Analyzing alternative Strategies and Strategy Choice Session 6 29 October 2011 Civil Service College Dhaka Presentation by Dr. Muhammad G. Sarwar Cell:

Strategic Management: course outline Sl. No. Topic Title Session no. 1Strategic Management: an overview 1 2Strategy Formulation  Designing Vision and Mission Statements1 External Assessment1 Internal Assessment1 Setting Objectives and Strategic Options1 Strategy Analysis and Choice1 3Strategy Execution 1 4Strategy Evaluation 1 5Limitations of Strategic Management: why strategy may fail ? 1 2

Stages of Strategic Management Strategic Management process consists of three stages: 1.Strategy formulation, 2.Strategy implementation, and 3.Strategy evaluation. 3

Strategy formulation Strategy formulation includes: Developing a vision and mission statements Identifying organization’s external opportunities and threats Indentifying internal strengths and weaknesses Setting long-term objectives and alternative strategies Analyzing alternative strategies and choosing particular strategy. 4

Presentation Contents of 6 th Session Nature of Strategy Analysis and choice Process of Strategy Analysis and Choice A Comprehensive Strategy Formulation Framework – Input stage: EFE Matrix, CP (Competitive Profile) Matrix, and IFE (Internal Factor Evaluation) Matrix – Matching stage: SWOT Matrix, SPACE Matrix, IE Matrix, GS Matrix – Decision stage: QSP (Quantitative Strategic Planning) Matrix  Cultural and Political Aspects of Strategy Choice 5

Nature of Strategy Analysis and choice Generating and analyzing alternative strategies and selecting a set of strategies involve making subjective decision based on objective information. Alternative strategies are derived from the organization’s vision, mission, objectives, external audit, and internal audit, and are build on past strategies that have worked well. 6

Process of Strategy Analysis and Choice As it’s not possible to consider infinite number of alternative strategies, a manageable set of most attractive alternative strategies are developed. Identifying and evaluating alternative strategies should involve as many managers and employees as possible from each department who earlier participated in formulation of organizational vision, mission, internal and external audits. After identifying all feasible strategies, they must be ranked to arrive at a list of prioritized strategies reflecting the collective wisdom of the organization. 7

A Comprehensive Strategy-Formulation Analytical Framework (SFAF) Stage 1: Input Stage: – EFE Matrix, – IFE (Internal Factor Evaluation) Matrix, and – CP (Competitive Profile) Matrix Stage 2: Matching Stage – SWOT ( Strength-Weakness-Opportunities-Threat) Matrix, – SPACE (Strategic Position and Action Evaluation) Matrix, – IE (Internal-External) Matrix, – GS (Grand Strategy) Matrix Stage 3: Decision making stage – QSP (Quantitative Strategic Planning) Matrix 8

EFE Matrix An EFE (external factor evaluation) Matrix summarizes and evaluate all the external forces that affect an organization. It is developed in 5 stages: 1.List key external factors identified in external audit; 2.Assign to each factor weight ranging from say 0.0 (not important) to 1.0 (very important) indicating relative importance of that factor to be successful in the industry. 3.Assign rating say between 1 (poor response) and 4 (superior response) based on effectiveness of the organization’s strategies. 4.Multiply weight by its rating to get weighted score 5.Sum up to get total weighted score for the organization. 9

Example of EFE Matrix Key External FactorsWeightRatingWeighted score Opportunities 1. Domestic demand increasing 10% annually 2.Export demand increasing 15% annually 3. Input price decreasing 5% annually Threats 1. Rival organizations increasing ad by 20% annually 2. Govt. Tightening its regulation 3. Interest rates are increasing 3% annually Total 10

IFE (Internal Factor Evolution) Matrix IFE Matrix is a management strategy formulation tool that summarizes and evaluates major strengths and weaknesses in functional areas of the organization. Five steps to construct IFE Matrix: – List key strengths and weaknesses – Assign weight ranging from 0.0 (not important) to 1.0 (all important) – Assign rating from 1 (major weakness) to 4 (major strength) – Multiply weights and rating to get weighted score – Sum the weighted score to get total weighted score for the organization. 11

An example of IFE Matrix Key Internal FactorsWeightRatingWeighted Score Strengths Weaknesses Total Weighted Score 12

CP (Competitive Profile) Matrix CP Matrix identifies a organization’s strategic competitors and its particular strengths and weakness in relation to the organization’s strategic position. CP Matrix is broader as it includes both internal and external issues. CP Matrix rating refers to strengths and weakness between I (major weakness) and 4 (major strength). 13

Example of CP Matrix Org AOrg BOrg C Critical success factors weightratingscoreratingscoreRatingscore Product quality Price competitiveness Advertising Management Financial position Market share Customer loyalty Global expansion Total 14

SWOT (Strength-Weakness-Opportunities- Threat) Analysis SWOT Analysis Resource Strengths Threats Resource Weaknesses Market Opportunities 15

SWOT Analysis (contd.) SWOT analysis leads to: Drawing conclusions from the SWOT listings about overall situation of an organization; and Translating these conclusions into strategic actions to better match organization’s strategy to its resource strengths and market opportunities, and to correct the weaknesses and to defend from external threats. 16

SWOT Matrix contd. SWOT Matrix generates 4 types of strategies: 1.SO (Strength-Opportunities) Strategies: intend to use internal strengths to take advantage of external opportunities. 2.WO (Weakness-Opportunities) Strategies: aim at improving internal weakness by taking advantage of external opportunities. 3.ST (Strengths-Threat) Strategies: intend to use internal strengths to reduce the impact of external threats. 4.WT (Weakness-Threat) Strategy: defensive strategy at reducing internal weakness and avoiding external threats. 17

SWOT Matrix (contd.) Strength - S Weakness – W Opportunities –O SO Strategies WO Strategies Threats- T ST Strategies WT Strategies

SWOT Matrix contd. Eight steps to construct a SWOT Matrix: strategies 1.Listing key external opportunities 2.Listing key external threats 3.Listing key internal strengths 4.Listing key internal weakness 5.Matching internal strengths with external opportunities to get the SO 6.Matching internal weakness with external opportunities to get WO strategies 7.Matching internal strengths with external threats to get ST strategies 8.Matching internal weakness with external threats to get WT strategies.

SPACE (Strategic Position and Action Evaluation) Matrix SPACE Matrix in its 4 quadrant framework indicates whether aggressive, conservative, defensive or competitive strategies are appropriate for a organization. Axes of the SPACE Matrix represent 2 internal and 2 external dimensions. Internal dimensions are: – FS (Financial strength) – CA (Competitive Advantage)  External dimensions are:  ES (Environmental Stability)  IS (Industry Strength)

Factors of SPACE Matrix (contd.) Internal Strategic PositionExternal Strategic Position FS (Financial Strengths)ES (Environmental Stability) 1.Return on Investment 2.Leverage Ratios 3.Liquidity Ratios 4.Working Capital 5.Cash Flow 1. Rate of Inflation 2. Price Elasticity of Demand 3. Competitive Pressure 4. Price range of competing products 5. Technological change CA (Competitive Advantage)IS (Industry Strength) 1.Market share 2.Product quality 3.Customer loyalty 4.Control over input suppliers 1.Growth potential 2.Profit potential 3.Financial stability 4.Productivity

SPACE Matrix (contd.) FS + Conservative Strategies Aggressive Strategies CA IS _ + Defensive Strategies Competitive Strategies ES _

IE (Internal-External) Matrix IE Matrix is based on two dimensions: – IFE total weighted scores on x-axis, and – EFE total weighted scores on y-axis  IE Matrix is divided into 3 regions with different strategic implications:  I, II &IV : grow and build (intensive or integrative strategies)  III, V & VII : hold and maintain (market penetration and product development strategies)  VI, VIII &IX : harvest or divest (defensive strategies)

IE (Internal-External) Matrix (contd.) IFE TW Score EFE TW Score IFE Strong 3.0 – 4.0 IFE Average 2.0 – 2.99 IFE Weak 1.0 – 1.99 EFE High 3.0 – 4.0 I Grow and build II Grow and build III Hold and maintain EFE Medium 2.0 – 2.99 IV Grow and build V Hold and maintain VI Harvest or divest EFE Low 1.0 – 1.99 VII Hold and maintain VIII Harvest or divest IX Harvest or divest

GS (Grand Strategy) Matrix GS Matrix is based on two evaluative dimensions: 1.Competitive Position, and 2.Market Growth. All organizations can be positioned in one of the four strategy quadrants: 1.Quadrant I is an excellent strategic position for an organization due to strong competitive position and rapid market growth. 2. Quadrant II organizations need to evaluate their market position as they are facing weak competitive position. 3.Quadrant III organizations are in slow growth industries and have weak competitive position. 4.Quadrant IV organizations have strong competitive position, but are in a slow growth industry.

GS (Grand Strategy) Matrix (contd.) RMG Quadrant II Quadrant I Intensive strategies Intensive strategies Defensive strategies Integration strategies WCP SCP Quadrant III Quadrant IV Defensive strategies Diversification strategies SMG

QSP (Quantitative Strategic Planning) Matrix QSP Matrix is the decision making tool of Stage 3 of Strategy-Formulation Analytical Framework. QSP Matrix determines the relative attractiveness of various strategies based on the extent to which key external and internal success factors are capitalized upon or improved. QSP Matrix is prepared using information of stage 1 (input stage) and stage 2 (matching stage) of Strategy Formulation Analytical Framework.

QSP Matrix (contd.) Six steps are required to prepare QSP Matrix: Step 1: listing external opportunities/threats and internal strengths/weakness from stage 1 (input stage) of SFAF; Step 2: assigning weights to each external and internal factors as from stage 1 (input stage) of SFAF; Step 3: Identifying alternative strategies from stage 2 (matching stage) of SFAF; Step 4: determining strategy Attractiveness Score (AS); Step 5: Computing Total Attractiveness Score (TAS); and Step 6: Computing Sum Total Attractiveness Score (STAS).

QSP Matrix (contd.) Key FactorsWeightStrategy 1Strategy 2Strategy 3 ASTASASTASASTAS Key External Factors (Opportunities/Threats) Economy Political/legal/governance Technology trends Competitive environment Key Internal Factors (Strengths/Weakness) Management Marketing Finance/Accounting Production/Operation R&D MIS

Limitations of the Strategy Formulation Framework Quantitative techniques used in Strategy Formulation Analytical Framework (SFAF), like any other quantitative methods are based on simplified assumptions that may not always realistic; SFAF always requires intuitive judgments based on objective information; SFAF can be only as good as the inputs and matching analysis on which it is based.

Cultural and Political aspects of Strategy Choice All organization have a culture. If formulated strategies are in conflict with organizational culture, implementation will be slow and difficult. All organization have internal power politics. Unless internal power politics is managed well, implementation of strategies could be sabotaged.

Strategic Management: references Fred R. David (2008), Strategic Management: Concepts and Cases, 11th Edition, Prentice Hall (Chapter 6) Arthur A. Thompson, Jr. (2010) Crafting and Executing Strategy: the quest for comparative, 16 th Edition, McGraw Hill (Chapter 5 & 6) 32

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