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Ch 6 -1

Chapter 6

Strategy Analysis & Choice

Strategic Management:

Concepts & Cases

Dr. Ayham Jaaron

Date: 23rd March 2011

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Ch 6 -2

Chapter Outline

The Nature of Strategy & Choice

A ComprehensiveStrategy-Formulation Framework

The Input Stage

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Ch 6 -3

Chapter Outline (contd)

The Matching Stage

The Decision Stage

Cultural Aspects of Strategy Choice

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Ch 6 -4

Chapter Outline (contd)

The Politics of Strategy Choice

Governance Issues

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Ch 6 -6

Comprehensive Strategy-Formulation

Framework

Stage 1:

The Input Stage

Stage 2:

The Matching Stage

Stage 3:

The Decision Stage

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Ch 6 -7

Strategy-Formulation Analytical

Framework

Internal Factor EvaluationMatrix (IFE)

External Factor EvaluationMatrix (EFE)

Competitive Profile Matrix(CPM)

Stage 1:The Input Stage

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Ch 6 -8

Stage 1: The Input Stage

It is a basic input of information for the

matching & decision stage matrices

It requires strategists to quantify subjectivity

early in the process

Good intuitive judgment always needed

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Ch 6 -9


Framework

It consists of five techniques that can beused in any sequence:

SWOT Matrix

SPACE Matrix

BCG Matrix

IE Matrix

Grand Strategy Matrix

Stage 2:The Matching Stage

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Ch 6 -10

Stage 2: The Matching Stage

Match between organizations internal

resources & skills and the opportunities & riskscreated by its external factors

Matching external and internal critical success

factors is the key to effectively generating

feasible alternative strategies.

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Ch 6 -11

Stage 2: The Matching Stage

Strengths

Weaknesses

Opportunities

Threats

SWOT Matrix

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Ch 6 -12

SWOT Matrix

Strengths-Opportunities (SO)

Weaknesses-Opportunities (WO)

Strengths-Threats (ST)

Weaknesses-Threats (WT)

Four Types of Strategies

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Ch 6 -13

SOStrategies

Use a firms

internal strengths

to take advantage

of external

opportunitiesSO

Strategies

Strengths

Weaknesses

OpportunitiesThreats

SWOT

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Ch 6 -14

WOStrategies

Improving internal

weaknesses by

taking advantage

of external

opportunitiesWO

Strategies

Strengths

Weaknesses


SWOT

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Ch 6 -15

STStrategies

Use a firms

strengths

to avoid orreduce the impact

of external

threats

ST

Strategies

Strengths

Weaknesses


SWOT

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Ch 6 -16

WTStrategies

Defensive tactics

aimed at reducing

internal

weaknesses &avoiding

environmental

threats

WT

Strategies

Strengths

Weaknesses


SWOT

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Ch 6 -17

SWOT Matrix

Developing the SWOT

List firms key internal Strengths

List firms key internal Weaknesses

List firms key external Opportuni t ies

List firms key external Threats

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Ch 6 -18

SWOT Matrix

Leave B lank

Strengths S

List Strengths

Weaknesses W

List Weaknesses

Opportunities O

List Opportunities

SOStrategies

Use strengths to take

advantage o f

opportuni t ies

WOStrategies

Overcomin g weaknesses

by taking advantage of

opportuni t ies

Threats T

List Threats

STStrategies

Use strengths to avoid

threats

WTStrategies

Minimize weaknesses and

avoid threats

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Example: SWOT Matrix

Ch 6 -19

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Ch 6 -20

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'sfacilities

=

Exit of two major foreign

competitors from theindustry (opportunity)

+Insufficient capacity

(weakness)

Acquire Cellfone, Inc.=20% annual growth inthe cell phone industry

(opportunity)

+Excess working capital

(strength)

Key Internal Factor Key External Factor Resultant Strategy

Matching Key Factors to Formulate Alternative Strategies

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Ch 6 -21

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

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Ch 6 -22


FrameworkSWOT Matrix

SPACE Matrix

BCG Matrix

IE Matrix


Stage 2:

The Matching Stage

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Ch 6 -23

SPACE Matrix

Strategic Position & Action Evaluation Matrix

Aggressive: focus on internal strengths

Conservative: use basic competencies and not to

take threats.

Defensive: rectify internal weaknesses.

Competitive: use competitive strategies such asbackward, forward and horizontal integration.

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Ch 6 -24

SPACE Matrix

Two Internal Dimensions

Financial Strength (FS)Competitive Advantage (CA)

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Ch 6 -25

SPACE Matrix

Two External Dimensions

Environmental Stability (ES)Industry Strength (IS)

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Ch 6 -26

SPACE Factors

Environmental Stability (ES)

Technological changes

Rate of inflationDemand variability

Price range of competing products

Barriers to entry

Competitive pressure

Price elasticity of demandEase of exit from market

Risk involved in business

Financial Strength (FS)

Return on investment

LeverageLiquidity

Working capital

Cash flow

External Strategic PositionInternal Strategic Position

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Ch 6 -27

SPACE Factors

Industry Strength (IS)

Growth potential

Profit potentialTechnological know-how

Resource utilization

Ease of entry into market

Productivity, capacity utilization

Competitive Advantage CA

Market share

Product qualityProduct life cycle

Customer loyalty

Competitions capacity utilization

Technological know-how

Control over suppliers & distributors

External Strategic PositionInternal Strategic Position

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Ch 6 -28

Steps to Developing a SPACE Matrix

1. Select a set of variables to define FS, CA,

ES, & IS

2. Assign a numerical value:

1. From +1 to +6 to each FS & IS dimension

2. From -1 to -6 to each ES & CA dimension

3. Compute an average score for each FS,

CA, ES, & IS

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Ch 6 -29

Steps to Developing a SPACE Matrix

1. Plot the average score on the appropriate

axis

2. Add the two scores on the x-axis and plot

the point. Add the two scores on the y-axisand plot the point. Plot the intersection of

the new xy point

3. Draw a directional vector from the originthrough the new intersection point.

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SPACE Matrix Example....

Ch 6 -30

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Ch 6 -31

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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Ch 6 -32



SPACE Matrix

BCG Matrix

IE Matrix


Stage 2:

The Matching Stage

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Ch 6 -33

BCG Matrix

Boston Consulting Group Matrix

Enhances multi-divisional firm in formulating

strategies

Autonomous divisions = business portfolio

Divisions may compete in different industries

Focus on market-share position & industry

growth rate

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Ch 6 -34

BCG Matrix

Relative Market Share Position

Ratio of a divisions own market share in anindustry to the market share held by the largest

rival firm in that industry

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Ch 6 -35

BCG Matrix

Dogs

IV

Cash Cows

III

Question Marks

I

Stars

II

Relative Market Share PositionHigh

1.0

Medium

.50

Low

0.0

IndustrySalesGrow

thRate

High

+20

Low

-20

Medium

0

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Ch 6 -36

BCG Matrix

Question Marks

Low relative market share they compete in

high-growth industry

Cash needs are high

Cash generation is low

Decision whether to strengthen (intensivestrategies) or divest.

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Ch 6 -37

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, jointventures.

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Ch 6 -38

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, concentric diversification

If weakensretrenchment or divestiture

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Ch 6 -39

BCG Matrix

Dogs

Low relative market share & compete in slow or

no market growthWeak internal & external position

Liquidation, divestiture, retrenchment

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Ch 6 -40



SPACE Matrix

BCG Matrix

IE Matrix


Stage 2:

The Matching Stage

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Ch 6 -41

The Internal-External Matrix

Positions an organizations 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

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Ch 6 -42

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Ch 6 -43

IE Matrix

Based on two key dimensions

The IFE total weighted scores on the x-axis

The EFE total weighted scores on the y-axis

Divided into three major regions Grow and build Cells I, II, or IV

Hold and maintain Cells III, V, or VII

Harvest or divest Cells VI, VIII, or IX

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Ch 6 -45


Framework

SPACE Matrix

BCG Matrix

IE Matrix

Stage 2:

The Matching Stage

SWOT Matrix


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Ch 6 -46


Tool for formulating alternative strategies

Based on two dimensionsCompetitive position

Market growth

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Ch 6 -47

Quad rant IV

1. Concentric diversification

2. Horizontal diversification

3. Conglomeratediversification

4. Joint ventures

Quadrant III

1. Retrenchment


3. Horizontal diversification4. 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

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Ch 6 -48


Excellent strategic position

Concentration on current markets/products

Take risks aggressively when necessary

Quadrant I

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Ch 6 -49


Evaluate present approach

How to improve competitiveness

Rapid market growth requires intensive

strategy

Quadrant II

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Ch 6 -50


Compete in slow-growth industries

Weak competitive position

Drastic changes quickly

Cost & asset reduction (retrenchment)

Quadrant III

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Ch 6 -51


Strong competitive position

Slow-growth industry

Diversification to more promising growth areas

Quadrant IV

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Ch 6 -52


Framework

Stage 3:

The Decision Stage

Quantitative Strategic

Planning Matrix(QSPM)

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Ch 6 -53

QSPM

Technique designed to determine the relativeattractiveness of feasible alternative actions

Quantitative Strategic Planning Matrix

QSPM St t i Alt ti

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Ch 6 -54

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

St t D l QSPM

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Ch 6 -55

Steps to Develop a QSPM

1. Make a list of the firms key external

opportunities/threats and internal

strengths/weaknesses in the left column

2. Assign weights to each key external andinternal factor

3. Examine the Stage 2 (matching) matrices,

and identify alternative strategies that theorganization should consider implementing

St t D l QSPM

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Ch 6 -56

Steps to Develop a QSPM

4. Determine the Attractiveness Scores (1=not

attractive, 2= somewhat attractive, 3=

reasonably attractive, highly attractive).

5. Compare the Total Attractiveness Scores6. Compute the Sum Total Attractiveness

Score

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QSPM

Requires intuitive judgments & educatedassumptions

Only as good as the prerequisite inputs

Limitations

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Ch 6 -59

QSPM

Sets of strategies considered simultaneously orsequentially

Integration of pertinent external & internal

factors in the decision making process

Advantages

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Cultural Aspects of Strategy

Choice

Successful strategies depend on the degree ofconsistency with the firms culture

Organization Culture

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Ch 6 -61

Politics of Strategy Choice

Management hierarchy of command

Career aspirations of different people

Allocation of scarce resourcesThese factors guarantees the formation of

coalitions of individuals who strive to take care of

themselves first, and the organization second,

third or fourth. Successful strategists rely heavilyon informal questioning of individuals, and

sought to clarify issues until a consensus

emerged.

Politics in Organizations

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Ch 6 -62

Politics of Strategy Choice

Because strategies must be effective in the marketplace

and capable of gaining internal commitment, the following

tactics are used to aid strategists:

Equifinality/ last preparations. (generate new alternatives

that give similar results).

Satisfying: satisfactory results with acceptable strategy is

better than failure.

Generalization: leave specific issues and talk about future

benefits.Higher-order issues: focus on issues of survival.

Political access on important issues

Political Tactics for Strategists

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Ch 6 -63

Governance Issues

Control & oversight over management

Adherence to legal prescriptions

Consideration of stakeholder interests

Advancement of stockholder rights

Board of Directors Roles & Responsibilitiesare

Corporate Governance Issues

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Ch 6 64

Corporate Governance Issues

1. No more than 2 directors are current or former company

executives

2. No directors do business with the company

3. Audit, compensation, and nominating committees made upof outside directors

4. Each director owns a large equity stake in the company

5. At least one outside director with extensive experience

6. Fully employed directors sit on no more than 4 boards

Retirees on no more than 7

7. Each director attends at lest 75% of all meetings

Business Weeks Principles of Good Governance

4794 Chap 06

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