by Sean Purcell
Relevant to Paper 12 (Professional)
One of the main problems faced by students at Module F is how to apply
the concepts that are discussed in Paper 12 Management and Strategy. Early
on in their preparation most students feel comfortable with all that is
discussed in Paper 12 and many develop a false sense of security
preferring to concentrate on what seems to be an overwhelming amount of
information for Papers 13 and 14. It is only when students enter the
revision phase do they realise that you need to do much more than just
learn the notes in order to pass the exam. The main skill that a student
needs to develop is an ability to apply the acquired knowledge in a
scenario situation. The following article provides an insight into how to
apply your knowledge effectively.
In the previous article we established how the complexities of
strategic planning could be broken down into three main areas:
- Strategic analysis.
- Strategic choice.
- Strategic implementation.
The previous article comprehensively explained strategic analysis by
breaking it down into three questions:
- Where do we want to go? (think stakeholder constraints)
- What constraints exist on our resources? (think 6Ms)
- What are the key threats from the external environment? (think
LePEST and 5 Forces)
In this article we are going to try to adopt a similar simplification
approach to the issues of strategic choice and strategic
Johnson and Scholes break down the issue of
strategic choice into three distinct subheadings which are:
- On what basis do we decide to compete?
- Which direction should we choose?
- How are we going to achieve the chosen direction?
On what basis do we decide to compete?
A useful framework to
use here is Porter’s Generic Strategies. Michael Porter stated that a
firm, which is wishing to obtain competitive advantage over its rivals, is
faced with two choices:
Is the company seeking to compete by achieving lower
costs than its rivals achieve and by charging similar prices for the
products and services, which it offers, thereby achieving advantage via
Is the company wishing to differentiate itself and the customer is
prepared to pay a premium price for the added value which the customer
perceives in the product, and thereby enjoys greater margin than the
What is the scope of the area in which the company
wishes to obtain competitive advantage? Is it industry-wide or is it
restricted to a specific niche?
The answers to these two choices leave the organisation faced with
three generic strategies, which are defined as:
- Cost leadership.
1. Cost leadership
Set out to be the lowest cost producer in
an industry. By producing at the lowest possible cost the manufacturer can
compete on price with every other producer in the industry and earn the
highest unit profits.
In order to achieve cost leadership some of the following need to be in
- Seek to set up production facilities for mass production as these
will facilitate the economies of scale advantages to be achieved.
- Invest in the latest technology – improved quality less labour
- Seek to obtain favourable access to sources of raw materials.
- Look to develop product designs that facilitate automation.
- Minimise overhead costs by exploiting bargaining power.
- Concentrate on productivity objectives and constantly seek to
improve efficiency and economy, e.g., ZBB, value chain analysis.
One should also be aware of the drawbacks of such a strategy, such as
the need to continually keep up-to-date with potential changes in
technology or consumer tastes.
A firm differentiates itself from its
competitors when it provides something unique that is valuable to buyers.
Differentiation occurs when the differentiated product is able to obtain a
price premium in the market, which is above the cost incurred to create
As a consequence of differentiation being about uniqueness it is not
really possible to give an exhaustive list detailing how a firm may
differentiate itself. To truly differentiate yourself we must understand
the product or service offered and the customer to whom you are selling
Ways of achieving differentiation
Marketing is used to feign differentiation where it
otherwise does not exist, i.e., an image is created for the product. This
can also include cosmetic differences to a product that do not enhance its
performance in any serious way, e.g., perfume – colour, size,
More substantial but still has no
effect on the product itself, is to differentiate on the basis of
something that goes alongside the product, some basis of support.
This may have to do with selling, e.g., 0% finance, 24 hour
This means the features of the
product, which make it better – not fundamentally different but just
better. The product will perform with:
- greater initial reliability;
- greater long-term durability;
- superior performance.
Differentiate on the basis of design
and offer the customer something that is truly different as it breaks away
from the dominant design if there is one, e.g., Apple’s iMac computer.
Reward of a differentiation strategy
Consumers are likely to
pay a higher price for the goods because of the added value created by the
A focus strategy is based on fragmenting the market
and focusing on particular market niche. The firm will not market its
products industry-wide but will concentrate on a particular type of buyer
or geographical area.
Cost focus: This involves selecting a particular niche in the
market and focusing on providing products for that niche. By concentrating
on a limited range of products or a small geographical area the costs can
be kept low.
Differentiation focus: Select a particular niche and concentrate
on competing in that niche on the basis of differentiation, e.g., luxury
This can be summarised in the following diagram:
We stated that the alternative directions available to a business could
be described in general terms as follows:
- Do nothing.
- Market penetration.
- Product development.
- Market development.
This involves following the current strategy
whilst events around change and can often prove to be a successful
short-term strategy. Basically if an organisation is exposed to some form
of competitive threat its short-term objective is to not react and hence
get involved in what could be an expensive decision.
Sell out/withdraw from the market
This may be followed so as
to maximise the return on a business, which may be at the top of its cycle
and hence will be in line with the goal of maximisation of cash flows.
Withdrawal from a business sector may be chosen to give the business more
focus, e.g., Richard Branson’s decision to sell his original business
Virgin Records to concentrate on the airlines business.
This involves increasing the market share
in the current market with the current product. Market share can be
enhanced by such techniques as improved quality, productivity or increased
This involves introducing a new product
into the current market. The product change is often the result of changes
and modifications to an existing successful product, e.g., Mars ice cream.
This is an alternative to the present product and builds upon present
knowledge and skills.
In this case the organisation keeps its
tried and tested products but tries to apply them to different market
segments. This strategy maintains the security of the present product
whilst enabling extra revenue to be generated from new segments, e.g.,
McDonald’s and its geographic market development.
This is the most risky of the product market
strategies as it involves the introduction of a totally new product in a
new market. Diversification can either be related or unrelated.
This involves development of the
product and market but still remaining within the broad confines of the
industry. There are three main types.
- Backward. A development into the business which inputs into
the present business, e.g., move up the supply chain into raw material
- Forward. A development into activities concerned with a
company’s outputs also called downstream integration, e.g., move down
the supply chain into distribution activities.
- Horizontal. Movement into activities which are competitive
with existing activities, e.g., to benefit access to market or
This involves movement into
industries which bear little relationship to the present one and is often
the result of a profit motive.
Ansoff represented the last four choices in his product/market
The final problem that must be overcome is to decide how
the chosen strategic option should be undertaken.
- internal development;
- external development/acquisition;
- joint development.
A formal agreement between two or more
organisations to undertake a new venture together, e.g., Airbus (spreading
Often undertaken to
maintain the present equilibrium within the company as it is much less
disruptive than an acquisition. Another reason may be that there is not
sufficient finance available for an acquisition or that the government may
prevent acquisition/merger through legislation.
- If there is sufficient finance available an acquisition will provide
a very quick way of providing access to new product/market areas and the
new organisation will have economies of scale advantages.
A formal agreement between two or more
organisations to undertake a new venture together, e.g., Airbus (spreading
Methods of joint development
- Consortia. Two or more firms working together to share the
costs and benefits of a business opportunity.
- Joint venture. A separate business entity whose shares are
owned by two or more business entities.
- Strategic alliance. A long-term agreement to share knowledge,
technology or business opportunities.
- Franchising. The purchase of the right to exploit a business
brand in return for a capital sum and a share ofprofits or turnover. The
franchiser also usually provides marketing and technical support to the
purchaser of the franchise.
- Licensing. The right to exploit an invention or resource in
return for a share of proceeds. Differs from franchise because there
will be little central support.
To summarise then we can use the following diagram:
Once all the alternative options have been generated we need to
evaluate their appropriateness before making a choice. A useful framework
to apply when considering the appropriateness of an option is:
Suitability identifies the extent to which the
proposed strategy enhances the situation identified in the strategic
analysis. The following questions need to be addressed about the strategic
- Does it close the planning gap?
- Does it address threats and weaknesses?
- Does it build on identified strengths and exploit opportunities?
- Does it fit in with the organisation’s mission?
The issue of feasibility evaluates whether the
chosen strategy can be implemented successfully. The resources the
organisation has at its disposal will obviously determine this. To save
time simply think about the 6Ms.
The final issue to address is whether the
selected strategy will meet the expectations of the key stakeholders in
the firm and typical issues to be looked at would include the level of
risk and return resulting from the option.
Remember that in the examination it is unlikely that you are going to
get a question, which asks you to regurgitate the information on strategic
choice in the way in which I have just explained to you. Questions will
normally touch on some part of the process we have described and if you
have an in-depth understanding of everything which we have covered you
will be able to construct much more comprehensive arguments in the exam
and we will show this in a previous exam question later.
The area of strategic implementation
covers almost all of the areas of the Paper 12 syllabus covering
everything from project management to structure. However as with strategic
analysis and strategic choice it is possible to simplify the issues in to
a number of key sub-headings:
- Resource management.
- Organisational structure.
- Management of change.
This will ensure that the 6Ms are working
for you in the best way possible. Budgets and other performance management
tools are likely to be used here.
This will deal with issues regarding
the levels of centralisation and decentralisation, together with
structural form and style of management.
Management of change
The scope, speed and style of the
changes need to be carefully reviewed in order to obtain full commitment
to them. A useful model of change to remember is Kurt Lewins three-step
model, which involved:
For the change to take place the existing
equilibrium must be broken down before a new one can be adopted.
Is the second stage, mainly concerned with
identifying what the new, desirable behaviour or norm should be,
communicating it and encouraging individuals and groups to ‘own’ the new
attitude or behaviour. To be successful, one should consider the adoption
of the following management styles to improve the acceptance of the
- Participation with employees affected by the change so they feel
more of a sense of ownership.
- Education and communication of the new ways so that they fully
understand what is going on and not in a situation where they are afraid
of the unknown and therefore show resistance.
- Negotiation may also be appropriate if there are large group
stakeholders such as a trade union.
Refreeze is the final stage, implying consolidation or
reinforcement of the new behaviour. Positive reinforcement (praise,
reward, etc.) or negative reinforcement (sanctions applied to those who
deviate from the new behaviour) may be used.
Therefore to summarise what we have just said:
On what basis do we decide to compete?
(Porter’s generic strategies.)
Which direction should we choose?
(Ansoff’s product market matrix, do nothing, withdraw.)
How are we
going to achieve the chosen direction? (internal external joint
Organisational structure (centralisation, decentralisation,
specific structural form)
Management of change (unfreeze, change,
Let us see how we can expect to get questioned in this area in the
ACCA Paper 12 June 1998 examination
Gulsand is the owner and chief executive of a chain of twenty sports
equipment shops, Sportak. These shops are clustered in the south of the
country. The company is privately owned by the family and the freeholds of
these shops, which the company owns and which are on prime retail sites
account for the majority of the assets of Sportak. The company sells a
wide range of sports equipment such as golf clubs, tennis, skiing
equipment, soccer and other sports equipment. Recently it has expanded its
range to include certain types of designer sports clothing.
The company was founded by Jerome’s father a quarter of a century
earlier when he opened his first small shop. Over the next twenty-five
years the company grew steadily. A major reason for this successful
development lay with the philosophy of Jerome’s father who delegated much
of the decision-making to the individual shop managers. He believed that
this gave the local managers a higher degree of motivation. It also
allowed them to respond to local demand conditions as stock ordering was
carried out by each shop and was not organised at the head office. The
managers were also permitted to develop local marketing activities, using
sales promotions and publicity as they felt appropriate. These shop
managers were remunerated partly by a basic salary and partly by a
sales-related performance bonus which could be up to 40% of their basic
salary. These methods of operation were satisfactory whilst the company
was operating in a steady growth environment. However, by late 1997 there
was evidence that Sportak’s overall position within the market was
weakening. Sales had stabilised but even more importantly competition was
growing from a number of discount traders who were prepared to operate on
low profit margins but with larger volumes. It was at this time that
Jerome took over the company from his father.
Jerome was impatient with the lack of growth. By nature he was an
entrepreneur who sought growth. He was not sure that the steady organic
growth was appropriate to these conditions. His father’s policy had been
to open a store each year, funding this growth out of current earnings.
Jerome saw that the market was becoming so competitive that even small and
specialist markets were proving to be vulnerable. He believed that only
the big, nation-wide retail chains would survive and that the smaller
sized groups would be taken over by the larger chains of sports goods
retailers who were more profitable and had greater capability to raise
finance. He decided that a ‘dash for growth’ was required if the company
was to achieve the critical size to survive in the market place. It had
been suggested to him that the franchising of the Sportak brand name would
be a reasonable and relatively risk-free method of expansion. Growth,
using other people’s money has its advantages, but it did not appeal to
Jerome. He wanted a more ‘hands-on’ approach.
At about this time another chain of fifteen sports shops became
available for purchase. This group was in a distinctly separate area of
the country – about 150 miles from Sportak’s current area of operations.
As the overall sports equipment and sports wear market was still growing,
the price being asked for this acquisition was rather high. However Jerome
was convinced that this was too good an opportunity to miss. He believed
that Sportak needed this expansion so as to take advantage of the
profitable sales still available in this sector. However for an
acquisition of this size it was obvious that the growth could not be
funded internally. Jerome assumed that he might use the freeholds of the
properties Sportak owned as securities for the finance the company needed
to borrow. Before approaching the bank Jerome discussed this issue with
his accountant and offered the following ideas for his proposed
In anticipating this proposed expansion and the need to manage an
enlarged group Jerome believes that it is time for a strong and
centralising leader. Recognising that the current system of product
ordering is delegated to individual store managers, he proposes to provide
a centralised purchasing function based upon a warehouse owned and
controlled by Sportak. Individual shop managers will be permitted to
decide upon their stock range but they will have to order from the central
warehouse set up by Sportak.
Jerome has also decided to tackle the problem of marketing, and in
particular, promotion. The decentralised approach adopted by his father
has not brought about the development of a well-known image and therefore
the brand of Sportak needs to be strengthened. Under Jerome’s plan it is
proposed to allocate a substantial budget – 15% of sales – to spend on
press advertising and on public relations: and this level of commitment
will continue for the foreseeable future. Sports personalities will be
paid to appear in all stores which will have to be re-equipped. By a
competent use of merchandising it is hoped that these stores will
increasingly be recognised as centres for influencing the fashion of both
sports equipment and clothing. The shop managers will also be encouraged
to stock more expensive lines of products where the margins will be higher
and, in addition, they will be expected to hold much more stock.