05. Strategy Formulation. Strategy Analysis & Choice (8-10M)
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Transcript of 05. Strategy Formulation. Strategy Analysis & Choice
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Strategy Formulation:
Strategy Analysis & Choice
ReferencesReferences
Strategic Management Concepts & CasesStrategic Management Concepts & Cases 1010thth editionedition Fred R. DavidFred R. DavidInternetInternet
Resource Person:Hassan Shahzad
Chapter # 5
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Feasible Alternatives
Chosen Alternative
Constraints
Environments (I&E)
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Strategy Analysis & Choice
The Nature of Strategy Analysis and ChoiceThe Nature of Strategy Analysis and Choice
a.a. EstablishingEstablishinglonglong--term objectivesterm objectives
b. Generate feasible alternatives
c. Evaluate alternativesd. Select specific course of action
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5
Generating, evaluating & selecting bestalternatives involve;
Develop set of most attractive alternative strategies Advantages & Disadvantages
Trade-offs, Costs & Benefits Involve a broad mix of personnel
Representation from each department/function
Provides vehicle to develop commitment to attainment oforganizational objectives
Evaluate each alternative
Internal and external audit information
Firms mission/Vision statement
Listed in writing
Ranked in order of attractiveness
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StrategyStrategy--FormulationFormulation Analytical Framework
Stage 1: The Input Stage
Stage 2: The Matching Stage
Stage 3: The Decision Stage
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External Factor Evaluation
Matrix (EFE)
Competitive Profile
Matrix
Internal Factor Evaluation
Matrix (IF
E)
Stage 1:The Input Stage
Stage 1 provides basic Input information for
Stages 2 and 3
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SPACE Matrix
Stage 2:The Matching Stage
SWOT Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2 tries to create match between organizations
internal resources & skills and the opportunities
& risks created by its external factors
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Steps in developing the TOWS Matrix
1. List the firms key external opportunities
2. List the firms key external threats
3. List the firms key internal strengths4. List the firms key internal weaknesses
5. Match internal strengths with external opportunities andrecord the resultant SO Strategies
6.
Match internal weaknesses with external opportunities andrecord the resultant WO Strategies
7. Match internal strengths with external threats and recordthe resultant ST Strategies
8. Match internal weaknesses with external threats andrecord the resultant WT Strategies
Stage 2: The Matching Stage:SWOT Matrix
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Stage 2: The Matching Stage:SWOT Matrix
Four Types of Strategies
1. Strengths-Opportunities (SO):
Use a firms internal strengths to take advantage of external
opportunities2. Weaknesses-Opportunities (WO):
Improving internal weaknesses by taking advantage
of external opportunities
3. Strengths-Threats (ST):Use a firms strengths to avoid or reduce the impact of external
threats.
4. Weaknesses-Threats (WT):
Defensive tactics aimed at reducing internal weaknesses and
avoiding external threats
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SWOT/TOWS Matrix
WT Strategies
Minimize weaknesses
and avoid threats
ST Strategies
Use strengths to avoid
threats
ThreatsThreats--TT
List ThreatsList Threats
WO Strategies
Overcome weaknesses
by taking advantage of
opportunities
SO Strategies
Use strengths to take
advantage of opportunities
OpportunitiesOpportunities--OO
List OpportunitiesList Opportunities
WeaknessesWeaknesses--WW
List WeaknessesList Weaknesses
StrengthsStrengths--SS
List StrengthsList Strengths
Leave BlankLeave Blank
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Strategic Position & Action Evaluation
Matrix (SPACE) Four quadrant framework helps to 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]
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Developing the SPACE Matrix:
EFE
Matrix IFE Matrix
Financial Strength
Competitive Advantage Environmental Stability
Industry Strength
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The Steps of SPACE Matrix
1. Select variables to define FS, CA, ES, & IS
2. Assign numerical ranking from +1 (worst) to +6(best) for FS and IS; Assign numerical ranking from
1 (best) to 6 (worst) forES and CA.3. Compute average score for FS, CA, ES, & IS
4. Plot the average scores on the Matrix
5. Add the two scores on the x-axis and plot point on
X. Add the scores on the y-axis and plot Y. Plot theintersection of the new xy point.
6. Draw a directional vector from origin through thenew intersection point.
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SPACE MatrixFS
+6
+1
+5
+4
+3
+2
-6
-5
-4
-3
-2
-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6
ES
CA IS
Conservative Aggressive
Defensive Competitive
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This particular SPACE matrix tells us that our companyshould pursue an aggressive strategy. Our company has a
strong competitive position it the market with rapidgrowth. It needs to use its internal strengths to develop amarket penetration and market development strategy.This can include product development, integration with
other companies, acquisition of competitors, and so on.
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The BCGmatrix method(Boston Consulting Group- Bruce
Henderson in 1970) is based on theproduct life cycle
theory that can be used to determine what priorities should
be given in theproduct portfolio or product lines of a
business unit..This helps the company allocate resources
and is used as an analytical tool in brand marketing, product
management, strategic management, and portfolio analysis.
It has 2 dimensions: market share and market growth.The basic idea behind it is that the bigger the market share a
product has or the faster the product's market grows the
better it is for the company.
BCG Matrix
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Enhances multidivisional firms efforts to formulate
strategies
Firms divisions may compete in different
industries/markets requiring separate strategy.
Graphically portrays differences among divisions
Manage business portfolio through relative market share
position and industry growth rate.
Boston Consulting Group Matrix
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1. Question Marks- Low relative market share
position yet compete in high-
growth industry.
Cash needs are high with lowprofit generation.
Decision to strengthen(intensive strategies) or divest
2. Stars High relative market share and
high industry growth rate.
Best long-run opportunities for
growth and profitability Substantial investment to
maintain or strengthendominant position
Integration strategies, intensive
strategies, joint ventures
3. Cash Cows High relative market share position,
but compete in low-growth industry
Generate cash in excess of theirneeds
Milked for other purposes
Maintain strong position as long aspossible
Product development, concentricdiversification
If becomes weakretrenchment ordivestiture.
4. Dogs Low relative market share position
and compete in slow or no marketgrowth
Weak internal and external position
Decision to liquidate, divest,retrenchment
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BCG Matrix of BBC
Radio: 52.6% market share,47.4% growth rate;considered a STAR
TV: 37
.1% market share,62.9% growth rate; rated as
CASH COW
BBC Online: QUESTIONMARKThis is because it
has a very low marketshare, but retains a highgrowth rate percentage.
Some limitations of theBoston ConsultingGroup Matrix include:
High market share is notthe only success factor
Market growth is not theonly indicator forattractiveness of a market
Sometimes Dogs canearn even more cash as
Cash Cows
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Internal-External (IE) Matrix IE matrix is used to analyze working conditions and
strategic position of a business.The IE matrix is acontinuation of theEFE matrix&IFE matrixmodels.
It works on a similar manner like the BCG matrix, the IEmatrix positions an organization into a nine cell matrix.
The IE matrix is based on the following two criteria:I. EFE matrixScore - this score is plotted on the y-axis
II. IFE matrixScore-plotted on the x-axis
On the x axis of the IE Matrix, an IFE total weighted score of1.0
to 1.99 represents a weak internal position. A score of 2.0 to 2.99 isconsidered average. A score of 3.0 to 4.0 is strong.
On the y axis, an EFE total weighted score of1.0 to 1.99 isconsidered low. A score of 2.0 to 2.99 is medium. A score of 3.0 to4.0 is high.
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IE matrix example Lets we calculated IFE
matrix for a company &got total weighted score
of 2.79 which shows an
above-average internal
strength.
We also calculated the
EFE matrix for the same
company & got total
weighted score calculatedof 2.46 which suggests a
slightly less than average
ability to respond to
external factors.
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The IE matrix can be divided into three major
regions that have different strategy implications.
Grow & Build
Market Penetration
Market DevelopmentProduct Development
Backward Integration
Forward Integration
Horizontal Integration
Hold & Maintain
Market Penetration
Product Development Harvest orDivest
Retrenchment
DivestitureLiquidation
IE matrix requires more information about the business than the BCG matrix
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Grand Strategy Matrix
The model defines the situation of businessthrough the market growth and their competitive
position in the market.
All organizations (or divisions) can be positionedin one of four quadrants
Based on two dimensions Competitive position
Market growth
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Grand Strategy Matrix
QuadrantIV
Concentric diversification
Horizontal diversification
Conglomeratediversification
Joint ventures
QuadrantIII
Retrenchment
Concentric diversification
Horizontal diversification
Conglomeratediversification
Liquidation
QuadrantI
Market development
Market penetration
Product development
Forward integration
Backward integration
Horizontal integration
Concentric diversification
QuadrantII
Market development
Market penetration
Product development
Horizontal integration
Divestiture
Liquidation
RAPIDMARKETGROWTH
SLOW MARKET GROWTH
WEAK
COMPETITIVE
POSITION
STRONG
COMPETITIVE
POSITION
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Four Quadrants ofGrand Strategy Matrix
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
Cost and asset reduction
indicated (retrenchment)
Quadrant IV
Strong competitive position
Slow-growth industry
Diversification indicated to
more promising growth
areas
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GRAND STRATEGYMATRIX OF BBC
The BBC lies in Quadrant I, which indicates itis part of a rapid market growth industry whilemaintaining a strong competitive position.
Compared to its rivals in the UK, the BBC hasmore financial strength giving it an advantageover competitors. Globally, the company canmake use of its resources/subsidiaries allowing
an increase in customer base.
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Quantitative Strategic
Planning Matrix
(QSPM)Stage 3:The Decision Stage
The QSPM comes under the last stage of The Decision
Stage and also the final stage of this process.The best
thing about QSPM is that it never insist the strategist to
enter the information on assumptions, it extracts the
information from stage1
& stage 2 and suggestsappropriate strategy to choose.
The QSPM combine the intuitive thinking of managers
with the analytical process to decide the best strategy for
the organization success.
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Format of Quantitative Strategic Planning Matrix
There are four main columns in QSPM, the left column listdown the key internal and externalkey factors which aresame as in EFE and IFE matrix. Adjacent column to keyfactors is Weight (relative importance of the factor) whichhold the numeric value obtained from EFE and IFE matrixweight column.The next to weight is AS stands forattractive score assign priority to key factors using thenumeric value 4 for most importance and 1 for leastimportance and the last column TAS (Total attractive score)is the value calculated by multiplying weight by AS. One
thing important to note for each strategy separate AS andTAS value added in the table, weight remain same for all setof strategies mentioned in QSPM.The topmost shows thestrategies are compared in the QSPM matrix, belowmentioned table illustrate the structure of QSPM matrix.
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Steps to develop QSPM1. List the firms key external opportunities & threats; list the firms key
internal strengths and weaknesses (EFE Matrix and IFE Matrix). Aminimum of10 external & internal critical success factors should be taken.
2. Assign weights to each external and internal critical success factor
3. Examine the Stage 2 (matching) matrices and identify alternative strategiesthat the organization should consider implementing.Record these strategiesin the top row of the QSPM. Group the strategies into mutually exclusivesets if possible.
4.
Determine the Attractiveness Scores (AS), defined as numerical values thatindicate the relative attractiveness of each strategy in a given set ofalternatives.The range for Attractiveness Scores is 1 = not attractive, 2 =somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive.
5. Compute the Total Attractiveness Scores.Total Attractiveness Scores aredefined as the product of multiplying the weights (Step 2) by the
Attractiveness Scores (Step 4) in each row.6. Compute the Sum Total Attractiveness Score. Add Total Attractiveness
Scores in each strategy column of the QSPM.The Sum Total AttractivenessScores reveal which strategy is most attractive in each set of alternatives.Higher scores indicate more attractive strategies, considering all the relevantexternal and internal factors that could affect the strategic decisions.
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QSPM
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/OperationsResearch and Development
Computer InformationSystems
Strategy 3Strategy 2Strategy 1WeightKey External Factors
EconomyPolitical/Legal/Governmental
Social/Cultural/Demographic/Environmental
Technological
Competitive
Strategic Alternatives
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Assignment 2 & 3
Group Assignment (2 Members)
On the bases of environmental analysis, develop a
comprehensiveStrategyStrategy--FormulationFormulation Analytical
Frameworkof any company involving;
i. IFE, EFE & CPM of Stage1,
ii. TOWS, BCG & SPACE Matrices of Stage2
iii. QSPM of Stage 3 with at least 3 alternative strategies.
Date of Announcement- Submission
Date-