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Strategic Direction

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Business Studies

Strategic direction is the set of activities and decisions a firm needs to make in order to achieve its goals and objectives. Defining a strategic direction ensures that owners, managers and employees are focused on the objectives of the firm. It also ensures that all business decisions that are being made by the organization are concentrated on these objectives. Let's take a look at how businesses can set their strategic direction using various different tools.

Setting a strategic direction example

First, the business needs to decide on its overall purpose. The overall purpose is often entailed in the mission and vision of the firm and can range anywhere from operating a profitable business with low costs to making the world a better place.

Once the business is clear on their overall purpose, they have to figure out how to achieve this goal. This involves creating a plan of specific business decisions and activities that are achievable and measurable.

Let's say you are an executive at a clothing retailer and your company is achieving low sales growth in the current country of operation. You decide that in order to boost sales and revenue, you are going to diversify your operations.

Diversification is an example of strategic direction. Now, you have set specific goals and objectives to work towards your strategic direction. Your team has conducted extensive market research and selected two new countries in which your business is projected to be profitable. Your company needs to decide whether they will be setting up their own production facilities in the new country, buying existing facilities or outsourcing the production to a local company. The next step is deciding whether you will be offering the exact same collections of clothing or if you are going to change certain designs to fit the local style preferences better. These are all examples of business decisions you have to make, keeping in mind the overall strategy of the firm.

Strategic direction matrix

An effective way of setting strategic direction is by creating a decision matrix.

Outsourcing decision matrix

The outsourcing decision matrix is used when setting strategic decisions on whether the firm should outsource or keep its operations in-house.

The two axes are strategic importance and contribution to operational performance (see Figure 1 below). To use the matrix, the firm has to come up with a list of important tasks to plot on the matrix based on how much they contribute to the operational performance of the firm and how strategically significant they are.

Strategic Direction Outsourcing Decision Matrix, StudySmarterFigure 1. Outsourcing Matrix, StudySmarter

The outsourcing matrix is made up of four quadrants:

  • Form a strategic alliance: tasks in this quadrant are strategically important to the company but contribute little to operational performance. Although these tasks are important strategically, it is not necessary to keep them in-house, therefore forming a strategic alliance is beneficial as both partners share control over the tasks.

  • Retain: these tasks are strategically important and contribute significantly to the operational performance of the firm. It is advisable to keep these tasks in-house to maintain full control over them.

  • Outsource: these tasks are not strategically important but contribute significantly to the operational performance of the firm. These tasks can usually be outsourced safely as the firm does not need to have full control over its operations due to its strategic insignificance.

  • Eliminate: tasks in this quadrant are unimportant to the operational performance of the firm and do not contribute significantly to the overall strategy. These tasks can be eliminated.

The Ansoff Matrix

The Ansoff matrix is another important strategic decision-making tool used by businesses.

Strategic Direction, the Ansoff Matrix, StudySmarterFigure 2. Ansoff Matrix, StudySmarter

The Ansoff matrix is a tool used for marketing, which helps the business set a marketing growth strategy.

The matrix helps businesses determine the right strategy and set a marketing strategic direction. Figure 2 shows the four quadrants of the Ansoff matrix:

  • Market penetration: existing products in an existing market

  • Product development: new products in an existing market

  • Market development: existing products in a new market

  • Diversification: new products in a new market

A detailed explanation of the Ansoff matrix's different quadrants can be found in our Differentiation explanation!

  • When choosing market penetration as a strategic direction, the business can decide to decrease prices or increase promotion to attract new customers.

  • When choosing product development as a strategic direction, the business can focus on innovation and R & D to create new products or form strategic alliances.

  • When choosing market development as a strategic direction, the business can expand internationally or try to target a new customer segment with its existing products.

  • When choosing diversification as a strategic direction, the business can decide to either expand their product offering or manufacture unrelated products to enter new markets.

Choosing areas of competition

Competition is a standard occurrence in all business environments - it is an indicator of a prosperous market. Businesses compete based on price, quality, branding, etc. Competition can increase efficiency in a market, as it encourages firms to optimize their use of resources and strategy in ways that give them an advantage over competitors. There are three ways businesses can compete with one another:

  • Direct competition: this is when businesses sell similar (or the same) products targeted at the same customer segment in the same market. For example, Vodafone and O2.

  • Indirect competition: businesses that sell different products but operate in the same industry and satisfy the same customer need. For example, McDonald's and Subway.

  • Replacement competition: businesses that sell different products but could replace your business's offering due to new technologies. For example, smartphones and digital cameras.

Choosing how to compete

A significant part of business strategy is choosing how to compete based on price and quality.

Bowman's Strategic Clock is a strategic tool that helps businesses understand their strategic positioning in the market based on price and perceived value.

This strategic analysis tool is often used together with the Ansoff Matrix and Porter's low cost, differentiation and focus strategies.

There are eight different strategic positions a business can take according to Bowman's Strategic Clock (see Figure 3 below). Each of these positions represents a strategy the business can pursue to gain a competitive advantage in the market.

Strategic Direction, Bowman's strategic clock, StudySmarterFigure 3. Bowman's Strategic Clock, StudySmarter

Analysing the strategic direction

A company can analyse and create new strategic directions through the following process:

  • First, the company has to identify issues with their current strategy. It is important to notice strategic issues as soon as possible, so the company can stay on track in achieving its overall business objectives.

  • The second step is to conduct an external analysis (PESTLE). The external environment is important to overall strategy, as external factors can impact the internal processes of the business - including certain internal decisions made by the business.

  • It is also important to conduct a competitive analysis, like Porter's Five Forces analysis, to examine the competitive environment. This allows the organization to see which strategic direction would prove the most profitable in the competitive environment.

  • A SWOT analysis is also essential for understanding where the company's competitive advantages and weaknesses are, in regards to the overall strategy.

  • Finally, once the overall issues and objectives have been defined, the company can use a strategic direction matrix like the outsourcing decision matrix or the Ansoff Matrix, to set a detailed strategy that will help them achieve its overall business objectives.

Choosing Strategic Direction - Key takeaways

  • Strategic direction is the set of activities and decisions a firm needs to make in order to achieve its goals and objectives.
  • Defining a strategic direction ensures that owners, managers and employees are focused on the objectives of the firm.
  • The business needs to define its overall purpose and objective and understand how to achieve these through smaller-scale tasks.
  • The strategic direction is set by the business and depends on various factors like the scale and current objectives of the organization.
  • An effective way of setting strategic direction is by creating a decision matrix.
  • For instance, the outsourcing decision matrix is used when setting strategic decisions on whether the firm should outsource or keep its operations in-house. The two axes are strategic importance and contribution to operational performance.
  • The outsourcing decision matrix is made up of four quadrants: retain, outsource, eliminate and form a strategic alliance.
  • The Ansoff matrix is a tool used for marketing, which helps the business set a marketing growth strategy.
  • The four outcomes of the Ansoff matrix are market penetration, product development, market development and diversification.
  • Bowman's Strategic Clock is a strategic tool that helps businesses understand their strategic positioning in the market based on price and perceived value.
  • To set a new strategic direction the company has to:
    • Identify issues with the current strategy,
    • Create an external analysis
    • Conduct a competitive analysis
    • Conduct a SWOT analysis
    • Bowman's Strategic Clock
    • Use a strategic decision-making matrix.

Frequently Asked Questions about Strategic Direction

Strategic direction is the set of activities and decisions a firm needs to make to achieve its goals and objectives. Defining a strategic direction ensures that owners, managers and employees are focused on the objectives of the firm. It also ensures that all business decisions that are being made by the organization are concentrated on these objectives. 

First, the company needs to decide on their overall purpose. The overall purpose is often entailed in the mission and vision of the firm and can range anywhere from operating a profitable business with low costs to making the world a better place. Then the company needs to identify gaps or issues in their current strategy and set objectives on how to fix them. This set of objectives should lead to an overall strategic direction.

Strategic direction has to be company-specific because every company has different goals and objectives. The individual strategic direction tends to be based on the overall mission and vision, which is different for each company. 

The overall strategic direction is usually set by executives and managers of the organization, as they have the most oversight on the overall performance of the firm. Defining a strategic direction ensures that owners, managers and employees are focused on the objectives of the firm.

Final Strategic Direction Quiz

Question

Define strategic direction.

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Strategic direction is the set of activities and decisions a firm needs to make to achieve its goals and objectives. Having a strategic direction ensures that all business decisions that are being made by the organization are concentrated on specific objectives.

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Who sets the strategic direction of the organization?


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The overall strategic direction is usually set by executives and managers of the organization, as they have the most oversight on the overall performance of the firm.

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Why is it important to have a strategic direction? 


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Defining a strategic direction ensures that owners, managers and employees are focused on the objectives of the firm. It also ensures that all business decisions that are being made by the organization are concentrated on these objectives.

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How can a business identify its overall purpose?


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The overall purpose is often entailed in the mission and vision of the firm and can range anywhere from operating a profitable business with low costs to making the world a better place.

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Name an example of a strategic decision matrix. 


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The outsourcing decision matrix.

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The two axes of the outsourcing decision matrix are: 

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Strategic importance and contribution to operational performance

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Concerning the outsourcing matrix, when would a business form a strategic alliance?


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When tasks are strategically important but contribute little to operational performance.

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Concerning the outsourcing matrix, when would a business retain the chosen activities in-house?


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When tasks are strategically important and contribute significantly to the operational performance of the organization.

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Concerning the outsourcing matrix, when would a business outsource?


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When tasks are not strategically important but contribute significantly to the operational performance of the organization.

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Concerning the outsourcing matrix, when would a business eliminate certain tasks?


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When tasks are not strategically important and do not contribute to the operational performance of the business.

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The Ansoff matrix is used for:

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Setting marketing strategy

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How would a business attract new customers when setting a market penetration strategy?


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By decreasing prices and / or increasing promotion.

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Name two examples of how a company could diversify its operations.


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By expanding their product offering or by developing unrelated products.

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When would a company choose a market development strategy? 


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When the company is trying to sell its existing products in new markets or to new customer segments.

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Name two types of analytical tools a business would use when analyzing strategic direction? 


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SWOT and PESTLE.

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What is competition?

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Competition can be defined as the aggregation of businesses in the same market competing for the attention of consumers. Competition is present in all profitable markets, where businesses compete on price, quality, reputation, brand name, etc.

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How is competition related to innovation?


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Competition trends to boost innovation.

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How does competition impact consumers?


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Competition is beneficial for consumers as it can lead to economic growth and lower prices (as a result of innovation).

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Competition can help businesses:

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All of the above answers are correct.

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Which of the following statements is correct?


I. Firms often race to be the first ones to introduce new technology into the marketplace.

II. Innovation in the industry often leads to better products and more efficient production and use of resources

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Both statements are correct. 

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What are the three different types of competition? 


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Direct, indirect and replacement competition.

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Describe direct competition. 


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Direct competitors are businesses that sell similar (or the same) products to the same customer segments in the same market.

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Describe indirect competition. 


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Indirect competitors are businesses that sell products that are not the same as yours but they still operate in the same industry and satisfy the same consumer need.

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Describe replacement competition. 


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Replacement competitors are businesses that sell products different to yours but could potentially replace your business's offering due to new technologies. The products sold by these types of competitors are often providing new solutions to a problem as a result of innovation that customers could decide to spend their money on instead.

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The rivalry between Pepsi and Coca Cola is an example of: 

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Direct competition

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Which of the following statements is correct?


I. Businesses can learn from the strengths and failures of their competitors.

II. Studying competitors can help a business find its own competitive advantage. 

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Both statements are correct. 

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Competition can: 

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All of the above answers are correct. 

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Name two advantages of competition. 


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  • Increased innovation. 

  • Helps businesses gain more insight into the wants and needs of consumers

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Name two disadvantages of competition. 


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  • Customers can get confused by the wide range of similar products.

  • Businesses could end up accruing a lot of extra costs.

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What type of strategy is diversification in business?

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A growth strategy.

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Diversification is when: 

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All of the above.

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What is vertical diversification? 


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Vertical diversification, also known as vertical integration, is when you expand forward or backwards in your supply chain or production process. During vertical integration, the business combines two or more stages of production that are usually operated by other companies.

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What is horizontal diversification?


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Horizontal diversification is when your business expands into products or fields that are somewhat unrelated to current business activities.

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What is concentric diversification? 


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Concentric diversification is when your business starts producing products that are similar in the type of technology or expertise it requires to produce them.

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What is conglomerate diversification?  


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 Conglomerate diversification is when your business develops products that are completely unrelated to its current product offering.

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Name an example of horizontal diversification. 


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For example, if you are a company selling fragrances you might expand into selling other products like hair care or body wash. The new products are not directly related, but if customers enjoy your fragrances they could be interested in buying other cosmetic products that use the same fragrances.

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Name an example of conglomerate diversification. 


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A company that sells laundry detergent starts selling jeans (unrelated products).

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What is the Ansoff matrix? 


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By using the Ansoff matrix, businesses can examine various growth strategies and use their analysis for strategic planning.

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What are the four quadrants of the Ansoff matrix?


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Market penetration, market development, product development and diversification.

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What are the defining characteristics of a market development strategy?


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The business trying to sell its existing products in new markets.

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What are the defining characteristics of a diversification strategy?


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The business trying to sell new products in new markets.

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Which of the following statements is correct? 

  1. Diversification can lead to increased profitability. 

  2. It can be quite costly to diversify. 

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Both statements are correct. 

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Name two advantages of diversification. 


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  • Diversification often leads to increased profitability. 

  • Businesses can tap into industries, markets and segments that have not been reached yet. 

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Name two disadvantages of diversification. 


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  • There could be a lack of expertise in one field if the business is operating in multiple industries, which can reduce the business's competitiveness. 
  • Diversification can also be confusing to customers if the business is known for a signature product.

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What is Bowman’s Strategy Clock?

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It is a strategic tool which designs a marketing strategy to analyze a company’s competitive position.

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What does the Bowman’s Strategic Block help by?


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It helps to determine how a product should be positioned to give it the most competitive position in the market.

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How to use the Bowman’s Strategy Clock?


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You should think about the two dimensions: value and price of a product or service. They will help you to arrive at an appropriate position on the clock.

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What are the eight strategies of the Bowman’s Strategy Clock?


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Low price and value added, low price, hybrid, differentiation, focused differentiation, risky high margins, monopoly pricing, loss of market share.

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Give an example of a business using a hybrid strategy.


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Ikea, Wilko.

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Which of these companies use a differentiation strategy?


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Adidas

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