Chapter 6 Strategy Analysis And Choice Strategic Management

Chapter 6 Strategy Analysis And Choice Strategic Management: Concepts and Cases. 9 th edition Fred R. David Power. Point Slides by Anthony F. Chelte Western New England College Fred R. David Prentice Hall Ch 6 -1

Chapter Outline • The Nature of Strategy Analysis and Choice • A Comprehensive Strategy-Formulation Framework • The Input Stage Fred R. David Prentice Hall Ch 6 -2

Chapter Outline • The Matching Stage • The Decision Stage • Cultural Aspects of Strategy Choice Fred R. David Prentice Hall Ch 6 -3

Chapter Outline • The Politics of Strategy Choice • The Role of a Board of Directors Fred R. David Prentice Hall Ch 6 -4

Strategy Analysis & Choice Whether it’s broke or not, fix it—make it better. Not just products, but the whole company if necessary. -- Bill Saporito Fred R. David Prentice Hall Ch 6 -5

Strategy Analysis & Choice Strategic analysis and choice largely involves making subjective decisions based on objective information. Fred R. David Prentice Hall Ch 6 -6

Strategy Analysis & Choice The Nature of Strategy Analysis and Choice – – – Establishing long-term objectives Generating alternative strategies Selecting strategies to pursue Best alternative to achieve mission and objectives Fred R. David Prentice Hall Ch 6 -7

Strategy Analysis & Choice Alternative strategies derive from – – Vision – Mission – Objectives – External audit – Internal audit – Past successful strategies Fred R. David Prentice Hall Ch 6 -8

Strategy Analysis & Choice Participation in generating alternative strategies should be broad – Fred R. David Prentice Hall Ch 6 -9

Strategy-Formulation Analytical Framework Stage 1: The Input Stage 2: The Matching Stage 3: The Decision Stage Fred R. David Prentice Hall Ch 6 -10

Formulation Framework Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage External Factor Evaluation Matrix (EFE) Competitive Profile Matrix Fred R. David Prentice Hall Ch 6 -11

Input Stage • Provides basic input information for the matching and decision stage matrices • Requires strategists to quantify subjectivity early in the process • Good intuitive judgment always needed Fred R. David Prentice Hall Ch 6 -12

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall Ch 6 -13

Matching Stage • Match between organization’s internal resources and skills and the opportunities and risks created by its external factors. Fred R. David Prentice Hall Ch 6 -14

Matching Key Factors to Formulate Alternative Strategies Key Internal Factor Key External Factor Resultant Strategy Excess working capacity (strength) 20% annual growth in the + cell phone industry = (opportunity) Acquire Cellfone, Inc. Insufficient capacity (weakness) + Exit of two major foreign competitors form the industry (opportunity) = Pursue horizontal integration by buying competitor's facilities Strong R&D (strength) + Decreasing numbers of young adults (threat) = Develop new products for older adults Poor employee morale (weakness) + Strong union activity (threat) Fred R. David Prentice Hall = Develop a new employee benefits package Ch 6 -15

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall Ch 6 -16

Matching Stage TOWS Matrix – Threats – Opportunities – Strengths – Weaknesses Fred R. David Prentice Hall Ch 6 -17

TOWS Matrix Develop four types of strategies – Strengths-Opportunities (SO) – Weaknesses-Opportunities (WO) – Strengths-Threats (ST) – Weaknesses-Threats (WT) Fred R. David Prentice Hall Ch 6 -18

SO Strategies Threats Opportunities Weaknesses Strengths (TOWS) SO Strategies Fred R. David Prentice Hall Use a firm’s internal strengths to take advantage of external opportunities Ch 6 -19

WO Strategies Threats Opportunities Weaknesses Strengths (TOWS) WO Strategies Fred R. David Prentice Hall Improving internal weaknesses by taking advantage of external opportunities Ch 6 -20

ST Strategies Threats Opportunities Weaknesses Strengths (TOWS) ST Strategies Fred R. David Prentice Hall Using firm’s strengths to avoid or reduce the impact of external threats. Ch 6 -21

WT Strategies Threats Opportunities Weaknesses Strengths (TOWS) WT Strategies Fred R. David Prentice Hall Defensive tactics aimed at reducing internal weaknesses and avoiding environmental threats. Ch 6 -22

TOWS Matrix Steps in developing the TOWS Matrix 1. 2. 3. 4. 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 Fred R. David Prentice Hall Ch 6 -23

TOWS Matrix Developing the TOWS Matrix 5. 6. 7. 8. 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 Fred R. David Prentice Hall Ch 6 -24

TOWS Matrix Leave Blank Strengths-S Weaknesses-W List Strengths List Weaknesses Opportunities-O SO Strategies WO Strategies List Opportunities Use strengths to take advantage of opportunities Overcome weaknesses by taking advantage of opportunities Threats-T ST Strategies WT Strategies List Threats Use strengths to avoid threats Minimize weaknesses and avoid threats Fred R. David Prentice Hall Ch 6 -25

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall Ch 6 -26

SPACE Matrix Strategic Position and Action Evaluation Matrix § § Four quadrant framework Determines appropriate strategies Aggressive § Conservative § Defensive § Competitive § Fred R. David Prentice Hall Ch 6 -27

SPACE Matrix Two Internal Dimensions Financial Strength [FS] § Competitive Advantage [CA] § Two External Dimensions Environmental Stability [ES] § Industry Strength [IS] § Fred R. David Prentice Hall Ch 6 -28

SPACE Matrix Overall Strategic position determined by: Financial Strength [FS] – Competitive Advantage [CA] – Environmental Stability [ES] – Industry Strength [IS] – Fred R. David Prentice Hall Ch 6 -29

SPACE Matrix Developing the SPACE Matrix: • • • EFE Matrix IFE Matrix Financial Strength Competitive Advantage Environmental Stability Industry Strength Fred R. David Prentice Hall Ch 6 -30

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 Fred R. David Prentice Hall Ch 6 -31

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. Fred R. David Prentice Hall Ch 6 -32

SPACE Factors Internal Strategic Position External Strategic Position Financial Strength (FS) Environmental Stability (ES) Return on investment Leverage Liquidity Working capital Cash flow Ease of exit from market Risk involved in business Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand Fred R. David Prentice Hall Ch 6 -33

SPACE Factors Internal Strategic Position External Strategic Position Competitive Advantage CA Industry Strength (IS) Market share Product quality Product life cycle Customer loyalty Competition’s capacity utilization Technological know-how Control over suppliers & distributors Growth potential Profit potential Financial stability Technological know-how Resource utilization Capital intensify Ease of entry into market Productivity, capacity utilization Fred R. David Prentice Hall Ch 6 -34

SPACE Matrix FS Conservative Aggressive +6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 -1 +2 +3 +4 +5 +6 -2 -3 -4 -5 Defensive -6 ES Fred R. David Prentice Hall Competitive Ch 6 -35

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall Ch 6 -36

BCG Matrix Boston Consulting Group Matrix • • • 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 Fred R. David Prentice Hall Ch 6 -37

BCG Matrix Boston Consulting Group Matrix • • • 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 Fred R. David Prentice Hall Ch 6 -38

BCG Matrix 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. Fred R. David Prentice Hall Ch 6 -39

BCG Matrix Relative Market Share Position Industry Sales Growth Rate High 1. 0 High +20 Medium. 50 Low 0. 0 Stars II Question Marks I Cash Cows III Dogs IV Medium 0 Low -20 Fred R. David Prentice Hall Ch 6 -40

BCG Matrix • • Question Marks Stars Cash Cows Dogs Fred R. David Prentice Hall Ch 6 -41

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 Fred R. David Prentice Hall Ch 6 -42

BCG Matrix Stars • High relative market share and high industry growth rate. • • Best long-run opportunities for growth and profitability Substantial investment to maintain or strengthen dominant position • Integration strategies, intensive strategies, joint ventures Fred R. David Prentice Hall Ch 6 -43

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 • Fred R. David Prentice Hall Ch 6 -44

BCG Matrix Dogs • Low relative market share position and compete in slow or no market growth • • Weak internal and external position Decision to liquidate, divest, retrenchment Fred R. David Prentice Hall Ch 6 -45

IE Matrix • The IE matrix positions an organization’s various divisions in a nine cell display. • IE matrix requires more information about the divisions than BCG Matrix • Strategists in multidivisional firms develop both BCG and IE Matrix Fred R. David Prentice Hall Ch 6 -46

Formulation Framework TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall Ch 6 -47

Grand Strategy Matrix • Popular tool formulating alternative strategies • All organizations (or divisions) can be positioned in one of four quadrants • Based on two evaluative dimensions: Competitive position – Market growth – Fred R. David Prentice Hall Ch 6 -48

RAPID MARKET GROWTH 1. 2. 3. 4. 5. 6. WEAK COMPETITIVE POSITION 1. 2. 3. 4. 5. Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation 1. 2. 3. 4. 5. 6. 7. Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification Quadrant III Quadrant IV Retrenchment 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint ventures Liquidation SLOW MARKET GROWTH Fred R. David Prentice Hall STRONG COMPETITIVE POSITION Ch 6 -49

Grand Strategy Matrix Quadrant I Excellent strategic position • Concentration on current markets and products • Take risks aggressively when necessary • Fred R. David Prentice Hall Ch 6 -50

Grand Strategy Matrix Quadrant II • Evaluate present approach seriously • How to change to improve competitiveness • Rapid market growth requires intensive strategy Fred R. David Prentice Hall Ch 6 -51

Grand Strategy Matrix Quadrant III • • Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost and asset reduction indicated (retrenchment) Fred R. David Prentice Hall Ch 6 -52

Grand Strategy Matrix Quadrant IV Strong competitive position • Slow-growth industry • Diversification indicated to more promising growth areas • Fred R. David Prentice Hall Ch 6 -53

Formulation Framework Quantitative Strategic Planning Matrix (QSPM) Stage 3: The Decision Stage Fred R. David Prentice Hall Ch 6 -54

QSPM Quantitative Strategic Planning Matrix • Only technique designed to determine the relative attractiveness of feasible alternative actions Fred R. David Prentice Hall Ch 6 -55

QSPM Quantitative Strategic Planning Matrix • • • Tool for objective evaluation of alternative strategies Based on identified external and internal crucial success factors Requires good intuitive judgment Fred R. David Prentice Hall Ch 6 -56

QSPM Quantitative Strategic Planning Matrix • 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 Fred R. David Prentice Hall Ch 6 -57

QSPM Quantitative Strategic Planning Matrix • Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing • Determine the Attractiveness Scores (AS) Fred R. David Prentice Hall Ch 6 -58

QSPM Quantitative Strategic Planning Matrix • Compute the total Attractiveness Scores • Compute the Sum Total Attractiveness Score Fred R. David Prentice Hall Ch 6 -59

QSPM Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Strategic Alternatives Weight Strategy 1 Strategy 2 Strategy 3 Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Fred R. David Prentice Hall Ch 6 -60

QSPM Limitations: • Requires intuitive judgments and educated assumptions • Only as good as the prerequisite inputs Fred R. David Prentice Hall Ch 6 -61

QSPM Positives: • Sets of strategies examined simultaneously or sequentially • Requires the integration of pertinent external and internal factors in the decision-making process Fred R. David Prentice Hall Ch 6 -62

Cultural Aspects of Strategy Choice Culture: • The set of shared values, beliefs, attitudes, customs, norms, personalities, heroes, and heroines that describe a firm Fred R. David Prentice Hall Ch 6 -63

Cultural Aspects of Strategy Choice Culture: • Successful strategies depend on degree of support from a firm’s culture Fred R. David Prentice Hall Ch 6 -64

Politics of Strategy Choice Politics in organizations: • • • Management hierarchy Career aspirations Allocation of scarce resources Fred R. David Prentice Hall Ch 6 -65

Politics of Strategy Choice Political tactics for strategists: • • • Equifinality Satisfying Generalization Focus on Higher-Order Issues Provide Political Access on Important Issues Fred R. David Prentice Hall Ch 6 -66

Role of A Board of Directors Duties and Responsibilities: 1. 2. 3. 4. Control and oversight over management Adherence to legal prescriptions Consideration of stakeholder interests Advancement of stockholders’ rights Fred R. David Prentice Hall Ch 6 -67

Key Terms • • Aggressive quadrant Attractiveness Scores (AS) Board of Directors Boston Consulting Group (BCG) Matrix Business portfolio Cash cows Champions Competitive Advantage (CA) Fred R. David Prentice Hall Ch 6 -68

Key Terms • • • Competitive quadrant Conservative quadrant Culture Decision stage Defensive quadrant Directional vector Dogs Environmental Stability (ES) Financial Strength (FS) Fred R. David Prentice Hall Ch 6 -69

Key Terms • • • Grand Strategy Matrix Halo error Industry Strength (IS) Input stage Internal-External (IE) Matrix Long-term objectives Matching stage Quantitative Strategic Planning Matrix (QSPM) Fred R. David Prentice Hall Ch 6 -70

Key Terms • • Question marks Relative market share position SO strategies ST strategies Stars Strategic Position and Action Evaluation (SPACE) Matrix Strategy-formulation framework Fred R. David Prentice Hall Ch 6 -71

Key Terms • • • Sum total attractiveness scores Threats-Opportunities-Weaknesses. Strengths (TOWS) Matrix Total Attractiveness Scores (TAS) WO strategies WT strategies Fred R. David Prentice Hall Ch 6 -72