1. Directions and Methods of Development Dr Keefa Kiwanuka Lecturer, Marketing and Management Room 3.3b, CoBAM 9 April 2013

2. Session outline  Understand directions for strategy development  Understand Methods of strategy development  Internal, acquisition, alliance  Understand Forms of strategic alliances  Examine Success criteria for strategic choices  Suitability, acceptability, feasibility  Techniques to evaluate strategic options

3. What are Strategic Choices? Strategic choices involve understanding the underlying bases for future strategy at both the business unit and corporate levels and the options for developing strategy in terms of both the directions and methods of development

4. Exhibit III.1 Strategic choices

5. Development Directions Development directions are the strategic options available to an organisation, in terms of products and market coverage, taking into account the strategic capability of the organisation and the expectations of stakeholders

6. Strategy Development Directions ExistingNew Existing New Markets Products

7. Strategy Development Directions Protect/build Consolidation Market penetration ExistingNew Existing New Markets Products

8. Strategy Development Directions Protect/build Consolidation Market penetrationProduct Development ExistingNew Existing New Markets Products

9. Strategy Development Directions Protect/build Consolidation Market penetration Product Development Market development ExistingNew Existing New Markets Products

10. Strategy Development Directions Protect/build Consolidation Market penetration Product Development Market developmentDiversification ExistingNew Existing New Markets Products

11. Protect and Build Reshaping by downsizing or withdrawal from activities Maintenance of market share – High market share leads to a chain of benefits Consolidation - Protect and strengthen position in current markets with current products Market Growth rate – How do firms grow in PLC? Desirability of dominant market share Market penetration – Organisation gains market share Market penetration – Organisation gains market share

12. Product Development  Follow changing customer needs (retail industry)  Short product life cycles (e.g. softwares and consumer electronics)  Change in Critical Success Factors (CSFs) Associated dilemmas  Unacceptable consequences of not developing new products  Expense, risk and potential unprofitability Deliver modified or new products to existing markets

13. Market Development  New market segments with similar CSFs  New uses for existing products  New geographic markets Offer existing products in new markets

14. Diversification  Related diversification  Unrelated diversification A strategy that takes the organisation away from both its current markets and products In practice, a combination of development directions is usually pursued. For example, development into new markets usually requires some product changes too!

15. 15 Global strategies:  Globalization strategy.  World is one large market; standardize products and advertising as much as possible.  Ethnocentric view.  Multidomestic strategy.  Customize products and advertising to local markets as much as possible.  Transnational strategy  Balance efficiencies in global operations and responsiveness to local markets.

16. 16 Restructuring and divestiture strategies  Readjusting operations when an organization is in trouble.  Retrenchment  Correcting weaknesses by making changes to current operations.  Liquidation  Restructuring  Downsizing and rightsizing  Restructuring through divestiture

17. 17 E-business strategies  The strategic use of the Internet to gain competitive advantage.  Popular e-business strategies  Business-to-business (B2B) strategies  Business-to-customer (B2C) strategies

18. 18  Incrementalism Modest and incremental changes in strategy occur as managers learn from experience and make adjustments.  Emergent strategies Develop progressively over time in the streams of decisions that managers make as they learn from and respond to work situations.

19. Methods of Strategy Development

20.  Internal Development  Build on and develop an organisation’s own capabilities  Organic development  Mergers and Acquisitions  Take over ownership of another organisation  Strategic Alliances  Two or more organisations share resources and activities

21. Motives for Internal Development  Only one in field  Core competence in product manufacturing  Develop new markets – direct involvement to increase understanding & create core competence  Spread cost over time – easier for companies with low resources  Avoid cultural clash

22. Motives for M&As  Speed  Competitive Situation – lower competitor reaction  Financial motives  Extreme example is that of Asset Stripping  Lack of resources  Cost efficiency (by merging) to avoid duplication  Stakeholder expectations  Ambitions of senior managers  Empire building

23. Motives for Strategic Alliances  Need for:  Cost reduction  Improved customer offering  Co-specialisation  Each partner concentrates on using own capabilities, e.g. geographical market entry, value chain activities  Learning  Helps to develop future competences

24. Types of Strategic Alliance  Loose  Networks / Opportunistic Alliances  Contractual  Licensing  Franchising  Subcontracting  Outsourcing alliances  Supplier alliances  Distribution alliances  Ownership  Consortia

25. 25 Choosing Strategic Options  What are our Opportunities?  Possible new markets?  Strong economy?  Weak market rivals?  Emerging technologies?  Growth of existing market?  What are our Threats?  New competitors?  Shortage of resources?  Changing market tastes?  New regulations?  Substitute products?

26. The TOWS Matrix

27. Success Criteria for Strategic Options  Suitability  Whether strategy addresses circumstances in which organisation is operating  Acceptability  The expected performance outcomes (e.g. risk/return)  Meeting expectations of stakeholders  Feasibility  Whether strategy can be made to work in practice  Linked to strategic capability

28. Evaluating strategic options SuitabilityAcceptabilityFeasibility Evaluating strategic options  Establishing the rationale  Screening options and criteria Does it solve the problem? Is it acceptable to stakeholders?  Returns  Risk  Reactions by stakeholders Can we deliver?  Cash flow  Break-even  Resources  Competencies Adapted from Johnson & Scholes

29. Choosing an option  Three tests  Does it take us towards where we want to be? (Alignment)  Do we have, or can we obtain, the resources required to implement it? (Feasibility)  Will it win the support of those who need to approve it, and those who need to implement it? (Acceptability)

30. Financial appraisal techniques  Cash flow projection  Discounted cash flow (DCF) method  Sensitivity analysis  Break even analysis

31. Criteria for assessing Acceptability Risk  Financial ratios  E.g. High long term debt means high risk  Sensitivity analysis (What-if analysis) Stakeholder reactions

32. Feasibility  Financial  Funds flow forecasting  Break-even analysis  Resource deployment  Resources and competences needed

33. Key Points (1) Three elements of strategic choice – Competitive strategy – Direction of development – Method of development Four key categories of development directions – Protect and build – Product development – Market development – Diversification

34. Key Points (2)  Three methods of strategy development  Internal development  Mergers and acquisitions  Strategic alliances  Three success criteria for strategic options  Suitability  Acceptability  Feasibility  Wide range of analytical techniques for evaluation of strategic options