CHAPTER 8

STRATEGY FORMULATION;FUNCTIONAL STRATEGY & STRATEGIC CHOICE

STRATEGIC MANAGEMENT AND BUSINESS POLICY

11th Edition

Thomas L. Wheelen

J. David Hunger

Strategy Formulation

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-- Generating alternative strategies-- Selecting strategies to pursue-- Best alternative - achieve mission & objectives

Nature of Strategy Analysis & Choice

Strategy Analysis & Choice

Strategy Formulation

Comprehensive Strategy-Formulation Framework

Stage 1:The Input Stage

Stage 2:The Matching Stage

Stage 3:The Decision Stage

Strategy Formulation

Strategy-Formulation Analytical Framework

Internal Factor EvaluationMatrix (IFE)

External Factor EvaluationMatrix (EFE)

Stage 1:The Input Stage

Strategy Formulation

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

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

BCG Matrix

Grand Strategy Matrix

Stage 2:The Matching Stage

Strategy Formulation

BCG Matrix

Boston Consulting Group Matrix

BCG reveals differences among business divisions in terms of:

1- 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.

2- Market growth rate

Strategy Formulation

BCG Matrix

Strategy Formulation

BCG Matrix

Based on the observation that a company’s divisions can be classified into four categories based on combinations of market growth & market share relative to the largest competitor.

A framework assumes that an increase in relative market share will result in an increase in the generation of cash.

Strategy Formulation

BCG Matrix

Question Marks

Low relative market share – compete in high-growth industry

Cash needs are high

Cash generation is low

Organization must decide whether to: strengthen them (intensive strategies) or divest

Strategy Formulation

BCG Matrix

Stars

High relative market share and high growth rate

Best long-run opportunities for growth & profitability

Consider substantial investment to maintain or strengthen dominant position

Integration strategies, intensive strategies, joint ventures

Strategy Formulation

BCG Matrix

Cash Cows

High relative market share, competes in low-growth industry

Generate cash in excess of their needs

Milked for other purposes

Cash cow divisions should be managed to maintain strong position as long as possible

Product development, concentric diversification

If weakens—retrenchment or divestiture

Strategy Formulation

BCG Matrix

Dogs

Low relative market share & compete in slow or no market growth

Weak internal & external position

Liquidation, divestiture, retrenchment

Strategy Formulation

Limitations:

Oversimplification & inaccuracy Does not reflect if other divisions are growing

overtime A snapshot of an organization at a given point in

time. Other variables as CA & size of the market are

important in strategic decisions about divisions.

Strategy Formulation

BCG Matrix

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

BCG Matrix

Grand Strategy Matrix

Stage 2:The Matching Stage

Strategy Formulation

Grand Strategy Matrix

Tool for formulating alternative strategies

Based on two dimensions

Competitive position

Market growth

Strategy Formulation

Quadrant IV

1. Concentric diversification

2. Horizontal diversification

3. Conglomerate diversification

4. Joint ventures

Quadrant III

1. Retrenchment

2. Concentric diversification

3. Horizontal diversification

4. Conglomerate diversification

5. Liquidation

Quadrant I

1. Market development

2. Market penetration

3. Product development

4. Forward integration

5. Backward integration

6. Horizontal integration

7. Concentric diversification

Quadrant II

1. Market development

2. Market penetration

3. Product development

4. Horizontal integration

5. Divestiture

6. Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK COMPETITIVE

POSITION

STRONGCOMPETITIVE

POSITION

Strategy Formulation

Grand Strategy Matrix

Excellent strategic position

Concentration on current markets/products

Take risks aggressively when necessary

Quadrant I

Strategy Formulation

Grand Strategy Matrix

Evaluate present approach

How to improve competitiveness

Rapid market growth requires intensive strategy

Quadrant II

Strategy Formulation

Grand Strategy Matrix

Compete in slow-growth industries

Weak competitive position

Drastic changes quickly

Cost & asset reduction (retrenchment)

Quadrant III

Strategy Formulation

Grand Strategy Matrix

Strong competitive position

Slow-growth industry

Diversification to more promising growth areas

Quadrant IV

Strategy Formulation

Strategy-Formulation Analytical Framework

Stage 3:The Decision Stage

Quantitative StrategicPlanning Matrix

(QSPM)

Strategy Formulation

QSPM

Technique designed to determine the relative attractiveness of feasible alternative actions

Quantitative Strategic Planning Matrix

Strategy Formulation

QSPM

Key Internal Factors

Management

Marketing

Finance/Accounting

Production/Operations

Research and Development

Computer Information Systems

Strategy 3Strategy 2Strategy 1WeightKey External Factors

Economy

Political/Legal/Governmental

Social/Cultural/Demographic/Environmental

Technological

Competitive

Strategic Alternatives

Strategy Formulation

QSPM – 6 Steps to Develop

(1) Make a list of the firm’s key external & internal factors from the EFAS & IFAS in the left column. A minimum of 10 external & 10 internal should be included in the QSPM.

(2) Assign weights to each key external & internal factor. Weights are identical to those in the EFAS & IFAS matrices.

(3) Examine Stage 2 matrices (matching techniques; SWOT analysis, SPACE Matrix, BCG, & Grand Strategy Matrix), and identify the alternative strategies the organization should consider implementing. Record these strategies in the top row of the QSPM.

Strategy Formulation

QSPM – 6 Steps to Develop(4) Determine the Attractiveness Score (AS) of each

strategy. AS indicates the relative attractiveness of each strategy.

AS is determined by examining each factor (external/internal), one at a time, & asking:

“Does this factor affect the choice of strategies?”

If YES: then the factors’ AS is rated as follows:

1: Slightly attractive, 2: Somewhat attractive, 3: Reasonably attractive, 4: Highly attractive.

If NO: then that factor has no effect on the choice being made, thus given a dash.

N.B.: A dash in one strategy gives a dash in all other strategies for that specific factor.

Strategy Formulation

QSPM – 6 Steps to Develop

(5) Compute the Total Attractiveness Scores (TAS). Multiply each weight by each AS. TAS indicates the relative attractiveness of each alternative strategy, considering only the impact of the adjacent external or internal factor.

(6) Compute the Sum Total Attractiveness Scores (STAS), to reveal which strategy is more attractive. Higher STAS scores indicate more attractive strategies.

Strategy Formulation

QSPM

Never work column by column, always prepare a QSPM working row by row.

Dashes are inserted all the way across the row when used.

Never duplicate AS scores in a row.

NOTE

Strategy Formulation

QSPM

Requires intuitive judgments & educated assumptions

Only as good as the prerequisite inputs

Limitations

Strategy Formulation

QSPM

Sets of strategies considered simultaneously or sequentially

Integration of pertinent external & internal factors in the decision making process

Advantages

Strategy Formulation

Cultural Aspects of Strategy Choice

Successful strategies depend on the degree of consistency with the firm’s culture

Organization Culture

Strategy Formulation

Politics of Strategy Choice

Management hierarchy

Career aspirations

Allocation of scarce resources

Politics in Organizations

Strategy Formulation

Politics of Strategy Choice

Equifinality

Satisfying

Generalization

Higher-order issues

Political access on important issues

Political tactics for strategists

Strategy Formulation

Governance Issues

Control & oversight over management

Adherence to legal prescriptions

Consideration of stakeholder interests

Advancement of stockholder rights

Board of Directors Roles & Responsibilities

Strategy Formulation

Corporate Governance Issues

1. No more than 2 directors current or former company executives2. No directors do business with the company3. Audit, compensation, and nominating committees made up

of outside directors4. Each director attends at lest 75% of all meetings5. Audit committee meets at least four times a year6. CEO is not also the Chairperson of the Board7. Shareholders have considerable power and information to

choose & replace directors8. Stock options are considered a corporate expense9. No interlocking directorships

Business Week’s “principles of good governance”

Strategy Formulation