Strategy

Strategy
THE PLANNING PROCESS
There are 2 theories about where the planning process should
start:
Accountancy led
Where objectives are set independently of the environment -
i.e. road works need to be done on the M at some stage!
therefore we will do them even if it is the "ugust #ank
$oliday.
This is often production rather than market led.
Marketing led
Where the starting point is reached only after the
environment is well known. #y knowing the market! planning
% have a better basis.
&rior to doing any planning we need to know:
' Who we are:
the Mission (tatement and de)ning (#*s may help here
' Where we are:
where all the various position analysis tools can be used
"lternatively! The +haos Theory advocates assume that all
planning is nonsense: no matter how much planning is done.
something will go wrong.
The Mission Statement
To give direction during the planning process! an underlying mission
statement is often used
The mission statement! in simple terms! tells the world who we are
and what we are striving to do. ,t can! therefore! be a motivational
statement for the bene)t of employees or a marketing statement for
consumer.
,t is best used when giving direction to the business or when the
business is trying to change direction.
-or e.ample!
"/,( 0We try harder1.
Wolters 2luwer +reating value for &rofessionals
SBUs
Organizations can be usefully split into Strategic Business Units
(SBUs). These are the parts of the business that can be
diferentiated from each other and so should hae their planning
done in isolation.
3ach (#* will have di4erent strategies in relation to the 5 &s:
1
Strategy
&romotion
&roduct
&rice
&lace 6or
distribution7
!OS"T"O# $#$%&S"S
"ny consultant worth their salt has come up with a techni8ue to
assess where the business and its particular (#*s! products and
markets are. 9nce this is known! then the appropriate planning and
resource allocation can be done.
!'ST analysis
&olitical
3conomic
(ociological
Technological
S(OT analysis
(trengths
Weaknesses
9pportunities
Threats
(trengths and weaknesses are internal and current. (trengths
should be built upon and weaknesses should be eliminated.
9pportunities and threats are e.ternal and in the future.
9pportunities should be e.ploited and threats should be defended
against.
!orter)* forces
' :ivalry
' Threat of new entrants
' Threat of substitutes
' &ower of suppliers
' &ower of customers
Boston +onsulting ,roup

,ro-th.
Mar/et 0igh
share
%o-
%o- 0igh
Mar/et size

;ormally the strategy for each of these types of businesses < products
2
+ash cow (tar
=og
&roblem child
Strategy
would be:
+ash cows should be harvested
(tars should have investment in the product
&roblem child should be either invested in or divested from
=ogs should be divested from
!1O2U+T %"3' +&+%'
The &roduct >ife +ycle is useful when analy?ing the di4erent stages
of a product development. We need to be aware of where a product
is in its life cycle as this has a major in@uence on investment needs
and pricing decisions.
The diagram above shows the di4erent stages of a product1s
journey through life. The length of the stages and the overall life will
vary from product to product.
(trategically it is advantageous to:
' (peed up development < introduction
' &rolong the later stages of growth
' $ave a #alanced &ortfolio
The 'merging !roduct
!ioneer or copycat
The pioneering strategy is the riskiest but should bring greater
rewards.
+opying is safer as you can learn from other companies1 mistakes.
$owever the rewards are normally lower as you are playing catch-
up with the innovator.
Strategic partners
(trategic alliances can reduce the risk of a product1s failure.
' +ompetitors: ensuring products are compatible
' (uppliers: availability of vital components
' +ustomers: secure outlets or even contracts
3
Strategy
Branding

" key defence against copying and a way of aiding repeat purchases.
The cost of establishing a brand can be very e.pensiveA therefore!
the bene)ts achieved must outweigh the cost.
!rice 4 image
The product itself must send the same message as the price and the
promotion. Benerally a cheap price indicates as inferior product and
high price indicates a 8uality product. $owever! 2 approaches may
be used to circumvent this approach:
' &enetration
(old cheaply to increase market share leading to
subse8uent price increases as followed by many Capanese
businesses when entering 3uropean markets in the DEFGs
and DEHGs.
' &rice skimming
*sed for innovative products where the innovative
consumer is prepared to pay a premium for the product.
This price skimming has a limited life.
The Mature !roduct
The costs of gro-ing mar/et share
To gain market share in a mature market! you normally have to give
the potential buyer of your product a reason to change suppliers.
The )nancial bene)ts of increased market share and potential repeat
purchases must outweigh the costs of the marketing strategy. (ee
#9B9-.
To-increase market share! &orter recommends not only to selling
e.isting products to e.isting customers! but selling:
;ew products to e.isting customers
3.isting products to new customers! and
;ew products to new customers
Moing from diferentiation to cost leadership
&orter says that products and organi?ations should move from
di4erentiation to cost leadership in order to get market share in this
environment. This is a situation in which a company aims to keep its
costs as low as possible in order to increase its marginal revenue on
every unit sold. (upermarkets have followed this strategy over the
last few years.
The 2eclining !roduct
"n organi?ation will sooner or later haw to make a decision as a
product1s market dwindles. The options may be:
4
Strategy
:eap positive cash @ows for as long as possible with limited
further investment
"ttempt to rekindle demand in the product with a relaunch
-ocus on one segment of the market and protect this niche
Bet out! selling rights to produce to someone else
"#T'1#'T ST1$T',&
The "nternet 5alue +hain
"S! 6 0orizontal !ortal 6 5ertical portal 6 ' commerce player

"nternet serice proider ("S!)
(ubscription 6"9>7
-ree 6-reeserve7
$ome users need a commercial ,(&
&rovide communications software! telephone number! modems! and
cables.
(trategy to move down the value chain
2ey strengths
-irst point of access
,denti)cation of customer
+apital investment or outsourced partner
3urope vs. "merica - local call charges
0orizontal !ortals
The )rst port of call on the internet and provides navigation! content
and services developed from the search engines IahooJ ! 3.cite!
>ycos
"ll the main (earch engines continue to be in the ten most visited
sites
(trategy to create stickiness
-re8uency and duration
3mail 6messenger services7 and chat
2ey strengths
/olume of users
(afety of walled garden
&ressures
+onsumer choice
:egulation
"dvertiser pressure
5
Strategy
5ertical !ortal
&rovide focused content on a speci)c topic
" more targeted version of the hori?ontal portal
(trengths
"dvertisers will pay higher rate for targeted audience
3-commerce site will pay higher referral fees for targeted
audience
&ressure
=ownward pressure on price as 8uality sites proliferate! o4set
by increased internet usage
'7 commerce
3-tailers and e-)nance companies are the destination at he end of
the value chain.

Most important features of an e-commerce site
/ariety of choice
(ecurity of sensitive information
3ase of placing orders
Kuality of information about choices
:eliability of internet vendor
>owest prices
Timely arrival of orders
3asy payment procedures
+ustomer service and after sales support
3asy handling of returns
3ase of contacting vendor
3ase of canceling orders
#eing on the cutting edge
+ritical success factors
Brand
Scale and momentum
$lliances and ac8uisitions
"nnoation
6
Strategy
+ustomer focus
!1"+"#,
,t is often said that the single most important statement that is
made about a product or service is its price. ;o amount of
mathematical theory or jargon can take account of this issue.
$owever! theoretical pricing still does have its value.
Strategic pricing
&rices should be consistent with group strategy. Taking Michael
&orter1s competitive strategy model! we would therefore be looking
for:
=i4erentiation L pricing above the industry average! or
+ost >eadership L pricing at the industry average.
The &rice < (trategy matri. provides a useful picture as to the current
state of the organi?ationMs products <services.
"t this stage! it is worth noting that for most products or services! no
one single NrightN price e.ists. More often! we see a range of prices!
with the @oor determined by customer trust and the ceiling
determined by substitutes and competitors.
Tactics
,f possible! tactical pricing should be consistent with group strategy.
(uch tactics include:
' &enetration
' &rice skimming
' &rice wars
' #undling
' &roduct line pricing
' >oss >eaders
' &rice promotion
!rice . 8uality strategy matri9.
PRICE
0igh
Medium
%o-
0i
gh
:
U
Medium
7
&remium
strategy
&enetration
strategy
(uperb value
strategy
9vercharging
strategy
"verage strategy
Bood value
strategy
:ip-o4 strategy
+ream-skimming
strategy
+heap value
strategy
Strategy
$
%
"
& %o-
Theory
&ricing policy involves O key elementsA customers! competition and
costs.
+ustomers
The pattern of demand is determined by the customer. -or most
products the graph of demand looks like:
!rice
:uantity
The cheaper the price! 6usually7 the more is sold. ,t is important for
the company to understand the general relationship between price
and 8uantity for its product. ,f the product sales are very responsive
to price changes demand is said to be elastic. " small change in
price will lead to a proportionately greater change in 8uantity sold.
+onversely a product 6maybe a necessity7 with a weaker relationship
between price and 8uantity is said to have inelastic demand. $ere
price rises will have little e4ect on sales. "n understanding of the
revenue implications of the relationship between price and 8uantity
is integral to pricing strategy.
$owever! demand curve analysis is essentially the province of the
company economistA the management accountant focuses on more
internal factors.
+ompetition
The general market conditions will in@uence the pricing strategy of
the company. The economist1s e.tremes of perfect competition and
pure monopoly will not e.ist in the real world. ;evertheless! these
e.tremes indicate the likely pressures on )rms! as the actual
markets take on the characteristics of monopoly or perfect
competition.
" )rm operating in a heavily competitive industry will! in the
absence of product di4erentiation! have to set its price close to the
market norms! otherwise customers will simply buy elsewhere.
" )rm operating in an environment dominated by a single company
will be in a monopoly and therefore will itself determine the market
8
Strategy
price. The 8uantity sold at this price will depend upon overall
consumer demand.
There are many intermediate market structures considered by
economists! notably monopolistic competition and oligopoly.
$owever analysis here is largely theoretical and once again
undertaken by economists! rather than the management
accountant.
+osts
+osts are crucial to the pricing decision! because if revenues do not
cover costs the company will make a loss.
While there are occasionally good reasons for pricing below cost! i.e.
to penetrate new markets! to destroy competition! loss leaders! etc.
it is normally more rational to price in e.cess of cost in order to
make a pro)t.
There are 2 fundamental ways in which cost enter the pricing
decision. The )rst is cost plus pricing! the second is more
sophisticated and uses the notion of marginal cost to determine the
optimum output for the company and the conse8uent selling price.

+ost plus pricing
"dding a percentage mark up to the unit cost is a common! if
somewhat unscienti)c form of pricing strategy. $aving taken account
of consumer desires and market pressures! the )rm decides on its
own acceptable degree of pro)tability.
There are a number of possible 0costM alternatives.
D (tandard full cost
The standard cost is a predetermined )gure based on e.pected
production costs. -ull cost incorporates all production overheads
6i.e. those costs which do not vary directly with production levels7
into the unit cost )gure. #y setting the selling price above this
)gure we should 6depending upon the sales volume7 make a
pro)t.
2 (tandard variable cost
"gain predetermined standards are used! but here variable cost
is the base.
This is a short-term strategy! which may be a deliberate ploy to
eliminate competition! or a matter forced upon the )rm by the
market. We ensure that those costs directly attributable to
production are covered and we will still make a contribution
towards our ).ed costs.
$owever! having incurred the ).ed costs! the market is
penetrated by new competitors charging a much lower price. "t
the current price of PDDG the )rm would make no sales at all.
;ow variable costs become the relevant base for pricing.
"t a price below PFG per unit we would stop production
immediately and simply lose PGG!GGG.
$owever any price above this will cover the variable costs and
provide some contribution towards paying o4 the ).ed costs.
"t PQG per unit selling price the contribution per unit will be:
9
Strategy
Strategies for mature products
D. =i4erentiate the
product
2. (egment the market
O. "dd value
5. -orward
. &rice lead
F. &ush<pull
H. #uy the competition
Q. &roliferate the brand
!ricing ob;ecties
"nternal factors
D. +ompany
2. ,ndustry practices
O. >egal restrictions
5. 3thics
"ntegrating price -ith other mar/et ariables
D. &rice and product strategy
2. &rice and promotion strategy
O. &rice and distribution strategy
5. &rice and sales strategy
"ssues of transfer pricing
D. =iRculties in allocating costs of shared network
infrastructure.
2. >ack of a framework for commitments and pricing
between internal providers and purchasers of shared
services.
O. ,nability to de)ne internal service level agreements in
terms of the re8uired functionality! 8uality! cycle time!
volumes and cost.
5. >ittle incentive for internal providers of services to be
more eRcient than a third party.
. +ustomer-facing business units are unable to forecast
future demand and deliver the volume of commitments
made.
F. The 8uestions of whether transfer prices are based on
actual costs or are related to market prices! and of what
sort of transaction plan if starting with the former.
10
'9ternal
factors
3conomy
Bovernment
Technology
(ocial
Strategy
M'1,'1S $#2 $+:U"S"T"O#S 7 ST1$T',"+ $S!'+TS
+orporate growth is a key indicator of success. Browth can happen
organically or via ac8uisition.
The key strategic reasons for ac8uisition are:
D =iversi)cation
2 (ynergy
O 3conomies of scale
5 /ertical integration - supplier
/ertical integration - customer
F "ccess to new markets
H "ccess to tangible assets
Q "ccess to intangible assets
E +ritical mass < image
DG 3liminate competition
DD Thwart competition
D2 #oot strapping
DO Ta.ation
>ess reputable reasons for ac8uisition are
D 0+orporate machismoM
2 1=efence tacticsM
O *tili?ation of cash
5 &rotection for directors
(hort term growth
The viewpoints of all stakeholders should be taken into account when
considering an ac8uisition < merger.
" successful mergers < ac8uisitions strategy can provide a very rapid
and e4ective means of attaining corporate growth! but many factors
dictate the success < failure of the initiative.
3.g. -
- ;ature of the approach - friendly! hostile
- Motive < re8uired outcome - take-over! joint venture! strategic
alliance
There have been 5 noticeable merger waves during the past century:
' DEGGs hori?ontal integration
' DE2Gs vertical integration
' DEFGs conglomerate growth
' DEEGs strategic ac8uisitions
The synergistic bene)ts should be inherent in the ability to share
).ed costs e.g. fro?en meats S ice creams - same distribution
network - but opposite demand cycles throughout the seasons.
2efence tactics
The approach made by a company in attempting to buy < merge
with another can either be of a friendly or hostile nature. #idding
and defending against unwelcome bids can become very tactical.
2efence Strategies 7 sourced from +ity Uniersity
Business School.$c8uisitions Monthly
2efence strategy 2escription
11
Strategy
2nocking copy &art of defence document attacking credibility of
bid terms and bidder
#idder shareholder
appeal
"ppeal to shareholders to vote down bid
&ro)t forecast -or current accounting year
&ro)t report :eported pro)t for past year
,ncreased dividend $igher dividend declared or forecast for future
"sset
revaluation
(trengthen balance sheet to show that bid
undervalues target
=ivestment "nnounce sell o4 < spin o4
"c8uisition "nnounce mergers < ac8uisitions
Management change +hange directors < managers
-riendly shareholders >obby family shareholders < friendly institutions
White s8uire -riendly party who buys a stake to stave o4 the
hostile bid
White knight -riendly bidder countering the hostile bid
"nti-trust lobbying >obby the 9-T etc.
:egulatory appeal >obby the Take-over &anel < (tock 3.change
citing violation of rules
>itigation 3nforce anti-trust rules or force nominee
shareholding disclosure
&olitical lobbying >obby politicians to argue that bid is against
public interest
*nion support >obby unions pointing to possible redundancies
+ustomer support (eek customer support to sow doubts about
performance in future under bidder
&re-emption letter "dvice to target shareholders before sending
formal defence document
"dvertising &: campaign
Bood news &ublish info! on new products! new contracts! etc
:ed herring "ttack bidder on peripheral matters
#locking "ny other strategy - golden parachute etc.
J
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