© 2001 Prentice Hall Ch. 6-1 Strategic Management Concepts & Cases 8 th edition Fred R. David Chapter 6: Strategy Analysis & Choice PowerPoint Slides By: Anthony F. Chelte Western New England College

© 2001 Prentice Hall Ch. 6-2 Strategy Analysis & Choice “ Strategic management is not a box of tricks or a bundle of techniques. It is analytical thinking and commitment of resources to action. But quantification alone is not planning. Some of the most important issues in strategic management cannot be quantified at all. ” —Peter Drucker—

© 2001 Prentice Hall Ch. 6-3 Strategy Analysis & Choice Strategic Analysis and Choice: Making subjective decisions based on objective information

© 2001 Prentice Hall Ch. 6-4 Strategy Analysis & Choice Strategic Analysis and Choice: Generate feasible alternatives Evaluate alternatives Select specific course of action

© 2001 Prentice Hall Ch. 6-5 Strategy Analysis & Choice Generating & Selecting Strategies Develop set of most attractive alternative strategies Determine for the set Advantages Disadvantages Trade-offs Costs Benefits

© 2001 Prentice Hall Ch. 6-6 Strategy Analysis & Choice Generating & Selecting Strategies Involve a broad mix of personnel Representation from each department/function Provides opportunity to gain understanding of firm ’ s direction Provides vehicle to develop commitment to attainment of organizational objectives

© 2001 Prentice Hall Ch. 6-7 Strategy Analysis & Choice Generating & Selecting Strategies Evaluate each alternative Internal and external audit information Firm ’ s mission statement Listed in writing Ranked in order of attractiveness

© 2001 Prentice Hall Ch. 6-8 Strategy-Formulation Analytical Framework Stage 1: The Input Stage External Factor Evaluation Matrix (EFE) Competitive Profile Matrix Internal Factor Evaluation Matrix (IFE)

© 2001 Prentice Hall Ch. 6-9 Strategy-Formulation Analytical Framework Stage 2: The Matching Stage Threats Opportunities Weaknesses Strengths (TOWS) Strategic Position & Action Evaluation (SPACE) Boston Consulting Group Matrix (BCG) Internal- External Matrix (IE) Grand Strategy Matrix

© 2001 Prentice Hall Ch Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Quantitative Strategic Planning Matrix (QSPM)

© 2001 Prentice Hall Ch Strategy Analysis & Choice Stage 1: The Input Stage Provides Basic Input for Stages 2 and 3 External Factor Evaluation Matrix (EFE) Internal Factor Evaluation Matrix (IFE) Competitive Profile Matrix

© 2001 Prentice Hall Ch Strategy Analysis & Choice Stage 2: The Matching Stage Strategy is characterized by the organizational match between Internal resources and skills Opportunities & risks created by external factors

© 2001 Prentice Hall Ch Example: Matching Key Factors Resultant StrategyKey External FactorKey Internal Factor 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 Visioncable, Inc.= 20% annual growth in the cablevision industry (opportunity) + Excess working capacity (strength)

© 2001 Prentice Hall Ch Four Types of Strategies WT Strategies ST Strategies WO Strategies SO Strategies Threats Opportunities Weaknesses Strengths (TOWS)

© 2001 Prentice Hall Ch TOWS Matrix WT 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

© 2001 Prentice Hall Ch Strategy Analysis & Choice Strategic Position & Action Evaluation Matrix (SPACE) Four quadrant framework Determines appropriate strategies  Aggressive  Conservative  Defensive  Competitive

© 2001 Prentice Hall Ch Strategy Analysis & Choice Strategic Position & Action Evaluation Matrix (SPACE) Two Internal Dimensions  Financial Strength [FS]  Competitive Advantage [CA] Two External Dimensions  Environmental Stability [ES]  Industry Strength [IS]

© 2001 Prentice Hall Ch Strategy Analysis & Choice Strategic Position & Action Evaluation Matrix (SPACE) Developing the SPACE Matrix: EFE Matrix IFE Matrix Financial Strength Competitive Advantage Environmental Stability Industry Strength

© 2001 Prentice Hall Ch Strategy Analysis & Choice The 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

© 2001 Prentice Hall Ch Strategy Analysis & Choice The 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.

© 2001 Prentice Hall Ch 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 PositionInternal Strategic Position

© 2001 Prentice Hall Ch 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 Technological know-how Control over suppliers & distributors External Strategic PositionInternal Strategic Position

© 2001 Prentice Hall Ch SPACE Matrix FS ES CAIS ConservativeAggressive Defensive Competitive

© 2001 Prentice Hall Ch Strategy Analysis & Choice Boston Consulting Group Matrix (BCG) 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

© 2001 Prentice Hall Ch Strategy Analysis & Choice Boston Consulting Group Matrix (BCG) 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

© 2001 Prentice Hall Ch Strategy Analysis & Choice Boston Consulting Group Matrix (BCG) 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.

© 2001 Prentice Hall Ch BCG Matrix DogsIV Cash Cows III Question Marks IStarsII Relative Market Share Position High 1.0 Medium.50 Low 0.0 Industry Sales Growth Rate High +20 Low -20 Medium 0

© 2001 Prentice Hall Ch Strategy Analysis & Choice BCG Matrix Question Marks  Low relative market share position yet compete in high-growth industry.  Cash needs are high  Case generation is low  Decision to strengthen (intensive strategies) or divest

© 2001 Prentice Hall Ch Strategy Analysis & Choice 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

© 2001 Prentice Hall Ch Strategy Analysis & Choice 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

© 2001 Prentice Hall Ch Strategy Analysis & Choice 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

© 2001 Prentice Hall Ch Strategy Analysis & Choice Grand Strategy Matrix Popular tool for formulating alternative strategies Based on two evaluative dimensions  Competitive position  Market growth

© 2001 Prentice Hall Ch Grand Strategy Matrix Quadrant IV Concentric diversification Horizontal diversification Conglomerate diversification Joint ventures Quadrant III Retrenchment Concentric diversification Horizontal diversification Conglomerate diversification Liquidation Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation RAPID MARKET GROWTH SLOW MARKET GROWTH WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION

© 2001 Prentice Hall Ch Strategy Analysis & Choice Grand Strategy Matrix Quadrant I  Excellent strategic position  Concentration on current markets and products  Take risks aggressively when necessary

© 2001 Prentice Hall Ch Strategy Analysis & Choice Grand Strategy Matrix Quadrant II  Evaluate present approach seriously  How to change to improve competitiveness  Rapid market growth requires intensive strategy

© 2001 Prentice Hall Ch Strategy Analysis & Choice Grand Strategy Matrix Quadrant III  Compete in slow-growth industries  Weak competitive position  Drastic changes quickly  Cost and asset reduction indicated (retrenchment)

© 2001 Prentice Hall Ch Strategy Analysis & Choice Grand Strategy Matrix Quadrant IV  Strong competitive position  Slow-growth industry  Diversification indicated to more promising growth areas

© 2001 Prentice Hall Ch Strategy Analysis & Choice Quantitative Strategic Planning Matrix (QSPM) Comprises Stage 3 of the analytical framework Analytical technique designed to determine the relative attractiveness of feasible alternative actions. Uses input from Stage 1 and Stage 2

© 2001 Prentice Hall Ch Strategy Analysis & Choice Quantitative Strategic Planning Matrix (QSPM) Tool for objective evaluation of alternative strategies Based on identified external and internal crucial success factors Requires good intuitive judgment

© 2001 Prentice Hall Ch QSPM Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Strategy 3Strategy 2Strategy 1WeightKey External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Strategic Alternatives

© 2001 Prentice Hall Ch Strategy Analysis & Choice QSPM 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

© 2001 Prentice Hall Ch Strategy Analysis & Choice QSPM Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing Determine the Attractiveness Scores (AS)

© 2001 Prentice Hall Ch Strategy Analysis & Choice QSPM Compute the total Attractiveness Scores Compute the Sum Total Attractiveness Score

© 2001 Prentice Hall Ch Strategy Analysis & Choice QSPM Positives: Sets of strategies examined simultaneously or sequentially Requires the integration of pertinent external and internal factors in the decision-making process

© 2001 Prentice Hall Ch Strategy Analysis & Choice QSPM Limitations: Requires intuitive judgments and educated assumptions Only as good as the prerequisite inputs