Strategy Analysis and Choice Chapter Five Chapter Objectives

Strategy Analysis and Choice Chapter Five

Chapter Objectives 1. Describe a three-stage framework for choosing among alternative strategies. 2. Explain

Comprehensive Strategy-Formulation Framework Stage 1: The Input Stage 2: The Matching Stage 3: The Decision Stage

A Comprehensive Strategy-Formulation Framework v Stage 1 - Input Stage: 9 Summarizes the basic input information needed to formulate strategies. 9 Consists of the EFE Matrix, the IFE Matrix, and the Competitive Profile Matrix (CPM). Copyright © 2013 Pearson Education 6 -4

Competitive Profile Matrix (CPM) q Competitive Profile Matrix (CPM): Ø Identifies firm’s major competitors and their strengths and weaknesses in relation to a design firm’s strategic positions. Copyright 2007 Prentice Hall 6 -5

Strategy-Formulation Analytical Framework Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage Competitive Profile Matrix (CPM) External Factor Evaluation Matrix (EFE) Note: EFE and CPM form external and IFE from internal (assessment)

A Comprehensive Strategy-Formulation Framework v Stage 2 - Matching Stage: 9 Focuses on generating possible alternative strategies by Matching key external and internal factors. 9 Techniques include : Ø (SWOT) Matrix. Ø The Boston Consulting Group (BCG) Matrix. ØThe Grand Strategy Matrix. 6 -7

Stage 2 : The Matching Stage SWOT Matrix Stage 2: The Matching Stage BCG Matrix Grand Strategy Matrix

Stage 2 : The Matching Stage 1. (SWOT) Matrix: Strengths-Weaknesses. Opportunities-Threats. Ø helps managers to develop four types of strategies: 9 SO (strengths-opportunities) Strategies. 9 WO (weaknesses-opportunities) Strategies. 9 ST (strengths-threats) Strategies. 9 WT (weaknesses-threats) Strategies. 6 -9

(SWOT) Matrix v “SO” Strategies 9 use a firm’s internal strengths to take advantage of external opportunities. v “WO” Strategies 9 aim at improving internal weaknesses by taking advantage of external opportunities. 6 -10

(SWOT) Matrix v “ST ” Strategies v “WT” Strategies 9 use a firm’s strengths to avoid or reduce the impact of external threats. 9 defensive tactics directed at reducing internal weakness and avoiding external threats. Copyright © 2013 Pearson Education 6 -11

SWOT Matrix Strengths – S Weaknesses – W SWOT List Strengths List Weaknesses Opportunities – O SO Strategies WO Strategies List Opportunities Match and determine strategy Threats – T ST Strategies WT Strategies List Threats Match and determine strategy

SWOT Matrix Strengths – S Weaknesses – W List Strengths List Weaknesses SO Strategies WO Strategies 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 SWOT Opportunities – O List Opportunities

SWOT Matrix Key Internal Factor Great working capacity (strength) + Insufficient capacity (weakness) + Strong R&D (strength) + Poor employee morale (weakness) + Key External Factor 20% annual growth in the cell phone industry (opportunity) Exit of two major foreign competitors from the industry (opportunity) Decreasing numbers of young adults (threat) Strong union activity (threat) Result Strategy = Acquire Cellphone, Inc. = Pursue horizontal integration by buying competitor's facilities = Develop new products for older adults = Develop a new employee benefits package 14

A SWOT Matrix for a Retail Computer Store 6 -15

The Boston Consulting Group (BCG) Matrix 2. BCG Matrix : 9 Graphically shows differences among divisions in terms of relative market share position and industry growth rate. 9 allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share position and the industry growth rate of each division relative to all other divisions in the organization. 6 -16

The BCG Matrix v The major benefit of the BCG Matrix is that it draws attention to the cash flow, investment characteristics, and needs of an organization’s various divisions. Copyright © 2013 Pearson Education 6 -17

BCG Matrix High Industry Growth High Low Market Share Position Stars II Ø High market share Ø High growth Industry Cash Cows III Ø High market share Ø low-growth industry Low Question Marks I Ø Low market share Ø high-growth industry Dogs IV Ø Low market share Ø low-growth industry 18

BCG Matrix 6 -19

BCG Matrix 1. Question Marks: Ø Low relative market share – compete in high-growth industry. Ø Cash needs are high. Ø Cash generation is low. ü Decision to strengthen (intensive strategies) or divest.

BCG Matrix 2. Stars: Ø High relative market share and high growth rate. Ø Best long-run opportunities for growth & profitability. § Large investment to maintain or strengthen leading position. § Integration strategies, intensive strategies, joint ventures.

BCG Matrix 3. Cash Cows: Ø High relative market share, competes in lowgrowth industry. Ø Generate cash in excess of their needs. Ø Milked for other purposes. § Maintain strong position as long as possible. §Product development, concentric diversification. § retrenchment or divestiture.

BCG Matrix 4. Dogs: Ø Low relative market share compete in slow or no growth industry. Ø Weak internal and external position. § Liquidation, divestiture, retrenchment.

Grand Strategy Matrix §Tool formulating alternative strategies §Based on two dimensions 1. Competitive position 2. Market growth

Rapid Market Growth Quadrant II 1. 2. 3. 4. 5. Weak 6. Competitive Position 1. 2. 3. 4. 5. Market development Market penetration Product development Horizontal integration Divestiture Liquidation Quadrant III 1. 2. 3. 4. 5. 6. Market development Market penetration Product development Forward integration Backward integration Horizontal integration Strong Competitive Quadrant IV Position Retrenchment 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint ventures Liquidation Slow Market Growth 25

Grand Strategy Matrix Quadrant I Ø Excellent strategic position Ø Concentration on current markets/products Ø Take risks aggressively when necessary Ø Which type of strategy would you suggest?

Grand Strategy Matrix Quadrant II Ø Evaluate present approach Ø How to improve competitiveness Ø Rapid market growth requires intensive strategy

Grand Strategy Matrix Quadrant III Ø Compete in slow-growth industries Ø Weak competitive position Ø Drastic changes quickly Ø Cost & asset reduction (retrenchment)

Grand Strategy Matrix Quadrant IV Ø Strong competitive position Ø Slow-growth industry Ø Diversification to more promising growth areas

Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Quantitative Strategic Planning Matrix (QSPM)

A Comprehensive Strategy-Formulation Framework v Stage 3 - Decision Stage: 9 Involves the Quantitative Strategic Planning Matrix (QSPM). 9 Discloses the relative attractiveness of alternative strategies and thus provides objective basis for selecting specific strategies. 6 -31

The Quantitative Strategic Planning Matrix (QSPM) v Quantitative Strategic Planning Matrix (QSPM): 9 Objectively indicates which alternative strategies are best. 9 Uses input from Stage 1 analyses and matching results from Stage 2 analyses to decide objectively among alternative strategies. 6 -32

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.

Positive Features of the QSPM v Sets of strategies can be examined sequentially or simultaneously. v Requires strategists to integrate pertinent external and internal factors into the decision process. v Can be adapted for use by small and large for -profit and nonprofit organizations. 6 -34