Chapter 6 Strategy Analysis & Choice



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Chapter 6 Strategy Analysis & Choice

  • Strategic Management: Concepts & Cases
  • 11th Edition
  • Fred David

Chapter Outline

  • The Nature of Strategy & Choice
  • The Input Stage

Chapter Outline (cont’d)

  • The Matching Stage
  • The Decision Stage

Chapter Outline (cont’d)

  • The Politics of Strategy Choice
  • Governance Issues

To acquire or not to acquire, that is the question – Robert J. Terry

  • To acquire or not to acquire, that is the question – Robert J. Terry
  • Strategy Analysis & Choice
  • Life is full of lousy options – General P.X. Kelley

-- Establishing long-term objectives

  • -- Establishing long-term objectives
  • -- Generating alternative strategies
  • -- Selecting strategies to pursue
  • -- Best alternative - achieve mission & objectives
  • Nature of Strategy Analysis & Choice
  • Strategy Analysis & Choice

Vision

  • Vision
  • Mission
  • Objectives
  • External audit
  • Internal audit
  • Past successful strategies
  • Strategy Analysis & Choice
  • Alternative Strategies Derive From --
  • Strategy Analysis & Choice
  • Generating Alternatives --
  • Participation in generating alternative strategies should be as broad as possible
  • Comprehensive Strategy-Formulation Framework
  • Stage 1: The Input Stage
  • Stage 2: The Matching Stage
  • Stage 3: The Decision Stage
  • Internal Factor Evaluation Matrix (IFE)
  • External Factor Evaluation Matrix (EFE)
  • Competitive Profile Matrix (CPM)
  • Stage 1: The Input Stage
  • 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
  • Strategy-Formulation Analytical Framework
  • SWOT Matrix
  • SPACE Matrix
  • BCG Matrix
  • IE Matrix
  • Stage 2: The Matching Stage
  • Stage 2: The Matching Stage
  • Match between organization’s internal resources & skills and the opportunities & risks created by its external factors
  • Stage 2: The Matching Stage
  • Strengths
  • Weaknesses
  • Opportunities
  • Threats
  • SWOT Matrix
  • SWOT Matrix
  • Strengths-Opportunities (SO)
  • Weaknesses-Opportunities (WO)
  • Strengths-Threats (ST)
  • Weaknesses-Threats (WT)
  • Four Types of Strategies

SO Strategies

  • Use a firm’s internal strengths to take advantage of external opportunities
  • SO Strategies
  • Strengths Weaknesses Opportunities
  • Threats SWOT

WO Strategies

  • Improving internal weaknesses by taking advantage of external opportunities
  • WO Strategies
  • Strengths Weaknesses Opportunities
  • Threats SWOT

ST Strategies

  • Use a firm’s strengths to avoid or reduce the impact of external threats
  • ST Strategies
  • Strengths Weaknesses Opportunities
  • Threats SWOT

WT Strategies

  • Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats
  • WT Strategies
  • Strengths Weaknesses Opportunities
  • Threats SWOT
  • SWOT Matrix
  • Developing the SWOT
  • List firm’s key internal Strengths
  • List firm’s key internal Weaknesses
  • List firm’s key external Opportunities
  • List firm’s key external Threats

SWOT Matrix

  • Leave Blank
  • Strengths – S List Strengths
  • Weaknesses – W
  • List Weaknesses
  • Opportunities – O
  • List Opportunities
  • SO Strategies Use strengths to take advantage of opportunities
  • WO Strategies Overcoming weaknesses by taking advantage of opportunities
  • Threats – T
  • List Threats
  • ST Strategies Use strengths to avoid threats
  • WT Strategies Minimize weaknesses and avoid threats
  • 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 from the industry (opportunity)
  • +
  • Insufficient capacity (weakness)
  • Acquire Cellfone, Inc.
  • =
  • 20% annual growth in the cell phone industry (opportunity)
  • +
  • Excess working capacity (strength)
  • Key Internal Factor
  • Key External Factor
  • Resultant Strategy
  • Matching Key Factors to Formulate Alternative Strategies

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
  • Strategy-Formulation Analytical Framework
  • SWOT Matrix
  • SPACE Matrix
  • BCG Matrix
  • IE Matrix
  • Grand Strategy Matrix
  • Stage 2: The Matching Stage
  • SPACE Matrix
  • Strategic Position & Action Evaluation Matrix
  • Aggressive
  • Conservative
  • Defensive
  • Competitive
  • SPACE Matrix
  • Two Internal Dimensions
  • Financial Strength (FS)
  • Competitive Advantage (CA)
  • SPACE Matrix
  • Two External Dimensions
  • Environmental Stability (ES)
  • Industry Strength (IS)

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 Ease of exit from market Risk involved in business
  • Financial Strength (FS)
  • Return on investment
  • Leverage
  • Liquidity
  • Working capital
  • Cash flow
  • External Strategic Position
  • Internal Strategic Position

SPACE Factors

  • Industry Strength (IS)
  • Growth potential
  • Profit potential
  • Financial stability
  • Technological know-how
  • Resource utilization
  • 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 Position
  • Internal Strategic Position

Steps to Developing a SPACE Matrix

  • Select a set of variables to define FS, CA, ES, & IS
  • Assign a numerical value:
    • From +1 to +6 to each FS & IS dimension
    • From -1 to -6 to each ES & CA dimension
  • Compute an average score for each FS, CA, ES, & IS

Steps to Developing a SPACE Matrix

  • Plot the average score on the appropriate axis
  • Add the two scores on the x-axis and plot the point. Add the two scores on the y-axis and plot the point. Plot the intersection of the new xy point
  • Draw a directional vector from the origin through the new intersection point.

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
  • Strategy-Formulation Analytical Framework
  • SWOT Matrix
  • SPACE Matrix
  • BCG Matrix
  • IE Matrix
  • Grand Strategy Matrix
  • Stage 2: The Matching Stage
  • BCG Matrix
  • Boston Consulting Group Matrix
  • Enhances multi-divisional firm in formulating strategies
  • Autonomous divisions = business portfolio
  • Divisions may compete in different industries
  • Focus on market-share position & industry growth rate
  • BCG Matrix
  • Relative Market Share Position
  • Ratio of a division’s own market share in an industry to the market share held by the largest rival firm in that industry

BCG Matrix

  • Dogs
  • IV
  • Cash Cows
  • III
  • Question Marks
  • I
  • Stars
  • II
  • Relative Market Share Position
  • High
  • 1.0
  • Medium
  • .50
  • Low
  • 0.0
  • Industry Sales Growth Rate
  • High
  • +20
  • Low
  • -20
  • Medium
  • 0
  • BCG Matrix
  • Question Marks
  • Low relative market share – compete in high-growth industry
    • Cash needs are high
    • Case generation is low
  • Decision to strengthen (intensive strategies) or divest
  • BCG Matrix
  • Stars
  • 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
  • BCG Matrix
  • Cash Cows
  • 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
  • BCG Matrix
  • Dogs
  • Low relative market share & compete in slow or no market growth
    • Weak internal & external position
  • Liquidation, divestiture, retrenchment
  • Strategy-Formulation Analytical Framework
  • SWOT Matrix
  • SPACE Matrix
  • BCG Matrix
  • IE Matrix
  • Grand Strategy Matrix
  • Stage 2: The Matching Stage

The Internal-External Matrix

  • Positions an organization’s 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

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
  • Strategy-Formulation Analytical Framework
  • SPACE Matrix
  • BCG Matrix
  • IE Matrix
  • Stage 2: The Matching Stage
  • SWOT Matrix
  • Grand Strategy Matrix
  • Grand Strategy Matrix
  • Tool for formulating alternative strategies
  • Based on two dimensions
    • Competitive position
    • Market growth
  • Quadrant IV
  • Concentric diversification
  • Horizontal diversification
  • Conglomerate diversification
  • Joint ventures
  • Quadrant III
  • Retrenchment
  • Concentric diversification
  • Horizontal diversification
  • Conglomerate diversification
  • 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
  • Grand Strategy Matrix
  • Excellent strategic position
  • Concentration on current markets/products
  • Take risks aggressively when necessary
  • Quadrant I
  • Grand Strategy Matrix
  • Evaluate present approach
  • How to improve competitiveness
  • Rapid market growth requires intensive strategy
  • Quadrant II
  • Grand Strategy Matrix
  • Compete in slow-growth industries
  • Weak competitive position
  • Drastic changes quickly
  • Cost & asset reduction (retrenchment)
  • Quadrant III
  • Grand Strategy Matrix
  • Strong competitive position
  • Slow-growth industry
  • Diversification to more promising growth areas
  • Quadrant IV
  • Strategy-Formulation Analytical Framework
  • Stage 3: The Decision Stage
  • Quantitative Strategic Planning Matrix (QSPM)
  • QSPM
  • Technique designed to determine the relative attractiveness of feasible alternative actions
  • Quantitative Strategic Planning Matrix

QSPM

  • Key Internal Factors
  • Management
  • Marketing
  • Finance/Accounting
  • Production/Operations
  • Research and Development
  • Computer Information Systems
  • Strategy 3
  • Strategy 2
  • Strategy 1
  • Weight
  • Key External Factors
  • Economy
  • Political/Legal/Governmental
  • Social/Cultural/Demographic/Environmental
  • Technological
  • Competitive
  • Strategic Alternatives

Steps to Develop a QSPM

  • Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column
  • Assign weights to each key external and internal factor
  • Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing

Steps to Develop a QSPM

  • Determine the Attractiveness Scores
  • Compare the Total Attractiveness Scores
  • Compute the Sum Total Attractiveness Score
  • QSPM
  • Requires intuitive judgments & educated assumptions
  • Only as good as the prerequisite inputs
  • Limitations
  • QSPM
  • Sets of strategies considered simultaneously or sequentially
  • Integration of pertinent external & internal factors in the decision making process
  • Advantages
  • Cultural Aspects of Strategy Choice
  • Successful strategies depend on the degree of consistency with the firm’s culture
  • Organization Culture
  • Politics of Strategy Choice
  • Management hierarchy
  • Career aspirations
  • Allocation of scarce resources
  • Politics in Organizations
  • Politics of Strategy Choice
  • Equifinality
  • Satisfying
  • Generalization
  • Higher-order issues
  • Political access on important issues
  • Political Tactics for Strategists
  • Governance Issues
  • Control & oversight over management
  • Adherence to legal prescriptions
  • Consideration of stakeholder interests
  • Advancement of stockholder rights
  • Board of Directors Roles & Responsibilities

Corporate Governance Issues

  • No more than 2 directors are current or former company
  • executives
  • 2. No directors do business with the company
  • 3. Audit, compensation, and nominating committees made up of outside directors
  • 4. Each director owns a large equity stake in the company
  • 5. At least one outside director with extensive experience
  • 6. Fully employed directors sit on no more than 4 boards –
  • Retirees on no more than 7
  • 7. Each director attends at lest 75% of all meetings
  • Business Week’s “Principles of Good Governance”

Corporate Governance Issues

  • 8. Board meets regularly without management present
  • 9. Audit committee meets at least four times a year
  • 10. Board is frugal on executive pay, diligent in CEO succession, and prompt to act when trouble arises
  • 11. CEO is not also the Chairperson of the Board
  • 12. Shareholders have considerable power and information to choose & replace directors
  • 13. Stock options are considered a corporate expense
  • 14. No interlocking directorships
  • Business Week’s “principles of good governance”

Key Terms & Concepts

  • Key Terms & Concepts
  • For Review (Chapter 6)
  • Aggressive Quadrant
  • Business Portfolio
  • Attractiveness Scores (AS)
  • Cash Cows
  • Boards of Directors
  • Competitive Advantage (CA)
  • Boston Consulting Group (BCG) Matrix
  • Competitive Quadrant

Key Terms & Concepts

  • Key Terms & Concepts
  • For Review (Chapter 6)
  • Conservative Quadrant
  • Dogs
  • Culture
  • Environmental Stability (ES)
  • Defensive Quadrant
  • Financial Strength (FS)
  • Directional Vector
  • Governance

Key Terms & Concepts

  • Key Terms & Concepts
  • For Review (Chapter 6)
  • Grand Strategy Matrix
  • Internal-External (IE) Matrix
  • Halo Error
  • Matching
  • Industry Strength (IS)
  • Matching Stage
  • Input Stage
  • Quantitative Strategic Planning Matrix (QSPM)

Key Terms & Concepts

  • Key Terms & Concepts
  • For Review (Chapter 6)
  • Question Marks
  • Stars
  • Relative Market Share Position
  • Strategic Position & Action Evaluation (SPACE)
  • SO Strategies
  • Sum Total Attractiveness Score (STAS)
  • ST Strategies
  • Sustainability

Key Terms & Concepts

  • Key Terms & Concepts
  • For Review (Chapter 6)
  • Total Attractiveness Scores (TAS)
  • WO Strategies
  • WT Strategies
  • Strengths, Weaknesses Opportunities, Threats SWOT

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