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The strategic planning process - part 2

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:

  1. Strategic analysis.
  2. Strategic choice.
  3. 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 implementation.

Strategic choice
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:

Choice 1
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 superior profitability?

Or

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 undifferentiated product.

Choice 2
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.
  • Differentiation.
  • Focus.

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 place:

  • 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 needed.
  • 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.

2. Differentiation
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 the differentiation.

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 it.

Ways of achieving differentiation
Image 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, packaging.

Support differentiation
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 delivery.

Quality differentiation
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.

Design differentiation
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 differentiation.

3. Focus
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 goods.

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:

  1. Do nothing.
  2. Withdrawal.
  3. Market penetration.
  4. Product development.
  5. Market development.
  6. Diversification.

Do nothing
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.

Market penetration
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 marketing activity.

Product development
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.

Market development
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.

Diversification
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.

Related diversification
This involves development of the product and market but still remaining within the broad confines of the industry. There are three main types.

  1. Backward. A development into the business which inputs into the present business, e.g., move up the supply chain into raw material inputs.
  2. 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.
  3. Horizontal. Movement into activities which are competitive with existing activities, e.g., to benefit access to market or technology.

Unrelated diversification
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 matrix.

How?
The final problem that must be overcome is to decide how the chosen strategic option should be undertaken.
The options available are:

  • internal development;
  • external development/acquisition;
  • joint development.

Joint development
A formal agreement between two or more organisations to undertake a new venture together, e.g., Airbus (spreading of cost).

Internal development
Reasons
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.

Acquisitions

  • 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.

Joint development
A formal agreement between two or more organisations to undertake a new venture together, e.g., Airbus (spreading of cost).

Methods of joint development

  1. Consortia. Two or more firms working together to share the costs and benefits of a business opportunity.
  2. Joint venture. A separate business entity whose shares are owned by two or more business entities.
  3. Strategic alliance. A long-term agreement to share knowledge, technology or business opportunities.
  4. 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.
  5. 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.
  • Feasibility.
  • Acceptability.

Suitability
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 options:

  • 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?

Feasibility
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.

Acceptability
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.

Strategic implementation
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.

Resource management
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.

Organisational structure
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:

  • Unfreeze.
  • Change.
  • Refreeze.

Unfreeze
For the change to take place the existing equilibrium must be broken down before a new one can be adopted.

Change
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 change:

  • 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:

Strategic choice
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 venture.)

Strategic implementation
Resource management (6Ms)
Organisational structure (centralisation, decentralisation, specific structural form)
Management of change (unfreeze, change, refreeze)

Let us see how we can expect to get questioned in this area in the exam.

Question 1
ACCA Paper 12 June 1998 examination

Jerome 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 expansion.

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.