Chap 06

Strategic Management Concepts & Cases
Fred R. David
8th edition
Chapter 6: Strategy Analysis & Choice

PowerPoint Slides By: Anthony F. Chelte
Western New England College
Ch. 6-1 2001 Prentice Hall
Comprehensive Strategic Management Model
External Audit
Chapter 3 Strategy Analysis & Choice Chapter 6
Vision & Mission Statements
Strategies In Action
Implement Strategies: Mgmt Issues
Chapter 2
Chapter 5
Chapter 7
Implement Strategies: Marketing, Fin/Acct, R&D, CIS
Measure & Evaluate Performance
Chapter 8
Chapter 9
Internal Audit
Chapter 4
Strategy Analysis & Choice

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 its broke or not, fix itmake 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 firms direction Provides vehicle to develop commitment to attainment of organizational objectives

Evaluate each alternative

Internal and external audit information Firms mission statement Listed in writing Ranked in order of attractiveness
Strategy-Formulation Analytical Framework
Stage 1: The Input Stage
Stage 2: The Matching Stage
Stage 3: The Decision Stage
External Factor Evaluation Matrix (EFE)
Competitive Profile Matrix
Internal Factor Evaluation Matrix (IFE)
Threats Opportunities Weaknesses Strengths (TOWS)
Strategic Position & Action Evaluation (SPACE)
Boston Consulting Group Matrix (BCG)
InternalExternal Matrix (IE)
Grand Strategy Matrix
Stage 3: The Decision Stage
Quantitative Strategic Planning Matrix (QSPM)

Provides Basic Input for Stages 2 and 3

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

Strategy is characterized by the organizational match between

Internal resources and skills Opportunities & risks created by external factors
Matching Key Factors

Key Internal Factor Excess working capacity (strength) Key External Factor Resultant Strategy 20% annual growth in the cablevision + = Acquire Visioncable, Inc. industry (opportunity)
Insufficient capacity (weakness)
Exit of two major foreign competitors + = form the industry (opportunity)
Pursue horizontal integration by buying competitor's facilities Develop new products for older adults Develop a new employee benefits package
Ch. 6-17
Decreasing numbers Strong R&D (strength) + of young adults = (threat)
Poor employee morale + Strong union (weakness) activity (threat)

2001 Prentice Hall
Four Types of Strategies
SO Strategies
WO Strategies
ST Strategies
WT Strategies
SO Strategies
SO Strategies
Use a firms internal strengths to take advantage of external opportunities
WO Strategies
Improving internal weaknesses by taking advantage of external opportunities
WO Strategies
ST Strategies
ST Strategies
Using firms strengths to avoid or reduce the impact of external threats.
WT Strategies
Defensive tactics aimed at reducing internal weaknesses and avoiding environmental threats.
WT Strategies

The TOWS Matrix
List List List List
the the the the
firms firms firms firms
key key key key
external opportunities external threats internal strengths 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 Matrix
Leave Blank Strengths-S
List Strengths
Weaknesses-W
List Weaknesses
Opportunities-O
List Opportunities
SO Strategies
Use strengths to take advantage of opportunities
WO Strategies
Overcome weaknesses by taking advantage of opportunities
Threats-T
List Threats
ST Strategies
Use strengths to avoid threats
2001 Prentice Hall
WT Strategies
Minimize weaknesses and avoid threats
Ch. 6-25

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]


Strategic Position & Action Evaluation Matrix (SPACE) 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 Factors
Internal Strategic Position External Strategic Position
Financial Strength (FS)

Return on investment Leverage Liquidity Working capital Cash flow Ease of exit from market Risk involved in business
Environmental Stability (ES)

Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand
SPACE Factors
Internal Strategic Position External Strategic Position
Competitive Advantage CA
Market share Product quality Product life cycle Customer loyalty Competitions capacity utilization Technological know-how Control over suppliers & distributors
Industry Strength (IS)

Growth potential Profit potential Financial stability Technological know-how Resource utilization Capital intensify Ease of entry into market Productivity, capacity utilization
Ch. 6-33
2001 Prentice Hall
SPACE Matrix
Conservative FS
+6 +5 +4 +3 +2 +1
Aggressive
CA
-6 -5 -4 -3 -2 -1 -1 -2 -3 -4 -5 +1 +2 +3 +4 +5 +6
IS
Defensive
-6
Competitive ES
Ch. 6-34
2001 Prentice Hall

Enhances multidivisional firms efforts to formulate strategies Autonomous divisions (or profit centers) constitute the business portfolio Firms 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 divisions own market share in a particular industry to the market share held by the largest rival firm in that industry.
BCG Matrix
Relative Market Share Position
High 1.0 Medium .50 Low 0.0
Industry Sales Growth Rate
High +20
Stars II
Medium 0
Question Marks I
Cash Cows III

Low -20
2001 Prentice Hall
Dogs IV
Ch. 6-38

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 profitability
Substantial
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
possible

strong position as long as
Product development, concentric diversification If becomes weakretrenchment or divestiture


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


Popular tool for formulating alternative strategies Based on two evaluative dimensions
Competitive
position Market growth

RAPID MARKET GROWTH
Quadrant II

Quadrant I

Market development Market penetration Product development Horizontal integration Divestiture Liquidation
WEAK COMPETITIVE POSITION

Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification
Quadrant III
Retrenchment Concentric diversification Horizontal diversification Conglomerate diversification Liquidation

Quadrant IV
Concentric diversification Horizontal diversification Conglomerate diversification Joint ventures
STRONG COMPETITIVE POSITION
SLOW MARKET GROWTH


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

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

Tool for objective evaluation of alternative strategies Based on identified external and internal crucial success factors Requires good intuitive judgment
QSPM
Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Weight
Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3

QSPM
List the firms key external opportunities & threats; list the firms key internal strengths and weaknesses Assign weights to each external and internal critical success factor

QSPM
Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing Determine the Attractiveness Scores (AS)

QSPM

Compute the total Attractiveness Scores Compute the Sum Total Attractiveness Score

QSPM
Positives: Sets of strategies examined simultaneously or sequentially Requires the integration of pertinent external and internal factors in the decision-making process

QSPM
Limitations: Requires intuitive judgments and educated assumptions Only as good as the prerequisite inputs
Key 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)
Ch. 6-58
2001 Prentice Hall

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
Ch. 6-59
2001 Prentice Hall

Sum total attractiveness scores Threats-OpportunitiesWeaknesses-Strengths (TOWS) Matrix
Total Attractiveness Scores (TAS) WO strategies WT strategies

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Strategic Management Concepts & Cases

Chapter 6: Strategy Analysis & Choice

Western New England College

Ch. 6-1 2001 Prentice Hall

Comprehensive Strategic Management Model

Chapter 3 Strategy Analysis & Choice Chapter 6

Vision & Mission Statements

Implement Strategies: Mgmt Issues

Implement Strategies: Marketing, Fin/Acct, R&D, CIS

Measure & Evaluate Performance

Ch. 6-2 2001 Prentice Hall

Strategy Analysis & Choice

Strategy Analysis & Choice

Ch. 6-4 2001 Prentice Hall

Strategy Analysis & Choice

Strategy Analysis & Choice

Ch. 6-6 2001 Prentice Hall

Strategy Analysis & Choice

Ch. 6-7 2001 Prentice Hall

Strategy Analysis & Choice

Advantages Disadvantages Trade-offs Costs Benefits

Strategy Analysis & Choice

Involve a broad mix of personnel

Ch. 6-9 2001 Prentice Hall

Strategy Analysis & Choice

Evaluate each alternative

Ch. 6-10 2001 Prentice Hall

Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Ch. 6-11 2001 Prentice Hall

Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

External Factor Evaluation Matrix (EFE)

Competitive Profile Matrix

Internal Factor Evaluation Matrix (IFE)

Ch. 6-12 2001 Prentice Hall

Strategy-Formulation Analytical Framework

Stage 2: The Matching Stage

Threats Opportunities Weaknesses Strengths (TOWS)

Strategic Position & Action Evaluation (SPACE)

Boston Consulting Group Matrix (BCG)

InternalExternal Matrix (IE)

Grand Strategy Matrix

Ch. 6-13 2001 Prentice Hall

Strategy-Formulation Analytical Framework

Stage 3: The Decision Stage

Quantitative Strategic Planning Matrix (QSPM)

Ch. 6-14 2001 Prentice Hall

Strategy Analysis & Choice

Provides Basic Input for Stages 2 and 3

Ch. 6-15 2001 Prentice Hall

Strategy Analysis & Choice

Strategy is characterized by the organizational match between

Ch. 6-16 2001 Prentice Hall

Matching Key Factors

Insufficient capacity (weakness)

Exit of two major foreign competitors + = form the industry (opportunity)

Decreasing numbers Strong R&D (strength) + of young adults = (threat)

Poor employee morale + Strong union (weakness) activity (threat)

Four Types of Strategies