6.2 Business Strategy | Business and Its Environment

Strategic management

Strategic management is the process of analysing the current position of a business, making strategic choices and implementing those choices to achieve long-term objectives.

Strategic analysis

Strategic analysis is the process of examining the internal and external environment of a business to identify factors that could influence its future strategic direction.

Strategic choice

Strategic choice is the process of selecting the most appropriate strategy from alternative options after considering their advantages, disadvantages, feasibility and likely outcomes.

Strategic implementation

Strategic implementation is the process of putting a chosen strategy into action by allocating resources, changing structures and managing people and operations.

Purpose of business strategy

Business strategy provides a long-term direction for the organisation.

-> This allows managers to coordinate decisions across different departments towards common objectives, rather than making isolated decisions.

✓ This is particularly important for large or complex businesses with many departments.

Purpose of business strategy: competitive advantage

Business strategy aims to create competitive advantage by determining how the business will compete in its market.

-> A sustainable advantage can help the business achieve higher sales, market share or profit than competitors.

✓ The strategy must be difficult for competitors to copy to provide a lasting advantage.

Purpose of business strategy: resource allocation

Strategy determines how scarce business resources should be allocated.

-> Finance, labour and capital can be directed towards activities most likely to achieve long-term objectives.

✓ This is particularly important when the business has limited resources.

Purpose of business strategy: respond to change

Strategy allows a business to anticipate and respond to changes in its environment.

-> Identifying technological, economic or competitive changes early can allow the business to adapt before competitors.

✓ This depends on the quality and accuracy of the business's strategic analysis.

Strategic management: strategic analysis

Strategic analysis identifies where the business is now and what is happening in its environment.

-> Managers can make decisions based on evidence rather than assumptions, reducing the risk of choosing an inappropriate strategy.

✓ The usefulness depends on the quality and relevance of the information collected.

Strategic management: strategic choice

Strategic choice involves comparing alternative strategies.

-> Managers can select an option that is most likely to create competitive advantage while remaining achievable.

✓ The choice depends on available finance, resources, skills and risk tolerance.

Strategic management: strategic implementation

Strategic implementation converts the chosen strategy into action.

-> Resources, employees, organisational structures and systems must be aligned with the strategy for it to succeed.

✓ Even an excellent strategy can fail if implementation is poor.

Why strategic analysis is important

Strategic analysis reduces the risk of inappropriate strategic decisions.

-> Understanding the business's internal strengths/weaknesses and external opportunities/threats allows managers to choose strategies that fit the business environment.

✓ Its effectiveness depends on whether managers identify the most significant factors rather than collecting excessive irrelevant information.

Why strategic choice is important

Strategic choice allows a business to select between alternative courses of action.

-> Comparing options helps managers choose a strategy with the greatest potential benefit relative to its costs and risks.

✓ The best choice depends on the business's objectives and available resources.

Why strategic implementation is important

Strategic implementation ensures resources and people are organised to deliver the strategy.

-> Without adequate finance, staff, leadership and systems, the strategy may not produce the intended results.

✓ Implementation is particularly difficult when the strategy requires major organisational change.

Factors needed for strategic implementation

Successful implementation requires appropriate organisational structure, adequate resources, motivated employees, suitable leadership, a culture open to change, and effective control/review systems.

-> These factors ensure the strategy is actually translated into coordinated action.

✓ Weakness in any one area can limit the success of implementation.

Strategic decisions

Strategic decisions are long-term, high-impact decisions usually made by senior managers/directors that affect the whole organisation and are difficult or costly to reverse.

Tactical decisions

Tactical decisions are short- to medium-term decisions usually made by middle or junior managers that implement strategic objectives within particular departments or areas.

Strategic versus tactical decisions

Strategic decisions determine the overall direction of the business, whereas tactical decisions determine how that direction is implemented.

-> Strategic decisions affect multiple departments and are usually harder to reverse, while tactical decisions tend to have a narrower impact.

✓ The distinction may be less clear in small businesses, where managers perform multiple roles.

Why strategic decisions are difficult to reverse

Strategic decisions involve significant commitments of resources.

-> Once a business has invested heavily in factories, technology, branding or staff, reversing the decision creates large sunk costs and disruption.

✓ The difficulty is greater when the investment involves specialised assets.

Why strategic decisions are cross-functional

Strategic decisions affect several business functions simultaneously.

-> A change in strategy may require changes to marketing, finance, HR and operations, meaning departments must coordinate.

✓ Cross-functional coordination is especially important for large businesses.

Failure to undertake strategic management

Without strategic management, a business may fail to plan for future changes.

-> Managers may react to problems only after they occur, reducing the business's ability to maintain competitive advantage.

✓ This is particularly risky in rapidly changing industries.

Failure to undertake strategic management: inconsistent decisions

Without a clear strategy, departments may make conflicting decisions.

-> Resources may be allocated towards different priorities, reducing efficiency and strategic coherence.

✓ The problem is greater in businesses with many departments or locations.

Failure to undertake strategic management: missed opportunities

Without strategic analysis, businesses may fail to identify opportunities.

-> Competitors may exploit new markets or technologies first, causing the business to lose market share and potential growth.

✓ The risk is greater where markets experience rapid change.

Red Ocean Strategy

Red Ocean Strategy is a strategy in which a business competes in an existing market by attempting to outperform existing rivals.

Red Ocean: existing demand

Red Ocean Strategy focuses on existing customer demand.

-> The business competes for customers that already understand and purchase the product, potentially making demand easier to estimate.

✓ However, demand is divided between existing competitors.

Red Ocean: competition

Red Ocean Strategy requires a business to compete directly with rivals.

-> Intense competition can force firms to reduce prices or increase promotion, potentially reducing profit margins.

✓ The effect depends on the number and strength of competitors.

Red Ocean: differentiation

A business can compete in a Red Ocean through product differentiation.

-> Unique features or branding can increase customer perceived value and loyalty, reducing direct price competition.

✓ Differentiation requires sufficient marketing and product-development resources.

Red Ocean: low-cost strategy

A business can compete through low costs and competitive prices.

-> Lower prices can increase sales volume and market share.

✓ The strategy is more effective when the business can achieve genuine cost advantages without reducing quality excessively.

Advantage of Red Ocean Strategy: existing market

Red Ocean Strategy operates in an established market with existing demand.

-> The business can use existing market research and competitor information to make more informed forecasts.

✓ This may reduce uncertainty compared with creating an entirely new market.

Disadvantage of Red Ocean Strategy: intense competition

Red Ocean Strategy exposes the business to direct competition.

-> Competitors may respond with lower prices, increased promotion or product improvements, causing profit margins to fall.

✓ The problem is greater when products are similar and easily substituted.

Blue Ocean: uncontested market

Blue Ocean Strategy seeks to create an uncontested market space.

-> The business can attract new demand rather than fighting competitors directly for existing customers.

✓ Success depends on whether the business can correctly identify an unmet customer need.

Blue Ocean: make competition irrelevant

Blue Ocean Strategy aims to make competition less relevant by changing the basis of competition.

-> Competitors may initially lack comparable products, allowing the business to establish market leadership and customer loyalty.

✓ Competitors may eventually imitate the innovation.

Blue Ocean: differentiation AND low cost

Blue Ocean Strategy seeks both high customer value and low business cost.

-> Customers receive greater perceived value while the business maintains relatively low costs, potentially creating higher profit margins.

✓ Achieving both simultaneously can be difficult.

Blue Ocean: create new demand

Blue Ocean Strategy creates or attracts new demand rather than simply competing for existing demand.

-> The business can potentially access new customers and revenue streams.

✓ The strategy is risky if the business has overestimated demand.

Blue Ocean: Raise

Raise means increasing factors that an industry has traditionally provided at a relatively low level.

-> Increasing these factors can raise customer perceived value and differentiate the product.

✓ The increase must create enough additional value to justify any additional cost.

Blue Ocean: Create

Create means introducing factors that the industry has not previously offered.

-> New features or experiences can attract new demand and differentiate the business.

✓ Customers must actually value the new factor.

Blue Ocean: Reduce

Reduce means lowering factors that the industry has traditionally overprovided.

-> Reducing unnecessary features can lower costs without substantially reducing customer value.

✓ This depends on identifying which features customers consider less important.

Blue Ocean: Eliminate

Eliminate means removing factors that the industry has traditionally competed on but customers no longer value highly.

-> Eliminating unnecessary activities can significantly reduce costs while allowing the business to focus resources on higher-value factors.

✓ Elimination can damage the product if managers misjudge customer preferences.

Advantage of Blue Ocean Strategy: reduced competition

Blue Ocean Strategy can reduce direct competitive pressure.

-> Lower competitive pressure may allow the business to charge prices that generate higher margins while establishing its brand.

✓ The advantage may be temporary if competitors copy the innovation.

Advantage of Blue Ocean Strategy: new demand

Blue Ocean Strategy can create new sources of demand.

-> The business may expand its customer base and revenue beyond the existing market.

✓ This depends on whether customers are willing to adopt the new offering.

Disadvantage of Blue Ocean Strategy: uncertainty

Creating a new market involves uncertainty about customer demand.

-> If customers do not value the new product sufficiently, the business may lose its development and marketing investment.

✓ Risk is greater when the business has limited market research.

Disadvantage of Blue Ocean Strategy: imitation

Successful Blue Ocean products may attract competitors.

-> Rivals can copy successful features, increasing competition and reducing the original advantage.

✓ Imitation is more likely when the innovation is easy to copy and poorly protected.

Purpose of scenario planning

Scenario planning prepares businesses for different possible futures.

-> Managers can develop contingency responses before an unexpected event occurs, improving speed and quality of decision-making.

✓ It is particularly useful when the external environment is uncertain.

Scenario planning: economic change

A business can develop different scenarios for possible economic conditions.

-> Managers can prepare strategies for recession, stable growth or rapid growth, reducing reaction time when conditions change.

✓ Scenarios are only useful if they are based on plausible assumptions.

Scenario planning: technological change

Businesses can consider scenarios involving major technological developments.

-> Early preparation can allow the business to invest in technology or skills before competitors, protecting competitive advantage.

✓ The value depends on how accurately managers identify likely technological developments.

Advantage of scenario planning: preparedness

Scenario planning increases organisational preparedness.

-> Managers have already considered potential responses, allowing the business to react faster to change.

✓ This is especially valuable when decisions must be made quickly.

Advantage of scenario planning: reduces uncertainty

Scenario planning encourages managers to consider uncertainty systematically.

-> Considering multiple possible futures reduces reliance on a single forecast, potentially improving strategic resilience.

✓ It cannot eliminate uncertainty because the actual future may be different from all scenarios.

Advantage of scenario planning: flexible strategy

Scenario planning encourages strategic flexibility.

-> Businesses can prepare different responses and adapt their strategy as conditions change, reducing the risk of being locked into one plan.

✓ Flexibility may be limited by financial and organisational constraints.

Disadvantage of scenario planning: inaccurate scenarios

Scenarios are based on assumptions about the future.

-> If managers identify the wrong variables or underestimate unexpected events, the resulting plans may be ineffective.

✓ This risk is greater in industries with rapid technological or political change.

Disadvantage of scenario planning: cost/time

Developing multiple scenarios requires managerial time and resources.

-> Time spent analysing hypothetical futures could reduce resources available for current business operations.

✓ The cost is more significant for small businesses.

Disadvantage of scenario planning: false confidence

Detailed scenarios may create a false sense of preparedness.

-> Managers may become overly confident that they have considered all possibilities, reducing their ability to respond to unexpected events.

✓ This can be reduced by regularly reviewing and updating scenarios.

Strengths

Strengths are internal factors that give a business an advantage over competitors or support its ability to achieve objectives.

Weaknesses

Weaknesses are internal factors that place a business at a disadvantage or restrict its ability to achieve objectives.

Opportunities

Opportunities are external factors that the business could exploit to improve its performance or achieve growth.

Threats

Threats are external factors that could negatively affect the business's performance or strategic position.

SWOT: internal factors

Strengths and weaknesses are internal factors because they arise from within the business.

-> Managers may have greater ability to change or control these factors than external factors.

✓ However, some weaknesses such as limited finance may be difficult to change quickly.

SWOT: external factors

Opportunities and threats are external factors because they arise from outside the business.

-> Businesses cannot directly control them but can develop strategies to respond to or exploit them.

✓ Their impact depends on the business's exposure to the external environment.

SWOT strength: patent

A patent can be a strength because it gives the business legal protection over an innovation.

-> Competitors may be prevented from copying the product, helping the business maintain competitive advantage and profit margins.

✓ The strength depends on the patent's remaining duration and commercial value.

SWOT strength: experienced management

Experienced management can be a strength because managers possess knowledge and strategic expertise.

-> Better decision-making may improve efficiency and reduce strategic mistakes.

✓ Experience is most valuable when managers have relevant industry knowledge.

SWOT weakness: poorly trained workforce

A poorly trained workforce is a weakness because employees may have lower productivity and make more errors.

-> Higher costs and lower quality can reduce competitiveness and profitability.

✓ The weakness can potentially be reduced through training.

SWOT weakness: ageing equipment

Ageing equipment can be a weakness because it may be less productive and more prone to breakdowns.

-> Higher maintenance costs and production interruptions can reduce output and profit.

✓ The significance depends on whether the business has enough finance to replace the equipment.

SWOT weakness: limited production capacity

Limited production capacity is a weakness because the business may be unable to meet increasing demand.

-> Lost sales can allow competitors to gain market share.

✓ The significance depends on the business's growth in demand and ability to expand capacity.

SWOT opportunity: new technology

New technology can be an opportunity if it allows the business to improve products or reduce costs.

-> Higher productivity or better products can increase competitiveness and profit.

✓ The opportunity depends on whether the business can afford and effectively implement the technology.

SWOT opportunity: export markets

Growing export markets can be an opportunity for expansion.

-> Access to additional customers can increase sales and economies of scale.

✓ The opportunity depends on exchange rates, trade barriers and the business's international competitiveness.

SWOT threat: new competitors

New competitors are a threat because they increase competitive pressure.

-> Existing businesses may lose market share or need to reduce prices and increase promotion.

✓ The threat is greater when barriers to entry are low.

SWOT threat: legal change

Changes in laws and regulations can be a threat if they increase business costs or restrict activities.

-> Higher compliance costs may reduce profit margins.

✓ The impact depends on the specific regulation and the firm's exposure.

Advantage of SWOT: simple

SWOT is relatively simple to understand and use.

-> Managers can quickly organise large amounts of information into four categories, supporting strategic discussion.

✓ Simplicity is useful for small businesses with limited analytical resources.

Advantage of SWOT: holistic view

SWOT combines internal and external factors.

-> Managers can consider how the business's capabilities fit with opportunities and threats, improving strategic alignment.

✓ Its usefulness depends on identifying the most important factors.

Advantage of SWOT: strategy generation

SWOT can help generate strategic options.

-> Managers can match strengths with opportunities or address weaknesses that prevent the business exploiting opportunities, improving strategic decision-making.

✓ SWOT itself does not determine which option is financially or strategically best.

Disadvantage of SWOT: subjectivity

SWOT analysis can be subjective because managers decide which factors to include and how important they are.

-> Important factors may be overlooked or managers may overestimate their own strengths, resulting in poor strategic choices.

✓ The risk can be reduced using reliable data and multiple managers' input.

Disadvantage of SWOT: no prioritisation

SWOT lists factors but does not automatically rank their importance.

-> Managers may struggle to determine which factor should receive the greatest strategic attention.

✓ Additional techniques such as decision tre