has been strong but in a static jeans market
existing growth rates will be difficult to maintain.
Changes in the competitive nature of the jeans markets may lead to a greater emphasis on
flexibility, rather than cost. A detailed financial appraisal of in-house manufacturing is now
required. This could either be by a green field start-up or an acquisition.
Blue Jeans' existing policy of differentiation should be continued.
257
Business strategy
258

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chapter 6

Rational planning model revisited

Corporate appraisal (SWOT analysis)

Generic competitive strategies: how to

Product-market strategy: direction of growth

Summary and Self-test

The Institute of Chartered Accountants in England and Wales, March 2009

Specific syllabus references for this chapter are: 1c, 2b.

Stop and think

What are they intending to do in the future?

Those are the strategic options.

The Institute of Chartered Accountants in England and Wales, March 2009

The Institute of Chartered Accountants in England and Wales, March 2009

1 Rational planning model revisited

The rational model

The present chapter considers three of the stages:

Corporate appraisal: Combining assessment of environment (Chapters 3 and 4) with assessment of

The Institute of Chartered Accountants in England and Wales, March 2009

Three strategic choices: overview

Worked example: Virgin group

The Institute of Chartered Accountants in England and Wales, March 2009

Leisure and pleasure

Social and environment

Virgin Balloon Flights

Virgin Experience Days

Finance and money

The Institute of Chartered Accountants in England and Wales, March 2009

2 Corporate appraisal (SWOT analysis)

Role of corporate appraisal

What opportunities exist in the business environment?

What threats might arise?

Bringing them together the cruciform chart

Limitations on space restricts management to focusing on the big points

Allows mapping of connections between points (see below)

The Institute of Chartered Accountants in England and Wales, March 2009

Match strengths with market opportunities

Interactive question 1: Hall Faull Downes Ltd

[Difficulty level: Intermediate]

Weirich's TOWS matrix

The Institute of Chartered Accountants in England and Wales, March 2009

SO strategies employ strengths to seize opportunities.

Interactive question 2: Fleetrail

[Difficulty level: Exam standard]

The Institute of Chartered Accountants in England and Wales, March 2009

See Answer at the end of this chapter.

Overview of gap analysis

The organisation's targets for achievement over the planning period

Strategic objective (F1)

The Institute of Chartered Accountants in England and Wales, March 2009

Strategies to fill the gap

Ambitious objectives being set by management (or imposed on management by investors)

These are illustrated below.

4 Generic competitive strategies: how to compete

The Institute of Chartered Accountants in England and Wales, March 2009

The choice of competitive strategy

Worked example: Porsche

The Institute of Chartered Accountants in England and Wales, March 2009

Porter's three generic strategies

Set up production facilities to obtain economies of scale.

The Institute of Chartered Accountants in England and Wales, March 2009