Chapter 6 Strategy Analysis And Choice

Strategy Analysis & Choice Strategic analysis and choice largely involves making subjective decisions based on objective information.

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

Strategy Analysis & Choice Alternative strategies derive from – Vision Mission Objectives External audit Internal audit Past successful strategies

Strategy Analysis & Choice Participation in generating alternative strategies should be broad –

Strategy-Formulation Analytical Framework Stage 1: The Input Stage Stage 2: The Matching Stage Stage 3: The Decision Stage

Formulation Framework Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage External Factor Evaluation Matrix (EFE) Competitive Profile Matrix

Input Stage Provides basic input information for the matching and decision stage matrices Requires strategists to quantify subjectivity early in the process Good intuitive judgment always needed

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix

Matching Stage Match between organization’s internal resources and skills and the opportunities and risks created by its external factors.

Matching Key Factors to Formulate Alternative Strategies Key Internal Factor Key External Factor Resultant Strategy Develop a new employee benefits package = Strong union activity (threat) + Poor employee morale (weakness) Develop new products for older adults Decreasing numbers of young adults (threat) Strong R&D (strength) Pursue horizontal integration by buying competitor's facilities Exit of two major foreign competitors form the industry (opportunity) Insufficient capacity (weakness) Acquire Cellfone, Inc. 20% annual growth in the cell phone industry (opportunity) Excess working capacity (strength)

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix

Matching Stage TOWS Matrix Threats Opportunities Strengths Weaknesses

TOWS Matrix Develop four types of strategies Strengths-Opportunities (SO) Weaknesses-Opportunities (WO) Strengths-Threats (ST) Weaknesses-Threats (WT)

SO Strategies Threats Opportunities Weaknesses Strengths (TOWS) Use a firm’s internal strengths to take advantage of external opportunities

WO Strategies Threats Opportunities Weaknesses Strengths (TOWS) Improving internal weaknesses by taking advantage of external opportunities

ST Strategies Threats Opportunities Weaknesses Strengths (TOWS) Using firm’s strengths to avoid or reduce the impact of external threats.

WT Strategies Threats Opportunities Weaknesses Strengths (TOWS) Defensive tactics aimed at reducing internal weaknesses and avoiding environmental threats.

TOWS Matrix Steps in developing the TOWS Matrix List the firm’s key external opportunities List the firm’s key external threats List the firm’s key internal strengths List the firm’s key internal weaknesses

TOWS Matrix Developing the TOWS Matrix Match internal strengths with external opportunities and record the resultant SO Strategies Match internal weaknesses with external opportunities and record the resultant WO Strategies Match internal strengths with external threats and record the resultant ST Strategies Match internal weaknesses with external threats and record the resultant WT Strategies

TOWS Matrix WT Strategies ST Strategies Threats-T WO Strategies Minimize weaknesses and avoid threats ST Strategies Use strengths to avoid threats Threats-T List Threats WO Strategies Overcome weaknesses by taking advantage of opportunities SO Strategies Use strengths to take advantage of opportunities Opportunities-O List Opportunities Weaknesses-W List Weaknesses Strengths-S List Strengths Leave Blank

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix

SPACE Matrix Strategic Position and Action Evaluation Matrix Four quadrant framework Determines appropriate strategies Aggressive Conservative Defensive Competitive

SPACE Matrix Two Internal Dimensions Two External Dimensions Financial Strength [FS] Competitive Advantage [CA] Two External Dimensions Environmental Stability [ES] Industry Strength [IS]

SPACE Matrix Overall Strategic position determined by: Financial Strength [FS] Competitive Advantage [CA] Environmental Stability [ES] Industry Strength [IS]

SPACE Matrix Developing the SPACE Matrix: EFE Matrix IFE Matrix Financial Strength Competitive Advantage Environmental Stability Industry Strength

SPACE Matrix Select variables to define FS, CA, ES, & IS Assign numerical ranking from +1 (worst) to +6 (best) for FS and IS; Assign numerical ranking from –1 (best) to –6 (worst) for ES and CA. Compute average score for FS, CA, ES, & IS

SPACE Matrix Plot the average scores on the Matrix Add the two scores on the x-axis and plot point on X. Add the scores on the y-axis and plot Y. Plot the intersection of the new xy point. Draw a directional vector from origin through the new intersection point.

External Strategic Position Internal Strategic Position SPACE Factors Environmental Stability (ES) Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand Financial Strength (FS) Return on investment Leverage Liquidity Working capital Cash flow Ease of exit from market Risk involved in business External Strategic Position Internal Strategic Position

External Strategic Position Internal Strategic Position SPACE Factors Industry Strength (IS) Growth potential Profit potential Financial stability Technological know-how Resource utilization Capital intensify Ease of entry into market Productivity, capacity utilization Competitive Advantage CA Market share Product quality Product life cycle Customer loyalty Competition’s capacity utilization Control over suppliers & distributors External Strategic Position Internal Strategic Position

SPACE Matrix FS Conservative Aggressive CA IS Competitive Defensive ES +6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4 -5 Competitive Defensive -6 ES

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix

BCG Matrix Boston Consulting Group Matrix Enhances multidivisional firms’ efforts to formulate strategies Autonomous divisions (or profit centers) constitute the business portfolio Firm’s divisions may compete in different industries requiring separate strategy

BCG Matrix Boston Consulting Group Matrix Graphically portrays differences among divisions Focuses on market share position and industry growth rate Manage business portfolio through relative market share position and industry growth rate

BCG Matrix Relative market share position defined: Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry.

Relative Market Share Position Industry Sales Growth Rate BCG Matrix Relative Market Share Position High 1.0 Medium .50 Low 0.0 Industry Sales Growth Rate Dogs IV Cash Cows III Question Marks I Stars II High +20 Medium Low -20

BCG Matrix Question Marks Stars Cash Cows Dogs

BCG Matrix Question Marks Low relative market share position yet compete in high-growth industry. Cash needs are high Cash generation is low Decision to strengthen (intensive strategies) or divest

BCG Matrix Stars High relative market share and high industry growth rate. Best long-run opportunities for growth and profitability Substantial investment to maintain or strengthen dominant position Integration strategies, intensive strategies, joint ventures

BCG Matrix Cash Cows High relative market share position, but compete 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 becomes weak—retrenchment or divestiture

BCG Matrix Dogs Low relative market share position and compete in slow or no market growth Weak internal and external position Decision to liquidate, divest, retrenchment

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix

Grand Strategy Matrix Popular tool for formulating alternative strategies All organizations (or divisions) can be positioned in one of four quadrants Based on two evaluative dimensions: Competitive position Market growth

RAPID MARKET GROWTH Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION Quadrant III Retrenchment Concentric diversification Horizontal diversification Conglomerate diversification Liquidation Quadrant IV Concentric diversification Horizontal diversification Conglomerate diversification Joint ventures SLOW MARKET GROWTH

Grand Strategy Matrix Quadrant I Excellent strategic position Concentration on current markets and products Take risks aggressively when necessary

Grand Strategy Matrix Quadrant II Evaluate present approach seriously How to change 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 and asset reduction indicated (retrenchment)

Grand Strategy Matrix Quadrant IV Strong competitive position Slow-growth industry Diversification indicated to more promising growth areas

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

QSPM Quantitative Strategic Planning Matrix Only technique designed to determine the relative attractiveness of feasible alternative actions

QSPM Quantitative Strategic Planning Matrix Tool for objective evaluation of alternative strategies Based on identified external and internal crucial success factors Requires good intuitive judgment

QSPM Quantitative Strategic Planning Matrix List the firm’s key external opportunities & threats; list the firm’s key internal strengths and weaknesses Assign weights to each external and internal critical success factor

QSPM Quantitative Strategic Planning Matrix Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing Determine the Attractiveness Scores (AS)

QSPM Quantitative Strategic Planning Matrix Compute the total Attractiveness Scores Compute the Sum Total Attractiveness Score

Strategic Alternatives QSPM Strategic Alternatives Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Strategy 3 Strategy 2 Strategy 1 Weight Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/Environmental Technological Competitive

QSPM Limitations: Requires intuitive judgments and educated assumptions Only as good as the prerequisite inputs

QSPM Positives: Sets of strategies examined simultaneously or sequentially Requires the integration of pertinent external and internal factors in the decision-making process