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Chapter 6 Strategy Analysis & Choice

Strategic Management: Concepts & Cases 12th Edition Fred David

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Ch 6 -1

Chapter Outline
The Nature of Strategy & Choice

A Comprehensive Strategy-Formulation Framework

The Input Stage

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Ch 6 -2

Chapter Outline (cont’d)
The Matching Stage

The Decision Stage

Cultural Aspects of Strategy Choice

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Ch 6 -3

Inc.Chapter Outline (cont’d) The Politics of Strategy Choice Governance Issues Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -4 .

fix it – make it better.” – Bill Saporito “Life is full of lousy options.X.” – General P. Kelley Copyright © 2009 Pearson Education. Inc.Strategy Analysis & Choice “Whether it’s broke or not. Publishing as Prentice Hall Ch 6 -5 . Not just products. but the whole company if necessary.

Publishing as Prentice Hall Ch 6 -6 . Inc.Strategy Analysis & Choice Nature of Strategy Analysis & Choice – Establishing long-term objectives – Generating alternative strategies – Selecting strategies to pursue – Best alternative – achieve mission & objectives Copyright © 2009 Pearson Education.

Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -7 . Inc.

Strategy Analysis & Choice Alternative Strategies Derive From –       Vision Mission Objectives External audit Internal audit Past successful strategies Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -8 . Inc.

Natural Environment Perspective What Is a Sustainability Report?     Sustainability (corporate social-responsibility) reports disclose policies to shareholders Global Reporting Initiative has issued a set of detailed reporting guidelines Wal-Mart and Kohl’s installing solar panels Home Depot doubled offerings of environmentally friendly products Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -9 .

Inc.Strategy Analysis & Choice Generating Alternatives – Participation in generating alternative strategies should be as broad as possible Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -10 .

Publishing as Prentice Hall Ch 6 -11 .Copyright © 2009 Pearson Education. Inc.

Comprehensive Strategy-Formulation Framework Stage 1: The Input Stage Stage 2: The Matching Stage Stage 3: The Decision Stage Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -12 .

Inc.Strategy-Formulation Analytical Framework Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage External Factor Evaluation Matrix (EFE) Competitive Profile Matrix (CPM) Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -13 .

Inc. Publishing as Prentice Hall Ch 6 -14 .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 Copyright © 2009 Pearson Education.

Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -15 .

Publishing as Prentice Hall Ch 6 -16 . Inc.Stage 2: The Matching Stage Match between organization’s internal resources & skills and the opportunities & risks created by its external factors Copyright © 2009 Pearson Education.

Stage 2: The Matching Stage SWOT Matrix Strengths Weaknesses Opportunities Threats Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -17 .

Inc.SWOT Matrix Four Types of Strategies Strengths-Opportunities (SO) Weaknesses-Opportunities (WO) Strengths-Threats (ST) Weaknesses-Threats (WT) Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -18 .

SO Strategies Strengths Weaknesses Opportunities Threats SWOT SO Strategies Use a firm’s internal strengths to take advantage of external opportunities Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -19 .

WO Strategies Strengths Weaknesses Opportunities Threats SWOT WO Strategies Improving internal weaknesses by taking advantage of external opportunities Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -20 .

ST Strategies Strengths Weaknesses Opportunities Threats SWOT ST Strategies Use a firm’s strengths to avoid or reduce the impact of external threats Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -21 .

WT Strategies Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats Strengths Weaknesses Opportunities Threats SWOT WT Strategies Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -22 . Inc.

SWOT Matrix Developing the SWOT List firm’s key internal List firm’s key internal List firm’s key external List firm’s key external Strengths Weaknesses Opportunities Threats Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -23 . Inc.

Publishing as Prentice Hall Ch 6 -24 .SWOT Matrix Strengths – S List Strengths Weaknesses – W List Weaknesses Opportunities – O List Opportunities 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 Copyright © 2009 Pearson Education. Inc.

2. Average Customer Purchase up $97 to $128. 5. 2. Customer checkout process too slow. 8. 7. Revenue from repair/service in-store up 16%. 9. 5. Desire for Websites up 18% by realtors. Small business growth in areas up 10%. increases in sales. Store has no Web site. Local University offers computer repair. Send flyer to all seniors over age 55(S5. 1. (S4. 3. Add 4 new in-store promotions monthly. Desire for Web sites up 12% by small firms. Inc. Hire 2 new cashiers(W8. Pearson Education.W4.T5) WT Strategies.T4) 2. 2. Copyright © prices 2009 8%. Raise out-of-store service calls from $60 to $80. In-store technical support persons have MIS degrees.W4. 3.T1). Software revenues in store down 12%. 6. T1). Publishing as Prentice Hall . Up Web site services by 50%.4 days.(W3. 7.03).(S6.T1. Add 2 new repair/service persons(S6. T3). Purchase land to built new store(S8.O5). Purchase land to built new store(W2. Vehicle traffic passing store up 12%. Weaknesses 1. Vendors raising 3. 6. 1. 5. 4. 3. New mall being built nearby. Total store revenues down 8%.O1) .7. Install new carpet/ paint. Carpet and paint in store in disrepair. Revenue per employee up 19%. S7. In store promotion = 20% .Strengths 1.(W6.(W3. 8. 1. Opportunity SO Strategies WO Strategies 1. ST Strategies Hire two more repair persons and market these new services.O8) Launch mailout to all realtors in city (W5. 6. New Bypass Hwy 34 in 1 yr will divert traffic. Newspaper advertising expenditures down 10%. 2. 3.O7. Population of city growing 10%. 4. 3. 3.O2) Install new carpet/paint/bath. 4. Gas Prices up 14%. 7. Inventory Turnover up 5. Supplier on-time-delivery up to 2. Rival Company store opening 1 mile away.O7). 2. 4. 2.(S6. Senior citizen use of computers up to 8%. O5). 2. Store’s debt-to-total assets ratio down 34%. Bathroom in store needs refurbishing. 4. Treats 1. 8. Vendors average six new products/yr. 6. Location of store hurt by new Hwy 34. Best Buy opening new store in 1 year nearby. 1. Employee morale is excellent.8 to 6. 5.

Inc.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 Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -26 .

Publishing as Prentice Hall Ch 6 -27 . Inc.Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2009 Pearson Education.

Publishing as Prentice Hall Ch 6 -28 .SPACE Matrix Strategic Position & Action Evaluation Matrix Aggressive Conservative Defensive Competitive Copyright © 2009 Pearson Education. Inc.

Inc. Publishing as Prentice Hall Ch 6 -29 .SPACE Matrix Two Internal Dimensions Financial Strength (FS) Competitive Advantage (CA) Copyright © 2009 Pearson Education.

Publishing as Prentice Hall Ch 6 -30 . Inc.SPACE Matrix Two External Dimensions Environmental Stability (ES) Industry Strength (IS) Copyright © 2009 Pearson Education.

SPACE Factors Internal Strategic Position External Strategic Position Financial Strength (FS) Return on investment Leverage Liquidity Working capital Cash flow Inventory turnover Earnings per share Price earnings ratio 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 -31 Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall .

SPACE Factors Internal Strategic Position External Strategic Position Competitive Advantage (CA) Market share Product quality Product life cycle Customer loyalty Competition’s capacity utilization 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. Inc. Publishing as Prentice Hall Ch 6 -32 . capacity utilization Copyright © 2009 Pearson Education.

2. Copyright © 2009 Pearson Education. Compute an average score for each FS. CA. Assign a numerical value: 1. and IS. Inc. CA. ES. 2. ES. 1. and IS.Steps to Developing a SPACE Matrix Select a set of variables to define FS. From +1 to +6 to each FS & IS dimension From -1 to -6 to each ES & CA dimension 3. Publishing as Prentice Hall Ch 6 -33 .

3.25 = -2. The bank’s revenues increased 7% to $3. 2. 2. Kentucky. Pennsylvania's interstate banking law allows the bank to acquire other banks in the New Jersey. 2. 4.0 1.08 ( The Bank should pursue a Competitive .0 10 -4. Total Industry Position (IP) 1. Banking deregulation has created instability throughout the industry. Ohio.0 9. The bank’s net income was $183 Million.0 FP Average is 9.Financial Position (FP) Ratings 1. The bank’s return on asset is negative 0.33 Publishing as Prentice Hall Y-Axis: -4. and gas industries. Deregulation increases competition in the banking sector.23%.0 SP Average is -13. Total Conclusion 4.0 4. 2.46Billion. Total Stability Position (SP) 1. Deregulation provides geographic and product freedom.0 -9. Less-developed countries are experiencing high inflation and political insatiability.70.0 -2. These industries are depressed.0/3 = -4. Total Competitive Position (CP) 1. down 9% from a year earlier.33 =0.0 3.0 4.0 -5. The bank’s primary capital ratio is 7. 3.0 2. 4.0 -13. oil. international banks and nonbanks are becoming increasingly competitive.23% points over the generally required ratio of 6%. 3.0 + 3. 3.0/3 = -3. The bank provides data processing services for more than 450 institutions in 38 states.25 Copyright © 2009 Pearson Education.0/4 = 2. Directional vector coordinates: X-axis: -3.33 + 2.33 CP Average is -9. and West Virginia.0 1. Inc.77. compared to a bank industry average ratio of positive 0. The bank has a large customer base.33 IP Average is 10/3= 3. which is 1.0 -4. the District of Columbia.0 -5. Superregional banks.0 -2. the bank historically has been heavily dependent on the steel. Headquartered in Pittsburgh.

Add the two scores on the y-axis and plot the point. Plot the intersection of the new xy point. Add the two scores on the x-axis and plot the point. Ch 6 -35 4. Inc.Steps to Developing a SPACE Matrix Plot the average score on the appropriate axis. 6. Publishing as Prentice Hall . Copyright © 2009 Pearson Education. 5. Draw a directional vector from the origin through the new intersection point.

Publishing as Prentice Hall Ch 6 -36 .Copyright © 2009 Pearson Education. Inc.

Inc.Copyright © 2009 Pearson Education. Publishing as Prentice Hall .

Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -38 . Inc.

Inc. Publishing as Prentice Hall Ch 6 -39 .BCG Matrix Boston Consulting Group Matrix Enhances multidivisional firm in formulating strategies Autonomous divisions = business portfolio Divisions may compete in different industries Focus on market-share position & industry growth rate Copyright © 2009 Pearson Education.

BCG Matrix Relative Market Share Position Ratio of a division’s own market share in an industry to the market share held by the largest rival firm in that industry Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -40 . Inc.

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Ch 6 -41

BCG Matrix
Question Marks
Low relative market share, competes in highgrowth industry
Cash needs are high

Case generation is low

Decision to strengthen (intensive strategies) or divest

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Ch 6 -42

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

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Ch 6 -43

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. Inc. concentric diversification If weakens – retrenchment or divestiture Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -44 .

divestiture.BCG Matrix Dogs Low relative market share. Publishing as Prentice Hall Ch 6 -45 . Inc. competes in slow or no market growth Weak internal & external position Liquidation. retrenchment Copyright © 2009 Pearson Education.

Inc. Publishing as Prentice Hall Ch 6 -46 .Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2009 Pearson Education.

Inc. Publishing as Prentice Hall Ch 6 -47 .The Internal-External Matrix   Positions an organization’s 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 Copyright © 2009 Pearson Education.

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Inc. VIII.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. or IV Hold and maintain – Cells III. II. or VII Harvest or divest – Cells VI. Publishing as Prentice Hall Ch 6 -49 . or IX  Divided into three major regions    Copyright © 2009 Pearson Education. V.

Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -50 .

Publishing as Prentice Hall Ch 6 -51 .Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2009 Pearson Education. Inc.

Publishing as Prentice Hall Ch 6 -52 . Inc.Grand Strategy Matrix  Tool for formulating alternative strategies  Based on two dimensions  Competitive position  Market growth Copyright © 2009 Pearson Education.

6. 2. Inc. 2. Publishing as Prentice Hall Ch 6 -53 . 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. WEAK COMPETITIVE POSITION 1. 6. 5.RAPID MARKET GROWTH 1. 2. 4. 4. 3. 7. Liquidation SLOW MARKET STRONG COMPETITIVE POSITION Copyright © 2009 Pearson Education. Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation 1. Conglomerate diversification 4. Horizontal diversification 3. 3. 4. 5. 3. Concentric diversification 2.

Grand Strategy Matrix Quadrant I Excellent strategic position Concentration on current markets/products Take risks aggressively when necessary Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -54 .

Inc.Grand Strategy Matrix Quadrant II Evaluate present approach How to improve competitiveness Rapid market growth requires intensive strategy Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -55 .

Grand Strategy Matrix Quadrant III Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost & asset reduction (retrenchment) Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -56 . Inc.

Inc. Publishing as Prentice Hall Ch 6 -57 .Grand Strategy Matrix Quadrant IV Strong competitive position Slow-growth industry Diversification to more promising growth areas Copyright © 2009 Pearson Education.

Inc.Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Quantitative Strategic Planning Matrix (QSPM) Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -58 .

Publishing as Prentice Hall Ch 6 -59 .QSPM Quantitative Strategic Planning Matrix Technique designed to determine the relative attractiveness of feasible alternative actions Copyright © 2009 Pearson Education. Inc.

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 © 2009 Pearson Education. Inc. Publishing as Prentice Hall Strategic Alternatives Weight Strategy 1 Strategy 2 Strategy 3 Ch 6 -60 .

Inc. 2. Assign weights to each key external and internal factor. Ch 6 -61 1.Steps to Develop a QSPM Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column. Publishing as Prentice Hall . 3. Examine the Stage 2 (matching) matrices. Copyright © 2009 Pearson Education. and identify alternative strategies that the organization should consider implementing.

Steps to Develop a QSPM Determine the Attractiveness Scores. Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -62 . 6. Inc. Compare the Total Attractiveness Scores. Compute the Sum Total Attractiveness Score. 5. 4.

Publishing as Prentice Hall Ch 6 -63 . Inc.QSPM Limitations Requires intuitive judgments & educated assumptions Only as good as the prerequisite inputs Copyright © 2009 Pearson Education.

Publishing as Prentice Hall Ch 6 -64 .QSPM Advantages Sets of strategies considered simultaneously or sequentially Integration of pertinent external & internal factors in the decision-making process Copyright © 2009 Pearson Education. Inc.

Cultural Aspects of Strategy Choice Organization Culture Successful strategies depend on the degree of consistency with the firm’s culture Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -65 .

Politics of Strategy Choice Politics in Organizations Management hierarchy Career aspirations Allocation of scarce resources Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -66 . Inc.

Politics of Strategy Choice Political Tactics for Strategists Equifinality Satisfying Generalization Higher-order issues Political access on important issues Copyright © 2009 Pearson Education. Inc. Publishing as Prentice Hall Ch 6 -67 .

Governance Issues Board of Directors Roles & Responsibilities Control & oversight over management Adherence to legal prescriptions Consideration of stakeholder interests Advancement of stockholder rights Copyright © 2009 Pearson Education. Publishing as Prentice Hall Ch 6 -68 . Inc.

Publishing as Prentice Hall Ch 6 -69 . large markets and affluent markets attract new businesses Taxes can be used to reward or penalize companies for locating locally or moving overseas Copyright © 2009 Pearson Education. Inc.Global Perspective Corporate Tax Rates Worldwide – Europe is Lowest     Lowest corporate tax rates reside in Europe and European countries Average tax rate in EU countries is 26% Besides tax rates.

Each director owns a large equity stake in the company 5. and nominating committees made up of outside directors 4. Fully employed directors sit on no more than 4 boards. No more than 2 directors are current or former company executives 2. Each director attends at least 75% of all meetings Copyright © 2009 Pearson Education. Inc. compensation. At least one outside director with extensive experience 6. retirees on no more than 7 7. Publishing as Prentice Hall Ch 6 -70 . Audit.Corporate Governance Issues BusinessWeek’s “Principles of Good Governance” 1. No directors do business with the company 3.

Audit committee meets at least four times a year 10. Shareholders have considerable power and information to choose & replace directors 13. and prompt to act when trouble arises 11. Publishing as Prentice Hall Ch 6 -71 . diligent in CEO succession. Stock options are considered a corporate expense 14. Inc. Board is frugal on executive pay.Corporate Governance Issues Business Week’s “principles of good governance” 8. Board meets regularly without management present 9. CEO is not also the chairperson of the board 12. No interlocking directorships Copyright © 2009 Pearson Education.

For Review (Chapter 6) Key Terms & Concepts Aggressive Quadrant Attractiveness Scores (AS) Board of Directors Boston Consulting Group (BCG) Matrix Copyright © 2009 Pearson Education. Publishing as Prentice Hall Business Portfolio Cash Cows Competitive Advantage (CA) Competitive Quadrant Ch 6 -72 . Inc.

For Review (Chapter 6) Key Terms & Concepts Conservative Quadrant Dogs Environmental Stability (ES) Financial Strength (FS) Governance Ch 6 -73 Culture Defensive Quadrant Directional Vector Copyright © 2009 Pearson Education. Publishing as Prentice Hall . Inc.

Inc. Publishing as Prentice Hall .For Review (Chapter 6) Key Terms & Concepts Grand Strategy Matrix Internal-External (IE) Matrix Halo Error Industry Strength (IS) Input Stage Matching Matching Stage Quantitative Strategic Planning Matrix (QSPM) Ch 6 -74 Copyright © 2009 Pearson Education.

For Review (Chapter 6) Key Terms & Concepts Question Marks Relative Market Share Position SO Strategies Stars Strategic Position & Action Evaluation (SPACE) Sum Total Attractiveness Score (STAS) Sustainability Ch 6 -75 ST Strategies Copyright © 2009 Pearson Education. Publishing as Prentice Hall . Inc.

Weaknesses. Publishing as Prentice Hall Ch 6 -76 . Opportunities.For Review (Chapter 6) Key Terms & Concepts Strengths. Threats (SWOT) WO Strategies Total Attractiveness Scores (TAS) WT Strategies Copyright © 2009 Pearson Education. Inc.

mechanical.All rights reserved. photocopying. without the prior written permission of the publisher. recording. No part of this publication may be reproduced. or otherwise. stored in a retrieval system. Copyright © 2009 Pearson Education. or transmitted. Inc. in any form or by any means. Publishing as Prentice Hall Ch 6 -77 . electronic. Printed in the United States of America.