Strategic choice is a key step within the strategic planning process:
- Strategic analysis (examination of the current strategic position)
- strategic choice
- strategic implementation (or strategy into action).
Strategic choice typically follows strategic analysis and is based upon the following three elements.
- Generation of strategic options, e.g. growth, acquisition, diversification or concentration.
- Evaluation of the options to assess their relative merits and feasibility.
- Selection of the strategy or option that the organisation will pursue. There could be more than one strategy chosen but there is a chance of an inherent danger or disadvantage to any choice made. Although there are techniques for evaluating specific options, the selection is often subjective and likely to be influenced by the values of managers and other groups with an interest in the organisation.
In addition to deciding the scope and direction of an organisation,choices also need to be made about how to achieve the goal.
Broadly,there are two ways in which a strategy can be pursued:
- Internal development (organic growth)
- External development- merger/acquisition, JV, franchising/licensing.
Generation of strategic options
Three key questions
Strategic options generation is the process of establishing a choice of possible future strategies. There are three main areas to consider.
Porter describes certain generic competitive strategies (lowest cost or differentiation) that an organisation may pursue for competitive advantage They determine how you compete.
Ansoff describes product-market strategies (which markets you should enter or leave). They determine where you compete and the direction of growth.
When considering the method of growth the choice may be between models involving 100% ownership (acquisition v organic growth) or a joint strategy (e.g. franchising, joint ventures, etc).
A number of portfolio models (e.g. the BCG matrix) have been developed that attempt to both analyse a product portfolio and generate strategies for those products.
Evaluation of the options
Johnson, Scholes and Whittington argue that for a strategy to be successful it must satisfy three criteria:
- Suitability – whether the options are adequate responses to the firm’s assessment of its strategic position.
- Acceptability – considers whether the options meet and are consistent with the firm’s objectives and are acceptable to the stakeholders.
- Feasibility – assesses whether the organisation has the resources it needs to carry out the strategy.
This criteria can be applied to any strategy decision such as the competitive strategies, the growth strategies, or even the methods of development.
Suitability is a useful criterion for screening strategies, asking the following questions about strategic options:
- Does the strategy exploit the company strengths, such as providing work for skilled craftsmen or environmental opportunities, e.g. helping to establish the organisation in new growth sectors of the market?
- How far does the strategy overcome the difficulties identified in the analysis? For example, is the strategy likely to improve the organisation’s competitive standing, solve the company’s liquidity problems or decrease dependence on a particular supplier?
- Does the option fit in with the organisation’s purposes? For example, would the strategy achieve profit targets or growth expectations, or would it retain control for an owner-manager?
Acceptability is essentially about assessing risk and return and is strongly related to stakeholders’ expectations. The issue of ‘acceptable to whom?’ thus requires the analysis to be thought through carefully.
Some of the questions that will help identify the likely consequences of any strategy are as follows:
- How will the strategy impact shareholder wealth? Assessing this could involve calculations relating to NPV, SVA or EVA.
- How will the organisation perform in profitability terms? The parallel in the public sector would be cost/benefit assessment.
- How will the financial risk (e.g. liquidity) change?
- What effect will it have on capital structure (gearing or share ownership)?
- Will the function of any department, group or individual change significantly?
- Will the organisation’s relationship with outside stakeholders, e.g. suppliers, government, unions, customers need to change?
- Will the strategy be acceptable in the organisation’s environment, e.g. higher levels of noise?
Assesses whether the organisation has the resources it needs to carry out the strategy.
Factors that should be considered can be summarized under the M-word model.
- Machinery. What demands will the strategy make on production? Do we have sufficient spare capacity? Do we need new production systems to give lower cost/better quality/more flexibility/etc?
- Management. Is existing management sufficiently skilled to carry out the strategy.
- Money. How much finance is needed and when? Can we raise this? Is the cash flow feasible?
- Manpower. What demands will the strategy make on human resources? How many employees are needed, what skills will they need and when do we need them? Do we already have the right people or is there a gap? Can the gap be filled by recruitment, retraining, etc?
- Markets. Is our existing brand name strong enough for the strategy to work? Will new brand names have to be established? What market share is needed for success – how quickly can this be achieved?
- Materials. What demands will the strategy make on our relationships with suppliers. Are changes in quality needed?
- Make-up. Is the existing organisational structure adequate or will it need to be changed?
Studying takes you on a path towards acquiring hard skills – the specific technical skills you need to do your job effectively. While these are the skills you’ll list on your CV, today’s employers seek more than this. Increasing importance is being placed on soft skills – personal attributes that enable you to interact well with other people. Here are the reasons why soft skills are more important than ever:
1 – HARD SKILLS ARE USELESS WITHOUT SOFT SKILLS
In most jobs, technical skills alone are not enough to be truly effective. A salesperson with an unrivalled knowledge of their product and market will have little success if they don’t have the interpersonal skills needed to close deals and retain clients. A business manager needs to be able to listen to employees, have good speaking skills, and be able to think creatively. All careers require at least some soft skills to make the hard skills valuable.
2 – SOFT SKILLS ARE HARDER TO LEARN
Hard skills aren’t necessarily hard to acquire. They can be easily taught, and can be learned and perfected over time. Soft skills are more challenging to develop, since they have little to do with knowledge or expertise, but are closely linked with a person’s character. It takes conscious effort, ongoing practice, and a commitment to self-development to improve your soft skills. Hard skills may look impressive on your CV, but the soft skills are what will set you apart from the many candidates who have similar expertise to you.
3 – THE MODERN WORKPLACE IS INTERPERSONAL
Skills such as listening, collaborating with others, presenting ideas and communicating with team members are all highly valued in the modern workplace. Strong soft skills ensure a productive, collaborative and healthy work environment, all vital attributes for organisations in an increasingly competitive world.
4 – CUSTOMERS DEMAND SOFT SKILLS
The modern market offers consumers an unlimited number of choices through technologies such as the internet and smartphones. For these consumers, convenience and low prices are easy to come by, so customer service is often what influences the choice to use a particular business. The ability to communicate efficiently and effectively with customers is therefore a vital factor in an organisation’s success.
5 – THE FUTURE WORKPLACE WILL RELY ON SOFT SKILLS
Automation and artificial intelligence will result in a greater proportion of jobs relying on soft skills. Thanks to cutting-edge technology, tasks that require hard skills are continuing to decline, making soft skills key differentiators in the workplace. As an example, look at this fascinating study by Deloitte Access Economics, which predicts that two-thirds of all jobs in Australia will rely on soft skills by 2030. This trend will inevitably be mirrored globally.
Now that you know the importance of soft skills, which ones do you think you need to develop? Here’s a list of the soft skills that today’s employers value most:
- Communication (oral and written)
- Learning from criticism
- Working under pressure
You can improve your soft skills by taking personal development courses or online courses, networking with people both inside and outside your organisation and challenging yourself to take on new tasks. With a strong set of soft skills complementing your hard skills, the most important paving stones to success will be in place.
What is an ‘Opportunity Cost’
Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it is the difference in return between a chosen investment and one that is necessarily passed up.
BREAKING DOWN ‘Opportunity Cost’
What is the Formula for Calculating Opportunity Cost?
When assessing the potential profitability of various investments, businesses look for the option that is likely to yield the greatest return. Often, this can be determined by looking at the expected rate of return for a given investment vehicle. However, businesses must also consider the opportunity cost of each option. Assume that, given a set amount of money for investment, a business must choose between investing funds in securities or using it to purchase new equipment. No matter which option is chosen, the potential profit that is forfeited by not investing in the other option is called the opportunity cost. This is often expressed as the difference between the expected returns of each option:
Opportunity Cost = Return of Most Lucrative Option – Return of Chosen Option
Option A in the above example is to invest in the stock market in hopes of generating returns. Option B is to reinvest the money back into the business with the expectation that newer equipment will increase production efficiency, leading to lower operational expenses and a higher profit margin. Assume the expected return on investment in the stock market is 12%, and the equipment update is expected to generate a 10% return. The opportunity cost of choosing the equipment over the stock market is 12% – 10%, or 2%.
Opportunity cost analysis also plays a crucial role in determining a business’s capital structure. While both debt and equity require some degree of expense to compensate lenders and shareholders for the risk of investment, each also carries an opportunity cost. Funds that are used to make payments on loans, for example, are therefore not being invested in stocks or bonds which offer the potential for investment income. The company must decide if the expansion made possible by the leveraging power of debt will generate greater profits than could be made through investments.
Because opportunity cost is a forward-looking calculation, the actual rate of return for both options is unknown. Assume the company in the above example decides to forgo new equipment and invests in the stock market instead. If the selected securities decrease in value, the company could end up losing money rather than enjoying the anticipated 12% return. For the sake of simplicity, assume the investment simply yields a return of 0%, meaning the company gets out exactly what it put in. The actual opportunity cost of choosing this option is 10% – 0%, or 10%. It is equally possible that, had the company chosen new equipment, there would be no effect on production efficiency and profits would remain stable. The opportunity cost of choosing this option is then 12% rather than the anticipated 2%.
It is important to compare investment options that have a similar degree of risk. Comparing a Treasury bill (T-bill)—which is virtually risk-free—to investment in a highly volatile stock can result in a misleading calculation. Both options may have anticipated returns of 5%, but the rate of return of the T-bill is backed by the U.S. government while there is no such guarantee in the stock market. While the opportunity cost of either option is 0%, the T-bill is clearly the safer bet when the relative risk of each investment is considered.
Using Opportunity Costs in Our Daily Lives
When making big decisions like buying a home or starting a business, you will likely scrupulously research the pros and cons of your financial decision, but most of our day-to-day choices aren’t made with a full understanding of the potential opportunity costs. If they’re cautious about a purchase, most people just look at their savings account and check their balance before spending money. For the most part, we don’t think about the things that we must give up when we make those decisions.
However, that kind of thinking could be dangerous. The problem lies when you never look at what else you could do with your money or buy things blindly without considering the lost opportunities. Buying takeout for lunch occasionally can be a wise decision, especially if it gets you out of the office when your boss is throwing a fit. However, buying one cheeseburger every day for the next 25 years could lead to several missed opportunities. Aside from the potentially harmful health effects of high cholesterol, investing that $4.50 on a burger could add up to just over $52,000 in that time frame, assuming a very doable rate of return of 5%.
This is just one simple example, but the core message holds true for a variety of situations. From choosing whether to invest in “safe” treasury bonds or deciding to attend a public college over a private one in order to get a degree, there are plenty of things to consider when making a decision in your personal finance life.
While it may sound like overkill to have to think about opportunity costs every time you want to buy a candy bar or go on vacation, it’s an important tool to use to make the best use of your money.
What is the Difference Between a Sunk Cost and an Opportunity Cost?
The difference between a sunk cost and an opportunity cost is the difference between money already spent and potential returns not earned on an investment because capital was invested elsewhere. Buying 1,000 shares of company A at $10 a share, for instance, represents a sunk cost of $10,000. This is the amount of money paid out to make an investment, and getting that money back requires liquidating stock at or above the purchase price.
Opportunity cost describes the returns that could have been earned if the money was invested in another instrument. Thus, while 1,000 shares in company A might eventually sell for $12 each, netting a profit of $2 a share, or $2,000, during the same period, company B rose in value from $10 a share to $15. In this scenario, investing $10,000 in company A netted a yield of $2,000, while the same amount invested in company B would have netted $5,000. The difference, $3,000, is the opportunity cost of having chosen company A over company B.
The easiest way to remember the difference is to imagine “sinking” money into an investment, which ties up the capital and deprives an investor of the “opportunity” to make more money elsewhere. Investors must take both concepts into account when deciding whether to hold or sell current investments. Money has already been sunk into investments, but if another investment promises greater returns, the opportunity cost of holding the underperforming asset may rise to the point where the rational investment option is to sell and invest in a more promising investment elsewhere.
What is the Difference Between Risk and Opportunity Cost?
In economics, risk describes the possibility that an investment’s actual and projected returns are different and that some or all of the principle is lost as a result. Opportunity cost concerns the possibility that the returns of a chosen investment are lower than the returns of a necessarily forgone investment. The key difference is that risk compares the actual performance of an investment against the projected performance of the same investment, while opportunity cost compares the actual performance of an investment against the actual performance of a different investment.
A firm’s relative position within its industry determines whether a firm’s profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.
1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.
The focus strategy has two variants.
(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser’s target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.
In a business climate where only the best companies survive and thrive, one thing is clear: you must avoid the stupid stuff. You must eliminate the things that leave customers and employees scratching their heads, frustrated and mystified.
The problem is that every company, no matter what size, battles to some degree a central tension: people with ideas on how to make things better, and hidden obstacles that keep those positive changes from actually happening.
In his recent book How Excellent Companies Avoid Dumb Things, Neil Smith distills down what he’s learned by working in exemplary companies into a list of the key barriers that are holding back even the world’s best companies.
According to Smith, the following eight things are the typical barriers to desirable attributes of growth, efficiency, simplicity, and profitability.
1. Avoiding Controversy. Controversial ideas exist and are left unresolved because dealing with them would cause too much disruption. Politics, personalities, alliances and appearances all contribute to making ideas controversial.
2. Using Time Poorly. Even in organizations where people are very busy and long days are the norm, employees use their time very badly. There are three aspects to this barrier: the lack of time, the use of time and the value of time.
3. Resisting Change. The most human and pervasive of the eight barriers, this involves resisting the impulse to remain creatures of habit and complacency. People fear change because it is about the unknown.
4. Erecting Organizational Silos. These silos, or departments, within an company are necessary evils, providing structure and accountability, but at the same time preventing the flow of information, focus, and control outward.
5. Committing Ideacide. Many good ideas are shot down not for perceived lack of merit but because a manager feels threatened by the idea in some way. Employees are generally powerless in these situations. The result? Employees are frustrated and good ideas are never put to the test.
6. Making Decisions on Bad Data and Assumptions. Information can be incorrect, outdated, or difficult to obtain. Assumptions are made when data doesn’t exist or hasn’t been calculated. Decisions made using bad assumptions or incorrect information will always yield poor results.
7. Ignoring Size, Scale, and Scope. A great challenge for many companies is managing the economies related to smaller and less profitable customers or transactions. Companies ignore or don’t think about the potential impact of even simple size-based changes in the way they conduct business.
8. Ignoring Process. Existing processes can prevent great ideas from being implemented even if people are advocating for change. The problem is that there is no process to change processes. The issues that need to be solved often aren’t complex, but resolving them without a process in place to do so can be very complex.
Smith says that he’s never worked with a company that didn’t have all eight barriers present. Which raises the obvious question: Why is that?
“These eight hidden barriers are caused by both human nature and the way companies are naturally organized,” says Smith. “The human nature type of barrier has to do with the way we instinctively behave. For example, most people get anxious about the fear of the unknown, so there is a reluctance to change.”
“Structural barriers result from the way companies, rather than individuals, function. Take the case of organizational silos, which are important to provide structure to a company, but can make it difficult for people to share the same priorities.”
The key to avoiding the dumb things, to breaking down the barriers, seems straightforward enough: consensus. Smith believes consensus about specific ideas is the both the glue and the grease that keeps the business moving forward positively and ensure full implementation of ideas for change.
“Everyone who is going to be affected by an idea has to be on board with it,” Smith maintains. “Otherwise crippling problems will crop up during the implementation phase. If people weren’t consulted about something that will affect them or their sphere of influence, they may be resentful, they may have very practical, reasonable objections, or they may feel blindsided. None of these will help you get things done.”
“Getting consensus often means modifying an idea,” Smith continues. “But don’t think that’s about diluting its impact. Idea modification is what makes it possible for an idea to have impact. A great idea that doesn’t go anywhere because consensus has not been built, won’t help the company with its goals of increasing efficiency, boosting profits, and reducing complexity.”
How many of the eight hidden barriers exist in your company? What are you doing to eliminate them?
Using the BCG Matrix (Growth Market Share Matrix) to review your product portfolio
What is the BCG Matrix?
The Boston Consulting group’s product portfolio matrix (BCG) is designed to help with long-term strategic planning, to help a business consider growth opportunities by reviewing its portfolio of products to decide where to invest, to discontinue or develop products. It’s also known as the Growth/Share Matrix.
The Matrix is divided into 4 quadrants derived on market growth and relative market share, as shown in the diagram below.
- 1. Dogs: These are products with low growth or market share.
- 2. Question marks or Problem Child: Products in high growth markets with low market share.
- 3. Stars: Products in high growth markets with high market share.
- 4. Cash cows: Products in low growth markets with high market share
How to use the BCG Matrix?
To look at each of these quadrants, here are some tips:
- Dogs: The usual marketing advice is to remove any dogs from your product portfolio as they are a drain on resources.
However, some can generate ongoing revenue with little cost.
For example, in the automotive sector, when a car line ends, there is still a need for spare parts. As SAAB ceased trading and producing new cars, a whole business has emerged providing SAAB parts.
- Question marks: Named this, as it’s not known if they will become a star or drop into the dog quadrant. These products often require significant investment to push them into the star quadrant. The challenge is that a lot of investment may be required to get a return. For example, Rovio, creators of the very successful Angry Birds game has developed many other games you may not have heard of. Computer games companies often develop hundreds of games before gaining one successful game. It’s not always easy to spot the future star and this can result in potentially wasted funds.
- Stars: Can be the market leader though require ongoing investment to sustain. They generate more ROI than other product categories.
- Cash cows: ‘Milk these products as much as possible without killing the cow!. Often mature, well established products.The company Procter & Gamble which manufactures Pampers nappies to Lynx deodorants has often been described as a ‘cash cow company’.
Use the model as an overview of your products, rather than detailed analysis. If market share is small, use the ‘relevant market share’ axis is based on your competitors rather than entire market.
BCG Matrix Example: How it can be applied to digital marketing strategies?
The BCG Model is based on products rather than services, however it does apply to both. You could use this if reviewing a range of products, especially before starting to develop new products.
Looking at the British retailer, Marks & Spencer, they have a wide range of products and many different lines. We can identify every element of the BCG matrix across their ranges:
Example: Lingerie. M&S was known as the place for ladies underwear at a time when choice was limited. In a multi-channel environment, M&S lingerie is still the UK’s market leader with high growth and high market share.
- Question Marks/Problem Child
Example: Food. For years M&S refused to consider food and today has over 400 Simply Food stores across the UK. Whilst not a major supermarket, M&S Simply Food has a following which demonstrates high growth and low market share.
- Cash Cows
Example: Classic range. Low growth and high market share, the M&S Classic range has strong supporters.
Example: Autograph range. A premium priced range of men’s and women’s clothing, with low market share and low growth. Although placed in the dog category, the premium pricing means that it makes a financial contribution to the company.
You can also apply the BCG model to areas other than your product strategy. We developed this matrix as an example of how a brand might evaluate its investment in various marketing channels. The medium is different, but the strategy remains the same- milk the cows, don’t waste money on the dogs, invest in the stars and give the question marks some experimental funds to see if they can become stars.
What to watch for?
The BCG Model is seen as simplistic and it can be difficult to classify products in smaller businesses where the relative market share is too small to quantify. It’s also based on the concept that market share can be achieved by spending more on the marketing budget.
Barksdale, H. C. and Harris Jr., C. E. (1982). Portfolio Analysis and the Product Life Cycle. Long Range Planning. (Vol. 15 Issue 6). p74-83.