05. Strategy Formulation. Strategy Analysis & Choice

8/8/2019 05. Strategy Formulation. Strategy Analysis & Choice

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Strategy Formulation:

Strategy Analysis & Choice

ReferencesReferences

Strategic Management Concepts & CasesStrategic Management Concepts & Cases 1010thth editionedition Fred R. DavidFred R. DavidInternetInternet

Resource Person:Hassan Shahzad

Chapter # 5


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Feasible Alternatives

Chosen Alternative

Constraints

Environments (I&E)


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Strategy Analysis & Choice

The Nature of Strategy Analysis and ChoiceThe Nature of Strategy Analysis and Choice

a.a. EstablishingEstablishinglonglong--term objectivesterm objectives

b. Generate feasible alternatives

c. Evaluate alternativesd. Select specific course of action


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5

Generating, evaluating & selecting bestalternatives involve;

Develop set of most attractive alternative strategies Advantages & Disadvantages

Trade-offs, Costs & Benefits Involve a broad mix of personnel

Representation from each department/function

Provides vehicle to develop commitment to attainment oforganizational objectives

Evaluate each alternative

Internal and external audit information

Firms mission/Vision statement

Listed in writing

Ranked in order of attractiveness


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StrategyStrategy--FormulationFormulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage


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External Factor Evaluation

Matrix (EFE)

Competitive Profile

Matrix

Internal Factor Evaluation

Matrix (IF

E)

Stage 1:The Input Stage

Stage 1 provides basic Input information for

Stages 2 and 3


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SPACE Matrix

Stage 2:The Matching Stage

SWOT Matrix

BCG Matrix

IE Matrix

Grand Strategy Matrix

Stage 2 tries to create match between organizations

internal resources & skills and the opportunities

& risks created by its external factors


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Steps in developing the TOWS Matrix

1. List the firms key external opportunities

2. List the firms key external threats

3. List the firms key internal strengths4. List the firms key internal weaknesses

5. Match internal strengths with external opportunities andrecord the resultant SO Strategies

6.

Match internal weaknesses with external opportunities andrecord the resultant WO Strategies

7. Match internal strengths with external threats and recordthe resultant ST Strategies

8. Match internal weaknesses with external threats andrecord the resultant WT Strategies

Stage 2: The Matching Stage:SWOT Matrix


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Stage 2: The Matching Stage:SWOT Matrix

Four Types of Strategies

1. Strengths-Opportunities (SO):

Use a firms internal strengths to take advantage of external

opportunities2. Weaknesses-Opportunities (WO):

Improving internal weaknesses by taking advantage

of external opportunities

3. Strengths-Threats (ST):Use a firms strengths to avoid or reduce the impact of external

threats.

4. Weaknesses-Threats (WT):

Defensive tactics aimed at reducing internal weaknesses and

avoiding external threats


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SWOT/TOWS Matrix

WT Strategies

Minimize weaknesses

and avoid threats

ST Strategies

Use strengths to avoid

threats

ThreatsThreats--TT

List ThreatsList Threats

WO Strategies

Overcome weaknesses

by taking advantage of

opportunities

SO Strategies

Use strengths to take

advantage of opportunities

OpportunitiesOpportunities--OO

List OpportunitiesList Opportunities

WeaknessesWeaknesses--WW

List WeaknessesList Weaknesses

StrengthsStrengths--SS

List StrengthsList Strengths

Leave BlankLeave Blank


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Strategic Position & Action Evaluation

Matrix (SPACE) Four quadrant framework helps to determines appropriate

strategies

Aggressive

Conservative

Defensive

Competitive

Two Internal Dimensions

Financial Strength [FS]

Competitive Advantage [CA]

Two External Dimensions

Environmental Stability [ES]

Industry Strength [

IS]


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Developing the SPACE Matrix:

EFE

Matrix IFE Matrix

Financial Strength

Competitive Advantage Environmental Stability

Industry Strength


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The Steps of SPACE Matrix

1. Select variables to define FS, CA, ES, & IS

2. Assign numerical ranking from +1 (worst) to +6(best) for FS and IS; Assign numerical ranking from

1 (best) to 6 (worst) forES and CA.3. Compute average score for FS, CA, ES, & IS

4. Plot the average scores on the Matrix

5. Add the two scores on the x-axis and plot point on

X. Add the scores on the y-axis and plot Y. Plot theintersection of the new xy point.

6. Draw a directional vector from origin through thenew intersection point.


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SPACE MatrixFS

+6

+1

+5

+4

+3

+2

-6

-5

-4

-3

-2

-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6

ES

CA IS

Conservative Aggressive

Defensive Competitive


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This particular SPACE matrix tells us that our companyshould pursue an aggressive strategy. Our company has a

strong competitive position it the market with rapidgrowth. It needs to use its internal strengths to develop amarket penetration and market development strategy.This can include product development, integration with

other companies, acquisition of competitors, and so on.


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The BCGmatrix method(Boston Consulting Group- Bruce

Henderson in 1970) is based on theproduct life cycle

theory that can be used to determine what priorities should

be given in theproduct portfolio or product lines of a

business unit..This helps the company allocate resources

and is used as an analytical tool in brand marketing, product

management, strategic management, and portfolio analysis.

It has 2 dimensions: market share and market growth.The basic idea behind it is that the bigger the market share a

product has or the faster the product's market grows the

better it is for the company.

BCG Matrix


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Enhances multidivisional firms efforts to formulate

strategies

Firms divisions may compete in different

industries/markets requiring separate strategy.

Graphically portrays differences among divisions

Manage business portfolio through relative market share

position and industry growth rate.

Boston Consulting Group Matrix


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1. Question Marks- Low relative market share

position yet compete in high-

growth industry.

Cash needs are high with lowprofit generation.

Decision to strengthen(intensive strategies) or divest

2. Stars High relative market share and

high industry growth rate.

Best long-run opportunities for

growth and profitability Substantial investment to

maintain or strengthendominant position

Integration strategies, intensive

strategies, joint ventures

3. Cash Cows High relative market share position,

but compete in low-growth industry

Generate cash in excess of theirneeds

Milked for other purposes

Maintain strong position as long aspossible

Product development, concentricdiversification

If becomes weakretrenchment ordivestiture.

4. Dogs Low relative market share position

and compete in slow or no marketgrowth

Weak internal and external position

Decision to liquidate, divest,retrenchment


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BCG Matrix of BBC

Radio: 52.6% market share,47.4% growth rate;considered a STAR

TV: 37

.1% market share,62.9% growth rate; rated as

CASH COW

BBC Online: QUESTIONMARKThis is because it

has a very low marketshare, but retains a highgrowth rate percentage.

Some limitations of theBoston ConsultingGroup Matrix include:

High market share is notthe only success factor

Market growth is not theonly indicator forattractiveness of a market

Sometimes Dogs canearn even more cash as

Cash Cows


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Internal-External (IE) Matrix IE matrix is used to analyze working conditions and

strategic position of a business.The IE matrix is acontinuation of theEFE matrix&IFE matrixmodels.

It works on a similar manner like the BCG matrix, the IEmatrix positions an organization into a nine cell matrix.

The IE matrix is based on the following two criteria:I. EFE matrixScore - this score is plotted on the y-axis

II. IFE matrixScore-plotted on the x-axis

On the x axis of the IE Matrix, an IFE total weighted score of1.0

to 1.99 represents a weak internal position. A score of 2.0 to 2.99 isconsidered average. A score of 3.0 to 4.0 is strong.

On the y axis, an EFE total weighted score of1.0 to 1.99 isconsidered low. A score of 2.0 to 2.99 is medium. A score of 3.0 to4.0 is high.


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IE matrix example Lets we calculated IFE

matrix for a company &got total weighted score

of 2.79 which shows an

above-average internal

strength.

We also calculated the

EFE matrix for the same

company & got total

weighted score calculatedof 2.46 which suggests a

slightly less than average

ability to respond to

external factors.


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The IE matrix can be divided into three major

regions that have different strategy implications.

Grow & Build

Market Penetration

Market DevelopmentProduct Development

Backward Integration

Forward Integration

Horizontal Integration

Hold & Maintain

Market Penetration

Product Development Harvest orDivest

Retrenchment

DivestitureLiquidation

IE matrix requires more information about the business than the BCG matrix


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The model defines the situation of businessthrough the market growth and their competitive

position in the market.

All organizations (or divisions) can be positionedin one of four quadrants

Based on two dimensions Competitive position

Market growth


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QuadrantIV

Concentric diversification

Horizontal diversification

Conglomeratediversification

Joint ventures

QuadrantIII

Retrenchment


Horizontal diversification

Conglomeratediversification

Liquidation

QuadrantI

Market development

Market penetration

Product development

Forward integration

Backward integration

Horizontal integration


QuadrantII

Market development

Market penetration

Product development

Horizontal integration

Divestiture

Liquidation

RAPIDMARKETGROWTH

SLOW MARKET GROWTH

WEAK

COMPETITIVE

POSITION

STRONG

COMPETITIVE

POSITION


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Four Quadrants ofGrand Strategy Matrix

Quadrant I

Excellent strategic position

Concentration on current

markets and products

Take risks aggressively

when necessary

Quadrant II

Evaluate present approach

seriously

How to change to improve

competitiveness

Rapid market growth

requires intensive strategy

Quadrant III

Compete in slow-growth

industries

Weak competitive position

Cost and asset reduction

indicated (retrenchment)

Quadrant IV

Strong competitive position

Slow-growth industry

Diversification indicated to

more promising growth

areas


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GRAND STRATEGYMATRIX OF BBC

The BBC lies in Quadrant I, which indicates itis part of a rapid market growth industry whilemaintaining a strong competitive position.

Compared to its rivals in the UK, the BBC hasmore financial strength giving it an advantageover competitors. Globally, the company canmake use of its resources/subsidiaries allowing

an increase in customer base.


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Quantitative Strategic

Planning Matrix

(QSPM)Stage 3:The Decision Stage

The QSPM comes under the last stage of The Decision

Stage and also the final stage of this process.The best

thing about QSPM is that it never insist the strategist to

enter the information on assumptions, it extracts the

information from stage1

& stage 2 and suggestsappropriate strategy to choose.

The QSPM combine the intuitive thinking of managers

with the analytical process to decide the best strategy for

the organization success.


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Format of Quantitative Strategic Planning Matrix

There are four main columns in QSPM, the left column listdown the key internal and externalkey factors which aresame as in EFE and IFE matrix. Adjacent column to keyfactors is Weight (relative importance of the factor) whichhold the numeric value obtained from EFE and IFE matrixweight column.The next to weight is AS stands forattractive score assign priority to key factors using thenumeric value 4 for most importance and 1 for leastimportance and the last column TAS (Total attractive score)is the value calculated by multiplying weight by AS. One

thing important to note for each strategy separate AS andTAS value added in the table, weight remain same for all setof strategies mentioned in QSPM.The topmost shows thestrategies are compared in the QSPM matrix, belowmentioned table illustrate the structure of QSPM matrix.


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Steps to develop QSPM1. List the firms key external opportunities & threats; list the firms key

internal strengths and weaknesses (EFE Matrix and IFE Matrix). Aminimum of10 external & internal critical success factors should be taken.

2. Assign weights to each external and internal critical success factor

3. Examine the Stage 2 (matching) matrices and identify alternative strategiesthat the organization should consider implementing.Record these strategiesin the top row of the QSPM. Group the strategies into mutually exclusivesets if possible.

4.

Determine the Attractiveness Scores (AS), defined as numerical values thatindicate the relative attractiveness of each strategy in a given set ofalternatives.The range for Attractiveness Scores is 1 = not attractive, 2 =somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive.

5. Compute the Total Attractiveness Scores.Total Attractiveness Scores aredefined as the product of multiplying the weights (Step 2) by the

Attractiveness Scores (Step 4) in each row.6. Compute the Sum Total Attractiveness Score. Add Total Attractiveness

Scores in each strategy column of the QSPM.The Sum Total AttractivenessScores reveal which strategy is most attractive in each set of alternatives.Higher scores indicate more attractive strategies, considering all the relevantexternal and internal factors that could affect the strategic decisions.


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QSPM

Key Internal Factors

Management

Marketing

Finance/Accounting

Production/OperationsResearch and Development

Computer InformationSystems

Strategy 3Strategy 2Strategy 1WeightKey External Factors

EconomyPolitical/Legal/Governmental

Social/Cultural/Demographic/Environmental

Technological

Competitive

Strategic Alternatives


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Assignment 2 & 3

Group Assignment (2 Members)

On the bases of environmental analysis, develop a

comprehensiveStrategyStrategy--FormulationFormulation Analytical

Frameworkof any company involving;

i. IFE, EFE & CPM of Stage1,

ii. TOWS, BCG & SPACE Matrices of Stage2

iii. QSPM of Stage 3 with at least 3 alternative strategies.

Date of Announcement- Submission

Date-

05. Strategy Formulation. Strategy Analysis & Choice

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