Unit 3: Business Analysis and Strategy PDF

UNIT 3: BUSINESS ANALYSIS AND STRATEGY Strategy and Implementation STRATEGIC DECISIONS TACTICAL DECISIONS OPERATIONAL DECISIONS Business Ob...

UNIT 3: BUSINESS ANALYSIS AND STRATEGY Strategy and Implementation STRATEGIC DECISIONS TACTICAL DECISIONS OPERATIONAL DECISIONS Business Objectives and Strategy Long-term Medium-term Short-term Strategy is the way a business operates in order to achieve its aims and objectives. The formulation of strategy is basically the same thing as constructing a business plan. Involves high commitment of resources Less resources involved Few resources involved Implementation is putting the plan into practice. Can be changed in a reasonably short A plan should not be rigid; it should be sufficiently flexible Difficult to reverse Fairly easy to reverse time-scale to allow for changing circumstances. It should include a feedback loop to regularly check if the plan is working and Usually taken by senior management Usually taken by middle management Usually taken by junior management adapting it as and when necessary. The setting and achievement of objectives within a large Made infrequently Made occasionally Made regularly business is a hierarchical process, which starts at the top with the setting of a corporate strategy and is put into action by business functions that design strategies to fulfil objectives: Corporate Strategy is concerned with the strategic Tactical Decisions decisions a business makes that affect the entire business. Tactical decisions are medium-term decisions made by At the corporate level, strategy is concerned with setting Corporate Strategy objectives for overall financial performance, proposed middle managers. They follow on from strategic decisions and aim to meet the objectives stated in any strategic plan. mergers or acquisitions, long term human resource Strategic Direction planning and the allocation of resources to different A corporate objective may be to grow market share and in business divisions. order to do this a business may have to widen distribution channels or improve web presence. Again, these decisions Divisional Strategy Strategic Direction is a course of action that ultimately are tactical in nature. Tactical decisions are also adaptable leads to the achievement of the stated goals of the - the tactical approach can change to adjust to changing Function Level Strategy corporate strategy. Once the corporate strategy is market conditions even though the corporate objectives established then the strategic planning that follows is used have not changed. to establish the strategic direction, i.e. sets out in broad There are three main types of decisions: terms of how the objectives will be achieved. Strategic decisions concern the general direction and Divisional Strategy the overall corporate strategy will be The Corporate Plan overall policy of a business. communicated to the divisional managers. This information A corporate plan is a statement of organisational goals to Tactical decisions tend to be medium-term decisions shapes the plans the divisional managers create. be achieved in the medium- to long-term. It will be based which are less far-reaching than strategic decisions. on management assessments of market opportunities, the Functional Strategy relates to a single functional operation economic situation and the resources and technologies Operational decisions are administrative decisions that such as: production, marketing or HRM and the activities available to the business. It will make clear measurable will be short-term and carry little risk. involved within each of these functions. The decisions objectives and formulate strategies for achieving these made at this level of strategy are guided and limited by objectives. The corporate plan will include methods for the higher level corporate and divisional strategies and will SWOT support those strategies. monitoring the achievement of objectives and the tactical decisions made to achieve these objectives. A SWOT analysis is used to identify and analyse the internal strengths and weaknesses of an organisation, as well as the external opportunities and threats created by Definition Example the business and economic environment. SWOTs are often used when developing corporate Effective distribution networks objectives, or on a smaller functional scale such as Strong brand identity A strength is only a strength when a a marketing strategy. This analysis looks at both the Strengths High staff motivation things that the business can control, its strengths and S [Internal] business is good at something and also Thought of as a price leader takes advantage of this strength. weaknesses and the factors that are beyond its control, the Good industrial relations opportunities and threats that it faces. High levels of productivity The objective of using a SWOT is the development of Limited product range A weakness occurs when a business a strategic plan that considers many different internal Poor investment record in technology Weaknesses performs poorly in an important area of and external factors and maximises the potential of the W [Internal] operations or when it fails to take advantage High levels of staff turnover strengths and opportunities whilst minimising the impact Failing to achieve industry benchmarks of an existing strength. of the weaknesses and threats. Bad debt or cash-flow problems Benefits of carrying out a SWOT analysis: Changes in technology and competitive An opportunity is an external condition that It makes a business assess its current market position in structure of markets could positively impact on the business’s Opportunity Changes in government policy related to terms of its strengths and weaknesses. O [External] performance and improve competitive the business’s field It enables a business to build on its strengths and advantage provided positive action is taken Changes in social patterns, population protect itself against its weaknesses. in time. profiles, lifestyle changes, fashion etc. It will show where there are market opportunities to exploit. Economic recession Changing consumer incomes or tastes It will enable a business to reduce the impact of any A threat is an external condition that could New product launches by competitors threats. Threats have a negative impact on the business’s T [External] performance and reduces competitive Environmental legislation New or increased taxes Drawbacks of carrying out a SWOT analysis: advantage. New technologies being used by It may be assumed that all strengths, weaknesses, competitors opportunities and threats have been thought of, whereas something important might have been missed which means the business may take a wrong direction. Using The Swot The Bargaining Power of Suppliers There may be unexpected exogenous shocks, such as a Once the SWOT has been completed, the information can Suppliers want to maximize their profits. The more power recession. be used to help develop a strategy that uses the strengths a supplier has over its customers, the higher prices it and opportunities to reduce the weaknesses and threats can charge and the more it can reallocate profit from and to achieve the objectives of the business. the customer to itself. Limiting the power of its supplier, Porters Five Forces therefore, will improve the competitive position of a An effective SWOT will allow a business to: business. It has a variety of strategies it can use: Michael Porter outlined five forces or factors which build on strengths determine the profitability of an industry. He argued that Backward vertical integration (taking over a supplier). resolve weaknesses the aim of competitive strategy is to cope with and ideally exploit opportunities Seek out new suppliers to create more competition change those forces in favour of the business. avoid threats. between its suppliers. Where the collective strength of those five forces is Engage in technical research to find substitutes for a favourable, a business will be able to earn above average particular input. rates of return on capital. Where the collective strength of Threat of New Entrants Minimize the information provided to suppliers in the five forces is unfavourable, a business will be locked order to prevent the supplier realising its power over into low or wildly fluctuating returns. If businesses can easily come into an industry and leave customers. it again if profits are low, it becomes difficult for existing Threat of New Entry: Competitive Rivalry: businesses in the industry to charge high prices and make - Time and cost of entry - Number of competitors high profits. This can be countered by erecting barriers to - Specialist knowledge Threat of New - Quality differences entry to the industry. These may take the form of: Bargaining Power of Buyers - Economies of scale Entrants - Other differences - Cost advantages - Switching costs Applying for patents and copyright to protect its Buyers want to obtain goods and services for the lowest - Technology protection - Customer loyalty intellectual property. price. If buyers or customers have considerable market - Barriers to entry - Costs of leaving market power, they will be able to beat down prices offered by Attempting to develop strong brands which attract customer loyalty and make products less price sensitive. suppliers. Strategies to reduce the bargaining power of customers are: Spending large amounts of money on advertising. Rivalry Pricing. Forward vertical integration (taking over a customer). Bargaining Among Bargaining Power of Existing Power of Make it more expensive for customers to switch Suppliers Competitors Buyers to another supplier. (For example, games console Threat of Substitutes manufacturers make their games incompatible with any other games machines.) Supplier Power: Buyer Power: The more substitutes there are for a particular product, the - Number of suppliers - Number of customers fiercer the competitive pressure on a business making the - Size of suppliers - Size of each order - Uniqueness of service - Differences between product. A business can reduce the number of potential - Your ability to substitute Threat of competitors substitutes through: Rivalry Among Existing Business - Cost of changing - Price sensitivity Substitutes - Ability to substitute Research and development and patenting the The degree of rivalry among existing business in an Threat of Substitution: - Cost of changing substitutes themselves. (Sometimes a business will buy industry will also determine prices and profits for any - Substitute performance the patent for an invention from a third party and do single business. Businesses can reduce rivalry by: - Cost of change nothing with it simply to prevent the product coming to market.) Forming cartels or engaging in a broad range of anti- Marketing tactics, such as predator (destroyer) pricing. competitive policies. (In UK and EU law this is illegal but Ansoff Matrix is not uncommon.) Taking over their rivals (horizontal integration). (This Definition: The Ansoff matrix outlines the options open is legal, but Competition Law may prevent it from to businesses if they wish to grow, with a view to increase Product Development happening.) profitability and revenue. The Ansoff matrix considers whether the marketing strategy is targeted at existing Involves the development of new products for existing Not competing on price but competing by bringing out customers or new customers and if existing products markets. new products, and through advertising. should be used or alternatively, if new products should be Improve or relaunch the product into existing markets developed. by changing an existing product (for example, PRODUCTS repackaging or adding extra ingredients). Market Development Existing New Developing new products (such as Mars ice cream). Finding and developing new markets for existing products. Requires businesses to innovate and look at new ways There are two broad market development strategies. of extending the product life cycle of their existing Identifying users in different markets with similar Existing Market Product Penetration Development products. needs to existing customers (the market could be in a Strategy Strategy different country). This strategy can be risky as different counties have different tastes and needs – the product MARKETS Diversification may have to be adapted. Also new distribution channels may have to be used. Developing new products and new markets. Identifying new customers who would use a product It involves offering a new product in a different area. in a different way. For example, using Lucozade as a Market sports drink rather than something to have next to Diversification It is when a business expands its activities outside its New Development your bed when you have flu or measles. Repackaging Strategy normal range, for example, farmers starting up quad Strategy and resizing the product may open a new market. biking or Cadbury’s moving into the market for toilet bleach. For example, a business selling food to the hotel or restaurant market may start selling to consumers by Developing new products for new markets involves repacking the product in small quantities. changes to both a business’s product and market. Market Penetration Diversification may be attempted if a business sees a new opportunity and has investment funds available. Concentrating on sales of existing products to existing Diversification carries the greatest level of risk Reasons for Takeovers and Mergers markets. (compared with market penetration, which is low risk Takeovers can help a firm grow. As a result, it can Attracting customers who have not yet become regular and the other two options considered as medium risk benefit from economies of scale such as bulk users, but are occasional users, by increasing brand strategies) because it involves changes in both the purchasing; manufacturing economies; use of specialists loyalty. market and the product. Virgin Trains have had limited and marketing economies of scale. success, but Virgin Money has been more successful. Taking customers from competitors (aggressive Increased market share leads to increased market pricing). Internet service providers are continually trying Diversification spreads risk for a business as it allows a power in the market and a reduction in competition. to win customers from competitors through pricing business to reduce its reliance on existing markets and Diversification – businesses will benefit from spreading strategies and promotional activities. products. If sales are falling for existing products or in their risks across several products and markets. existing markets, then a successful launch and growth Persuading existing customers to increase Acquiring new products and technology. A takeover is of a new product in a new market can help to maintain usage perhaps by reducing the price or offering one way of acquiring technology that may be protected the overall performance of the business. promotions e.g., Sky offers packages or bundles to by patent or may be expensive or time consuming to get existing customers to increase their monthly develop internally. subscription. Types of Integration Strong brands also are likely to attract a high degree of customer loyalty, which also reduces risk and allows for long-term planning. Business Growth Control of supply chain. Organic growth or internal growth is when a business Vertical Forward – when a business expands by selling more of its existing products/expansion. takes over another business further Rapid growth. This is a less risky but slower growth strategy. This can be up the chain of production. Higher returns to shareholders. achieved by: Benefit from synergy – the two businesses fit together Expanding the product range in a way that allows costs to be reduced and profits increased. Targeting new markets Acquisition of technology and expertise. Expanding the distribution network, such as opening more stores or selling in new places. Underperforming management teams can be removed Lateral – Horizontal – giving an immediate boost to performance. when a when a External growth is growth by acquisition, takeover or business business merger. A quicker method of growth than organic growth. takes over TOY SHOP takes over It can be via mergers, takeovers or acquisitions. a firm in a firm in the same the same FRANCHISE Arguments for growth: Eliminate competition; increase sector but sector and market share; exploit new markets; benefit from economies in a similar in the same of scale. industry. industry. FRANCHISE Arguments against growth: Costs involved; issues with HR; diseconomies of scale; bad publicity. FRANCHISE Vertical Integration Conglomerate – Vertical Backwards – Definition: The merging of two businesses at different when a business when a business stages of production. This can be Forward Vertical takes over another takes over another Integration or Backward Vertical Integration. totally unrelated business back down the business. chain of production. Benefits of Vertical Integration: FRANCHISE Security of supplies and control of suppliers’ prices. FRANCHISE Improves supply chain co-ordination. Can guarantee the quality of its raw materials. Horizontal Integration Security of distribution outlet for products. Definition: The merging of business which are at the same Can determine standard of outlets/shops. stage of production. Often the firms are both providing the FRANCHISE same service and selling similar goods. Use of outlets to determine brand image. Keeps all profit – no middlemen – increased profit Benefits of Horizontal Integration: margins means not having to buy raw materials from a Removes some of the competition – possibly for third-party outlets. defensive reasons. Control over quality. May benefit from increased economies of scale. Possible benefits of economies of scale. Increases market power to compete with market FRANCHISE leaders by spreading the brand. Synergy – the two businesses joined together may form FRANCHISE Franchises an organisation that is more powerful and efficient than the two businesses operating on their own. It’s a quick Definition: A franchise is the legal right to use the brand way for a business to expand the business as opposed name, products and business style of an existing business. to growing it internally. McDonald’s restaurants, for example, often operate as franchises. A business-person has paid McDonald’s a fee to Increased capital of merged businesses. open a franchise of McDonald’s. The franchisee (the person who has bought the franchise) now has the right to use the Opportunity to cut costs, for example combining HR/ Expanding via Franchising or Opening ICT services. business model, brand, business style etc. in a specific area. Combination of new ideas/innovation. Own Stores Benefits of expansion through franchising: many businesses already have many franchises Franchisor and evidence suggests that they are successful Franchisee Definition: The franchisor is the individual who owns the receipt of royalties business which is being franchised out. Definition: The franchisee is the individual who is buying into the franchise. no need to find finance to set up because that is the Benefits for the Franchisor: role of franchisee Benefits for the Franchisee: no need to find sites because that is the role of Extra commitment from franchisees. May be supported by national advertising/promotion. franchisee Able to expand the market and sales quickly. Reduced risk of failure as they are selling an already able to expand the market and sales quickly Increased revenues e.g., in the form of monthly royalties proven product or service which makes it easier to get which must be paid even if the franchisee makes a loss. expansion can be achieved relatively cheaply loans from the bank to fund business ventures. Risks and uncertainty are shared. employees are the responsibility of the franchisee Support is offered by the franchisor e.g., full training, Initial fee – what the franchisee must pay to buy into and start-up equipment such as materials. can take advantage of enthusiasm/commitment of the franchise. franchisees Retaining a degree of independence. Expansion can be achieved relatively cheaply. do not suffer losses of individual outlets Disadvantages for the Franchisee: do not have effort/cost of running individual outlets Disadvantages for the Franchisor: Cannot operate with same level of freedom as an spreading of risks Franchisees may not operate in a satisfactory manner ordinary business because of the franchise agreement. and the reputation of the business may be damaged statistics tend to suggest that franchise businesses Franchisee cannot sell the business without the generally do well. which may result in bad PR. franchisor’s permission. Franchise agreements must be carefully drawn up or In some franchises the franchisor can end the franchise Benefits of expansion through opening of own shops: disputes could occur. without reason or compensation. retain independence Could the franchisor effectively recruit, support and Franchisee must make regular payments to the control of expansion service many franchisees? If not dissatisfaction and franchisor. This is a royalty fee. poor practice could result. will keep all profits Does not have complete control of the day to day avoids training and administration associated with running of the business. setting up franchises can reap benefits from economies of scale.