Chapter 6 Strategy Analysis & Choice

Strategic Management: Concepts & Cases

Dr. Ayham Jaaron Date: 23rd March 2011

Ch 6 -1

Chapter Outline
The Nature of Strategy & Choice

A Comprehensive Strategy-Formulation Framework

The Input Stage

Ch 6 -2

Chapter Outline (contd)

The Matching Stage

The Decision Stage

Cultural Aspects of Strategy Choice

Ch 6 -3

Chapter Outline (contd)

The Politics of Strategy Choice

Governance Issues

Ch 6 -4

The nature of Strategy Analysis & Choice

Alternative Strategies Derive From -

Vision Mission Objectives External audit Internal audit Past successful strategies

Ch 6 -5

Comprehensive Strategy-Formulation Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Ch 6 -6

Strategy-Formulation Analytical Framework

Internal Factor Evaluation Matrix (IFE)

Stage 1: The Input Stage

External Factor Evaluation Matrix (EFE)

Competitive Profile Matrix (CPM)

Ch 6 -7

Stage 1: The Input Stage

It is a basic input of information for the matching & decision stage matrices
It requires strategists to quantify subjectivity early in the process Good intuitive judgment always needed

Ch 6 -8

Strategy-Formulation Analytical Framework

It consists of five techniques that can be used in any sequence:

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

Ch 6 -9

Stage 2: The Matching Stage

Match between organizations internal resources & skills and the opportunities & risks created by its external factors Matching external and internal critical success factors is the key to effectively generating feasible alternative strategies.

Ch 6 -10

Stage 2: The Matching Stage SWOT Matrix

Strengths
Weaknesses Opportunities Threats

Ch 6 -11

SWOT Matrix Four Types of Strategies

Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO) Strengths-Threats (ST) Weaknesses-Threats (WT)

Ch 6 -12

SO Strategies

Strengths Weaknesses Opportunities Threats SWOT

SO Strategies

Use a firms internal strengths to take advantage of external opportunities

Ch 6 -13

WO Strategies

Strengths Weaknesses Opportunities Threats SWOT

WO Strategies

Improving internal weaknesses by taking advantage of external opportunities

Ch 6 -14

ST Strategies

Strengths Weaknesses Opportunities Threats SWOT

ST Strategies

Use a firms strengths to avoid or reduce the impact of external threats

Ch 6 -15

WT Strategies
Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats

Strengths Weaknesses Opportunities Threats SWOT

WT Strategies

Ch 6 -16

SWOT Matrix
Developing the SWOT
List firms key internal
Strengths

List firms key internal

List firms key external List firms key external

Weaknesses
Opportunities Threats

Ch 6 -17

SWOT Matrix
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

ST Strategies
Use strengths to avoid threats

WT Strategies
Minimize weaknesses and avoid threats

Ch 6 -18

Example: SWOT Matrix

Ch 6 -19

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 capital (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 -20

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

Ch 6 -21

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

Ch 6 -22

SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive: focus on internal strengths

Conservative: use basic competencies and not to

take threats.

Defensive: rectify internal weaknesses.

Competitive: use competitive strategies such as
backward, forward and horizontal integration.
Ch 6 -23

SPACE Matrix Two Internal Dimensions

Financial Strength (FS)
Competitive Advantage (CA)

Ch 6 -24

SPACE Matrix Two External Dimensions

Environmental Stability (ES)
Industry Strength (IS)

Ch 6 -25

SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS)

Return on investment Leverage Liquidity Working capital Cash flow

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

Ch 6 -26

SPACE Factors
Internal Strategic Position External Strategic Position

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

Industry Strength (IS)

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

Ch 6 -27

Steps to Developing a SPACE Matrix

Select a set of variables to define FS, CA, ES, & IS Assign a numerical value:
1. 2.

1.

2.

From +1 to +6 to each FS & IS dimension From -1 to -6 to each ES & CA dimension

3.

Compute an average score for each FS, CA, ES, & IS

Ch 6 -28

Steps to Developing a SPACE Matrix

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 -29

1.

2.

3.

SPACE Matrix Example....

Ch 6 -30

SPACE Matrix
Conservative FS
+6 +5 +4 +3 +2

Aggressive

+1

CA
-6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6

IS
-2
-3 -4

Defensive

-5
-6

Competitive
ES
Ch 6 -31

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

Ch 6 -32

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

Ch 6 -33

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

Ch 6 -34

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 -35

BCG Matrix Question Marks

Low relative market share they compete in high-growth industry
Cash needs are high
Cash generation is low

Decision whether to strengthen (intensive strategies) or divest.

Ch 6 -36

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.

Ch 6 -37

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

Ch 6 -38

BCG Matrix Dogs

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

Liquidation, divestiture, retrenchment

Ch 6 -39

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

Ch 6 -40

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

Ch 6 -41

Ch 6 -42

IE Matrix

Based on two key dimensions

The IFE total weighted scores on the x-axis The EFE total weighted scores on the y-axis Grow and build Cells I, II, or IV Hold and maintain Cells III, V, or VII Harvest or divest Cells VI, VIII, or IX

Divided into three major regions

Ch 6 -43

Ch 6 -44

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

Ch 6 -45

Grand Strategy Matrix

Tool for formulating alternative strategies

Based on two dimensions

Competitive position Market growth

Ch 6 -46

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 III Quadrant IV Retrenchment 1. Concentric diversification Concentric diversification 2. Horizontal diversification Horizontal diversification 3. Conglomerate diversification Conglomerate diversification 4. Joint ventures Liquidation SLOW MARKET GROWTH

STRONG COMPETITIVE POSITION

Ch 6 -47

Grand Strategy Matrix

Quadrant I

Excellent strategic position

Concentration on current markets/products Take risks aggressively when necessary

Ch 6 -48

Grand Strategy Matrix

Quadrant II

Evaluate present approach

How to improve competitiveness Rapid market growth requires intensive strategy

Ch 6 -49

Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries

Weak competitive position Drastic changes quickly

Cost & asset reduction (retrenchment)

Ch 6 -50

Grand Strategy Matrix

Quadrant IV

Strong competitive position

Slow-growth industry Diversification to more promising growth areas

Ch 6 -51

Strategy-Formulation Analytical Framework

Stage 3: The Decision Stage

Quantitative Strategic Planning Matrix (QSPM)

Ch 6 -52

QSPM
Quantitative Strategic Planning Matrix

Technique designed to determine the relative attractiveness of feasible alternative actions

Ch 6 -53

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 Weight

Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3

Ch 6 -54

Steps to Develop a QSPM

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
Ch 6 -55

1.

2.

3.

Steps to Develop a QSPM

Determine the Attractiveness Scores (1=not attractive, 2= somewhat attractive, 3= reasonably attractive, highly attractive). Compare the Total Attractiveness Scores Compute the Sum Total Attractiveness Score

4.

5.
6.

Ch 6 -56

Ch 6 -57

QSPM
Limitations

Requires intuitive judgments & educated assumptions

Only as good as the prerequisite inputs

Ch 6 -58

QSPM
Advantages

Sets of strategies considered simultaneously or sequentially

Integration of pertinent external & internal factors in the decision making process

Ch 6 -59

Cultural Aspects of Strategy Choice

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

Ch 6 -60

Politics of Strategy Choice

Politics in Organizations
Management hierarchy of command Career aspirations of different people

Allocation of scarce resources

These factors guarantees the formation of coalitions of individuals who strive to take care of themselves first, and the organization second, third or fourth. Successful strategists rely heavily on informal questioning of individuals, and sought to clarify issues until a consensus emerged.
Ch 6 -61

Politics of Strategy Choice

Political Tactics for Strategists
Because strategies must be effective in the marketplace and capable of gaining internal commitment, the following tactics are used to aid strategists:

Equifinality/ last preparations. (generate new alternatives that give similar results). Satisfying: satisfactory results with acceptable strategy is better than failure.

Generalization: leave specific issues and talk about future benefits.

Higher-order issues: focus on issues of survival.

Political access on important issues

Ch 6 -62

Governance Issues
Board of Directors Roles & Responsibilities are
Control & oversight over management

Adherence to legal prescriptions

Consideration of stakeholder interests

Advancement of stockholder rights

Ch 6 -63

Corporate Governance Issues

Business Weeks Principles of Good Governance

1. No more than 2 directors are current or former company executives 2. No directors do business with the company 3. Audit, compensation, and nominating committees made up of outside directors 4. Each director owns a large equity stake in the company 5. At least one outside director with extensive experience 6. Fully employed directors sit on no more than 4 boards Retirees on no more than 7 7. Each director attends at lest 75% of all meetings

Ch 6 -64