UFE Results – How to survive failure Part 2

As a strategic planner, you must first identify the strategic options open to your company?s future so as to avoid making costly decisions.

Johnson and Scholes a leading author on strategy breaks the options into three questions namely: On what basis do we decide to compete?
Which direction should we choose?
How are we going to achieve the chosen direction?

This page has a detailed blue print of the key factors underlying each of the three questions you need to ask your self when assessing the best strategic options for your business.

Qn. On what basis do we decide to compete?

Prof Michael Porter an authority on strategic options states that if your company is wishing to obtain competitive advantage over its rivals, then it faces two options:

Option 1
Is it 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 it 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 ?

Options 2
What is the scope of the area in which your company wishes to obtain competitive advantage? Is it industry-wide or is it restricted to a specific niche?

The answers to these two options leave you and your company faced with three generic strategic options, which are defined as: Cost leadership.
Differentiation.
Focus.

Cost leadership

Set out to be the lowest cost producer in your industry. By producing at the lowest possible cost you can compete on price with every other producer in your industry and earn the highest unit profits.

You need to have some of the following in place in order to achieve cost leadership: Seek to set up production facilities for mass production as these will facilitate the economies of scale advantages you need to achieve.
Invest in the latest technology by improving quality and reducing labor costs.
Seek to obtain favourable access to more sources of raw materials.
Look to develop product designs that facilitate automation.
Minimise overhead costs by exploiting bargaining power(bulk purchases).
Concentrate on productivity objectives and constantly seek to improve efficiency and economy, e.g. Introduce zero based budgeting, value chain analysis.

The drawbacks of the above strategic options involve the need to continually keep up-to-date with potential changes in technology or consumer tastes.

Differentiation

Your firm will differentiate itself from its competitors when it provides something unique that is valuable to customers. Differentiation is said to occur when the product you are differentiating is able to obtain a premium price in the market, which is above the cost incurred to create the differentiation.

Ways of achieving differentiation

Image differentiation
Marketing is one of the strategic options you may use to feign differentiation where it otherwise does not exist, i.e., you create an artificial image 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 ? color, size, packaging.

Quality differentiation
This means you add new features to the product, which make it better ? not fundamentally different but just better. Implying the product will perform with: greater initial reliability;
greater long-term durability;
superior performance.

Reward of a differentiation strategy
Consumers are likely to pay you a higher price for the goods because of the added value created by the differentiation.

Focus

Porter also names two strategic options which are based on the need to fragment your market and focusing on a particular market niche. The Company will not market its products industry-wide but will concentrate on a particular type of customer 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, you can effectively keep your costs low.

Differentiation focus: Here you select a particular niche and concentrate on competing in that niche on the basis of differentiation, e.g., luxury goods.

Qn. Which direction should we choose ?

Here you get to choose which strategic options to take by way of deciding which products/markets to choose as a way forward for the business. Six generic options are recommended for guiding your planning and these are Do nothing.
Withdrawal.
Market penetration.
Product development.
Market development.
Diversification.

Do nothing
If your company is exposed to some form of competitive threat you may take a short-term objective not react and hence get involved in what could be an expensive decision.

Sell out/withdraw from the market
If too busy or over diversified, another of your strategic options may be to Withdrawal from some particular business sectors, so as to concentrate on the few you can manage. 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. You can enhance your market share by such techniques as improved quality, productivity or increased marketing activity.

Product development
This involves introducing a new product into the current market. You change by modifying an existing successful product, e.g., Mars ice cream, software upgrades.

Market development
Your company keeps its tried and tested products but tries to apply them to different market segments. This strategy will help maintain the security of the present product whilst enabling you to generate extra revenue from new segments, e.g., McDonald?s and its geographic market development.

Diversification
This is the most risky of the product market strategic options as it requires you to introduce a totally new product in a new market.

Qn. How are we going to achieve the chosen direction?

The final problem that you must overcome is to decide how you are going to develop your chosen strategic options. The development options available are: joint development.
internal development;
external development/acquisition;

Joint development
You form an agreement between your company and one or more other companies to undertake a new venture together, e.g., Airbus (leading to spreading of cost).

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 of profits 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.

Internal development
This involves developing your business strategic options with your own existing resources. Companies Often undertake this to maintain their equilibrium, and 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.

External development/acquisition;
If there is sufficient finance available an acquisition will provide a very quick way of providing access to new product/market areas and the newly created company will have economies of scale advantages.

Our discussion on strategic options is a composition of models that could help you produce a detailed and complex diagnostic report highlighting the strength, weaknesses opportunities and threats underlying the future of your company.