3.1.2: Theories of corporate strategy

business strategy

business strategy

• planning to achieve corporate objectives

• using analytical tools to understand the current position of business

• evaluating where the business wants to be

• SWOT

• five forces analysis

• corporate strategy dervices to achieve long-term aims

• use: advantage in competitive market, helps fulfill stakeholder expectations

development of corporate strategy

• key members of management looking critically at what the business has done before

• look at what needs to be done in order to achieve corporate objectives

• tools: ansoff’s matrix, porter’s strategix matrix, portfolio analysis

ansoff’s matrix

• igor ansoff

• strategic tool to help a business achieve growth

• allows the owners of a business to consider a number of factors that wil determine its corporate strategy:

  • level of investment in existing and new products

  • exploitation of different markets

  • growth strategy for the business

  • level of risk business is willing to accept

• 4 possible strategies that a business might adopt

• the further a business gets from the top left-hand corner of the matrix, the greater the risk

ansoff’s matrix - market penetration

• used to achieve growth in existing

• ways a business can achieve this:

  • increase brand loyalty to reduce use of substitute brands

    • adopting loyalty schemes

  • encourage regular use

  • encourage increased use

    • larger sizes

• low risk, low level of investment

ansoff’s matrix - product development

• marketing new or modified products in existing markets

• used when PLC is short or in quick changing trends

• associated with product innovation and continuous development

• requires high investment and R&D

• high risk

• requires heavy investment in promotion

ansoff’s matrix - market development

• marketing of existing products in new markets

• entering geographically new markets

• adjusting tastes and preferences based on regions

• changing the name or labelling the product differently to meet international laws

ansoff’s matrix - diversification

• occurs when new products are developed for new markets

• enables a business to move away from depending upon existing markets and products

• allows the company to spread risk and increase safety

• takes a business outside its area of expertise

• hoghest risk

• performance in new markets may be poor compared with more experienced operators

• useful for large MNCs and conglomerates with extensive networking, strong branding and considerable capital

porter’s strategic matrix

• developed by michael porter

• identifies sources of competitive advantage that a business might achieve in a market

• any business that fails to adopt one of these strategies is unlikely to succeed

porter’s strategic matrix - cost leadership

• striving to be the lowest-cost provider in the market

• competes in 2 ways:

  1. increasing profits while charging market level prices

  2. increasing market share while charging lower prices - still profitable

• generally held by one business in the market with the significant market share to achieve lowest costs

• focus on reducing costs through negotiation and simplifying operations

• cost leaders offer a basic product to minimise cost and limit adding value

• minimal service and number of available versions

porter’s strategic matrix - differentiation

• business operating in a mass market with a unique position

• used by business that can differentiate itself from the competition

• adding value to products in a unique way

• business can charge premium price for USP

• difficult to guarantee that rewards of differentiation will justify additional costs

  • good R&D

  • effective marketing

• easier to copy

porter’s strategic matrix - focus

• targeting a narrow range of customers in 1 of 2 ways

• closely aligned to niche marketing

• used by small or specialist firms

• focuses on a very narrow segment of the market

• gains an advantage by understanding customers well

• delivers products specific to needs

• high level of customer satisfaction and loyalty

• less competition, high profit margins

• small market = low bargaining power

• 2 forms:

  1. cost focus: cost minimisation within a niche market, focused range of products at low prices

  2. differentiation focus: following different strategies within a focused market

portfolio analysis - aim

• method of categorising products of a firm in order to decide where each fits in the strategic plan

• products evaluated according to their competitive position and potential growth rates

• 2 step process:

  1. give a full and detailed overview of all of the products in the current business portfolio

  2. look at the performance of each product and service by examining:

     • current and projected sales

     • current and projected costs

     • competitor activity and future competition

     • risks that may affect performance

boston matrix

• stars:

  • high growth

  • strong compared to competitors

  • require investment

  • ideally should become cash cows

• cash cows:

  • low growth

  • high market share

  • generate more cash than consumed

  • generate ROI and fund investment

• question marks:

  • low market share in high growth markets

  • consume cash, little return

  • potential to turn into stars

  • potential for growth

• dogs:

  • low market share in low growth markets

  • may break even

  • take time and effort with little prospect of future growth

  • sold//divested

effect of strategic and tactical decisions

• strategies set out long term direction that a business takes to achieve objectives

• tactics are short term responses to current opportunities and threats

effect of strategic and tactical decisions - human resources

• strategic decisions = long lasting effect

  • increased workforce size

  • recruiting different types of labour

  • moving existing workers to a new location

  • indefinite impact

• tactical decisions = short period, affects only a small proportion

  • seasonal working hours

effect of strategic and tactical decisions - physical resources

• physical resources: land, machines, tools, equipment, vehicles, shops, computers, factories and raw materials

• strategic decision: dramatic changes

• tactical decisions: smaller changes

effect of strategic and tactical decisions - financial resources

• strategic decisions: significant long-term impact

  • raise millions by selling shares and therefore have to meet dividend payments

• tactical decision: short-terrm effect

  • deliberate overdraw due to payment delay