Introduction

Part 1 considered the complexities of strategic planning and how they can be broken down into three main areas. Part 2 adopts a similar simplification approach to the issues of strategic choice and strategic implementation.

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Strategic choice

Johnson and Scholes break down the issue of strategic choice into three distinct subheadings, which are:

• On what basis do we decide to compete?
• Which direction should we choose?
• How are we going to achieve the chosen direction?

On what basis do we decide to compete? 

A useful framework to use here is Porter’s generic strategies. Michael Porter stated that a firm that is wishing to obtain competitive advantage over its rivals is faced with two choices:

Choice 1: Is the company seeking to compete by achieving lower costs than its rivals achieve and by charging similar prices for the products and services that it offers, thereby achieving advantage via superior profitability? Or…

Is the company wishing to differentiate itself and the customer is prepared to pay a premium price for the added value which the customer perceives in the product, and thereby enjoys greater margin than the undifferentiated product?

Choice 2: What is the scope of the area in which the company wishes to obtain competitive advantage? Is it industry-wide or is it restricted to a specific niche?

The answers to these two choices leave the organisation faced with three generic strategies, which are defined as:

1. cost leadership
2. differentiation
3. focus.

1. Cost leadership
Set out to be the lowest cost producer in an industry. By producing at the lowest possible cost, the manufacturer can compete on price with every other producer in the industry and earn the highest unit profits.

In order to achieve cost leadership, some of the following need to be in place:

• Seek to set up production facilities for mass production as these will facilitate the economies of scale advantages to be achieved.
• Invest in the latest technology – improved quality means less labour needed.
• Seek to obtain favourable access to sources of raw materials.
• Look to develop product designs that facilitate automation.
• Minimise overhead costs by exploiting bargaining power.
• Concentrate on productivity objectives and constantly seek to improve efficiency and economy – for example, value chain analysis.

One should also be aware of the drawbacks of such a strategy, such as the need to continually keep up to date with potential changes in technology or consumer tastes.

2. Differentiation
A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers. Differentiation occurs when the differentiated product is able to obtain a price premium in the market that is above the cost incurred to create the differentiation.

As a consequence of differentiation being about uniqueness, it is not really possible to give an exhaustive list detailing how a firm may differentiate itself. To truly differentiate yourself we must understand the product or service offered and the customer to whom you are selling it.

Ways of achieving differentiation:

• Image differentiation
  Marketing is used to feign differentiation where it otherwise does not exist – ie an image is created for the product. This can also include cosmetic differences to a product that does not enhance its performance in any serious way – for example, perfume – colour, size, packaging.
  
  
• Support differentiation
  More substantial, but still has no effect on the product itself, is to differentiate on the basis of something that goes alongside the product, some basis of support. This may have to do with selling – for example, 0% finance, 24-hour delivery.
  
  
• Quality differentiation
  This means the features of the product that make it better – not fundamentally different, but just better. The product will perform with:
  - greater initial reliability
  - greater long-term durability
  - superior performance.
  
  
• Design differentiation
  Differentiate on the basis of design and offer the customer something that is truly different as it breaks away from the dominant design if there is one – for example, Apple’s iMac computer.
  
  
• Reward of a differentiation strategy
  Consumers are likely to pay a higher price for the goods because of the added value created by the differentiation.

3. Focus
A focus strategy is based on fragmenting the market and focusing on a particular market niche. The firm will not market its products industry-wide but will concentrate on a particular type of buyer or geographical area.

Cost focus: This involves selecting a particular niche in the market and focusing on providing products for that niche. By concentrating on a limited range of products or a small geographical area, the costs can be kept low.

Differentiation focus: Select a particular niche and concentrate on competing in that niche on the basis of differentiation – for example, luxury goods.

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Strategic implementation

The area of strategic implementation covers many areas from project management to structure. However, as with strategic analysis and strategic choice, it is possible to simplify the issues into a number of key sub-headings:

• Resource management.
• Organisational structure.
• Management of change.

Resource management
This will ensure that the 6Ms are working for you in the best way possible. Budgets and other performance management tools are likely to be used here.

Organisational structure
This will deal with issues regarding the levels of centralisation and decentralisation, together with structural form and style of management.

Management of change
The scope, speed and style of the changes need to be carefully reviewed in order to obtain full commitment to them. A useful model of change to remember is Kurt Lewins’ three-step model, which involved:

• unfreeze
• change
• refreeze.

Unfreeze 
For the change to take place the existing equilibrium must be broken down before a new one can be adopted.

Change 
This is the second stage, mainly concerned with identifying what the new, desirable behaviour or norm should be, communicating it and encouraging individuals and groups to ‘own’ the new attitude or behaviour. To be successful, one should consider the adoption of the following management styles to improve the acceptance of the change:

• Participation with employees affected by the change, so that they feel more of a sense of ownership.
• Education and communication of the new ways, so that they fully understand what is going on and are not in a situation where they are afraid of the unknown and therefore show resistance.
• Negotiation may also be appropriate if there are large group stakeholders such as a trade union.

Refreeze 
This is the final stage, implying consolidation or reinforcement of the new behaviour. Positive reinforcement (praise, reward, etc) or negative reinforcement (sanctions applied to those who deviate from the new behaviour) may be used. You should also look at the Change Kaleidoscope and Cultural Web.

Therefore, to summarise what we have just said:

Strategic choice 

• On what basis do we decide to compete? (Porter’s generic strategies.)
• Which direction should we choose? (Ansoff’s product market matrix, do nothing, withdraw.)
• How are we going to achieve the chosen direction? (Internal, external, joint venture.)

Strategic implementation

• Resource management (6Ms)
• Organisational structure (centralisation, decentralisation, specific structural form)
• Management of change (unfreeze, change, refreeze)

Let us see how we can expect to get questioned in this area in the exam.

Question 1 
Sample ACCA exam 
Jerome Gulsand is the owner and chief executive of a chain of 20 sports equipment shops, Sportak. These shops are clustered in the south of the country. The company is privately owned by the family and the freeholds of these shops, which the company owns and which are on prime retail sites, account for the majority of the assets of Sportak. The company sells a wide range of sports equipment such as golf clubs, tennis, skiing equipment, soccer and other sports equipment. Recently it has expanded its range to include certain types of designer sports clothing.

The company was founded by Jerome’s father a quarter of a century earlier when he opened his first small shop. Over the next 25 years the company grew steadily. A major reason for this successful development lay with the philosophy of Jerome’s father who delegated much of the decision-making to the individual shop managers. He believed that this gave the local managers a higher degree of motivation. It also allowed them to respond to local demand conditions as stock ordering was carried out by each shop and was not organised at the head office. The managers were also permitted to develop local marketing activities, using sales promotions and publicity as they felt appropriate.

These shop managers were remunerated partly by a basic salary and partly by a sales-related performance bonus, which could be up to 40% of their basic salary. These methods of operation were satisfactory while the company was operating in a steady growth environment. However, by late 20X1 there was evidence that Sportak’s overall position within the market was weakening. Sales had stabilised but, even more importantly, competition was growing from a number of discount traders who were prepared to operate on low profit margins but with larger volumes. It was at this time that Jerome took over the company from his father.

Jerome was impatient with the lack of growth. By nature, he was an entrepreneur who sought growth. He was not sure that the steady organic growth was appropriate to these conditions. His father’s policy had been to open a store each year, funding this growth out of current earnings. Jerome saw that the market was becoming so competitive that even small and specialist markets were proving to be vulnerable. He believed that only the big, nationwide retail chains would survive and that the smaller sized groups would be taken over by the larger chains of sports goods retailers who were more profitable and had greater capability to raise finance.

He decided that a ‘dash for growth’ was required if the company was to achieve the critical size to survive in the market place. It had been suggested to him that the franchising of the Sportak brand name would be a reasonable and relatively risk-free method of expansion. Growth, using other people’s money, has its advantages, but it did not appeal to Jerome. He wanted a more ‘hands-on’ approach.

At about this time another chain of 15 sports shops became available for purchase. This group was in a distinctly separate area of the country – about 150 miles from Sportak’s current area of operations. As the overall sports equipment and sportswear market was still growing, the price being asked for this acquisition was rather high. However, Jerome was convinced that this was too good an opportunity to miss. He believed that Sportak needed this expansion so as to take advantage of the profitable sales still available in this sector. However, for an acquisition of this size, it was obvious that the growth could not be funded internally. Jerome assumed that he might use the freeholds of the properties Sportak owned as securities for the finance the company needed to borrow. Before approaching the bank Jerome discussed this issue with his accountant and offered the following ideas for his proposed expansion.

In anticipating this proposed expansion and the need to manage an enlarged group, Jerome believes that it is time for a strong and centralising leader. Recognising that the current system of product ordering is delegated to individual store managers, he proposes to provide a centralised purchasing function based upon a warehouse owned and controlled by Sportak. Individual shop managers will be permitted to decide upon their stock range, but they will have to order from the central warehouse set up by Sportak.

Jerome has also decided to tackle the problem of marketing and, in particular, promotion. The decentralised approach adopted by his father has not brought about the development of a well-known image and, therefore, the brand of Sportak needs to be strengthened. Under Jerome’s plan it is proposed to allocate a substantial budget – 15% of sales – to spend on press advertising and on public relations, and this level of commitment will continue for the foreseeable future. Sports personalities will be paid to appear in all stores, which will have to be re-equipped. By a competent use of merchandising, it is hoped that these stores will increasingly be recognised as centres for influencing the fashion of both sports equipment and clothing. The shop managers will also be encouraged to stock more expensive lines of products where the margins will be higher and, in addition, they will be expected to hold much more stock. A criticism of the stores when Jerome’s father was in charge was that they were often short of stock. Most customers were unwilling to wait for the product to be ordered and they therefore bought from competitors’ shops.

Jerome recognised that during this period of change Sportak might lose a number of its key shop managers. These people have enjoyed substantial autonomy, and although they will still have some freedom on the stock range that they offer, they might increasingly see their freedom to act as managers being eroded. In appreciating that these shop managers provide much goodwill and their loss would be damaging to the company, Jerome is proposing to increase their sales-related bonuses as an inducement to stay.

Jerome fully understands that the costs incurred in the proposed acquisition involve more than the purchase of the new shops. Store modernisation programmes for all the shops, as well as upgrading stock with a wider and more sophisticated range of products, will also require funding. Forecasts of immediate future sales appear to be attractive. Jerome anticipates that sales per store will rise by about 8% over the next year. He believes that this growth in sales, accompanied by his more aggressive approach to retailing, will enable his bold expansion plans for Sportak to be achieved. Above all, Jerome wishes to see his company, Sportak, become a national company, no longer having to operate as a regional retailer does.

In Table 1 is a summary of the figures that have been prepared by Jerome’s accountant for discussion. Part of the data has been obtained from trade association statistics as well as government forecasts.

Requirements

(a) Jerome Gulsand’s father was a great believer in the decentralisation of both operations and decision making. To what extent has this process harmed or benefited Sportak? Provide examples to justify your arguments.

(10 marks)

(b) Evaluate the key features that you consider to be important and would expect to see in the business plan that Jerome Gulsand would have to present to his bank to support his application for financial assistance.

(15 marks)

(c) Acting in the position of Jerome Gulsand’s accountant, and using the financial data provided and the intentions developed by Jerome, assess the viability of the strategy that has been proposed by him.

(15 marks)

(d) Discuss whether a franchise operation would have been a better option for expansion than an acquisition.

(10 marks)

Summary

Hopefully you are now able to overview the strategic planning part of the syllabus in a more systematic and logical way. All you need to remember is the key steps of strategic analysis, choice and implementation. This should then set off another chain of words in your head, such as:

• strategic analysis (think 6Ms, think PESTEL and five forces and stakeholder constraints)
• strategic choice (on what basis do we decide to compete? Which direction should we choose? How are we going to achieve the chosen direction?)
• strategic implementation (resource management, organisational structure, management of change)

All that is necessary now is to use the framework in an applied way relevant to the question asked.

Adapted from an article originally written by Sean Purcell BA ACMA (a leading freelance lecturer)

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