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Teaching guide: Choosing a strategic direction and strategic methods (A-level only) (podcast)

These podcast teaching guides cover topics from our AS and A-level Business specifications. You can download them below.

Podcast 8: Choosing a strategic direction and strategic methods (A-level only)

This podcast covers the specifications' eighth and ninth subject areas. These correspond to section 3.8 of the specification ’Choosing a Strategic Direction’ and section 3.9 ‘Strategic Methods: how to pursue strategies’.

Transcript

Hello and welcome to the AQA A-level Business podcast, supporting your teaching of our specification.

Today, you are listening to the eighth podcast in our series. In this podcast we’ll continue to look at subject areas specific to the second year of teaching of our A-level Business qualification.

In the first six podcasts belonging to this series, we covered the first six subject areas relevant to our AS and A-level Business specifications. We considered the objectives of different businesses and analysed decision making in the different functional areas. The content of these subject areas was built around a decision making model, where we: considered functional objectives, analysed the existing situation and weighed up alternative actions that might be taken in order to make a decision.

This decision making model continues into the remaining subject areas of the specification but the emphasis is now on strategic decisions. We’re now thinking about how the business as a whole might want to move forward.

In podcast 7, we looked at subject area 7 of the syllabus. We considered the importance of the internal and external environments in terms of deciding what strategy to pursue. This included PEST analysis, Porter’s five forces, SWOT analysis, Elkington’s Triple Bottom Line and Norton and Kaplan’s Balanced Scorecard.

We now turn to talk about subject areas 8 and 9 of the specification. In the first section, we’ll look at ‘Choosing a Strategic Direction’, in the second section we’ll cover, strategic positioning and in the final section we’ll look at the ‘Strategic Methods’ a business may choose.

Part 1: Choosing a strategic direction

The choice of strategic direction involves deciding which markets a business wants to compete in and which products it wants to offer.

Most businesses evolve over time in terms of what they are, where they compete and what they offer customers. Just look at Google, it seems to be constantly changing its strategic direction with its acquisitions and joint ventures. Strategic decisions are made in terms of the extent to which managers want the business to enter new market segments and develop new products.

Strategic direction can be categorized using Ansoff’s Matrix in terms of:

 Market development: this involves building sales of existing products in existing markets

 Market penetration: this involves offering existing products to new customer groups

 New product development: this involves developing new products to offer to existing customers

 Diversification: this involves offering new products to new markets

The right strategy will depend on a range of factors such as the risk that managers are willing to take the competences the business has, and how or whether these competences can transfer into new markets, the brand values of the business and its overall portfolio.

There are plenty of opportunities in this subject area to discuss possible changes in strategic direction- for example, should a particular company move into new product areas or new countries? How should a company develop over time? There are always plenty of case studies in the news and this should lead to interesting analysis and evaluation.

Part 2: Strategic positioning

Within its chosen market and with its chosen products, a business still has to decide how to position itself and so how to compete. Where does it fit in relation to the competition? Is it premium or budget? Is it innovative? Look at any market and you will find businesses have selected particular positions for themselves. JD Sports may focus on fashion; while SportsDirect more on sportswear. Why did they select this position? Is it the right position to choose? Will the business still want to be there in ten years time? Iceland has a clear positioning as a low price frozen food retailer providing excellent value for families – will this strategy still work in the future? Think about why or why not?

Strategic positioning focuses on how a business competes - what benefits it offers and what price it charges relative to competitors. There are different positioning strategies that can be successful. For example, a business may decide to offer relatively low benefits, but provided the price is low enough this can still be regarded as value for money. Just think of the success of discount shops in many markets. Alternatively, a business may focus on providing a very high level of benefits compared to competitors (think of top luxury hotels). If the services are valued highly then customers will be prepared to pay a high price for this and the business can be competitive even if what it offers seem expensive at first. However there are clearly some combinations of benefits and prices that are unlikely to be successful. For example, it may be difficult to convince customers to pay a higher price than competitors if the benefits you offer are lower. By comparison, a lower price for higher benefits may seem very appealing to customers but a business may struggle to make a profit as offering many benefits tends to be expensive!

These positioning strategies can be analysed using Bowman’s strategic clock. This model enables you to plot the different strategies of businesses in terms of the price and the benefits relative to competitors. Think about why a particular strategy is chosen: What is everyone else doing? What are your competences? What does your SWOT analysis show? Why might a business change its strategy? For example, Easyjet and Ryanair have started to add more benefits to their offering: What does this mean in terms of movement on the clock? What does it mean in terms of the implications for the different functions? What does it mean for competitors? Why do you think they are making this change?

Another way of analysing these strategies is by considering Porter’s low cost and differentiation strategies. Which of these strategies is likely to be most successful for a particular business given its business environment? Which is sustainable? Think about what is realistic, so if managers want to compete by being low cost then what cost advantage do they have over others? Why will the costs of this business be lower than anyone elses? To pursue a strategy effectively managers must be able to achieve, and protect, an advantage. What differentiates their business from the competition? What enables them to achieve lower costs, is it the way they manage the supply chain, their IT systems or their human resource flow? We need to analyse the source of lower costs or differentiation. Remember that a competitive advantage means a business does something better than competitors so what exactly can a business do that others cannot?

Managers need to identify what they think their competitive advantage should be and how they can achieve and sustain it. Maintaining an advantage can be difficult, as others will want to imitate or surpass them. It is important that we do not just assume that achieving low costs or differentiation is easy. Managers need to find ways in which their business can be better in their area than others and need to think how they can protect this advantage.

Part 3: Strategic methods

Once the direction is decided, the next step in strategic planning involves making choices about the strategic methods to be used. These might include changing the scale of its operations, being more innovative, going international, or going digital.

When it comes to changing the scale of its operations this can be either increasing or decreasing in size. Usually, a business will want to grow in size but sometimes it may have to scale down. If a business is trying to grow this may be organic - growing the existing business - or external - acquiring or merging with another business. Growth may bring with it the benefits of internal economies of scale, for example, lower unit costs through purchasing, managerial or technical economies. Businesses can also benefit from economies of producing several different products and sharing common resources for them -these are economies of scope - and from the experience of having operated in an industry for some time, which is the experience curve. Managers may pursue growth because it brings power, reduces unit cost and can give them a sense of self achievement (think of self actualisation in Maslow’s hierarchy of needs). Make sure you analyse the specific motives behind the growth of a business. Is it horizontal growth to benefit from technical economies of scale, vertical growth to gain better control of supplies or outlets, or conglomerate growth to spread risk? Sainsbury’s decision to join with Argos is different than Foxconn taking over Sharp and therefore the motives and consequences need to be analysed and evaluated in context.

However, it may be possible for a business to become too big. It may encounter diseconomies of scale, such as communication, coordination and control problems, or expand so fast that it encounters liquidity issues or overtrading. Choosing the right scale of operations and the right speed of growth are therefore interesting challenges, as is the managing of growth. Do managers want to grow the business and if so, why, and how will they manage this?

Greiner’s model of growth highlights some of the issues that businesses face as they get bigger and older. There are often competing pressures as a business grows, in terms of trying to keep control and at the same time letting individuals, departments, divisions and regions have enough independence. Juggling these competing pressures and developing the right monitoring, information and control systems is an ongoing challenge for managers. At times there will be pressures to decentralise, but then at other times there will be pressures to maintain control and direction.

There is, of course, no ’right’ size for a business; it will depend on factors such as the level of demand, the extent to which economies of scale occur, and the objectives of managers. Students need to consider whether a business should get bigger or smaller and the management challenges and opportunities that different scales provide.

There is also a decision to be made about the best way of growing the business. When choosing the right way to grow, managers will consider issues such as the cost, the required speed of growth, the alternatives and the desired degree of control. Students need to be able to consider what is the best way for a particular business to grow, and be able to defend their choice.

Let’s now look at innovation

Another strategic choice is how innovative a business wants to be. The cliché that you need to keep moving just to stand still is right. Other businesses are constantly developing and improving what they do. That means managers need to develop better products but also better processes. If they don’t improve then they need to watch out for rivals and be very careful that the whole industry they are in is not redefined. It is important, therefore, to be innovative. Having said this, organisations may differ in the extent to which they want to lead innovation in an industry; some may be happier following what others do, and making sure they keep up, rather than take the risks of becoming pioneers.

The challenges of developing and keeping an innovative organisation include ensuring that ideas are flowing through to managers; that the right ideas are selected and invested in; and that the good ideas are implemented effectively. This is partly to do with the culture of the business and whether or not it is acceptable to fail. Are employees rewarded for trying out new things? Are employees encouraged to share information with each other and monitor what other organisations are doing?

In terms of where this innovation comes from, it may come from kaizen (a process of continuous improvement), investment in research and development, encouraging risk taking, and matching against others through benchmarking. Are managers looking around at what others are doing (and in corners they might not have looked in in the past?) are they learning from others? Is innovation clearly on the business agenda? Are managers prepared to support and invest in it? Are they encouraging risk taking and creativity and, if so how?

You need to be able to consider the need for innovation. It may be more important in some industries than others and for some businesses than others. You need to be able to demonstrate how to bring it about and how best to protect it.

Next, we’ll look at internationalisation

Another strategic option for a business is to operate more internationally. This can affect almost all aspects of business, such as where it sources materials, where it recruits and where it sells. Assessing the international environment is vital for many businesses. As ever the key is to prioritise - What are the key regions we would like to operate in? If we are thinking of targeting overseas markets there are many countries out there and many regions within those countries so which offer the best return on investment? What is the risk of operating within them?

Managers will need to assess a variety of factors including market size, the competitive environment, potential growth, the potential positioning of the business, the political, legal and economic, social, cultural and technological issues, and an assessment of the competitive environment. How attractive is a market overseas? How appealing is producing or sourcing from abroad? What are the risks, and what are the alternatives?

Managers also need to consider how best to enter a market. Is it worth entering in to a venture with a local business or investing and setting up there themselves. They need to consider the investment required and the potential risks compared to the potential rewards.

If a business is operating overseas it needs to consider how best to do this. Should it be very centralised, running the operation essentially from its domestic headquarters or should it let its operations overseas run themselves independently? There is tension here between the benefits of standardising and having a central control, such as the potential economies of scale, with the gains from decentralising and having activities more suited to the local markets and potentially meeting customer needs more effectively. The combination of options is shown by Bartlett and Ghosal’s model. Students need to be able to consider the best approach for a business wanting to operate globally. This will depend on the relative pressures for global integration and the need for local responsiveness.

Finally, let’s look at digital

Another strategic option involves deciding on the extent to which digital technology is adopted. The question of how to benefit from the opportunity of digital technology whilst protecting yourself from its threats is one that most senior managers are busy tackling. For example, digital technology affects what we buy, our understanding of customers (think of how Amazon uses data mining), the way we manage the supply chain with ERP, and our ability to forecast with big data. We have to consider how digital technologies are transforming businesses, how they are changing industries and the potentially disruptive effect they can have. Digital technology gives managers more information, more insight into many aspects of their business and more ways of communicating with, and interacting with, stakeholders. It is changing how business competes, who competes (think of Uber’s impact on the taxi market and the growth of peer to peer lending) and how markets work. It is therefore a dramatic and significant force for managers to consider when deciding on their strategy.

Summary

To summarise what we’ve covered in this podcast. The business environment is constantly changing. Managers must assess the existing position of the business and where it should go next.

A business faces many strategic options and must choose how to grow and how fast to grow (if it decides to grow at all), whether to go international, how digital its operations need to be and how it can ensure it’s as innovative as it wants to be and needs to be.

Thank you for listening we hope you have found this podcast useful. For more helpful AQA resources, visit the AS and A-level Business pages of our website, aqa.org.uk/business

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