1. Chapter 6 Strategy Analysis & Choice

2. -- Establishing long-term objectives -- Generating alternative strategies -- Selecting best alternative to achieve mission & objectives Nature of Strategy Analysis & Choice Strategy Analysis & Choice

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

4. Strategy-Formulation Analytical Framework Internal Factor Evaluation Matrix (IFE) External Factor Evaluation Matrix (EFE) Stage 1: The Input Stage

5.  Basic input information comes from the internal /external evaluation (matrices)  Requires strategists to quantify subjectivity early in the process: the assigned weights…  Good intuitive judgment always needed

6. Strategy-Formulation Analytical Framework SWOT Matrix BCG Matrix Stage 2: The Matching Stage

7. Stage 2: The Matching Stage: SWOT analysis  Match between organization’s internal strengths and weaknesses and the opportunities & risks created by its external factors  E.g. internal: strong R and D function  External changing demographics (e.g. population getting older)  Strategy: Develop new products for older adults (related to long term objectives financial or strategic)

8. Stage 2: The Matching Stage: SWOT Matrix Four Types of Strategies Strengths-Opportunities (SO): Use a firm’s internal strengths to take advantage of external opportunities Weaknesses-Opportunities (WO): Improving internal weaknesses by taking advantage of external opportunities Strengths-Threats (ST): Use a firm’s strengths to avoid or reduce the impact of external threats. Weaknesses-Threats (WT): Defensive tactics aimed at reducing internal weaknesses and avoiding external threats

9. 9 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 Cellfone, Inc.= 20% annual growth in the cell phone industry (opportunity) + Excess working capacity (strength) Key Internal FactorKey External FactorResultant Strategy Matching Key Factors to Formulate Alternative Strategies Which types of strategies, e.g. intensive diversification…, are referred to above

10. 10 Spend money annually to increase customer services. = T2: increase in competitors customers services (threat) + W2: Poor customer service (weakness) Hedge (invest) money to protect against rising oil prices = Risk of increasing oil prices(threat) + S7: profits increase by 200%(strength) Increase amount spent on advertising to attract customers only concerned about price. = Cheaper holiday’s being offered by resorts (opportunity) + W7: charge for items free on other airlines (weakness) Invest money (e.g. 100 million) in terminal space at new airports now currently served. = 02: lower interest rates on borrowing money (opportunity) + S1: Own 42 bases in Europe (strength) Key Internal FactorKey External FactorResultant Strategy Ryanair : Matching Key Factors to Formulate Alternative Strategies The above is based on the internal and external evaluation of Ryanair:

11. Strengths:Weaknesses: 1.R and D almost complete 2.Basis for strong management team 3.Key first major customer acquired 4.Initial product can evolve into range of offerings 5.Located near a major centre of excellence 6.Very focused management/staff 7.Well-rounded and managed business 1.Over dependent on borrowings - Insufficient cash resources 2.Board of Directors is too narrow 3.Lack of awareness amongst prospective customers 4.Need to relocate to larger premises 5.Absence of strong sales/marketing expertise 6.Overdependence on few key staff 7.Emerging new technologies may move market in new directions Threats:Opportunities: 1.Major player may enter targeted market segment 2.New technology may make products obsolescent 3.Economic slowdown could reduce demand 4.Euro/Yen may move against $ 5.Market may become price sensitive 6.Market segment's growth could attract major competition 1.Market segment is poised for rapid growth 2.Export markets offer great potential 3.Distribution channels seeking new products 4.Scope to diversify into related market segments

12. Key Strategies 1.Accelerate product launches by strengthening R and D team 2.Extend links with key technology centres 3.Raise additional venture capital 4.Expand senior management team in sales/marketing 5.Recruit non-executive directors 6.Strengthen human resources function and introduce share options for staff 7.Appoint advisers for intellectual property and finance 8.Seek new market segments/applications for products

13. SWOT Matrix Leave Blank 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 Inset key strategies into correct box element of the Matrix

14. 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

15. Boston Consulting Group (BCG) Matrix  Enhances multi-divisional firm in formulating strategies  Divisions may compete in different industries  Focus on market-share position & industry growth rate

16. 16 BCG Matrix Dogs IV Cash Cows III Question Marks (problem child) I Stars II Relative Market Share Position High 1.0 Medium.50 Low 0.0 Industry Sales Growth Rate High +20 Low -20 Medium 0  Ratio of a division’s own market share in an industry to the market share held by the largest rival firm in that industry

17. BCG Matrix Quadrant 1: Question Marks or Problem child  Low relative market share – compete in high- growth industry  Cash needs are high  Case generation is low  Decision to strengthen (intensive strategies) or divest (a defensive strategy)

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

19. BCG Matrix 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, Related diversification  If weakens—retrenchment or divestiture

20. BCG Matrix Dogs  Low relative market share & compete in slow or no market growth  Weak internal & external position  Liquidation, divestiture, retrenchment

21. Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Quantitative Strategic Planning Matrix (QSPM)  Technique designed to determine the relative attractiveness of feasible alternative actions

22. 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

23. 23 QSPM : information from IFE and EFE Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Sum total A.S. Strategy 3Strategy 2Strategy 1WeightKey External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Strategic Alternatives AS 1 to 4 and blank if factor does not effect strategy: TAS = Weight x AS

24. QSPM  Requires intuitive judgments & educated assumptions  Only as good as the prerequisite inputs Limitations Advantages  Sets of strategies considered simultaneously or sequentially  Integration of pertinent external & internal factors in the decision making process Example of a QSPM for Dell

25. Questions Explain, using a SWOT analysis, how you would come up with a set of strategies for an organisation based on an internal evaluation, external evaluation and long term objectives. (30 marks) Describe, using suitable examples, the BCG matrix (10 marks) Explain, using an example, the types of strategies a firm could adopt for each of the 4 quadrants. (20 marks)