BUS 411 DAY 10

Agenda Question? Assignment 3 corrected Assignment 4 posted Today  1 B, 2 C’s, 3 D’s and 2 F’s Major problems with financial ratios Assignment 4 posted Due March 6 assignment 4 SP14.pdf Today  Begin Chap 6 Strategic analysis and choice

Strategy Analysis and Choice Chapter Six

Strategy Analysis & Choice “Whether it’s 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

Chapter Objectives Describe a three-stage framework for choosing among alternative strategies. Explain how to develop a SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, Grand Strategy Matrix and QSPM. Identify important behavioral, political, ethical, and social responsibility considerations in strategy analysis and choice.

Chapter Objectives Discuss the role of intuition in strategic analysis and choice. Discuss the role of organizational culture in strategic analysis and choice. Discuss the role of a board of directors in choosing among alternative strategies.

A Comprehensive Strategic-Management Model

The Process of Generating and Selecting Strategies A manageable set of the most attractive alternative strategies must be developed The advantages, disadvantages, trade-offs, costs, and benefits of these strategies should be determined

The Process of Generating and Selecting Strategies Identifying and evaluating alternative strategies should involve many of the managers and employees who earlier assembled the organizational vision and mission statements, performed the external audit, and conducted the internal audit.

The Process of Generating and Selecting Strategies Alternative strategies proposed by participants should be considered and discussed in a series of meetings. Proposed strategies should be listed in writing. When all feasible strategies identified by participants are given and understood, the strategies should be ranked in order of attractiveness. (Priority order)

The Strategy-Formulation Analytical Framework Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

A Comprehensive Strategy-Formulation Framework Stage 1 - Input Stage summarizes the basic input information needed to formulate strategies consists of the EFE Matrix, the IFE Matrix, and the Competitive Profile Matrix (CPM)

A Comprehensive Strategy-Formulation Framework Stage 2 - Matching Stage focuses on generating feasible alternative strategies by aligning key external and internal factors techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix

A Comprehensive Strategy-Formulation Framework Stage 3 - Decision Stage involves the Quantitative Strategic Planning Matrix (QSPM) reveals the relative attractiveness of alternative strategies and thus provides objective basis for selecting specific strategies

Matching Key External and Internal Factors to Formulate Alternative Strategies

The Matching Stage The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix helps managers develop four types of strategies: SO (strengths-opportunities) Strategies WO (weaknesses-opportunities) Strategies ST (strengths-threats) Strategies WT (weaknesses-threats) Strategies

The Matching Stage SO Strategies WO Strategies use a firm’s internal strengths to take advantage of external opportunities WO Strategies aim at improving internal weaknesses by taking advantage of external opportunities

The Matching Stage ST Strategies WT Strategies use a firm’s strengths to avoid or reduce the impact of external threats WT Strategies defensive tactics directed at reducing internal weakness and avoiding external threats

SWOT 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 Match internal strengths with external opportunities and record the resulting SO strategies

SWOT Matrix (cont.) 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

SWOT Matrix 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

A SWOT Matrix for a Retail Computer Store

A SWOT Matrix for a Retail Computer Store

SWOT Matrix Copyright 2012, Tony Gauvin, UMFK Strengths Weaknesses Sells essential items with relatively inelastic demand Healthy gross profit margin Accepts food stamps Lower than industry average leverage ratio Being able to raise its dividends Better than industry average total asset turnover Its return on assets of 1.84% is higher than the industry average Its return on equity is 4%, higher than the industry average Approximately 90% of the company's products are priced below $10 In the past year, the company's stock has outperformed the average retail industry Does not do much advertising Limited market, solely in the only In the year 2008, the company's market share dropped from 1.85% to 1.75% The company's EPS is only 72% of the industry average and is not growing as quickly as the industry average Limited in variety of products being offered For the year 2008, the company's overall sales only grew by 2.18% whereas the average industry sales grew by 5.31% Does not generate enough sales from its web site due to limited technology Higher than industry average quick ratio, indicating lack of long term re-investment The company's long-term debt to equity ratio is only 31.4% of the industry average Opportunities S-O Strategies W-O Strategies The income for the middle class is diminishing, causing them to be more cautious with their expenditures The average household income is dropping due to weak economy The demand for low-priced items is growing The unemployment rate is increasing Smaller retailers are closing their stores and some have filed for bankruptcy Implement some price cuts to improve sales (S2, O1, S9, O3) Advertise to improve product variety and offerings (S1, S2, S3, O4, O5) Increase number of stores in low income areas (O2, O1, W3, W2) Expand product offerings such fruits and other perishable products (W3, W5, O3, O4, O5) Threats S-T Strategies W-T Strategies High competition among large discount retailers Dollar General has higher market share compare to Family Dollar Per square foot, Dollar General is creating more sales The industry is sensitive to economic conditions Change in demographics due to purchasing habits Increase in tariffs and trade barriers Lack of quality control in products due to being imported from and other countries Due to better return on assets ratio, the company can invest in technology, promoting online selling (S6, T1, T5) Increase advertising by offering discounts, coupons, and other special offerings (W1, W2, W3, T1, T2, T3, T4) Copyright 2012, Tony Gauvin, UMFK

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  Halo Error

The Strategic Position and Action Evaluation (SPACE) Matrix four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are most appropriate for a given organization

The SPACE Matrix

The Strategic Position and Action Evaluation (SPACE) Matrix Two internal dimensions (financial position [FP] and competitive position [CP]) Two external dimensions (stability position [SP] and industry position [IP]) Most important determinants of an organization’s overall strategic position

Factors That Make Up the SPACE Matrix Axes

Steps to Develop a SPACE Matrix Select a set of variables to define financial position (FP), competitive position (CP), stability position (SP), and industry position (IP)

External Strategic Position Internal Strategic Position SPACE Factors Stability Position (SP) 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 Position (FP) Return on investment Leverage Liquidity Working capital Cash flow Inventory turnover Earnings per share Price earnings ratio External Strategic Position Internal Strategic Position

External Strategic Position Internal Strategic Position SPACE Factors Industry Position (IP) Growth potential Profit potential Financial stability Technological know-how Resource utilization Ease of entry into market Productivity, capacity utilization Competitive Position(CP) Market share Product quality Product life cycle Customer loyalty Competition’s capacity utilization Control over suppliers & distributors External Strategic Position Internal Strategic Position

Steps to Develop a SPACE Matrix Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables that make up the FP and IP dimensions. Assign a numerical value ranging from –1 (best) to –7 (worst) to each of the variables that make up the SP and CP dimensions For IP and SP compare to other industries For FP and CP compare to competitors

Steps to Develop a SPACE Matrix Compute an average score for FP, CP, IP, and SP Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE Matrix Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point

Steps to Develop a SPACE Matrix Draw a directional vector from the origin of the SPACE Matrix through the new intersection point This vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative

Example Strategy Profiles

Example Strategy Profiles Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

The steps to develop a SPACE Matrix: Select a set of variables to define financial position (FP), competitive position (CA), stability position (SP), and industry position (IP). Table 6-2 provides Good examples Assign a numerical value ranging from 1 (worst) to 7 (best) for the variables that make up the FP and IP dimensions. Assign a number between –1 (best) to –7 (worst) for variables that make up the SP and CP dimensions. On the FP and CP axes, make comparison to competitors. On the IP and SP axes, make comparison to other industries. Compute an average score for FP, CP, IP, and SP by summing the values given to the variables and dividing by the number of variables included in each dimension. Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE Matrix. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point. Draw a directional vector from the origin of the SPACE matrix through the new intersection point. This vector reveals the type of strategies recommended for the organization. Aggressive Competitive Defensive Conservative Space_matrix1v2.xltx

SPACE Matrix FP Conservative Aggressive CP IP Defensive Competitive SP +6 +5 +4 +3 +2 +1 CP IP -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4 Defensive -5 Competitive -6 SP

SPACE MATRIX 11/11/2018 FP CP SP IP Copyright 2012, Tony Gauvin, UMFK -1 -2 -3 -4 -5 -6 6 5 4 3 2 1 Conservative Aggressive Competitive Defensive Copyright 2012, Tony Gauvin, UMFK 11/11/2018

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

Relative Market Share Position 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 Company’s revenue / largest company’s revenue

The Boston Consulting Group (BCG) Matrix graphically portrays differences among divisions in terms of relative market share position and industry growth rate allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share position and the industry growth rate of each division relative to all other divisions in the organization

The BCG Matrix

Making Pie Indicators Size of pie is relative percentage of total revenue Division revenue/ total revenue Size of pie slice is relative percentage of total profits Division profits/ total profits %rev&profit.xlsx http://perleybrook.umfk.maine.edu/pies.htm

The BCG Matrix Question marks – Quadrant I Stars – Quadrant II Organization must decide whether to strengthen them by pursuing an intensive strategy (market penetration, market development, or product development) or to sell them Stars – Quadrant II represent the organization’s best long-run opportunities for growth and profitability

The BCG Matrix Cash Cows – Quadrant III Dogs – Quadrant IV generate cash in excess of their needs should be managed to maintain their strong position for as long as possible Dogs – Quadrant IV compete in a slow- or no-market-growth industry businesses are often liquidated, divested, or trimmed down through retrenchment

The BCG Matrix The major benefit of the BCG Matrix is that it draws attention to the cash flow, investment characteristics, and needs of an organization’s various divisions

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

The Internal-External (IE) Matrix

The Internal-External (IE) Matrix The IE Matrix is based on two key dimensions: the IFE total weighted scores on the x-axis and the EFE total weighted scores on the y-axis Three major regions Grow and build (Cells I, II and IV) Hold and maintain (Cells III, V, and VII) Harvest or divest (Cells VI, VIII and IX)

The IE Matrix

The IFE Total Weighted Score IE Matrix The IFE Total Weighted Score Strong 3.0 to 4.0 Average 2.0 to 2.99 Weak 1.0 to 1.99 High 3.0 to 3.99 I II III The EFE Total Weighted Score Medium 2.0 to 2.99 IV VI Low 1.0 to 1.99 VII VIII IX Copyright 2012, Tony Gauvin, UMFK

The Grand Strategy Matrix based on two evaluative dimensions: competitive position and market (industry) growth

The Grand Strategy Matrix

The Grand Strategy Matrix Quadrant I continued concentration on current markets (market penetration and market development) and products (product development) is an appropriate strategy Quadrant II unable to compete effectively need to determine why the firm’s current approach is ineffective and how the company can best change to improve its competitiveness

The Grand Strategy Matrix Quadrant III must make some drastic changes quickly to avoid further decline and possible liquidation Extensive cost and asset reduction (retrenchment) should be pursued first Quadrant IV have characteristically high cash-flow levels and limited internal growth needs and often can pursue related or unrelated diversification successfully

Weak Competitive Position Strong Competitive Position Grand Strategy Matrix Weak Competitive Position Quadrant II Quadrant I Quadrant IV Quadrant III Strong Competitive Position Rapid Market Growth Slow Market Growth Market Development Market Penetration Product Development Forward Integration Backward Integration Horizontal Integration Related Diversification Copyright 2012, Tony Gauvin, UMFK

Matrix Analysis Summary Alternative Strategies IE SPACE GRAND BCG COUNT Forward Integration x X 2 Backward Integration Horizontal Integration Market Penetration 4 Market Development 3 Product Development Concentric Diversification Conglomerate Diversification 1 Horizontal Diversification Retrenchment Divestiture Liquidation Copyright 2012, Tony Gauvin, UMFK

The Quantitative Strategic Planning Matrix (QSPM) objectively indicates which alternative strategies are best uses input from Stage 1 analyses and matching results from Stage 2 analyses to decide objectively among alternative strategies

The Quantitative Strategic Planning Matrix (QSPM)

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

Steps in a QSPM (cont.) Determine the Attractiveness Scores (AS) Compute the Total Attractiveness Scores Compute the Sum Total Attractiveness Score QSPM Matrix.xlt

A QSPM for a Retail Computer Store

A QSPM for a Retail Computer Store

Increase number of stores in low income areas QSPM   Increase number of stores in low income areas Increase advertising by offering discounts, coupons, and other special offerings Key Factors Weight AS TAS Opportunities  1. The income for the middle class is diminishing, causing them to be more cautious with their expenditures 0.1 3 0.3 2 0.2 2. The average household income is dropping due to weak economy 4 0.4 3. The demand for low-priced items is growing 0.07 0.21 0.14 4. The unemployment rate is increasing 0.09 0.18 0.27 5. Smaller retailers are closing their stores due to lower sales 0.08 0.24 0.16 Threats High competition among large discount retailers 1 0.10 0.20 Dollar General has higher market share compare to Family Dollar --- Per square foot, Dollar General is creating more sales The industry is sensitive to economic conditions Change in demographics due to purchasing habits 0.05 0.15 6. Increase in tariffs and trade barriers 7. Lack of quality control in products due to being imported from and other countries TOTAL 1.00 1.96 1.52 Strengths  Sells essential items with relatively inelastic demand Healthy gross profit margin Accepts food stamps 0.32 Lower than industry average leverage ratio Being able to raise its dividends 0.03 Better than industry average total asset turnover Its return on assets of 1.84% is higher than the industry average 0.02 8. Its return on equity is 4%, higher than the industry average 9. Approximately 90% of the company's products are priced below $10 0.28 10. In the past year, the company's stock has outperformed the average retail industry 0.06 Weaknesses Does not do much advertising Limited market, solely in the only In the year 2008, the company's market share dropped from 1.85% to 1.75% The company's EPS is only 72% of the industry average and is not growing as quickly as the industry average Limited in variety of products being offered For the year 2008, the company's overall sales only grew by 2.18% whereas the average industry sales grew by 5.31% Does not generate enough sales from its web site due to limited technology Higher than industry average quick ratio, indicating lack of long term re-investment The company's long-term debt to equity ratio is only 31.4% of the industry average 0.04 SUBTOTAL 2.06 1.91 SUM TOTAL ATTRACTIVENESS SCORE 4.02 3.43 Copyright 2012, Tony Gauvin, UMFK 11/11/2018

Positive Features of the QSPM Sets of strategies can be examined sequentially or simultaneously Requires strategists to integrate pertinent external and internal factors into the decision process Can be adapted for use by small and large for-profit and nonprofit organizations

Limitations of the QSPM Always requires intuitive judgments and educated assumptions Only as good as the prerequisite information and matching analyses upon which it is based

The Politics of Strategy Choice Political maneuvering consumes valuable time, subverts organizational objectives, diverts human energy, and results in the loss of some valuable employees Political biases and personal preferences get unduly embedded in strategy choice decisions

The Politics of Strategy Choice The hierarchy of command in an organization, combined with the career aspirations of different people and the need to allocate scarce resources, guarantees the formation of coalitions of individuals who strive to take care of themselves first and the organization second, third, or fourth

Tactics to Aid Strategists Equifinality Satisfying Generalization Focus on Higher-Order Issues Provide Political Access on Important Issues

Governance Issues Board of directors a group of individuals who are elected by the ownership of a corporation to have oversight and guidance over management and who look out for shareholders’ interests

Board of Director Duties and Responsibilities

Principles of Good Governance No more than two directors are current or former company executives The audit, compensation, and nominating committees are made up solely of outside directors Each director owns a large equity stake in the company, excluding stock options Each director attends at least 75 percent of all meetings

Principles of Good Governance The board meets regularly without management present and evaluates its own performance annually The CEO is not also the chairperson of the board Stock options are considered a corporate expense There are no interlocking directorships (where a director or CEO sits on another director’s board)