Unit 8

Question 1

Define strategic direction

Answer 1

Refers to the course of action or plan that should lead to the achievement of long-term goals.
- Refers to the process of making decisions about which markets to operate in and what goods and services to sell.

Question 2

What is strategy?

Answer 2

Strategy is all about the choices that businesses make about how to achieve their objectives. Essentially:
- Where the business is trying to get in long-term (strategic direction)
- Which markets
- How the business performs better than its competition
- Resources required in order to be able to compete
- The external, environmental factors affecting business’ ability to compete
- The values and expectations of the stakeholders

Question 3

Why is strategic direction important?

Answer 3

Because the external environment is constantly changing and businesses must develop and compete in areas that make the best use of their strengths and core competencies.

Question 4

What is the strategic tool used to help businesses analyse their strategic direction?

Answer 4

The Ansoff’s matrix

Question 5

What is the Ansoff’s matrix?

Answer 5

The Ansoff’s matrix is a strategic tool that businesses can use to help choose the market they wish to operate in and the products they will sell within that market.
- The model offers 4 distinct strategies based on the products’ degree of newness and the business’ understanding and experience of the market.
- Also helps the business assess the degree of risk associated with different strategic options.

Question 6

What are the 4 distinct strategies in the Ansoff’s matrix?

Answer 6

• Market penetration
• Market development
• Product development
• Diversification

Question 7

What is market penetration?

Answer 7

Trying to increase market share by selling more of an existing product to existing market.

Question 8

What is market development?

Answer 8

Selling existing products to new markets through finding either a new segment or a new geographic market or a new distribution channel.

Question 9

What is product development?

Answer 9

Selling new products in the existing market, so introducing new products to increase sales.

Question 10

What is diversification?

Answer 10

Selling new products in new markets.

Question 11

What are the two types of diversification and what do they mean?

Answer 11

1) Related diversification
- When a business moves into a new industry that has similarities with its existing industry, so there is a link between the products/markets.
- Enables a business to develop and exploit a core competency to achieve economies of scope.
- E.g. Dyson entering the hand dryer market.

2) Unrelated diversification
- When a business moves into a completely new industry in which it has no experience or expertise, so there is no link between the products/markets.
- E.g. Dyson trying to enter the electric car market.

Question 12

What are the internal factors affecting the choice of strategy for a business?

Answer 12

• Corporate objectives
• Financial resources
• Ability to innovate
• Boston matrix (gap?)
• Shareholders’ attitude to risk

Question 13

What are the external factors affecting the choice of strategy for a business?

Answer 13

• Changes in technology (need for a new product)
• Law (ban on existing products)
• Competitors’ actions
• Barriers to entry (Porter’s 5 forces)

Question 14

What are the reasons for a business choosing the product development strategy?

Answer 14

• This strategy is a good choice for a business that has a strong brand name, such as Virgin or Apple.
• Businesses will benefit if they know their customer base, making their market research and promotion easier.
• This strategy is required if existing product has become obsolete.
• May be used if there is potential for new segments of the market to be targeted or if complimentary products can be produced.

Question 15

What are the reasons for a business choosing the market penetration strategy?

Answer 15

• This strategy can be implemented quickly with limited risk.
• It avoids the commitment of expense and time that is involved in developing new products or investigating and analysing unfamiliar markets.

Question 16

What are the reasons for a business choosing the diversification strategy?

Answer 16

• This strategy may be chosen if the existing industry is in decline or has become saturated.
• As a result, it can enable further growth for a business and spread risk.

Question 17

What are the reasons for a business choosing the market development strategy?

Answer 17

• This is a good strategy for a business with a well-established brand name, such as Starbucks or Coca Cola.
• Should make entry to new markets easier as the product is already proven and the business remains focused on its core function.
• It avoids the development of new products, which can be costly.

Question 18

What are the possible approaches to the market penetration strategy?

Answer 18

• Change elements of the marketing mix to increase sales, e.g. reduce the price, increase advertising, etc.
• Use strategies aimed at gaining market share from competitors.
• Encourage customers to buy more or more frequently, e.g reward loyalty, etc.
• Use extension strategies to prolong the product life cycle.

Question 19

What are the potential dangers of the market penetration strategy?

Answer 19

• The market may become saturated.
• Competitors may have better products or services to offer.

Question 20

What are the possible approaches to the product development strategy?

Answer 20

• Launch totally new products (as opposed to improving existing products).
• Introduce complementary products/services.

Question 21

What are the potential dangers of the product development strategy?

Answer 21

• Introducing radically new products may be risky as take up may be low, e.g. Apple watch?
• Unsuccessful products may damage the brand name, e.g. Google glasses.
• Innovations may shorten the product life cycle of existing products within a business’ portfolio.

Question 22

What are the possible approaches to the market development strategy?

Answer 22

• Enter a new international market, e.g. try to sell the product in China.
• Enter a different market, e.g. target B2B or B2C if not done before.
• Change promotional message to aim the product to a new market segment.
• Use new distribution channels, e.g. online.

Question 23

What are the potential dangers of the market development strategy?

Answer 23

• The product may not meet the needs of new customers/segments.
• Entering a new market could be costly and may take a long time to become profitable.
• It may become difficult to manage a business operating in different markets.
• Current customers may be confused by the new promotional message.

Question 24

What are the possible approaches to the diversification strategy?

Answer 24

• Acquisitions of existing businesses providing different products in different markets.
• Investing in research and development in new products for new markets, e.g. Dyson researching batteries for electric cars.

Question 25

What are the potential dangers of the diversification strategy?

Answer 25

- May require substantial investment for either research and development or acquisition of another business. - Managing a business operating in unrelated markets may be difficult. - Acquisitions sometimes fail. - The business may lack experience in both the product and its market.

Question 26

What is the level of risk and reward associated with market penetration?

Answer 26

Low risk strategy but limited potential reward.

Question 27

What is the level of risk and reward associated with product development?

Answer 27

Risk comes from not knowing the products, high research and development costs and competitors' reactions. - medium risk

Question 28

What is the level of risk and reward associated with market development?

Answer 28

Risk associated with lack of knowledge of customers, e.g. may be new customers type or new location. - medium risk

Question 29

What is the level of risk and reward associated with diversification?

Answer 29

High risk strategy as two elements are unknown, i.e. the market and the product. - highest risk but also the greatest potential for reward.

Question 30

Define strategic positioning

Answer 30

Strategic positioning of a business relates to how that business is perceived relative to other businesses in the same market.

Question 31

Define competitive advantage

Answer 31

A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

Question 32

What model can be used for a business to decide on their strategic postitioning?

Answer 32

Porter's generic strategies model

Question 33

What is Porter's generic strategies model?

Answer 33

Porter's generic strategies model suggests that a business should follow one of three positioning strategies in order to compete within its market, either a: - Low-cost strategy - Differentiation strategy - Focus strategy

Question 34

What are the two categories of the focus strategy in Porter's generic strategies model?

Answer 34

- Cost focus - Differentiation focus

Question 35

What do businesses essentially compete on?

Answer 35

- Price (cost leadership) - Uniqueness or value perceived by the customer (differentiation) - By focusing on a niche or very specific type of customers (market segmentation)

Question 36

What is the competitive advantage and competitive scope that the cost leadership strategy comes under in Porter's generic strategies model?

Answer 36

- Lower cost - Broad target

Question 37

What is the competitive advantage and competitive scope that the differentiation strategy comes under in Porter's generic strategies model?

Answer 37

- Differentiation - Broad target

Question 38

What is the competitive advantage and competitive scope that the cost focus strategy comes under in Porter's generic strategies model?

Answer 38

- Lower cost - Narrow target

Question 39

What is the competitive advantage and competitive scope that the differentiation focus strategy comes under in Porter's generic strategies model?

Answer 39

- Differentiation - Narrow target

Question 40

What does Porter's generic strategies model suggest to businesses?

Answer 40

- Businesses should decide which of the generic strategies to choose and whether to target the mass market or a niche. - A business has to be either low costs or differentiated; it cannot combine both. - It has to be clear in terms of what the business wants to be and how it wants to be positioned in the market. - A business should avoid being 'stuck in the middle' where it is not clear internally or to customers what the business' strategy actually is, by not being the cheapest or not offering strong differentiation.

Question 41

What does the cost leadership strategy require?

Answer 41

- Focus on cost-minimisation - Large sales volume - Economies of scale - Power over suppliers - Efficiency

Question 42

What does the differentiation strategy require?

Answer 42

- Strong USP - Focus on innovation - High profit margins - Developing brand loyalty

Question 43

What do the focus strategies require?

Answer 43

- A lucrative niche market - Clear focus on one segment

Question 44

Give examples of businesses using the cost leadership (mass market) strategy

Answer 44

Aldi, Lidl, McDonald's, IKEA, Ryanair

Question 45

Give examples of businesses using the differentiation (mass market) strategy

Answer 45

Apple, Mercedes, Lush

Question 46

Give examples of businesses using the cost focus (niche market) strategy

Answer 46

Claire's, Coca Cola - Diet Coke

Question 47

Give examples of businesses using the differentiation focus (niche market) strategy

Answer 47

Aston Martin, Tesla

Question 48

Ways of achieving a cost leadership strategy

Answer 48

- Use of bargaining power to negotiate the lowest prices from suppliers. - Lean production (e.g. JIT) - High levels of productivity. - High levels of capacity utilisation. - Effective use of technology in the production process. - Access to the most effective distribution channels. - Achieving economies of scale through growth.

Question 49

Ways of achieving a differentiation strategy

Answer 49

- Superior product quality (features, benefits, durability, reliability) - Branding (strong customer recognition and brand loyalty) - Consistent and heavy promotional support. - Industry-wide distribution across all major channels (e.g. the product or brand is an essential item to be stocked by retailers). - Heavy investment in research and development as well as market research to meet the needs of a specific market.

Question 50

Internal factors that influence a business where to position itself

Answer 50

- Strengths and weaknesses - Strategic direction, i.e. decisions already made regarding which market(s) to compete in and which products to offer. - Core competencies of the business - Corporate objectives (growth, profit, cash flow, RoCE, survival, etc.)

Question 51

External factors that influence a business where to position itself

Answer 51

- Competitors' positions - Opportunities and threats - Market conditions, e.g. which part of the business cycle are we in? PESTLE factors. - Gap in the market

Question 52

Benefits for a business having a competitive advantage

Answer 52

- Greater sales - Brand loyalty - Increased market share - Barriers to entry (making it difficult for existing competitors to gain market share and for new competitors to set up in the market) - Profit achieved through higher volume (economies of scale) in a cost-leadership strategy and premium price and higher profit margins in a differentiation strategy. - Shareholder value: more profit leads to higher dividend payments and higher share price.

Question 53

Difficulties for businesses in maintaining a lower price as a competitive advantage

Answer 53

- Investment required to scale up production and distribution to be able to sell in large quantities and achieve economies of scale. - Customers' expectations of low prices may mean that the business isn't able to increase its prices in line with inflation, e.g. Poundland where customers are expecting to pay not more than £1. - Human resources issues: to keep costs low the business may seek to employ minimum amount of staff, to pay minimum wage and use zero hour contracts leading to high labour turnover and poor customer service (Sports Direct was an example).

Question 54

Difficulties for businesses in maintaining differentiation as a competitive advantage

Answer 54

- Investment required in research and development to develop new products and processes, in intellectual property protection (patent protection), in promotion and branding, etc. - Costs: producing high quality products or ethically sourced products, using more advanced equipment and more sophisticated manufacturing processes is likely to be more expensive. Similarly, employing the best people in the industry will cost more. - Development in technology: staying ahead of innovation in technology may be difficult. Competitors may come up with new or better ideas. - Human resources or talent: having the best people in the industry is key to achieve innovation and creativity.