Business

ACCA P3
Analysis
Instructor: Nguyen, Hoang Lan

Hanoi
 Preface Contents

RELATIONAL DIAGRAM OF MAIN CAPABILITIES

Strategic Strategic Strategic Action

position (1) Choices (2) (3)

Business Information Project Financial

process technology Management Analysis
change (4) (5) (6) (7)

People (8)
 Strategic Choices
Topic List
1. Diversification
2. The corporate parent
3. The corporate portfolio
4. Generic strategies
5. Sustaining competitive advantage
6. Direction and method of growth
7. Strategy and market position

8. Success criteria
 Diversification
The corporate The corporate Generic Sustaining
parent portfolio strategies competitive advantage

Diversity of products and markets may be advantageous to the organisation for three reasons:

1 Economies of scope in the form of synergy

2 Corporate management skills are extended

3 Cross-subsidy can enhance market power

However, there are three questionable reasons that may be given to justify a policy of
diversification:
1 Response to environmental change may be a cover for protecting the interests of
top management and may lead to ill-considered acquisitions.
2 Risk spreading is valid for owner managed businesses, but shareholders in large
public companies can diversify their own portfolios
3 Powerful shareholder expectations, especially demands for growth, can lead to
inappropriate diversification
 Strategic choices
Topic List
Diversification
The corporate parent
The corporate portfolio
Generic strategies
Sustaining competitive advantage
Direction and method of growth
Strategy and market position
Success criteria
Various strategic choices can present themselves
to an organisation. An organisation will select its
preferred choice as a result of environmental and
internal analysis that shows which choice provides
the best strategic 'fit' for the organisation. There
is no right or wrong answer: different frameworks
and models will apply in different business
settings.
Horizontal integration
Development into activities that
are competitive with, or
complementary to, present
activities; eg, electricity
companies selling gas. Offers
economies of scale.
Vertical integration
The organisation becomes its own supplier
(backward integration) or distributor (forward
integration).
▪Secures supplies, lower supplier bargaining power
▪Stronger relationship with end-users
▪Profits from all parts of value system
▪Creates barriers to entry
However:
▪'More eggs in same end-market basket' (Ansoff)
– more vulnerable to a single market
▪Does not offer significant economies of scale
6: Strategic choices
In August 2014 online retailer, Amazon, paid
In July 2014 Italy's Ferrero – maker of Nutella
$970m to buy video-gaming service Twitch.
chocolate spread and Ferrero Rocher
Formerly known as Twitch.tv, Twitch enables
chocolates – purchased Turkey's largest
users to watch other people play video games
hazelnut company, Oltan Gida. Ferrero's
online. Amazon's acquisition of Twitch was in
acquisition of Oltan Gida was viewed as an
response to the emergence of YouTube and
attempt to secure the company's supply of
Netflix. The purchase of Twitch enabled
hazelnuts for use in its products.
Amazon to reach committed gamers, and was
seen by many as a natural extension of
Amazon's existing offering. Amazon's Prime
service already allows subscribers to stream
television shows and movies

Horizontal integration Vertical integration

 Conglomerate (unrelated) diversification
 Spreads risk; escape from present business
 May obtain synergy (eg acquiring new skills, utilizing distribution
channels, pooling R&D) organizational learning
 Use surplus cash/exploit under-used resources
However:
 Unfamiliarity with new segments increases risk
 More opportunities to go wrong
 Lack of common culture and purpose
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategie advantage
s

International business orientations (Perlmutter)

Ethnocentrism is a home country orientation in which the same products are marketed in
the same way both at home and in foreign countries.
- ignores any inter-country differences, market the same products with the same marketing
programs in overseas countries, no local market research or adaptation of promotion 
market not be fully exploited, and foreign customers may be alienated by the approach
Polycentrism adapts products and marketing methods to each local environment. Each
national subsidiary runs its own operations.
- each country is unique, establishes largely independent local subsidiaries and
decentralizes its marketing management. But the loss of economies of scale can
seriously damage profitability
Geocentrism recognizes both similarities and differences between markets and
incorporates them into regional or global strategies.
- create a global strategy that is fully responsive to local market differences
Regiocentrism is similar to geocentrism but considers that there are differences
between regions.
Home Depot is an American home improvement (DIY) retailer which operates large
out-of-town stores selling power tools and hardware supplies. The growth of the middle
class and millions of new homeowners in China attracted the company to enter the
Chinese market in 2006.
However, only six years later the company was closing its remaining stores. Benjamin
Carlson of CNBC (2013) notes that there were several reasons for the failure. 'First was
simply the timing: Home Depot came late to China, after its competitors already had a
foothold. By the time it arrived China's growth was slowing down. Second was the
nature of China's housing market. Many people buy homes for investment and
speculation, not to improve. Third was the store format. As Best Buy and other
American retailers have found, Chinese consumers don't like big, boxy warehouses far
away from a city center. Finally, and most fatally, Home Depot tried to bring American
notions of DIY to a market where labour was so cheap that most people simply hired a
handyman'.
Source:
Carlson, B. (2013) 'Why big American businesses fail in China' CNBC, 26 September 2013, www.cnbc.com

? What is the business orientation?

 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategie advantage
s

Global strategic management (Ohmae)

5 stages in global expansion

1 Exporting: via agents to extend scale of operations  The management orientation is
ethnocentric
2 Overseas branches to replace agents with stronger presence  Management
orientation is still ethnocentric
3 Overseas production exploits cheap labour and saves shipping costs 
Management orientation is still ethnocentric and the business is still largely run
from its HQ
4 Insiderisation via full capability: polycentric orientation with fully functional
organizations being set up overseas
5 Global company has geocentric management orientation
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategie advantage
s

Global strategic management (Ohmae)

Ohmae suggests there are five reasons why companies are moving towards the global
stage. He calls these the five Cs

Customer: global market convergence by widespread customer demand for

products with similar characteristics
Company: search for economies of scale drives expansion towards the global
scale
Competition: the very existence of global competitors motivates companies to
expand for reasons of prestige and competitiveness. They may also be amenable
to cost-reducing strategic alliances
Currency: manage exchange rate risk by operating globally explicit
Country: absolute and comparative advantage. They also enable it to promote
itself as locally oriented in each country, thus enhancing its image with the local
government and markets
 Key decisions for international expansion

1. Whether to market 3. Mode of entry? -

abroad at all? 2. Which markets to enter? How

Advantages ▪ Market attractiveness Direct or Foreign

▪ Higher sales and profits ▪ Competitive advantage indirect subsidiaries
▪ Life cycle extended possessed exporting or joint
▪ Spread seasonality ▪ Risks (political; business; ventures
▪ Spread risk Overseas
currency) production
Disadvantages ▪ Legal/regulatory factors
▪ Less control
▪ Costly Before getting involved, the company must
▪ Adaptations needed consider both strategic
('Does it fit?') and tactical/operational ('Can we do
it?') issues.

6: Strategic choices
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategie advantage
s

Entry strategies

Exporting Overseas production

Indirect Direct Licensing, Contract Joint ▪ Wholly owned

▪ Export
Franchising manufactur venture,
Oversea
to final user via
e Production
management firms Wholesalers Strategi
company branch ▪ Acquisition
▪ Buying offices Distributors c
offices ▪ Organic growth
▪ Complementary Stockists alliances
Agents E-commerce and
exporting
▪ Export houses Internet

Indirect exporting is where a firm's goods are sold abroad by other organizations who
can offer greater market knowledge.
Direct exporting occurs where the producing organization itself performs the export tasks
rather than using an intermediary.
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategie advantage
s

Exporting Overseas production

Advantages Concentrates production; small Lower distribution costs;

start possible; minimizes overcomes trade barriers; possibly
overheads lower production costs

Key issues Exchange rates, protectionism Political risk; partnership; managing

overseas facilities; more risky

Involvement Usually less involved, but an Usually more involved, but

exporter might depend on the overseas subsidiaries might
overseas market act independently: varying
levels of control and risk
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategie advantage
s

Portfolio analysis is applicable to products, market segments and SBUs. There

are four basic strategies:
Build Hold Harvest Divest
Invest for market Maintain current Manage for profit Release resources
share growth position in the short term for use elsewhere

The Boston Consulting Group (BCG) Matrix

Matrix assesses business in terms of potential cash generation and cash
expenditure requirement
High Stars Question
Market marks
Growth
Low Cash cows Dogs
High Low
Relative market share
Stars – build
Cash cows – hold or harvest
Question marks – build or harvest
Dogs – divest or hold
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategie advantage
s

The public sector portfolio matrix

The principal way of judging success in the private sector is by reference to
customers. In the public sector, activities must have political support. This does not
depend exclusively on the opinions of the consumers of the ser vices provided.

High
Ability to serve effectively Low

High Public sector Political hot

star box
Public or
political
need (and
therefore
support
for
expense) Golden fleece Back drawer
issue
Lo
w
Political hot boxes are services that
the public want, or which are
mandated, but for which there are not
adequate resources or competences.
A public sector star is something
that the system is doing well and
should not change. They are
essential to the viability of the
system.
Golden fleeces are services that are
done well but for which there is
low demand. They are potential
targets for cost cutting.
Back drawer issues are unappreciated and
have low priority for funding. They are
obvious candidates for cuts, but if
managers perceive them as essential, they
should attempt to increase support for
them and move them into the political hot
box category.
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategies advantage

Porter believes there are three Generic strategies:

Business Unit Strategies (Generic Strategies) involve a choice between the
lowest cost producer (cost leadership), making the product different from
competitors' products in some way (differentiation) or specializing on a segment
of the market (Focus).

Cost Leadership Differentiation Focus

A cost leadership The exploitation of a A restriction of activities to only
strategy seeks to product or service part of the market (Segment)
achieve the position of which the industry as - Providing goods/services at
lowest-cost producer a whole believes to lower cost (Cost-focus)
in the industry as a be unique. - Providing a differentiate
whole product (Differentiation-focus)
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategies advantage

Cost leadership Differentiation

Aims to be the lowest cost Aims to exploit a product perceived as
producer in the industry as a unique within the industry as a whole
whole
Aspects of cost leadership Aspects of differentiation

▪ Economies of scale ▪ Breakthrough products -radical performance

advantage
▪ Use the latest production
▪ Improved products – superior performance
technology or cheap labour
at a competitive price
▪ Productivity improvement
▪ Competitive products – unique
▪ Minimisation of overheads
combinations of features
▪ Favourable access to inputs – Brand image
– Special features
– Unique combination of value activities

6: Strategic choices
 Diversification The corporate The corporate Generic Sustaining competitive
parent portfolio strategies advantage

Cost Leadership Differentiation Focus (Niche)

How to achieve overall How to build the When focus strategy can
cost leadership? differentiation? achieve competitive
advantage?

- Set up production facilities - Build up the brand - When a product does

to obtain economies of
scale
- Use latest technology, Use
cheap labor
- Improving productivity
- Minimize overhead costs
- Get favorable access to
sources of supply
image
- Provide the product
special features
- Exploit other activities
of the value chain
(after sale-service, free
delivery..)
not fully meet the needs
of a segment 
Differentiation focus
- Over performance of
business give a
segment more than it
really wants  cost
focus
Case study 2

The managing director of Hermes Telecommunications plc is interested in corporate strategy.

Hermes has invested a great deal of money in establishing a network which competes with
that of Telecom UK, a recently privatised utility. Initially Hermes concentrated its efforts on
business customers in the South East of England, especially the City of London, where it
offered a lower cost service to that supplied by Telecom UK. Recently, Hermes has
approached the residential market (ie domestic telephone users)
offering a lower cost service on long-distance calls. Technological developments have
resulted in the possibility of a cheap mobile telecommunication network, using microwave
radio links. The franchise for this service has been awarded to Gerbil phone, which is
installing transmitters in town centers and at rail stations.

Question:
What competitive strategies have been raised in the above Hermes Telecommunications ‘s
scenario?
SrategrategiessSrate
Case study 2

The managing director of Hermes Telecommunications plc is interested in corporate strategy.

Hermes has invested a great deal of money in establishing a network which competes with
that of Telecom UK, a recently privatized utility. Initially Hermes concentrated its efforts on
business customers in the South East of England, especially the City of London, where it
offered a lower cost service to that supplied by Telecom UK. Recently, Hermes has
approached the residential market (ie domestic telephone users)
offering a lower cost service on long-distance calls. Technological developments have
resulted in the possibility of a cheap mobile telecommunication network, using microwave
radio links. The franchise for this service has been awarded to Gerbil phone, which is
installing transmitters in town centers and at rail stations.

Question:
What competitive strategies have been raised in the above Hermes Telecommunications ‘s
scenario?
Case study 2

Question:
What competitive strategies have been raised in the above Hermes Telecommunications ‘s
scenario?

Answer:
- Hermes initially pursued a cost-focus strategy, by targeting the business segment.
- be moving into a cost leadership strategy over the whole market although its competitive
offer, in terms of lower costs for local calls
 The strategy clock
The strategy clock develops Porter’ theory, analyzing strategies in terms of price and
perceived value added
High
4 Differentiation
5 Focused
3 Hybrid differentiation
Perceived added value

2 Low price 6

1 No frills 7 6, 7 and 8 are all

destined for ultimate
failure.
8
Low
Low Price High
Strategy 1. A no frills strategy under low Price,
Low perceived added value Differentiation Strategy depending on
 may be used for market entry, to gain whether a price premium is charged or a
experience and build volume. Eg. Vietjet competitive price is accepted in order to
airline build market share.
 The chosen basis for differentiation is
Strategy 2. Low Price strategy offers better difficult to imitate, need to be developed
value than competitors.  generic strategy of over time
cost leadership is appropriate
Focus Differentiation Strategy seeks a
Strategy 3,4,5 are relevant to high price premium in return for a high
consumers who require a customized degree of differentiation.
product.  Differentiation
Strategies
Hybrid strategy seeks both differentiation and
a lower price than competitors. This strategy
may be more advantages under some situations:
- If it leads to growth in market share
- Particular market segment
- As market entry strategy
Arragon Antennas Ltd is a company based in the country of Dragovia. It designs and manufactures
antennas for airborne navigation and communication systems. The industry is characterized by
dedication to high technical standards because of the demands of aircraft safety. There are three
main parts to the business: design and integration of antennas for new aircraft; aftermarket spares
for existing systems; and sub-contract manufacture of other firms' designs. Design of new
installations is highly technical and very time consuming since it depends on extensive tests,
including test flying. Globally, there are only three other manufacturers capable of this work. The
aftermarket operation includes spares for Arragon's own products and for antennas the company
has designed to replace the other three manufacturers' own proprietary designs. Sales of the latter
are somewhat price sensitive, but the aircraft spares market generally is characterized by the high
prices charged to captive customers for approved spares.

Demand for subcontracting work tends to be intermittent but forms a profitable supplement to the
manufacture of the company's own designs. Nobody in the industry thinks it odd that Arragon
should both manufacture for and compete with other firms. Arragon's market is now being
threatened by Wizzomatic Inc, which is a subsidiary of a major armaments group based in the
larger country of Erewhon. Wizzomatic is offering a family of standardized antennas derived from
its work for the Erewhon government. The antennas offer a substantial price advantage over most
proprietary designs and are being promoted as suitable for most applications.
Case Study 2

Arragon Antennas

Required
(a) Assess the strategic options available to Arragon Antennas.
(b) Suggest an appropriate marketing mix for Arragon Antennas.
 Direction and Strategy and Succes
method of market position s
growth criteria
Ansoff described the four possible growth vectors in the four cells in the diagram
below: the growth vector matrix .
PRODUCT
Existing New
Market penetration Product development
Existing ▪ Maintain or increase market ▪ Launch new products (using existing
share knowledge of customers and their
▪ Dominate growth markets needs/wants)
▪ Drive out competition from ▪ May require new competences
mature markets ▪ Forces competitors to follow suit
▪ Increase usage by existing ▪ Discourages newcomers
MARKET customers ▪ May require investment in R&D
or new production facilities
Market development Diversification
▪ New markets for current
New products
▪ New geographic areas – export
▪ New package sizes
▪ New distribution channels
▪ Differential pricing to suit new
segments

Joint ventures
Two or more organisations join forces,
and each has a share in the equity and
management of the b usiness .
▪ Share costs – capital outlay is shared
▪ Synergies – combining expertise in
different areas
▪ Overseas JVs provide local
knowledge, quickly
▪ Participating enterprises benefit from
But:
all sources of profit
▪ Profits are shared
▪ Conflicts over interest between
different parties
▪ Disagreements over profit
share splits, management and
strategy
▪ Risk of one partner
withdrawing
Direction and Strategy and Succes
method of market position s
growth criteria
Franchises
Allow a business to expand with less capital
expenditure than would otherwise be
necessary. Franchisees pay lump sum to enter
the franchise, and also bear some of the
running costs.
▪ Reduces capital requirements
▪ Quicker expansion than opening new
company- owned facilities
▪ Specialisation – franchisee and franchiser
both concentrate on their own areas
▪ Reduces head office and management costs
But:
▪ Profits are shared
▪ Issues re control over franchisees, and
potential for conflict
▪ Risk to brand/reputation if
franchisee provides inferior
goods/services
 Direction and Strategy and Success
method of growth market criteria
position

Strategies may be based upon market position

PIMS research showed a strong link between market share and profitability, probably
dervived from scale economies.

Market leaders Market

challengers
Aims ▪ Expand total market Aims
▪ Protect current market share Build market share in the
▪ Expand market share (eg increased hope of eventually overtaking
promotion, aggrerssive pricing) the existing leader by
attacking smaller rivals
Market followers Market nichers
Accept status quo, compete in suitable Specialise in a niche with adequate size
segments, control costs and grow with and growth potential. Multiple niching
market. Beware of predators. spreads risk.

6: Strategic choices
 Direction and Strategy and Success
method of market position criteria
growth

Strategies are evaluated according to:

External factors
1 Their suitability to the firm's strategic situation. SO ST
This might be analysed using life cycle analysis; Use strengths to Use
business profile analysis or strategy screening. maximise strengths to
TOWS strategies are inherently suitable. opportunities minimise
Internal threats
Their feasibility in terms of resources factors WO WT
and competences Minimise Minimise
2 Resource deployment analysis, and financial weaknesses by weaknesses
taking advantage and avoid
approaches such as funds flow analysis and of opportunities threats
breakeven analysis would be appropriate tools
to access feasibility.
TOWS Matrix

3 Their acceptability to key stakeholder groups