3-1-2-theories-of-corporate-strategy

Development of corporate strategy

• A successful corporate strategy helps to provide a competitive advantage

• Effective corporate strategy development requires careful consideration of a range of internal factors and the external environment in which the business operates

  • Internal factors include the human and capital resources available

  • External factors include the economic and political environments

• Two strategic models used to develop a corporate strategy are the Ansoff matrix and Porter’s strategic matrix

The Ansoff matrix

• The Ansoff matrix is a tool for businesses with a growth objective

• It is used to identify an appropriate corporate strategy and the level of risk associated with the chosen strategy

• The model considers four elements, which are broken down into two categories:

  • The market — existing and new markets

  • The product — existing and new products

The Ansoff matrix: strategies for growth

• The least risky strategy to achieve growth is to pursue a strategy of market penetration 

  • This involves selling more products to existing customers by encouraging:

    • More regular use of the product

    • Increased use of the product

    • Brand loyalty of customers

• Market development involves finding and exploiting new market opportunities for existing products by:

  • Entering new markets at home or abroad

  • Repositioning the product by selling to different customer profiles (selling to other businesses as well as directly to consumers)

  • Seeking complementary locations

    • For example, M&S Food has achieved significant growth since teaming up with fuel retailers such as BP and Applegreen and providing express retail outlets

• Product development involves selling new or improved products to existing customers by:

  • Developing new versions or upgrades of existing successful products

  • Redesigning packaging and aesthetic features

  • Relaunching heritage products at commercially convenient intervals

    • For example, Cadbury relaunches Christmas-themed products each year, often with a subtle design change, to recapture the interest of customers

• Diversification is the most risky growth strategy, as it involves targeting new customers with entirely new or redeveloped products

  • Examples of diversification include:

    • Tesco launching a range of financial products, including current accounts and credit cards

    • Greggs launching a range of themed clothing products

Porter’s generic strategic matrix

• Porter’s generic strategic matrix identifies a range of strategies a business might adopt, considering:

  • Its source of competitive advantage (cost or differentiation)

  • The scope of the market in which it operates (mass or niche)

• Porter argues that failing to adopt one of these strategies risks a business being “stuck in the middle” and unable to compete successfully with rivals in the market

Porter’s generic matrix

• Businesses operating in the mass market should adopt either a cost leadership or a differentiation strategy, depending on what it is that makes them stand out from their competitors

  • Businesses that have a significant cost advantage over competitors should exploit this as much as possible to achieve success, which is called cost leadership

  • Businesses that are unable to operate as the most competitive on cost should adopt a strategy of differentiation 

• A business that operates in a niche market should adopt a focus strategy that closely meets the needs of its specific group of customers

  • A cost focus involves being the lowest cost competitor within the market niche

  • A differentiation focus involves offering specialised products within the niche market

Portfolio analysis

• Portfolio analysis involves a business carrying out a detailed evaluation of its full range of products so that appropriate strategies may be identified and pursued

Boston matrix

• The Boston Matrix is a portfolio analysis tool that considers the relative market share of a firm’s products and the rate of growth within the market in which each product is sold

• Stars are products sold in high-growth markets and have a high level of market share

  • Stars require some ongoing investment to maintain their market position and, if managed well, they are likely to become cash cows in the future

  • A market penetration strategy to increase sales revenue and maximise market share is likely to be appropriate

• Cash cows are sold in lower-growth markets and have a high market share

  • Cash cows generate more cash than they need to maintain their market position and can be used to fund the development of other products in the portfolio

  • Businesses may seek new markets for these products if they are relatively risk-free 

• Question marks are sold in high-growth markets and have a relatively low market share

  • Question marks require significant investment if they are to improve their level of market share and become stars

  • There is a risk that question marks will become dogs when market growth rates slow

• Dogs are sold in low-growth markets and have a relatively low market share

  • Dogs have little potential for future growth and should be divested so that finance and effort may be invested in other products

Achieving competitive advantage through distinctive capabilities

• When a business has a particular strength that is very difficult for competitors to copy, it has a distinctive capability

• The nature of that distinctive capability will determine the aims and objectives of the business and the strategies it will pursue to achieve them

Examples of distinctive capabilities