Chapter 6Strategy Analysis & Choice

-- Establishing long-term objectives-- Generating alternative strategies-- Selecting best alternative to achieve mission & objectives

Nature of Strategy Analysis & Choice

Strategy Analysis & Choice

Comprehensive Strategy-Formulation Framework

Stage 1:The Input Stage

Stage 2:The Matching Stage

Stage 3:The Decision Stage

Strategy-Formulation Analytical Framework

Internal Factor EvaluationMatrix (IFE)

External Factor EvaluationMatrix (EFE)

Stage 1:The Input Stage

Stage 1: The Input Stage

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

Strategy-Formulation Analytical Framework

SWOT Matrix

BCG MatrixStage 2:The Matching Stage

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)

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 advantageof 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

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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 Factor Key External Factor Resultant Strategy

Matching Key Factors to Formulate Alternative Strategies

Which types of strategies, e.g. intensive diversification…, are referred to above

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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 Factor Key External Factor Resultant Strategy

Ryanair : Matching Key Factors to Formulate Alternative Strategies

The above is based on the internal and external evaluation of Ryanair:

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

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

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

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

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

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BCG Matrix

Dogs

IV

Cash Cows

III

Question Marks (problem child)

I

Stars

II

Relative Market Share PositionHigh1.0

Medium.50

Low0.0

Ind

us

try

Sa

les

Gro

wth

Ra

te

High+20

Low-20

Medium0

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

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)

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

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

BCG Matrix

Dogs

Low relative market share & compete in slow or no market growth

Weak internal & external position

Liquidation, divestiture, retrenchment

Strategy-Formulation Analytical Framework

Stage 3:The Decision Stage

Quantitative StrategicPlanning Matrix

(QSPM)

Technique designed to determine the relative attractiveness of feasible alternative actions

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

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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

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

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)