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8 - Choosing strategic direction (The value of different strategic…
8 - Choosing strategic direction
Strategic direction refers to a course of action or plan that is hoped will lead to the achievement of long-term goals.
Factors influencing which markets compete in and which products to offer
When an organisation undertakes a
SWOT analysis
, it examines the
internal strengths and weaknesses
and
external opportunities
and threats.
This analysis can be used in
choosing the organisation's strategic direction
, seeking to build on its
strengths
or
develop any opportunities
identified.
Alternatively, it may wish to
address any weaknesses or threats
. The choice of strategic direction can be further analysed using the
Ansoff matrix.
The Ansoff Matrix
Definition: a
strategic or marketing planning tool that links a business's marketing strategy with its general strategic direction.
The matrix identifies four strategies...
Market development
: involves finding new markets for existing products using market research and segmentation to identify new groups of customers.
New product development
: involves producing new products for existing markets.
Market penetration
: increased market share in existing markets achieved by selling more products to either existing or new customers.
Diversification
: the most risky strategy, involving new products in new areas.
Link to the Ansoff matrix:
Factors impacting the choice of strategic direction...
Barriers to entry.
Competitors' actions
: organisations will seek
proactive strategies
to enable them to
stay ahead of competitors
, although sometimes they'll need to be
reactive
,
responding to competitors.
Cost
: the
budget
available is likely to have an impact on strategic direction, which will be
analysed
in relation to the
expected returns
in a
cost-benefit analysis
.
Cost-benefit analysis
: a
process by which a business can be analysed, where benefits and costs are quantified and then the costs subtracted from the benefits.
Ethics involved
: with
greater attention
attached to
corporate social responsibility
, the ethics involved may be an
important consideration.
Objectives and attitude to risk
: some businesses may be
risk averse
and therefore
pursue
strategies that are
more conservative,
focusing on
what they know
and
steady growth
rather than adopting a
more risky strategy
that offers fast growth.
The reasons for choosing and the value of different options for strategic direction
Market penetration (existing products in existing markets)
It can be
implemented quickly
with a
limited risk.
Avoids commitment
in terms of the
expense
and
time
involved in
developing new products
or
investigating and analysing unfamiliar markets.
Does
require potential for growth
within the market, otherwise if the market is
saturated
heavy promotion
may be needed to
entice
customers
away from competitors.
Market development (existing products in new markets)
Good strategy for a business
well-established
brand name,
e.g. Coca-Cola.
Product is
already proven
and the business remains f
ocused on its core function
, making
entry
to new markets
easier
.
Avoids
the possibly
costly development
of
new
products.
However, it
depends
on
markets being accessible
and could be
costly
if
modifications
are
required
.
New product development (new products in existing markets)
Good for an organisation with a
strong brand name
,
e.g. Virgin Media.
Benefit
from
knowing
their
customer base
, making
market research
and
promotion easier.
Strategy is
required
if an
existing product
has become
obsolete
and also if there is
potential
for
new segments
of the market to be
targeted
.
However, may involve
producing and selling
products that it has
limited expertise
with, and where they
may be already established.
Diversification (new products in new markets)
May be
related
(
e.g. an alcoholic drinks business moving into soft drinks
) or
unrelated
(no previous industry experience).
May be chosen if the
existing
industry is in
decline
or has become
saturated
.
Can enable
further growth
for a business and
spread risk.
However, it involves
greater risk
as a business is
moving
into an
area
in which it has
no experience.
How to compete in terms of benefits and price
Porter's generic strategies
Definition: they
describe how a business might pursue competitive advantage across its market using a low-cost, differentiation or focus strategy.
The three strategies...
Differentiation strategy
: involves making products
different
from and
more attractive
than
competitors
. Methods may be through
quality, durability, functionality, customer service, or a brand image that's valued by customers
. A
successful strategy
requires
research and development
,
innovation
and
effective
sales and marketing.
Focus strategy
: an organisation
focuses on a particular niche
in the market. However, within that, it is
still important
to decide
how to achieve a competitive advantage
and whether a
low-cost
or
differentiation
strategy will be chosen.
Low-cost strategy
: not just having
low-costs
but
being the leader
in terms of cost in your industry. To pursue this strategy, an organisation
needs to be confident
it can
maintain its leadership
. It must have a
sustainable low-cost base
and
access to capital
to
invest in technology
that can
further reduce costs
.
Link to porter's generic strategies:
Bowman's strategic clock
Definition: a
model used to explore strategic positioning in order to arrive at the most competitive position in the market.
It identifies
eight strategic positions
according to
varying levels of price and value
, as well as identifying the
likelihood of success
of each strategy.
Eight positions on the clock...
Differentiation
: offers customers
high perceived value
at a
reasonable price
.
Branding
is important as it
allows
companies to
become synonymous
with
quality
and can
enable higher prices
to be charged,
e.g. Nike, BMW.
Focused differentiation
:
high perceived value and price,
such as where markets are
highly targeted
and
margins are high
, as with designer products,
e.g. Gucci, Armani and Rolex.
Hybrid (moderate price/moderate differentiation)
: offers products at a
low cost
but a
higher perceived value
and gains a
reputation
and
consumer loyalty
for
fair
prices and
reasonable
goods,
e.g. IKEA.
Increased price/standard product
: this can only be
short-term
as a
premium price cannot be justified
in a
competitive
market and
will not survive
.
Low price
: companies operating here are
low-cost leaders
selling
everyday
products on
low margins
but in
high volume
,
e.g. Aldi and Lidl
High price/low value
: a classic monopoly position that fortunately for consumers is
unlikely to exist in a market economy.
Low price/low added value
: offers bargain basement - not popular as there is a
lack of differentiated value
and
profit
is only achieved by
selling high volume
,
e.g. Poundland.
Low value/standard price
: involves a
business losing sales.
Link to bowman's strategic clock:
Strategic positioning of a business relates to how that business is perceived relative to other businesses in the same industry.
Influences on the choice of a positioning strategy
The competition
:
strengths and weaknesses of the competitors
. Customer
perception
of their value brand and quality may influence positioning.
Customer
: relates to
customer needs
and
current trends
and may be analysed in terms of
existing and potential customers
,
demographics
or
satisfaction
and brand
perception
.
The business itself
: relating to the
size
,
skills
,
assets
and
culture
of the business and its
resulting strengths
, what it is good at, what it is known for and where it wishes to go.
External environment
: includes
political
and
economic
factors.
The value of different strategic positioning strategies
Although the model produced by
Bowman
is
complex
, it gives an
insight into the possibilities
available to a business in terms of
price
and
perceived value
. Although
little used by businesses
today, it enables students to more easily understand positioning.
Porter's generic strategies
of
low cost versus differentiation
are perhaps
easier to use
and may provide a
better insight
into the business world.
Knowledge
of of
different
positioning strategies has some
value
.
However, the
message from both models
is that any business needs to
treat positioning seriously
, ensuring that the strategy chosen
fits clearly with its mission
and
objectives
and with
how customers perceive
the organisation and their
expectations
.
The
correct positioning
of a product or service is
essential
to the generation of
revenue
and
profit
.
The benefits of having a competitive advantage
A
competitive advantage
is gained by an organisation when it
provides the same value as its competitors
but at a
lower price,
or
charges a higher price
than competitors due to
greater value
through
differentiation
.
Benefits...
Brand loyalty
Profit
: achieved through higher volume in a cost leadership strategy or from higher margins in a differentiation strategy.
Sales
: should be greater from having a competitive advantage.
Shareholder value
However, these benefits are
dependent on having a competitive advantage
that is
not easy for competitors to duplicate or beat
- it needs to be
sustainable
.
The difficulties of maintaining a competitive advantage
Human resources
Financial constraints
Investment
Short termism
Developments in technology