Professional Documents
Culture Documents
1 Re-read the Introducing the topic case study at the start of this chapter. Analyse the
four strategic options by using the Ansoff Matrix. [12]
Strategy Commentary
Market penetration: The market is saturated and is no longer growing. Therefore,
increase market share in it will be difficult to gain market share. Promotional activity
the gas and electricity and pricing would be important to the success of this option.
markets that ABCA However, there is less risk as ABCA Power understands this
Power already operates in market well, but the potential for growth is low.
Product development: As the technological differences between renewable and
develop renewable forms non-renewable energy supplies are considerable, this will be
of energy for sale in a risky option. It requires significant investment in R&D and
existing markets ABCA Power would need to recruit suitable scientists. There
is no guarantee that the research will be successful. However,
the potential market is large due to climate-change concerns.
Market development: Potentially a costly option as ABCA Power may have to
enter other countries establish infrastructure in other countries. Offers much
markets for gas and greater potential for growth than remaining in existing
electricity supply countries as ABCA Power can target a market that is not
saturated. It may be difficult for ABCA to build sales as there
will be no brand awareness of the business in the new markets.
Diversification: develop The riskiest option as ABCA Power does not have experience
a range of non-energy of the non-energy market and is, therefore, developing new
products for sale in new products for a new market. However, one of its directors has
markets previously been a senior manager for an office-equipment
company. ABCA Power will be trying to enter a market with
established brand leaders; the cost of developing a range of
office equipment and marketing the products to penetrate
the market would be substantial. The risk of failure is high
and the potential returns depend on the degree of brand
loyalty in the market and its rate of growth.
1 Explain why companies like these need long-term plans to help achieve their
objectives. [6]
Are objectives likely to be achieved just because they have been set? Logically,
having determined its objectives, a business needs to develop strategies that will
facilitate the achievement of the objectives; hence the need for a long-term plan.
GDP per head this will affect consumer demand for coffee shops. Rising
incomes provide an opportunity for increasing sales at the type of coffee bars
operated by Caff Nero.
Inflation if inflation is volatile in Turkey, this would make it more difficult to
plan for the future. Predicting future costs and revenues becomes increasingly
difficult the more volatile the inflation rate.
The number of established coffee chains in the market and their market share if
one chain such as Starbucks has already built a substantial market share, it may
be more difficult for Caff Nero to establish itself.
Recent growth in the market a rapidly growing market will be easier to enter.
Competition may be less intense as there are sufficient consumers to share.
Changing patterns of consumption, e.g. relative spending on different types of
coffee. This may indicate whether there is potential for the type of products that
Caff Nero sells.
Exchange rate this will affect the cost to Caff Nero of entering the market.
3 Using Ansoff s Matrix, compare and contrast the different strategies being adopted
by these two companies and comment on possible reasons why these were decided
upon. [12]
Caff Nero is adopting market development as it is aiming to sell its existing products
in new markets by entering the Turkish and Chinese markets, among others. Caff
Nero is, therefore, focusing on the product that it already understands this
reduces risk. However, by entering new markets the business is taking a risk as
the consumers in those markets may be very different from consumers in existing
markets. Therefore, Caff Nero may need to adapt its product offer. The appointment
of a manager with experience of the Turkish market and understanding of changing
consumer tastes in the country will give Caff Nero a better chance of success.
Product development this strategy seeks to sell new products in existing markets.
Asda is expanding its presence in the non-food market. This carries more risk than
market penetration as the non-food market is not Asdas core competence. It may
have chosen this strategy because there is greater opportunity for sales growth than
in food retailing due to rising incomes in the UK.
4 Discuss the factors that might influence the long-term plans or strategies adopted by a
business. [12]
Businesses typically aim to make profit, increase market share and increase sales.
There are numerous factors that influence the long-term plans or strategies adopted
by a business. A few of them are as follows:
Ownership this will affect the availability of finance and skills within the
business and, therefore, the strategies that can successfully be adopted. Asdas
strategy of market penetration may be influenced by the resources available to
the business as a result of its ownership by Wal-Mart.
Attitude toward risk of owners if the owners are risk averse, they will avoid
taking on too much debt and will use more cautious strategies. For example,
expansion may be far less aggressive and organic growth more likely.
Economic factors:
Interest rates will affect the desirability of debt finance.
Economic growth will be critical.
The exchange rate may influence location decisions.
Market factors consideration will have to be given to the long-term prospects
within a market, e.g. oil companies will have to look for alternative energies if
they are to continue to grow. Competition will also have a significant impact on
strategic decisions, e.g. if Asda is to compete with Tesco, then it has to expand
rapidly into non-food retailing.
Social factors tobacco companies have had to develop strategies to respond
to declining sales in the western economies. This has typically involved
diversification and targeting developing economies.
Political factors tobacco company strategies have been influenced by legal
restrictions in many countries. The evolution of trading blocs, such as the EU,
influences location decisions.
1 How would you analyse part 1 of the directors survival plan, according to Ansoff s
matrix? Explain your answer. [4]
2 Using a force-field analysis diagram, identify and assess the relative strength of the forces
that will drive the change in part 2 of the plan and those that will constrain it. [12]
Inadequate skills of 3
existing staff
Disruption 4
3 Recommend to the directors ways in which they could increase the chances of this
strategic choice being successful. [8]
Improving the chances of this strategic choice being successful requires the
directors to increase the forces driving the plan and/or reducing the strength of the
forces opposing. Possible approaches may include:
Raising wages of remaining staff to reflect their additional responsibilities this
would add a new force (+3) in favour of the change.
Staff training this would reduce inadequate skills by 3 but add a new force,
cost of transition, against change, of +1.
Offer attractive redundancy packages this would reduce the manager
opposition by 3 but add to the cost of transition by 1.
These changes would swing the balance of the force-field analysis from 19:14
against the plan to 17: 15 in favour of the strategy.
Factors include:
Expected change in GDP and its impact on demand if GDP is growing,
then there will be an increase in demand. Income elasticity of demand will be
important.
Level of unemployment unemployment affects household income and,
therefore, spending.
Impact of competition in each town if a town has a competitor offering
similar products, this will affect estimated revenues.
1 Show these options on a decision tree, adding the payoffs and probabilities. [6]
0.8 High
$500,000
$480,000
Petrol forecourt
(100,000) 2
$530,000 0.2 Low
$400,000
1 0.8 High
$800,000
$680,000
Car showroom
(150,000) 3
0.2 Low
$200,000
2 Calculate the expected value of both investments and recommend which option
should be taken. [6]
Based on the decision-tree analysis, the car showroom is the better option.
3 State three other factors that you consider might influence the business owners final
decision. [3]
Attitude toward risk if demand is low, then the car showroom only provides
a return of $50,000, whereas the petrol forecourt provides a more consistent
1 Using the data above, draw a decision tree of the options Joe has and add the
probabilities and forecast economic returns. [6]
0.4
$5,000
$6,800
Town A 0.6
2 $8,000
0.3
$3,000
$4,500
Town B
3 0.5
$4,000
$6,900 0.2
$8,000
1 0.4
$3,000
$5,200
Town C 0.5
4 $6,000
0.1
$10,000
0.3
$5,000
$6,900
Town D 0.3
5 $6,000
0.4
$9,000
2 Calculate the expected values of Bes four options. Which town should Joe visit on
Saturday on the basis of quantitative data alone? [10]
Weather poor weather may keep customers away from the market.
The amount of data contained in past records Joe will need to have past data
for the same week of the year for each town. There may be seasonal influences
on demand which incomplete data would not reveal.
Decisions of other stallholders there may be other mobile market sellers of
kitchen equipment who may decide to visit the same town as Joe next Saturday.
1 Draw a decision tree of the options available to Mark and Stella and add to it the
probabilities and economic returns of each option. [6]
Close
$0
0.5
$3,000
$2,800 $3,500
1 Professional
(2,000) 2
0.5
$4,000
0.6
$3,000
$3,800
Relatives
(1,000) 3
0.4
$5,000
Employing the two relatives gives the highest estimated return, $2,800 compared
with $1,500 if hiring the professional.
Impact on reputation if Mark and Stella use their inexperienced relatives, this
could have a longer-term impact on their reputation if the haircuts they provide
are of an inferior quality.
Impact on the two junior assistants if the salon is closed, this will force the
two assistants to take a holiday. Should Mark and Stella consult the assistants to
ascertain their preferred option?
Impact on customers will closing the salon inconvenience regular customers?
Customers may feel let down if they are not able to make an appointment
during that two-week period and, therefore, go elsewhere.
Essay
2 a Explain how force-field analysis could be used to assess forces driving and
constraining a major decision to relocate a business to another country. [10]
This is a technique for identifying and analysing the positive factors that
support and the negative factors that constrain a decision. It looks at the
advantages and disadvantages of the decision to relocate to another country.
Factors identified are shown on a force-field diagram for ease of interpretation.
The technique is useful for summarising the forces for and against a decision.
A force-field analysis involves:
Analysing the current situation and the desired situation.
Listing factors driving change, e.g. need to be more competitive, high costs
of current location.
Listing constraining factors, e.g. language difficulties, capital outlay
required, impact on existing employees
Allocating a numerical score to each force.
Showing the forces on a diagram.
Identifying whether the change is viable.
Considering how to reduce the strength of the constraining forces and
increase the strength of the driving forces.
Force-field analysis is a framework for considering decisions. The quality of the
assessment of driving and constraining forces depends entirely on the ability of
the manager/team conducting the analysis.
Answers will usually start with a definition of decision-tree analysis and provide a
simple example to illustrate key issues.
Benefits:
Decision trees provide a diagrammatic summary of the options connected with
a decision and the outcomes and economic returns that may result.
It is a quantitative technique.
It aims to reduce risk by taking into account the probability of different
outcomes arising from a decision. It is therefore a more realistic modelling of
decision making as it is not usually certain what the outcome of a decision will
actually be.
Weaknesses:
Are the data accurate? It is likely to be based on the estimates of future
economic activity and a range of judgements about competitors and the
reaction of relevant stakeholders to the decision being considered.
It ignores qualitative factors. These are often very important to decision makers.
Quality of forecasts may be poor.
Assessment of probability is difficult and is, to some extent, based on the
intuition of the analyst. The business environment is so dynamic that
predictions are, almost inevitably, incorrect.
There is potential for the data to be manipulated to show what the manager
wants to show.
Decision trees do not eliminate risk.
It provides an average economic return. In reality, assuming the data are good,
the return will be one of the branches of the tree, not the average.