Transcript Chapter 5 STRATEGIC OPTIONS

STRATEGIC OPTIONS
CHAPTER 5
OBJECTIVES
Upon completion of this chapter, you should be able to:
• Critically apply Porter’s generic competitive strategies.
• Apply Ansoff’s market options matrix to identify strategic
opportunities.
• Examiner your organisations internal and external expansion
opportunities.
• Review your organisations resource based strategic options.
• Link strategic options to your SWOT analysis.
• Consider the benefits and drawbacks of different strategic
options available to the organisation.
Generic Competitive Strategies
• Long-term or grand strategy must be based on core idea
about how the firm can best compete in the marketplace.
• The popular term for this core idea is generic strategy. From a
scheme developed by Michael Porter, many planners believe
that any long-term strategy should derive from a firm’s
attempt to seek a competitive advantage based on one of
three generic strategies:
– Low-cost leadership
– Differentiation
– Focusing on cost or differentiation concerns.
• The 3 basic strategies open to any business
are cost leadership, differentiation and focus.
These can be explained by considering two
aspects of the competitive environment:
– Two source of competitive advantage
– The competitive scope of the target customers
• Low-Cost Leadership
– Low-cost leaders in any industry will have build
and maintained plant, equipment, labour cost and
working practices that deliver the lowest costs in
that industry.
– The essential point is that the firm with the lowest
costs has a clear and possibly sustainable
competitive advantage.
– However in order to cut costs, a low cost producer
must find and exploit all the sources of cost
advantage.
– Cost leadership does not necessarily imply a low
price. The company could charge an average price
and reinvest the extra profits generated.
• Differentiation
– Occurs when the products of an organisation meet the
needs of some customers in the market place better than
others.
– Underlying differentiation is the concept of market
segmentation – the identification of specific groups who
respond differently from other groups to competitive
strategies.
– Through differentiation strategy, the firm produces nonstandardised products for customers who value
differentiated features more than they value low cost.
– 2 problems associated with differentiation strategies –
refer to page 161.
• Focus Strategy (niche strategy)
– A focus strategy occurs when the organisation
focuses on a specific niche in the market place and
develops its competitive advantage by offering
products especially developed for that niche;
hence tailoring its strategy to serve them to the
exclusion of others.
– Porter argues that the company may undertake
this process either by using a cost leadership
approach or by differentiation: (refer to page 161)
– Problems with focus strategy – (refer to page 162)
• Comments of Generic Strategies
(page 163)
Market Options Matrix
• It presents the product and market choices open
to the organisation.
• Distinction is drawn between markets, which are
defined as customers and products which are
defined as the items sold to customers.
• Matrix examines the options available to the
organisation from a broader strategic perspective
than simple product/market matrix.
• It also explores the possibilities of withdrawing
from markets and moving into unrelated markets.
• Market Penetration
1. Market penetration in the Existing Market
– Without moving outside the organisation’s
current range of products/services, it may be
possible to attract customers from directly
competing products by penetrating the market.
– Market penetration strategies should begin with
existing customers.
– This strategy may be costly in the short run but
may prove beneficial in the future in terms of
increased market share.
– Market penetration is easier if the market is
growing.
2. Withdrawal
– A strategy must always take into account the
unpredictable if it is to develop competitive
advantage. There are a number of situations
where this option is applicable:
•
•
•
•
Product life cycle in decline phase with little possibility
of retrenchment.
Overextension of product range, which can only be
resolved by discontinuation.
Holding company sale of subsidiaries
Raising funds for investment elsewhere.
3. De-merger
– This is a form of withdrawal from the market but
has a specialist meaning.
– For some listed companies, the value of the
underlying assets may be larger than the value
implied by the share price.
– The company may then split itself i.e. de-merge
itself into two companies, thus issuing two sets
of shares at a greater value.
4. Privatisation
– the trend to privatise government-owned
companies has been an option for some
institutions.
• Market Development
– The organisation moves beyond its immediate
customer focus into attracting new customers for
its existing product range.
– It may seek new segments of the market, new
geographical areas or new uses for its
product/services that will bring in new customers.
– This strategy may involve some slight repackaging
and then promotion into a new market segment.
This usually involves selling a repackaged product
in international markets.
• Product Development
– This refers to significant new product developments,
not a minor variation on an existing product.
– There are number of reasons that might justify such a
strategy:
•
•
•
•
•
Utilise excess productive capacity
Counter competitive entry
Exploit new technology
Maintain the company’s stance as a product innovator
Protect overall market share.
– Innovation may be the most significant reason to
undertake such a strategy as it represents a threat to
an existing product line or an opportunity to take
market share from competition.
• Diversification
1. Related Markets
•
•
•
Forward integration
Backward integration
Horizontal integration
2. Unrelated Markets
•
When an organisation moves into unrelated markets,
it runs the risk of operating in areas where its detailed
knowledge of its key factors for success is limited
Comments
• The market options matrix is a useful way of structuring the
options available. However it does not provide many useful
indicators as of which option to choose under specific
circumstances.
• The Expansion Method Matrix
– Acquisitions & Merger
– Joint Ventures
– Strategic Alliances
– Franchise
Comments – this matrix suffers from the same
disadvantages as the market options matrix whereby it is
useful at structuring the options but offers only limited
guidance on choosing between them.
Resource-Based Strategic Options
• The Value Chain
– Relevant when market opportunities are limited, either
because the market is growing slowly or because the
organisation itself has limitations placed on their
resources.
– Identifying sources of value added:
• Upstream: activities early in the value chain i.e. inbound logistics
and operations
• Add value by: buying in bulk
Make few changes to production
processes.
– This is assisted if the organisation produces standardised
items. Upstream value is added by low-cost efficient
production processes and process innovations.
– Downstream: activities later on in the value chain
i.e. outbound logistics, sales and marketing and
service.
– Add value by: - R & D
- Patents
- Advertising
- Market positioning
• Resource-based view strategy
– Need to consider the opportunities presented by
the RBV.
– The identification of these resources is important
in delivering a sustainable competitive advantage.
– One method of locating these options is to test
resource against the criteria of:
• Architecture
• Reputation
• Innovation
• Core competencies
– Are identified as a group of skills and technologies
that enable an organisation to provide a particula
benefit to customers.
– One way of generating options based on core
competencies is to consider them as a hierarchy of
competencies, starting with low-level individual
skills and rising through the organisation to
higher-level combined knowledge and skills.