Choosing strategic direction flashcards

Topic 8: Choosing strategic direction

Strategic direction vs strategic positioning

Direction is where: which markets to compete in and which products to offer (Ansoff). Positioning is how: competing on benefits and price (Porter, Bowman).

Ansoff matrix: the four directions

Market penetration (existing products, existing markets; lowest risk); market development (existing products, new markets); new product development (new products, existing markets); diversification (new products, new markets; highest risk).

Market penetration: methods, value and limit

Methods: promotion, price cuts, loyalty schemes, wider distribution. Value: low risk, quick, builds on existing skills. Limit: saturation and rival retaliation.

Diversification: value and limit

Spreads risk and opens growth, but the business lacks experience in both the product and the market. Trap: if only the product or only the market is new, it is not diversification.

A £90,000 campaign adds £200,000 of sales at a 35% contribution margin. Net gain?

Extra contribution 200,000 × 0.35 = £70,000. Net gain = 70,000 − 90,000 = −£20,000, a loss in year 1.

Porter's generic strategies

Low cost (broad scope, lowest unit costs); differentiation (broad, unique features or brand for a premium); focus (a narrow niche, using low cost or differentiation).

Stuck in the middle

Having neither the lowest costs nor a clear difference, so no competitive advantage.

Exam trap: low cost vs low price

A low-cost strategy means having the lowest unit costs; the price can still equal rivals', giving higher margins. Cost leadership does not mean charging the lowest price.

Bowman's strategic clock: positions 3, 4 and 5

3 Hybrid: low price, higher benefits (needs very low costs). 4 Differentiation: higher benefits at a standard price. 5 Focused differentiation: high price, high benefits. Positions 6 to 8 (higher price or low benefits) are generally seen as unsustainable.

Difficulties of maintaining competitive advantage

Imitation by rivals; changing technology; shifting tastes; rising input costs; fading patents or brand appeal; the need for constant investment; dependence on a single supplier, product or person.