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534
Unit 8 Choosing strategic direction
Key models and theories: Michael Porter
Michael Porter is a famous business writer on strategy.
His work on work cost leadership and differentiation
highlighted to managers the importance of being clear
on how you were going to compete and ensuring the
strategy fitted with the strengths and competences
of the business. To be a cost leader there must be
something in terms of what you do or how you do it
that gives you a cost advantage. To differentiate there
must be something you do that enables you to be more
expensive than others.
provide a basic service without pre-booking seats
and without food and newspapers provided.
Business in focus: Poundland
Assessment
activities at the
end of every
chapter
Key terms
A cost leadership strategy involves achieving lower
costs than rivals in the same industry
A differentiation strategy involves offering more
benefits than rivals in the same industry
Figure 34.2 One of Poundland’s 500 stores
The Poundland Story
Cost-leadership strategy
A cost-leadership strategy involves becoming the
lowest-cost organisation in the industry in which
the business is competing. This may be achieved
through:
● Lower input costs: A business may find a way of
reducing the cost of its inputs. This may be by owning
some of its suppliers and thereby avoiding the profit
margins of its suppliers. Morrisons, for example, owns
many of the farms that supply its products; Zara also
owns its suppliers; and IKEA designs and develops
all its own products. Alternatively, a business could
be located nearer supplies than competitors reducing
transportation costs.
● Economies of scale: The business may have cost
advantages by being bigger than its rivals. For
example, it may be able to spread fixed costs over
more units if it is big enough, thereby reducing
unit costs.
● Experience: The managers and employees may
be more experienced than rivals enabling them to
source cheaper materials and make more efficient
decisions.
● Product/process design: The design of the
product or the process used to produce it may be
more cost efficient than competitors. For example,
budget airlines use local regional airports where
it is cheaper to take off and land than it is at the
major airports such as Heathrow and Gatwick; they
Everything for £1 was the idea of our founders in 1990
and we’ve grown to become one of the largest discount
and value retailers in the UK, with thousands of great
products at £1 across over 700 stores… and sometimes
we offer special promotions and products at other prices.
Knowledge-check
questions to test
student understanding
We work hard to bring you amazing value products every
day with over two-thirds being sourced from the UK.
Did you know?
Last year, we sold some amazing products…
Short answer
questions, data
response questions
and essay questions
to prepare students
for writing answers
in exams
● 5.5 million boxes of Maltesers
● 2.5 million umbrellas
● 3 million lightbulbs
● 18 million cans of Coke
● 250,000 garden gnomes
● 4.4 million bags of sugar
78
Unit 2 Managers, leadership and decision making
● 3 million metres of tinsel
● 5.5 million bars of Toblerone.
Source: Poundland Website
www.poundland.co.uk/about-us/our-values/
Questions
1. Analyse how Poundland is able to make a profit at
such a low price.
(9 marks)
2. Do you think Poundland should ever sell items for
more than £1?
(16 marks)
By being a cost leader a business can charge similar
prices to its competitors and earn higher returns or, if
needed, it can reduce prices lower their competitors
can and still make the same profit margin as they do.
ASSESSMENT ACTIVITIES
(a) Knowledge check questions
1 What is meant by the term stakeholders?
2 State two examples of primary stakeholders and
two examples of secondary stakeholders.
3 State two needs that customers may have as
stakeholders.
4 Is the following statement true or false? ‘In the
past, managers in companies tended to operate
largely in the interests of their stakeholders.’
5 State the two factors relating to stakeholders that
are commonly measured on a stakeholder map.
6 Using the stakeholder map (Figure 6.2), indicate
which quadrant of the grid the following
stakeholder would be classified; a shareholder of a
company with only a few shares but who monitors
the company’s activities closely.
7 State two objectives that suppliers may have in
their relationship with a business.
8 State two possible positive impacts on stakeholders
following a decision by a business to reduce its
costs.
9 State two internal factors that might influence a
business’s relationships with its stakeholders.
10 Is the following statement true or false?
‘Consultation is the most appropriate way to
engage high power, high interest stakeholders.’
(b) Short answer questions
Key terms defined
throughout
1 Explain why the objectives of employees and
customers might overlap if a business decides to
expand production.
(4 marks)
3 Explain one way in which a business’s
management or leadership style might influence its
relationship with its stakeholders.
(5 marks)
2 Explain one reason why the situation revealed by a
stakeholder map may change over time. (5 marks)
4 Explain why managers may want to involve
stakeholders who are key players in making a
particular decision.
(5 marks)
(c) Data response questions
Handling data
1+b
=3
c
A business has a very successful lean approach to its
operations which means its unit cost is £4 a unit. The
industry average is £5. The business price matches its
competitors and sells at £8. Compare the profit margin
of this business compared to the industry average.
1. Calculate the profit earned by this business compared
to a typical business within the industry if it sold 20
million units a year.
New ‘Handling data’ feature
encouraging students
to focus specifically on
interpreting and using data
Sinai Ltd is a construction company that has been
awarded a contract to repair, renew and extend the sewer
system in a large town in Lincolnshire over a two-year
period. This is a large contract, worth £21.2 million, and
will require the company to raise £2 million initially to
fund it. Sinai Ltd will need to use the specialist services
of other companies, for example, for tunnelling and for
managing health and safety risks. These are likely to be
very costly, though some suppliers provide important
and scarce services that are essential to the project.
The company has to decide how much of the work
it should undertake itself and the extent to which it
should employ other businesses to carry out some
activities. Making good quality decisions is important
because there is the possibility of winning further
contracts for similar projects.
The management team is uncertain of the extent to
which it should involve the company’s stakeholders
in this decision and, if so, which ones. The chief
executive favours inviting employees, suppliers and
the customer to participate in the decision-making
process, while others believe that all stakeholders
are not the same and they should form a partnership
with suppliers for this project.
1 Explain why Sinai Ltd should consider the needs of
its employees when making this decision. (5 marks)
2 Analyse the possible benefits and drawbacks to
Sinai Ltd of inviting its stakeholders to participate in
decision making in these circumstances. (9 marks)
3 Do you think that the company should form
a partnership with all of its suppliers for this
project? Justify your decision.
(16 marks)
(d) Essays
1 To what extent is it more difficult for managers
in a public limited company to meet the needs
of stakeholders than managers in a sole trader
business?
(25 marks)
2 The business’s objectives are the most important
influence on the relationship between a
multinational company and its stakeholders.
Do you agree? Justify your decision.
(25 marks)
Sample pages from AQA A-level Business
35
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