Chapter 5: Strategy selection
Objectives:
In this chapter you will learn more about
the following:
- The Ansoff matrix of product-market
strategies.
- Methods of growth, and the issues to
consider when selecting a strategy.
Chapter 5: Strategy selection
1. Product-Market strategy: Direction of
growth
1.1 Product-market mix
Product-market mix is a short-hand term for
the products/services a firm sells (or a
service which a public sector
organization provides) and the markets it
sells them to.
Ansoff’s Matrix (chapter 5)
Chapter 5 (cont.)
Ansoff’s matrix
- Protect/Build: Current products and current markets
(Withdrawal, consolidation and market penetration)
➢ Withdrawal
The circumstances where complete or partial withdrawal
would be the most sensible course of action:
✓ The organization is unable to secure the resources or
achieve the competence levels of the leaders in the market.
✓ Organization’s unique resources and core competences are
limited.
✓ The expectation of dominant stakeholders may also be a
reason for withdrawal.
✓ Partially withdraw from a market by licensing the rights to
other organizations.
➢ Consolidation
Consolidation is concerned with protecting
and strengthening the organization’s
position in its current markets.
Factors help to sustain a successful strategy
of consolidation:
- Quality
- Marketing expenditure
- Improve productivity through capital
investment (for example, by the
mechanization of routine tasks).
- Strategy of harvesting (gaining maximum
pay-off from its strong position)
➢ Market penetration
→To gain market share but it depends on:
➢ the nature of the market and
➢ the organization’s resources and core competences
and
➢ the extent to which these can be developed:
✓ Market growing?
✓ Static market?
- Market development: Present products and
new markets
Market development is the process by which the
firm seeks new markets for its current products.
Some possible approaches:
+ New geographical areas and export markets
+ Different package sizes
+ New distribution channels
+ Differential pricing policies
- Product development: New products
and present markets
Product development is the launch of new
products (innovation) to existing markets.
+ Advantages:
- Product development forces competitors to
innovate
- Newcomers to the market might be discouraged
+ The drawbacks include the expense and the risk
- Diversification: New products- new markets
Diversification occurs when a company decides to
make new products for new markets (identify
directions of development which take
organization away from its present markets and
its present products at the same time).
Two broad types:
- Related diversification
- Unrelated diversification
Chapter 5 (cont)
Related diversification
Related diversification is ‘development beyond the present product
market, but still within the broad confines of the
industry…[it]..therefore builds on the assets or activities which the
firm has developed (Johnson and Scholes 2002). It takes the form of
vertical or horizontal integration
➢ Horizontal integration is the development into activities which are
competitive with or directly complementary to a company’s present
activities.
➢ Vertical integration occurs when a company becomes its own
supplier or distributor.
- Backward integration
- Forward integration
• Backward integration refers to development into
activities which are concerned with the inputs
into the company current business.
• Forward integration refers to development into
activities which are concerned with a company
outputs.
Eg: Acquisition of a car manufacturer of a component
manufacturer
- Acquiring dairy farms rather than buying raw milk
-Surf
and
OMO
of
Uniliv Coconut
er.
-AJC ??
and
Cooki
es of
Kinh
Do
???
Advantages of vertical integration
- A secure supply of components or materials
- Stronger relationships
- A share of the profits
- Differentiation strategy
- Barriers to entry
Disadvantages of vertical integration
- Over concentration
- Fails to benefit from any economies of scale or technical
advances
Chapter 5 (cont.)
Unrelated diversification
Unrelated or conglomerate diversification is development
beyond the present industry into products/markets
which, at face value, may bear no close relation to the
present product/market.
Unrelated diversification needs to be divided into three
categories:
- Exploiting the current core competences of the
organization.
- Creating new markets
- New competences are developed for new market
opportunities.
Eg: Vietnamese corporation???
Berkshire Hathaway - Warren Buffet
Advantages of conglomerate diversification
- Risk-spreading
- High profit opportunities
- Escape
- Better access to capital markets
- No other way to grow
- Use surplus cash
- Exploit under-utilized resources
- Obtain cash
- Use a company’s image and reputation
Disadvantages of conglomerate diversification
- Dilution of shareholders’ earnings
- Lack of a common identity and purpose
- Failure in one of the businesses will drag down
the rest
- Lack of management experience
Activity 1
Chapter 5 (cont.)
1.2 Diversification and synergy
Synergy occurs when the combined results
produce a better rate of return than would be
achieved by the same resources used
independently. Synergy is used to justify
diversification.
→ Synergy is a commonly cited reason for both
related and unrelated diversification.
Obtaining synergy
- Marketing synergy
- Operating synergy
- Investment synergy
- Management synergy
Activity 2.
GROW
OR
BUY????
Chapter 5 (cont.)
2. Market entry strategies
2.1 Methods of growth
- Internal development (Organic
development) - Building up new businesses
- Acquiring
- Merger
- Joint ventures or co-operation
Chapter 5 (cont.)
a. Organic growth (Internal development)
Organic growth is the primary method of growth for many
organizations, for a number of reasons. Organic growth
is achieved through the development of internal
resources.
Reasons for pursuing organic growth:
- Learning
- Innovation
- No suitable target for acquisition
- Planned more meticulously
- More convenient
- Same style of management and corporate culture
- Hidden or unforeseen losses are less likely
- Economies of scale
Problems with organic growth
- Time
- Barriers to entry
- Acquire the resources independently
- Too slow for the dynamics of the market
b. Acquisitions and Mergers
The purposes of acquisitions
a. Marketing advantages
b. Production advantages
c. Finance and management
d. Risk-spreading
e. Independence
f. Overcome barriers to entry
The reasons for mergers may be similar to those for
acquisitions. However, mergers are more typically the
result of organizations coming together voluntarily.
Chapter 5 (cont.)
Problems with acquisitions and mergers
- Cost
- Customers
- Incompatibility
- Incomplete information
- Driven by the personal goals
- Corporate financiers and banks
- Poor success record of acquisitions
- Firms rarely take into account non-financial
factors
Chapter 5 (cont.)
c. Joint ventures, alliances and franchising
Joint ventures: two firms (or more) join forces for
manufacturing, financial and marketing purposes
and each has a share in both the equity and the
management of the business.
Joint ventures are typically thought of as
arrangements where organizations remain
independent, but set up a newly created
organization jointly owned by the parents.
Motives for joint-ventures
- Share costs
- Cut risk
- Benefit from all sources of profit
- Close control
- Local knowledge, quickly
- Synergies
- Learning
- Technology
- The alliance itself can generate innovations
- Testing the firm’s core competence
Disadvantages of joint ventures
- Conflicts of interest between the different parties
- Disagreements may arise over profit shares,
amounts invested, the management of the joint
venture, and the marketing strategy
- One partner may wish to withdraw from the
arrangement
• Alliances
Concerning with the assets involved in
development.
The form of the alliance is likely to be influenced
by the following:
- Asset management: the extent to which assets
do or do not need to be managed jointly
- Asset reparability: the extent to which it is
possible to separate the assets between the
parties involved.
- Asset appropriability: the extent to which there
is a risk of one or other of the parties involved
appropriating the assets for themselves.
Chapter 5 (cont.)
Franchising is a method of expanding the
business on less capital than would
otherwise be possible.
- The franchiser
+ Name, and any goodwill associated with it
+ Systems and business methods
+ Support services, such as advertising, training
and help with site decoration
- The franchisee
+ Capital, personal involvement and local
market knowledge
+ Payment to the franchiser for rights and for
support services
+ Responsibility for the day-to-day running, and
the ultimate profitability of the franchise
Disadvantages of franchising
- Search for competent candidates
- Control