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Notes ACCA Paper P3 Business Analysis For exams in 2010
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ExPress Notes
ACCA P3 Business Analysis
Chapter 5
Strategic Choice
START The Big Picture This chapter covers a number of important issues. The focus is on the choices available to an organisation as well as methods for making appropriate decisions.
KEY KNOWLEDGE Parenting style theory (Gould & Campbell) This is a framework for the role of the corporate headquarters and how it gets involved in the strategic development of the businesses within the group. They identified 3 styles which companies tend to follow: Page |5.1
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ExPress Notes
ACCA P3 Business Analysis
Financial Control Head office sets financial targets but limited role in setting strategy of SBU.
Strategic Control A middle ground between financial control and strategic planning. Head office coordinates and reviews strategy.
Strategic Planning Head office plays a central role in setting the strategy of the SBU.
KEY KNOWLEDGE Boston Consulting Group (BCG) Matrix This matrix helps organisations analyse their product lines or business units. It helps identifies priorities and where resources should be allocated. Items are allocated to the various quadrants according to how attractive the market is (measured as the growth rate) and how strong a position they hold within the market (their market share)
Growth Rate
Market Share High
Low
High
Stars
Question Marks
Low
Cash Cows
Dogs
A balanced portfolio would have: 1. Stars to ensure the future. 2. Question marks to convert to Stars. 3. Cash Cows to provide funding to develop the Stars and Question Marks.
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ExPress Notes
ACCA P3 Business Analysis
General Electric matrix An organisation’s SBUs are entered onto the matrix based on industry attractiveness and business strength. The appropriate action for each segment is shown in the table below.
Business Position
GE Matrix: High
Selective Investment
Invest / Grow
Invest / Grow
Medium
Harvest / Divest
Selective Investment
Invest / Grow
Low
Harvest / Divest
Harvest / Divest
Selective Investment
Low
Medium
High
Industry Attractiveness
Business strength determined by for example, financial position, competencies and supplier relationships. Industry attractiveness determined by for example, competitors within the industry, growth rate of industry. The three cells in the top right hand corner of the matrix are the most attractive in which to be. These require a policy of investment for growth. The three cells running diagonally are of medium attractiveness. Management should review these carefully to determine which ones to invest in and retain. The three cells in the bottom left hand corner are less attractive. Management should consider a policy of harvesting or divesting these items.
KEY KNOWLEDGE Porter’s Generic Strategy Porter identified 3 generic strategies that are commonly used by businesses to create and maintain competitive advantage: Page |5.3
Differentiation Cost leadership Focus
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA P3 Business Analysis
Selling price Higher profit due to higher selling price
Profit
Selling price
Selling price
Profit Profit
Cost
Cost
Cost
Differentiation
"In the middle"
Cost leadership
Higher profit due to lower cost
1. Differentiation This involves a product or service that is considered to be “different” or unique within its industry. Due to these unique characteristics the organisation can charge a premium. The uniqueness of the item could be based on a variety of things such as the design, technical features, support service, branding, etc. Examples of companies that have used the differentiation strategy include:
Apple computers, iphones and ipod. Land Rover off-road cars.
2. Cost leadership This is where an organisation can produce goods or services at a lower cost than the industry average. Importantly, note that this does not mean lower quality. Low cost production can be obtained by way of economies of scale, preferential access to raw materials or labour, access to extensive distribution channels, etc. The “cost leadership product” is often a basic good or service which is made available to a large customer base. Examples of companies that have used cost leadership strategies include: Page |5.4
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ACCA P3 Business Analysis
Dell computers
Wall mart stores
3. Focus This is where an organisation concentrates on a small number of niche markets. Differentiation focus – an example would be a specialist holiday or tour operator (e.g. specialising in Skiing holidays). Cost focus – an example would be a small chain of retailers that create their own label range of products. Strategy clock (Bowman) The strategic clock is a method of analysing an organisation’s competitive position in contrast with its competitors’ ways of competitive positioning. The clock is classified into 8 parts. Namely: 1. 2. 3. 4. 5. 6. 7. 8.
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Low added value Low price Hybrid Differentiation Focused differentiation High price / standard value High price / low value Standard price / low value
© 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA P3 Business Analysis
High
4. Differentiation
Perceived added value
3. Hybrid
5. Focussed differentiation
2. Low price
6
7 1. Low price, low added value Low
8
Low
Price
High
KEY KNOWLEDGE Ansoff’s matrix (the Product – Market Mix) This allows companies to identify a number of options to grow the business via existing and / or new products in existing and / or new markets.
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ACCA P3 Business Analysis
Existing Products
Existing Markets
New Markets
New Products
1. Consolidation 2. Penetration 3. Withdrawal
4. Product development
5. Market development
6. Diversification
1. Consolidation. This is not “doing nothing”. It is doing enough to maintain the existing position. 2. Penetration. Actively trying to increase the share of the market through techniques such as advertising and PR. 3. Withdrawal. Pulling out of a particular market. Reasons could include it’s loss making or a company wants to utilise resources elsewhere. 4. Product development. Developing new products to sell to existing markets. An example would be a soft drinks manufacturer launching a new healthy range of drinks. 5. Market development. Existing products are sold in new markets. This can either be for example geographical (McDonalds establishing restaurants in new geographical areas) or can be repositioning the market (e.g. Land Rover developing from an agricultural market vehicle to mainstream car producer). 6. Diversification. Generally considered to be the most risky. There are a number of types of diversification: a. Backwards vertical integration whereby an organisation takes on the role of its supplier. An example would be an oil refining company taking on the role of its supplier of oil exploration – i.e. it would now be in a position to supply itself with its raw materials. b. Forwards vertical integration whereby an organisation takes on the role of its customer. For example, a farmer sets up a farm shop to sell direct to the public rather than to shops.
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ExPress Notes
ACCA P3 Business Analysis
c. Unrelated diversification refers to a new product or service in a completely new market.
Methods of expansion. Internal Development. “Organic” growth using an organisations own resources. Mergers & Acquisition. Often treated as being the same thing, these are in fact different. A true merger is a “joining of equals” where organisations of approximately the same size and strength come together (e.g. when Glaxo Wellcome and SmithKline Beecham merged to form GlaxoSmithKline). An acquisition (or takeover) is usually the purchase of a smaller target company by a larger one. The acquisition may be friendly (the company being acquired is in favour of the takeover) or hostile (the company does not want to be taken over). Strategic Alliance. A formal relationship between parties which aims to achieve certain strategic objectives whilst enabling them both to remain independent. An example of a strategic alliance would be when a hotel chain and a restaurant chain work together. Franchise. The Franchisor gives the right to the Franchisee to use its brand in exchange for a capital sum and /or a royalty payment. Examples of a franchise include certain McDonald’s restaurants around the world.
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