ACCA Paper P3: Notes

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Notes
ACCA Paper P3
Business Analysis
For exams in 2010
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ExPress Notes
ACCA P3 Business Analysis
Chapter 5
Strategic Choice
START
The Big Picture
This chapter covers a number of important issues. The focus is on the choices available to
an organisation as well as methods for making appropriate decisions.
KEY KNOWLEDGE
Parenting style theory (Gould & Campbell)
This is a framework for the role of the corporate headquarters and how it gets involved in
the strategic development of the businesses within the group.
They identified 3 styles which companies tend to follow:
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ExPress Notes
Financial Control Strategic Control Strategic Planning

Head office sets financial A middle ground between Head office plays a central
targets but limited role in financial control and strategic role in setting the strategy of
setting strategy of SBU. planning. Head office co- the SBU.
ordinates and reviews
strategy.
KEY KNOWLEDGE
Boston Consulting Group (BCG) Matrix
This matrix helps organisations analyse their product lines or business units. It helps
identifies priorities and where resources should be allocated.
Items are allocated to the various quadrants according to how attractive the market is
(measured as the growth rate) and how strong a position they hold within the market (their
market share)
Market Share
High Low
High Stars Question Marks

Growth Rate
Low Cash Cows Dogs
A balanced portfolio would have:
1. Stars to ensure the future.
2. Question marks to convert to Stars.
3. Cash Cows to provide funding to develop the Stars and Question Marks.
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General Electric matrix
An organisations SBUs are entered onto the matrix based on industry attractiveness and
business strength. The appropriate action for each segment is shown in the table below.
GE Matrix:
Selective
High Invest / Grow Invest / Grow
Business Position
Investment
Selective
Medium Harvest / Divest Invest / Grow
Investment
Selective
Low Harvest / Divest Harvest / Divest
Investment
Low Medium High
Industry Attractiveness
Business strength determined by for example, financial position, competencies and supplier
relationships.
Industry attractiveness determined by for example, competitors within the industry, growth
rate of industry.
The three cells in the top right hand corner of the matrix are the most attractive in which to
be. These require a policy of investment for growth.
The three cells running diagonally are of medium attractiveness. Management should review
these carefully to determine which ones to invest in and retain.
The three cells in the bottom left hand corner are less attractive. Management should
consider a policy of harvesting or divesting these items.
KEY KNOWLEDGE
Porters Generic Strategy
Porter identified 3 generic strategies that are commonly used by businesses to create and
maintain competitive advantage:
Differentiation
Cost leadership
Focus
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Selling price
Higher profit
Selling Selling
due to higher
Profit price price
selling price
Profit
Higher profit
Profit due to lower
cost
Cost Cost Cost
"In the Cost

Differentiation middle" leadership
1. Differentiation
This involves a product or service that is considered to be different or unique within its
industry. Due to these unique characteristics the organisation can charge a premium. The
uniqueness of the item could be based on a variety of things such as the design, technical
features, support service, branding, etc.
Examples of companies that have used the differentiation strategy include:
Apple computers, iphones and ipod.

Land Rover off-road cars.
2. Cost leadership
This is where an organisation can produce goods or services at a lower cost than the
industry average. Importantly, note that this does not mean lower quality.
Low cost production can be obtained by way of economies of scale, preferential access to
raw materials or labour, access to extensive distribution channels, etc. The cost leadership
product is often a basic good or service which is made available to a large customer base.
Examples of companies that have used cost leadership strategies include:

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ExPress Notes
Dell computers
Wall mart stores
3. Focus
This is where an organisation concentrates on a small number of niche markets.
Differentiation focus an example would be a specialist holiday or tour operator (e.g.

specialising in Skiing holidays).
Cost focus an example would be a small chain of retailers that create their own label range
of products.
Strategy clock (Bowman)
The strategic clock is a method of analysing an organisations competitive position in

contrast with its competitors ways of competitive positioning.
The clock is classified into 8 parts. Namely:
1. Low added value

2. Low price
3. Hybrid
4. Differentiation
5. Focused differentiation
6. High price / standard value
7. High price / low value
8. Standard price / low value
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4. Differentiation
High
3. 5. Focussed
Hybrid differentiation
Perceived added value
2. Low price 6
1. Low price, low

added value 8
Low
Low Price High
KEY KNOWLEDGE
Ansoffs matrix (the Product Market Mix)
This allows companies to identify a number of options to grow the business via existing and
/ or new products in existing and / or new markets.
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Existing Products New Products
1. Consolidation
Existing Markets 2. Penetration 4. Product development
3. Withdrawal
New Markets 5. Market development 6. Diversification
1. Consolidation. This is not doing nothing. It is doing enough to maintain the existing
position.
2. Penetration. Actively trying to increase the share of the market through techniques
such as advertising and PR.
3. Withdrawal. Pulling out of a particular market. Reasons could include its loss making
or a company wants to utilise resources elsewhere.
4. Product development. Developing new products to sell to existing markets. An

example would be a soft drinks manufacturer launching a new healthy range of
drinks.
5. Market development. Existing products are sold in new markets. This can either be
for example geographical (McDonalds establishing restaurants in new geographical
areas) or can be repositioning the market (e.g. Land Rover developing from an
agricultural market vehicle to mainstream car producer).
6. Diversification. Generally considered to be the most risky. There are a number of

types of diversification:
a. Backwards vertical integration whereby an organisation takes on the role of
its supplier. An example would be an oil refining company taking on the role
of its supplier of oil exploration i.e. it would now be in a position to supply
itself with its raw materials.
b. Forwards vertical integration whereby an organisation takes on the role of its
customer. For example, a farmer sets up a farm shop to sell direct to the
public rather than to shops.
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ExPress Notes
c. Unrelated diversification refers to a new product or service in a completely

new market.
Methods of expansion.
Internal Development. Organic growth using an organisations own resources.
Mergers & Acquisition. Often treated as being the same thing, these are in fact different. A
true merger is a joining of equals where organisations of approximately the same size and
strength come together (e.g. when Glaxo Wellcome and SmithKline Beecham merged to
form GlaxoSmithKline). An acquisition (or takeover) is usually the purchase of a smaller
target company by a larger one. The acquisition may be friendly (the company being
acquired is in favour of the takeover) or hostile (the company does not want to be taken
over).
Strategic Alliance. A formal relationship between parties which aims to achieve certain
strategic objectives whilst enabling them both to remain independent. An example of a
strategic alliance would be when a hotel chain and a restaurant chain work together.
Franchise. The Franchisor gives the right to the Franchisee to use its brand in exchange for
a capital sum and /or a royalty payment. Examples of a franchise include certain McDonalds
restaurants around the world.
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ACCA Paper P3: Notes

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Thank you for downloading this extract from our

ExPress notes to accompany your free online

They identified 3 styles which companies tend to follow:

Financial Control Strategic Control Strategic Planning

High Stars Question Marks

Low Cash Cows Dogs

A balanced portfolio would have:

1. Stars to ensure the future.

2. Question marks to convert to Stars.

General Electric matrix

Low Medium High

Cost Cost Cost

"In the Cost

Examples of companies that have used the differentiation strategy include:

Apple computers, iphones and ipod.

Examples of companies that have used cost leadership strategies include:

Wall mart stores

This is where an organisation concentrates on a small number of niche markets.

Differentiation focus an example would be a specialist holiday or tour operator (e.g.

Strategy clock (Bowman)

The strategic clock is a method of analysing an organisations competitive position in

The clock is classified into 8 parts. Namely:

1. Low added value

1. Low price, low

Low Price High

Existing Products New Products

New Markets 5. Market development 6. Diversification

4. Product development. Developing new products to sell to existing markets. An

6. Diversification. Generally considered to be the most risky. There are a number of

c. Unrelated diversification refers to a new product or service in a completely

Internal Development. Organic growth using an organisations own resources.

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