Strategic choices
This is where analysis turns into decisions. Having assessed its position, the board must choose how each business will compete, which direction to grow in, how to manage its portfolio of businesses, and whether to grow by building, buying or partnering. In the exam, a typical task gives you two or three options in the exhibits and asks you to evaluate them and recommend one. So learn the models below as ways of generating and describing options, and suitability, acceptability and feasibility as the way of choosing between them.
How to compete: price, differentiation and lock-in
Business-level strategy is about how a business competes in its market. Two dimensions do most of the work: the price customers pay, and the value they perceive in the product compared with rivals' products.
| Position | Price | Perceived value | When it works |
|---|---|---|---|
| No frills | Low | Low | In price-sensitive segments, where costs can be kept very low |
| Low price | Lower than rivals' | Similar to rivals' | Only with a lasting cost advantage; otherwise rivals match the price and margins fall |
| Hybrid | Moderately low | Higher than rivals' | When a low cost base can be combined with features customers value; often used to build share |
| Differentiation | Similar to or above rivals' | Higher than rivals' | When the business knows what its strategic customers value and can deliver it in ways rivals find hard to copy |
| Focused differentiation | Premium | Much higher, for a narrow segment | When a segment will pay a high premium for a specialised offer |
| Likely to fail | Higher than the value justifies | Same or lower | Only with a monopoly or customer inertia |
Price-based strategies need a cost advantage; without one, a price cut simply starts a price war. Differentiation needs the unique resources and core competences of lesson 04.
Lock-in is the position where a product becomes the standard in its market, so that customers, and the suppliers of complementary products, find it costly to move to a rival. It comes from switching costs, from network effects (the product becomes more valuable as more people use it, as with payment networks) and from complementary products built around the standard. It can sustain advantage for years, but attracts competition regulators.
The 7Ps of the marketing mix put the strategy into practice and must be consistent with it.
| P | Supporting a price-based strategy | Supporting differentiation |
|---|---|---|
| Product | Standard, limited range | Distinctive features, quality, design, brand |
| Price | Low, simple pricing | Premium, reflecting value |
| Place | Low-cost channels, such as online or self-service | Selected channels that protect the brand |
| Promotion | Price-led messages | Messages about quality and benefits |
| People | Efficient, lean staffing | Skilled staff who deliver excellent service |
| Processes | Standardised and automated | Designed around the customer's experience |
| Physical evidence | Functional premises and packaging | Premises, packaging and online presence that signal quality |
Which direction: the Ansoff growth vector matrix
| Existing products | New products | |
|---|---|---|
| Existing markets | Market penetration: more share of current markets, through price, promotion or buying a rival. Lowest risk, but limited in a mature market | Product development: new products for current customers. Needs research and development capability |
| New markets | Market development: current products for new segments, uses or countries. Needs market knowledge and distribution | Diversification: new products for new markets. Highest risk, because both are unfamiliar |
Diversification may be related, either vertical (backwards towards suppliers or forwards towards customers) or horizontal (into complementary activities), and can create synergies by sharing capabilities; or unrelated, which spreads risk but rarely adds value unless the parent has skills its businesses lack.
National, multinational and global perspectives. Expanding abroad offers a larger market, an escape from a saturated home market, economies of scale, access to resources and a spread of risk. It also brings unfamiliar customers and culture, currency and political risk, different laws, higher coordination costs, reputational exposure and strain on management. A multinational approach adapts products and operations to each country; a global approach standardises them worldwide for efficiency. The balance depends on how much customers' needs differ between countries and how much scale matters.
Managing a portfolio: BCG and the public sector portfolio matrix
The BCG matrix classifies each business unit by the growth rate of its market and by its relative market share: its own share divided by that of its largest rival, so that a figure above 1.0 means it is the market leader.
| High relative market share | Low relative market share | |
|---|---|---|
| High market growth | Star: invest to keep the lead; cash flow roughly in balance | Question mark: needs heavy investment to build share; build or exit |
| Low market growth | Cash cow: harvest its cash to fund stars and question marks | Dog: low returns; divest, or keep only if it supports other units |
The aim is a balanced portfolio in which cash cows fund future stars. The limits: share and growth are not the only drivers of profit, the market's definition changes the answer, and links between units are ignored.
The public sector portfolio matrix adapts the idea to public services, where profit and market share do not apply. It classifies each service by the public's need and support for it (including how attractive it is to funders) and by the organisation's ability to deliver it effectively.
| High ability to deliver | Low ability to deliver | |
|---|---|---|
| High public need and support | Public sector star: valued and delivered well; maintain it | Political hot box: demand the organisation cannot meet well; politically exposed, so build capability or work with partners |
| Low public need and support | Golden fleece: delivered well but little valued; may be seen as wasteful, so reduce or redirect resources | Back drawer issue: neither valued nor delivered well; a candidate for withdrawal or transfer |
How to grow: methods of development
| Method | Advantages | Disadvantages |
|---|---|---|
| Internal (organic) development | Full control; capabilities built in-house; cost spread over time; no premium | Slow; may lack the skills or scale needed |
| Business combinations (mergers and acquisitions) | Speed; buys share, brands, capabilities or a foothold abroad | Costly premium; integration and culture clashes; hidden liabilities, so due diligence matters; competition approval |
| Strategic alliances (joint ventures, licensing, franchising) | Shares cost and risk; access to a partner's resources or local knowledge | Shared control; disputes; loss of know-how; dependence |
| Partnering (long-term contracts, outsourcing, public-private partnerships) | Uses partners' expertise and capacity; flexible | Less control over quality; a partner's failure or conduct affects the organisation |
A joint venture is a new entity owned jointly by the partners; licensing sells the right to use intellectual property for a royalty; franchising lets others use the brand and business model for fees, funding growth with their capital.
Evaluating options: suitability, acceptability and feasibility
Johnson, Scholes and Whittington evaluate strategic options against three criteria, and an option should pass all three.
| Criterion | The question | Typical evidence |
|---|---|---|
| Suitability | Does the option fit the strategic position: use strengths, address weaknesses, take opportunities, counter threats and fit the mission? | SWOT, five forces, scenarios, portfolio analysis |
| Acceptability | Will the expected outcomes be acceptable to the stakeholders who matter? | Return (net present value, payback); risk (gearing, sensitivity); stakeholders' reactions (Mendelow's matrix) |
| Feasibility | Can it be done with the resources and competences available or obtainable? | Funding, skills, technology, time, and the ability to withstand rivals' responses |
Evaluate each option against the criteria, compare, then recommend.
Worked example
Teranova Foods Plc (a fictional company) is a listed food group in Nigeria. Its board treats 10% a year as the dividing line between high and low market growth.
| Business unit | Revenue $m | Market growth | Teranova's share | Largest rival's share |
|---|---|---|---|---|
| Instant noodles | 120 | 2% | 35% | 20% |
| Breakfast cereals | 40 | 14% | 8% | 32% |
| Bottled water | 25 | 3% | 6% | 30% |
| Protein snacks | 15 | 18% | 40% | 25% |
There are three options for breakfast cereals: (A) invest $20m over three years in new products and marketing; (B) acquire Sahel Cereals, a regional maker with a 12% share, for $55m, financed by debt that would raise gearing from 30% to 48%; or (C) form a joint venture with an international cereal brand, each partner investing $10m, with the products made in Teranova's factory. The finance director says option B would "make us number two overnight", and Sahel's owners claim synergies of $6m a year. The cereal factory runs at 60% of capacity.
Requirement. Prepare a section of a report to the board that analyses the portfolio and evaluates the three options for breakfast cereals, with a recommendation.
Model answer extract
The portfolio. Relative market share is our share divided by the largest rival's.
| Business unit | Relative share | Market growth | Classification | Implication |
|---|---|---|---|---|
| Instant noodles | 35 ÷ 20 = 1.75 | Low (2%) | Cash cow | Our main source of cash; protect it and use its cash to fund growth |
| Breakfast cereals | 8 ÷ 32 = 0.25 | High (14%) | Question mark | Needs a decision: invest to build share, or exit |
| Bottled water | 6 ÷ 30 = 0.20 | Low (3%) | Dog | Consider selling, unless it supports other units |
| Protein snacks | 40 ÷ 25 = 1.60 | High (18%) | Star | Invest to keep the lead as the market grows |
Skill earned: analysis. The calculations are shown, and each classification leads to an implication for the board.
| Criterion | A: organic investment | B: acquire Sahel Cereals | C: joint venture |
|---|---|---|---|
| Suitability | Uses spare capacity, but builds share slowly against a leader with 32% | Combined share of 20% (8% + 12%), still well behind the leader | Adds brand strength and product know-how, our main weakness in cereals, and uses spare capacity |
| Acceptability | Moderate return, low risk, no new debt | Gearing rises from 30% to 48%; synergies unproven | Returns shared, but so are risk and cost ($10m) |
| Feasibility | Affordable from noodle cash flows, but we lack a strong cereal brand | Integration risk; debt finance needed | Depends on agreeing control, profit-sharing and exit terms |
Skill earned: evaluation. Each option is tested against all three criteria using case figures, giving a balanced comparison.
The acquisition claims need testing. Whether we become "number two overnight" depends on other rivals' shares, which we have not been given, and the $6m of synergies is the sellers' figure. Independent due diligence should check both.
Skill earned: scepticism. It challenges the director's assertion and the sellers' figure, and says what evidence is needed.
Recommendation. Option C best fits our position: it addresses our main weakness in cereals while using our spare capacity and keeping gearing at 30%. We should agree clear control, profit-sharing and exit terms before signing. Separately, bottled water should be reviewed for sale, with the proceeds invested in protein snacks.
Skill earned: commercial acumen and communication. A clear choice with reasons and conditions, linked to the portfolio.
Common mistakes
- Describing the models instead of using them to evaluate the options in the case.
- Confusing direction with method: buying a rival is a method; the direction is market penetration.
- Calculating relative market share against the whole market instead of against the largest rival.
- Recommending a price-based strategy for a business with no cost advantage.
- Ending with a recommendation that does not follow from, or contradicts, the evaluation.
Exam technique
Build your answer around the options in the exhibits, not around the models: assess each for suitability, acceptability and feasibility using the case figures, then compare. A table is efficient, but follow it with a paragraph of judgement and a firm recommendation. Show calculations such as relative market share in full. Test claims such as promised synergies: scepticism marks are often found there.
Study with AI
I am studying ACCA Strategic Business Leader (SBL), strategic choices. Write a short
case about a fictional company with four business units and three strategic options,
with enough figures for me to classify the units on the BCG matrix. Ask me to analyse
the portfolio, evaluate each option for suitability, acceptability and feasibility,
and recommend one. Then mark my answer as an SBL marker would, including which
professional skills I showed and which I missed.AI can misstate models and miscalculate: check its classifications and figures against these notes.
Lecturer's note: Every strategic option is three decisions wrapped together: how to compete, which direction to go and which method to use. "Buy a rival cereal maker" is a method (acquisition) serving a direction (market penetration), and it still has to answer how the enlarged business will compete. Separate the three and weak options reveal themselves: an acquisition that adds market share but gives customers no new reason to choose you is an expensive way to stand still.
Key points
- Price-based strategies need a cost advantage, differentiation needs capabilities rivals cannot copy, and lock-in comes from switching costs and network effects; the 7Ps put the strategy into practice.
- The Ansoff growth vector matrix offers market penetration, product development, market development and diversification, with risk rising as the organisation moves from what it knows.
- The BCG matrix uses market growth and relative market share; the public sector portfolio matrix uses public need and support and the ability to deliver.
- Internal development, business combinations, strategic alliances and partnering trade off speed, control, cost and risk differently.
- Evaluate options for suitability, acceptability and feasibility, and make the recommendation follow from that evaluation.
Quick check
- A business unit has a 15% share of a market growing at 4% a year, and the largest rival has 10%. Using 10% growth and a relative share of 1.0 as the dividing lines, classify it on the BCG matrix.
- A Nigerian bank opens branches in Ghana offering the same accounts it offers at home. Which Ansoff direction is this?
- An option has an attractive net present value and fits the company's strengths, but needs engineers the company cannot recruit in time. Which test does it fail?
Answers
- Relative share = 15% ÷ 10% = 1.5, so the unit is the market leader; growth of 4% is low. It is a cash cow.
- Market development: existing products in a new geographical market.
- Feasibility: the company lacks the resources (the skills) to deliver it.