Business strategy
Business strategy
What is strategy?
A business strategy is the means by which a
business sets out to achieve its desired objectives. It
can be described as the long-term plan of a
business. Typically a business strategy will cover a
period of the next 3–5 years and look to set out the
overall direction of the business.
Business strategy
Types of strategy
There are two main categories:
(1) generic (general) strategies
(2) competitive strategies
Business strategy
Generic strategies
The main types of generic strategies that a business may use are:
(1) Market dominance through internal growth (e.g. expanding assets)
and in developing new products, and acquisitions (mergers and
takeovers).
(2) Globalisation i.e. moving operations into more and more countries.
For example, Whole Foods entering the UK market.
(3) Retrenchment involves cutting back to focus on your best lines. The
Americans refer to this as ‘sticking to the knitting’.
(4) Restructuring: a complete rethink of the way the business is
organised using a range of techniques such as delayering (which involves
flattening the management structure, removing bureaucracy and speeding
up decision making).
Business strategy
Competitive strategies
Competitive strategies are concerned with doing things better than rivals.
There are two main ways of being competitive:
(1) Cost leadership: selling goods at lower prices than rivals. This is possible
when a firm is the market leader and benefits from economies of scale.
(2) Differentiation: making your product different from competitors enables
you to charge a higher price if desired.
For example, the airline industry is divided into two main segments. At one end
of the market are the premium price firms such as Virgin and Emirates that
concentrate on differentiation. They offer better service to passengers, more
legroom and better in-flight entertainment. At the other end of the market the
emphasis is on being the lowest-cost producer, exemplified by ‘no frills’ airlines
such as easyJet and Ryanair. Ryanair focuses on short-haul destinations and
keeping its planes in the air as frequently as possible in a 24 hour period.
Business strategy
Theorist:
Porter’s generic model
Porter argued that there are two major strategies a business should focus
on:
(1) Cost leadership: be the cheapest and most cost-effective product.
(2) Product differentiation: your product is the most innovative and
different on the market. This attracts customers and generates large
profits.
Porter argued that the big danger is that a firm is both moderate in terms
of cost and moderately differentiated — this attracts few customers to the
product. It is better for the business to focus on one of the two strategies.
Business strategy
Theorist:
Ansoff’s matrix
Ansoff’s matrix suggests four alternative marketing strategies that hinge on whether
products are new or existing. They also focus on whether a market is new or existing.
Within each strategy there is a differing level of risk.
Business strategy
Market penetration
Market penetration is about increasing the market share of an
existing product. It is the most common type of strategy, as it
is usually the safest. This is because the business already has
the expertise and experience in the sector.
A typical example would be a business using promotional offers
such as buy one get one free (BOGOF) to increase sales and
therefore market share.
Business strategy
Market development
Market development is a little more risky, as it involves finding
new markets for existing products. A business can do this by:
• repositioning a product
• moving into new markets (geographical)
An example is Cobra Beer in the UK. Initially it was only sold in
Indian restaurants, but the strategy of its owner was to expand
into the airline, supermarket and pub markets.
Whole Foods entering the UK market is another example.
Business strategy
Product development
Product development is riskier still. This is because you are
looking to develop a new product in an existing market, and
product development is time consuming, lengthy and expensive
in terms of research and development. For example, Tesco
developed the Tesco Express brand in the UK market. It had
the same customers but was a new product for Tesco.
Innovation is key and this can be profitable if the right product
is developed e.g. Dyson vacuum cleaners.
Business strategy
Diversification
This involves moving new products into new markets. It is the
most risky strategy. The more an organisation moves away
from what it has done in the past, the more uncertainties are
created. However, if existing activities are threatened,
diversification helps to spread risk.