The Macro Environment: Business Strategies (Grade 12 NSC Matric Business Studies): Revision Notes
Business Strategies
Business strategies act as essential roadmaps that help companies stay competitive and profitable in their chosen markets. These strategic approaches guide businesses on how to respond to challenges and opportunities while maintaining sustainable operations. Companies use different types of strategies depending on their specific circumstances, market position, and business goals.
There are four main categories of business strategies that businesses can adopt: integration strategies, intensive strategies, diversification strategies, and defensive strategies. Each category serves a different purpose and is suitable for different business situations.
Integration strategies
Integration strategies help businesses expand their influence and control within their industry by connecting with other companies in their supply chain. When a company uses integration strategies, it essentially takes over or merges with businesses that were previously separate from its operations.
Main purposes of integration strategies:
- Improve supply and distribution channels
- Reduce operating costs
- Control competition more effectively
- Combine resources more efficiently
- Access new markets
- Gain control over suppliers and distributors
Types of integration strategies
Forward vertical integration
This strategy involves a business taking control of companies that distribute its products to customers. The business moves forwards along the supply chain towards the final consumer.
Key features:
- The business takes over its distributors (companies that sell goods/services to end consumers)
- It gains control over the distribution system (the network that moves products from source to consumers)
- The business can sell products/services directly to customers
- The company merges with businesses that were once their customers while maintaining control of primary business activities
Backward vertical integration
This approach involves a business taking control of its suppliers (companies that provide raw materials or semi-finished goods) by moving backwards up the supply chain.
Key features:
- The business combines with or takes over suppliers
- This reduces the business's dependence on external suppliers
- The business expands its role to include activities previously completed by suppliers
- It involves buying or merging with companies that supply products/services to the business
Horizontal integration
This strategy involves taking control of or merging with other businesses at the same level in the industry that produce similar products.
Key features:
- The business takes control of competitors in the same industry
- The aim is to reduce competition and substitute products/services
- The business can strengthen and expand its market share (the portion of total market customers)
- It involves acquiring a related business that operates at the same level of the supply chain
Practical Example: Food Supply Chain Integration
Consider a food supply chain with three levels:
- Landman Farmers (LF): Plants, grows, and harvests fresh vegetables
- Veggietin Manufacturers (VM): Specialises in producing tinned vegetable products
- Emihle Nazo Wholesalers (ENW): Sells various final goods to retailers in bulk
Forward vertical integration examples:
- If LF takes over VM, it's moving forwards down the supply chain
- If VM takes over ENW, it's moving forwards towards final customers
- If LF takes over ENW, it's moving forwards to control distribution
Backward vertical integration examples:
- If ENW takes over VM, it's moving backwards up the supply chain
- If VM takes over LF, it's moving backwards to control suppliers
- If ENW takes over LF, it's moving backwards to control the source
Intensive strategies
Intensive strategies require businesses to make concentrated and rigorous efforts to improve their competitive position with existing products in current markets. These strategies focus on maximising performance through thorough and sustained efforts rather than branching into completely new areas.
Businesses typically use intensive strategies to expand their product lines, scale their operations, and establish new market outlets. They often involve extensive sales promotion and marketing campaigns to achieve growth objectives.
Types of intensive strategies
Market penetration
This strategy focuses on increasing sales of current products within existing markets.
Key approaches:
- The business concentrates on selling existing products to current customers
- Market research on existing customers helps determine how to improve the marketing mix
- Aggressive marketing campaigns are used, such as lowering or reducing prices to attract potential customers
- The business does not modify existing products or introduce new products during market penetration
Market development
This growth strategy involves selling existing products in new markets or geographical areas.
Key approaches:
- The business uses this strategy to sell current products in new locations
- Customers in potential markets (outside the normal target market) are targeted
- The business increases sales of existing products through developing new markets
- Prices are restructured to cater to customers of all income levels
Product development
This strategy focuses on introducing new products into existing markets.
Key approaches:
- The business uses this strategy to introduce new products to current customers
- New ideas and products are generated for existing markets
- The business conducts test marketing and market research to establish whether new products will be accepted by existing customers
- New products may be different from or of higher quality than competitors' offerings
Understanding the Key Differences
The table below clearly illustrates how market development and product development differ in their approaches and implementation:
Differences between market development and product development
| Market development | Product development |
|---|---|
| Growth strategy where business aims to sell existing products in new markets | Growth strategy where business aims to introduce new products into existing markets |
| Business implements the idea of expanding/selling products in other geographical areas | Business improves/enhances the product line by adding different types of related products/services |
| Business finds new ways of distributing products | Business conducts test marketing/market research to establish whether new products will be accepted by existing customers |
| Prices are restructured to cater to customers of all income levels | New products may be different/of higher quality than competitors |
Advantages of intensive strategies
When businesses successfully implement intensive strategies, they may experience:
- Increased market share as intensive strategies reduce the business's vulnerability to competitors' actions
- Improved sales and profitability because of aggressive advertising campaigns and more products/services being sold
- Enhanced service delivery which may improve business image, brand recognition, and brand awareness
- Greater control over pricing for products/services
- Increased customer loyalty through effective promotion campaigns
- Reduced prices that may influence customers to buy more products/services
- Higher regular sales from existing customers
- Competitive advantage by removing existing competitors and dominating market prices
- Improved focus on markets and well-researched quality products that satisfy customer needs
Practical Example: Swift Shopping Retailers
Swift Shopping Retailers demonstrates how a business can apply different intensive strategies:
Market Penetration: SSR sells existing products into current markets to increase market share through aggressive marketing and sales promotions on existing products.
Market Development: SSR uses this growth strategy to sell existing products in new markets/geographical areas, such as opening a new branch in Northern Cape where SSR currently does not operate.
Product Development: SSR uses this growth strategy to introduce new products into existing markets, such as launching a new frozen chicken product range based on market research of existing customers.
Diversification strategies
Diversification strategies are used by businesses to expand operations into markets or industries that the company has not previously explored. This approach enables businesses to expand market share, enter new markets, and explore new sales opportunities while achieving greater profitability.
The main purpose is to extend the business's operations to improve brand identity and boost brand image. Diversification strategies serve as a purposeful mechanism to potentially minimise or reduce current market and industry downturn (general slowdown in business activity within a particular industry) risks, while protecting the business from strong competitors.
Types of diversification strategies
Concentric diversification
This approach involves adding new products/services that are related to existing products/services but will appeal to new customers.
Key features:
- Occurs when a business wants to increase, expand, and progress its product range and markets
- The business creates a new product that is technologically similar to existing products aimed at new customers and markets
- Occurs when a business uses existing infrastructure, organisational resources, and expertise to create products with some degree of similarity but with clear differentiation from existing products
Horizontal diversification
This strategy involves adding new products/services that are unrelated to existing products but may appeal to existing customers.
Key features:
- The business adds new products/services that are unrelated to existing products but which may appeal to existing customers
- Occurs when a business acquires or merges with a business that is at the same production stage but may offer different products
- The business extends the production of products/services above/beyond the market/industry in which it currently operates
- Occurs when the business increases its development potential and extends its brand while significantly reducing risk as new products are aimed at existing customers
Conglomerate diversification
This approach involves adding new products/services that are unrelated to existing products and may appeal to new groups of customers.
Key features:
- The business adds new products/services that are unrelated to existing products which may appeal to new groups of customers
- Occurs when the business operates multiple product lines or business entities for entirely different industries and consumers
- The business grows into new products/services and markets
- Occurs when the business can increase overall product/service flexibility and proficiency by extending activities to unexplored, untapped, and unfamiliar markets
Advantages of diversification strategies
The business may experience:
- Increased sales, revenue, and income leading to business growth
- Sustained profitability from different product lines during times of fluctuating economic activity
- Increased number of products being sold to existing and new customers
- Additional new markets established in unrelated markets and industries
- Enhanced technological capabilities through product modification
- Improved brand image and brand awareness of the business
- Reduced risk of relying only on one product for sales, revenue, and income
- Retained competitive advantage by meeting the needs of current and new customers while expanding into new unexplored markets
- Continued relevance and operational effectiveness in the context of ever-changing business environments
Practical Example: Intyambo Enterprises
Intyambo Enterprises demonstrates different types of diversification:
Concentric diversification: IE has diversified their product/service range by offering gourmet spit braai services as demand for these services has recently increased by new potential customers. This is concentric because IE is adding new products/services related to existing products but appealing to new customers.
Horizontal diversification: IE has diversified their product/service range by providing luxury car hiring services for various events such as weddings and matric balls, based on the needs of existing customers. This is horizontal because IE is adding new products/services that are unrelated to existing products but may appeal to existing customers.
Conglomerate diversification: IE has diversified their product range by exploring a new market and establishing a new beauty salon within the CBD. This is conglomerate because IE is adding new products/services that are unrelated to existing products/services and may appeal to new groups of customers.
Defensive strategies
Defensive strategies are used by businesses to defend their existence, survival, and operations during times of financial difficulty, turmoil, or when defending against competitors. These strategies may be required when a business needs to make difficult decisions that affect its future growth and survival.
Defensive strategies help businesses avoid or prevent closure by protecting themselves from suffering potential losses in sales, income, and market share. Operational reasons (decisions taken by the business to ensure regular operations continue to exist) often drive the implementation of these strategies.
Types of defensive strategies
Divestiture/Divestment
This strategy involves disposing of or selling some assets, divisions, or parts of the business that are no longer profitable, productive, functional, or relevant.
Key actions:
- The business disposes of or sells some assets/divisions that are no longer profitable
- Selling off divisions or product lines with slow growth potential
- Paying off debts by selling unproductive assets
- The business decreases the number of shareholders by selling ownership
- Shareholders withdraw their investment share in another business (divesting)
Retrenchment
This strategy involves reducing business operations and costs through various cost-cutting measures.
Key actions:
- The business terminates employment contracts of employees for operational, structural, and restructuring reasons
- Decreasing the number of product lines and closing certain departments, resulting in some workers becoming redundant or obsolete
- This is an aggressive strategy where management takes bold decisions by letting go of employees to reduce operational costs and expenses
- Through retrenchment, the business can reduce prices and offer discounts and incentives for customers
Liquidation
This is the most extreme defensive strategy involving the complete closure of the business.
Key actions in liquidation:
- The business sells all assets to pay creditors due to lack of capital or inability to repay creditors (bankruptcy)
- Selling the entire business to pay shareholders a fair price for their shares upon business closure
- The process of liquidation allows creditors to apply for forced liquidation to have their claims settled
- It is an unpleasant process of bringing business activities to an end as a last resort to repay creditors
Practical Example: JADE Finances
JADE Finances demonstrates the application of different defensive strategies:
Divestiture/Divestment: JFSA sold off two office blocks that are no longer being utilised to a property company.
Retrenchment: JFSA was forced to let go of certain staff members because of operational reasons and to ensure the survival of the business.
Liquidation: Creditors embarked on forced liquidation to reclaim all debt that had been unpaid by JFSA because of insolvency.
Strategy evaluation
The business must continuously evaluate strategies to change and adapt them according to current market and industry demands. Strategy evaluation enables a business to keep abreast of changes in the business environment and allows assessment of whether the intended strategy is serving its purpose.
Why strategy evaluation matters:
Strategy evaluation is essential because business environments are constantly changing. What works today may not work tomorrow, so businesses need regular assessment to ensure their strategies remain effective and relevant to current conditions.
Steps in strategy evaluation
The evaluation process involves nine key steps:
- Examine and assess the underlying basis of a business strategy - Review the foundation and reasoning behind the chosen strategy
- Look forwards and backwards into the implementation process - Analyse both future projections and past implementation experiences
- Compare the expected performance with the actual performance - Measure whether the strategy achieved its intended results
- Measure the business performance to determine reasons for deviations and analyse these reasons - Identify why performance differed from expectations
- Take corrective action so that deviations may be corrected - Implement changes to address performance gaps
- Set specific dates for control and follow up - Establish timelines for monitoring progress
- Draw up a table/list of the advantages and disadvantages of a strategy - Evaluate the pros and cons systematically
- Decide on the desired outcome - Determine what the business wants to achieve
- Consider the impact of the strategic implementation in the internal and external environments of the business - Assess how the strategy affects all aspects of the business environment
Key Points to Remember:
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Business strategies serve as guidelines to help companies remain sustainable and competitive in their chosen markets by responding effectively to challenges and opportunities.
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Integration strategies focus on supply chain control through forwards vertical integration (taking over distributors), backwards vertical integration (taking over suppliers), and horizontal integration (taking over competitors at the same level).
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Intensive strategies concentrate existing resources on improving performance through market penetration (existing products in current markets), market development (existing products in new markets), and product development (new products in existing markets).
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Diversification strategies spread business risk by expanding into new areas through concentric (related products for new customers), horizontal (unrelated products for existing customers), and conglomerate (unrelated products for new customers) approaches.
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Defensive strategies protect business survival during difficult times through divestiture (selling unprofitable assets), retrenchment (reducing operations and staff), and liquidation (complete business closure as a last resort).