Lecture 14 Strategy Analysis And Choice. Lecture Outline The Nature of Strategy Analysis and Choice...

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Lecture 14Strategy Analysis And Choice

Lecture Outline

• The Nature of Strategy Analysis and Choice

• A Comprehensive Strategy-Formulation Framework

• The Input Stage

Lecture Outline

• The Matching Stage

• The Decision Stage

• Cultural Aspects of Strategy Choice

Lecture Outline

• The Politics of Strategy Choice

• The Role of a Board of Directors

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

Strategic analysis and choice largely involves making subjective decisions based on objective information.

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

Alternative strategies derive from –

– Vision– Mission– Objectives– External audit– Internal audit– Past successful strategies

Participation in generating alternative strategies should be broad –

Strategy-FormulationStrategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Formulation Framework

External Factor EvaluationMatrix (EFE)

Competitive ProfileMatrix

Internal Factor EvaluationMatrix (IFE)

Stage 1:The Input Stage

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

SPACE Matrix

Stage 2:The Matching Stage

TOWS Matrix

BCG Matrix

IE Matrix

Grand Strategy Matrix

Matching Stage

• Match between organization’s internal resources and skills and the opportunities and risks created by its external factors.

Matching Key Factors to Formulate Alternative Strategies

Resultant StrategyKey External FactorKey Internal Factor

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 form the industry (opportunity)

+Insufficient capacity (weakness)

Acquire Cellfone, Inc.=20% annual growth in the cell phone industry (opportunity)

+Excess working capacity (strength)

SPACE Matrix

TOWS Matrix

BCG Matrix

IE Matrix

Matching Stage

TOWS Matrix

– Threats– Opportunities– Strengths– Weaknesses

TOWS Matrix

Develop four types of strategies

– Strengths-Opportunities (SO)– Weaknesses-Opportunities (WO)– Strengths-Threats (ST)– Weaknesses-Threats (WT)

SO Strategies

Strategies

Use a firm’s internal

strengths to take advantage of

external opportunities

ThreatsOpportunitiesWeaknesses

Strengths(TOWS)

WO Strategies

Strategies

Improving internal

weaknesses by taking

advantage of external

opportunities

Strengths(TOWS)

ST Strategies

Strategies

Using firm’s strengths to

avoid or reduce the impact of

external threats.

Strengths(TOWS)

WT Strategies

Strategies

Defensive tactics aimed at reducing internal

weaknesses and avoiding

environmental threats.

Strengths(TOWS)

TOWS Matrix

Steps in developing the TOWS Matrix

1. List the firm’s key external opportunities2. List the firm’s key external threats3. List the firm’s key internal strengths4. List the firm’s key internal weaknesses

TOWS Matrix

Developing the TOWS Matrix

5. Match internal strengths with external opportunities and record the resultant SO Strategies

6. Match internal weaknesses with external opportunities and record the resultant WO Strategies

7. Match internal strengths with external threats and record the resultant ST Strategies

8. Match internal weaknesses with external threats and record the resultant WT Strategies

TOWS Matrix

WT Strategies

Minimize weaknesses and avoid threats

ST Strategies

Use strengths to avoid threats

Threats-T

List Threats

WO Strategies

Overcome weaknesses by taking advantage of

opportunities

SO Strategies

Use strengths to take advantage of opportunities

Opportunities-O

List Opportunities

Weaknesses-W

List Weaknesses

Strengths-S

List Strengths

Leave Blank

SPACE Matrix

TOWS Matrix

BCG Matrix

IE Matrix

SPACE Matrix

Strategic Position and Action Evaluation Matrix

Four quadrant framework Determines appropriate strategies

Aggressive Conservative Defensive Competitive

SPACE Matrix

Two Internal Dimensions Financial Strength [FS] Competitive Advantage [CA]

Two External Dimensions Environmental Stability [ES] Industry Strength [IS]

SPACE Matrix

Overall Strategic position determined by:

– Financial Strength [FS]– Competitive Advantage [CA]– Environmental Stability [ES]– Industry Strength [IS]

SPACE Matrix

Developing the SPACE Matrix:

• EFE Matrix• IFE Matrix• Financial Strength• Competitive Advantage• Environmental Stability• Industry Strength

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

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

Environmental Stability (ES)

Technological changes

Rate of inflation

Demand variability

Price range of competing products

Barriers to entry

Competitive pressure

Price elasticity of demand

Financial Strength (FS)

Return on investment

Leverage

Liquidity

Working capital

Cash flow

Ease of exit from market

Risk involved in business

External Strategic PositionInternal Strategic Position

SPACE Factors

Industry Strength (IS)

Growth potential

Profit potential

Financial stability

Technological know-how

Resource utilization

Capital intensify

Ease of entry into market

Productivity, capacity utilization

Competitive Advantage CA

Market share

Product quality

Product life cycle

Customer loyalty

Competition’s capacity utilization

Technological know-how

Control over suppliers & distributors

External Strategic PositionInternal Strategic Position

SPACE MatrixFS

-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6

Conservative Aggressive

Defensive Competitive

SPACE Matrix

TOWS Matrix

BCG Matrix

IE Matrix

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

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

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.

BCG Matrix

Cash Cows

Question Marks

Relative Market Share PositionHigh1.0

Medium.50

Low0.0

e High+20

Low-20

Medium0

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

• 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 strong position as long as possible• Product development, concentric diversification• If becomes weak—retrenchment or divestiture

BCG Matrix

• Low relative market share position and compete in slow or no market growth • Weak internal and external position

• Decision to liquidate, divest, retrenchment

SPACE Matrix

TOWS Matrix

BCG Matrix

IE Matrix

Thank You

Lecture 15 Strategy Analysis And Choice

• Popular tool for formulating alternative strategies

• All organizations (or divisions) can be positioned in one of four quadrants

• Based on two evaluative dimensions:– Competitive position– Market growth

Quadrant IV

1. Concentric diversification

2. Horizontal diversification

3. Conglomerate diversification

4. Joint ventures

Quadrant III

1. Retrenchment

3. Horizontal diversification

4. Conglomerate diversification

5. Liquidation

Quadrant I

1. Market development

2. Market penetration

3. Product development

4. Forward integration

5. Backward integration

6. Horizontal integration

Quadrant II

1. Market development

2. Market penetration

3. Product development

4. Horizontal integration

5. Divestiture

6. Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK COMPETITIVE

POSITION

STRONGCOMPETITIVE

POSITION

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

Quantitative Strategic Planning Matrix

(QSPM)

Stage 3:The Decision Stage

• 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

• 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)

• Compute the total Attractiveness Scores

• Compute the Sum Total Attractiveness Score

Key Internal FactorsManagementMarketingFinance/AccountingProduction/OperationsResearch and DevelopmentComputer Information Systems

Strategy 3Strategy 2

Strategy 1

WeightKey External FactorsEconomyPolitical/Legal/GovernmentalSocial/Cultural/Demographic/EnvironmentalTechnologicalCompetitive

Strategic Alternatives

Limitations:

• Requires intuitive judgments and educated assumptions

• Only as good as the prerequisite inputs

Positives:

• Sets of strategies examined simultaneously or sequentially

• Requires the integration of pertinent external and internal factors in the decision-making process

Cultural Aspects of Strategy Choice

Culture:

• The set of shared values, beliefs, attitudes, customs, norms, personalities, heroes, and heroines that describe a firm

Cultural Aspects of Strategy Choice

Culture:

• Successful strategies depend on degree of support from a firm’s culture

Politics of Strategy Choice

Politics in organizations:

• Management hierarchy• Career aspirations• Allocation of scarce resources

Politics of Strategy Choice

Political tactics for strategists:

• Equifinality• Satisfying• Generalization• Focus on Higher-Order Issues• Provide Political Access on Important Issues

Role of A Board of Directors

Duties and Responsibilities:

1. Control and oversight over management2. Adherence to legal prescriptions3. Consideration of stakeholder interests4. Advancement of stockholders’ rights

Key Terms

• Aggressive quadrant• Attractiveness Scores (AS)• Board of Directors• Boston Consulting Group (BCG) Matrix• Business portfolio• Cash cows• Champions• Competitive Advantage (CA)

Key Terms

• Competitive quadrant• Conservative quadrant• Culture• Decision stage• Defensive quadrant• Directional vector• Dogs• Environmental Stability (ES)• Financial Strength (FS)

Key Terms

• 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)

Key Terms

• Question marks• Relative market share position• SO strategies• ST strategies• Stars• Strategic Position and Action Evaluation

(SPACE) Matrix• Strategy-formulation framework

Key Terms

• Sum total attractiveness scores• Threats-Opportunities-Weaknesses-

Strengths (TOWS) Matrix• Total Attractiveness Scores (TAS)• WO strategies• WT strategies

Thank You

Lecture 14 Strategy Analysis And Choice. Lecture Outline The Nature of Strategy Analysis and Choice...

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