CHAPTER 4

INTRODUCTION TO
BUSINESS STRATEGY

201053_Ch4_Introduction to business strategy 1

TOPIC LIST
1. What is strategy? 7. Setting strategic
2. Introduction to objectives
strategic management 8. Choosing a corporate
3. The strategic planning strategy
process 9. Implementing the
4. Analyzing the strategy
environment
5. Analyzing the
business
6. Corporate appraisal
201053_Ch4_Introduction to business strategy 2
1. What is strategy?

- The long-term direction (objectives) of the business

- The environment in which it operates
- The resources at its disposal
- The return it makes to stakeholders
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Levels of strategy
Determined at Board Level:
- Overall corporate mission and objectives
- Overall product/market decisions
- Major investment decisions
- Overall financing decisions
- Relations with external stakerholders
Corporate - Policies relating to ESG, sustainability and climate
Strategy change

- Forms strategic business units (SBU) – a section

responsible for its own products or services
Business - Competitive strategy:
strategy + How advantage over competitors can be achieved
+ Marketing issues, such as marketing mix

Functional
(Operational) Main functions: productions, IT, etc and how
201053_Ch4_Introduction to business strategy
these deliver the strategies effectively
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2. What is strategic management?
 Strategic management: management of resources of a business in
order to achieve its goals and objectives
 Organizations need to plan if they are not to drift. Strategic
management involves:
- Decisions about the scope of activities
- Long-terms direction of the business
- Allocation of resources
- Involves an entire cycle of planning and control ➔ called strategic
planning.

 Drift: move slowly with no control of directions

201053_Ch4_Introduction to business strategy 5

Formal (rational) strategic planning

 Formal strategic planning involves 4 key stages

Implementatio
Strategic Strategic Review and
n of chosen
analysis choice control
choices

201053_Ch4_Introduction to business strategy 6

Formal (rational) strategic planning

Strategic plan: a statement of

Planning: the establishment long-term goals along with a
of objectives and the definition of the strategies and
formulation, evaluation and policies which will ensure the
selection of the policies, achievement of these goals
strategies, tactics and action
required to achieve them
Long-term/
strategic
planning
Planning
Short-term/
operational
planning
201053_Ch4_Introduction to business strategy 7
Making strategic decisions
In order to develop a strategy, a business has
to answer the following questions:
- What is it good at?
- How might the market change?
- How can customer satisfaction be delivered?
- What might prevent the plan?
- what should be done to minimize the risk?
- What actions should be followed?

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3. Strategic Planning Process

201053_Ch4_Introduction to business strategy

Strategic Analysis
Stage Comment Key tools, models,
techniques
Step 1 External Identify opportunities and - PESTEL
analysis threats in the business’ - Porter’s five forces
external environment - Competitors analysis
Step 2 Internal Identify internal strengths - Resource audit
analysis and weaknesses - Distinctive competencies
- Value chain
- Supply chain
- BCG matrix
- Product life cycle
Step 3 Corporate Combines step 1 and 2 SWOT analysis
appraisal
Step 4 Missions, Mission denotes values; - Stakeholder analysis
goals and goals interpret the - Mission statement
objectives mission; objectives
quantify mission
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Strategic Choice
Stage Comment Key tools, models,
techniques
Strategic - How to compete - Porter’s generic strategies
options (competitive advantage) in - Ansoff’s product/market
generation the market strategies
- Where to compete
- Method of growth
Strategic Evaluating each strategic - Stakeholder analysis
options option carefully and - Risk analysis
evaluation objectively - SFA analysis
Strategy Choosing between
selection alternative strategies

After the process, the business should have three types of strategy:
- Competitive strategy: It determines how it competes
- Product/market strategy: determines where it competes and the
direction of growth
- Institutional strategy: method of growth (acquisition)
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Strategy Implementation

Strategy implementation is the

conversion of the strategies chosen
into detailed objectives for
operating units, and plans to achieve

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4. Analysing the environment
What is in the business’s external environment
Environment of a business:
Everything outside its
boundaries The environment

General environment: covers PESTEL

Task environment: competitors,

customers, and suppliers of resources
Task
environment

201053_Ch4_Introduction to business strategy 13

 Environment uncertainty
No business can predict the future with absolute certainty. A business needs to
think about how static or dynamic its future environment is likely to be
Static environments (S) – Dynamic environment (D)

S S S S
• Static • Single • Simple • Safe
Environment Single Low-tech Because
changes product/ change is
slowly market slow and
predictable

D D D D
• Dynamic • Diverse • Difficult • Dangerous
• Environment • Multiproduct, • Analyzing • Ignoring the
changes various environment environment
rapidly and markets, is challenging may have
complicatedl internationall serious
y y consequences
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Analyzing the general environment:
PESTEL analysis
P • Political

E • Economical

S • Social

T • Technological

E • Ecological

L • Legal

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Analyzing the general environment:
PESTEL analysis
 Political vs. Legal factors
 Political factors: elements of politics, including
things such as government tax policies, social
welfare policies, trade policies, and the stability of the
government itself

 Legal factors: relates to the employment &

environmental laws, regulations, and competition
legislation, consumer protection, health and safety
regulations that will affect the way the business
operates in the sense that the business must follow

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Analyzing the general environment:
PESTEL analysis
Economic factors: the economic environment is an
important influence at the local and national levels,
including the followings:
 Local economic trends: types of industry, labor & house
prices
 National economic trends: GDP, inflation, interest rates,
tax levels, government spending, business cycle,
productivity.
Social factors: growth of population, age, geography
distribution, household and family structure, social
structure, employment, wealth, lifestyle changes, etc
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Analyzing the general environment:
PESTEL analysis
Technological factors: technology change rapidly, and businesses
must adapt to it.
• Government investment and R&D policy
• New discoveries: products and methods of production
• Speed of technology transfer
• Level of R&D spending by competitors
• Developments in other industries
• New development: big data, data analytics, and cyber security
• Opportunities and cost of failing to keep up

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Analyzing the general environment:
PESTEL analysis
Ecological factors: related to the followings:
• Sustainability issues: energy and natural
resources
• Pollution
• Green issues

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Analyzing the competitive (task) environment
Porter’s five forces analysis
 Distinguish between a market and an
industry:
 Market: comprises the customers and/or
potential customers
 Industry:comprises those businesses
which use a particular competence,
technology, product, or service to satisfy
customer needs
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Analyzing the competitive (task) environment
Porter’s five forces analysis

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Analyzing the competitive (task) environment
Competitor analysis
Types of competitors
Brand Industry Generic Form
competitors competitors competitors competitors

• Similar firms • Similar • Compete for • Distinctly

offering products but same different
similar different disposable products
products ways income with satisfying
(different • E.g. Amazone different same needs
brand names) and traditional products • E.g. matches
markets. satisfying and lighters
• E.g. different
needs
• McDonald’s
and Burger • E.g. iTunes
King (music) and
Netflix
(movies)
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Analyzing the competitive (task) environment
Competitor analysis
Factors to be analyzed Comment
Competitor’s strategy Stated financial goals? Short and long- term strategy?
Managerial belief?
Organizational structure
What is the favor of director? Particular strategy?
The competitor’s Its relative position in the industry (cost, product,
assumptions about the quality?)
industry Are there any cultural or regional differences?
Future of the industry?
The competitor’s current Distribution, operation, overall costs, financial
and potential situation strengths, products, etc
Competitor’s capabilities Core competence? Ability to expand? Competitive
advantages and disadvantages? 23
Analyzing the competitive (task) environment
Competitor analysis
All these above-analyzed factors are combined
into a competitor reaction profile, and there are
04 reaction profiles (Kotler):
 Laid back
 Tiger
 Selective
 Stochastic

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Analyzing the competitive (task) environment
Competitor analysis
➢ Thelaid-back competitor does not respond
to moves by its competitors
➢ The tiger competitor responds aggressively
to all opposing moves
➢ Theselective competitor reacts to some
threats in some markets but not to all
➢ The stochastic competitor is unpredictable

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5. Analyzing the business
 Introduction: Internal analysis involve the analysis of the
business’s resources and competencies, value chain,
supply chain, and products/markets.
- Resources and competencies by using position and resource
audit
- Value chain: primary and secondary/support activities
- Supply chain: all suppliers and partners working together to
produce goods and services for customers
- Products and markets by using product life cycle and
Boston Consulting Group (BCG) matrix

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Internal analysis- resources and
competences
The position audit
 Position audit: part of the planning process which examines the current
state of the entity in respect of:
✓ Resources of tangible and intangible assets and finance
✓ Its competencies, that is what it has the ability to do well
✓ Products, brands, and markets
✓ Operating systems such as production and distribution
✓ Internal organization
✓ Current results
✓ Returns to shareholders
Sustainability of business
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✓
Internal analysis- resources and
competences
The resource audit – 9 Ms model
Resource Example
Machinery Age, condition, cost, technological update?

Make-up Culture and structure?

Management Size, skills, loyalty, career progression
Management Info Information system, innovation,
Markets Products and customers
Materials Source, suppliers and partnering, waste, etc

Men and women Number, skills, wage cost, efficiency, labor turnover

Methods How are activities carried out?

Money Credit and turnover ratio, cash surplus/deficit,
short/long term financing, gearing level etc
A resource audit should go on to consider how well and badly resources
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have been used

Internal analysis- resources and
competences
Limiting factor or key factor: anything which limits
the activity of the entity. An entity seeks to optimize
the benefit it obtains from the limiting factor.

Once the limiting factor has been identified, the

planner should:
- In short term, make best use of the resources
available
- Try to reduce the limitation in the long term

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Porter’s value chain
- Activities (Value activities): the means by which a business
creates value in its products (from taking inputs from the
environment, processing them, and selling them at a price
greater than the costs)
- Value drivers: Elements of a product or service and
activities that increase the value consumers place on it.
They are means of differentiating the products and services
from others. For example branding, customer services, etc
- Cost drivers: any activity that affects the cost of a product
or service

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Activities in the Porter’s value chain

The margin is the excess the customer is prepared to pay over the cost to
the business of obtaining the resource input and providing value activities.

Value chain: the sequence of business activities by which (from the

perspective of the end-user) value is added to the products or services
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Primary activities
Primary activities are directly related to production, operations, sales,
marketing, delivery, and services.

• Receive, handle, store inputs ready for

Inbound logistics production (warehouse, transport,…)

• Convert inputs to final

Operations products/services

• Storing and distribution of products:

Outbound logistics packaging, warehousing, etc

Marketing and • Introduce and sell the products:

advertising, promotion etc
sales
• Installing, guarantee/repairing,
Services upgrading, providing spare parts, etc
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 Support activities
Support activities provide purchased inputs, human resources, technology, and
infrastructural functions to support the primary activities.

• Acquire inputs to the primary activities:

Procurement eg purchase of materials, equipments, etc

Human resource • Recruiting, training, developing,

rewarding people
management
Technology • Product design, process improvement
and/or resource utilization
development
• Planning, finance, quality control
Firm infrastructure

• Linkages connect the activities of the value chain

• Activities in the value chain affect one another: for example better
quality production might reduce the need for after-sale services
• Linkages
201053_Ch4_Introduction to business strategy require coordination: for example reducing level of 33inventory
held requires the smooth functioning of operations, etc
Using the value chain

A business can secure competitive advantages by:

- Invent new or better ways to do activities

- Combine activities in a new or better way

- Manage the linkages in its own value chain

- Manage the linkages in the value system

Analyzing the supply chain
- Simple view: about getting the best price from
suppliers for the best quality goods and services,
based on the relationship with the supplier. The
business, therefore, needs to analyze its supply
chain and see whether the principles of supply chain
management can be applied to improve efficiency.
- Supply chain management (SCM): optimize the
activities of businesses working together to produce
goods and services.

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Analyzing products and markets-
Product life cycle
 Product life cycle: how a product demonstrates different
characteristics of profit and investment over time =>
examine the portfolio of goods/services. The product life
cycle is an attempt to recognize distinct stages in a the
product’s history.

 Different aspects of a product:

✓ Product class: a broad category of product
✓ Product form: different forms that the product within a
class can take
✓ Brand: the particular type of the product form
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Product life cycle

 Class Form Brand

Mazda 3
(hatchback)
Hatchback cars
Toyota yaris
(hatchback)
Car
Mazda 3 (sedan)

Toyota yaris
Sedans
(sedan)

Honda civic
(sedan) 37
Product life cycle

Introduction Growth Maturity Decline

A new product takes If the new product Sale growth slows Sales begin to
time to find gains market down and the decline so there is
acceptable, resulting acceptance, then product reaches an over-capacity of
in slow growth in the product starts to maturity. Most production in the
sales. have profit, resulting products on the industry. Fierce
Unit costs are high in increased sales market will be at the competition, profit
because of low and production and mature stage of their falls, and some
output and decreased unit cost. life. producers may leave
expensive sales Competitors are the market.
promotion attracted.
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Product life cycle
In the strategic analysis process, the planner should
assess:

- The stage of its life cycle that any product has

reached
- Each product’s remaining life: how much longer
the product will contribute to profits
- How urgent is the need to innovate, to develop new
and improved products?

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Planning products and markets:
The BCG matrix
Another way to look at the products/services the
business is engaged in and the markets it services is to
analyze them using the Boston Consulting Group (BCG)
matrix.

BCG assesses the business’s products in terms of

potential cash generation and cash expenditure.
Products or SBU (strategic business units) are
categorized in terms of market growth rate and
relative market share.
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Planning products and markets:
The BCG matrix

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The BCG matrix

Require capital Little investment Need serious Maybe ex-

expenditure in needed, high consideration cash cows (on
excess of the cash income, on whether to hard times)
cash generated used to finance pour more modest cash
to maintain Stars capital or outflows an
market Strategy: hold leave it out inflows
position, (maintain
promise future Strategy: Strategy:
market position) build (invest) divest
high returns or harvest
Strategy: (maximize
or harvest (release
build earnings) resources) or
hold
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6. Corporate appraisal
 Corporate appraisal brings together the results of the external and
internal analyses so that the business can assess its strengths,
weaknesses, opportunities, and threats (SWOT analysis)

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SWOT analysis
 Corporate appraisal: a ‘critical assessment of the strengths and
weaknesses, opportunities and threats (SWOT analysis) in relation
to the internal and environmental factors affecting an entity in
order to establish its condition prior to the preparation of the long-
term plan’
 (CIMA Official Terminology)

 ‘Critical assessment’: not simply listing but requiring an intimate

understanding of the nature and implications of factors. In
particular, it is important to be realistic.

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Strengths and weaknesses

1. Marketing Counter
2. Products and brands
3. Distribution/logistics
Internal 4. R&D Shortcomings
5. Finance
appraisal:
6. Plant and equipment/
-Skills production
7. Raw materials and Strengths
-Resources
finished inventory
8. Management and staff
9. Business
management and Exploit
organization
10. Technology
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Opportunities and threats
Defend
For opportunities:
- What opportunities
are out there?
External - Capability of
competitors? Threats
appraisal:
- The company’s
-PESTEL comparative
performance? Opportunities
-Porter’s 5
For threats:
forces - What threats may
arise?
- How will competitors
be affected?
Exploit
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Combining elements of SWOT analysis

• SWOT indicates the types of strategy that appears to be

available, to exploit strengths and opportunities and
to deal with weaknesses, and defend against threats.

• Major strengths and profitable opportunities can be

further exploited

• Major weaknesses and threats should be countered

201053_Ch4_Introduction to business strategy 47

7. Setting strategic objectives
What are we trying to achieve?
At this point, we look at the business mission and
objectives:
✓ Whatis the business about, who is it for, and
what is it aiming to achieve?
✓ In
order to do so, we need to conduct a
detailed stakeholder analysis.

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Stakeholder analysis
- Stakeholders’ goals and objectives are balanced
in order to determine the business’s goals and
objectives
- The needs of objectives of each set of
stakeholders are not always congruent, but often
conflict
- The business’s objectives follow the most
dominant stakeholders

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Stakeholder analysis
Stakeholder mapping: power and interest
Low LEVEL OF INTEREST High

A - Minimal effort B – Keep informed

Low They can be directed Do not have great ability to
influence strategy, but may
POWER TO INFLUENCE
influence more powerful
stakeholders
E.g. Community representatives,
charities

C – Keep satisfied D – Key players

Often passive, but capable of Strategy must be acceptable to
moving to segment D. The business them, at least and ideally
should intervene with these they should participate in it
stakeholders and keep them E.g. Major customers
satisfied.
E.g. Large institutional 50
shareholders
High
Determine the mission and strategic
objectives
Mission: states the business’s
basic function
Strategic objectives: profit for
shareholders plus other major
objectives
Goals and targets: strategic
goals should be translated into
quantified and specific goals
Business strategies:
competitive, investment, or
financial strategy?
Functional strategies for HR,
IT, etc
Detailed plans and standards
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8. Choosing a corporate strategy
 Generic competitive strategies (Porter, 1980)
- Cost leadership
- Differentiation
- Niche
 Product/market strategies (Ansoff’s matrix)
- Market penetration
- Product development
- Market development
- Diversification
 SFA analysis (Suitability, Feasibility, Acceptability
Choosing a corporate strategy
Porter’s generic competitive strategies
Competitive strategy: Taking offensive or defensive actions to create a defendable
position in an industry; to cope successfully with… competitive forces and thereby
give a superior return on investment for the business.

• Producing at lowest cost: economies

Cost leadership of scale, use latest technology,
productivity improvement, etc.

• The provision of products or services

Differentiation which are considered to be unique

• Concentrating on only a part

Focus (or niche) (segment) of the market: cost focus
or differentiation focus strategy
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Choosing a corporate strategy
Ansoff: product/market strategies
Ansoff matrix: describe how a combination of a business’s activities in current and new
markets, with existing and new products can lead to 04 different competitive strategies for
growth

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Choosing a corporate strategy
Ansoff: product/market strategies

201053_Ch4_Introduction to business strategy 55

Choosing a corporate strategy
SFA analysis
SFA analysis: three criteria for evaluating and choosing
alternative strategies – Suitability, Feasibility, and
Acceptability
- Suitability: does the strategy fit the business’s
circumstance (use strengths and mitigate weaknesses)?
- Feasibility: can it be implemented within the availability
of resources?
- Acceptability: relates to people’s expectations of the
strategy

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9. Implementing the strategy
Breaking the strategy down

Choose corporate strategy

Competitive, investment and financial

strategies

Business strategies determined how competitive

advantage is gained

Functional strategies: marketing function,

production function, HR, finance, IT 57
Implementing the strategy
Levels of plan
General direction that will be
taken to achieve the corporate
objectives

Strategic Sets out the market(s) to be served, how the

plan business/SBU will serve the market(s), and
what finance is required (based on the
business strategy)
Business
plan
Specifies what is expected of each
function based on the relevant
Operational functional strategy, and how specific
plan actions will be taken in order to meet
that expectation
Budgets have to be prepared based on the business plan for a
201053_Ch4_Introduction to business strategy 58
defined period
  END OF CHAPTER 4

THANK YOU FOR YOUR

ATTENTION!

201053_Ch4_Introduction to business strategy 59