Business strategy

Business A2 · Business and its environment. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

A business strategy is a long-term plan of action to achieve the overall objectives of the business. Strategic management has three stages: analysis (where are we now?), choice (which way shall we go?) and implementation (putting the plan into action and controlling it).

Each technique has a job. SWOT, PEST, Porter's five forces, core competences and scenario planning help with analysis. The Ansoff matrix, force field analysis and decision trees help with choice. Blue ocean strategy means creating a new market space with little or no competition instead of fighting rivals.

A strategy only works if it is carried out well. That needs a corporate plan, a culture that supports it, leaders who win staff over to change, and contingency plans for when things go wrong.

Rules to remember

SWOT: strengths and weaknesses are internal (inside the firm); opportunities and threats are external.
PEST = political, economic, social and technological factors in the external environment.
Porter's five forces: rivalry among existing firms, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers.
Ansoff matrix: market penetration (existing product, existing market); market development (existing product, new market); product development (new product, existing market); diversification (new product, new market; the highest risk).
Decision tree: expected value = sum of (probability × outcome) for each branch; then subtract the cost of the option. Probabilities on the branches from one chance node add up to 1.
Force field analysis: compare the total score of driving forces (for the change) with the total of restraining forces (against it).
Core competence = a capability that is hard for rivals to copy, gives customers a benefit and can be used across several products or markets. Contingency planning is done before a crisis; crisis management is the response once it happens.

Common mistake

In the Ansoff matrix students mix up market development and product development. Ask two questions in order: is the product new to the firm, and is the market new to the firm? Selling the same product in a new country is market development.

Worked example

A firm can open a new branch at a cost of $80,000. There is a 70% chance of high demand, giving a return of $300,000, and a 30% chance of low demand, giving a return of $50,000. What is the expected monetary value of opening the branch?

High demand branch: 0.7 × $300,000 = $210,000.
Low demand branch: 0.3 × $50,000 = $15,000.
Expected value before cost = $210,000 + $15,000 = $225,000.
Subtract the cost: $225,000 − $80,000 = $145,000.

Answer: Expected monetary value = $145,000.

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CORPORATE CULTURE

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