Chapter 6 Complete

CHAPTER-6 ALTERNATIVE STRATEGIES (1)
Chapter 6 – ALTERNATIVE STRATEGIES
Strategic Direction: Methods of Strategic Business Forecasting Assessing Business Strategies

Development (Case base
• Product based and SFA (suitability, feasibility and
question/knowledge base Qualitative
resource based strategies acceptability analysis)
question) forecasting (Think
• Key areas of successful
tank, Delphi, sales
strategy development Organic growth VS
o Product-market scope force opinion, market
Mechanistic growth
o Competitive research)
advantage Greiner’s model of
o Growth vector development Quantitative
o Synergy forecasting (statistical
• ANSOFF Growth Matrix
Mergers and acquisitions approach) – high-low
(Case base question) method, linear
Integration strategies
o Market penetration (Forward and Backward)
regression and time
o Market development series analysis
o Product development Diversification strategies
o Diversification
(concentric and
conglomerate)
• GAP analysis
• Withdrawal strategies
• Corrective and
consolidated strategies
CHAPTER-6 METHODS OF DEVELOPMENT (2)
CHAPTER NO. 6
ALTERNATIVE STRATEGIES
Contents
1 Strategic direction: An introduction
2 Strategic direction: Ansoff Grid
3 Methods of strategic development
4 Methods of business forecasting
5 Assessment of business strategies

1. Strategic direction: An introduction
Section overview
◼ PIMS analysis
◼ Product-based and resource-based strategies
◼ Four key areas for successful strategy development
◼ Product-based strategies and strategic direction
1.1 Product-based and resource-based strategies

Product market strategies can be:
• Product-based or
• Resource-based
Product-based strategy identifies which products a firm should sell and then select market segments to
which these products should be sold. The focus is on which products are most likely to be successful in
their markets, hence generate more profits.
Resource-based strategy identifies that firms should look for the strengths and competencies in their
internal resources. The resource-based strategy takes the view that firms should exploit opportunities in
the market by exploiting their core competencies.
Hamel and Prahalad argued that a resource-based approach to strategy selection:
• provides a basis for deciding which new product-market areas to enter, and
• is a more flexible approach to strategic planning than the selection of target products and
markets as part of a formal, long-term business plan.
Example: Amazon.com was originally a specialist online seller of books via the internet. Over time, it
developed several core competencies:
• a user-friendly website for online purchasing
• an efficient delivery service for small packages to customer addresses
• a recognized name and reputation.
The company has been able to use these core competencies to develop its business outside the sale of
books. The same competencies that sell books successfully can be applied to similar products that are
easily warehoused and can be dispatched in small parcels, such as CDs and DVDs.
1.2 Four key areas of successful strategy development
The entity should focus on following key areas for successful strategy development:
• Product-market scope: The entity should have a clear product-market scope. This product-
market scope comes from corporate level strategy discussed in chapter 1.
• Competitive advantage: The entity should identify those properties of the product-market
areas in which it intends to operate that will give the entity a strong competitive advantage over
its rivals. Making strategic choices about which strategy provides competitive advantage has
been discussed in chapter 5
• A growth vector is the direction in which the entity is moving from its current product-market
position. It indicates where the entity sees its future growth. The growth vector might be a new
product area, a new market, or both (ANSOFF matrix)
• An entity should also indicate how it might expect to benefit from synergy by moving into new
product-market areas. Synergy is perhaps best described as the ‘2 + 2 = 5 effect’.
Synergy can be achieved by:
• Instead of making just one product, making two different products with the same equipment and
getting better utilization of the equipment as a result.
• Selling two products with the same sales force, instead of selling just one product.
Synergy can therefore provide extra benefits from making and selling two products instead of one, or
making and selling a product in two different markets instead of one.
2. Strategic direction: ANSOFF Grid/Growth Matrix
Section overview
◼ Growth vector analysis: Ansoff

◼ Market penetration strategy
◼ Market development strategy
◼ Product development strategy
◼ Diversification strategy
◼ Gap analysis
◼ Withdrawal strategy
◼ Consolidation and corrective strategies
2.1 Growth vector analysis
Ansoff (1957) argued that when a firm is planning its growth strategies, there should be a link between
its current products and markets and its future products and markets. This link is necessary so that
outsiders (for example, investors) can see in which direction the entity is moving. It also provides
guidance to the entity’s own management.
Ansoff summarized the potential strategies for product-market development with a 2 × 2 matrix. It
sometimes referred to as Ansoff’s growth vector matrix or product mission matrix.
Product
Existing products New products
Product development
Existing Market penetration strategy
market strategy
(or innovation strategy)
Market
New Market development Diversification strategy
market strategy
2.2 Market penetration strategy
A market penetration strategy is sometimes called a ‘protect and build’ strategy. With a market
penetration strategy, an entity seeks to sell more of its current products in its existing markets. This
strategy is a sensible choice in a market that is growing fast. With fast growth, all the companies
competing in the same market can expect to benefit from the rising sales demand.
A market penetration strategy is more difficult to implement when the market has reached maturity or
is growing only slowly.
Kotler suggested that market penetration strategy can be successful in three ways:
• Persuade existing customers to use more of the product or service, and so buy more.
• Persuade individuals who have not bought the product in the past to start buying and using the
product. Marketing tactics for attracting new users might include advertising or special
promotional offers
• Persuade individuals to switch from buying the products of competitors. This is a competitive
strategy based on winning a bigger market share.
Example: In the month of Ramazan, fast moving consumer goods companies offer different
promotional discounts to encourage the consumers to buy their products. “buy one, get one free” is one
of the promotional strategies, firms deploy. This is short term strategy. In the long run, the firm may
offer 50% discount. That will be a ‘low price’ strategy.
A market penetration strategy is a low-risk product-market strategy for growth, because unless the
market is growing fast, it should require the least amount of new investment. However, there are some
risks with this strategy:
• If the company fails to increase sales, its business will have no strategic direction, and will suffer
from ‘strategic drift’.
• A strategic choice of ‘doing nothing new’ is a high-risk choice, because competitors are likely
to be much more innovative and competitive.
• This strategy will be difficult to implement when firms are facing price wars
2.3 Market development strategy
Market development involves opening up new markets for existing products. Kotler suggested that there
are two ways of pursuing this strategy:
Market can be developed:
• Geographically (The entity can start to sell its products in new geographical markets)
• Demographically (The entity can try to attract customers in new market segments, by offering
slightly differentiated versions of its existing products, or by making them available through
different distribution channels.)
Example: Gourmet bakers and restaurants initiated their business in Lahore. After capturing the market
of Lahore, the business expanded in other cities of Pakistan such as Islamabad, Faisalabad etc. This is
geographic market development
Cadbury’s daily milk chocolate is targeting older people as their consumers instead of children. They
are projecting the use of chocolate in different age groups and not only children. This is demographic
market development.
2.4 Product development strategy
Product development is a strategy of producing new products for an existing market. There are several
reasons for choosing this strategy.
• The business entity might have a strong brand name for its products, and it can extend the
goodwill of the brand name to new products.
• The entity might have a strong research and development department or a strong product design
team.
• The entity has to react to new technological developments by producing a new range of products
or product designs.
• The market has growth potential provided that new products are developed.
• The entity wants to respond to a strategic initiative by a major competitor, when the competitor
has developed a new product.
• Customer needs might be changing, so that new product development is essential for the
survival of the business.
Disadvantages of a product development strategy are that:
• developing new products can be expensive

• a large proportion of new products are unsuccessful.
Example: Pepsi Co has successfully pursued product development strategy by launching new products
like energy drinks (Sting), potato chips (Lays) and juices (Tropicana) in the market.
2.5 Diversification strategy
Diversification is a strategy of selling new products in new markets. A distinction can be made between:
• Concentric diversification/related diversification

• Conglomerate diversification
Concentric diversification/related diversification: the new product-market area is related in some

way to the entity’s existing products and markets. The aim of concentric diversification might be to use
the entity’s existing technological know-how and experience in a related but different product-market
area. Here are some examples:
• Bareeze, a female apparel brand has successfully initiated male apparel brand named Bareeze
Men.
• An airline company might acquire an international chain of hotels.
• An automobile manufacturer starts manufacturing industrial generators
Conglomerate diversification: the new product-market area is not related in any way to the entity’s
existing products and markets. The aim of conglomerate diversification is to build a portfolio of different
businesses. The reasoning behind this strategy might be as follows:
• Diversification reduces risk. Some businesses might perform badly, but others will perform
well. Taking the businesses as a diversified portfolio, the overall risk should be less than if the
entity focused on just one business.
• Diversification will save costs and generate ‘synergy’ but it won’t be possible if the company
is engaged in truly unrelated business (Guard automobile parts and Guard rice)
2.6 Using ANSOFF model for gap analysis
ANSOFF matrix can be used by the firms to identify the gap between their current and desired position.
The riskier the strategy will be, the farther it will take the organization.
(Rs)
Example: Fine China is a manufacturer of high-quality dinner services (plates, saucers, bowls, cups, saucers
etc.) and has a dominant position at the high-quality end of its national market. The market is in a slow
decline.
Management is considering its strategies for the future. The aim is to achieve a 5% average annual growth in
the entity’s share price over the next five years.
Required
Suggest briefly a strategy that the entity might adopt if its strategic direction is:
• Market penetration
• Product development
• Market development
• Diversification
Solution
Market penetration Aim to win more share of the existing market, possibly by means of a takeover
(acquisition of a competitor’s business).
Product development Aim to develop new products for the same market. This might be achieved by
developing lower-quality and lower-priced products, under a new brand name,
for sale through the same outlets as the existing products.
Market development Try to sell the company’s existing products in new geographical markets – in
selected other countries.
Diversification The company might be able to diversify into related products and markets
(concentric diversification) by developing household ornaments made from
china.
2.7 Withdrawal strategy
As the name suggests, a withdrawal strategy is a strategy for withdrawing from a particular product-
market area. This might be appropriate, for example, when:
• the entity can no longer compete effectively, or
• the entity wishes to use its limited funds and resources in a different product-market area.
A withdrawal strategy might be adopted as a deliberate policy by deciding to:
• reduce the range of products offered to the market
• reduce the number of markets or market segments (for example, pulling out of a market in one
or more regions of the world)
• withdrawing entirely from the market, and no longer operating in the market.
The reasons leading to a withdrawal from a product-market area might be any of the following:
• A decline in the size of the market or market segment, for example because the product is
becoming obsolete.
• More effective and successful competition from rival firms.
• Poor financial results; for example, the product might be loss-making.
• A decision by the entity that the product is no longer a ‘core product’ and the entity therefore
does not intend to continue making and selling it.
2.8 Consolidation and corrective strategy

A business entity might decide that it does not need to grow. A consolidation strategy is a strategy for
maintaining market share, but not increasing it. There are several reasons why an entity might choose a
non-growth strategy:
• The entity might be managed by their owner, who does not want the business to get any larger.
• Management might take the view that if the entity gets any bigger, there will be serious problems
in managing the enlarged entity.
However, a strategy of non-growth does not mean a strategy of doing nothing.
Business entities must continue to innovate even to ‘stand still’. For that, business need a corrective
strategy.
Corrective strategy is a strategy for making corrections and adjustments to current strategy, to counter
threats from competitors or to respond to changes in customer needs. Corrective strategies might be
necessary as a part of a consolidation strategy.
Example: British Broadcasting Corporation (BBC) does not have a growth strategy. The firm is not
looking for new listeners or viewers, but the firm has to cope with technological advancements. A
corrective strategy in recent years has therefore been to develop digital television and radio broadcasting.
The BBC launched several digital television and radio channels, designed to attract existing customers
to the new technology.
3 Methods of strategic development
Section overview
◼ Organic growth through internal development

◼ Greiner’s growth model
◼ Mergers and acquisitions
◼ Diversification and integration
◼ Forward and backward integration
Whatever product-market strategies are selected, an entity must also decide how to develop the chosen
strategies.
There are three main approaches to developing a product-market strategy for growth:
• Organic growth
• Growth through acquisitions and mergers
• Joint ventures and strategic alliances
3.1 Organic growth through internal development

An entity might grow its business with its own resources, seeking to increase sales and profits each year.
There are several advantages of internal development over other forms of strategy for growth:
• Management can control the rate of growth more easily and ensure that the entity has sufficient
resources to grow successfully.
• The entity should be able to focus on its core competencies and develop these in order to grow
successfully.
• If the entity finds that it is short of a key labor skill, it can buy the labor skills it needs by
recruiting new staff.
There are some disadvantages with growth through internal development.
• The biggest disadvantage is probably that there is a limit to the rate of growth a business entity
can achieve with its internal resources. Rival firms might be able to grow much more quickly
by means of mergers, acquisitions and joint ventures.
• It may take time for the firm to develop its business. The rate at which business develops might
be slow as compared to the rate at which market expands
• If growth requires diversification, the firm will have to learn new skills.
Greiner’s growth model provides an analysis of how organization and management structures might
need to change as a business grows.
3.2 Greiner growth model
In the 1970s, Greiner suggested that an entity that grows in size goes through a series of changes as it
gets bigger. Each change occurs in response to a ‘crisis’, when the existing organization and
management structure is no longer capable of handling a business as large as it has now become.
According to Greiner, there are five phases in the life of an entity. These phases, and the crisis that starts
each new phase, are set out in the diagram below:
3.2.1 Phase 1: period of growth through creativity
The early years of a successful business entity are a period of creativity and innovation. The entity is
probably managed in an entrepreneurial way, and it is producing new products that appeal to customers
and is developing new markets.
Over time, production becomes more organized. As the entity grows, the entrepreneurial method of
management and the existing organization structure both become inefficient. The organization needs
organization and planning and control systems.
There is a crisis of leadership. Management must become more ‘professional’. The entity therefore
introduces professional management, and it enters its next phase of growth.
3.2.2 Phase 2: period of growth through direction
The entity is now more structured, with a ‘traditional’ management hierarchy. Formal systems are
introduced, such as planning and control systems (budgeting and budgetary control), accounting
systems, inventory control, production scheduling, communication and IT systems etc.
However, as the entity grows, the hierarchical management structure becomes inefficient. The control
systems and reporting systems are designed for close control from the top by senior management.
However, management control from the top is not as effective as it used to be. Top management are far
away from actual operations, and ‘local’ managers know much more about how the business functions
in their area of operations.
There is a crisis of autonomy. The ‘tensions’ between senior management and local management grow.
Until local managers are given more authority to take decisions for themselves, the entity will be
managed inefficiently from the top.
3.2.3 Phase 3: period of growth through delegation
In order to survive, the entity is reorganized, with much more authority delegated to ‘local’ managers.
The entity is organized in divisions, which might be profit centers. Central management receive reports
from the divisions, but divisional managers take most of the decisions about how the division should be
run.
However, as the business continues to grow, central management realize that they are losing most of
their own authority, and that the local managers are becoming perhaps too powerful and unaccountable.
This leads to a crisis of control. Central/senior management must change the organization and
management structure, to avoid losing control.
3.2.4 Phase 4: period of growth through coordination
In this phase of growth, central management monitor their local managers carefully, using sophisticated
reporting systems. Local managers are more accountable, although they have delegated authority to
make decisions.
The key focus is now on coordinating the activities of the business and developing a clear reporting line
from top to bottom. However, as the entity continues to grow, the reporting systems start to create a
bureaucratic culture at head office. Local managers become angry at having to provide so many reports,
and explain so much to head office, when they feel that their time would be better spent in managing
operations. This leads to a crisis of red tape – with too much form-filling, report-writing and
bureaucracy.
3.2.5 Phase 5: period of growth through collaboration
Greiner suggested that the crisis of red tape leads to a further change. To overcome the problems of red
tape, head office management and local managers find ways to collaborate more constructively.
There is a greater emphasis on teamwork and problem-solving, and less emphasis on formal reporting
systems and accountability. Participation in decision-making by more individuals is encouraged.
Since no entity has gone beyond Phase 5 of its development Greiner suggested that it was too early to
tell whether there is a crisis the end of Phase 5, leading perhaps to even more change.
3.3 Mergers and acquisitions
An entity can grow quickly by means of mergers or acquisitions. Both mergers and acquisitions involve
the creation of a single entity from two separate entities.
Mergers: two entities that come together are approximately the same size.
Acquisitions: one entity is usually larger than the other and acquires ownership (control) by purchasing a
majority of the equity shares.
Acquisitions are more common than mergers, but large mergers are possibly more significant, because they
can create market leaders in their industry.
3.3.1 Advantages of acquisitions and mergers
Acquisitions and mergers have several advantages as a strategy for growth, compared with a strategy of
internal development:
• Growth by acquisition or merger is much faster than growth through internal development.
• An acquisition can give the buyer immediate ownership of new products, new markets and new
customers, that would be difficult to obtain through internal development.
• An acquisition enables an entity to enter new market where the barriers to entry are high.
• It might result in cost savings and higher profits (‘synergy’).
3.3.2 Disadvantages of acquisitions and mergers

• An acquisition might be expensive. The bid price has to be high enough to make the shareholders
of the target company willing to sell their shares.
• A merger or acquisition can result in a loss of proportional ownership of the entity (a shareholder
who held say 10% of one of the companies before the merger might only own 5% of the merged
company.)
• The two entities will have different organization structures, different management styles,
different cultures, different systems of salaries and wages.
• When individuals from different ‘cultures’ are brought together into a single organization, there
will probably be a ‘clash of cultures’, and it may be difficult for individuals from the different
cultures to work together easily.
3.3.3 The issue of ‘synergy’ in mergers and acquisitions
Synergy is often a key reason for a merger or acquisition. Synergy will occur when, as a result of a
merger or acquisition, there are operational or financial benefits:
• There might be over-capacity of equipment and property, so that the surplus assets can be sold
off.
• An acquisition often results in redundancies for large numbers of employees. Running costs are
reduced.
• Two Research and Development departments can be combined into just one, and savings in
running costs should be possible.
3.3.4 Challenges to acquisitions
A successful strategy of growth through acquisition requires financial strength. A company needs one or more
of the following:
• A large amount of cash that is available for long-term investment.

• Access to additional funding, in the form of new equity
• Highly-regarded shares. Many acquisitions are negotiated as a share-for- share exchange, with
shareholders in the target company agreeing to accept shares in the acquiring company as payment for
their shares.
3.4 Diversification and integration

Integration is a term that means extending a business. There are two main types of integration:
• Horizontal integration
• Vertical integration
o Forward integration
o Backward integration
Horizontal integration. With horizontal integration, an entity extends its business by obtaining a larger
share of its existing product markets. Typically, an entity might acquire one or more of its competitors.
Vertical integration. With vertical integration, an entity extends its business by acquiring (or merging
with) another entity at a different stage in the supply chain. A strategy of vertical integration is usually
a form of concentric diversification.
3.5 Forward and backward integration
With forward vertical integration, also called ‘downstream’ integration, an entity enters the product
markets of its customers. For example:
• Car manufacturer opens their own company operated showroom of cars

• Wholesaler enters retail business
• A company specializing in oil and gas exploration moves into the business of oil and gas
extraction
With backward vertical integration, also called ‘upstream’ integration an entity enters the product
markets of its suppliers. For example:
• A car showroom owner starts own car assembling/manufacturing

• A retailer enters into wholesale business
• A company specializing in oil and gas extraction moves into the business of oil and gas
exploration.
3.5.1 Advantages of vertical integration
The reasons given for forward or backward vertical integration might be as follows:
• Backward integration gives an entity control over its source of supply.

• Forward integration can give an entity control over its channels of distribution.
• Vertical integration allows an entity to extend its expertise and skills into related product
markets.
• Vertical integration makes it easier to find ways of reducing costs in the supply chain and adding
value.
• Vertical integration can help to differentiate the product.
3.5.2 Disadvantages of vertical integration

• A cozy, relaxed relationship is likely to grow between, say, an in-house component

manufacturer and producer of the finished product. The component manufacturer knows that
the group company will almost certainly buy its components, and so there is little pressure for
cost efficiency and innovation.
• Other companies might turn out to be more successful in reducing the cost and innovating
because of their expertise. The company is bound to source raw material from in-house
department, whereas, there are cheaper sources might be available.
• Firm may deviate from its core business
• The firm may not have ample management skills to handle integrated business
4 Methods of business forecasting
Section overview
◼ Intuitive (qualitative) forecasting

◼ Statistical forecasting techniques
◼ High-low method
◼ Linear regression analysis
◼ The nature of a time series
Firms need to understand the future impact of selected strategy or strategies. Forecasting is a generic
skill that can assist management in making strategic decisions and developing functional plans. There
are different forecasting techniques that help management assess the impact of selected strategies and
make functional plans accordingly.
4.1 Intuitive forecasting
Intuitive (qualitative) forecasting is forecasting based, not on mathematical techniques, but on the
intuition and opinion of experts – i.e. qualitative factors. Intuitive forecasting techniques include:
• Think tanks
• Delphi method
• Sales force opinion
• Market research
4.1.1 Think tanks
A think tank might be used to produce collective ideas about the future. A think tank is a group of experts
who meet to discuss what might happen in the future, and possibly to recommend a course of action or
strategy for the future.
A firm might establish a think tank. This will then meet occasionally and produce reports for senior
management, setting out their views, predictions and (possibly) recommendations.
A potential weakness of think tanks is that by bringing several experts together to share ideas, the views
of stronger-minded individuals might dominate those of their colleagues.
4.1.2 Delphi method
The Delphi method is named after the Delphic oracle of Greek legend. There are three different types
of participants in the Delphi method: decision makers, staff personnel, and respondents. Decision makers
usually consist of a group of 5 to 10 experts who will be making the actual forecast. Staff personnel
assist decision makers by preparing, distributing, collecting, and summarizing a series of questionnaires
and survey results. The respondents are a group of people, often located in different places, whose
judgments are valued. This group provides inputs to the decision makers before the forecast is made.
4.1.3 Sales force opinion

This involves liaising with the sales force to gather their perspectives and forecasts on sales and market
figures. A common approach is to add together the forecasts provided by each individual sales team to
produce a consolidated total forecast sales figure. This is called a ‘bottom-up’ approach.
4.1.4 Market research
A market research approach involves interacting with the market, perhaps through surveys,
questionnaires and feedback forms, to establish the market’s view on a product or strategy in order to
gauge potential demand.
4.2 Statistical forecasting techniques
Statistical forecasting techniques are methods of forecasting with mathematical models.

In some cases, forecasts might be prepared by projecting historical trends, on the assumption that trends
in the past will continue into the future.
4.3 High-low method
The high-low method provides an estimate of fixed and variable costs for an activity based on analyzing
two historical costs:
• the total costs for the highest recorded volume of the activity, and
• the total costs for the lowest recorded volume of the activity
The high-low method is a simple method of separating mixed costs into fixed and variable cost elements.
However, it is based on the assumption that two historical records of cost are reliable indicators of cost
behavior.
4.4 Linear regression analysis
Linear regression analysis is a technique for estimating a ‘line of best fit’ from historical data. . It can
also be used to analyze a historical trend, for example a historical trend in sales volume, in order to
prepare a forecast for future periods, on the assumptions that the trend:
• is upward or downward in a ‘straight line’, and

• the historical trend will continue in a straight line in the future.
Linear regression analysis is a more accurate forecasting method than the high- low method. Like the
high-low method, it assumes that there is a straight-line formula 'y = a + bx’. It also uses historical data
to produce an estimate for the values of a and b.
4.5 The nature of a time series
A time series is a record of data over a period of time. In budgeting, an important time series is the
amount of annual sales revenue (or sales revenue per month or revenue per quarter) over time. Time
series analysis works same as linear regression. The independent variable ‘x’ is replaced by time ‘t’ in
time series analysis (y = a + bt)
There may be seasonal variations in time series analysis.
5 Assessment of business strategies

Section overview
◼ The basis for assessing business strategy

◼ Suitability of a strategy
◼ Suitability: life cycle analysis and the life cycle portfolio matrix
◼ Suitability: assess resources and competencies
◼ Suitability: business profile analysis
◼ Feasibility of a strategy
◼ Acceptability of a strategy
◼ Selecting individual investments: strategic fit
5.1 The basis for assessing business strategy
Before deciding whether or not to choose a particular business strategy, an assessment should be
carried out to judge whether the strategy is acceptable. Johnson and Scholes suggested that when
judging the strengths or weaknesses of a proposed strategy, the strategy should be evaluated for its:
• Suitability (does the strategy addresses strategic requirements and the circumstances?)
• Feasibility (is it practical?)
• Acceptability (will the strategy be accepted by the stakeholders?)
The qualifying criteria of any strategy is its financial viability. Financial aspects must be taken into
consideration while evaluating a strategy.
Exam focus: In your examination, you might be given a case study to evaluate various strategies based
on SFA analysis. You should keep this thing in mind that that a strategy must not be recommended if it
financially not viable.
5.1.1 Suitability of a strategy
A strategy is suitable when:
• It helps firm to gain competitive advantage over the competitors

• It bears a certain level of acceptable business risk
Suitability of a strategy can be assessed by using any of the following techniques:
• Lifecycle analysis and lifecycle portfolio matrix

• An assessment of resources and competences
• Business profile analysis
Lifecycle portfolio matrix can be used to assess the suitability of a strategy in relation to product
lifecycle stage. Lifecycle portfolio matrix suggest that a firm should adopt a strategy that is consistent
with its product lifecycle stage and competitive market position. A few strategies that can be seen on
intersection of product lifecycle stage and competitive market position are:
• ‘Fast grow’ means ‘grow the company’s business at a faster rate than the rate of growth in the
market as a whole’.
• ‘Grow with the industry’ means ‘grow the company’s business at the same rate as the average
rate of growth in the market as a whole’.
• ‘Find niche’ means try to develop a market niche for the product.
• ‘Retrench’ means cut expenditure and reduce investment: usually this means accepting a
reduction in market share.
• ‘Renew’ means give the product new ‘life’ by introducing new and improved features.
• ‘Harvest profits’ means treat the product as a ‘cash cow’: take the money from profits but do
not invest further.
An assessment of resources and competence is made based on:
• The key resources that are needed to carry out a strategy

• The key competences a firm must need to carry out a strategy
A strategy should not be considered suitable unless it is expected to make use of the entity’s core
competencies.
A business profile analysis is used to match the strategy with overall profile of the organization. For
example, a firm is known for superior quality branded products. Launching a product to be sold in lower
end of the market to increase market share is therefore not a suitable strategy.
5.1.2 Feasibility of a strategy
The feasibility of a strategy is concerned with whether it will work. A strategy is feasible if it can be
implemented successfully. Assessing whether or not a strategy is feasible will require some judgement
by management.
Some of the questions to consider are as follows:
• Is there sufficient finance for the strategy?

• Can we achieve the necessary level of quality that the strategy will require?
• Do we have the marketing skills to reach the market position that the strategy will expect us to
achieve?
• Do we have enough employees with the necessary skills to implement this strategy successfully?
• Can we obtain the raw materials that will be needed to implement this strategy?
• Will our technology be sufficient to implement the strategy successfully?
An important aspect of strategy evaluation is the financial assessment.
• Will the strategy provide a satisfactory return on investment?

• Is the risk acceptable for the level of expected return?
• What will be the expected costs and benefits of the strategy? How will it affect profitability?
• What effect is the strategy likely to have on the share price?
5.1.3 Acceptability of a strategy
The acceptability of a strategy is concerned with whether it will be acceptable to key stakeholders.
Management should then consider whether a strategy that is not acceptable to a key stakeholder should
be undertaken or not.
There are several aspects of ‘acceptability’.
• Management will not regard a strategy as acceptable if the expected returns on investment are
too low, or if the risk is too high in relation to the expected return.
• Investors might regard a strategy as unacceptable if they will be expected to provide a large
amount of additional investment finance.
• Employees and investors might consider a strategy unacceptable if they regard it as unethical.
5.2 Strategic fit

When an entity has decided its business strategies, it might make new investments or undertake new
business initiatives in order to put the strategy into practice. In principle, all new investment decisions:
• should be expected to provide a minimum acceptable financial return

• should be consistent with the chosen strategies.
However, an investment opportunity might be identified that will provide high financial returns, but is
not a good strategic fit. Even though the investment is not consistent with agreed strategy, it would
probably be undertaken
In other situations, an entity may decide to undertake an investment with low financial returns, because
it is an excellent ‘strategic fit’.
Past papers Grid
CFAP CFAP (BMS) Module E (BM)

(SPM)
Attempt W- S- W- S- W- W- S- W- S- W- S- W- S- W- S- W- S- W- S- W- S-
22 22 21 21 20 19 19 18 18 17 17 16 16 15 15 14 14 13 13 12 12
Topic
Ch. 6
Product based and resource-based strategies
Successful strategy development
ANSOFF Grid Q2 Q3b Q1b Q7b Q5a Q6

i,ii
Withdrawal, corrective and consolidation Q7e Q3
strategy
Organic growth (Greiner model) Q2 Q8a Q4 Q4i Q7a Q8
Mergers and acquisitions Q1a Q8a
Diversification Q7 Q7d Q2a Q6iv

ii
Backward and forward integration Q3a, Q7b Q7c Q6ii Q6ii Q3a
b i i
Forecasting
SFA Analysis Q7
Total Qs of CFAP-3 (BMS) during W-2016 to W-2022 = 12

PRACTICE QUESTIONS
Q NO. 1
Steadfast Bank (Bank) is operating through its branches in major cities of the country. The management has
recently introduced certain structural changes for Bank’s branches. Each branch is now being treated as a profit
center where return on invested capital will be an important criterion for fund allocation. Branch managers are
given greater autonomy for making operational decisions. The management at head office is now concentrating
on strategizing the ways to expand the business in other parts of the country.
Required:
By using Greiner’s growth model:

(a) Identify and explain the present phase of the Bank. Also, discuss the crisis it may likely encounter if it
continues to grow. (04)
(b) Suggest the measures that management at head office should take to overcome the crisis as discussed
in part (a). (03)
(Summer 2019, Q4)
Q NO. 2
Grill Shack (GS) is the largest fast food chain of the country. It is regarded for ambiance, gourmet meals and
customer services. The major ingredients are imported from USA. The management is concerned over the
increasing cost of imports contributed by weakening local currency and increasing import duties.
GS is considering acquiring local livestock and poultry farms where all activities from breeding to processing
would be carried out exclusively for meeting major ingredient requirements of GS. Fariha Wajahat (Fariha),
marketing head, has raised concerns that such integration may have adverse impact on the financial and non-
financial performance of the business. However, COO has suggested that introduction of entity-wide balanced
scorecard could assist in achieving a satisfactory balance between various aspects of performance.
Required:
(a) Identify the integration GS is intending to pursue. Briefly discuss the benefits that may accrue to GS
on adopting such integration. (05)
(b) Justify the concerns raised by Fariha. (03)
(Summer 2019, Q3(a&b))
Q NO. 3
Fashion Couture (FC), a leading fashion designer has a presence in all the prominent shopping malls across the
country. It started a small boutique that transformed into a first choice brand among women in short span of
time. It has following three product lines:
Daily wear
It comprises of unstitched and ready-made dresses. It was the first product line that FC introduced in 1990 and
gained instant popularity due to availability of different designs and sizes with reasonable quality and courteous
customer support staff at the most economical prices in the market. The demand for this product line has
significant potential for growth in the existing market and the competitors are striving hard to increase their
respective market shares.
Bridal dresses
It comprises of tailor-made bridal dresses. This product line is popular among targeted upper class groups. The
designers are well-qualified having sound knowledge of customer needs. The premium quality and unique
designs are highly regarded by targeted customers. However, the demand for bridal dresses is moderate whereas
competitors offering party wear dresses are enjoying hefty profits due to high demand.
Fragrances
It comprises of range of perfumes. This product line was first launched in 2015. Despite aggressive marketing,
this product line could not attract the high-end targeted customers who have strong brand loyalty towards already
established brands available in the market. Consequently, FC has set high prices in the hope of achieving break-
even.
Required:
Recommend the growth strategy for each of the product line of FC in terms of Ansoff’s Matrix. Also discuss
how the recommended strategy can be implemented successfully. (09)
(Winter 2018, Q1(b))
Q NO. 4
Identify the strategies/policies that are being pursued in each of the following cases. Also discuss two risks
associated with each strategy/policy:
Oven Fresh (OF) are a home based cake bakers. They have outsourced their online order taking, packaging and
delivery services to Tezz food distributors. However, due to constant complaints of customers over delayed
delivery, OF is in the process of starting its own delivery services. (04)
(Summer 2018, Q7 (b))
Q NO. 5
Study the different situations and the information given below and select the most appropriate option. Each
multiple choice question carries ONE mark.
A company engaged in the manufacture of cement is planning to launch ventures in earth moving equipment
and motor cars. The company is pursuing a policy of:
(a) vertical/forward strategy
(b) synergy optimisation
(c) conglomerate expansion or diversification
(d) horizontal integration [Summer 2017, Q7 (ii)]
Q NO. 6
Robust Tyres Limited (RTL) is engaged in the business of manufacturing and marketing of tyres for cars, trucks
and tractors. Recently, Eagle Tyre Limited (ETL) has offered to sell its company to RTL because of serious
internal conflicts among the principal owners.
Consultants appointed by RTL to conduct an examination of the affairs of ETL have given satisfactory report
regarding the quality of assets, competence of the staff, manufacturing processes, marketing and distribution
network, and financial position of the company. The consultants have further stated that the asking price by ETL
is high but not too unreasonable.
Discuss what other matters of significance should RTL consider in evaluating the proposal of ETL. (06)
(Winter 2016, Q 1(a))
Q NO. 7
Study the following scenarios:
Established as a family business in 2005, Star Confectionary Limited has expanded its operations significantly
due to the sustained efforts of family members and substantial reinvestment of earnings in the business.
Match each of the above scenarios with any one of the following concepts/principles.
(i) environmental footprint (ii) change management
(iii) transformational change (iv) organic growth
(v) activists (vi) clusters
(vii) career progression (viii) ethical manufacturing
(ix) Delphi method (x) sustainable reorganization
(xi) conflict (xii) queuing theory
(xiii) horizontal growth (xiv) pragmatist
(Winter 2016, Q4(i))
SOLUTIONS TO PRACTICE QUESTIONS

SOLUTION TO Q NO. 1
ICAP EXAMINER COMMENTS
Many examinees failed to identify the correct phase of growth and opted for guesswork. Consequently, they
could not be able to suggest appropriate measure.
SOLUTION BY ICAP
(a) As per Greiner’s growth model, Bank is in the phase 3 i.e. ‘Period of growth through delegation’. In this
phase of growth, central management mostly focuses on strategy and business expansion. Divisional
managers take most of the decisions about how division should be run.
This phase may lead to crisis of ‘control’. As business continues to grow, central management would
realize that it is losing most of its authority and that local managers are becoming too powerful and
unaccountable.
(b) The management at head office should take following measures:
• Branches should be carefully monitored at head office by using sophisticated reporting systems.
• Branch managers should be held accountable for their decisions.
• Focus should be on coordination of activities at all branches and overall consolidation of the
business.
SOLUTION TO Q NO. 2
(a) • Some examinees could not identify the backward vertical integration from the given scenario.
• Many examinees repeated the same benefits by using different wordings.
(b) This part was performed well by the examinees.
SOLUTION BY ICAP
(a) GS is intending to pursue ‘backward vertical integration’ as it is entering the product market of its
suppliers. Following benefits may accrue to GS:
• It would have greater control over the source of supply that may be extended to desired quality
and timely availability of ingredients.
• It may be in a better position to differentiate its product as backward vertical integration often
assists in making unique components to meet customers’ demand more efficiently.
• It may result in reducing costs for GS in terms of suppliers’ profit margins and import duties.
• It may develop competitive advantage for GS as it would be in a better position of achieving
economies of scale.
• It may relieve GS from foreign exchange risks.
(b) Fariha has rightly raised concerns over probable adverse impact on the financial and non-financial
performance of GS because of the following:
• Acquiring and operating livestock and poultry farms may involve high capital investments. The
costs incurred may outweigh the benefits expected to achieve.
• Core competence (ambiance, customer service and gourmet meals) might be compromised
while seeking new competence that may adversely impact the overall reputation of GS.
• A relaxed relationship between entities is likely to grow. Management at farms know that GS
restaurants would most certainly buy its products that may result in less pressure on achieving
cost efficiency and innovation.
• As GS would no more be importing ingredients from USA, certain number of customers might
be lost who prefer meals prepared from imported ingredients.
SOLUTION TO Q NO. 3
This question required thorough understanding of the Strategic Clock as mentioned by Bowman. According to
the given scenario, a leading fashion designer had three product lines. Relevant details were provided in the
question. The question consisted of two parts. The overall performance was rather poor as only 23% of the
candidates could secure passing marks. This was mainly because many candidates lacked knowledge of
Bowman’s Strategic Clock. Other issues are discussed in the part-wise comments given below:
This part of the question required growth strategy for each product line in terms of Ansoff’s Matrix. Some
students gave answers with respect to BCG matrix.
Most of the students who answered with respect to the Ansoff’s growth matrix, correctly mentioned the Market
penetration strategy for Daily wear. However, many of them were not sure as to what exactly should be done.
Similar situation was witnessed in the case of Bridal dresses also as most students identified Product
development strategy correctly but could not specify what could be done to implement the strategy.
As regards Fragrances, many students stated that this product line should be abandoned. In fact, closing down a
product line must be the last resort. In the given situation, there was a need to rethink the strategy of relying on
high end customers and look for other geographical markets or different customer segment.
SOLUTION BY ICAP
Recommended strategy for each product line in terms of Ansoff’s Matrix with guidance for implementation is
given hereunder:
Daily wear
It is recommended to follow market penetration strategy as demand for this product line has significant potential
for growth in the existing market. This strategy can be implemented successfully by means of aggressive
marketing. FC should seek to sell more of its current products in its existing markets by persuading existing
customers to buy more, persuading individuals who have not bought the product in the past to start buying and
persuading individuals to switch from buying the products of competitors.
Bridal dresses
It is recommended to follow product development strategy. This can be achieved by offering party wear dresses
also as competitors are enjoying hefty profits. This strategy can be implemented successfully by using qualified
staff and the existing brand name that may be extended to new products i.e. party wear dresses.
Fragrances
It is recommended to follow market development strategy since high end targeted customers have strong brand
loyalty to competitors’ products. This strategy can be implemented successfully by selling products in new
geographical markets (regional, national, etc.) or attracting customers in new market segments (low end
customers) by offering slightly differentiated versions of its existing products or by making them available
through different distribution channels.
SOLUTION TO Q NO. 4
In this part majority of the students identified the strategy as Outsourcing probably because they failed to read
the question carefully.
SOLUTION BY ICAP
OF is pursuing the strategy of forward vertical integration. This strategy might be subject to following risks:
▪ Vertical forward integration may require substantial capital investments. The costs associated with such
integration may outweigh the benefits derived from it.
▪ OF might have to compromise its core competencies or new competencies and its technical skills might
be beyond the capabilities of the entity.
SOLUTION TO Q NO. 5
77.19% candidates secured passing marks in this question.
SOLUTION BY ICAP
conglomerate expansion or diversification
SOLUTION TO Q NO. 6
The overall performance in this part was poor as most of the candidates failed to read and understand the
requirement of the question which was to discuss the matters of significance in the given scenario, other than
those which were already mentioned therein. Consequently they repeated the same points as were already
discussed in the question.
SOLUTION BY ICAP
RTL’s management should carefully examine the following important matters while evaluating the proposal of
ETL for sale of its company:
• The prospects of achieving significant synergies. (Increase in sales, economies in expenses, etc.)
• The prospects of growth in demand. (Local as well as international)
• The availability of sufficient financial resources for acquisition. (Its short and long term impact on
RTL)
• Differences between the cultures of the two organizations. (Impact of such differences on the merged
entity)
• Organization structure of the merged entity. (The financial and motivational aspects
of such changes)
SOLUTION TO Q NO. 7
In this question seven brief scenarios and the candidates were required to match these with appropriate
concepts/principles which were also mentioned separately in the question. The performance was good.
SOLUTION BY ICAP
organic growth

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CHAPTER-6 ALTERNATIVE STRATEGIES (1)

Chapter 6 – ALTERNATIVE STRATEGIES

Strategic Direction: Methods of Strategic Business Forecasting Assessing Business Strategies

1 Strategic direction: An introduction

2 Strategic direction: Ansoff Grid

3 Methods of strategic development

4 Methods of business forecasting

5 Assessment of business strategies

1. Strategic direction: An introduction

1.1 Product-based and resource-based strategies

Hamel and Prahalad argued that a resource-based approach to strategy selection:

Synergy can be achieved by:

2. Strategic direction: ANSOFF Grid/Growth Matrix

◼ Growth vector analysis: Ansoff

2.1 Growth vector analysis

2.2 Market penetration strategy

2.3 Market development strategy

Market can be developed:

2.4 Product development strategy

• developing new products can be expensive

2.5 Diversification strategy

• Concentric diversification/related diversification

Concentric diversification/related diversification: the new product-market area is related in some

2.6 Using ANSOFF model for gap analysis

2.7 Withdrawal strategy

2.8 Consolidation and corrective strategy

3 Methods of strategic development

◼ Organic growth through internal development

3.1 Organic growth through internal development

There are some disadvantages with growth through internal development.

3.2 Greiner growth model

3.2.1 Phase 1: period of growth through creativity

3.2.2 Phase 2: period of growth through direction

3.2.3 Phase 3: period of growth through delegation

3.2.4 Phase 4: period of growth through coordination

3.2.5 Phase 5: period of growth through collaboration

3.3 Mergers and acquisitions

3.3.2 Disadvantages of acquisitions and mergers

3.3.3 The issue of ‘synergy’ in mergers and acquisitions

• A large amount of cash that is available for long-term investment.

3.4 Diversification and integration

3.5 Forward and backward integration

• Car manufacturer opens their own company operated showroom of cars

• A car showroom owner starts own car assembling/manufacturing

• Backward integration gives an entity control over its source of supply.

3.5.2 Disadvantages of vertical integration

• A cozy, relaxed relationship is likely to grow between, say, an in-house component

4 Methods of business forecasting

◼ Intuitive (qualitative) forecasting

4.1.2 Delphi method

4.1.3 Sales force opinion

4.1.4 Market research

4.2 Statistical forecasting techniques

Statistical forecasting techniques are methods of forecasting with mathematical models.

4.4 Linear regression analysis

• is upward or downward in a ‘straight line’, and

4.5 The nature of a time series

There may be seasonal variations in time series analysis.

5 Assessment of business strategies

◼ The basis for assessing business strategy

5.1 The basis for assessing business strategy

5.1.1 Suitability of a strategy

A strategy is suitable when: