6.

3 BUSINESS STRATEGY
 It is the process of conducting research into the business environment within which an
organisation operates, and into the organisation itself, to help form future strategies.

 It involves looking in detail, at the current position and predict changes to the future, ensuring
they fit with the long-term strategy.

 Answers 3 main questions:

o Where is the business now?

o How might the business be affected by what is happening or likely to happen?

o How could the business respond to these likely changes?

Definition

a) Strategic Management
b) Strategic analysis
c) Strategic choice
d) Strategic implementation

APPROACHES TO DEVELOPING BUSINESS STRATEGY

1. BLUE OCEAN STRATEGY

 Seeks to create new market space ('blue oceans') rather than competing in existing markets
('red oceans').

 Encourages innovation to offer unique value propositions.

 To help identify a blue ocean, Kim and Mauborgne recommended that business consider what
they call the FOUR ACTION FRAMEWORK.

1. RAISE – What factors, such as quality or customer service.

2. REDUCE- What factors, such as costly competitive advertising.
3. ELIMINATE-What have been used to compete against rivals could be eliminated.
4. CREATE- factors to create that the industry never offered.
 2. SENARIO PLANNING

 Involves creating detailed, imagined scenarios of possible future states.

 Assists in preparing for various potential future challenges and opportunities.

 3. SWOT Analysis

 SWOT analysis is a form of strategic analysis that identifies and analyses the main internal
strengths and weaknesses and external opportunities and threats that will influence the future
direction and success of a business.

 S – STRENGTHS – Internal factors of a business, which can be a basis to develop their

competitive advantage. Identified through internal audits.

 W – WEAKNESSES – Internal negative factors, such as poor training and motivation

 O – OPPORTUNITIES – Potential areas of expansion for the business to make higher profits.
Identified through external audits.

 T – THREATS – External factors about the business’s economic environment, market conditions
which may negatively affect the business performance

 Helps managers assess the likely success of future strategies and their constrains.

 Not necessary to pursue the most profitable option, rather focus on developing a USP by
exploiting the strengths and opportunities.

 Not sufficient to carry out only SWOT.

 It is subjective based on personal opinions and feelings rather than on facts.

 No quantitative data

 Should be used as ONLY a guide.

 4. PEST Analysis

 The strategic analysis of a firm’s macro environment including political, economic, social and
technological factors.

 P – Political

 E – Economical

 S – Social

 T – Technological

 Helps assess the chance of success of a business strategy.

 PESTEL is complementary to SWOT, not an alternative.

 Must be constantly updated – dynamic business environment.

EXAMPLE ON PG 128

5. Porter’s Five Force Analysis

 Michael Porter identified 5 main forces that models an industry.

It can be used to build a competitive edge and helps understand the business’s external environment.

Figures shows the five forces, with the key forces of competitive rivalry at the Centre.
 Barriers to entry

o How easily can new competitors enter the market?

o Becomes a threat when:

 Low EOS

 Cheap technology needed.

 Easy to access distribution channels.

 No patents/legal restrictions

 Low need for product differentiation

 Power of buyers

o Power of customers on the industry

o Higher power when:

 Small, undifferentiated suppliers

 Low cost of switching

 Limited consumers

 Power of suppliers

o High cost of switching

o High brand image

o Little bargaining power for customers

 Threat of substitutes

o Substitute products in other industries.

 Competitive rivalry

o Key, most important part.

o Determines the level of competition in an industry.

o Determined by the other 4 forces.

o High rivalry when:

 Cheap and easy for new firms to enter.

 Threat from substitute products

 High supplier power

 High consumer power

  Large number of firms with similar market share

 High fixed costs

 Slow market growth

Porter’s five forces as a framework for business strategy

 Helps firms identify whether or not to enter the market – profitability, competition, whether or
not to stay in the market

 Develop strategies to improve competitive position.

o Product differentiation

o Buying out rivals

o Market segmentation

o Communicate and collude with competitors.

 Rapidly changing markets may not remain the same.

 Complex

6. Core Competencies(Gary Hamel & C.K Prahalad)

 Core competence is an important business capability that gives a firm competitive advantage.

 Develop core competencies to gain competitive advantage as they help develop core products.

 Core products are products based on a business’s core competences, but not necessarily for the
final consumer.

 Being good at one product isn’t the same as their core competence.

 It depends on integrating multiple technologies and different product skills which already exist
in the business.

 Doesn’t always require huge R&D expenditure.

PG 132

7. ANSOFF MATRIX
A strategic tool for identifying company growth opportunities of market penetration, market
development, product development and product diversification.

The Ansoff matrix shows the two main variables in a strategic marketing decision are:

• the market in which the business is going to operate

• the product(s) it plans to sell.

In terms of the market, managers have two options:

• to remain in the existing market

• to enter new ones.

In terms of the product, the two options are:

• selling existing products

• developing new ones.

 Market Penetration: Increasing market share in existing markets.

 Market Development: Entering new markets with existing products.

 Product Development: Introducing new products to existing markets.

 Diversification: Entering new markets with new products.

pg. 133

8. Forced Field Analysis

 Evaluates the forces driving(positive factors) and restraining change(negative factors) in
decision making.
 Useful for understanding the dynamics of organisational change.

Conducting a force-field analysis

1 Analyse the current situation and the desired situation.

2 List all of the factors driving change towards the desired situation.

3 List all of the constraining factors against change towards the desired situation.

4 Allocate a numerical score to each force, indicating the scale or significance of each
force: 1 =extremely weak and 10 = extremely strong.

5 Chart the forces on the diagram with driving forces on the left and restraining forces
on the right.

6 Total the scores and establish from this whether the change is really viable. Is it worth
going ahead?

If yes, then the next stage is important.

7 Discuss how the success of the change or proposed decision can be affected by
decreasing the strength of the restraining forces and increasing the strength of the
driving forces.
Looking at the example in Figure, the forces against the new IT system are greater than those that are
positive towards it (11:10). Forcing through a decision to introduce the IT system without responding to
this analysis could be very unwise. Staff may be uncooperative and resistant if change is forced through
with no attempt to reduce the forces against change.

Possible management strategies to address the restraining forces include:

• Employees could be trained (increasing cost by +1) to help eliminate fear of technology (reducing

staff concern about new technology by –2).

• It would be important to show staff that change is necessary for business survival (add a new force in
favour, +2).

• Staff could be shown that new IT equipment would introduce new skills and interest to their jobs (add
a new force in favour, +1).

• Managers could raise wages to reward staff for higher productivity (increase cost, +1, but reduce cost
by loss of staff, −2).

• IT machines could be selected that are more energy efficient (environmental impact of new

technology, −1).

These changes would swing the balance of the force-field analysis from the original 11:10 against to
13:8 in favour of the decision. Pg 135
 9. DECISION TREES
 A decision support tool that uses a tree-like graph of decisions and their possible
consequences.
 Helps in evaluating the potential outcomes of a decision, factoring in risks, costs, and benefits.

This technique is based on a diagram that represents four main features of a business decision (see
Figure)

• all of the options open to a manager

• the different possible outcomes resulting from these options

• the chances of these outcomes occurring

• the economic returns from these outcomes.

Constructing decision trees

The tree is a diagram with the following features:

• It is constructed from left to right.

• Each branch of the tree represents an option together with a range of consequences or outcomes and
the chances of these occurring.

• Decision points (decision nodes) are denoted by a square.

• A circle (chance node) shows that a range of outcomes may result from a decision.

• Probabilities are shown alongside each of these possible outcomes. These probabilities are numerical
values that measure the chance of an outcome occurring.

• The economic returns are the expected financial gains or losses of a particular outcome.

Working out expected values on decision trees.

Using the definition, the expected value of tossing a coin and winning $5 if it comes down heads is.

0.5 × $5 = $2.50. In effect, the average return, if you repeated this a number of times, would be to win
$2.50. The purpose of a decision tree is to show the option that gives the highest expected value.

Example:

The manager of a business that organises events has to decide between holding a fundraising auction
indoors or outdoors. The financial success of the event depends on the weather and also on the decision
whether to hold it indoors or outdoors.

Table shows the expected net financial returns or economic returns from the event for each of these
different circumstances. From past weather records for August, there is a 60% chance of fine weather
and a 40% chance of it being poor. The indoor event will cost $2 000 to arrange and the outdoor event
will cost $3 000.
Main Advantages of Decision Trees:

• They force the decision-maker to consider all of the options and variables related to a decision.

• They put these on an easy-to-follow diagram, which allows for numerical considerations of risk and
economic returns to be included.

• The approach encourages logical thinking and discussion among managers

ANSWER=

The answer is obtained by calculating the expected value at each of the chance nodes. This is done by
multiplying the probability by the economic return for both outcomes and adding the results. The cost of
each option is then subtracted from this expected value to find the net return. This

is done by working through the tree from right to left, as follows (see Figure 8.10).

• The expected value at node 1 is $5 800.

• The expected value at node 2 is $7 600.

• Subtract the cost of holding the event either indoors or outdoors:

• indoors = $5 800 – $2 000 = $3 800

• outdoors = $7 600 – $3 000 = $4 600.

Therefore, the events manager would be advised to hold the event outdoors as, on average, this will
give the highest expected value. The other option is blocked off with a DOUBLE LINE (||) in to indicate
that this decision will not be taken.
PG 138 – EXERCISE

MORE COMPLEX DECISION TREES

The examples used above have been based on fairly straightforward decisions where only one choice
had to be made. Most strategic decisions are more complex than this. Figure below is a more complex
decision tree, showing a construction company’s strategic options for a derelict building.

There are two options initially facing the business. The building could either be sold now for $1 million
or improved and updated at a cost of $0.5 million. After renovation, the building could be sold as one
house.

However, after renovation, another option would be to split the building into three apartments, which
will cost a further $0.25 million.

The payoffs from these options will depend on interest rates at the time of sale. High rates will reduce
the
 returns in both cases, as seen in Table below. Based on past economic records, the chance of interest
rates being high during the same period for the house or flats is 60% and the chance of low rates is 40%.

The important rule of working from right to left in calculating expected values is
still relevant with these more complex examples. The calculations must now be
divided into two stages:
1 The expected values of selling either the house or the apartments must be worked out, taking the
additional conversion cost of the apartments into account.

2 The values of the two initial options can be compared, using the higher of the two outcomes from the
second decision. Which offers a better return: the immediate sale or the investment in the building?

CALCULATIONS

At node 3, the expected value is $1.7 million. At node 4, the expected value is $2.2 million. From this,
must be subtracted the additional apartment conversion costs of $0.25 million to leave $1.95 million.

Verify these results with your own calculations. The apartment option is preferred to selling as one
house.

This is the return that is taken back to node 2.

Now subtract the renovation costs of the building from this return to give the overall net return of not
selling the building immediately. This is compared with the $1 million from the sale of the building now.

It is clear, based on quantitative issues alone, that the business would be advised to both develop the
building and convert it into apartments. Therefore, working from right to left, the highest expected
value at node 1 becomes $1.45 million, obtained from the apartments option.

EXERCISE PG 139

Advantages:

• Clearly lay out the problem so that all options can be

considered.
• Allow managers to analyse fully the possible consequences and risks of a decision.

• Provide a framework to quantify the values of outcomes and the probabilities of achieving them.

• Decision trees give an easy-to-understand visual representation of the problem.

Disadvantages:

• Can oversimplify a decision and focus too much on the financial outcome.

• Don’t include other factors such as manpower considerations, managers’ opinions and marketing
issues.

• Probabilities are difficult to predict and may reflect bias.

• There may be other options that are not included in the decision tree.

• Can be time consuming to construct and may be interpreted with bias.

• Time lags often occur in decision-making so information may be out of date.

• Use probabilities which only gives an estimate which may be inaccurate.