Chapter 3.3.9 Strategic Methods: How to Pursue Strategies

Hey students! Welcome to one of the most exciting parts of strategy—the 'doing' part! We have already figured out where we want to go (strategic direction, like Ansoff's Matrix). Now, this chapter focuses on how we actually get there. Should we grow slowly, buy a competitor, innovate aggressively, or conquer new international markets? These notes will help you break down the strategic methods businesses use to achieve their long-term objectives.


3.3.9.1 Assessing a Change in Scale: Growth and Retrenchment

Strategies often involve changing the scale of operations—either getting bigger (growth) or getting smaller (retrenchment).

Why Businesses Grow or Retrench

Businesses choose growth to:

  • Increase market share and dominance.
  • Achieve economies of scale (lower average costs).
  • Increase profitability and shareholder returns.
  • Reduce risk by diversifying products or markets.

Businesses choose retrenchment (shrinking or withdrawing from markets) if they are underperforming, facing declining markets, or need to cut costs to survive.

Types of Growth

There are two fundamental ways to grow:

1. Organic (Internal) Growth

This is when a business expands using its own resources and efforts. Think of it like a sapling naturally growing into a tree.

  • Examples: Increasing output, developing a new product in-house (R&D), opening new branches, hiring more staff.

2. External Growth

This involves joining with other businesses. It’s usually faster but much riskier and more expensive.

  • Examples: Mergers, takeovers, joint ventures.


Quick Comparison: Organic vs. External Growth

  • Organic Advantage: Less risk, easier to manage, maintains existing culture.
  • Organic Disadvantage: Slow, relies on the success of existing markets.
  • External Advantage: Fast access to new markets/technology, immediate reduction in competition.
  • External Disadvantage: High cost, clash of cultures, integration difficulties (many mergers fail!).
Methods of External Growth (The How)
  • Merger: When two or more firms agree to join together to form a single, new, larger company. (They shake hands.)
  • Takeover (Acquisition): When one company buys a majority stake (control) in another company. The bought company loses its separate identity. (One company forces the other to join.)
  • Franchises: Giving another business the right to trade under your name and use your operating system (e.g., fast food chains).
  • Joint Ventures: Two or more businesses agree to work together on a specific project or for a specific time, pooling resources but remaining separate companies.
Types of Integration (The What/Where)

Integration describes where in the supply chain the growth happens:

1. Vertical Integration
Joining with a business at a different stage of the supply chain.

  • Backward Vertical Integration: Buying a supplier. (A coffee shop buys the coffee bean farm.) This gives better control over quality and costs.
  • Forward Vertical Integration: Buying a customer (distributor/retailer). (A chocolate factory buys a chain of sweet shops.) This gives better control over distribution and pricing.

2. Horizontal Integration
Joining with a business at the same stage of the supply chain (a competitor).

  • Example: One car manufacturer buys another car manufacturer. This reduces competition and increases market share instantly.

3. Conglomerate Integration
Joining with a business in a completely unrelated industry.

  • Example: A technology company buys a hotel chain. This is the riskiest, but it spreads risk across different markets (diversification).


Managing the Problems of Growth

Growth isn't always smooth. As businesses get bigger, they face challenges:

  • Economies of Scale (EOS): Cost savings achieved as output increases.
    • Technical EOS: Using large machinery/mass production methods.
    • Purchasing EOS: Buying inputs in bulk (getting better discounts).
    • Managerial EOS: Employing specialist managers (HR, Finance) who are more efficient than generalists.
  • Diseconomies of Scale (DOS): When output increases beyond the optimum point, and average costs start to rise.
    • Common Causes: Communication breakdown, poor coordination, demotivation among staff in massive organisations.
  • Synergy: The idea that the combined business is worth more than the sum of its individual parts. If Company A is worth \$10m and Company B is worth \$10m, the combined Company C is worth \$25m (2+2=5 effect).
  • The Experience Curve: The concept that unit costs fall as cumulative output increases over time, because employees become more experienced and efficient.
  • Overtrading: Growing so fast that the business runs out of cash to pay its short-term debts, leading to failure. (The business gets lots of orders but can't afford the inputs needed to fulfill them.)

The Key Takeaway for Growth: Growth must be managed carefully. The pursuit of Economies of Scale must be balanced against the risk of suffering from Diseconomies of Scale and Overtrading.


3.3.9.2 Innovation: A Strategic Imperative

Innovation is vital for long-term survival and gaining a competitive advantage. It involves turning an invention (a new idea) into a commercially viable product, service, or process.

Types of Innovation
  • Product Innovation: Creating new goods or services (e.g., introducing the electric car).
  • Process Innovation: Improving the way products are made or delivered, leading to efficiency and cost savings (e.g., using robotics in manufacturing).
  • Disruptive Innovation: Innovation that creates a completely new market and eventually disrupts an existing market, displacing established market leaders. (Think Netflix disrupting video rental stores like Blockbuster.)
Ways of Becoming an Innovative Organisation

To succeed, a business must foster a culture that supports new ideas:

  • Research and Development (R&D): Dedicated departments focused on systematic investigation to discover new products or processes.
  • Kaizen (Continuous Improvement): A Japanese philosophy focusing on small, ongoing, incremental changes involving all employees, rather than just large radical changes.
  • Intrapreneurship: Encouraging employees within the organisation to act like entrepreneurs—taking risks and developing new ideas, often supported by the company's resources.
  • Benchmarking: Comparing the organisation's processes and products against the best performers in the industry to identify areas for improvement and innovation.
  • Developing the Right Culture: Establishing an organisational structure that is flexible and accepts failure as part of the learning process.
The Value of Intellectual Property (IP)

IP is crucial for protecting the financial gains from innovation.

  • IP refers to creations of the mind (inventions, designs, symbols, names).
  • Protecting IP (through patents and copyrights) allows the innovative firm to gain a monopoly on its new idea for a period, maximising returns and preventing rivals from copying.

Barriers to Innovation

  • High costs of R&D.
  • High risk of failure (most R&D projects do not make it to market).
  • Organisational culture that is resistant to change (fear of failure).
  • Lack of financial rewards or protection (weak IP laws).

The Key Takeaway for Innovation: Innovation is an investment. While costly and risky, it is essential for achieving a sustainable competitive advantage in dynamic markets.


3.3.9.3 Internationalisation: Going Global

Internationalisation is the process of increasing business activity in foreign countries, leading to the firm becoming a multinational business (MNC).

Reasons for Operating Internationally
  • Market Saturation: Home markets are declining or already saturated, so new growth must come from overseas.
  • Access to Emerging Economies: Tapping into countries experiencing rapid GDP growth and rising consumer wealth (e.g., Southeast Asia).
  • Cost Reduction: Accessing cheaper resources (labour, land, materials) through off-shoring (producing goods overseas).
  • Avoid Protectionism: Setting up operations inside a trade bloc (like the EU) to avoid paying tariffs and quotas.
Factors Influencing International Strategy

Businesses must analyse significant differences between countries:

  • Political/Legal Environment: Risk of political instability, corruption, and differing labour laws (e.g., employee rights).
  • Economic Environment: GDP growth rates, interest rates, exchange rate volatility, and quality of infrastructure (roads, internet).
  • Social/Cultural Environment: Differing consumer tastes, languages, and workforce norms.
  • Competitive Environment: The intensity of local rivalry (using Porter's Five Forces).

Protectionism: Policies used by governments to protect domestic industries from foreign competition.

  • Tariffs: Taxes placed on imported goods, making them more expensive.
  • Quotas: Physical limits on the quantity of a product that can be imported.

Trading Agreements: Groups like ASEAN, EU, and NAFTA reduce trade barriers between member countries, making international trade easier within the bloc.

Ways of Entering International Markets

These methods range from low risk/low commitment to high risk/high commitment:

  1. Exporting: Selling goods directly from the home country. (Lowest risk.)
  2. Licensing/Franchising: Granting a foreign business the right to use your IP or business model in exchange for fees (royalties).
  3. Joint Ventures (JVs): Partnering with a local firm to share risk, knowledge, and local expertise.
  4. Foreign Direct Investment (FDI): Setting up or buying physical assets (factories, offices) in the foreign country. (Highest risk and commitment, as this makes you a true multinational.)
Managing International Business: Standardisation vs. Localisation

MNCs face a difficult decision regarding their product and management:

  • Standardising: Offering the same product, marketing, and operational processes everywhere to achieve economies of scale. (E.g., selling the exact same iPhone globally.)
  • Responding to Local Conditions (Localisation): Adapting products, pricing, and promotion to suit local tastes and regulations. (E.g., McDonald's offering McSpicy Paneer burgers in India.)

MNCs must also decide between Centralising (key decisions made at HQ) or Decentralising (allowing functional areas in foreign markets to make decisions autonomously).

The Key Takeaway for Internationalisation: Going global offers huge opportunities for growth but requires careful strategic choices regarding market entry and adaptation to diverse political, economic, and social environments.


*Remember: When answering exam questions on strategy, always link the chosen strategic method (e.g., a merger) back to the business's core objectives (e.g., growth or increased profitability) and use the syllabus concepts (like economies of scale or internationalisation entry methods) to justify your points.*