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Module 6

Part III

Strategy Analysis & Choice

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Strategic management is not a box of tricksor a bundle of techniques. It is analytical

thinking and commitment of resources toaction. But quantification alone is notplanning. Some of the most importantissues in strategic management cannot bequantified at all.

Peter Drucker

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Planning is often doomed before it

ever starts, either because toomuch is expected of it or becausenot enough is put into it.

T. J. Cartwright

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Whether its broke or not, fix it

make it better. Not just products,but the whole company ifnecessary.

Bill Saporito

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Establishing long-term objectives

Generating alternative strategies

Selecting strategies to pursue

Best alternative achieve mission & objectives

Nature of Strategy Analysis & Choice


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Strategic Analysis and Choice:

Making subjective decisions basedon objective information

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Strategic Analysis and Choice:

Generate feasible alternatives

Evaluate alternatives

Select specific course of action

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Generating & Selecting Strategies

Develop set of most attractive alternative strategies

Determine for the set Advantages

Disadvantages

Trade-offs

Costs

Benefits

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Generating & Selecting Strategies

Evaluate each alternative Internal and external audit information

Firms mission statement

Listed in writing

Ranked in order of attractiveness

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Vision

Mission Objectives External audit Internal audit

Past successful strategies


Alternative Strategies Derive From

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Portfolio Approach

It is an attempt to design a strategy inorder to determine the long term growthand profitability prospects with the rightallocation of resources in the light of ever

evolving strengths and weaknesses of afirm. The strategy formulation techniques can be

integrated in to a three stage decisionmaking frame work

1. The Input Stage2. The Matching Stage3. The Decision Stage

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Strategy-Formulation Analytical Framework

Stage 1: The Input StageStage 1: The Input Stage

Stage 2: The Matching StageStage 2: The Matching Stage

Stage 3: The Decision StageStage 3: The Decision Stage

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Stage 1: The Input StageStage 1: The Input Stage

ExternalFactor

EvaluationMatrix (EFE)

CompetitiveProfileMatrix

InternalFactor

EvaluationMatrix (IFE)

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Stage 2: The Matching StageStage 2: The Matching Stage

ThreatsOpportunitiesWeaknesses

Strengths(TOWS)

StrategicPosition &

ActionEvaluation(SPACE)

BostonConsulting

GroupMatrix(BCG)

Internal-ExternalMatrix

(IE)

GrandStrategyMatrix

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Stage 3: The Decision StageStage 3: The Decision Stage

Quantitative StrategicPlanning Matrix

(QSPM)

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Stage 1: The Input Stage

Provides Basic Input for Stages 2and 3

External Factor Evaluation Matrix (EFE)

Internal Factor Evaluation Matrix (IFE)Competitive Profile Matrix

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Stage 1: The Input Stage

Basic input information for the matching & decision stage

matrices

Requires strategists to quantify subjectivity early in the

process

Good intuitive judgment always needed

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Strategy-Formulation Analytical

FrameworkSWOT Matrix

SPACE Matrix

BCG Matrix

IE Matrix

Grand Strategy Matrix

Stage 2:

The Matching Stage

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Stage 2: The Matching Stage

Strategy is characterized by theorganizational match between

Internal resources and skills

Opportunities & risks created by externalfactors

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Match between organizations internal

resources & skills and the opportunities & riskscreated by its external factors

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Match between organizations internal resources &

skills and the opportunities & risks created by its

external factors

E.g. internal: strong R and D function

External changing demographics (population

getting older)Strategy: Develop new products for older adults

(related to long term objectives financial or

strategic)

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Developing SWOT Matrix

List the firms key external opportunities

List the firms key external threats List the firms key internal strengths

List the firms key internal weaknesses

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Strengths: Weaknesses:

1. R and D almost complete

2. Basis for strong management team

3. Key first major customer acquired

4. Initial product can evolve intorange of offerings5. Located near a major centre of

excellence

6. Very focused management/staff

7. Well-rounded and managedbusiness

1. Over dependent on borrowings -Insufficient cash resources

2. Board of Directors is too narrow

3. Lack of awareness amongstprospective customers4. Need to relocate to larger premises5. Absence of strong sales/marketing

expertise

6. Overdependence on few key staff

7. Emerging new technologies may

move market in new directions

Threats: Opportunities:

1. Major player may enter targetedmarket segment

2. New technology may make

products obsolescent3. Economic slowdown could reduce

demand4. Euro/Yen may move against $

5. Market may become price sensitive

6. Market segment's growth couldattract major competition

1. Market segment is poised for rapidgrowth

2. Export markets offer great potential

3. Distribution channels seeking newproducts

4. Scope to diversify into relatedmarket segments

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Stage 2: The Matching Stage: SWOT Matrix

Four Types of Strategies

Strengths-Opportunities (SO):

Use a firms internal strengths to take advantage of external

opportunities

Weaknesses-Opportunities (WO):

Improving internal weaknesses by taking advantageof external opportunities

Strengths-Threats (ST):

Use a firms strengths to avoid or reduce the impact of external

threats.

Weaknesses-Threats (WT):

Defensive tactics aimed at reducing internal weaknesses and

avoiding external threats

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Four Types of Strategies

WTStrategies

STStrategies

WO

Strategies

SO

StrategiesThreatsOpportunitiesWeaknesses

Strengths(TOWS)

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SO Strategies

SO

Strategies

Use a firms

internalstrengths to

takeadvantage of

externalopportunities


Strengths(TOWS)

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WO Strategies

WO

Strategies

Improving

internalweaknesses

by takingadvantage of

externalopportunities


Strengths(TOWS)

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STStrategies

ST

Strategies

Using firms

strengths toavoid or

reduce theimpact of

externalthreats.


Strengths(TOWS)

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WTStrategies

WT

Strategies

Defensivetactics aimedat reducing

internalweaknesses

and avoidingenvironmentalthreats.


Strengths(TOWS)

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SWOT MatrixLeave Blank Strengths S

List Strengths

Weaknesses W

List Weaknesses

Opportunities O

List Opportunities

SO Strategies

Use strengths to takeadvantage ofopportunities

WO Strategies

Overcomingweaknesses by taking

advantage ofopportunities

Threats T

List Threats

STStrategies

Use strengths to avoidthreats

WTStrategies

Minimize weaknesses

and avoid threats

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Matching Key Factors

Resultant StrategyKey ExternalFactor

Key Internal Factor

Develop a newemployee benefitspackage

=Strong unionactivity(threat)

+Poor employeemorale (weakness)

Develop new

products for olderadults=

Decreasing

numbers ofyoung adults(threat)

+

Strong R&D

(strength)

Pursue horizontalintegration by buyingcompetitor's facilities

=

Exit of two major

foreigncompetitors fromthe industry(opportunity)

+Insufficientcapacity(weakness)

Acquire Hathway , CBangalore.

=

20% annualgrowth in thecablevisionindustry(opportunity)

+Excess workingcapacity (strength)

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Key Strategies

1. Accelerate product launches by strengthening R andD team

2. Extend links with key technology centres

3. Raise additional venture capital

4. Expand senior management team in sales/marketing5. Recruit non-executive directors

6. Strengthen human resources function and introduceshare options for staff

7. Appoint advisers for intellectual property and finance

8. Seek new market segments/applications for products

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Limitations with SWOT Matrix

Does not show how to achieve acompetitive advantage

Provides a static assessment in time

May lead the firm to overemphasize asingle internal or external factor informulating strategies

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SPACE Matrix

BCG Matrix

IE Matrix


Stage 2:

The Matching Stage

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Strategic Position & ActionEvaluation Matrix (SPACE)

Four quadrant framework Determines appropriate strategies

Aggressive

Conservative

Defensive Competitive

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Two Internal Dimensions Financial Strength [FS]

Competitive Advantage [CA]

Two External Dimensions

Environmental Stability [ES] Industry Strength [IS]

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Overall Strategic positiondetermined by:

Financial Strength [FS]

Competitive Advantage [CA] 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 SPACE Matrix

Select variables to define FS, CA, ES, & IS

Assign numerical ranking from +1 (worst)to +6 (best) for FS and IS; Assignnumerical ranking from 1 (best) to 6(worst) for ES and CA.

Compute average score for FS, CA, ES, &IS

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The SPACE Matrix

Plot the average scores on the Matrix

Add the two scores on the x-axis and plotpoint on X. Add the scores on the y-axisand plot Y. Plot the intersection of thenew xy point.

Draw a directional vector from originthrough the new intersection point.

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SPACE Factors

Environmental Stability(ES)

Technological changes

Rate of inflation

Demand variability

Price range of competingproducts

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 marketRisk involved in business

External Strategic

Position

Internal Strategic

Position

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SPACE Factors

Industry Strength (IS)

Growth potential

Profit potential

Financial stability

Technological know-how

Resource utilization

Capital intensifyEase of entry into market

Productivity, capacityutilization

Competitive AdvantageCA

Market share

Product quality

Product life cycle

Customer loyalty

Competitions capacityutilization

Technological know-how

Control over suppliers &

distributors

External Strategic

PositionInternal Strategic Position

SPACE Matrix

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SPACE Matrix

FS

+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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SPACE Matrix

BCG Matrix

IE Matrix


Stage 2:

The Matching Stage

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Boston Consulting Group Matrix(BCG)

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

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Graphically portrays differences among divisions

Focuses on market share position and industrygrowth rate

Manage business portfolio through relativemarket share position and industry growth rate

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Relative market share position defined:

Ratio of a divisions own market share in aparticular industry to the market share held by

the largest rival firm in that industry.

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Market attractiveness & Competitive

strength is also important.

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BCG Matrix

Question Marks

Stars

Cash Cows

Dogs

l h

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BCG Matrix

Question Marks

Low relative market share position yetcompete in high-growth industry. Cash needs are high

Case generation is low

Decision to strengthen (intensivestrategies) or divest/sell them.

S l & Ch

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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

S A l i & Ch i

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BCG Matrix Cash Cows

High relative market share position, butcompete 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 weakretrenchment or divestiture

S A l i & Ch i

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BCG Matrix

Dogs

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

Decision to liquidate, divest,retrenchment

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BCG Matrix

Low relative market share compete in

high-growth industry

Cash needs are high

Case generation is low

Decision to strengthen (intensive

strategies) or divest

High relative market share and high growth

rate

Best long-run opportunities for growth& profitability

Substantial investment to maintain or

strengthen dominant position

Integration strategies, intensive

strategies, joint ventures

STARS

QUESTION MARKS

High relative market share, competes 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 weakensretrenchment or

divestiture

CASH

COWS

Low relative market share & compete in slow

or no market growth

Weak internal & external position

Liquidation, divestiture, retrenchment

DOGS

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The BCG matrix

ITC- A BackgroundLearning points andconclusions

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ITC A background

Governance structure

Strategic supervision

Strategic management

Executive management

Core values

Nation Orientation; Trusteeship;

Excellence; Customer focus; respect for people;

Innovation

Vision & Mission statements

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Vision & Mission statements Vision: Sustain ITCs position as one

of Indias most valuable corporations

through world class performance,creating growing value for the Indianeconomy and the Companysstakeholders.

Mission: To enhance the wealthgenerating capability of theenterprise in a globalizing

environment, delivering superior andsustainable stakeholder value.

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Business Mix of ITC Ltd.

FMCG Cigarettes Foods Lifestyle Retailing Greeting, Gifting & Stationery

Safety Matches Agarbattis

Paperboards & Packaging

Paperboards & Specialty Papers Packaging
http://www.itcportal.com/busi_cigg_tob/busi_cig_itd_new.htmlhttp://www.itcportal.com/foods/foods.htmlhttp://www.itcportal.com/lyfestyle_retailing/lifestyle_retailing.htmlhttp://www.itcportal.com/greetings/greetings.htmhttp://www.itcportal.com/safetymatches/safetymatches.htmlhttp://www.itcportal.com/agarbathi/agarbathi.htmlhttp://www.itcportal.com/paperboards_specialtypapers/paperboards.htmlhttp://www.itcportal.com/packaging/packaging_new.htmlhttp://www.itcportal.com/packaging/packaging_new.htmlhttp://www.itcportal.com/paperboards_specialtypapers/paperboards.htmlhttp://www.itcportal.com/agarbathi/agarbathi.htmlhttp://www.itcportal.com/safetymatches/safetymatches.htmlhttp://www.itcportal.com/greetings/greetings.htmhttp://www.itcportal.com/lyfestyle_retailing/lifestyle_retailing.htmlhttp://www.itcportal.com/foods/foods.htmlhttp://www.itcportal.com/busi_cigg_tob/busi_cig_itd_new.html

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Business Mix (Contd)

Agri - Business

Agri-Exports e-Choupal Leaf Tobacco

Hotels

Group Companies ITC Infotech; etc.
http://www.itcportal.com/agri_exports/agri_exports_new.htmlhttp://www.itcportal.com/agri_exports/e-choupal_new.htmhttp://www.itcportal.com/busi_cigg_tob/busi_cig_iltd_new.htmlhttp://www.itcportal.com/group_companies/group_companies.htmlhttp://www.itcportal.com/group_companies/group_companies.htmlhttp://www.itcportal.com/busi_cigg_tob/busi_cig_iltd_new.htmlhttp://www.itcportal.com/agri_exports/e-choupal_new.htmhttp://www.itcportal.com/agri_exports/agri_exports_new.html

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Business wise Sales dataBusiness/ Year Growth

%

Value (Rs in Crore)

2005 2004

FMCG-Cigarettes 8.4 10002.54 9230.27

FMCG-Others 85.2 563.39 304.16

Hotels 124.1 577.25 257.53

Agribusiness 4.2 1780.07 1708.77

Paper & pkg. 24.9 1565.31 1253.29

Net revenue 12.99 13349.58 11815.04

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CAGR during FY 2005-2008

Category CAGR Growth parameters

Cigarettes 10.9 % Pricing power

Hotels 22.7% Inward traffic, occupancy

Paper 17.2 % Capacity utilization, valueadded products

Agri

business

34.3 % E-choupal, choupal sagar,

FMCG-Others

60.2 % Fast track, decent share.

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Market share of ITC Ltd.

Outstanding market leader

Cigarettes, Hotels, Paperboards, Packagingand Agri-Exports.

Gaining market share Nascent businesses of Packaged Foods &

Confectionery, Branded Apparel and GreetingCards.

Segment Dominance Contribution %

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Segment Dominance Contribution %Revenue PBIT

Cigarettes 70% share 77.0% 87.7%

Paper &Packg.

Packaging board No. 1 inAsia

7.3% 10.7%

Agribusiness

One of the largestexporters from India

7.0% 3.7%

Hotels ITC Group ranks No.2 4.3% 5.4%

FMCG

(Others)

20% share of greetingcards Expressions and

Stationery-Classmate .'Aashirvaad' atta isNo.1 in brandedsegment

4.4% -7.5%

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The BCG Matrix for ITC Ltd.

StarsHotels

Paperboards/

Packaging.Agri business.

?FMCG- Others

Cows

FMCG-Cigarettes

Dogs

Maybe ITC Infotech.

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points and conclusions

? - To be handled with care.

Strategic forays into emerging highgrowth markets.

E-Choupal is a transformationalstrategy.

Strong brand building capability will

be tested.

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Learning points

Corporate strategy of creating multiple drivers ofgrowth anchored on its core competencies anddistribution reach.

Embracing difficult and challenging corporatestrategy. (Ex: Paperboards).

EHS philosophy: Contribution to the triple bottomline- Economic, Environment and social capital.

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Major Advantages

It draws attention to cash flows ,investment characteristics and needsof the various divisions of the

Organisation. Overtime dogs evolve in to ? ,

? To * and * to cash cows

BCG helps Organisations strive tobecoming a *

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Limitations

Assumes market growth rate. A firm maygrow the market.

A Dog may be helping other products.

High market share/Growth is not the onlysuccess factor.

Linkage between market share and

profitability is questionable.

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The Internal-External Matrix (GE 9 CellMatrix)

Positions an organizations variousdivisions in a nine-cell display

Similar to BCG Matrix except the IEMatrix: Requires more information about the

divisions

Strategic implications of each matrix aredifferent

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IE Matrix

Based on two key dimensions The IFE total weighted scores on the x-

axis

The EFE total weighted scores on the y-axis

Divided into three major regions

Grow and build Cells I, II, or IV Hold and maintain Cells III, V, or VII

Harvest or divest Cells VI, VIII, or IX

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Popular tool for formulating alternativestrategies

Based on two evaluative dimensions Competitive position

Market growth


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Quadrant IV

Concentricdiversification

Horizontaldiversification

Conglomeratediversification

Joint ventures

Quadrant III

Retrenchment

Concentric

diversification Horizontal

diversification

Conglomeratediversification

Liquidation

Quadrant I

Market development

Market penetration

Product development

Forward integration

Backward integration

Horizontal integration Concentric

diversification

Quadrant II

Market development

Market penetration

Product development

Horizontal integration

Divestiture

Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK

COMPETITIVE

POSITION

STRONG

COMPETITIVE

POSITION


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Quadrant I Excellent strategic position

Concentration on current markets and products

Take risks aggressively when necessary


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Quadrant II Evaluate present approach seriously

How to change to improve competitiveness

Rapid market growth requires intensive strategy


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Quadrant III Compete in slow-growth industries

Weak competitive position Drastic changes quickly

Cost and asset reduction indicated (retrenchment)


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Quadrant IV Strong competitive position

Slow-growth industry

Diversification indicated to more promisinggrowth areas


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Quantitative Strategic Planning Matrix (QSPM)

Comprises Stage 3 of the analytical framework

Analytical technique designed to determine the relativeattractiveness of feasible alternative actions.

Uses input from Stage 1 and Stage 2


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Quantitative Strategic Planning Matrix(QSPM)

Tool for objective evaluation of alternative strategies

Based on identified external and internal crucialsuccess factors

Requires good intuitive judgment

QSPM Strategic Alternatives

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Key Internal Factors

Management

Marketing

Finance/Accounting

Production/Operations

Research andDevelopment

Computer InformationSystems

Strategy 3Strategy2

Strategy1

WeightKey External Factors

Economy

Political/Legal/Governmental

Social/Cultural/Demographic/Environmental

Technological

Competitive


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QSPM

List the firms key external opportunities &

threats; list the firms key internalstrengths and weaknesses

Assign weights to each external andinternal critical success factor


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QSPM

Examine the Stage 2 (matching) matrices

and identify alternative strategies that theorganization should consider implementing

Determine the Attractiveness Scores (AS)


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QSPM

Compute the total Attractiveness

Scores Compute the Sum Total

Attractiveness Score


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QSPMPositives:

Sets of strategies examinedsimultaneously or sequentially

Requires the integration of pertinentexternal and internal factors in thedecision-making process


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QSPMLimitations:

Requires intuitive judgments andeducated assumptions

Only as good as the prerequisite

inputs

09MBA SM Mod 6 , P-3

Documents

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