Business 87 PDF

1 BUSINESS ORGANISATION AND ENVIRONMENT
direct a business towards one particular future strategy. headings: cost advantage or differentiation (or product
However, by identifying the different ways in which a uniqueness). By applying these strengths in either a
business could expand, the matrix allows managers to broad way (industry wide) or in a narrow way (a market
analyse the degree of risk associated with each strategy. segment) three generic strategies result.
Managers can then apply decision-making techniques to
Cost leadership strategy
assess the costs, potential gains and risks associated with
Being the lowest-cost producer in the industry for a
all options. In practice, in today’s fiercely competitive
certain level of product quality will allow the fi rm to
world, it is common for large businesses to adopt multiple
make higher profits than rivals or, if it lowers its prices
strategies for growth at the same time.
below the average of competitors, to increase market
While Ansoff’s analysis helps to map the strategic
share. Ryanair, one of Europe’s largest and most prof-
business options, it has limitations too. It only considers
itable airlines, is also the lowest average cost airline.
two main factors in the strategic analysis of a business’s
Businesses adopting this strategy either sell products at
options – it is important to consider SWOT and PEST
average industry prices to earn higher profit than rivals
analysis too in order to give a more complete picture.
or below industry average prices to gain market share.
Recommendations based purely on Ansoff would tend to
Ryanair adopts the second of these pricing strategies.
lack depth and hard environmental evidence.
The cost leadership strategy usually targets a broad
Management judgement, especially based on experi-
rather than a niche market.
ence of the risks and returns from the four options, may
Cost leadership often stems from the following internal
be just as important as any one analytical tool for making
strengths:
the fi nal choice.
The matrix does not suggest detailed marketing options.
● high levels of investment in advanced production
For instance, market development may seem to be the
methods, requiring access to much capital
best option, but which market/country and with which of
● efficient production methods, e.g. low stock levels
the existing products produced by the business? Further
and low numbers of components used to shorten the
research and analysis will be needed to supply answers to
production process
these questions.
● efficient distribution channels, e.g. Ryanair only uses
the internet for selling tickets and communicating
with customers.
H HIGHER LEVEL Differentiation strategy

This strategy involves developing a product or service that
offers unique features valued by customers. The value
Evaluation of growth strategies added to the product or service by these features may
Internal growth can be quite slow with, perhaps, only
allow the fi rm to charge a premium price for it. Apple’s
a few branches or shops opening each year. However, it
constant research into innovative products allows it to
can avoid problems of external growth such as the need
charge high prices for its differentiated products.
to finance expensive takeovers, offer new share issues or
A differentiation strategy often results from the
expensive additional loans. Also, management problems
following internal strengths:
associated with bringing together very different busi-
nesses with their own attitudes and cultures are avoided.
● excellent research and development facilities and a
External growth can lead to rapid expansion, which
track record in developing unique products
might be vital in a competitive and expanding market.
● corporate reputation for innovation and quality
However, takeovers can be very expensive and may result
● strong sales team able to promote the perceived
in management problems caused by the need for different
strengths of the brand and the products.
management systems to deal with a bigger organisa-
tion. There can also be confl ict between the two teams
Focus strategy
of managers – who will get the top jobs? – and confl icts of
This concentrates on a narrow market segment, aiming
culture and business ethics.
to achieve either a cost advantage or differentiation. This
can lead to a high degree of customer loyalty within the
Porter’s generic strategies market segment. For example, Princess Boats has a loyal
FRAMEWORK FOR BUILDING COMPETITIVE ADVANTAGE consumer following for its uniquely designed luxury motor
Michael Porter, a famous management researcher, argues boats – some models costing millions of dollars. Discount
that a fi rm’s strengths ultimately fall under one of two retailers, on the other hand, focus on low-income market
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1 BUSINESS ORGANISATION AND ENVIRONMENT

H HIGHER LEVEL Differentiation strategy

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