Strategic Choices

Strategic Choices MuradRattani Oxford College of London

Strategic choice ‘ Strategic choice refers to any action taken by the management of the firm to respond to the changes in the environment in order to either exploit an opportunity or to avoid a threat. The main intention is to achieve the strategic fit between the organization and the environment.’ Murad Rattani

Factors to be considered before making a strategic choice • An analysis of the environmental threats and opportunities (SWOT Analysis, PEST Analysis, Michael Porter’s five forces of competitive strategies) • An analysis of the company’s resources (financial resource, human resource, expertise, core competencies, Michael Porter’s value chain analysis) • Portfolio Analysis (BCG matrix, PLC, BLC) • The stated objectives of the company and those of the management team. • The values and preferences of management decision-makers. • The realities of organizational politics. Murad Rattani

Strategic choices Strategic choices should meet one or all of the following criteria • Suitability: refers to considerations as the ability of the strategy to tackle major problems, improve competitive standing, exploit strengths, and the extent to which it meets corporate objectives. • Feasibility: It refers to the extent to which that strategy can be achieved given the financial, physical and human resource base of the company. In other words, the capability of the company allows the co. to go ahead with a particular strategy. • Acceptability: The strategy to be adopted should be acceptable to various interested parties, such as management, employees, shareholders and customers. Shareholders may be particularly sensitive to strategies of the acquisition. The ultimate acceptance of a particular strategy might depend on the attitude of senior management to risk. Murad Rattani

Strategic choices Sustainability:this refers to the extent to which the strategy is difficult for others to copy. Such a concept has much in common with core competence. Product and process innovation can lead to a sustainable competitive advantage that persists for many years, especially, when protected by patents and trademarks. Toyota achieved sustainable competitive edge over its competitors through continuous improvement in lean production. Coca Cola is enjoying sustainable advantage because of branding policies and the secret formula. In contrast to that any action or innovation brought about by any one of the UK supermarket chain is easily and promptly copied by the competitor for e.g. all the supermarket chains are offering customer loyalty cards, have opened cafeteria for the customers and introduced petrol stations. Murad Rattani

Types of strategic options Miles and Snow (1978) offer four main types of strategy that competing organizations can adopt within a single industry. They classify the firms as • The defender organization. • The prospector organization. • The analyser organization. • The reactor organization. Murad Rattani

The defender organization The defender organizations are such which • Tends to have limited product line. • By focussing on a niche market the defender can achieve market leadership. • The key focus of most defenders is to reduce cost and achieve efficiency through low-cost operations. • The defender is unlikely to innovate and is best suited to stable environments. Murad Rattani

The prospector organization The prospector organizations operates with a wide range of products in a growing and usually fast-moving market. Prospectors tend to focus on innovation and new market opportunities. Prospector organizations tend to be flexible and decentralized and tend to be creative while remaining efficient. The prospector organizations tend to emphasize on R&D and marketing as the crucial functions. Murad Rattani

The analyzer organization The analyzer organizations are rarely first in the market. These organizations follow others after a thorough analysis of the market and the competitors’ behaviour. Analyzers can be found in both stable environments where they tend to emphasize on cost reduction and in changing environments, where they emphasize product differentiation. Their approach to change is cautious and planning functions and planning teams play a key role. Murad Rattani

The reactor organization The reactor organizations tend to have mismatch between environment and their strategy. These organizations might not have any strategy at all. These organizations find it difficult to respond to the changes in the environment and their strategies could be inappropriate. Murad Rattani

Michael Porter’s Competitive Strategies According to Michael Porter (1985), competitive advantage is a product of positioning within that industry and he identifies two basic types of advantage and hence competitive focus. • Cost Leadership: firms pursuing this must aim to be the lowest-cost producer, but still be able to compete in terms of product function and quality. • Product Differentiation: firms pursuing the competitive strategy of product differentiation must aim to produce goods and services that have certain unique dimensions that make them attractive to customers. It involves adding those attributes and features which distinguishes the firm’s products from those of the competitors. Customers should be willing to pay premium for this product. Murad Rattani

Limitations of Porter’s competitive strategies. Porter’s approach is based on simplicity and logic, however business environment is not that easy. There are some constraints on the effectiveness of these strategies such as • Every firm wants to reduce their costs to increase their profits even those who offer premium products for e.g. by adopting JIT approach or lean production. • There is a limitation to which the firm can reduce the cost. Firms cannot reduce the cost at the expense of the quality. • Differentiation may be short-lived as the firm emulate each other. For e.g. BA introduced beds as part of their first-class service on long-haul flights. They were soon followed by Singapore Airlines, and Virgin announced plans to offer double beds as an option. Murad Rattani

Ansoff’s Matrix Source:www.marketingteacher.com/.../lesson_ansoff.htm Murad Rattani

Ansoff’s matrix Market Penetration In this growth strategy we market the existing products to the existing customer. The company tries to increase revenue by repositioning or branding but does not change either the product or the market. Murad Rattani

Ansoff’s matrix Market Development In this growth strategy, the company promotes the existing product in the new market. This could also involve exporting or promoting in a new region. Murad Rattani

Ansoff’s matrix Product Development In this growth strategy, the company redevelops, add new features and sells the innovated product to the existing customers or in the same market. Murad Rattani

Ansoff’s matrix Diversification The company develops new products for the new market. It could be related or unrelated. Related Diversification: A soup manufacturer diversifies into cake manufacturer. Unrelated Diversification: For e.g. a soup manufacturer diversifies into auto industry. Murad Rattani

Integrative strategies • Horizontal Integrative strategies (for e.g. mergers and takeovers). • Vertical Integrative strategies

Growth through Vertical Integration • Types of vertical integration • backward integration ('upstream' integration) • forward integration ('downstream' integration) Murad Rattani

Growth through Merger • Mergers and takeovers • distinction between mergers and takeovers • Motives for mergers and takeovers • growth • economies of scale • monopoly power • increased market valuation • reduced uncertainty • Opportunities • To avoid being taken over • Geographical expansion Murad Rattani

References David Needle, 2004, Business in Context, An introduction to business and its environment (ISBN: 978-1-86152-992-3), pgs: 754-756 Ian Marcouse, The Business Studies Teachers’ Book (ISBN: 0340-73763-8), 1999 www.marketingteacher.com/.../lesson_ansoff.htm (accessed on 19-11-09) Murad Rattani

Strategic Choices