Welcome to Strategic Choices!
In the previous chapters, we looked at Strategic Analysis—understanding where the business is right now. Now, we move on to the most exciting part: Strategic Choice. This is where we decide where we want to go and how we are going to get there. Think of it like a GPS; we know where we are, and now we need to pick the best route to our destination.
Don't worry if this seems like a lot to take in at first. We are going to break these big models down into simple, everyday ideas. By the end of these notes, you'll be able to advise any business on which path to take!
1. How to Compete: Porter's Generic Strategies
Michael Porter argued that for a business to be successful in the long run, it must have a clear competitive advantage. He suggested three main ways to achieve this. If a company doesn't choose one, it risks being "stuck in the middle"—having no clear identity and losing customers.
A. Cost Leadership
This means being the lowest-cost producer in the industry. It’s not just about low prices; it’s about having the lowest internal costs.
Example: A budget airline like Ryanair. They keep costs low by using one type of plane and flying to cheaper airports so they can offer the lowest fares.
B. Differentiation
This is about being unique. You offer something that customers perceive as better or different, allowing you to charge a premium price.
Example: Apple. People pay more for iPhones because of the design, brand, and ecosystem, even if cheaper phones exist.
C. Focus (Niche) Strategy
Instead of targeting the whole market, you target a specific segment (like a specific age group or geographic area). You can have a Cost Focus (cheapest in a small niche) or a Differentiation Focus (most unique in a small niche).
Example: A company that only makes high-end vegan hiking boots for professional climbers.
Quick Review:
- Cost Leadership: Be the cheapest to run.
- Differentiation: Be the most unique.
- Focus: Be the best for a small, specific group.
2. The Strategy Clock (Bowman)
Bowman’s Strategy Clock is like an "upgraded" version of Porter. it looks at the relationship between the Price of a product and the Perceived Value by the customer. There are 8 positions, but here are the most important ones for your exam:
Position 1 & 2 (Low Price/Low Value): "No frills." Selling basic products at very low prices.
Position 3 (Hybrid): This is the "sweet spot." High perceived value but at a relatively low price. Think of IKEA—good design but affordable.
Position 4 (Differentiation): High value at a mid-to-high price (like Nike).
Position 5 (Focused Differentiation): High value at a very high price. Luxury goods like Rolex.
Positions 6, 7, & 8: Usually failure strategies. These are when you charge high prices for low-value products. Customers will eventually leave.
Did you know? Companies that master the "Hybrid" strategy often dominate their markets because they give customers the best of both worlds!
3. Where to Grow: Ansoff’s Matrix
Once a company knows how to compete, it needs to decide where to grow. Ansoff’s Matrix provides four directions based on Products and Markets.
1. Market Penetration (Existing Product, Existing Market)
Selling more of what you already have to the people you already know. This is the lowest risk strategy.
Example: A coffee shop offering a "loyalty card" to get regular customers to buy more coffee.
2. Market Development (Existing Product, New Market)
Taking your current product to a new place or a new type of customer.
Example: A UK clothing brand opening its first store in New York.
3. Product Development (New Product, Existing Market)
Creating new things to sell to your loyal customers.
Example: Dyson moving from vacuum cleaners into hair dryers. They already have the brand and the customers.
4. Diversification (New Product, New Market)
The highest risk strategy because the business is doing something completely new in an unfamiliar market.
Example: A supermarket chain deciding to start a bank.
Common Mistake to Avoid: Don't assume Diversification is always bad. It’s risky, but it helps "spread the risk" if one industry fails. However, for SBL, always highlight the high risk involved!
4. How to Get There: Methods of Development
Now we know the direction (Ansoff), how do we actually do it? There are three main "Methods":
I. Internal Development (Organic Growth)
Doing it yourself. Building the business from the ground up using your own resources.
Pro: You keep total control. Con: It is very slow.
II. Mergers & Acquisitions (Inorganic Growth)
Buying another company.
Pro: Very fast way to enter a market. Con: Very expensive and cultures might clash.
III. Strategic Alliances & Franchising
Working with others.
Example: McDonald’s uses Franchising. They provide the brand, and a local businessman provides the capital and runs the store.
Memory Aid: Think of growth like getting a house.
- Organic: Building it brick by brick yourself.
- Acquisition: Buying a finished house.
- Alliance: Renting a room or sharing with a flatmate.
5. Evaluating the Choice: The SAFe Model
This is perhaps the most important part for your SBL exam! If the examiner asks you to "evaluate" a strategic option, use the SAFe framework.
S - Suitability: Does the strategy "fit"? Does it solve the problems identified in the SWOT analysis? Does it use the company's strengths?
A - Acceptability: Will the stakeholders be happy?
- Financial: Is the Return on Investment (ROI) high enough?
- Risk: Is the risk too high?
- Stakeholders: Will the employees or customers protest?
To calculate Acceptability, we often use the formula for Net Present Value (NPV):
\( NPV = \sum \frac{R_t}{(1+i)^t} \)
(Where \( R_t \) is net cash flow at time \( t \), and \( i \) is the discount rate). In SBL, you usually just need to explain if the NPV is positive or negative.
Fe - Feasibility: Can we actually do it?
- Do we have the Money? (Financial)
- Do we have the Manpower? (People/Skills)
- Do we have the Machinery? (Technology/Assets)
Key Takeaway: Never suggest a strategy without checking if it's SAFe! A great idea (Suitable) is useless if you have no money to start it (Feasible) or if the owners hate it (Acceptable).
Summary Checklist
Before moving to the next chapter, make sure you can:
- Explain the difference between Cost Leadership and Differentiation.
- Identify where a company sits on Ansoff's Matrix.
- Use SAFe to critique a business proposal.
- Understand why Organic growth is slower than Acquisition.
You’re doing great! Strategic Choice is all about logical thinking. Just ask yourself: "Does this move make sense for this specific business?"