Strategy Analysis and Choice

Strategic ManagementConcepts & Cases

8th edition

Fred R. David

Chapter 6:Strategy Analysis &

ChoicePowerPoint Slides By:

Anthony F. Chelte

Western New England College

Comprehensive Strategic Management ModelComprehensive Strategic Management Model

Vision &

Mission Statements

Chapter 2

ExternalAudit

Chapter 3

InternalAudit

Chapter 4

Strategies In

Action

Chapter 5

Strategy Analysis

&Choice

Chapter 6

ImplementStrategies:

Mgmt Issues

Chapter 7

ImplementStrategies:Marketing,Fin/Acct,R&D, CISChapter 8

Measure &Evaluate

Performance

Chapter 9

Strategy Analysis & Strategy Analysis & ChoiceChoice

“Strategic management is not a box of tricks or a bundle of techniques. It is analytical thinking and commitment of resources to action. But quantification alone is not planning. Some of the most important issues in strategic management cannot be quantified at all.”

—Peter Drucker—

“Whether it’s broke or not, fix it—make it better. Not just products, but the whole company if necessary.”

—Bill Saporito—

“Planning is often doomed before it ever starts, either because too much is expected of it or because not enough is put into it.”

—T. J. Cartwright—

Strategic Analysis and Choice:

Making subjective decisions based on objective information

Strategic Analysis and Choice:

• Generate feasible alternatives• Evaluate alternatives• Select specific course of action

Generating & Selecting Strategies

Develop set of most attractive alternative strategies

Determine for the set• Advantages• Disadvantages• Trade-offs• Costs• Benefits

Involve a broad mix of personnel• Representation from each

department/function• Provides opportunity to gain

understanding of firm’s direction• Provides vehicle to develop commitment

to attainment of organizational objectives

Evaluate each alternative• Internal and external audit information• Firm’s mission statement• Listed in writing• Ranked in order of attractiveness

Strategy-Formulation Analytical Framework

Stage 1: The Input StageStage 1: The Input Stage

Stage 2: The Matching StageStage 2: The Matching Stage

Stage 3: The Decision StageStage 3: The Decision Stage

Stage 1: The Input StageStage 1: The Input Stage

ExternalFactor

EvaluationMatrix (EFE)

CompetitiveProfileMatrix

InternalFactor

EvaluationMatrix (IFE)

Stage 2: The Matching StageStage 2: The Matching Stage

ThreatsOpportunitiesWeaknesses

Strengths(TOWS)

StrategicPosition &

Action Evaluation(SPACE)

BostonConsulting

Group Matrix(BCG)

Internal-ExternalMatrix

GrandStrategyMatrix

Stage 3: The Decision StageStage 3: The Decision Stage

Quantitative StrategicPlanning Matrix

(QSPM)

Stage 1: The Input Stage

Provides Basic Input for Stages 2 and 3

• External Factor Evaluation Matrix (EFE)• Internal Factor Evaluation Matrix (IFE)• Competitive Profile Matrix

Stage 2: The Matching Stage

Strategy is characterized by the organizational match between

• Internal resources and skills• Opportunities & risks created by

external factors

Matching Key FactorsMatching Key Factors

Resultant StrategyKey External Factor

Key Internal Factor

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 form the industry (opportunity)

+Insufficient capacity (weakness)

Acquire Visioncable, Inc.

20% annual growth in the cablevision industry (opportunity)

+Excess working capacity (strength)

Four Types of Four Types of StrategiesStrategies

WT Strategies

ST Strategies

WO Strategies

SO Strategies

Strengths(TOWS)

SOSO Strategies Strategies

SO Strategies

Use a firm’s internal

strengths to take

advantage of external

opportunities

Strengths(TOWS)

WOWO Strategies Strategies

WO Strategies

Improving internal

weaknesses by taking

advantage of external

opportunities

Strengths(TOWS)

STST Strategies Strategies

ST Strategies

Using firm’s strengths to

avoid or reduce the impact of external threats.

Strengths(TOWS)

WTWT Strategies Strategies

WT Strategies

Defensive tactics aimed at reducing

internal weaknesses and avoiding

environmental threats.

Strengths(TOWS)

The TOWS 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

The TOWS Matrix

• Match internal strengths with external opportunities and record the resultant SO Strategies

• 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

TOWS MatrixTOWS Matrix

WT Strategies

Minimize weaknesses and

avoid threats

ST Strategies

Use strengths to avoid threats

Threats-T

List Threats

WO Strategies

Overcome weaknesses by

taking advantage of opportunities

SO Strategies

Use strengths to take advantage of opportunities

Opportunities-O

List Opportunities

Weaknesses-W

List Weaknesses

Strengths-S

List Strengths

Leave Blank

Strategic Position & Action Evaluation Matrix (SPACE)

• Four quadrant framework • 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]

Overall Strategic position determined by:

• Financial Strength [FS]• Competitive Advantage [CA]• Environmental Stability [ES]• Industry Strength [IS]

Developing the SPACE Matrix:• EFE Matrix• IFE Matrix• Financial Strength• Competitive Advantage• Environmental Stability• Industry Strength

The SPACE Matrix

• Select variables to define FS, CA, ES, & IS• Assign numerical ranking from +1 (worst)

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

• Compute average score for FS, CA, ES, & IS

The SPACE Matrix

• Plot the average scores on the Matrix• Add the two scores on the x-axis and

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

• Draw a directional vector from origin through the new intersection point.

SPACE FactorsSPACE Factors

Environmental Stability (ES)

Technological changesRate of inflationDemand variabilityPrice range of competing productsBarriers to entryCompetitive pressurePrice elasticity of demand

Financial Strength (FS)Return on investmentLeverageLiquidityWorking capitalCash flowEase of exit from marketRisk involved in business

External Strategic Position

Internal Strategic Position

SPACE FactorsSPACE Factors

Industry Strength (IS)Growth potentialProfit potentialFinancial stabilityTechnological know-howResource utilizationCapital intensifyEase of entry into marketProductivity, capacity utilization

Competitive Advantage CA

Market shareProduct qualityProduct life cycleCustomer loyaltyCompetition’s capacity utilizationTechnological know-howControl over suppliers & distributors

External Strategic Position

Internal Strategic Position

SPACE MatrixSPACE MatrixFS

+5+4+3

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

Conservative Aggressive

Defensive Competitive

Boston Consulting Group Matrix(BCG)

• Enhances multidivisional firms’ efforts to formulate strategies

• Autonomous divisions (or profit centers) constitute the business portfolio

• Firm’s divisions may compete in different industries requiring separate strategy

• Graphically portrays differences among divisions

• Focuses on market share position and industry growth rate

• Manage business portfolio through relative market share position and industry growth rate

• Relative market share position defined:

Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry.

BCG MatrixBCG Matrix

DogsDogs

IVIVCash CowsCash Cows

IIIIII

Question MarksQuestion Marks

IIStarsStars

Relative Market Share PositionHigh1.0

Medium.50

Low0.0

High+20

Low-20

Medium0

BCG Matrix

• Question Marks • Stars• Cash Cows• Dogs

BCG Matrix

• Question Marks Low relative market share position

yet compete in high-growth industry. Cash needs are high Case generation is low

Decision to strengthen (intensive strategies) or divest

BCG Matrix• Stars

High relative market share and high industry growth rate. Best long-run opportunities for growth

and profitabilitySubstantial investment to maintain or

strengthen dominant position Integration strategies, intensive

strategies, joint ventures

BCG Matrix• Cash Cows

High relative market share position, but compete 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 becomes weak—retrenchment or divestiture

BCG Matrix

• DogsLow relative market share position

and compete in slow or no market growth Weak internal and external position

Decision to liquidate, divest, retrenchment

Grand Strategy Matrix

• Popular tool for formulating alternative strategies

• Based on two evaluative dimensions Competitive position Market growth

Grand Strategy Grand Strategy MatrixMatrix

Quadrant IV• Concentric

diversification• Horizontal

diversification• Conglomerate

diversification• Joint ventures

Quadrant III• Retrenchment• Concentric

diversification• Horizontal

diversification• Conglomerate

diversification• Liquidation

Quadrant I• Market development• Market penetration• Product development• Forward integration• Backward integration• Horizontal integration• Concentric

diversification

Quadrant II• Market development• Market penetration• Product development• Horizontal integration• Divestiture• Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK COMPETITIVE

POSITION

STRONGCOMPETITIVE

POSITION

• 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 Drastic changes quickly Cost and asset reduction indicated

(retrenchment)

• Quadrant IV Strong competitive position Slow-growth industry Diversification indicated to more promising

growth areas

Quantitative Strategic Planning Matrix (QSPM)

• Comprises Stage 3 of the analytical framework

• Analytical technique designed to determine the relative attractiveness of feasible alternative actions.

• Uses input from Stage 1 and Stage 2

Quantitative Strategic Planning Matrix (QSPM)

• Tool for objective evaluation of alternative strategies

• Based on identified external and internal crucial success factors

• Requires good intuitive judgment

QSPMQSPM

Key Internal FactorsManagementMarketingFinance/AccountingProduction/OperationsResearch and DevelopmentComputer Information Systems

Strategy 3Strategy 2

Strategy 1

WeightKey External FactorsEconomyPolitical/Legal/GovernmentalSocial/Cultural/Demographic/EnvironmentalTechnologicalCompetitive

Strategic Alternatives

Strategy Analysis & Strategy Analysis & ChoiceChoiceQSPM

• List the firm’s key external opportunities & threats; list the firm’s key internal strengths and weaknesses

• Assign weights to each external and internal critical success factor

• Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing

• Determine the Attractiveness Scores (AS)

• Compute the total Attractiveness Scores

• Compute the Sum Total Attractiveness Score

QSPMPositives:• Sets of strategies examined

simultaneously or sequentially• Requires the integration of

pertinent external and internal factors in the decision-making process

Limitations:• Requires intuitive judgments

and educated assumptions• Only as good as the

prerequisite inputs

Key Terms & ConceptsKey Terms & Concepts

• Aggressive quadrant• Attractiveness

Scores (AS)• Board of Directors• Boston Consulting

Group (BCG) Matrix• Business portfolio• Cash cows• Champions• Competitive

Advantage (CA)

• Competitive quadrant• Conservative quadrant• Culture• Decision stage• Defensive quadrant• Directional vector• Dogs• Environmental Stability

(ES)• Financial Strength (FS)

• Grand Strategy Matrix• Halo error• Industry Strength (IS)• Input stage• Internal-External (IE)

Matrix• Long-term objectives• Matching• Matching stage• Quantitative Strategic

Planning Matrix (QSPM)

• Question marks• Relative market share

position• SO strategies• ST strategies• Stars• Strategic Position and

Action Evaluation (SPACE) Matrix

• Strategy-formulation framework

• Sum total attractiveness scores

• Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix

• Total Attractiveness Scores (TAS)

• WO strategies• WT strategies

Strategy Analysis and Choice

Education

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