Chapter 6 Strategy Analysis & Choice

Strategy Analysis & Choice

Nature of Strategy Analysis & Choice

-- Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives

Strategy Analysis & Choice

Alternative Strategies Derive From - Vision Mission Objectives External audit Internal audit Past successful strategies

Comprehensive Strategy-Formulation Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Strategy-Formulation Analytical Framework

Internal Factor Evaluation Matrix (IFE)

Stage 1: The Input Stage

Competitive Profile Matrix (CPM)

External Factor Evaluation Matrix (EFE)

Note: EFE and CPM form external and IFE from internal (assessment)

Stage 1: The Input Stage

Basic input information for the matching & decision stage matrices
Requires strategists to quantify subjectivity early in the process Good intuitive judgment always needed

Strategy-Formulation Analytical Framework

SWOT Matrix

Stage 2: The Matching Stage

BCG Matrix

Grand Strategy Matrix

Stage 2: The Matching Stage

Match between organizations internal resources & skills and the opportunities & risks created by its external factors E.g. internal: strong R and D function External changing demographics (population getting older) Strategy: Develop new products for older adults (related to long term objectives financial or strategic)

Stage 2: The Matching Stage: SWOT Matrix

Four Types of Strategies Strengths-Opportunities (SO): Use a firms internal strengths to take advantage of external opportunities Weaknesses-Opportunities (WO): Improving internal weaknesses by taking advantage of external opportunities Strengths-Threats (ST): Use a firms strengths to avoid or reduce the impact of external threats. Weaknesses-Threats (WT): Defensive tactics aimed at reducing internal weaknesses and avoiding external threats

SWOT Matrix
Strengths S

Leave Blank
Opportunities O
List Opportunities

Weaknesses W
List Weaknesses

List Strengths

SO Strategies
Use strengths to take advantage of opportunities

WO Strategies
Overcoming weaknesses by taking advantage of opportunities

Threats T
List Threats

ST Strategies
Use strengths to avoid threats

WT Strategies
Minimize weaknesses and avoid threats

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

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Which types of strategies, e.g. intensive diversification, are referred to above

Strengths: 1. 2. 3. 4. 5. 6. 7.

Weaknesses: Over dependent on borrowings Insufficient cash resources Board of Directors is too narrow Lack of awareness amongst prospective customers Need to relocate to larger premises Absence of strong sales/marketing expertise Overdependence on few key staff Emerging new technologies may move market in new directions Opportunities:

1. 2. 3. 4.
5. 6. 7.

R and D almost complete Basis for strong management team Key first major customer acquired Initial product can evolve into range of offerings Located near a major centre of excellence Very focused management/staff Well-rounded and managed business
Threats:

1. 2. 3. 4. 5. 6.

Major player may enter targeted market segment New technology may make products obsolescent Economic slowdown could reduce demand Euro/Yen may move against $ Market may become price sensitive Market segment's growth could attract major competition

1. 2. 3. 4.

Market segment is poised for rapid growth Export markets offer great potential Distribution channels seeking new products Scope to diversify into related market segments

Key Strategies
1. 2. 3. 4. 5. 6. 7. 8. Accelerate product launches by strengthening R and D team Extend links with key technology centres Raise additional venture capital Expand senior management team in sales/marketing Recruit non-executive directors Strengthen human resources function and introduce share options for staff Appoint advisers for intellectual property and finance Seek new market segments/applications for products

SWOT Matrix
Strengths S Leave Blank List Strengths Weaknesses W List Weaknesses

Opportunities O List Opportunities

SO Strategies Match and determine strategy

WO Strategies Match and determine strategy

Threats T List Threats

ST Strategies Match and determine strategy

WT Strategies Match and determine strategy

Inset key strategies into correct box element of the Matrix

Limitations with SWOT Matrix

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

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

BCG Matrix
Relative Market Share Position
Ratio of a divisions own market share in an industry to the market share held by the largest rival firm in that industry

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
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BCG Matrix
Question Marks
Low relative market share compete in highgrowth industry
Cash needs are high

Case generation is low

Decision to strengthen (intensive strategies) or divest

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

Substantial investment to maintain or strengthen dominant position

Integration strategies, intensive strategies, joint ventures

BCG Matrix
Cash Cows
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

Product development, concentric diversification

If weakensretrenchment or divestiture

BCG Matrix
Dogs
Low relative market share & compete in slow or no market growth
Weak internal & external position

Liquidation, divestiture, retrenchment

Grand Strategy Matrix

Tool for formulating alternative strategies Based on two dimensions

Competitive position
Market growth

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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Grand Strategy Matrix

Quadrant I

Excellent strategic position Concentration on current markets/products Take risks aggressively when necessary Which type of strategy would you suggest?

Grand Strategy Matrix

Quadrant II

Evaluate present approach How to improve competitiveness Rapid market growth requires intensive strategy

Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost & asset reduction (retrenchment)

Grand Strategy Matrix

Quadrant IV

Strong competitive position Slow-growth industry Diversification to more promising growth areas

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

Steps to Develop a QSPM

1. Make a list of the firms key external opportunities/threats and internal strengths/weaknesses in the left column 2. Assign weights to each key external and internal factor 3. Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing 4. Determine the Attractiveness Scores (A.S) 5. Compare the Total Attractiveness Scores 6. Compute the Sum Total Attractiveness Score

QSPM : information from IFE and EFE

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 Sum total A.S. Weight

Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3

AS 1 to 4 and blank if factor does not effect strategy: TAS = Weight x AS

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QSPM
Limitations
Requires intuitive judgments & educated assumptions

Only as good as the prerequisite inputs

Advantages
Sets of strategies considered simultaneously or sequentially Integration of pertinent external & internal factors in the decision making process
Example of a QSPM for Dell

Questions
Discuss 3 techniques that can be used by organisations to choose alternative paths to achieve their long term objectives. Discuss how to choose the best of a set of alternative strategies.