Chapter 6 Strategy Analysis & Choice

Strategic Management: Concepts & Cases 13th Edition Global Edition Fred David

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Ch 6 -1

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Ch 6 -2

Strategy Analysis & Choice

Whether its broke or not, fix it make it better. Not just products, but the whole company if necessary. Bill Saporito

Life is full of lousy options. General P.X. Kelley

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Ch 6 -3

Strategy Analysis & Choice

Subjective decisions based on objective information Generating alternative strategies Selecting strategies to pursue Best alternative course of action to achieve mission & objectives Derived from vision, mission, objectives, external audit, and internal audit
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Strategy Analysis & Choice Generating Alternatives Participation in generating alternative strategies should be as broad as possible

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Ch 6 -5

Comprehensive StrategyFormulation Framework

Stage 1 - Input Stage
EFE Matrix IFE matrix CPM

Stage 2 - Matching Stage

SWOT SPACE matrix BCG matrix IE Matrix Grand strategy matrix

Stage 3 - Decision Stage

QSPM
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Strategy-Formulation Framework
External Factor Evaluation Matrix (EFE)

Stage 1: The Input Stage

Internal Factor Evaluation Matrix (IFE)

Competitive Profile Matrix (CPM)

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Ch 6 -7

Stage 2: The Matching Stage

Match between organizations internal resources & skills and the opportunities & risks created by its external factors

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Ch 6 -8

Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

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Ch 6 -9

Stage 2: The Matching Stage SWOT Matrix

Strengths Weaknesses Opportunities Threats

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Ch 6 -10

SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO) Weaknesses-Opportunities (WO) Strengths-Threats (ST) Weaknesses-Threats (WT)

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Ch 6 -11

SWOT Matrix
SO strategies use a firms internal strengths to take advantage of external opportunities WO strategies improve internal weaknesses by taking advantage of external opportunities ST strategies use a firms strengths to avoid or reduce the impact of external threats WT strategies defensive tactics aimed at reducing internal weakness and avoiding external threats
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Limitations with SWOT Matrix

Does not show how to achieve a competitive advantage Provides a static assessment in time May lead the firm to overemphasize a single internal or external factor in formulating strategies

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Ch 6 -13

Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

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Ch 6 -14

SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive Conservative Defensive Competitive

Ch 6 -15

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SPACE Matrix
Internal dimensions
Financial position (FP) Competitive position (CP)

External dimensions
Environmental position (EP) Industry position (IP)
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Ch 6 -17

Financial Stability (FS) Return on Investment Leverage Liquidity Working Capital Cash Flow Financial Stability (FS) Average

6 5 4 5 6 5.2

Environmental Stability (ES) Unemployment Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry Environmental Stability (ES) Average

-4 -2 -3 -4 -1 -2.8

Competitive Stability (CA) Market Share Product Quality Customer Loyalty Competitions Capacity Utilization Technological Know-How Competitive Stability (CA) Average

-1 -3 -5 -4 -6 -3.8

Industry Stability (IS) Growth Potential Financial Stability Ease of Market Entry Resource Utilization Profit Potential Industry Stability (IS) Average

4 3 5 3 6 4.2

Y-axis: FS + ES = 5.2 + (-2.8) = 2.4 X-axis: CA + IS = (-3.8) + (4.2) = 0.4

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Ch 6 -18

FS
Conservative
7 6 5 4 3 2 1

Aggressive

CA

IS
-7 -6 -5 -4 -3 -2 -1 -1 2 -3 -4 5 -6 -7 1 2 3 4 5 6 7

Defensive

Competitive

ES
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Financial Stability (FS) Return on Investment Leverage Liquidity Working Capital Cash Flow

1 2 1 1 1

Environmental Stability (ES) Unemployment Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry

-5 -5 -4 -2 -1

Competitive Stability (CS) Market Share Product Quality Customer Loyalty Competitions Capacity Utilization Technological Know-How

-6 -6 -4 -4 -5

Industry Stability (IS) Growth Potential Financial Stability Ease of Market Entry Resource Utilization Profit Potential

3 3 5 4 3

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Ch 6 -20

Financial Stability (FS) Return on Investment Leverage Liquidity Working Capital Cash Flow Financial Stability (FS) Average

1 2 1 1 1 1.2

Environmental Stability (ES) Unemployment Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry Environmental Stability (ES) Average

-5 -5 -4 -2 -1 -3.4

Competitive Stability (CS) Market Share Product Quality Customer Loyalty Competitions Capacity Utilization Technological Know-How Competitive Stability (CS) Average

-6 -6 -4 -4 -5 -5

Industry Stability (IS) Growth Potential Financial Stability Ease of Market Entry Resource Utilization Profit Potential Industry Stability (IS) Average

3 3 5 4 3 3.6

Y-axis: FS + ES = 1.2 + (-3.4) = -2.2 X-axis: CS + IS = (-5.0) + (3.6) = -1.4

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Rapid Market Growth Quadrant II Quadrant I

Weak Competitive Position

Strong Competitive Position

Quadrant III

Slow Market Growth

Quadrant IV

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Ch 6 -22

Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

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Ch 6 -23

BCG Matrix Boston Consulting Group Matrix

Assists multidivisional firm in formulating strategies Autonomous divisions = business portfolio Divisions may compete in different industries Focus on relative market-share position & industry growth rate
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BCG Matrix
Question Marks low relative market share in a high-growth industry Stars high relative market share in a highgrowth industry Cash Cows high relative market share in a low-growth industry Dogs Low relative market share in a slow or no growth industry
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Ch 6 -26

Division 1 2 3 4 5
Total

Revenues $60,000 40,000 40,000 20,000 5,000 $165,000

Percent Revenuer 37 24 24 12 3 100

Profits $10,000 5,000 2,000 8,000 500 $25,500

Percent Profits 39 20 8 31 2 100

Percent Market Share 80 40 10 60 5

Percent Growth Rate +15 +10 1 -20 -10

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Ch 6 -27

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Ch 6 -28

Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

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Ch 6 -29

The Internal-External Matrix

Positions an organizations various divisions in a nine-cell display Similar to BCG Matrix except the IE Matrix:
Requires more information about the divisions Strategic implications of each matrix are different

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Ch 6 -30

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Ch 6 -31

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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Ch 6 -32

Division 1 2
3

Sales $100 200 50 50 400

Percent Sales 25.0 50.0 12.5 12.5 100.0

Profits 10 5
4

Percent Profits 50 25
20

IFE Scores 3.6 2.1

3.1

EFE Scorer 3.2 3.5 2.1 2.5

4 Total

1 20

5 100

1.8

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Ch 6 -33

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Ch 6 -34

The IFE Total Weighted Score

Strong 3.0 to 4.0 I

Average 2.0 to 2.99 II

Weak 1.0 to 1.99 III

High 3.0 to 3.99

Wal-Mart Stores, Inc.

IV

IV

VI

The EFE Total Weighted Score Medium 2.0 to 2.99 VII VIII IX

Low 1.0 to 1.99

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Ch 6 -35

Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

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Ch 6 -36

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Grand Strategy Matrix

Tool for formulating alternative strategies Based on two dimensions

Competitive position Market growth
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RAPID MARKET GROWTH

1. 2. 3. 4. 5. 6.

Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation

1. 2. 3. 4. 5. 6. 7.

WEAK COMPETITIVE POSITION

1. 2. 3. 4. 5.

Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Related diversification Quadrant IV Related diversification Unrelated diversification Joint ventures

Quadrant III Retrenchment Related diversification Unrelated diversification Divestiture Liquidation

STRONG COMPETITIVE POSITION

1. 2. 3.

SLOW MARKET GROWTH

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Grand Strategy Matrix

Quadrant I

Excellent strategic position Concentration on current markets/products Take risks aggressively when necessary
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Grand Strategy Matrix

Quadrant II

Evaluate present approach How to improve competitiveness Rapid market growth requires intensive strategy
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Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost & asset reduction (retrenchment)
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Grand Strategy Matrix

Quadrant IV

Strong competitive position Slow-growth industry Diversification to more promising growth areas
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Strategy-Formulation Analytical Framework

Stage 3: The Decision Stage

Quantitative Strategic Planning Matrix (QSPM)

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Ch 6 -43

QSPM Quantitative Strategic Planning Matrix

Technique designed to determine the relative attractiveness of feasible alternative actions

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Ch 6 -44

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 Management Information Systems Weight

Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3

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Ch 6 -45

15

Steps to Develop a QSPM

Make a list of the firms key external opportunities/threats and internal strengths/weaknesses in the left column Assign weights to each key external and internal factor

1.

2.

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Ch 6 -46

Steps to Develop a QSPM

Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing Determine the Attractiveness Scores Compute the Total Attractiveness Scores Compute the Sum Total Attractiveness Score

3.

4. 5. 6.

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Ch 6 -47

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Ch 6 -48

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QSPM Advantages

Sets of strategies considered simultaneously or sequentially Integration of pertinent external & internal factors in the decisionmaking process
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QSPM Limitations

Requires intuitive judgments & educated assumptions Only as good as the prerequisite inputs

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Ch 6 -50

Cultural Aspects of Strategy Choice Organization Culture A set of values, beliefs, attitudes, customs, norms, personalities, heroes and heroines that describe a firm Successful strategies depend on support of the firms culture
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Politics of Strategy Choice

Politics in Organizations Hierarchy of command Career aspirations Allocation of scarce resources

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Ch 6 -52

Politics of Strategy Choice

Political Tactics for Strategists

Equifinality Satisfying Generalization Higher-order issues Political access on important issues

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Governance Issues
Board of Directors Roles & Responsibilities

Control & oversight over management Adherence to legal prescriptions Consideration of stakeholders interests Advancement of stockholders rights
Ch 6 -54

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