Chapter 5

Strategic choice

This chapter covers the following

1. Introduction
2. Competitive strategy options
3. Sustaining competitive advantage
4. Growth strategies
5. Strategy evaluation
1.  Introduction
– Strategic choice aims to close the gap between
where the organisation is at the moment and
where the organisation wants to be in the future
– An organisation must choose the strategy that it
feels best suits its mission, is feasible using its
strategic capabilities and gives it the best fit with
its environment
• Three key elements of strategic choice
– competitive strategies – how best to beat competitive
rivals
– growth strategies – how to achieve growth in new areas
– strategy evaluation – choosing the best available option
• Competitive or growth strategies
– competitive strategies are best employed when the organisation
feels that it can improve its market share with their product,
service or if market is in the early stages of its life, market is
continuing to grow, its value chain can be improved
– Growth strategies are more likely to be employed when an
existing market is mature or declining - consider expanding into
new markets, launching new products etc. are growth strategies
2. Competitive strategy options
• There are three generic competitive strategies
as per Michael Porter
– Cost leadership,
– differentiation and
– focus to achieve competitive advantage
 Cost Leadership Differentiation Focus
Aim Cut costs and reduce To offer a product Position the
price which is different business in one
from rivals and particular niche in
charge premium the market
price

How to achieve Economies of Branding, Quality, Reduction in

scale, Learning Innovation, product range, and
effects,, Knowledge find segment were
Large scale management no cost leader or
differentiation
production, using exists
cheaper labour,
material, moving
to cheaper
premises
Benefits high volumes Create brand loyalty Develop brand
Create barriers to reduce high margins loyalty, where little
entry, win price wars, in case of power of competition and go
reduce power of customers for other generic
substitutes strategies
 Cost Leadership Differentiation Focus
Threat NO fall back in position Perform badly in a It attracts rivals if
if leadership is lost recession low volume is highly
profitable

Suitability Large organizations Innovations with large Small business with

with economies of marketing budget strong market
scale knowledge and risk
taking attitude

A business that fails to achieve one of these generic positions

will be stuck in the middle and customer move either to
down market or upmarket or to rivals
• How does one become a cost leader?
– Set out lowest cost producer in an industry.
– Producing at the lowest possible cost can
compete on price with every other producer in the
industry and earn the highest unit profits.
• How does one become a cost leader?
– Decide whom you are competing against
– Perform value analysis
– Understand your own costs and cost drivers
– Try to make a product of comparable quality for a
lower cost
• Advantages
– Better margins through lower costs
– Low costs act as a barrier to entry
– Low prices make substitutes less attractive
– Low costs give a platform for expansion
– Better margins give more scope to absorb pressure from powerful
buyers/suppliers.
• Drawbacks
– cost leadership would be difficult to achieve, because many other
firms would be able to match the costs
– Only room for one cost leader
– Cost advantage may be lost because of inflation, movements in
exchange rates, competitors using more modern manufacturing
technology or cheap overseas labour
– Customers may prefer to pay extra for a better product.
• Differentiation
– Here the firm creates a product that is perceived
to be unique in the market.
• Ways of achieving differentiation
– Quality differentiation
– Design differentiation
– Image differentiation
– Support differentiation
Advantages Risks
better margins cheap copies
product uniqueness reduces customer  being out-differentiated
power  customers unwilling to pay the extra
quality acts as a barrier to entry differentiating factors no longer valued
quality reduces the attractiveness of by customers
substitutes
• Focus
– Position oneself to uniquely serve one particular
niche in the market
– It is focusing on particular market segments
– Two types of focus
• Cost focus
• Differentiation focus 
– Advantages is that the business becomes expert in
that niche market
– Risk is that the segment is not sustainable
• The strategy clock
– An alternative way of identifying strategies that
might lead to competitive advantage is to look at
‘market facing’ generic strategies.
– competitive advantage is achieved if a firm
supplies what customers want better or more
effectively than its competitors.
– customers are looking for what they perceive as
best ‘value for money’.
• 1 = no frills
– Very price-sensitive customers. Simple products can
be quickly imitated – price is a key competitive
weapon. Costs are kept low because the
product/service is very basic. 
• 2 = low price 
– Aim for a low price without sacrificing perceived
quality or benefits. In the long-run, the low price
strategy must be supported by a low cost base.
• 3 = hybrid strategy 
– Achieves differentiation, but also keeps prices down.
This implies high volumes or some other way in which
costs can be kept low despite the inherent costs of
differentiation
• 4 = differentiation
– Offering better products and services at higher
selling prices. Products and services need to be
targeted carefully if customers are going to be
willing to pay a premium price.
• 5 = focused differentiation
– Offering high perceived benefits at high prices.
Often this approach relies on powerful branding.
• 6, 7, 8 = failure strategies
– Ordinary products and services being sold at high
prices. Can only work if there is a protected
monopoly
3. Sustaining competitive advantage
– Once a competitive advantage is achieved it
should be sustained by strategic capability ie.,
• Valued by customers
• Rare or unique resources and
• Robust (hard to imitate)
– org. can take strategic steps to protect their
competitive position through:
• price based strategies, (further cost efficiencies,
winning price wars, or accepting lower margins)
• further differentiation, or lock-in (creating difficulties in
imitation, achieving imperfect mobility of resources,
and  re-investing margins)
• Differentiation through innovation
– Innovation is increasingly seen as important for
strategic success. The reasons are: 
• increased rate of technical advances increased competition
• increased customer expectations
– Innovation can apply to product, process, method
– An innovation strategy calls for a management policy
of giving encouragement to innovative ideas. This has
a number of aspects
• Financial backing must be given to innovation
• Employees must be given the opportunity
• Management can actively encourage employees and
customers to put forward new ideas
• Development teams can be set up
 – It is innovation that frequently undermines the
basis of competition in existing markets
• Richard Lynch identifies three distinctive roles
for innovation within a business level strategy:
– achieving new growth through entry into new
products and markets
– retaining competitive advantage by strengthening
the product offering
– achieving competitive advantage through jumping
ahead of existing rivals.
• Acquiring new technologies
– New technologies often emerge in one of two
ways.
– Technology-push is based upon an understanding
of the technology,
– less well-developed idea of market-pull has
important applications (exploit the latest
discoveries). New technologies are developed
based upon a good understanding of customer
requirements
– These two approaches are not mutually exclusive,
and frequently support each other
• Exploitation of existing technologies
• A successful company is one that:
– is outward-looking, constant change and reviews
its product-market policy continuously 
– is always looking to the future towards new
markets, innovative products, better designs, new
processes, improved quality, increased productivity
– has a structure designed for innovation in which
management and staff are stimulated to think and
act innovatively,
– stimulates creativity, and rewards ideas and
supports individual and team abilities.
• The impact of new product, process, and service
developments and innovation in supporting
organisation strategy
– They will help close the gap
– New launches can be a differentiator hence can attract
customers
– therefore launching more than one new development
can diversify away some of this risk
– new developments need to be found to replace them
– need to be thinking about their next development
– Developments encourage an organisation to be flexible
and to learn
– Organisations with a focus on quality see continuous
improvement
• Lock-in
– This approach can work for both price-based and
differentiation-based strategies. It happens where
a business’ products become the industry
standards
4. Growth strategies
– Ansoff suggested four categories of growth
strategies
 
• Market penetration – existing markets and
products
– increasing the average spend per existing
customers
– increasing the frequency of visits for existing
customers
– winning customers away from rivals encouraging
non-users to buy.
• Strategies used to penetrate a market include:
– Changes to the marketing mix
– Pursuing a new competitive strategy
– Increasing the sales force
• This strategy is possible under the following
conditions
– When the overall market is growing
– If other companies are leaving the market
– organisation that holds a strong market position
– relatively lower level of investment and senior
management involvement.
– market penetration is seen as the least risky of Ansoff’s
options, it should not be assumed that risk is always
low
– if a company focuses purely on market penetration and
rarely develops new products, then it runs the risk of
stagnation and falling behind rivals who have better
more innovative products
• Product development – existing markets and
new product
– This strategy has the aim of increasing sales by
developing products for a company’s existing
market
• develop new product features through attempting to
adapt, modify, magnify, substitute, rearrange, reverse
or combine existing features
• create different quality versions of the product develop
additional models and sizes.
• Reasons for product development strategy
– it holds a high relative share of the mark
– strong brand presence
– growth potential in the market
– changing needs of its customers demand new products
– Continuous product innovation
– react to technological developments
– strong in R&D
– strong organisation structure based on product
divisions
– responding to competitive innovations in the market.
• reasons why new-product development is
becoming increasingly difficult
– some industries there is a shortage of new
product ideas
– increasing market differentiation
– develop many product ideas in order to produce
one good one
– short life cycle of new developed product
– high chance of product failure
• Market development – existing products and new
markets
– Market development strategy has the aim of increasing
sales by repositioning present products to new markets
( market creation)
– there are two possibilities as per Philip Kotler
• the company can open additional geographical markets
• the company can try to attract other market segments
• developing product versions that appeal to these segments “
– Reasons for Market development strategy
• the company identifies potential opportunities for market
development
• the company’s distinctive competence lies with the product
• The new market will need a new external analysis.
• Often the risk of failure is perceived to be high and
therefore strategic alliances are commonly used to
reduce the risks from market development.
• Growth by diversification – new products and
new markets
– Diversification is the deployment of a company’s
resources into new products and new markets.
– Company involved in activities that differ from those in
which it is currently involved
– Diversification strategy means the company changes
the product lines, customer targets and its
manufacturing and distribution arrangements
• different techniques of diversification’
– Conglomerate diversification -- a firm moves into markets
that are unrelated to its existing technologies and products
to build up a portfolio of businesses
– Horizontal diversification -- synergy is highest in the case of
horizontal diversification, especially if the technology is
related,
• The strategy is undertaken when a company extends its activities
into products and markets in which it already possesses necessary
– Vertical integration
• Forward integration --moving towards the consumer
• Backward integration --moving away from the consumer
– Unrelated/conglomerate diversification–
• Diversifying into completely unrelated businesses
• Often leads to loss of shareholder value
 Advantages Disadvantages
  Increased flexibility   No synergies
  Increased profitability   No additional benefit for
  Ability to grow quickly   shareholders
Better access to capital markets   No advantage over small firms
   
Avoidance of anti-monopoly legislation Lack of management focus
   
  Diversification of risk  
Vertical integration
 
 
 
 
 

Advantages Disadvantages  

Cost  Cost    

  Economies of combined   It may not be cheaper to do it  

  operations.   oneself – especially if  

  suppliers have economies of  

  Economies of internal    

    scale.  

  control.  

  Increased operating gearing.  

  Economies of avoiding the  

  market.   Dulled incentives.  

Quality   Capital investment.  

 
  Tap into technology –   Reduced flexibility to switch
  enhanced ability to   to cheaper suppliers.  

  differentiate. Quality  

Barriers   Cut off from  

  Assured supply/demand.   suppliers/customers.  

  Defence against lock-out.   Reduced flexibility to switch  

  to better suppliers.  

  Create barriers by controlling      

  supplies/distribution/retail   Differing managerial  

  outlets.   requirements.  

    Barriers  

      Much more difficult to exit the  

      industry.  
• Horizontal diversification
– refers to development into activities that are
competitive with, or directly complementary to, a
company’s present activities
– There are three cases
• Competitive products
• Complementary products
• By-products
 Advantages Disadvantages
  Likely to be more synergies. Selling to different customers
  For example, when Coca against different rivals will
  Cola moved into the require an understanding of
  production of other types of the market.
  drinks such as bottled water Some new strategic
  and bottled tea, they could capabilities will be needed.
  share bottling plants, staff
  and distribution networks. Synergies are not automatic
and will need to be worked
  This can offer a defence on.
  against substitutes. It can be more difficult to
  This can widen the manage a diversified
  company's product portfolio business.
  and reduce reliance on one
  product or on powerful Many of these problems can be
  customers. overcome by the use of strategic
  There is likely to be less risk alliances and good corporate
  parenting and these ideas are
  than with vertical integration
  explored in more detail in the next
  or conglomeratisation as chapter.
  some existing strategic  
  capabilities can still be used.  
• Reasons why companies pursue a strategy of
international diversification
– There are increasing opportunities from global
markets
– If local markets are saturated or limited
– Risks may be spread
– to take advantage of particular aspects of different
locations and markets such as low labour costs
• Driving and restraining forces for international
expansion
– Driving forces
• Technology, Culture, Market needs, Cost, Free markets, Economic integration
– Restraining factors:
• Culture, Market differences Cost, National controls, Nationalism,
War

5. Strategy evaluation
– There are number of strategic options that an organisation
can choose from.
– But not all of these will be successful for every organisation.
– The choices need to be evaluated to determine which is the
best one for a particular organisation.
• Johnson, Scholes and Whittington (JSW) argue
that for a strategy to be successful it must
satisfy three criteria:
– Suitability – whether the options are adequate
responses to the firm’s assessment of its strategic
position.
– Acceptability – considers whether the options
meet and are consistent with the firm’s objectives
and are acceptable to the stakeholders.
– Feasibility – assesses whether the organisation
has the resources it needs to carry out the
strategy.
• Suitability 
– Suitability considers whether the new strategy fits
in with the organisation's environment and
addresses its key issues
– Suitability would therefore consider whether the
strategy takes account of
• changes in technology
• the threat from substitutes the reaction of competitors
• where the business is in its life cycle support for
overseas expansion
• the timing of the strategy
• Feasibility
– Assesses whether the organisation has the
resources it needs to carry out the strategy and
ensuring that
– the organisation has the right number of staff
– staff have the right skills
– adequate finance is available
– technology is suitable
– the organisation has appropriate skills in
marketing and design
• Acceptability
– Acceptability concerns assessing risk, return and
stakeholders’ expectations
– Risk
• Risk can be assessed through using: financial ratios to identify
any problems
• sensitivity analysis
– Return
• A project will only be acceptable if meets the returns expected
by key stakeholders.
• These returns may be both financial and non-financial
• the change in shareholder wealth (i.e. NPV); the accounting
return (in terms of profits);impact on KPI's
– It will be important to consider the reactions to the
strategy of all stakeholders