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6
Strategic Options
and their Evaluation

We can now consider the strategic options open to the firm. In Chapter 4 we reviewed
strategies for particular product and customer groups. In this chapter we shall examine the
general directions and methods that management may follow to build the business as a
whole. Crucial to this process is taking into account the potential responses of competitors
as we discussed in Chapter 2.
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LEARNING OUTCOMES
By the end of this chapter you should be able to:
䉴 Identify strategic options;
䉴 Evaluate strategic options;
䉴 discuss and apply both qualitative and quantitative techniques in the support of the
strategic decision making function.

6.1 Three sets of strategic choices

6.1.1 Recap and overview
Returning to our rational model of strategy it can be seen that we have reached the point
of strategic option generation (Figure 6.1). Applying the techniques discussed in earlier
chapters will ensure that the management team has an understanding of the following stra-
tegic issues:
● the general direction that the organisation must head in and the level of performance it
must exhibit to satisfy its crucial stakeholders;
● the principal threats and opportunities in its operating environment, in particular the
factors impacting on its financial performance, and forecasts or scenarios for how these
may develop in the future;
● arising from its position audit, an assessment of its principal strengths and weaknesses in
relation to these threats and opportunities;
● an understanding of the contribution to its earnings from its portfolio of products and
customer groups and how these may change in the future as their life-cycle plays out.
The next step is to decide how to develop the business in the future. This involves
deciding on development strategies.

273
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274 STUDY MATERIAL E3

STRATEGIC OPTIONS AND THEIR EVALUATION

Review and
Position audit
control

Strategy
Mission and Corporate Strategic option Strategy
evaluation and
objectives appraisal generation implementation
choice

Environmental
analysis

Figure 6.1 A model of a rational strategy process

6.1.2 Development strategies

Development
strategies
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What basis? Which direction? How?

Basis of choice Alternative directions Alternative methods

Corporate purpose Protect and build Internal development
and aspirations Market penetration External growth
SBU generic Product development (mergers and
competitive strategies Market development acquisitions)
The role of the Diversification Joint development
corporate parent and alliances

Figure 6.2 Development strategies (adapted from Johnson and Scholes, 1997)

6.1.3 Some illustrations

1. Basis of choice. This is sometimes called the choice of competitive strategy. Effectively
it decides the business methods that the firm will use to win customers and beat rivals.
Note that this will be formulated within the framework of the broader aspirations, or
mission, of the business. For example:
● Virgin Group allows business units to set their own course within a framework con-

sistent with maintaining the corporation’s image of customer friendliness, fair dealing
and relative informality.
● Disney Corporation maintains a strong central control over its business operations to

ensure that the brands and characters are used consistently and that the ‘magic king-
dom’ remains reassuring to children and parents at all times and in all contexts.
2. Alternative directions. This deals with the future of the product and customer portfolio
of the business. It will also involve issues such as international extension of the business.
For example:
● Virgin Group remains principally focused on UK markets and its business has devel-

oped through adding additional products. Although it has extended its Megastores
concept outside the United Kingdom and its airlines do attract bookings from non-UK
residents, the bulk of its investment has been in the United Kingdom. For example, its
operation of rail services, cinemas, financial services, mobile telephones and soft drinks
are unique to the United Kingdom.
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ENTERPRISE STRATEGY 275

STRATEGIC OPTIONS AND THEIR EVALUATION

● Disney Corporation has a much more global outlook and has significant investments
in many countries of the world. It has developed its business beyond film production
by extending the range of products offered into toys, shops, holidays, television pro-
gramming and multimedia publishing Its market segment has remained principally
the same – children and parents – but its geographical scope has widened. However it
has diversified somewhat through expansion into feature films (Touchstone Pictures)
and film and video distribution services (Buena Vista).
3. Alternative methods. This considers how the firm will gain access to the products and
markets it wishes to develop into. The decision may vary according to the development
concerned, but the decision usually hinges upon the four considerations of investment
cost, speed of access, know-how and control. For example:
● Virgin Group has utilised most methods of growth in its history. Its original record retail-

ing business was developed using its own capital to acquire shop leases and to develop
its own recordings. Similarly, Virgin Atlantic Airlines and Virgin Megastores were set up
using its own resources. In contrast, its cinema chain was an acquisition from MGM and
it purchased the rail franchises from the UK government. It also operates joint develop-
ment partnerships. For example, its mobile telephones, drinks, financial services, railway
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operations and some of its holidays are actually provided by other organisations, with
Virgin providing the brand, quality systems and marketing interface.
● Disney Corporation has historically preferred internal development. It owns its theme

parks (or has a substantial shareholding in them), studios and video production and
distribution operations. However, it uses joint development techniques also through
licensing-out its images and brands to toy, confectionery and clothing manufacturers
while maintaining very strict control over how they are used. Recently some of its vir-
tual reality films (e.g. Toy Story and A Bug’s Life) have been collaborative ventures with
outside production companies. The latest of which, with Pixar, has recently resulted
in a merger.

6.2 Porter’s generic competitive strategy model

6.2.1 Three generic strategies
According to Porter (1980), ‘there are three potentially successful generic strategic
approaches to outperforming other firms in an industry’. He terms these:
1. Overall cost leadership: lowest cost producer relative to competitors.
2. Differentiation: creating something that is perceived industry-wide as unique for which
customers will pay a premium.
3. Focus: serving a narrow strategic target more effectively than rivals who are competing
more broadly.
Porter uses the term ‘generic’ to mean a system of classification into which we can slot the
competitive strategies of real-world firms. He writes:
Successfully executing each generic strategy involves different resources, strengths, organisational arrange-
ments and managerial style. Rarely is a firm suited for all three (p. 42).
Hence a management must dedicate themselves to just one of the three types of strategy
to risk dilution of their competitive advantages. This is the only way that firms can outper-
form rivals and deliver high or satisfactory returns to shareholders.
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