BUSINESS STRATEGIES CHAPTER 5

BUSINESS STUDIES

GRADE 12
TERM ONE
CHAPTER5
BUSINESS STRATEGIES
2019
TABLE OF CONTENTS

TOPICS PAGES
Examination guidelines for human resources 2
Terms and definitions 2
Definition of a strategy 3
Steps in developing a strategy 3
The strategic management process 3
SWOT analysis 3-4
Example of a SWOT analysis 4
PORTERS’ FIVE Forces 4-5
PESTLE analysis 6-7
Types of business strategies 7-9
Steps in evaluating a strategy 9

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CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT PURPOSES

Learners must be able to:
• Define a strategy
• Outline/Describe/Explain/Discuss the strategic management process.
• Apply the strategic management process to solve business-related problems.
• Identify business challenges from given case studies.
• Identify and describe/explain/discuss the different types of business strategies.
• Devise/Develop/Analyse/Formulate strategies to overcome challenges from given
scenarios of businesses and make recommendations for improvement.
• Explain how/when businesses can apply each type of business strategy.
• Evaluate the effectiveness (positives) of each type of business strategy.
• Analyse case studies and apply the following industrial analysis tools to analyse the
challenges of the business environment:
- SWOT analysis
- Porter's Five Forces
- PESTLE analysis
• Recommend business strategies to address challenges identified from given case
studies/scenarios.
• Outline/Explain/Recommend activities/steps in strategy evaluation.

Term Definition
Formulation of strategies To devise/develop a strategy.
Implementation of strategies This takes place after the formulation of the strategy and
involves all the activities that are required for putting the strategy
Evaluation of strategies This takes place after the implementation of the strategy and
determines whether the implemented strategy resolved the
challenge.
Industry analysis tools SWOT, Porter’s Five Forces and PESTLE analysis models are used
to analyse the challenges posed by business environments.

Suppliers Include factories/providers of goods/services that businesses

would obtain/buy from in order to operate their business.
Buyers The final users of the product/services.
Competitors All other businesses selling the same/similar products/services
Substitute product or service Different products/services that satisfy the same needs of
consumers and can be used to replace one another.
New Entrants New businesses that are selling the same/similar products entering
the market for the first time.

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Definition of a strategy
• A strategy is a long term plan of action to achieve a goal.
• A strategy is a plan of action to address an opportunity or to solve a problem.
• The business needs a strategy to achieve its vision and mission.

Steps in developing a strategy

• Application of SWOT analysis/PESTLE/Porter's Five Forces/environmental scanning
of the business environments.
• Formulate strategies to meet objectives/Develop measurable strategic
goals/ objectives.
• Implement strategies using action plans, etc.
• Evaluation of strategies/Compare the expected performance with the actual
performance/ Measure business performance in order to determine the reasons for
deviations and analyse these reasons, etc.

The strategic management process

• Have a clear vision, a mission statement and measurable/realistic objectives in place.
• Identify opportunities/weaknesses/strengths/threats by conducting environ-mental
scanning/situational analysis.
• Tools available for environmental scanning may include a SWOT analysis/Porter's
Five Forces model/PESTLE analysis/industrial analysis tools.
• Formulate alternative strategies to respond to the challenges. (This involves
different types of business strategies)
• Develop (an) action plan(s), including the tasks to be done/deadlines to be
met/resources to be procured, etc.
• Implement selected strategies by communicating it to all stakeholders/organising the
business's resources/motivating staff.
• Continuously evaluate/monitor/measure strategies in order to take corrective action.
(This involves steps in evaluating a strategy)

NOTE: The industrial analysis tools (SWOT, PESTLE AND PORTERS’FIVE) and
business strategies form part of the strategic management process.

Explanation of a SWOT ANALYSIS

STRENGTHS WEAKNESSES
• What advantages does your • High cost infrastructure
organisation have and what do you do • High employee turnover
better than anyone else? • Weak brand portfolio
• What unique or lowest-cost resources • High debts level
can you draw upon that others can't? • What are people in your market likely to
• Do you have skilled employees and a see as weaknesses?
strong customer base? • What factors cause loss of sales
• Do you provide high quality product? • Are your competitors doing any better
• Do you have sufficient resources? than you?
• What is your core competency?

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OPPORTUNITIES THREATS
• Market growth for the business product. • Corporate tax may increase
• New technology that will enhance • Rising pay levels.
quality services and products • Intense competition.
• Changing customer habits. • Increasing fuel price.
• Disposable income level will increase. • Aging population.
• Government’s incentives for ‘specific • Stricter laws regulating environment
industry pollution
• Growing number of people buying on • Currency fluctuations.
line (electronic marketing) • Changing technology.
• What good opportunities can you spot?
NOTE: The SWOT analysis can is usually assessed in the form of a scenario as
indicated below:

Example of a scenario that requires learners to compile a SWOT analysis

DAVE DIGITAL SOUND (DDS)

DDS specialises in selling radios and car sound systems. They employ qualified sound
engineers. The business does not have sufficient capital to buy and sell sound systems that
cater for large events. Businesses in the same industry are closing down due to ineffective
marketing campaigns. DDS is located in a high crime area.

SWOT analysis of Dave Digital Sound DDS

STRENGTHS WEAKNESSES
• DDS employs qualified sound • The business does not have sufficient
engineers. capital to buy/sell sound systems that
• DDS specialises in selling radios cater for large events.
and car sound systems.
OPPORTUNITIES THREATS
• Businesses in the same industry are • DDS is located in a high crime area.
closing down due to ineffective
marketing campaigns.

NOTE: You need to quote verbatim (as is) from the scenario, otherwise you will lose
marks for writing incomplete quotes or for writing a summary of the scenario.

ANALYSIS OF INDUSTRIAL ANALYSIS TOOL

1 PORTERS’ FIVE FORCES MODEL

Power of suppliers
• A business must assess the power of suppliers to influence prices.
• The more powerful the suppliers, the less control the business has over them.
• The smaller the number of suppliers, the more powerful they may be as the choice of
suppliers may be limited.
• The business should identify the kind of power its suppliers have in terms of the
quality of products/services/reliability/ability to make prompt deliveries.

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Power of buyers
• Buyers buying in bulk can bargain for prices in their favour.
• If a business is dealing with a few powerful buyers, they are often able to dictate their
terms to the business.
• If buyers can do without the business’s products then they have more power to
determine the prices and terms of sale
• The business must assess how easy it is for buyers/customers to drive prices down.
• This will depend on the number of buyers/the importance of each buyer to the
business and the cost of switching to other products.

Power of competitors/Competitive rivalry

• Competitive rivalry refers to the number of competitors and their ability to
influence/control the market.
• If competitors have a unique product/service, then they will have greater power.
• A business with many competitors in the same market has very little power in their
market.
• Businesses must draw up a competitor's profile so that they can determine their own
strength as well as that of competitors.

Threat of substitution/substitutes
• Substitute products or services are different products/services that satisfy the same
needs of consumers and can be used to replace one another.
• If the business’s product can be easily substituted, it weakens the power of the
business in the market.
• Substitute products may cause the business to completely lose its market share.
• Unique products will not be threatened by substitute products.

Threat/Barriers of new entrants to the market

• New entrants are other businesses that are selling the same/similar products in the
existing market for the first time.
• The power will depend on how easy it is for new businesses to enter the market.
• New competitors can quickly/easily enter the market, if it takes little time/ money to
enter the market.
• If there are a few suppliers of a product/service but many buyers, it may be easy to
enter the market.
• If the business is highly profitable, it will attract potential competitors that want to
benefit from high profits.
• If the barriers to enter the market are low, then it is easy for new businesses to enter
the market/industry.

NOTE: The main aim of Porter’s Five Forces model is to analyse the business
position in the market. This is more of a research study done by
businesses. Do not focus on recommendations as this is not required at
this stage.

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2 PESTLE ANALYSIS
NOTE: You need to name the PESTLE factor, identify challenges of each factor
and make recommend ways businesses can deal with the identified challenges
as explained in the table below:
FACTOR CHALLENGE RECOMMENDATIONS
Political • Some government policies may • Research recent government
affect businesses policies
• Consumer rights organisations • Network and lobby with the
may prevent businesses from NGOs and all consumer
selling products if they do not rights organisations.
meet certain requirements. • Trade only with countries that
• Trade agreements may prevent have favourable trade
businesses from importing some agreements with the
medicine/products. government.
Economic • Inflation/Interest rates may • Consider decreasing profit
negatively impact on business. margins rather than increasing
• Loans may be expensive due to product prices.
high interest rates. • Borrow money from financial
• Fluctuations in foreign currency institutions when interest rates
may restrict import. are favourable.
• Consider exchange rates
when trading with other
countries
Social • Customers may not be able to • Sell substitute/generic
afford products due to low products at lower prices.
income levels. • Learn local languages/Hire
• Businesses may not be employees who are well
conversant with the local conversant with the local
language of their customers. language.
Technological • May not keep up with/be aware • Continuous research on the
of the latest technology. latest available
• Employees may not be skilled to technology/equipment in the
operate/maintain new market.
technology/ equipment. • Train existing/appoint new
• Businesses may not be able to employees to maintain/use
afford new technology. new equipment.
• May not be able to cater for/ • Compare prices/Select
afford online transactions/e- suitable suppliers for new
commerce. equipment at reasonable
prices.
• Businesses must be geared
for online trading/e-commerce
Legal • Consider certain Acts that may • Comply with all relevant
have a direct impact on a legislation that may impact on
business, e.g. the CPA/BCEA. businesses.
• Legal requirements for operating • Comply with the legal
certain types of businesses requirements for operating
time-consuming. businesses, e.g. licence/trade
• High legal costs involved in mark registration/patents.
obtaining a licence/trade • Budget for high legal
establishment costs.

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mark/patent may prevent some

establishments.
• Businesses must know the
• Legalities of business contracts legalities of business
may limit business operations contracts so that they comply
with all the requirements.
Environmental • Chemicals/Ingredients in • Chemicals/Ingredients should
business’ products may be be clearly indicated on
harmful to customers. labels/packaging to inform
customers about possible side
effects/correct use of
• Measures to dispose of products.
business waste may be • Implement cost effective
expensive. measures to dispose of
• Packaging of some products medical waste.
may not be environmentally • Implement recycling
friendly may not be recyclable. measures to prevent pollution
of the environment/Use
packaging that is re-
usable/recyclable.

Types of business strategies

Integration strategies
Forward integration
• The business combines business with or take over its distributors.
• Involves expansion of business activities to gain control over the direct distribution of
the products.
Backward integration
• The business combines business with or take over its suppliers.
• The aim is to decrease the business’s dependency on the supplier

Horizontal integration
• A business takes control of/ incorporates other businesses in the same
industry/which produce/sell the same goods/services.
• The aim is to reduce the threat of competition /substitute products/services.

Intensive strategies
Market penetration
• New products penetrate an existing market at a low price, until it is well known to the
customers and then the prices increases.
• It is a growth strategy where businesses focus on selling existing products to existing
markets.
• Focuses on gaining a larger share of the market by reducing prices to increase
sales/increasing advertising and promotion.

Market Development
• It is a growth strategy where businesses aim to sell its existing products in new
markets.

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• This strategy involves finding new markets and new ways to distribute product.

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Product Development
• It is a growth strategy where businesses aim to introduce new products into existing
markets/modifies an existing product.
• Businesses generate new ideas and develop new products/services

Advantages of intensive strategies

• Increased market share reduces the business's vulnerability to actions of
competitors.
• Increase in sales/income and profitability.
• Improved service delivery may improve business image.
• Businesses may have more control over the prices of products/services.
• Gain loyal customers through effective promotion campaigns.
• Decrease in prices may influence customers to buy more products.
• Regular sales to existing customers may increase.
• Eliminate competitors and dominate market prices.
• Enables the business to focus on markets/well researched quality products that
satisfy the needs of customers.

Diversification strategies
Concentric diversification
• The business adds a new product or service that is related to existing products and
which will appeal to new customers.
• Occurs when a business wants to increase its product range and markets.

Horizontal diversification
• The business adds new products or services that are unrelated/ different to existing
products, but which may appeal to existing/current customers.
• Occurs when a business acquires or merges with a business that is at the same
production stage, but it may offer a different product

Conglomerate diversification
• The business adds new products or services that are unrelated to existing products
which may appeal to new groups of customers.
• Conglomerate diversification means that a business grows into new products,
services and markets.
• Occurs when a business wants to increase its product range and markets.

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Advantages of diversification strategies

• Increase sales and business growth.
• Diversification into a number of industries or product line can help create a balance
during economic fluctuations.
• More products can be sold to existing customers and additional more new markets
can be established.
• Businesses gain more technological capabilities through product modification.
• Business produce more output using less inputs as one factory may be used to
manufacture more products.
• Improves the business brand and image.
• Reduces the risk of relying only on one product.

Types of defensive strategies

Divestiture/ Divestment
• The business disposes/sells some assets/divisions that are no longer profitable/
productive.
• Businesses may sell off divisions/product lines with slow growth potential.
• The business sells ownership by decreasing the number of shareholders.
• Unproductive assets are sold to pay off debts.
• Process used to withdraw its investment in another business (divesting).

Retrenchment
• Terminating the employment contracts of employees for operational reasons.
• Decreasing the number of product lines/Closing certain departments may result in
some workers becoming redundant.

Liquidation
• All assets are sold to pay creditors due to a lack of capital/cash flow.
• Selling the entire business in order to pay all liabilities/close down the business.
• Companies in financial difficulty may apply for business rescue to avoid liquidation.
• Creditors may apply for forced liquidation in order to have their claims settled.

Steps in evaluating a strategy

• Examine the underlying basis of a business strategy.
• Look forward and backwards into the implementation process.
• Compare the expected results in order to determine the reasons for deviations and
analyse these reasons.
• Take corrective action so that deviations may be corrected.
• Set specific dates for control and follow up.
• Draw up a table of the advantages and disadvantages of a strategy.
• Decide on the desired outcome.
• Consider the impact of the strategic implementation in the internal and external
environments of the business.

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