Chapter 06

Fred R. DavidPrentice Hall

Ch 6-1

Chapter 6Chapter 6Strategy Analysis And ChoiceStrategy Analysis And Choice

Strategic Management: Concepts and Cases. 9th edition

Fred R. David

PowerPoint Slides byAnthony F. Chelte

Western New England College


Ch 6-2

Chapter OutlineChapter Outline

• The Nature of Strategy Analysis and Choice

• A Comprehensive Strategy-Formulation Framework

• The Input Stage


Ch 6-3


• The Matching Stage

• The Decision Stage

• Cultural Aspects of Strategy Choice


Ch 6-4


• The Politics of Strategy Choice

• The Role of a Board of Directors


Ch 6-5

Strategy Analysis & ChoiceStrategy Analysis & Choice

Whether it’s broke or not, fix it—make it better. Not just products, but the whole company if necessary.

-- Bill Saporito


Ch 6-6


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


Ch 6-7


The Nature of Strategy Analysis and Choice –The Nature of Strategy Analysis and Choice –

– Establishing long-term objectivesEstablishing long-term objectives– Generating alternative strategiesGenerating alternative strategies– Selecting strategies to pursueSelecting strategies to pursue– Best alternative to achieve mission and objectivesBest alternative to achieve mission and objectives


Ch 6-8


Alternative strategies derive from –Alternative strategies derive from –

– VisionVision– MissionMission– ObjectivesObjectives– External auditExternal audit– Internal auditInternal audit– Past successful strategiesPast successful strategies


Ch 6-9


Participation in generating alternative Participation in generating alternative strategies should be broad –strategies should be broad –


Ch 6-10

Strategy-FormulationStrategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage


Ch 6-11

Formulation FrameworkFormulation Framework

External Factor EvaluationMatrix (EFE)

Competitive ProfileMatrix

Internal Factor EvaluationMatrix (IFE)

Stage 1:The Input Stage


Ch 6-12

Input StageInput Stage

• Provides basic input information for the Provides basic input information for the matching and decision stage matricesmatching and decision stage matrices

• Requires strategists to quantify Requires strategists to quantify subjectivity early in the processsubjectivity early in the process

• Good intuitive judgment always neededGood intuitive judgment always needed


Ch 6-13


SPACE Matrix

Stage 2:The Matching Stage

TOWS Matrix

BCG Matrix

IE Matrix

Grand Strategy Matrix


Ch 6-14

Matching StageMatching Stage

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


Ch 6-15

Matching Key Factors to Formulate Alternative StrategiesMatching 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)


Ch 6-16


SPACE Matrix


TOWS Matrix

BCG Matrix

IE Matrix



Ch 6-17

Matching StageMatching Stage

TOWS MatrixTOWS Matrix

– ThreatsThreats– OpportunitiesOpportunities– StrengthsStrengths– WeaknessesWeaknesses


Ch 6-18


Develop four types of strategiesDevelop four types of strategies

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


Ch 6-19

SOSO StrategiesStrategies

SO Strategies

Use a firm’s internal

strengths to take advantage of

external opportunities

ThreatsOpportunitiesWeaknesses

Strengths(TOWS)


Ch 6-20

WOWO StrategiesStrategies

WO Strategies

Improving internal

weaknesses by taking

advantage of external

opportunities


Strengths(TOWS)


Ch 6-21

STST StrategiesStrategies

ST Strategies

Using firm’s strengths to

avoid or reduce the impact of

external threats.


Strengths(TOWS)


Ch 6-22

WTWT StrategiesStrategies

WT Strategies

Defensive tactics aimed at reducing internal

weaknesses and avoiding

environmental threats.


Strengths(TOWS)


Ch 6-23


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


Ch 6-24


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


Ch 6-25


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


Ch 6-26


SPACE Matrix


TOWS Matrix

BCG Matrix

IE Matrix



Ch 6-27

SPACE MatrixSPACE Matrix

Strategic Position and Action Evaluation Matrix

Four quadrant framework Determines appropriate strategies

Aggressive Conservative Defensive Competitive


Ch 6-28


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

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


Ch 6-29


Overall Strategic position determined by:

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


Ch 6-30


Developing the SPACE Matrix:

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


Ch 6-31


• 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


Ch 6-32


• 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.


Ch 6-33

SPACE FactorsSPACE Factors

Environmental Stability (ES)

Technological changesRate of inflationDemand variabilityPrice range of competing productsBarriers to entryCompetitive pressurePrice elasticity of demand

Financial Strength (FS)

Return on investmentLeverageLiquidityWorking capitalCash flowEase of exit from marketRisk involved in business

External Strategic PositionInternal Strategic Position


Ch 6-34

SPACE FactorsSPACE Factors

Industry Strength (IS)

Growth potentialProfit potentialFinancial stabilityTechnological know-howResource utilizationCapital intensifyEase of entry into marketProductivity, capacity utilization

Competitive Advantage CA

Market shareProduct qualityProduct life cycleCustomer loyaltyCompetition’s capacity utilizationTechnological know-howControl over suppliers & distributors

External Strategic PositionInternal Strategic Position


Ch 6-35

SPACE MatrixSPACE 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


Ch 6-36


SPACE Matrix


TOWS Matrix

BCG Matrix

IE Matrix



Ch 6-37

BCG MatrixBCG 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


Ch 6-38


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


Ch 6-39


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.


Ch 6-40


DogsDogsIVIV

Cash CowsCash CowsIIIIII

Question MarksQuestion MarksII

StarsStarsIIII

Relative Market Share PositionHigh1.0

Medium.50

Low0.0

Indu

stry

Sal

es G

row

th R

ate High

+20

Low-20

Medium0


Ch 6-41


• Question Marks • Stars• Cash Cows• Dogs


Ch 6-42


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


Ch 6-43


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


Ch 6-44


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


Ch 6-45


Dogs

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

• Decision to liquidate, divest, retrenchment


Ch 6-46


SPACE Matrix


TOWS Matrix

BCG Matrix

IE Matrix



Ch 6-47

Grand Strategy MatrixGrand Strategy Matrix• 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


Ch 6-48

Quadrant IV1. Concentric diversification2. Horizontal diversification3. Conglomerate

diversification4. Joint ventures

Quadrant III1. Retrenchment2. Concentric diversification3. Horizontal diversification4. Conglomerate

diversification5. Liquidation

Quadrant I1. Market development2. Market penetration3. Product development4. Forward integration5. Backward integration6. Horizontal integration7. Concentric diversification

Quadrant II1. Market development2. Market penetration3. Product development4. Horizontal integration5. Divestiture6. Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK COMPETITIVE

POSITION

STRONGCOMPETITIVE

POSITION


Ch 6-49

Grand Strategy MatrixGrand Strategy Matrix

Quadrant I

• Excellent strategic position• Concentration on current markets and

products• Take risks aggressively when necessary


Ch 6-50


Quadrant II

• Evaluate present approach seriously• How to change to improve competitiveness• Rapid market growth requires intensive

strategy


Ch 6-51


Quadrant III

• Compete in slow-growth industries• Weak competitive position• Drastic changes quickly• Cost and asset reduction indicated

(retrenchment)


Ch 6-52


Quadrant IV

• Strong competitive position• Slow-growth industry• Diversification indicated to more promising

growth areas


Ch 6-53


Quantitative Strategic Planning Matrix

(QSPM)

Stage 3:The Decision Stage


Ch 6-54

QSPMQSPM


• Only technique designed to determine the relative attractiveness of feasible alternative actions


Ch 6-55

QSPMQSPM


• Tool for objective evaluation of alternative strategies

• Based on identified external and internal crucial success factors

• Requires good intuitive judgment


Ch 6-56

QSPMQSPM


• 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


Ch 6-57

QSPMQSPM


• Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing

• Determine the Attractiveness Scores (AS)


Ch 6-58

QSPMQSPM


• Compute the total Attractiveness Scores

• Compute the Sum Total Attractiveness Score


Ch 6-59

QSPMQSPM

Key Internal FactorsManagementMarketingFinance/AccountingProduction/OperationsResearch and DevelopmentComputer Information Systems

Strategy 3Strategy 2

Strategy 1

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

Strategic Alternatives


Ch 6-60

QSPMQSPM

Limitations:

• Requires intuitive judgments and educated assumptions

• Only as good as the prerequisite inputs


Ch 6-61

QSPMQSPM

Positives:

• Sets of strategies examined simultaneously or sequentially

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


Ch 6-62

Cultural Aspects of Strategy Cultural Aspects of Strategy ChoiceChoice

Culture:

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


Ch 6-63

Cultural Aspects of Strategy Cultural Aspects of Strategy ChoiceChoice

Culture:

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


Ch 6-64

Politics of Strategy ChoicePolitics of Strategy Choice

Politics in organizations:

• Management hierarchy• Career aspirations• Allocation of scarce resources


Ch 6-65

Politics of Strategy ChoicePolitics of Strategy Choice

Political tactics for strategists:

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


Ch 6-66

Role of A Board of DirectorsRole 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


Ch 6-67

Key TermsKey Terms

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


Ch 6-68

Key TermsKey Terms

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


Ch 6-69

Key TermsKey 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)


Ch 6-70

Key TermsKey Terms

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

(SPACE) Matrix• Strategy-formulation framework


Ch 6-71

Key TermsKey Terms

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

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

Chapter 06

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