How Do We Develop Business Strategy Options?: Richard Lynch, Strategic Management 6 Edition, © Richard Lynch 2012

Slide 8.
Richard Lynch, Strategic Management

6th Edition, Richard Lynch 2012
How do we develop business strategy

options?
Chapter 8
Slide 8.2

Developing business strategy options
Options
Environment
This session
Purpose
Options
Choice
Resources
Options
Perhaps more options
Implement
Slide 8.3

SWOT analysis
Key elements of organisations purpose
Environment-based
options:
Generic strategies
Resource-based
options:
Value chain
Market options
Resource-based
view
Expansion methods
Cost reduction
Identify major options including

green strategies
Choose between options:

prescriptive
Perhaps keep options open:

emergent
Coupled with a
more ideasbased approach
that is difficult
to model and is
explored in
Chapter 11
Slide 8.4

SWOT Analysis
SWOT Analysis can be used to summarise earlier work on
strategic environmental and resource analysis:
strengths and weaknesses: mainly internal to the
organisation - related to resources
opportunities and threats: mainly external to the
organisation - related to its environment
But both areas are inter-related, e.g. a resource strength
must be related to the strengths of competitors in the
environment
Keep points short and well-argued
Concentrate only on the key issues: no long lists
Use key factors for success (KFS) as a guide
Slide 8.5

Environment-based strategic options
Slide 8.6

Options based on market opportunities

In prescriptive strategy, it is useful to consider the
possible strategic options that are available
After developing such options, we make a rational
selection between them: this process is considered in
a later session
The foundations for generating such options are the
environment and resource-based analyses explored
earlier in the prescriptive process
Coupled with the key factors for success which
provide some focus for strategy development areas
Slide 8.7

Options based on market opportunities - 1

In the 1980s, Professor Michael Porter argued that
there were only four fundamental strategic options
available to all companies: Porters Generic Strategy
Options
Although this approach has subsequently been
challenged, it does help in developing market-based
opportunities
Porters conceptual economic starting point: the need
to establish the prices and costs of an organisation in
comparison with its competitors
Slide 8.8


Two options based on Two options based on
companys competitive
competitive scope in
advantages:
the market place:
Cost leadership: the
lowest costs in the
industry
Differentiation:
See: Lynch distinctive product so
Ch 8,
can charge higher prices
section 8.2
Broad target: wideranging across much of

the market
Narrow target: aimed
towards a niche in the
market place
Options can be combined together to give four options in

total: four generic strategies for any organisation
Slide 8.9


Generic strategy - low cost leadership:
Low cost leadership build and maintain plant and equipment
plus low labour costs and working practices that deliver the
lowest costs versus competitors (not necessarily the lowest
prices)
Assuming the firm with the lowest costs charges the same
prices as competitors, then it will have higher profitability and
sustainable competition advantage (SCA) over competitors
Generic strategy differentiation:
Differentiation occurs when the products of an organisation
meet the needs of some customers in the market place better
than others: branding, superior performance are examples of
differentiation that will deliver SCA
Assumed that such a differentiated product can then charge and
maintain a higher price than its competitors, delivering higher
profitability than rivals
Slide 8.10


Generic strategies low cost and differentiated focus strategies
A focus strategy occurs when the organisation concentrates on
a specific niche in the market place and develops a competitive
advantage by offering products especially for that niche (or
segment)
Porter argued that the competitive advantage inside the niche
could be based on either the lowest costs or some form of
meaningful differentiation relevant to that niche
Hence two forms of focus strategy:
Low cost
Differentiated
Note: focus strategies are sometimes called niche strategies
Slide 8.11


Generic strategies: the danger of being Stuck in the middle
Porter concluded his analysis of generic strategies by arguing
that there are real dangers for the firm that explores each
generic strategy but fails to achieve any of them:
Such a firm will be much less profitable than rivals achieving
one of the generic strategies.
He called this the danger of being stuck in the middle
Essentially, either companies seek the lowest costs or they
seek to be differentiated. According to Porter, they cannot seek
both successfully.
Slide 8.12


Generic strategies: some difficulties with low cost leadership:
If the option is to seek low-cost leadership, then how can more
than one company be the single leader?
Radical technological change may undermine cost leadership
Cost leaders may need to lead on price if they are to stay ahead
but permanent price reduction by the cost leader may damage
its market positioning
Generic strategies: some difficulties with competitive scope:
Distinction between broad and narrow targets sometimes
unclear by size of market? By customer?
As markets fragment and product life cycles become shorter,
the concept of broad targets becomes redundant
Slide 8.13


Generic strategies: some difficulties with differentiation:
Some forms of differentiation are not based on price: the option
is therefore over-simplistic
Identifying the need for differentiation solves nothing: it is the
precise form that matters and this is not so easy to determine
Differentiation is not necessarily accompanied by higher prices:
it may be used to build market share and lower profits
Generic strategies: the difficulty with being stuck in the middle
Many commentators have pointed out that the lowest cost
leaders like Toyota in cars are also differentiated through
branding
Having both the lowest costs and a differentiated product is
therefore feasible and attractive
Slide 8.14


Market options matrix
Withdraw
Market:
increase
new
customer
base
See: Lynch Ch 8,
section 8.3
Product: increase technical innovation

Option:
market
penetration
Option: product
development
Option:
market
development
Option:
diversification
Related
Unrelated
Slide 8.15


Market options matrix: structures a firms customer
and product options and the strategies required to
deliver them - market penetration, product
development, etc.
But needs to be coupled with broader options
concerning product withdrawal, etc.
Many options require significant funds: only suitable
for those organisations with substantial resources
Useful starting point for generating ideas
Slide 8.16


Expansion method matrix
Inside company
GeoHome
graphic
location
Intl
See: Lynch Ch 8,
section 8.4
Outside company
Internal
development
Merge,
acquire, j.v.,
alliance, etc.
Export,
overseas
manufacture,
etc.
Merge,
acquire, j.v.,
alliance, etc.
j.v. means
joint
venture
Slide 8.17


Expansion method matrix:
Expansion method matrix: represents a method of
structuring the possible geographic market
opportunities and the external links available to
the company
Highlights opportunities in acquisitions, joint
ventures, etc.
Useful at structuring the options
But offers no guidance on choosing between them
Slide 8.18

Resource-based strategic options
Slide 8.19

Options from resource-based approaches - 1

Use the organisations value chain to identify options:
Upstream: those activities that add value early in the value
chain with options including:
low cost raw materials bought in bulk
standardised products at low cost
process innovations to reduce production costs
Downstream: those activities that add value later in the
value chain with options including:
differentiated products
advertising and marketing to promote non-standardised
items
high levels of special service
See: Lynch Ch 8, section 8.5
Slide 8.20


Resource-based options need to offer sustainable competitive
advantage or at least distinctiveness over competitors
In developing options, one method would be to consider them
against three criteria and examine implications - Kay:
Architecture: the network of relationships and contracts
inside and outside the organisation
Reputation: the favourable impression generated by the
organisation
Innovative capability: the organisations capacity to
develop new products and services
New options in these areas might take lengthy periods to
develop
Slide 8.21

Single task
The hierarchy
of core
competencies
may deliver
resource-based
options
Functionrelated: indepth and
best practice
Group tasks
Middle
management:
more
complex
Crossfunctional coordination
skills
Slide 8.22


Resource-based options based on cost reductions:
Designing-in cost reduction: before the product ever

reaches the factory floor, redesign of its components
may save costs
Structured approach to cost reduction: exploring the
options using the Ohmae approach
Supplier relationships: negotiating better prices for
the same quality will reduce costs for a manufacturer
Economies of scale: unit costs may reduce as the size
of the plant increases
continued
Slide 8.23


Resource-based options based on cost
reductionscontinued:
Economies of scope: it may be possible for different

products to share some functional costs, e.g. common
services, and so reduce costs
The Experience Curve: as a company becomes more
experienced at production, it should be able to reduce
costs
Capacity utilisation: where plant has a high fixed
cost, cost reductions from running plant as close to
capacity as possible
Slide 8.24

Developing green strategy options

Government
regulations
Technology:
feasibility, costs
and research
status
Campaigns and
influence from
lobbyists and
activists
Stakeholder and
customer
pressures
Existing or
potential green
industry
standards
Cost pressures from

rising energy and
commodity prices
Carbon usage
Consumption
and recycling
opportunities

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Slide 8.

Richard Lynch, Strategic Management