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3.1.2 Theories of corporate strategy

Development of corporate strategy

Ansoff’s Matrix – This is a market planning tool that helps a business determine its product and market growth strategy.

ansoff's matrix

  • Market penetration – This is when the business decides to sell existing products in existing markets. The main aim of this is in order to sell more to the existing market in order to maintain or increase the market share of current products e.g. through advertisement. This will help the business to dominate the market.
  • Diversification – This is when a business sells a new product to a new market. The benefit of this is that they are able to spread risk so that if one market fails then they still have a new market to rely on. Although this is the case, it is a high risk strategy due to the fact that they do not have experience of operating in the market and therefore significant market research is needed to ensure there’s enough demand in the market and for the new product.
  • Market development – This is when the business use an existing product but sell it in a new market. For example, if the business were to expand then they may decide to sell their existing products to overseas market. Market research needs to take place before entering the market; this is especially the case in foreign markets in order to ensure that an ethnocentric marketing strategy will work.
  • Product development – This occurs when a business introduce new products to existing markets. This is less risky than market development as the business already knows the market that they’re operating in. Product development may occur as part of a porter’s differentiation competitive advantage. This is likely to be through innovation and looking at changes in the trends and fashions of the market.

 

Porter’s strategic matrix – This is a business tool that is used in order to find a sustainable competitive advantage.

Porter's strategic matrix

  • Cost leadership – This is when the business becomes the lowest cost producer in the market. By doing this it enables the business to either charge a lower price thus increasing sales or to increase their profit margins resulting in an increased amount of profit. As cost leadership occurs in a mass market, the cost advantage is usually gained through producing a large output of goods/services thus enabling the business to exploit economies of scale. This requires high productivity levels as well as a high capacity utilisation.
  • Differentiation leadership – This occurs when businesses targeting large markets aim to achieve a competitive advantage by differentiating their goods/services from their competitors. This can be through things such as superior product quality, branding or promotion.
  • Cost focus – This is when the business tries to achieve a cost advantage in a relatively small market.
  • Differentiation focus – This occurs when a business tries to differentiate their product from competitors in a small market. As this is a niche market it means that businesses are more able to differentiate their product for consumers with different needs.

 

Boston matrix – A portfolio analysis tool categorising products based on their market growth rate and relative market share.

Boston matrix

  • Question mark – This is a product that has low market share but high market growth. Therefore the product should be invested in as it may turn into a star.
  • Star – This is a product that has high market share and high market growth. This product should continue to be invested in and are likely to the main source of profit for the business. The product is likely to turn into a cash cow in the future as sales start to decline.
  • Dogs – These are products that have a low market share and a low market growth rate. The business should stop selling these goods and not invest in them.
  • Cash cow – These are products that have a high market share but low market growth. The business should continue selling these but not invest in them. They will continue to make the business a profit; however over time they’re likely to turn into dogs.

Benefits of Boston matrix

  • Portfolio decision making – The business is able to decide which products to invest in and which not to through the use of Boston matrix. This will help save the business money as they will the Boston matrix will help them identify where they should not be investing their money in and therefore makes sure that money is not wasted.
  • Market share – This is a relatively good measure of the profitability of a product.

Drawbacks of Boston matrix

  • Only a snapshot – The Boston matrix only provides a snapshot of the current attributes of a business’s product portfolio. Therefore it has no predictive element to it.

 

C) Achieving competitive advantage through distinctive capabilities.

Kay’s distinctive capabilities – This is the three distinctive capabilities that help a business to get added value and a competitive advantage.

  • Architecture – Relational contacts within or around the organisation with customers, suppliers and employees. This increases co-ordination within and around the business thus allowing the business to respond quickly to changes in the market.
  • Reputation – This includes the customers own experience and word of mouth created by businesses providing a good customer service as well as quality products. This creates loyal customers thus giving the business a competitive advantage over existing business and new entrants.
  • Innovation – This is when a business creates new goods and inventions. This is makes the business differentiated to its competition. However, it is only likely to last in the short term as similar products are released once other businesses see the invention.

 

D) Effect of strategic and tactical decisions on human, physical, and financial resources.

Strategy – This is a long term plan that is proactive and used to try and achieve the businesses overall goal.

Tactics – This is a short term plan that is reactive and is used to help the business keep on track/achieve its strategy.

Human resources – The strategy may be to make a profit. However, if there is a recession then the tactic may be to make redundancies as staff are no longer needed due to the lower demand.

Physical resources – The strategy have a good reputation. However, in order to do this the business may invest in machinery in order to match an increase in demand.

Financial resources – A businesses strategy may be to grow by 20%. However, if interest rates are high then the business may decide to borrow money from selling shares rather than loans.

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