Chapter 6 Strategy Analysis & Choice

Strategic Management: Concepts & Cases 11th Strategic Management: Edition Fred David
Concepts & Cases PowerPoint Slides by 11th Edition Anthony F. Chelte Fred Western New David England College

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Ch 6 -1

Strategy Analysis & Choice

Nature of Strategy Analysis & Choice -- Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives

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Ch 6 -2

Strategy Analysis & Choice

Alternative Strategies Derive From -

Vision Mission Objectives External audit Internal audit Past successful strategies

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Ch 6 -3

Comprehensive Strategy-Formulation Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

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Ch 6 -4

Strategy-Formulation Analytical Framework

Internal Factor Evaluation Matrix (IFE)

Stage 1: The Input Stage

External Factor Evaluation Matrix (EFE)

Information derived from the three matrices we learnt in Chapters 3 and 4 provides basic information for the matching and decision stages later.

Competitive Profile Matrix (CPM)

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Ch 6 -5

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix Match between organizations internal resources & skills and the opportunities & risks created by its external factors

Grand Strategy Matrix

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Ch 6 -6

SWOT Matrix results in four strategies (SO, WO, ST & WT)

Strengths S Leave Blank Opportunities O
List Opportunities List Strengths

Weaknesses W
List Weaknesses

SO Strategies
Use strengths to take advantage of opportunities

WO Strategies
Overcoming weaknesses by taking advantage of opportunities

Threats T
List Threats
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ST Strategies
Use strengths to avoid threats

WT Strategies
Minimize weaknesses and avoid threats
Ch 6 -7

Examples of matching Key Factors to Formulate Alternative Strategies Key Internal Factor Key External Factor
20% annual growth in the cell phone industry (opportunity)

Resultant Strategy

Excess working capacity (strength)

Acquire Cellfone, Inc.

Insufficient capacity (weakness)

Exit of two major foreign + competitors from the = industry (opportunity)

Pursue horizontal integration by buying competitor's facilities

Strong R&D (strength)

Decreasing numbers of young adults (threat)

Develop new products for older adults

Poor employee morale (weakness)

Strong union activity (threat)

Develop a new employee benefits package

Ch 6 -8

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Limitations with SWOT Matrix

Provides a static assessment in time Does not show how to achieve a competitive advantage May lead the firm to overemphasize a single internal or external factor in formulating strategies

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Ch 6 -9

SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive Conservative Defensive Competitive

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Ch 6 -10

SPACE Matrix
Two Internal Dimensions
Financial Strength (FS) Competitive Advantage (CA)

Two External Dimensions

Environmental Stability (ES) Industry Strength (IS)
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Ch 6 -11

Examples of SPACE Factors-1

Internal Strategic Position External Strategic Position

Financial Strength (FS)

Return on investment Leverage* Liquidity Working capital Cash flow
* Financial leverage uses debt to supplement investment. Companies take loans or other borrowings and invest them with the intent that the return will be greater than the cost of interest.

Environmental Stability (ES)

Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand
Ease of exit from market Risk involved in business

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Ch 6 -12

Examples of SPACE Factors-2

Internal Strategic Position External Strategic Position

Competitive Advantage CA
Market share Product quality Product life cycle Customer loyalty Technological know-how Control over suppliers & distributors

Industry Strength (IS)

Growth potential Profit potential Financial stability Technological know-how Resource utilization Ease of entry into market Productivity, capacity utilization

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Ch 6 -13

Steps to Developing a SPACE Matrix

1. 2.
a. b.

Select a set of variables to define FS, CA, ES, & IS Assign a numerical value:
From +1 to +6 to each FS & IS dimension From -1 to -6 to each ES & CA dimension

3.

4. 5.

6.

Compute an average score for each FS, CA, ES, & IS Plot the average score on the appropriate axis Add the two scores on the x-axis and plot the point. Add the two scores on the y-axis and plot the point. Plot the intersection of the new xy point Draw a directional vector from the origin through the new intersection point
Ch 6 -14

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This sample SPACE Matrix suggest that the firm is in the AGGRESSIVE quadrant, indicating that as a risk taker, it should aggressively opt for a growth strategy.
Ch 6 -15

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Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

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Ch 6 -16

BCG Matrix

Boston Consulting Group Matrix

Enhances multi-divisional firm in formulating strategies

Autonomous divisions = business portfolio

Divisions may compete in different industries Focus on market-share position & industry growth rate
Based on two dimensions of relative market share & industry sales growth rate

Relative market share is the ratio of a divisions own market share in an industry to the market share held by the largest rival firm in that industry
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Ch 6 -17

BCG Matrix
Relative Market Share Position
High 1.0 High +20 Medium .50 Low 0.0

Industry Sales Growth Rate

Stars II
Medium

Question Marks I

Cash Cows III

Low -20

Dogs IV
Ch 6 -18

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BCG Matrix
High relative market share and high growth rate Best long-run opportunities for growth & profitability

QUESTION MARKS
Low relative market share compete in high-growth industry

Cash needs are high Cash generation is low

Decision to strengthen (intensive strategies) or divest

STARS

Substantial investment to maintain or strengthen dominant position Integration strategies, intensive strategies, joint ventures High relative market share, competes in lowgrowth industry Generate cash in excess of their needs Milked for other purposes Maintain strong position as long as possible

Low relative market share & compete in slow or no market growth

Weak internal & external position

Liquidation, divestiture, retrenchment

CASH COWS

Product development, concentric

diversification

If weakensretrenchment or divestiture

DOGS
Ch 6 -19

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Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

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Ch 6 -20

The Internal-External Matrix

Positions an organizations various divisions in a nine-cell display Similar to BCG Matrix except the IE Matrix: Requires more information about the divisions Strategic implications of each matrix are different

Based on two key dimensions The IFE total weighted scores on the x-axis The EFE total weighted scores on the y-axis Divided into three major regions Grow and build Cells I, II, or IV Hold and maintain Cells III, V, or VII Harvest or divest Cells VI, VIII, or IX

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Ch 6 -21

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Ch 6 -22

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

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Ch 6 -23

RAPID MARKET GROWTH

1. 2.

3.
4. 5. 6.

Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation

1. 2.

3.
4. 5. 6. 7.

WEAK COMPETITIVE POSITION

1. 2. 3. 4. 5.

Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification Quadrant IV Concentric diversification Horizontal diversification Conglomerate diversification Joint ventures GROWTH

Quadrant III Retrenchment 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Liquidation SLOW MARKET

STRONG COMPETITIVE POSITION

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Ch 6 -24

Strategy-Formulation Analytical Framework

Stage 3: The Decision Stage

Quantitative Strategic Planning Matrix (QSPM)

Technique designed to determine the relative attractiveness of feasible alternative actions

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Ch 6 -25

QSPM
Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Copyright 2007 Prentice Hall Weight

Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3

Ch 6 -26

Steps to Develop a QSPM

1.

2. 3.

4. 5.

6.

Make a list of the firms key external opportunities/threats and internal strengths/weaknesses in the left column Assign weights to each key external and internal factor Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing Determine the Attractiveness Scores for each strategy Compare the Total Attractiveness Scores Compute the Sum Total Attractiveness Score

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Ch 6 -27

QSPM
Advantages
Sets of strategies considered simultaneously or sequentially Integration of pertinent (suitable) external & internal factors in the decision making process

Limitations
Requires intuitive judgments & educated assumptions
Only as good as the prerequisite inputs
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Ch 6 -28

Cultural Aspects of Strategy Choice

Organization Culture
Successful strategies depend on the degree of consistency with the firms culture

Strategies that require fewer cultural changes may be more attractive

Culture becomes especially important when mergers takes place

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Ch 6 -29

Politics of Strategy Choice

Politics in organizations results from:
Management hierarchy Career aspirations Allocation of scarce resources

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Ch 6 -30

Politics of Strategy Choice

Politics affects strategies of organizations:

Political biases and personal preferences are embedded in strategy choice decisions
Internal politics affects the choice of strategies Coalitions of individuals often form around key strategic issues that face an enterprise Lack of objectivity encourages more politics in strategy choice
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Ch 6 -31

Politics of Strategy Choice

Political Tactics for Strategists
Satisfying: Achieving satisfactory results with an acceptable strategy Generalization: Shifting focus from specific to general issues Higher-order issues: Shifting focus from short-term to higher-order and long-term issues Political access on important issues: Issues having negative consequences for employees should be communicated properly and enable feedback

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Ch 6 -32

Governance Issues
Governance is the characteristic of ensuring that long-term strategic objectives and plans are established and that the proper management structure is in place to achieve those objectives, while at the same time making sure that the structure functions to maintain the corporations integrity, reputation, and responsibility to its various constituencies. Board of Directors Roles & Responsibilities

Control & oversight over management Adherence to legal prescriptions Consideration of stakeholder interests Advancement of stockholder rights
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Ch 6 -33

SOME IMPORTANT ISSUES IN CORPORATE GOVERNANCE

Boards of directors are held responsible for the performance of firms; outside / independent directors are appointed

Ethics and social responsibility is a significant issue in the corporate world Corporate governance codes are being developed around the world
Ch 6 -34

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