Chapter 6 Strategy Analysis Choice Strategic Management Concepts

Chapter 6 Strategy Analysis & Choice Strategic Management: Concepts & Cases 11 th Edition Fred David Copyright 2007 Prentice Hall 1

Strategy Analysis & Choice Nature of Strategy Analysis & Choice -- Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives Copyright 2007 Prentice Hall 2

Comprehensive Strategy-Formulation Framework Stage 1: The Input Stage 2: The Matching Stage Copyright 2007 Prentice Hall Stage 3: The Decision Stage 3

Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright 2007 Prentice Hall 4

SWOT Matrix Four Types of Strategies §Strengths-Opportunities (SO) §Weaknesses-Opportunities (WO) §Strengths-Threats (ST) §Weaknesses-Threats (WT) Copyright 2007 Prentice Hall 5

SO Strategies Strengths Weaknesses Opportunities Threats SWOT Copyright 2007 Prentice Hall SO Strategies Use a firm’s internal strengths to take advantage of external opportunities 6

WO Strategies Strengths Weaknesses Opportunities Threats SWOT Copyright 2007 Prentice Hall WO Strategies Improving internal weaknesses by taking advantage of external opportunities 7

ST Strategies Strengths Weaknesses Opportunities Threats SWOT Copyright 2007 Prentice Hall ST Strategies Use a firm’s strengths to avoid or reduce the impact of external threats 8

WT Strategies Strengths Weaknesses Opportunities Threats SWOT Copyright 2007 Prentice Hall WT Strategies Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats 9

SWOT Matrix Strengths – S Weaknesses – W List Strengths List Weaknesses Opportunities – O SO Strategies WO Strategies List Opportunities Use strengths to take advantage of opportunities Overcoming weaknesses by taking advantage of opportunities Threats – T ST Strategies WT Strategies List Threats Use strengths to avoid threats Minimize weaknesses and avoid threats Leave Blank Copyright 2007 Prentice Hall 10

Matching Key Factors to Formulate Alternative Strategies Key Internal Factor Key External Factor Excess working capacity (strength) 20% annual growth in the cell phone industry (opportunity) Insufficient capacity (weakness) Strong R&D (strength) Poor employee morale (weakness) + Resultant Strategy = Acquire Cellfone, Inc. Exit of two major foreign Pursue horizontal integration + competitors form the = by buying competitor's industry (opportunity) facilities + + Decreasing numbers of young adults (threat) Strong union activity (threat) = = Develop new products for older adults Develop a new employee benefits package 11

SPACE Factors Internal Strategic Position Financial Strength (FS) Return on investment Leverage Liquidity Working capital Cash flow Strategic Position and Action Evaluation External Strategic Position Environmental Stability (ES) Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand Ease of exit from market Risk involved in business 12

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 Ease of entry into market Productivity, capacity utilization 13

SPACE Matrix Select variables to define FS, CA, ES, & IS n 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. n Compute average score for FS, CA, ES, & IS n 14

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 Defensive -5 -6 Competitive ES 15

SPACE Matrix Select variables to define FS, CA, ES, & IS n 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. n Compute average score for FS, CA, ES, & IS n 16

SPACE Matrix Plot the average scores on the Matrix n 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. n Draw a directional vector from origin through the new intersection point. n 17

BCG Matrix - Boston Consulting Group 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 18

BCG Matrix Boston Consulting Group Matrix Graphically portrays differences among divisions n Focuses on market share position and industry growth rate n Manage business portfolio through relative market share position and industry growth rate n 19

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. 20

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 21

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 22

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 • 23

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 24

The Internal-External Matrix n n Positions an organization’s various divisions in a nine-cell display. Similar to BCG Matrix except the IE Matrix: q q Requires more information about the divisions Strategic implications of each matrix are different Copyright 2007 Prentice Hall 25

Copyright 2007 Prentice Hall 26

IE Matrix n Based on two key dimensions q q n The IFE total weighted scores on the x-axis The EFE total weighted scores on the y-axis Divided into three major regions q q q Grow and build – Cells I, II, or IV Hold and maintain – Cells III, V, or VII Harvest or divest – Cells VI, VIII, or IX Copyright 2007 Prentice Hall 27

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 STRONG COMPETITIVE POSITION 28

Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Copyright 2007 Prentice Hall Quantitative Strategic Planning Matrix (QSPM) 29

QSPM Quantitative Strategic Planning Matrix • n n n Only technique designed to determine the relative attractiveness of feasible alternative actions Tool for objective evaluation of alternative strategies Based on identified external and internal crucial success factors Requires good intuitive judgment 30

QSPM Quantitative Strategic Planning Matrix n n 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) 31

QSPM Quantitative Strategic Planning Matrix n Compute the total Attractiveness Scores n Compute the Sum Total Attractiveness Score 32

QSPM Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Weight Strategy 1 Strategy 2 Strategy 3 Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Copyright 2007 Prentice Hall 33

QSPM Limitations: n n Requires intuitive judgments and educated assumptions Positives: n Sets of strategies examined simultaneously or sequentially n Requires the integration of pertinent external and internal factors in the decision-making process Only as good as the prerequisite inputs 34

Strategic Alternatives QSPM Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Weight Strategy 1 Strategy 2 Strategy 3 Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems 35

Corporate Governance Issues Business Week’s “Principles of Good Governance” 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 are made up of outside directors 4. Each director attends at lest 75% of all meetings 5. Audit committee meets at least four times a year 6. CEO is not also the Chairperson of the Board 7. Shareholders have considerable power and information to choose & replace directors 8. Stock options are considered a corporate expense 9. No interlocking directorships Copyright 2007 Prentice Hall 36