Strategy Analysis and Choice Chapter Five

Chapter Objectives 1. Describe a three-stage framework for choosing among alternative strategies. 2. Explain how to develop a SWOT Matrix, BCG Matrix, and QSPM. 6-2 Copyright ©2013 Pearson Education

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

A Comprehensive Strategy-Formulation Framework  Stage 1 - Input Stage:  Summarizes the basic input information needed to formulate strategies.  Consists of the EFE Matrix, the IFE Matrix, and the Competitive Profile Matrix (CPM). 6-4 Copyright ©2013 Pearson Education

Copyright 2007 Prentice Hall 6 -5 Competitive Profile Matrix (CPM)  Competitive Profile Matrix (CPM):  Identifies firm’s major competitors and their strengths and weaknesses in relation to a design firm’s strategic positions.

Strategy-Formulation Analytical Framework Internal Factor Evaluation Matrix (IFE) External Factor Evaluation Matrix (EFE) Stage 1: The Input Stage Competitive Profile Matrix (CPM) Note: EFE and CPM form external and IFE from internal (assessment)

A Comprehensive Strategy-Formulation Framework  Stage 2 - Matching Stage:  Focuses on generating possible alternative strategies by Matching key external and internal factors.  Techniques include :  (SWOT) Matrix.  The Boston Consulting Group (BCG) Matrix.  The Grand Strategy Matrix. 6-7

Stage 2 :The Matching Stage SWOT Matrix BCG Matrix Grand Strategy Matrix Stage 2: The Matching Stage

1.(SWOT) Matrix: Strengths-Weaknesses- Opportunities-Threats.  helps managers to develop four types of strategies:  SO (strengths-opportunities) Strategies.  WO (weaknesses-opportunities) Strategies.  ST (strengths-threats) Strategies.  WT (weaknesses-threats) Strategies. 6-9

(SWOT) Matrix  “SO” Strategies  use a firm’s internal strengths to take advantage of external opportunities.  “WO” Strategies  aim at improving internal weaknesses by taking advantage of external opportunities. 6-10

(SWOT) Matrix  “ST ” Strategies  use a firm’s strengths to avoid or reduce the impact of external threats.  “WT” Strategies  defensive tactics directed at reducing internal weakness and avoiding external threats Copyright ©2013 Pearson Education

SWOT Matrix SWOT Strengths – S List Strengths Weaknesses – W List Weaknesses Opportunities – O List Opportunities SO Strategies Match and determine strategy WO Strategies Match and determine strategy Threats – T List Threats ST Strategies Match and determine strategy WT Strategies Match and determine strategy

SWOT Matrix SWOT 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

14 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 from the industry (opportunity) + Insufficient capacity (weakness) Acquire Cellphone, Inc. = 20% annual growth in the cell phone industry (opportunity) + Great working capacity (strength) Key Internal FactorKey External FactorResult Strategy SWOT Matrix

A SWOT Matrix for a Retail Computer Store 6-15

The Boston Consulting Group (BCG) Matrix 2. BCG Matrix :  Graphically shows differences among divisions in terms of relative market share position and industry growth rate.  allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share position and the industry growth rate of each division relative to all other divisions in the organization. 6-16

The BCG Matrix  The major benefit of the BCG Matrix is that it draws attention to the cash flow, investment characteristics, and needs of an organization’s various divisions Copyright ©2013 Pearson Education

18 BCG Matrix Dogs IV  Low market share  low-growth industry Cash Cows III  High market share  low-growth industry Question Marks I Stars II  High market share  High growth Industry Market Share Position High Low Industry Growth High Low  Low market share  high-growth industry

BCG Matrix 6-19

BCG Matrix 1.Question Marks:  Low relative market share – compete in high-growth industry.  Cash needs are high.  Cash generation is low. Decision to strengthen (intensive strategies) or divest.

BCG Matrix 2. Stars:  High relative market share and high growth rate.  Best long-run opportunities for growth & profitability.  Large investment to maintain or strengthen leading position.  Integration strategies, intensive strategies, joint ventures.

BCG Matrix 3. 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.  retrenchment or divestiture.

BCG Matrix 4. Dogs:  Low relative market share compete in slow or no growth industry.  Weak internal and external position.  Liquidation, divestiture, retrenchment.

Grand Strategy Matrix  Tool for formulating alternative strategies  Based on two dimensions 1. Competitive position 2. Market growth

25 Quadrant IV 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint ventures Quadrant III 1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate diversification 5. Liquidation Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation Rapid Market Growth Slow Market Growth Weak Competitive Position Strong Competitive Position

Grand Strategy Matrix  Excellent strategic position  Concentration on current markets/products  Take risks aggressively when necessary  Which type of strategy would you suggest? Quadrant I

Grand Strategy Matrix  Evaluate present approach  How to improve competitiveness  Rapid market growth requires intensive strategy Quadrant II

Grand Strategy Matrix  Compete in slow-growth industries  Weak competitive position  Drastic changes quickly  Cost & asset reduction (retrenchment) Quadrant III

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

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

A Comprehensive Strategy-Formulation Framework  Stage 3 - Decision Stage:  Involves the Quantitative Strategic Planning Matrix (QSPM).  Discloses the relative attractiveness of alternative strategies and thus provides objective basis for selecting specific strategies. 6-31

The Quantitative Strategic Planning Matrix (QSPM)  Quantitative Strategic Planning Matrix (QSPM):  Objectively indicates which alternative strategies are best.  Uses input from Stage 1 analyses and matching results from Stage 2 analyses to decide objectively among alternative strategies. 6-32

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.

Positive Features of the QSPM  Sets of strategies can be examined sequentially or simultaneously.  Requires strategists to integrate pertinent external and internal factors into the decision process.  Can be adapted for use by small and large for-profit and nonprofit organizations. 6-34