Business Decisions and Strategy

Businesses pursue growth for several important reasons. Growth allows companies to benefit from economies of scale, which means lower costs per unit as production increases. It also helps businesses increase their market share, making them more competitive and visible to customers. Profitability typically improves as revenue grows faster than costs. For survival, growth is often necessary to keep up with competitors and respond to market changes. Finally, growth through diversification helps spread risk by operating in multiple markets or product lines, reducing reliance on one area.

Types of Economies of Scale

Purchasing Economies: Large businesses buy materials in bulk at lower prices per unit, reducing production costs.

Technical Economies: Bigger companies can invest in expensive machinery and technology that smaller firms cannot afford, improving efficiency.

Managerial Economies: Larger organisations can hire specialist managers for different roles, improving decision making and efficiency.

Financial Economies: Large firms can borrow money at lower interest rates and raise capital more easily than small businesses.

Marketing Economies: Spreading advertising costs across a larger volume of products reduces cost per unit.

Risk Bearing Economies: Large companies can spread financial risk across many products and markets, making them more stable.

Organic growth occurs when a business expands using its own resources and internal capabilities. This method is slower but carries lower risk since it relies on the company's existing strengths.

Methods of Organic Growth

New Products: Developing and launching new goods or services to attract additional customers and increase revenue.

New Markets: Entering geographical areas or customer segments the business has not previously served, such as exporting to other countries.

Expanding Capacity: Increasing production by building new facilities, hiring more staff, or investing in additional equipment to meet growing demand.

Inorganic growth occurs when a business expands by acquiring or joining with other companies. This method is faster but carries higher risk and complexity due to integration challenges.

Reasons for Mergers and Takeovers

Businesses pursue mergers and takeovers for a variety of strategic, financial, and competitive reasons:

Achieving economies of scale: Combining operations allows the merged business to spread fixed costs over a larger output, reducing average unit costs and improving competitiveness on price.

Increasing market share and power: Acquiring a competitor increases the business's share of the market, giving it greater pricing power, stronger negotiating position with suppliers, and higher barriers to entry for new competitors.

Diversification: Acquiring a business in a different market or industry spreads risk so the company is not dependent on a single product or market. If one sector declines, revenue from other areas compensates.

Accessing new markets: Acquiring a business that already operates in a target market provides instant access to established distribution channels, customer relationships, and local knowledge without the time and cost of building from scratch.

Acquiring resources and capabilities: Takeovers can provide access to skilled employees, patents, technology, brands, or specialist knowledge that would be difficult or time consuming to develop internally.

Eliminating competition: Buying a rival removes them from the market, reducing competitive pressure and potentially allowing the business to increase prices or market share.

Defensive reasons: A business may acquire another to prevent a competitor from buying it first, or to protect its position in a rapidly consolidating industry where remaining independent could become unsustainable.

Financial reasons: A business may be undervalued by the market, making it an attractive takeover target. The acquiring company believes it can unlock more value through better management, synergies, or asset stripping.

Not all businesses want to grow. Some find success and profitability by remaining small and focused on specific markets or services.

Why Businesses Stay Small

Niche Markets: Some businesses focus on specific customer segments or products where they can dominate without serving mass markets. This allows them to charge premium prices and maintain high profit margins.

Personal Service: Small businesses can provide customised, high quality service that builds strong customer relationships and loyalty. This personal touch is lost as companies grow larger.

Flexibility: Small organisations can quickly adapt to market changes, introduce new ideas, and respond to customer needs faster than large bureaucratic companies.

Owner Preference: Many business owners choose to remain small to maintain control, avoid stress, and enjoy a better work-life balance.

Barriers to Growth: Limited access to finance, skilled labour shortages, or lack of market demand may prevent growth even if the owner wants it.

Diseconomies of Scale: As businesses grow, costs per unit may increase due to communication problems, reduced motivation, and coordination difficulties.

While growth offers many benefits, it also creates significant challenges that can harm a business if not managed properly.

Diseconomies of Scale

Communication Problems: As organisations grow, communication becomes slower and more difficult. Messages take longer to pass through hierarchies, leading to misunderstandings and delays.

Coordination Challenges: Managing different departments, teams, and locations becomes increasingly complex. Coordination failures can disrupt operations and reduce efficiency.

Loss of Motivation: Employees in large organisations may feel less valued and less connected to the company's mission than in smaller firms. This reduces productivity and engagement.

Bureaucracy: Large companies develop more rules, procedures, and layers of management. This slows decision making and reduces flexibility.

Other Growth Challenges

Loss of Control: As companies expand, owners and senior managers lose direct control over all operations. This can lead to inconsistent decision making and quality issues.

Financing Challenges: Growth requires large capital investment. Securing sufficient finance through loans or investors can be difficult and expensive.

Culture Change: The values and culture that made the business successful may be diluted as it grows. New employees may not share the original vision.

Overtrading: If growth outpaces working capital, the business may not have enough cash to pay suppliers and employees despite making sales. This can lead to insolvency.

Retrenchment

Retrenchment is the opposite of growth. It involves a business deliberately reducing the scale of its operations to cut costs, improve efficiency, or refocus on its core activities. Retrenchment may involve closing stores or factories, selling off parts of the business, reducing the workforce, or exiting unprofitable markets.

Reasons for retrenchment: Declining sales or market share in key markets; cash flow crises that threaten the business's survival; overexpansion leaving the business financially stretched; changes in the external environment making some operations unviable; and a need to refocus on core competencies where the business has a genuine competitive advantage.

Impact of Retrenchment on Stakeholders

How to Overcome Problems of Growth

Businesses that grow rapidly often face significant challenges. Successful companies develop strategies to manage these problems before they become critical:

Invest in management development: As a business grows, it needs more skilled managers to maintain control. Training existing staff and recruiting experienced managers helps prevent the loss of control that often accompanies rapid expansion.

Maintain strong communication systems: Larger businesses risk communication breakdowns between departments and layers of management. Investing in technology, regular meetings, and clear reporting structures helps information flow effectively.

Manage cash flow carefully: Growth often requires heavy upfront investment before revenues materialise. Businesses should use cash flow forecasts, maintain adequate reserves, and secure credit facilities before cash shortages occur.

Preserve company culture: Rapid growth, especially through mergers and acquisitions, can dilute the values and culture that made the business successful. Leaders should actively communicate core values and integrate new employees carefully.

Plan for economies and diseconomies of scale: Businesses should anticipate the point at which further growth may lead to diseconomies of scale, such as increased bureaucracy or slower decision making, and restructure operations to remain efficient.

Phase growth gradually: Rather than pursuing rapid expansion on all fronts, businesses can grow in stages, consolidating each phase before moving to the next. This reduces risk and allows the business to learn from early experience.

Use technology and systems: Implementing robust IT systems, enterprise resource planning (ERP) software, and automated processes helps growing businesses maintain efficiency and control without proportionally increasing headcount.

Investment appraisal is the process of evaluating capital investment projects to determine their financial viability. Businesses need to assess whether a potential investment will generate sufficient returns to justify the initial outlay. Three main methods are used: payback period, average rate of return, and net present value.

Payback Period

The payback period is the length of time it takes for a business to recover its initial investment through the cash flows generated by the project. It is calculated by dividing the initial investment by the annual cash inflows.

Average Rate of Return (ARR)

The Average Rate of Return is the average annual profit generated by an investment, expressed as a percentage of the initial investment. It shows the annual return on capital invested. ARR is also called Return on Investment (ROI).

Net Present Value (NPV)

Net Present Value is considered the most theoretically sound investment appraisal method. It accounts for the time value of money, recognising that cash received today is more valuable than cash received in the future.

Time Value of Money

The time value of money reflects the principle that money available now can be invested to earn returns. Therefore, GBP 100 today is worth more than GBP 100 in one year's time. This concept is fundamental to NPV.

Why money has time value: Money can be invested to earn interest or returns; money received later carries greater risk; inflation erodes purchasing power over time.

Discount rate: The discount rate (or required rate of return) is the percentage used to convert future cash flows into present values. It reflects the business's cost of capital and desired minimum return. A typical discount rate might be 10% per annum.

Discount factor: The discount factor is a multiplier applied to future cash flows to calculate their present value. For example, with a 10% discount rate, cash received in year 1 is multiplied by 0.909, and cash in year 2 is multiplied by 0.826.

Interpreting NPV

Positive NPV: The investment generates returns exceeding the discount rate. The business should invest.

Negative NPV: The investment does not generate sufficient returns. The business should not invest.

Zero NPV: The investment generates exactly the required return. The business is indifferent, though may accept for strategic reasons.

Contribution

Contribution is a key financial concept that measures how much each unit sold contributes toward covering fixed costs and generating profit. It is widely used in short term decision making and is closely linked to break even analysis.

Using Contribution in Decision Making

Contribution analysis is a powerful tool for managers making short term decisions:

Special orders: If a business has spare capacity, it should accept any special order where the price offered exceeds the variable cost per unit, as this generates a positive contribution toward fixed costs regardless of whether it covers the full cost.

Product mix decisions: When a business sells multiple products, contribution analysis helps managers identify which products generate the most contribution per unit or per limiting factor (such as machine hours), allowing resources to be directed toward the most profitable lines.

Make or buy decisions: A business can compare the variable cost of making a product internally against the price of buying it from a supplier. If the external price is lower than the variable cost, it makes financial sense to outsource.

Discontinuing a product: A product that appears to make a loss when fixed costs are allocated may still generate a positive contribution. Removing it would reduce total contribution and could make the business worse off overall.

A decision tree is a visual diagram that helps managers evaluate alternative business decisions and their potential outcomes. It breaks down a complex decision problem into a series of simpler decisions, each with associated probabilities and financial consequences.

Components of Decision Trees

Decision nodes: Shown as squares, these represent points where the business must choose between alternatives. The branches from a decision node show the available options.

Chance nodes: Shown as circles, these represent events beyond the business's control. Branches from a chance node show possible outcomes with associated probabilities.

Outcomes: The endpoints of the tree branches show the financial results of each decision and chance combination.

Probabilities: Numbers on branches from chance nodes indicate the likelihood of each outcome occurring. All probabilities from a chance node must sum to 1.0 (or 100%).

Expected Monetary Value (EMV)

The expected monetary value is the average financial outcome, calculated by multiplying each possible outcome by its probability and summing these products. EMV provides a single figure representing the long-run average outcome.

How to Construct and Evaluate Decision Trees

Step 1: Identify the decision problem. What choice must be made? What are the alternatives?

Step 2: Draw the decision node. Use a square to represent the initial decision point.

Step 3: Add branches for each option. Each branch represents an available choice.

Step 4: Add chance nodes. For each decision option, identify uncertain events. Use circles to represent these chance points.

Step 5: Add probability branches. Show possible outcomes from each chance node with associated probabilities.

Step 6: Calculate outcome values. Determine the financial result of each decision/outcome combination.

Step 7: Calculate EMV. Working backwards from the right side of the tree, calculate EMV at each chance node. At decision nodes, select the option with the highest EMV.

Critical Path Analysis (CPA) is a project management technique used to plan and schedule complex projects. It identifies the sequence of activities that determines the minimum time needed to complete the project. Any delay to an activity on the critical path will delay the entire project.

Key Concepts

A network diagram represents all activities in a project, their durations, and their dependencies. Each activity is shown as an arrow connecting nodes. Nodes represent points in time where one or more activities start or finish.

The Earliest Start Time (EST) is calculated using a forward pass through the network. It shows the earliest point at which the next activity can begin. Where two or more activities lead into a node, the EST is the highest value because all preceding activities must be complete.

The Latest Finish Time (LFT) is calculated using a backward pass from the end of the project. It shows the latest time an activity can finish without delaying the project. Where two or more activities leave a node, the LFT is the lowest value.

Float (also called slack) is the amount of time an activity can be delayed without delaying the project. Activities with zero float are on the critical path and cannot be delayed at all.

How to Find the Critical Path

Step 1: Draw the network. List all activities with their durations and dependencies. Draw nodes connected by arrows representing activities.

Step 2: Forward pass (calculate ESTs). Start at Node 1 with EST = 0. Add each activity duration to find the EST of the next node. Where two or more activities feed into a node, take the highest value.

Step 3: Backward pass (calculate LFTs). Start at the final node where LFT equals the EST. Subtract each activity duration to find the LFT of the previous node. Where two or more activities leave a node, take the lowest value.

Step 4: Identify the critical path. The critical path runs through all nodes where EST equals LFT. Activities on this path have zero float and cannot be delayed.

Moving averages are used to identify trends in time series data by smoothing out short-term fluctuations. A moving average is a series of averages calculated from successive overlapping sets of data. Extrapolation uses the identified trend to forecast future values.

Why Use Moving Averages?

Identify trends: Raw data often contains seasonal variations and random fluctuations. Moving averages smooth this noise, revealing underlying trends.

Forecast future values: Once a trend is identified, it can be extended to predict future sales, demand, or costs.

Manage inventory: Sales forecasts help businesses determine production schedules and inventory levels.

Calculating a 3 Period Moving Average

The most common approach is a 3 period moving average, which uses data from three consecutive periods. A 5 period or 4 period moving average can also be used, depending on the data characteristics.

Extrapolation

Extrapolation is the process of extending a trend line or pattern beyond the observed data to estimate future values. Once a trend is calculated using moving averages, the rate of change can be determined and projected forward.

Method: Calculate the rate of change between moving average values; extend this rate for the desired forecasting period; add the rate of change to the most recent moving average value multiple times for multiple future periods.

Quantitative Sales Forecasting

Quantitative sales forecasting uses numerical data and statistical methods to predict future sales. Unlike qualitative methods that rely on opinions and judgement, quantitative techniques are based on historical data and mathematical analysis.

Scatter Graphs and Correlation

A scatter graph (scatter diagram) plots historical data points on a chart with an independent variable on the x axis (such as advertising spend or temperature) and sales on the y axis. By examining the pattern of data points, businesses can identify whether a correlation exists between two variables.

Positive correlation: As one variable increases, the other also tends to increase. For example, higher advertising spending may be associated with higher sales.

Negative correlation: As one variable increases, the other tends to decrease. For example, higher price may be associated with lower sales volume.

No correlation: There is no clear pattern between the two variables.

Line of Best Fit

A line of best fit is a straight line drawn through the middle of data points on a scatter graph that best represents the overall trend. It is used to estimate unknown values and make predictions about future sales based on past patterns.

Stakeholders are any individuals or groups who have an interest in a business or are affected by its decisions. Understanding stakeholder influence is crucial because decisions that benefit one group may harm another.

Main Types of Stakeholders

• Employees: Seek job security, fair wages, good working conditions, and career development.
• Customers: Want quality products or services at reasonable prices, good customer service, and ethical practices.
• Shareholders: Prioritise profit growth, dividends, and increasing share price to boost their investment returns.
• Suppliers: Need reliable orders, fair payment terms, and long-term business relationships.
• Government and Regulatory Bodies: Enforce legal compliance, health and safety standards, and environmental regulations.
• Local Community: Concerned about employment opportunities, environmental impact, and noise or pollution from business activities.
• Pressure Groups: Campaign for specific causes, such as environmental protection or animal welfare, and can damage a business's reputation.

Stakeholder Conflict

Different stakeholders often have conflicting interests. For example, shareholders may want cost cuts through redundancies, while employees want job security. Customers may want lower prices, but shareholders want higher profits. Successful businesses must balance these competing demands.

Mendelow's Matrix

Mendelow's matrix is a tool for analysing stakeholder power and interest. It places stakeholders on a grid with two axes: power (ability to influence) and interest (level of concern about business decisions). This creates four quadrants, each with a different management strategy.

Stakeholder vs Shareholder Approach

There are two fundamentally different views about who a business should primarily serve. This debate shapes corporate strategy, ethical decision making, and how businesses balance competing interests.

Corporate culture is the set of shared values, beliefs, and behaviours that define how an organisation operates. It influences how employees work, how decisions are made, and how the business interacts with stakeholders.

Handy's Four Types of Corporate Culture

Charles Handy identified four main types of organisational culture, each with different characteristics.

• Power Culture: Centralised decision-making with one leader or small group making most decisions. Common in small businesses and startups. Advantages: quick decisions, clear direction. Disadvantages: can be inflexible, may demotivate staff.
• Role Culture: Bureaucratic with clearly defined jobs, roles, and procedures. Common in large organisations and public sector bodies. Advantages: stability, clear expectations. Disadvantages: inflexible, slow decision-making, can stifle innovation.
• Task Culture: Project-based with teams formed to solve problems or complete tasks. Common in consultancy and creative industries. Advantages: flexibility, encourages innovation. Disadvantages: can be unstable, unclear reporting lines.
• Person Culture: Rare type where the individual's interests come first, and the organisation exists to support individuals. Common in professional partnerships. Advantages: attracts talented individuals. Disadvantages: difficult to manage, coordination problems.

How Culture Affects Decision-Making

Corporate culture significantly influences business decisions. A risk-taking culture may lead to investment in innovation, while a conservative culture may prefer safe, proven strategies. A people-focused culture may prioritise employee welfare, whereas a profit-focused culture may prioritise shareholder returns. Culture shapes values, which guide decisions about ethics, customer service, and social responsibility.

Changing Culture and Its Challenges

Changing organisational culture is difficult because it requires changing deeply held beliefs and behaviours. Challenges include resistance from employees who are comfortable with existing ways, time required for new values to become embedded, and the need for consistent leadership support. Successful change requires clear communication, role modelling from leaders, training, and patience.

Business ethics refers to the moral principles and standards that guide decision-making in business. Ethical decisions consider the impact on all stakeholders, not just shareholders. However, ethical decisions sometimes conflict with profit maximisation.

Ethical Decisions vs Profit-Maximising Decisions

A profit-maximising decision prioritises shareholder returns above all else. An ethical decision considers the welfare of all stakeholders and the broader impact on society. Example: a clothing company could maximise profit by using poorly paid workers in unsafe conditions, but the ethical choice would be to pay fair wages and ensure safe working conditions.

Corporate Social Responsibility (CSR)

CSR is the commitment by a business to conduct its operations in a way that benefits society, not just shareholders. This includes environmental protection, fair labour practices, community involvement, and ethical supply chains. CSR can align profit-making with social good.

Ethical Dilemmas in Business

Businesses often face ethical dilemmas where there is no clearly right answer. Examples include: paying low wages to remain competitive versus fair pay; cutting jobs to maintain profit margins versus keeping people employed; using cheaper materials that may be less durable versus higher quality; exporting to countries with less stringent labour laws versus keeping production local at higher cost.

Corporate Social Responsibility goes beyond legal requirements and profit-making. It reflects a commitment to sustainable and ethical business practices that benefit society, the environment, and the business itself.

The Triple Bottom Line

The triple bottom line concept assesses business performance across three dimensions, not just profit.

• People: How the business treats employees, customers, and communities. This includes fair wages, safe working conditions, community investment, and social equality.
• Planet: Environmental impact of business operations. This includes reducing carbon emissions, minimising waste, protecting natural resources, and using sustainable materials.
• Profit: Financial performance and shareholder returns. Businesses must remain profitable to survive and fund social and environmental initiatives.

For sustainable business, all three must be balanced rather than prioritising profit alone.

Carroll's CSR Pyramid

Archie Carroll developed a pyramid to show different levels of business responsibility, from basic to more advanced.

• Economic Responsibility (Foundation): The business must be profitable and efficient. This is the foundation; without profit, the business cannot operate or fund other responsibilities.
• Legal Responsibility: The business must obey all laws and regulations. This is the minimum ethical standard expected by society.
• Ethical Responsibility: Beyond legal requirements, the business should act fairly and morally. This includes treating stakeholders well and avoiding harm, even where not legally required.
• Philanthropic Responsibility (Top): The business contributes to community welfare through charitable activities, donations, and voluntary programmes. This goes beyond legal and ethical requirements.

How CSR Affects Strategy and Reputation

CSR influences business strategy in several ways. Companies increasingly incorporate sustainability into their product design, supply chain management, and marketing. CSR directly affects reputation; businesses known for strong CSR practices attract customers, investors, and employees. Conversely, poor CSR practices can lead to boycotts, regulatory action, and loss of talent. CSR can provide competitive advantage through brand differentiation and customer loyalty.

Businesses use various metrics to assess their competitive position in the market. These measures help identify strengths and weaknesses compared to competitors.

Key Indicators of Competitiveness

Market Share: The percentage of total market sales that a business controls. Higher market share indicates stronger competitive position. A business with 25% of the market is more competitive than one with 5%.

Brand Loyalty: The extent to which customers consistently choose a business's products over competitors. Strong brand loyalty shows customers value the business's offerings. Customers willing to pay premium prices demonstrate high loyalty.

Quality: The degree to which products meet customer expectations and industry standards. Higher quality products command premium prices and create competitive advantage. Quality consistency builds customer confidence.

Customer Satisfaction: How satisfied customers are with products and services. High satisfaction leads to repeat purchases, positive word of mouth, and strong competitiveness. Customer satisfaction scores and review ratings indicate competitive strength.

Productivity: The output produced per unit of input such as per employee or per hour. Higher productivity means better efficiency and lower unit costs, creating competitive advantage through lower prices or higher profits.

Labour Costs: The wages and benefits paid to employees. Lower labour costs can improve competitiveness if quality is maintained. However, paying below market rates may harm recruitment and retention.

Financial ratios provide quantitative measures of competitive performance. They allow comparison with competitors and tracking of improvement over time.

Return on Capital Employed (ROCE)

Return on Capital Employed measures how efficiently a business uses its capital to generate profits. It shows the return earned on every pound of capital invested in the business.

Competitive Interpretation: A high ROCE (15% or above) indicates the business is using capital efficiently and generating strong returns. This gives the business competitive advantage through profitability. ROCE should exceed the cost of capital or the business is destroying value.

Labour Productivity

Labour productivity measures the output produced by each employee. Higher productivity reduces unit costs and increases competitive advantage through cost efficiency or higher profits.

Competitive Interpretation: Rising labour productivity indicates improving efficiency and suggests the business can compete on cost. Declining productivity may signal inefficiency, poor motivation, or problems with processes or technology.

Labour Turnover and Labour Retention

Labour turnover measures the rate at which employees leave a business. Labour retention is the inverse; it measures the percentage of employees who stay. These metrics affect competitiveness through recruitment and training costs.

Competitive Interpretation: Low turnover (under 10%) indicates good working conditions, strong culture, and motivated workforce. This reduces costs and maintains quality. High turnover (over 25%) is costly and suggests problems with management, pay, or working conditions.

Unit Costs

Unit cost is the average cost of producing one item. Lower unit costs allow a business to compete on price or earn higher profit margins on each sale. Unit costs are critical for competitiveness.

Competitive Interpretation: Falling unit costs indicate improving efficiency and stronger competitive position. This can result from economies of scale, better technology, improved processes, or lower input costs. Rising unit costs suggest the business is becoming less competitive.

Core competencies are the unique strengths and capabilities that allow a business to create value and compete effectively. Identified by business strategists Hamel and Prahalad, core competencies are at the heart of competitive advantage.

What Are Core Competencies?

Core competencies are the bundle of skills and technologies that a business performs better than competitors. They create sustainable competitive advantage and are difficult for competitors to copy. For example, Apple's core competency is design combined with technology; Google's is search algorithms and data analysis.

Characteristics of Core Competencies:

• Hard to imitate; competitors cannot easily copy them
• Create customer value; they benefit customers and justify premium pricing
• Apply across products; the competency is relevant to multiple products or markets
• Involve multiple skills; they combine technical, organisational, and management abilities
• Unique to the business; not available to all competitors in the industry

Identifying and Leveraging Core Competencies

Identifying Core Competencies: Businesses must honestly assess what they do better than competitors. Ask: What activities can we perform that others cannot? What creates customer value and loyalty? What competitive advantages do we have? What would it cost and take for a competitor to match us?

Leveraging for Advantage: Once identified, core competencies must be leveraged across the business. A technology company with superior engineering might apply that strength to multiple product lines. A retail business with exceptional customer service might emphasise this in all stores and marketing.

Investing in Core Competencies: Successful businesses invest heavily in developing and maintaining their core competencies. This might involve training, research and development, technology upgrades, or hiring talented people. The investment pays off through sustained competitive advantage.

Avoiding Overextension: Businesses should avoid moving too far from their core competencies. When companies try to compete in areas where they lack strength, they often fail. Staying focused on core strengths is generally more successful than competing in all markets.

Economist Michael Porter identified three generic strategies that businesses use to achieve competitive advantage. These strategies form the basis of competitive positioning in any industry.

Cost Leadership Strategy

Cost leadership means becoming the lowest cost producer in the industry while maintaining acceptable quality. The business competes primarily on price, undercutting competitors while still making profit.

How to Achieve Cost Leadership:

• Economies of scale through high volume production
• Efficient operations and lean production processes
• Lower labour costs; negotiating with suppliers
• Investment in automated technology to reduce costs
• Minimal advertising and simple product designs

Differentiation Strategy

Differentiation means making products or services distinctly different from competitors in ways that customers value. The business competes on uniqueness, brand, quality, design, or service rather than price. Customers are willing to pay premium prices for differentiated products.

How to Achieve Differentiation:

• Superior quality and reliability; better materials and craftsmanship
• Unique design, features, or functionality not offered by competitors
• Strong brand identity and reputation; emotional connection with customers
• Excellent customer service; personalised support and after sales service
• Technology leadership; patents and innovation
• Distribution network; unique availability or convenience

Focus Strategy

Focus strategy means concentrating on a specific market segment or niche rather than trying to serve the entire market. The business focuses either on cost leadership or differentiation but only within a narrow target market.

How to Achieve Focus Strategy:

• Identify an underserved market segment with specific needs
• Tailor products and services specifically for that segment
• Build expertise and knowledge in that niche area
• Create strong customer relationships within the target segment
• Use focused marketing directed at the specific segment

Stuck in the Middle

Being stuck in the middle means trying to pursue all three strategies simultaneously without excelling at any. The business attempts cost leadership while also trying to differentiate, without committing fully to either approach. This usually results in competitive weakness.

Problems of Being Stuck in the Middle: The business cannot compete on cost with true cost leaders who have economies of scale. It cannot command premium prices for differentiation because customers perceive it as average. Confused strategy leads to confused positioning in customers' minds. Resources are spread too thin across multiple strategies. Confusion internally about strategic direction hampers decision making.

Getting Unstuck: Successful businesses choose one clear strategy and execute it excellently. A company must decide: Are we the cost leader? Are we differentiated? Are we focused on a niche? Mixed strategies may work temporarily but lack the competitive punch of committed focus.

Organisations face change from many sources. Understanding these causes helps managers prepare for and manage change more effectively.

Planned vs Unplanned Change

Planned change: Deliberately introduced by management to achieve specific objectives (e.g., implementing new technology). These changes are usually more controlled and can be managed systematically.

Unplanned change: Sudden, unexpected changes forced on the organisation (e.g., a crisis, unexpected competitor action, or economic shock). These require rapid response and are harder to manage.

Several models help organisations manage change effectively. Two of the most important are Kotter's model and Lewin's force field analysis.

Kurt Lewin's model identifies forces within an organisation that either drive change or resist it. Change occurs when driving forces outweigh restraining forces. When the two sides are balanced, the organisation is in equilibrium. To implement change, management must increase driving forces, decrease restraining forces, or both.

Resistance to change is one of the biggest obstacles organisations face. Understanding why people resist and how to address resistance is crucial for successful change management.

Why People Resist Change

• Fear of the unknown: Employees worry about how change will affect their jobs, roles, and work environment. Uncertainty creates anxiety
• Loss of control: Change can make people feel they have lost control over their work and careers. This is particularly threatening to experienced staff
• Poor communication: If employees don't understand why change is needed or how it will work, they become suspicious and resistant
• Bad timing: Change introduced during busy periods, following other recent changes, or when employees are stressed is more likely to be resisted
• Lack of trust: If employees don't trust management, they may assume change is harmful or that management is misleading them
• Comfort with the status quo: Existing systems and processes are familiar. Change requires learning new ways of working, which is harder than doing what you already know
• Fear of job loss: Employees may worry that change will make their role redundant or lead to redundancies

How to Overcome Resistance

Clear communication: Explain why change is necessary, what the change involves, and how it will benefit the organisation and employees. Use multiple communication channels and repeat messages regularly. Address concerns directly.

Participation and involvement: Involve employees in planning and implementing change. When people have a say in how change happens, they are more likely to support it. This also provides valuable input that improves change implementation.

Training and support: Provide training to help employees develop skills needed for the new way of working. Offer support and assistance during the transition period. This reduces anxiety and enables people to succeed.

Negotiation: For groups with significant concerns, negotiate compromises or adjustments to the change. This demonstrates respect and can reduce resistance.

Leadership example: Senior leaders must visibly support and embrace change. If leaders are resistant or uncommitted, employees will perceive change as less important.

Recognise and reward: Acknowledge individuals and teams who embrace change. Reward behaviours that support the new way of working.

Organisational culture is the set of values, beliefs, and norms shared by members of an organisation. Culture significantly influences how successfully change is implemented.

How Culture Helps or Hinders Change

Culture that supports change: Some organisations have cultures that embrace innovation, encourage experimentation, and view change positively. Employees in these organisations are more willing to adopt new ways of working. This type of culture is often described as a "learning culture" or "change-ready culture."

Culture that resists change: Other organisations have cultures based on tradition, stability, and "the way we've always done things." These cultures resist change strongly because change threatens established values and practices. Bureaucratic organisations with rigid hierarchies often have change-resistant cultures.

Changing Organisational Culture

Changing culture is one of the most difficult forms of change because culture is deeply embedded and people's beliefs change slowly. Strategies include:

• Leadership change: Bringing in new leaders with different values can shift culture. However, it takes years for culture change to take effect
• Symbols and rituals: Changing symbols (logos, office layouts) and rituals (meetings, celebrations) signals that culture is changing
• Stories and role models: Telling stories about people who embody desired values reinforces cultural change. Recognising and promoting people with desired characteristics helps shift culture
• Reward systems: Changing what the organisation rewards reinforces new values. For example, rewarding innovation signals that creativity is valued
• Recruitment and redundancy: Hiring people with desired cultural values and moving out those who don't fit the new culture gradually shifts culture

The Role of Leadership in Change Management

Vision and direction: Leaders must articulate a clear vision of where the organisation is going and why change is necessary. Without this, employees lack direction.

Commitment and role modelling: Leaders must visibly commit to and embrace change. If leaders behave as though change is not important, employees will follow their example.

Communication: Leaders must communicate frequently and honestly about change. They should address concerns, explain decisions, and reinforce the vision repeatedly.

Support and resources: Leaders must ensure that employees have the resources, training, and support needed to change successfully. This shows that the organisation is serious about change.

Persistence: Leaders must maintain pressure for change over time. Without persistent leadership focus, change loses momentum and people revert to old habits.

Building a Change-Ready Culture

Organisations that successfully manage change often have cultures characterised by:

• Openness to new ideas and willingness to experiment
• Trust between employees and management
• Clear communication and transparency
• Employee empowerment and involvement in decision-making
• Learning focus; viewing failures as learning opportunities
• Flexibility and adaptability
• Shared values and understanding of organisational purpose

Scenario planning helps organisations prepare for uncertainty by considering different possible futures. Risk assessment identifies potential problems and develops responses.

What is Scenario Planning?

Scenario planning is the process of developing several plausible visions of the future and considering how the organisation should respond to each. Unlike forecasting, which attempts to predict the future accurately, scenario planning accepts that the future is uncertain and explores multiple possibilities.

A typical scenario planning process involves:

1. Identify key uncertainties: What external factors could change significantly (e.g., technology, regulation, competition, economic conditions)?
2. Develop scenarios: Create 2 to 4 distinct scenarios by combining key uncertainties in different ways. For example, a technology company might develop scenarios for "rapid AI adoption," "slow AI adoption," "AI banned," and "AI regulated"
3. Analyse implications: For each scenario, consider what would happen to the organisation, its customers, competitors, and market
4. Develop strategies: For each scenario, outline how the organisation should respond to succeed in that future
5. Identify early warning signs: Monitor signals that indicate which scenario is becoming reality, allowing the organisation to adjust strategy early

How Businesses Use Scenario Planning

Organisations use scenario planning to prepare for different futures in several ways:

• Investment decisions: Companies consider which technologies, markets, or capabilities to invest in for different futures
• Risk mitigation: Understanding different scenarios helps identify risks and develop responses before crises occur
• Strategic flexibility: Organisations can develop flexible strategies that work reasonably well across multiple scenarios
• Building understanding: Scenario planning helps leadership teams understand the business environment and build shared understanding of possibilities

Risk Assessment and Contingency Planning

Risk assessment: The process of identifying potential problems that could occur and evaluating their likelihood and impact. Risks can be internal (operational failures, staff departures) or external (market changes, regulatory changes, competitor actions).

Risk assessment typically rates risks using probability (likelihood of occurring) and impact (how serious if it does occur). Risks that are both likely and serious require the most attention.

Contingency planning: Developing plans to respond if identified risks actually occur. For serious risks, organisations develop detailed contingency plans that outline actions to take, responsible people, and resources needed. Examples include business continuity plans, crisis management plans, and emergency response procedures.