1. BUS 411
DAY 10

2. Agenda Question? Assignment 3 corrected Assignment 4 posted Today 
1 B, 2 C’s, 3 D’s and 2 F’s
Major problems with financial ratios
Assignment 4 posted
Due March 6
assignment 4 SP14.pdf
Today 
Begin Chap 6 Strategic analysis and choice

3. Strategy Analysis and Choice
Chapter Six

4. Strategy Analysis & Choice
“Whether it’s broke or not, fix it – make it better. Not just products, but the whole company if necessary.”
– Bill Saporito
“Life is full of lousy options.” – General P.X. Kelley

5. Chapter Objectives
Describe a three-stage framework for choosing among alternative strategies.
Explain how to develop a SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, Grand Strategy Matrix and QSPM.
Identify important behavioral, political, ethical, and social responsibility considerations in strategy analysis and choice.

6. Chapter Objectives
Discuss the role of intuition in strategic analysis and choice.
Discuss the role of organizational culture in strategic analysis and choice.
Discuss the role of a board of directors in choosing among alternative strategies.

7. A Comprehensive Strategic-Management Model

9. The Process of Generating and Selecting Strategies
A manageable set of the most attractive alternative strategies must be developed
The advantages, disadvantages, trade-offs, costs, and benefits of these strategies should be determined

10. The Process of Generating and Selecting Strategies
Identifying and evaluating alternative strategies should involve many of the managers and employees who earlier assembled the organizational vision and mission statements, performed the external audit, and conducted the internal audit.

11. The Process of Generating and Selecting Strategies
Alternative strategies proposed by participants should be considered and discussed in a series of meetings.
Proposed strategies should be listed in writing.
When all feasible strategies identified by participants are given and understood, the strategies should be ranked in order of attractiveness. (Priority order)

12. The Strategy-Formulation Analytical Framework
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

13. 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)

14. A Comprehensive Strategy-Formulation Framework
Stage 2 - Matching Stage
focuses on generating feasible alternative strategies by aligning key external and internal factors
techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix

15. A Comprehensive Strategy-Formulation Framework
Stage 3 - Decision Stage
involves the Quantitative Strategic Planning Matrix (QSPM)
reveals the relative attractiveness of alternative strategies and thus provides objective basis for selecting specific strategies

16. Matching Key External and Internal Factors to Formulate Alternative Strategies

17. The Matching Stage
The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix helps managers develop four types of strategies:
SO (strengths-opportunities) Strategies
WO (weaknesses-opportunities) Strategies
ST (strengths-threats) Strategies
WT (weaknesses-threats) Strategies

18. The Matching Stage SO Strategies WO 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

19. The Matching Stage ST Strategies WT 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

20. SWOT 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
Match internal strengths with external opportunities and record the resulting SO strategies

21. SWOT Matrix (cont.)
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

22. SWOT Matrix 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

23. A SWOT Matrix for a Retail Computer Store

24. A SWOT Matrix for a Retail Computer Store

25. SWOT Matrix Copyright 2012, Tony Gauvin, UMFK Strengths Weaknesses
Sells essential items with relatively inelastic demand
Healthy gross profit margin
Accepts food stamps
Lower than industry average leverage ratio
Being able to raise its dividends
Better than industry average total asset turnover
Its return on assets of 1.84% is higher than the industry average
Its return on equity is 4%, higher than the industry average
Approximately 90% of the company's products are priced below $10
In the past year, the company's stock has outperformed the average retail industry
Does not do much advertising
Limited market, solely in the only
In the year 2008, the company's market share dropped from 1.85% to 1.75%
The company's EPS is only 72% of the industry average and is not growing as quickly as the industry average
Limited in variety of products being offered
For the year 2008, the company's overall sales only grew by 2.18% whereas the average industry sales grew by 5.31%
Does not generate enough sales from its web site due to limited technology
Higher than industry average quick ratio, indicating lack of long term re-investment
The company's long-term debt to equity ratio is only 31.4% of the industry average
Opportunities
S-O Strategies
W-O Strategies
The income for the middle class is diminishing, causing them to be more cautious with their expenditures
The average household income is dropping due to weak economy
The demand for low-priced items is growing
The unemployment rate is increasing
Smaller retailers are closing their stores and some have filed for bankruptcy
Implement some price cuts to improve sales (S2, O1, S9, O3)
Advertise to improve product variety and offerings (S1, S2, S3, O4, O5)
Increase number of stores in low income areas (O2, O1, W3, W2)
Expand product offerings such fruits and other perishable products (W3, W5, O3, O4, O5)
Threats
S-T Strategies
W-T Strategies
High competition among large discount retailers
Dollar General has higher market share compare to Family Dollar
Per square foot, Dollar General is creating more sales
The industry is sensitive to economic conditions
Change in demographics due to purchasing habits
Increase in tariffs and trade barriers
Lack of quality control in products due to being imported from and other countries
Due to better return on assets ratio, the company can invest in technology, promoting online selling (S6, T1, T5)
Increase advertising by offering discounts, coupons, and other special offerings (W1, W2, W3, T1, T2, T3, T4)
Copyright 2012, Tony Gauvin, UMFK

26. 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  Halo Error

27. The Strategic Position and Action Evaluation (SPACE) Matrix
four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are most appropriate for a given organization

28. The SPACE Matrix

29. The Strategic Position and Action Evaluation (SPACE) Matrix
Two internal dimensions (financial position [FP] and competitive position [CP])
Two external dimensions (stability position [SP] and industry position [IP])
Most important determinants of an organization’s overall strategic position

30. Factors That Make Up the SPACE Matrix Axes

31. Steps to Develop a SPACE Matrix
Select a set of variables to define financial position (FP), competitive position (CP), stability position (SP), and industry position (IP)

32. External Strategic Position Internal Strategic Position
SPACE Factors
Stability Position (SP)
Technological changes
Rate of inflation
Demand variability
Price range of competing products
Barriers to entry
Competitive pressure
Price elasticity of demand Ease of exit from market Risk involved in business
Financial Position (FP)
Return on investment
Leverage
Liquidity
Working capital
Cash flow
Inventory turnover
Earnings per share
Price earnings ratio
External Strategic Position
Internal Strategic Position

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

34. Steps to Develop a SPACE Matrix
Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables that make up the FP and IP dimensions. Assign a numerical value ranging from –1 (best) to –7 (worst) to each of the variables that make up the SP and CP dimensions
For IP and SP compare to other industries
For FP and CP compare to competitors

35. Steps to Develop a SPACE Matrix
Compute an average score for FP, CP, IP, and SP
Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE Matrix
Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point

36. Steps to Develop a SPACE Matrix
Draw a directional vector from the origin of the SPACE Matrix through the new intersection point
This vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative

37. Example Strategy Profiles

38. Example Strategy Profiles
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

39. The steps to develop a SPACE Matrix:
Select a set of variables to define financial position (FP), competitive position (CA), stability position (SP), and industry position (IP).
Table 6-2 provides Good examples
Assign a numerical value ranging from 1 (worst) to 7 (best) for the variables that make up the FP and IP dimensions. Assign a number between –1 (best) to –7 (worst) for variables that make up the SP and CP dimensions. On the FP and CP axes, make comparison to competitors. On the IP and SP axes, make comparison to other industries.
Compute an average score for FP, CP, IP, and SP by summing the values given to the variables and dividing by the number of variables included in each dimension.
Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE Matrix.
Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point.
Draw a directional vector from the origin of the SPACE matrix through the new intersection point. This vector reveals the type of strategies recommended for the organization.
Aggressive
Competitive
Defensive
Conservative
Space_matrix1v2.xltx

40. SPACE Matrix FP Conservative Aggressive CP IP Defensive Competitive SP+6 +5 +4 +3 +2 +1 CP IP -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4
Defensive -5
Competitive -6 SP

41. SPACE MATRIX 11/11/2018 FP CP SP IP Copyright 2012, Tony Gauvin, UMFK-1 -2 -3 -4 -5 -6 6 5 4 3 2 1
Conservative
Aggressive
Competitive
Defensive
Copyright 2012, Tony Gauvin, UMFK
11/11/2018

42. Boston Consulting Group Matrix
Assists multidivisional firm in formulating strategies
Autonomous divisions = business portfolio
Divisions may compete in different industries
Focus on relative market-share position & industry growth rate

43. Relative Market Share Position
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
Company’s revenue / largest company’s revenue

44. The Boston Consulting Group (BCG) Matrix
graphically portrays 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

45. The BCG Matrix

46. Making Pie Indicators
Size of pie is relative percentage of total revenue
Division revenue/ total revenue
Size of pie slice is relative percentage of total profits
Division profits/ total profits
%rev&profit.xlsx

47. The BCG Matrix Question marks – Quadrant I Stars – Quadrant II
Organization must decide whether to strengthen them by pursuing an intensive strategy (market penetration, market development, or product development) or to sell them
Stars – Quadrant II
represent the organization’s best long-run opportunities for growth and profitability

48. The BCG Matrix Cash Cows – Quadrant III Dogs – Quadrant IV
generate cash in excess of their needs
should be managed to maintain their strong position for as long as possible
Dogs – Quadrant IV
compete in a slow- or no-market-growth industry
businesses are often liquidated, divested, or trimmed down through retrenchment

49. 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

50. The Internal-External Matrix
Positions an organization’s various divisions in a nine-cell display
Similar to BCG Matrix except the IE Matrix:
Requires more information about the divisions
Strategic implications of each matrix are different

51. The Internal-External (IE) Matrix

52. The Internal-External (IE) Matrix
The IE Matrix is based on two key dimensions: the IFE total weighted scores on the x-axis and the EFE total weighted scores on the y-axis
Three major regions
Grow and build (Cells I, II and IV)
Hold and maintain (Cells III, V, and VII)
Harvest or divest (Cells VI, VIII and IX)

53. The IE Matrix

54. The IFE Total Weighted Score
IE Matrix
The IFE Total Weighted Score
Strong 3.0 to 4.0
Average 2.0 to 2.99
Weak 1.0 to 1.99
High 3.0 to 3.99 I II
III
The EFE Total
Weighted Score
Medium 2.0 to 2.99 IV VI
Low 1.0 to 1.99
VII
VIII IX
Copyright 2012, Tony Gauvin, UMFK

55. The Grand Strategy Matrix
based on two evaluative dimensions: competitive position and market (industry) growth

56. The Grand Strategy Matrix

57. The Grand Strategy Matrix
Quadrant I
continued concentration on current markets (market penetration and market development) and products (product development) is an appropriate strategy
Quadrant II
unable to compete effectively
need to determine why the firm’s current approach is ineffective and how the company can best change to improve its competitiveness

58. The Grand Strategy Matrix
Quadrant III
must make some drastic changes quickly to avoid further decline and possible liquidation
Extensive cost and asset reduction (retrenchment) should be pursued first
Quadrant IV
have characteristically high cash-flow levels and limited internal growth needs and often can pursue related or unrelated diversification successfully

59. Weak Competitive Position Strong Competitive Position
Grand Strategy Matrix
Weak Competitive Position
Quadrant II
Quadrant I
Quadrant IV
Quadrant III
Strong Competitive Position
Rapid Market Growth
Slow Market Growth
Market Development
Market Penetration
Product Development
Forward Integration
Backward Integration
Horizontal Integration
Related Diversification
Copyright 2012, Tony Gauvin, UMFK

60. Matrix Analysis Summary
Alternative Strategies IE
SPACE
GRAND
BCG
COUNT
Forward Integration x X 2
Backward Integration
Horizontal Integration
Market Penetration 4
Market Development 3
Product Development
Concentric Diversification
Conglomerate Diversification 1
Horizontal Diversification
Retrenchment
Divestiture
Liquidation
Copyright 2012, Tony Gauvin, UMFK

61. The 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

62. The Quantitative Strategic Planning Matrix (QSPM)

63. Steps in a QSPM
Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column of the QSPM (from SWOT)
Assign weights to each key external and internal factor (taken from IFE and EFE)
Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing

64. Steps in a QSPM (cont.) Determine the Attractiveness Scores (AS)
Compute the Total Attractiveness Scores
Compute the Sum Total Attractiveness Score
QSPM Matrix.xlt

65. A QSPM for a Retail Computer Store

66. A QSPM for a Retail Computer Store

67. Increase number of stores in low income areas
QSPM
Increase number of stores in low income areas
Increase advertising by offering discounts, coupons, and other special offerings
Key Factors
Weight AS
TAS
Opportunities  1.
The income for the middle class is diminishing, causing them to be more cautious with their expenditures
0.1 3
0.3 2
0.2 2.
The average household income is dropping due to weak economy 4
0.4 3.
The demand for low-priced items is growing
0.07
0.21
0.14 4.
The unemployment rate is increasing
0.09
0.18
0.27 5.
Smaller retailers are closing their stores due to lower sales
0.08
0.24
0.16
Threats
High competition among large discount retailers 1
0.10
0.20
Dollar General has higher market share compare to Family Dollar
---
Per square foot, Dollar General is creating more sales
The industry is sensitive to economic conditions
Change in demographics due to purchasing habits
0.05
0.15 6.
Increase in tariffs and trade barriers 7.
Lack of quality control in products due to being imported from and other countries
TOTAL
1.00
1.96
1.52
Strengths 
Sells essential items with relatively inelastic demand
Healthy gross profit margin
Accepts food stamps
0.32
Lower than industry average leverage ratio
Being able to raise its dividends
0.03
Better than industry average total asset turnover
Its return on assets of 1.84% is higher than the industry average
0.02 8.
Its return on equity is 4%, higher than the industry average 9.
Approximately 90% of the company's products are priced below $10
0.28
10.
In the past year, the company's stock has outperformed the average retail industry
0.06
Weaknesses
Does not do much advertising
Limited market, solely in the only
In the year 2008, the company's market share dropped from 1.85% to 1.75%
The company's EPS is only 72% of the industry average and is not growing as quickly as the industry average
Limited in variety of products being offered
For the year 2008, the company's overall sales only grew by 2.18% whereas the average industry sales grew by 5.31%
Does not generate enough sales from its web site due to limited technology
Higher than industry average quick ratio, indicating lack of long term re-investment
The company's long-term debt to equity ratio is only 31.4% of the industry average
0.04
SUBTOTAL
2.06
1.91
SUM TOTAL ATTRACTIVENESS SCORE
4.02
3.43
Copyright 2012, Tony Gauvin, UMFK
11/11/2018

68. 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

69. Limitations of the QSPM
Always requires intuitive judgments and educated assumptions
Only as good as the prerequisite information and matching analyses upon which it is based

70. The Politics of Strategy Choice
Political maneuvering consumes valuable time, subverts organizational objectives, diverts human energy, and results in the loss of some valuable employees
Political biases and personal preferences get unduly embedded in strategy choice decisions

71. The Politics of Strategy Choice
The hierarchy of command in an organization, combined with the career aspirations of different people and the need to allocate scarce resources, guarantees the formation of coalitions of individuals who strive to take care of themselves first and the organization second, third, or fourth

72. Tactics to Aid Strategists
Equifinality
Satisfying
Generalization
Focus on Higher-Order Issues
Provide Political Access on Important Issues

73. Governance Issues Board of directors
a group of individuals who are elected by the ownership of a corporation to have oversight and guidance over management and who look out for shareholders’ interests

74. Board of Director Duties and Responsibilities

75. Principles of Good Governance
No more than two directors are current or former company executives
The audit, compensation, and nominating committees are made up solely of outside directors
Each director owns a large equity stake in the company, excluding stock options
Each director attends at least 75 percent of all meetings

76. Principles of Good Governance
The board meets regularly without management present and evaluates its own performance annually
The CEO is not also the chairperson of the board
Stock options are considered a corporate expense
There are no interlocking directorships (where a director or CEO sits on another director’s board)