strategy analysis and choice
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For educational purpose onlyTRANSCRIPT
© 2001 Prentice HallCh. 6-1
Strategic ManagementConcepts & Cases
8th edition
Fred R. David
Chapter 6:Strategy Analysis &
ChoicePowerPoint Slides By:
Anthony F. Chelte
Western New England College
© 2001 Prentice HallCh. 6-2
Comprehensive Strategic Management ModelComprehensive Strategic Management Model
Vision &
Mission Statements
Chapter 2
ExternalAudit
Chapter 3
InternalAudit
Chapter 4
Strategies In
Action
Chapter 5
Strategy Analysis
&Choice
Chapter 6
ImplementStrategies:
Mgmt Issues
Chapter 7
ImplementStrategies:Marketing,Fin/Acct,R&D, CISChapter 8
Measure &Evaluate
Performance
Chapter 9
© 2001 Prentice HallCh. 6-3
Strategy Analysis & Strategy Analysis & ChoiceChoice
“Strategic management is not a box of tricks or a bundle of techniques. It is analytical thinking and commitment of resources to action. But quantification alone is not planning. Some of the most important issues in strategic management cannot be quantified at all.”
—Peter Drucker—
© 2001 Prentice HallCh. 6-4
Strategy Analysis & Strategy Analysis & ChoiceChoice
“Whether it’s broke or not, fix it—make it better. Not just products, but the whole company if necessary.”
—Bill Saporito—
© 2001 Prentice HallCh. 6-5
Strategy Analysis & Strategy Analysis & ChoiceChoice
“Planning is often doomed before it ever starts, either because too much is expected of it or because not enough is put into it.”
—T. J. Cartwright—
© 2001 Prentice HallCh. 6-6
Strategy Analysis & Strategy Analysis & ChoiceChoice
Strategic Analysis and Choice:
Making subjective decisions based on objective information
© 2001 Prentice HallCh. 6-7
Strategy Analysis & Strategy Analysis & ChoiceChoice
Strategic Analysis and Choice:
• Generate feasible alternatives• Evaluate alternatives• Select specific course of action
© 2001 Prentice HallCh. 6-8
Strategy Analysis & Strategy Analysis & ChoiceChoice
Generating & Selecting Strategies
Develop set of most attractive alternative strategies
Determine for the set• Advantages• Disadvantages• Trade-offs• Costs• Benefits
© 2001 Prentice HallCh. 6-9
Strategy Analysis & Strategy Analysis & ChoiceChoice
Generating & Selecting Strategies
Involve a broad mix of personnel• Representation from each
department/function• Provides opportunity to gain
understanding of firm’s direction• Provides vehicle to develop commitment
to attainment of organizational objectives
© 2001 Prentice HallCh. 6-10
Strategy Analysis & Strategy Analysis & ChoiceChoice
Generating & Selecting Strategies
Evaluate each alternative• Internal and external audit information• Firm’s mission statement• Listed in writing• Ranked in order of attractiveness
© 2001 Prentice HallCh. 6-11
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
© 2001 Prentice HallCh. 6-12
Strategy-Formulation Analytical Framework
Stage 1: The Input StageStage 1: The Input Stage
ExternalFactor
EvaluationMatrix (EFE)
CompetitiveProfileMatrix
InternalFactor
EvaluationMatrix (IFE)
© 2001 Prentice HallCh. 6-13
Strategy-Formulation Analytical Framework
Stage 2: The Matching StageStage 2: The Matching Stage
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
StrategicPosition &
Action Evaluation(SPACE)
BostonConsulting
Group Matrix(BCG)
Internal-ExternalMatrix
(IE)
GrandStrategyMatrix
© 2001 Prentice HallCh. 6-14
Strategy-Formulation Analytical Framework
Stage 3: The Decision StageStage 3: The Decision Stage
Quantitative StrategicPlanning Matrix
(QSPM)
© 2001 Prentice HallCh. 6-15
Strategy Analysis & Strategy Analysis & ChoiceChoice
Stage 1: The Input Stage
Provides Basic Input for Stages 2 and 3
• External Factor Evaluation Matrix (EFE)• Internal Factor Evaluation Matrix (IFE)• Competitive Profile Matrix
© 2001 Prentice HallCh. 6-16
Strategy Analysis & Strategy Analysis & ChoiceChoice
Stage 2: The Matching Stage
Strategy is characterized by the organizational match between
• Internal resources and skills• Opportunities & risks created by
external factors
© 2001 Prentice HallCh. 6-17
Matching Key FactorsMatching Key Factors
Resultant StrategyKey External Factor
Key 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 Visioncable, Inc.
=
20% annual growth in the cablevision industry (opportunity)
+Excess working capacity (strength)
© 2001 Prentice HallCh. 6-18
Four Types of Four Types of StrategiesStrategies
WT Strategies
ST Strategies
WO Strategies
SO Strategies
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
© 2001 Prentice HallCh. 6-19
SOSO Strategies Strategies
SO Strategies
Use a firm’s internal
strengths to take
advantage of external
opportunities
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
© 2001 Prentice HallCh. 6-20
WOWO Strategies Strategies
WO Strategies
Improving internal
weaknesses by taking
advantage of external
opportunities
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
© 2001 Prentice HallCh. 6-21
STST Strategies Strategies
ST Strategies
Using firm’s strengths to
avoid or reduce the impact of external threats.
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
© 2001 Prentice HallCh. 6-22
WTWT Strategies Strategies
WT Strategies
Defensive tactics aimed at reducing
internal weaknesses and avoiding
environmental threats.
ThreatsOpportunitiesWeaknesses
Strengths(TOWS)
© 2001 Prentice HallCh. 6-23
Strategy Analysis & Strategy Analysis & ChoiceChoice
The TOWS Matrix
• List the firm’s key external opportunities
• List the firm’s key external threats• List the firm’s key internal strengths• List the firm’s key internal weaknesses
© 2001 Prentice HallCh. 6-24
Strategy Analysis & Strategy Analysis & ChoiceChoice
The TOWS Matrix
• Match internal strengths with external opportunities and record the resultant SO Strategies
• Match internal weaknesses with external opportunities and record the resultant WO Strategies
• Match internal strengths with external threats and record the resultant ST Strategies
• Match internal weaknesses with external threats and record the resultant WT Strategies
© 2001 Prentice HallCh. 6-25
TOWS MatrixTOWS Matrix
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
© 2001 Prentice HallCh. 6-26
Strategy Analysis & Strategy Analysis & ChoiceChoice
Strategic Position & Action Evaluation Matrix (SPACE)
• Four quadrant framework • Determines appropriate strategies
Aggressive Conservative Defensive Competitive
© 2001 Prentice HallCh. 6-27
Strategy Analysis & Strategy Analysis & ChoiceChoice
Strategic Position & Action Evaluation Matrix (SPACE)
• Two Internal Dimensions Financial Strength [FS] Competitive Advantage [CA]
• Two External Dimensions Environmental Stability [ES] Industry Strength [IS]
© 2001 Prentice HallCh. 6-28
Strategy Analysis & Strategy Analysis & ChoiceChoice
Strategic Position & Action Evaluation Matrix (SPACE)
Overall Strategic position determined by:
• Financial Strength [FS]• Competitive Advantage [CA]• Environmental Stability [ES]• Industry Strength [IS]
© 2001 Prentice HallCh. 6-29
Strategy Analysis & Strategy Analysis & ChoiceChoice
Strategic Position & Action Evaluation Matrix (SPACE)
Developing the SPACE Matrix:• EFE Matrix• IFE Matrix• Financial Strength• Competitive Advantage• Environmental Stability• Industry Strength
© 2001 Prentice HallCh. 6-30
Strategy Analysis & Strategy Analysis & ChoiceChoice
The SPACE Matrix
• 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
© 2001 Prentice HallCh. 6-31
Strategy Analysis & Strategy Analysis & ChoiceChoice
The SPACE Matrix
• 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.
© 2001 Prentice HallCh. 6-32
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 Position
Internal Strategic Position
© 2001 Prentice HallCh. 6-33
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 Position
Internal Strategic Position
© 2001 Prentice HallCh. 6-34
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
© 2001 Prentice HallCh. 6-35
Strategy Analysis & Strategy Analysis & ChoiceChoice
Boston Consulting Group Matrix(BCG)
• 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
© 2001 Prentice HallCh. 6-36
Strategy Analysis & Strategy Analysis & ChoiceChoice
Boston Consulting Group Matrix(BCG)
• 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
© 2001 Prentice HallCh. 6-37
Strategy Analysis & Strategy Analysis & ChoiceChoice
Boston Consulting Group Matrix(BCG)
• 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.
© 2001 Prentice HallCh. 6-38
BCG MatrixBCG Matrix
DogsDogs
IVIVCash CowsCash Cows
IIIIII
Question MarksQuestion Marks
IIStarsStars
IIII
Relative Market Share PositionHigh1.0
Medium.50
Low0.0
Ind
ust
ry S
ales
Gro
wth
Rat
e
High+20
Low-20
Medium0
© 2001 Prentice HallCh. 6-39
Strategy Analysis & Strategy Analysis & ChoiceChoice
BCG Matrix
• Question Marks • Stars• Cash Cows• Dogs
© 2001 Prentice HallCh. 6-40
Strategy Analysis & Strategy Analysis & ChoiceChoice
BCG Matrix
• 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
© 2001 Prentice HallCh. 6-41
Strategy Analysis & Strategy Analysis & ChoiceChoice
BCG Matrix• Stars
High relative market share and high industry growth rate. Best long-run opportunities for growth
and profitabilitySubstantial investment to maintain or
strengthen dominant position Integration strategies, intensive
strategies, joint ventures
© 2001 Prentice HallCh. 6-42
Strategy Analysis & Strategy Analysis & ChoiceChoice
BCG Matrix• 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
© 2001 Prentice HallCh. 6-43
Strategy Analysis & Strategy Analysis & ChoiceChoice
BCG Matrix
• DogsLow relative market share position
and compete in slow or no market growth Weak internal and external position
Decision to liquidate, divest, retrenchment
© 2001 Prentice HallCh. 6-44
Strategy Analysis & Strategy Analysis & ChoiceChoice
Grand Strategy Matrix
• Popular tool for formulating alternative strategies
• Based on two evaluative dimensions Competitive position Market growth
© 2001 Prentice HallCh. 6-45
Grand Strategy Grand Strategy MatrixMatrix
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
STRONGCOMPETITIVE
POSITION
© 2001 Prentice HallCh. 6-46
Strategy Analysis & Strategy Analysis & ChoiceChoice
Grand Strategy Matrix
• Quadrant I Excellent strategic position Concentration on current markets and
products Take risks aggressively when necessary
© 2001 Prentice HallCh. 6-47
Strategy Analysis & Strategy Analysis & ChoiceChoice
Grand Strategy Matrix
• Quadrant II Evaluate present approach seriously How to change to improve competitiveness Rapid market growth requires intensive
strategy
© 2001 Prentice HallCh. 6-48
Strategy Analysis & Strategy Analysis & ChoiceChoice
Grand Strategy Matrix
• Quadrant III Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost and asset reduction indicated
(retrenchment)
© 2001 Prentice HallCh. 6-49
Strategy Analysis & Strategy Analysis & ChoiceChoice
Grand Strategy Matrix
• Quadrant IV Strong competitive position Slow-growth industry Diversification indicated to more promising
growth areas
© 2001 Prentice HallCh. 6-50
Strategy Analysis & Strategy Analysis & ChoiceChoice
Quantitative Strategic Planning Matrix (QSPM)
• Comprises Stage 3 of the analytical framework
• Analytical technique designed to determine the relative attractiveness of feasible alternative actions.
• Uses input from Stage 1 and Stage 2
© 2001 Prentice HallCh. 6-51
Strategy Analysis & Strategy Analysis & ChoiceChoice
Quantitative Strategic Planning Matrix (QSPM)
• Tool for objective evaluation of alternative strategies
• Based on identified external and internal crucial success factors
• Requires good intuitive judgment
© 2001 Prentice HallCh. 6-52
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
© 2001 Prentice HallCh. 6-53
Strategy Analysis & Strategy Analysis & ChoiceChoiceQSPM
• 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
© 2001 Prentice HallCh. 6-54
Strategy Analysis & Strategy Analysis & ChoiceChoiceQSPM
• Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing
• Determine the Attractiveness Scores (AS)
© 2001 Prentice HallCh. 6-55
Strategy Analysis & Strategy Analysis & ChoiceChoiceQSPM
• Compute the total Attractiveness Scores
• Compute the Sum Total Attractiveness Score
© 2001 Prentice HallCh. 6-56
Strategy Analysis & Strategy Analysis & ChoiceChoice
QSPMPositives:• Sets of strategies examined
simultaneously or sequentially• Requires the integration of
pertinent external and internal factors in the decision-making process
© 2001 Prentice HallCh. 6-57
Strategy Analysis & Strategy Analysis & ChoiceChoiceQSPM
Limitations:• Requires intuitive judgments
and educated assumptions• Only as good as the
prerequisite inputs
© 2001 Prentice HallCh. 6-58
Key Terms & ConceptsKey Terms & Concepts
• Aggressive quadrant• Attractiveness
Scores (AS)• Board of Directors• Boston Consulting
Group (BCG) Matrix• Business portfolio• Cash cows• Champions• Competitive
Advantage (CA)
• Competitive quadrant• Conservative quadrant• Culture• Decision stage• Defensive quadrant• Directional vector• Dogs• Environmental Stability
(ES)• Financial Strength (FS)
© 2001 Prentice HallCh. 6-59
Key Terms & ConceptsKey Terms & Concepts
• 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)
• Question marks• Relative market share
position• SO strategies• ST strategies• Stars• Strategic Position and
Action Evaluation (SPACE) Matrix
• Strategy-formulation framework
© 2001 Prentice HallCh. 6-60
Key Terms & ConceptsKey Terms & Concepts
• Sum total attractiveness scores
• Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix
• Total Attractiveness Scores (TAS)
• WO strategies• WT strategies