Business Strategy
Meaning of business strategy
→ Business strategy is a long-term plan showing how a business will achieve its objectives and gain a competitive advantage.
→ It involves deciding:
- where the business wants to be in the future
- which markets and customers it will target
- how it will compete
- how resources will be allocated
- which major actions the business should take
Example:
A clothing business may decide to target the premium market by offering sustainable clothing, investing in better materials and building a strong ethical brand.
Purpose of business strategy
→ Gives the business a clear long-term direction.
→ Helps managers make consistent decisions about:
- products
- markets
- investment
- finance
- human resources
- technology
- production
→ Helps the business respond to changes in the external environment.
→ Helps identify opportunities and threats before making major decisions.
→ Helps the business develop a competitive advantage.
→ Ensures that different departments work towards common objectives.
Strategy and tactics
| Strategy | Tactics |
|---|---|
| Long-term direction | Short-term actions |
| Decides what the business wants to achieve and how | Decides how specific actions will be carried out |
| Usually made by senior managers | Often made by middle/lower-level managers |
| Example: Become a leading low-cost airline | Example: Introduce cheaper online check-in and reduce unnecessary services |
Strategic Management
Meaning and purpose
→ Strategic management is the process of analysing the business and its environment, choosing an appropriate strategy and putting that strategy into action.
It can be viewed as three connected stages:
Analysis → Strategic choice → Implementation
Strategic analysis
→ The business examines its internal and external environment.
→ Internal analysis considers:
- strengths
- weaknesses
- resources
- skills
- finance
- technology
- brand reputation
- core competencies
→ External analysis considers:
- competitors
- customers
- suppliers
- economic conditions
- political and legal changes
- technology
- social trends
- environmental issues
→ The purpose is to understand the business’s current position before choosing a strategy.
Strategic choice
→ Managers use the information from analysis to identify possible strategies.
→ They compare alternatives by considering:
- expected benefits
- costs
- risks
- resources required
- likely competitive advantage
- suitability for business objectives
→ The business then chooses the strategy it believes is appropriate.
Strategic implementation
→ The chosen strategy is put into action.
→ This may require:
- allocating financial resources
- changing organisational structures
- recruiting or training employees
- investing in technology
- changing production
- launching new products
- entering new markets
- communicating changes to employees
→ Implementation must also be monitored to determine whether the strategy is achieving its objectives.
Strategic management process
Analysis → Choice → Implementation → Monitoring → Further analysis
→ Strategy is not a one-time decision.
→ Changes in competitors, technology, customers or the economy may require the business to modify its strategy.
Blue Ocean Strategy
Meaning
→ Blue Ocean Strategy is an approach where a business tries to create a new market space rather than competing directly in an existing market.
→ The aim is to make competition less important by offering customers a different combination of value and price.
→ An existing highly competitive market can be described as a red ocean.
→ A new market with limited direct competition is described as a blue ocean.
Example:
Instead of competing with traditional luxury hotels, a business might create a completely different type of accommodation experience aimed at customers who want technology, flexibility and social interaction.
Purpose
→ Reduce direct competition.
→ Create new customer demand.
→ Differentiate the business from existing competitors.
→ Potentially increase sales and profitability.
Advantages
→ May allow the business to avoid intense price competition.
→ Creates opportunities for innovation.
→ Can attract customers who were previously not served by existing businesses.
→ Successful innovation may create a strong competitive advantage.
Limitations
→ Creating a new market can be expensive.
→ Customer demand may be uncertain.
→ Competitors may copy the idea.
→ The business may need significant research and innovation.
Strategy chain:
New customer need identified → innovative product/service → new market space → less direct competition → potential increase in demand and profit
Scenario Planning
Meaning
→ Scenario planning involves developing different possible future situations and considering how the business would respond to each one.
→ It does not attempt to predict exactly what will happen.
→ Instead, it prepares managers for several possible futures.
Example:
A car manufacturer may consider:
→ Scenario 1: Electric vehicle demand rises rapidly
→ Scenario 2: Demand grows slowly
→ Scenario 3: Government regulation changes significantly
The business can prepare strategies for each situation.
Purpose
→ Helps businesses prepare for uncertainty.
→ Encourages managers to think about different future possibilities.
→ Reduces the risk of being unprepared for major changes.
→ Helps identify strategies that remain effective under different conditions.
Advantages
→ Useful when the external environment is uncertain.
→ Encourages long-term thinking.
→ Can improve flexibility and contingency planning.
Limitations
→ Scenarios are based on assumptions.
→ Too many scenarios can make decision-making complicated.
→ Preparing for unlikely scenarios can waste resources.
→ It cannot eliminate uncertainty.
SWOT Analysis
Meaning
SWOT stands for:
→ Strengths – internal advantages of the business
→ Weaknesses – internal limitations
→ Opportunities – external possibilities the business could exploit
→ Threats – external factors that could harm the business
| Internal | External |
|---|---|
| Strengths | Opportunities |
| Weaknesses | Threats |
Examples
Strengths
→ Strong brand
→ Skilled employees
→ Good financial position
→ Efficient production
→ Loyal customers
Weaknesses
→ High costs
→ Outdated technology
→ Weak distribution network
→ Lack of finance
→ Limited management experience
Opportunities
→ Growing market
→ New technology
→ Changing customer preferences
→ International expansion
→ New distribution channels
Threats
→ New competitors
→ Economic recession
→ Rising costs
→ Changes in legislation
→ Changing consumer tastes
Purpose
→ Provides a simple overview of the business’s strategic position.
→ Helps managers match strengths with opportunities.
→ Helps managers identify weaknesses that need improvement.
→ Helps prepare responses to external threats.
Limitation
→ SWOT can be subjective.
→ Simply listing factors does not automatically produce a strategy.
→ The usefulness depends on the quality and accuracy of the information used.
Example:
→ Strong brand + growing international demand
→ Business may consider international expansion.
PEST Analysis
Meaning
PEST analysis examines major external factors affecting a business.
→ Political
→ Economic
→ Social
→ Technological
Political factors
→ Government policies
→ Taxation
→ Employment laws
→ Trade policies
→ Political stability
→ Environmental regulations
Example: A higher import tariff may increase the cost of imported raw materials.
Economic factors
→ Inflation
→ Interest rates
→ Economic growth
→ Unemployment
→ Exchange rates
→ Consumer incomes
Example: Higher interest rates may increase borrowing costs and reduce investment.
Social factors
→ Population changes
→ Age structure
→ Lifestyle
→ Consumer attitudes
→ Education
→ Cultural trends
Example: Growing health awareness may increase demand for healthier food products.
Technological factors
→ Automation
→ Artificial intelligence
→ E-commerce
→ Digital payments
→ New production technology
→ Communication technology
Example: E-commerce technology may allow a business to sell internationally without opening physical stores.
Purpose
→ Identifies major external opportunities and threats.
→ Helps managers anticipate environmental changes.
→ Supports decisions about:
- investment
- products
- markets
- location
- production
- marketing
Limitation
→ External factors are difficult to predict.
→ The importance of each factor may differ between industries.
→ PEST does not directly analyse the business’s internal strengths and weaknesses.
Porter’s Five Forces
Meaning
Porter’s Five Forces is a framework used to analyse the competitive pressures within an industry.
The five forces are:
→ Threat of new entrants
→ Bargaining power of suppliers
→ Bargaining power of buyers
→ Threat of substitutes
→ Competitive rivalry
Threat of new entrants
→ How easily can new businesses enter the market?
High threat when:
→ Low start-up costs
→ Few legal restrictions
→ Easy access to technology
→ Strong distribution channels available
Impact:
Easy entry → more competitors → greater competitive pressure → possible lower prices/profit margins
Bargaining power of suppliers
→ How much power do suppliers have over the business?
High supplier power when:
→ There are few suppliers
→ Inputs are highly specialised
→ Switching suppliers is difficult
→ The business depends heavily on one supplier
Impact:
Strong suppliers → higher input prices → higher costs → lower profit margins
Bargaining power of buyers
→ How much power do customers have when negotiating prices and conditions?
High buyer power when:
→ Customers have many alternatives
→ Products are similar
→ Switching costs are low
→ A small number of large customers purchase in large quantities
Impact:
Strong buyers → pressure for lower prices/better quality → lower profit margins
Threat of substitutes
→ A substitute is a different product that satisfies a similar customer need.
Examples:
→ Train travel can substitute for air travel.
→ Streaming services can substitute for cinema visits.
→ Video conferencing can substitute for some business travel.
High threat:
More substitutes → greater customer choice → businesses have less pricing power
Competitive rivalry
→ Measures the intensity of competition between existing businesses.
High rivalry when:
→ Many competitors exist
→ Products are similar
→ Market growth is slow
→ Businesses compete heavily on price
→ Customers can easily switch brands
Impact:
High rivalry → greater pressure on prices, marketing and innovation → potentially lower profit margins
Purpose
→ Helps managers understand the competitive structure of an industry.
→ Helps businesses decide whether to:
- enter a market
- leave a market
- differentiate products
- reduce costs
- strengthen supplier relationships
- target a specific market segment
Core Competence Framework
Meaning
→ A core competence is a distinctive capability, skill or resource that allows a business to perform particularly well and potentially gain competitive advantage.
Examples include:
→ Advanced technology
→ Strong research and development
→ Highly skilled employees
→ Strong brand management
→ Efficient supply chain
→ Excellent customer service
Purpose
→ Identifies what the business does particularly well.
→ Helps managers decide where resources should be concentrated.
→ Helps the business build strategies around capabilities that competitors may find difficult to copy.
Example:
A technology company with exceptional software-development expertise may focus its strategy on creating innovative digital products.
Developing strategy from core competencies
Identify key capability → assess whether competitors can copy it → use it to create customer value → build strategy around it → strengthen the capability
Limitation
→ A competence that is valuable today may become less important because of technological or market changes.
→ Businesses must continually develop their capabilities.
Ansoff Matrix
Meaning
The Ansoff Matrix helps businesses consider growth strategies based on existing/new products and existing/new markets.
| Existing markets | New markets | |
|---|---|---|
| Existing products | Market penetration | Market development |
| New products | Product development | Diversification |
Market penetration
→ Existing product + existing market
→ The business tries to increase sales of its existing products in its existing market.
Methods include:
→ Lower prices
→ More advertising
→ Promotions
→ Increased distribution
→ Encouraging existing customers to buy more
Example: A coffee chain offers loyalty rewards to encourage existing customers to visit more frequently.
→ Generally involves lower risk than the other strategies because the business knows the product and market.
Market development
→ Existing product + new market
→ The business sells existing products to new customers.
This may involve:
→ Entering a new country
→ Targeting a new age group
→ Using a new distribution channel
Example: A clothing company begins selling its existing products in another country.
Product development
→ New product + existing market
→ The business develops new products for customers it already serves.
Example: A smartphone company introduces a new model aimed at its existing customer base.
→ Requires research and development and may involve higher risk than market penetration.
Diversification
→ New product + new market
→ The business enters a new market with a new product.
Example: A food company enters the fitness industry by launching a new range of fitness equipment.
→ Usually involves the greatest uncertainty because both the product and market are unfamiliar.
Purpose
→ Helps managers consider different growth options.
→ Helps compare potential opportunities and risks.
General risk increases:
Market penetration → Market development/Product development → Diversification
However, the actual risk depends on the business, industry and resources available.
Force Field Analysis
Meaning
→ Force field analysis identifies the forces supporting and opposing a proposed change.
Driving forces
→ Forces pushing the business towards change.
Examples:
→ Expected higher profit
→ Customer demand
→ New technology
→ Government regulation
→ Competitor pressure
→ Lower costs
Restraining forces
→ Forces resisting or making change more difficult.
Examples:
→ High cost
→ Employee resistance
→ Lack of finance
→ Lack of skills
→ Risk of disruption
→ Uncertainty
Using force field analysis
Identify change → identify driving forces → identify restraining forces → assess their relative strength → develop action plan
Example: Introducing automated production
Driving forces
→ Higher productivity
→ Lower unit costs
→ Better consistency
Restraining forces
→ High investment cost
→ Employee training required
→ Possible job losses
→ Resistance to change
Purpose
→ Helps managers understand why a proposed change may succeed or fail.
→ Identifies barriers that need to be reduced.
→ Helps managers strengthen the forces supporting change.
→ Supports change-management decisions.
Limitation
→ Judging the strength of forces can be subjective.
→ Forces may change over time.
Decision Trees
Meaning
→ A decision tree is a quantitative technique used to evaluate different business decisions when there are several possible outcomes.
It normally includes:
→ Decision points – where the business chooses between alternatives.
→ Chance outcomes – possible outcomes that depend on uncertain events.
→ Probabilities – estimated likelihood of each outcome.
→ Expected monetary value (EMV) – the expected financial outcome.
Expected monetary value
EMV = Σ (Probability × Financial outcome)
Example:
A business is considering launching a new product.
| Outcome | Probability | Financial outcome |
|---|---|---|
| High demand | 0.6 | +$100 000 |
| Low demand | 0.4 | −$30 000 |
EMV
→ (0.6 × $100 000) + (0.4 × −$30 000)
→ $60 000 − $12 000
→ $48 000
The business can compare this expected value with the EMV of alternative decisions.
Purpose
→ Helps managers make decisions involving risk and uncertainty.
→ Makes possible outcomes more explicit.
→ Combines probabilities with financial outcomes.
→ Allows different strategies to be compared quantitatively.
Limitations
→ Probabilities are estimates and may be inaccurate.
→ Financial outcomes may be difficult to estimate.
→ EMV does not capture qualitative factors such as employee morale or brand reputation.
→ A decision with the highest EMV is not automatically the most suitable decision for every business.
Using Strategic Tools Together
→ Strategic tools are often more useful when combined rather than used individually.
For example:
PEST analysis → identifies external changes
↓
SWOT analysis → combines external opportunities/threats with internal strengths/weaknesses
↓
Porter’s Five Forces → examines competitive pressure
↓
Core competence → identifies what the business can do particularly well
↓
Ansoff Matrix → identifies possible growth strategies
↓
Scenario planning → considers different possible futures
↓
Decision tree → evaluates financial outcomes and risk
↓
Force field analysis → assesses barriers to implementing the chosen strategy
↓
Strategic implementation → puts the chosen strategy into action
Overall strategic management process
Analyse the current position → identify opportunities and threats → develop strategic options → evaluate risks and resources → choose a strategy → implement the strategy → monitor results → adapt when necessary