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36 Strategic choice

A Activity 36.1 (page 634): ABCA and Ansoffs matrix

1 Re-read the Introducing the topic case study at the start of this chapter. Analyse the
four strategic options by using the Ansoff Matrix. [12]

Strategy Commentary
Market penetration: The market is saturated and is no longer growing. Therefore,
increase market share in it will be difficult to gain market share. Promotional activity
the gas and electricity and pricing would be important to the success of this option.
markets that ABCA However, there is less risk as ABCA Power understands this
Power already operates in market well, but the potential for growth is low.
Product development: As the technological differences between renewable and
develop renewable forms non-renewable energy supplies are considerable, this will be
of energy for sale in a risky option. It requires significant investment in R&D and
existing markets ABCA Power would need to recruit suitable scientists. There
is no guarantee that the research will be successful. However,
the potential market is large due to climate-change concerns.
Market development: Potentially a costly option as ABCA Power may have to
enter other countries establish infrastructure in other countries. Offers much
markets for gas and greater potential for growth than remaining in existing
electricity supply countries as ABCA Power can target a market that is not
saturated. It may be difficult for ABCA to build sales as there
will be no brand awareness of the business in the new markets.
Diversification: develop The riskiest option as ABCA Power does not have experience
a range of non-energy of the non-energy market and is, therefore, developing new
products for sale in new products for a new market. However, one of its directors has
markets previously been a senior manager for an office-equipment
company. ABCA Power will be trying to enter a market with
established brand leaders; the cost of developing a range of
office equipment and marketing the products to penetrate
the market would be substantial. The risk of failure is high
and the potential returns depend on the degree of brand
loyalty in the market and its rate of growth.

Activity 36.2 (page 634): Caff Nero and Asda contrasting


strategies to achieve growth

1 Explain why companies like these need long-term plans to help achieve their
objectives. [6]

Are objectives likely to be achieved just because they have been set? Logically,
having determined its objectives, a business needs to develop strategies that will
facilitate the achievement of the objectives; hence the need for a long-term plan.

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A 2 Suggest six facts about the Turkish consumer market and economy that Caff Nero
would have found useful before taking this strategic decision. Briefly explain why each
one is important. [12]

GDP per head this will affect consumer demand for coffee shops. Rising
incomes provide an opportunity for increasing sales at the type of coffee bars
operated by Caff Nero.
Inflation if inflation is volatile in Turkey, this would make it more difficult to
plan for the future. Predicting future costs and revenues becomes increasingly
difficult the more volatile the inflation rate.
The number of established coffee chains in the market and their market share if
one chain such as Starbucks has already built a substantial market share, it may
be more difficult for Caff Nero to establish itself.
Recent growth in the market a rapidly growing market will be easier to enter.
Competition may be less intense as there are sufficient consumers to share.
Changing patterns of consumption, e.g. relative spending on different types of
coffee. This may indicate whether there is potential for the type of products that
Caff Nero sells.
Exchange rate this will affect the cost to Caff Nero of entering the market.

3 Using Ansoff s Matrix, compare and contrast the different strategies being adopted
by these two companies and comment on possible reasons why these were decided
upon. [12]

Caff Nero is adopting market development as it is aiming to sell its existing products
in new markets by entering the Turkish and Chinese markets, among others. Caff
Nero is, therefore, focusing on the product that it already understands this
reduces risk. However, by entering new markets the business is taking a risk as
the consumers in those markets may be very different from consumers in existing
markets. Therefore, Caff Nero may need to adapt its product offer. The appointment
of a manager with experience of the Turkish market and understanding of changing
consumer tastes in the country will give Caff Nero a better chance of success.

Caff Nero may have decided on this strategy because:


Existing markets are saturated.
The Turkish market has not been fully exploited by businesses such as Caff
Nero. The Chinese market is large and incomes are rising.

Asda is using two strategies simultaneously. It has chosen product development


and market penetration:

Product development this strategy seeks to sell new products in existing markets.
Asda is expanding its presence in the non-food market. This carries more risk than
market penetration as the non-food market is not Asdas core competence. It may
have chosen this strategy because there is greater opportunity for sales growth than
in food retailing due to rising incomes in the UK.

Market penetration the aim is to boost sales in existing markets. This is a


relatively safe strategy as it focuses on both markets and products that are

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A understood. However, the scope for growth may be limited and it is a competitive
market in which Tesco is dominant; therefore, the strategy is not risk free. This
strategy may have been chosen because:
Asda aims to take advantage of economies of scale.
Asda has significant financial resources to pursue a strategy of offering low
prices. It may have highly efficient supply chains established.

4 Discuss the factors that might influence the long-term plans or strategies adopted by a
business. [12]

Businesses typically aim to make profit, increase market share and increase sales.
There are numerous factors that influence the long-term plans or strategies adopted
by a business. A few of them are as follows:
Ownership this will affect the availability of finance and skills within the
business and, therefore, the strategies that can successfully be adopted. Asdas
strategy of market penetration may be influenced by the resources available to
the business as a result of its ownership by Wal-Mart.
Attitude toward risk of owners if the owners are risk averse, they will avoid
taking on too much debt and will use more cautious strategies. For example,
expansion may be far less aggressive and organic growth more likely.
Economic factors:
Interest rates will affect the desirability of debt finance.
Economic growth will be critical.
The exchange rate may influence location decisions.
Market factors consideration will have to be given to the long-term prospects
within a market, e.g. oil companies will have to look for alternative energies if
they are to continue to grow. Competition will also have a significant impact on
strategic decisions, e.g. if Asda is to compete with Tesco, then it has to expand
rapidly into non-food retailing.
Social factors tobacco companies have had to develop strategies to respond
to declining sales in the western economies. This has typically involved
diversification and targeting developing economies.
Political factors tobacco company strategies have been influenced by legal
restrictions in many countries. The evolution of trading blocs, such as the EU,
influences location decisions.

Activity 36.3 (page 636): Major change proposed at Buildit


Construction plc

1 How would you analyse part 1 of the directors survival plan, according to Ansoff s
matrix? Explain your answer. [4]

Market development: Buildit Construction plc is aiming to enter a new market


segment of the property market. Previously the firm built houses to sell; now it is
considering entering the rental market.

2 Using a force-field analysis diagram, identify and assess the relative strength of the forces
that will drive the change in part 2 of the plan and those that will constrain it. [12]

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A Some of the forces for and against change are identified below. Answers may
suggest other issues and weightings are relatively subjective.

Forces for change Score Forces against change Score


Cutting costs 8 Change proposal: Manager opposition 7
due to economic
downturn Delayering of
management and
multi-skilling
administration staff to
Increasing 3 Staff worried about 3
increase flexibility
responsibilities of new responsibilities
staff

Giving staff 3 Avoiding redundancy 2


greater skills

Inadequate skills of 3
existing staff

Disruption 4

3 Recommend to the directors ways in which they could increase the chances of this
strategic choice being successful. [8]

Improving the chances of this strategic choice being successful requires the
directors to increase the forces driving the plan and/or reducing the strength of the
forces opposing. Possible approaches may include:
Raising wages of remaining staff to reflect their additional responsibilities this
would add a new force (+3) in favour of the change.
Staff training this would reduce inadequate skills by 3 but add a new force,
cost of transition, against change, of +1.
Offer attractive redundancy packages this would reduce the manager
opposition by 3 but add to the cost of transition by 1.
These changes would swing the balance of the force-field analysis from 19:14
against the plan to 17: 15 in favour of the strategy.

Activity 36.4 (page 638): Location decision tree

1 Calculate the expected values at both nodes 1 and 2. [4]

Node 1: EV = 60,000 0.3 + 120,000 0.7 = $102,000


Node 2: EV = 80,000 0.3 + 200,000 0.7 = $164,000

2 Which option is more desirable from an economic viewpoint? [2]

Return of Town A = 102,000 50,000 = $52,000


Return of Town B = 164,000 75,000 = $89,000
Town B is more desirable.

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A 3 Explain the factors that should be taken into account in estimating the economic
returns. [8]

Factors include:
Expected change in GDP and its impact on demand if GDP is growing,
then there will be an increase in demand. Income elasticity of demand will be
important.
Level of unemployment unemployment affects household income and,
therefore, spending.
Impact of competition in each town if a town has a competitor offering
similar products, this will affect estimated revenues.

Any factor that potentially impacts demand or costs should be rewarded.

Activity 36.5 (page 639): Expansion decision

1 Show these options on a decision tree, adding the payoffs and probabilities. [6]

0.8 High
$500,000
$480,000

Petrol forecourt
(100,000) 2
$530,000 0.2 Low
$400,000

1 0.8 High
$800,000
$680,000

Car showroom
(150,000) 3
0.2 Low
$200,000

2 Calculate the expected value of both investments and recommend which option
should be taken. [6]

Node 2: EV = 500,000 0.8 + 400,000 0.2 = $480,000


Node 3: EV = 800,000 0.8 + 200,000 0.2 = $680,000

Financial return for petrol forecourt = 480,000 100,000 = $380,000


Financial return for car showroom = 680,000 150,000 = $530,000

Based on the decision-tree analysis, the car showroom is the better option.

3 State three other factors that you consider might influence the business owners final
decision. [3]

Attitude toward risk if demand is low, then the car showroom only provides
a return of $50,000, whereas the petrol forecourt provides a more consistent

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A outcome with returns of $400,000 and $300,000 respectively for high and low
demand.
Availability of finance the car showroom has a cost of $150,000 compared
with $100,000 for the petrol forecourt. The owner may struggle to finance the
car showroom.
Cash flow the petrol forecourt is likely to provide a quick turnover of stock
and require less working capital to run. The car showroom may require a
significant stock holding and working capital to run.
Payback if finance is an issue, then the owner will consider payback an
important issue. The quicker the payback, the better.

Activity 36.6 (page 641): Which market?

1 Using the data above, draw a decision tree of the options Joe has and add the
probabilities and forecast economic returns. [6]

0.4
$5,000
$6,800

Town A 0.6
2 $8,000

0.3
$3,000
$4,500

Town B
3 0.5
$4,000

$6,900 0.2
$8,000

1 0.4
$3,000
$5,200

Town C 0.5
4 $6,000

0.1
$10,000

0.3
$5,000
$6,900

Town D 0.3
5 $6,000

0.4
$9,000

2 Calculate the expected values of Bes four options. Which town should Joe visit on
Saturday on the basis of quantitative data alone? [10]

Town A, Node 2: EV = 5,000 0.4 + 8,000 0.6 = $6,800


Town B, Node 3: EV = 3,000 0.3 + 4,000 0.5 + 8,000 0.2 = $4,500
Town C, Node 4: EV = 3,000 0.4 + 6,000 0.5 + 10,000 0.1 = $5,200
Town D, Node 5: EV = 5,000 0.3 + 6,000 0.3 + 9,000 0.4 = $6,900

Joe should visit Town D.

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A 3 Explain three factors that could influence the accuracy of Joes forecasts. [6]

Weather poor weather may keep customers away from the market.
The amount of data contained in past records Joe will need to have past data
for the same week of the year for each town. There may be seasonal influences
on demand which incomplete data would not reveal.
Decisions of other stallholders there may be other mobile market sellers of
kitchen equipment who may decide to visit the same town as Joe next Saturday.

Revision case study 1 answer provided on Students CD-ROM.

Revision case study 2 (page 643): Hairdressers dilemma

1 Draw a decision tree of the options available to Mark and Stella and add to it the
probabilities and economic returns of each option. [6]

Close
$0

0.5
$3,000
$2,800 $3,500

1 Professional
(2,000) 2
0.5
$4,000

0.6
$3,000
$3,800

Relatives
(1,000) 3
0.4
$5,000

2 Calculate the expected values of the three options. [6]

Close the business The EV is $0. [A reduction in profit of $6,000 compared to


being open with Mark and Stella present]
Hire a professional stylist EV at node 2 = 3,000 0.5 + 4,000 0.5 = $3,500.
Return = 3,500 2,000 = $1,500.
Employ relatives for two EV at node 3 = 3,000 0.6 + 5,000 0.4 = $3,800.
weeks Return = 3,800 1,000 = $2,800

3 Which option is best on financial grounds alone? [2]

Employing the two relatives gives the highest estimated return, $2,800 compared
with $1,500 if hiring the professional.

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A 4 Explain the other factors you would advise Mark and Stella to consider before taking
the final decision. [6]

Impact on reputation if Mark and Stella use their inexperienced relatives, this
could have a longer-term impact on their reputation if the haircuts they provide
are of an inferior quality.
Impact on the two junior assistants if the salon is closed, this will force the
two assistants to take a holiday. Should Mark and Stella consult the assistants to
ascertain their preferred option?
Impact on customers will closing the salon inconvenience regular customers?
Customers may feel let down if they are not able to make an appointment
during that two-week period and, therefore, go elsewhere.

Essay
2 a Explain how force-field analysis could be used to assess forces driving and
constraining a major decision to relocate a business to another country. [10]

This is a technique for identifying and analysing the positive factors that
support and the negative factors that constrain a decision. It looks at the
advantages and disadvantages of the decision to relocate to another country.
Factors identified are shown on a force-field diagram for ease of interpretation.
The technique is useful for summarising the forces for and against a decision.
A force-field analysis involves:
Analysing the current situation and the desired situation.
Listing factors driving change, e.g. need to be more competitive, high costs
of current location.
Listing constraining factors, e.g. language difficulties, capital outlay
required, impact on existing employees
Allocating a numerical score to each force.
Showing the forces on a diagram.
Identifying whether the change is viable.
Considering how to reduce the strength of the constraining forces and
increase the strength of the driving forces.
Force-field analysis is a framework for considering decisions. The quality of the
assessment of driving and constraining forces depends entirely on the ability of
the manager/team conducting the analysis.

b Evaluate the usefulness of decision trees to managers who take strategic


decisions. [15]

Answers will usually start with a definition of decision-tree analysis and provide a
simple example to illustrate key issues.

Benefits:
Decision trees provide a diagrammatic summary of the options connected with
a decision and the outcomes and economic returns that may result.
It is a quantitative technique.
It aims to reduce risk by taking into account the probability of different
outcomes arising from a decision. It is therefore a more realistic modelling of
decision making as it is not usually certain what the outcome of a decision will
actually be.

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A The analysis encourages managers and other decision makers to consider all
relevant options and variables related to a decision.
The diagram is simple to interpret and provides a summary of the possible
outcomes of a decision.
It promotes discussion of options.
It encourages logical thinking.
It enables comparison of the worst-and best-possible outcomes of decisions.
This is useful to a business if it wishes to minimise risk.

Weaknesses:
Are the data accurate? It is likely to be based on the estimates of future
economic activity and a range of judgements about competitors and the
reaction of relevant stakeholders to the decision being considered.
It ignores qualitative factors. These are often very important to decision makers.
Quality of forecasts may be poor.
Assessment of probability is difficult and is, to some extent, based on the
intuition of the analyst. The business environment is so dynamic that
predictions are, almost inevitably, incorrect.
There is potential for the data to be manipulated to show what the manager
wants to show.
Decision trees do not eliminate risk.
It provides an average economic return. In reality, assuming the data are good,
the return will be one of the branches of the tree, not the average.

Evaluation may consider:


A decision tree is likely to be more accurate when it concerns a decision that has been
taken before as there will be past data to help make estimates about future forecasts.

It is a useful quantitative aid to decision makers that provides a clear assessment of


what decision a business should take. However, whether a business chooses to follow
the recommendation of the analysis will depend on other qualitative factors and the
businesss attitude toward risk. Use relevant business examples to apply the judgement
being shown.

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