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 non-standardised 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 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.

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.

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. 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 Related Markets Unrelated Markets Forward integration Backward integration Horizontal integration 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 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.