Chapter 6

Strategy Analysis & Choice

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: Stage 3:
The Matching Stage The Decision Stage
Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)

Stage 1: Competitive Profile Matrix

The Input Stage (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

SPACE Matrix

Stage 2:
The Matching Stage
BCG Matrix

Grand Strategy Matrix

Stage 2: The Matching Stage

Match between organization’s 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 firm’s 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 firm’s 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 Weaknesses –
W
Leave Blank
List Strengths
List Weaknesses
Opportunities – SO Strategies WO Strategies
O
Use strengths to take Overcoming
advantage of weaknesses by taking
List Opportunities opportunities advantage of
opportunities

Threats – T ST Strategies WT Strategies

Use strengths to avoid Minimize weaknesses

List Threats threats and avoid threats
 Matching Key Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in

Excess working capacity
+ the cell phone industry = Acquire Cellfone, Inc.
(strength)
(opportunity)

Exit of two major foreign Pursue horizontal integration

Insufficient capacity
+ competitors from the = by buying competitor's
(weakness)
industry (opportunity) facilities

Decreasing numbers of Develop new products for

Strong R&D (strength) + =
young adults (threat) older adults

Develop a new
Poor employee morale Strong union
+ = employee benefits
(weakness) activity (threat) package

Which types of strategies, e.g. intensive diversification…, are referred to above 10

 Strengths: Weaknesses:

1. Over dependent on borrowings -

1. R and D almost complete
Insufficient cash resources
2. Basis for strong management team
2. Board of Directors is too narrow
3. Key first major customer acquired
3. Lack of awareness amongst
4. Initial product can evolve into range
prospective customers
of offerings
4. Need to relocate to larger premises
5. Located near a major centre of
5. Absence of strong sales/marketing
excellence
expertise
6. Very focused management/staff
6. Overdependence on few key staff
7. Well-rounded and managed
7. Emerging new technologies may
business
move market in new directions
Threats: Opportunities:

1. Major player may enter targeted

market segment
1. Market segment is poised for rapid
2. New technology may make products
growth
obsolescent
2. Export markets offer great potential
3. Economic slowdown could reduce
3. Distribution channels seeking new
demand
products
4. Euro/Yen may move against $
4. Scope to diversify into related
5. Market may become price sensitive
market segments
6. Market segment's growth could
attract major competition
 Key Strategies
1. Accelerate product launches by strengthening R and D
team
2. Extend links with key technology centres
3. Raise additional venture capital
4. Expand senior management team in sales/marketing
5. Recruit non-executive directors
6. Strengthen human resources function and introduce
share options for staff
7. Appoint advisers for intellectual property and finance
8. Seek new market segments/applications for products
 SWOT Matrix
Strengths – S Weaknesses – W

Leave Blank List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Match and determine
List Opportunities strategy Match and determine
strategy

Threats – T ST Strategies WT Strategies

Match and determine Match and determine
List Threats strategy 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
SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive
Conservative
Defensive
Competitive

Copyright 2007 Prentice Ch 6 -15

Hall
SPACE Matrix

Two Internal Dimensions

Financial Strength (FS)

Competitive Advantage (CA)

Ch 6 -16
SPACE Matrix

Two External Dimensions

Environmental Stability (ES)

Industry Strength (IS)

Ch 6 -17
 SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Technological changes
Return on investment
Rate of inflation
Leverage
Demand variability
Liquidity
Price range of competing products
Working capital
Barriers to entry
Cash flow
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business

Ch 6 -18
 SPACE Factors
Internal Strategic Position External Strategic Position

Competitive Advantage CA Industry Strength (IS)

Market share Growth potential

Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Technological know-how
Competition’s capacity utilization Resource utilization
Technological know-how Ease of entry into market
Control over suppliers & distributors Productivity, capacity utilization

Ch 6 -19
Space Matrix

20
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 division’s 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 Medium Low
1.0 .50 0.0

High
+20
Industry Sales Growth Rate

Stars Question Marks

II I
Medium
0

Cash Cows Dogs

III IV
Low
-20
23
BCG Matrix

Question Marks
Low relative market share – compete in high-
growth 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 low-
growth industry
Generate cash in excess of their needs
Milked for other purposes

Maintain strong position as long as possible

Product development, concentric diversification
If weakens—retrenchment or divestiture
BCG Matrix

Dogs

Low relative market share & compete in slow or

no market growth
Weak internal & external position

Liquidation, divestiture, retrenchment

IE Matrix
 Construct The IE Matrix
Division Sales Percent Profits Percent IFE EFE
Sales Profits

1 100 25 10 50 3.6 3.2

2 200 50 5 25 2.1 3.5

3 50 12.5 4 20 3.1 2.1

4 50 12.5 1 5 1.8 2.5

Total 400 100 20 100

Strategy-Formulation Analytical
Framework

Quantitative Strategic
Stage 3:
Planning Matrix
The Decision Stage
(QSPM)

Technique designed to determine the relative

attractiveness of feasible alternative actions
 Steps to Develop a QSPM
1. Make a list of the firm’s 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
Strategic Alternatives
EFE
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
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.
34
AS 1 to 4 and blank if factor does not effect strategy: TAS = Weight x AS
QSPM-Specimen
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