Copyright 2005 Prentice Hall Bus 411 Day 9 Copyright 2005 Prentice Hall

Copyright 2005 Prentice Hall Agenda Question? Assignment 2 Corrected Just a few problems 4 A’s and 5 B’s Assignment 3 Posted IFE and Ratio analysis Due Feb 27 @ 12:30 PM Bus 411 assignment three.pdf Assignment 4 posted Due March 8 @ 12:30 PM SWOT, Space, BCG and QSPM matrixes for McDonald’s Mach test Discussion on Strategy Analysis and Choice Copyright 2005 Prentice Hall

Mach test On a separate sheet of paper, number from 1 to 10. For each of the 10 statements given on the following slides, record a 1, 2, 3, 4, or 5 to indicate your attitude where 1 = I disagree a lot. 2 = I disagree a little. 3 = My attitude is neutral. 4 = I agree a little. 5 = I agree a lot.   Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Mach test The best way to handle people is to tell them what they want to hear. When you ask someone to do something for you, it is best to give the real reason for wanting it, rather than a reason that might carry more weight. Anyone who completely trusts anyone else is asking for trouble. It is hard to get ahead without cutting corners here and there. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Mach test It is safest to assume that all people have a vicious streak and it will come out when they are given a chance. One should take action only when it is morally right. Most people are basically good and kind. There is no excuse for lying to someone else. Most people forget more easily the death of their father than the loss of their property. Generally speaking, people won’t work hard unless they’re forced to do so. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Mach test Scoring Add up the numbers you recorded beside statements 1, 3, 4, 5, 9, and 10. This sum is Subtotal One. For the other four statements, reverse the numbers you recorded so a 5 becomes a 1, 4 becomes a 2, 2 becomes a 4, 1 becomes a 5, and 3 remains a 3. Then add those four numbers to get Subtotal Two. Finally, add Subtotal One and Subtotal Two to get your Final Score Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Mach test results Below 16: Never uses manipulation as a tool. 16 to 20: Rarely uses manipulation as a tool. 21 to 25: Sometimes uses manipulation as a tool. 26 to 30: Often uses manipulation as a tool. Over 30: Always uses manipulation as a tool. A National Opinion Research Center poll found that the average score for Americans is 25. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Chapter 6 Strategy Analysis & Choice Strategic Management: Concepts & Cases 13th Edition Fred David Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Strategy Analysis & Choice Generating Alternatives – Participation in generating alternative strategies should be as broad as possible Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Comprehensive Strategy-Formulation Framework Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Strategy-Formulation Framework External Factor Evaluation Matrix (EFE) Stage 1: The Input Stage Internal Factor Evaluation Matrix (IFE) Competitive Profile Matrix (CPM) Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Stage 2: The Matching Stage Match between organization’s internal resources & skills and the opportunities & risks created by its external factors Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Stage 2: The Matching Stage Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Stage 2: The Matching Stage SWOT Matrix Strengths Weaknesses Opportunities Threats Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

SWOT Matrix Four Types of Strategies Strengths-Opportunities (SO) Weaknesses-Opportunities (WO) Strengths-Threats (ST) Weaknesses-Threats (WT) Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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

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

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

Strengths Weaknesses Opportunities WT Strategies Strengths Weaknesses Opportunities Threats SWOT Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats 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

SWOT Matrix 7-Apr-08 ® 2008, Tony Gauvin, UMFK Strengths – S A high-quality asset base Broad geographic diversity and multiple retail formats An extensive collection of consumer data A successful track record of competing head-to-head against supercenters. Outstanding private-label products Financial strength and resources Reputation for charitable giving and community involvement. Weaknesses – W Operates under two dozen banners. Only owns 35% of store property. Workforce is 71% unionized. Jewelry stores are 11% of stores, but account for less than 1% of revenue. Has not issued dividends since 1988. Negative net income in 2004. Opportunities – O 1. Supermarket sales of drugs up 2. Low-paid Wal-Mart workforce 3. Organic food sales growth 4. High level of Hispanic spending 5. Hispanic population growth rate 6. High Margins for private-labels 7. High demand for private labels SO Strategies 1. More pharmacies in stores (S1,O1) 2. Organic private-label (S9,O3-6-7) 3. Hispanic private-label (S9, O4-5) 4. Hispanic format (S4-5, O4-5) 5. Take Wal-Mart’s best employees (S10, O2) 6. New stores in Hispanic hot spots (S4, O5) WO Strategies 1. Hybridize banners & push Kroger brands (W1, O6-7) 2. Replace some jewelry stores with organic markets (W4, O3) Threats – T 1. Drugstore service/merchandise focus 2. Growth of mail-order pharmacies 3. Larger prescription rules for MOP’s 4. Illegal drug importation 5. Supercenters dominate grocery sales 6. Wal-Mart logistics technology 7. Labor >50% of operating expenses 8. Price pressure caused labor strikes ST Strategies 1. Match drugstore offerings of service & merchandise. (S1-5, T1) 2. Grow online pharmacy business (S6-10, T2) 3. New stores in non union areas (S4, T7) 4. VP of unions (S10, T7-8) 5. Stress customer service in all operations (S6-7, T1-5-7) WT Strategies 1. More hybrid banner supercenter-type stores (W1, T5) 2. Buy store property and save money (W2, T7-8) 3. Divert jewelry store funds into online pharmacy (W4, T2) 7-Apr-08 ® 2008, 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Stage 2: The Matching Stage Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Space Matrix 7-Apr-08 ® 2008, Tony Gauvin, UMFK

Space Matrix y-axis = FS + ES = 1.4 + (-5.0) = -3.6 x-axis = CA + IS = -1.4 + (+5.0) = 3.6 7-Apr-08 ® 2008, Tony Gauvin, UMFK

SPACE Matrix Aggressive Conservative Defensive Competitive Strategic Position & Action Evaluation Matrix Aggressive Conservative Defensive Competitive Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

SPACE Matrix Internal dimensions External dimensions Financial position (FP) Competitive position (CP) External dimensions Environmental position (EP) Industry position (IP) Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

External Strategic Position Internal Strategic Position 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 Inventory turnover Earnings per share Price earnings ratio External Strategic Position Internal Strategic Position

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 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, and 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, and IS.

Steps to Developing a SPACE Matrix 4. Plot the average score on the appropriate axis. 5. 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. 6. Draw a directional vector from the origin through the new intersection point.

Copyright 2007 Prentice Hall SPACE Matrix FS Conservative Aggressive +6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4 Defensive -5 Competitive -6 ES Copyright 2007 Prentice Hall

The steps to develop a SPACE Matrix: Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS). Table 6-2 provides Good examples Assign a numerical value ranging from 1 (worst) to 6 (best) for the variables that make up the FS and IS dimensions. Assign a number between –1 (best) to –6 (worst) for variables that make up the ES and CA dimensions. On the FS and CA axes, make comparison to competitors. On the IS and ES axes, make comparison to other industries. Compute an average score for FS, CA, IS, and ES by summing the values given to the variables and dividing by the number of variables included in each dimension. Plot the average scores for FS, IS, ES, and CA 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_matrix.xlt Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall Results from SPACE Conservative Market penetration Market development Product development Concentric diversification Defensive Retrenchment Divestiture Liquidation Aggressive Market penetration Market development Product development Integration (all types) Diversification (all types) Competitive Joint ventures Copyright 2007 Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Stage 2: The Matching Stage Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Boston Consulting Group Matrix 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 revenue / largest company revenue

Setting pie indicator 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

BCG Matrix Question Marks Low relative market share, competes 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 Product development, concentric diversification If weakens – retrenchment or divestiture

BCG Matrix Dogs Low relative market share, competes in slow or no market growth Weak internal & external position Liquidation, divestiture, retrenchment

Stage 2: The Matching Stage Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

IE Matrix Based on two key dimensions Divided into three major regions 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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Stage 2: The Matching Stage Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Tool for formulating alternative strategies Based on two dimensions Grand Strategy Matrix Tool for formulating alternative strategies Based on two dimensions Competitive position Market growth Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

RAPID MARKET GROWTH Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Related diversification WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION Quadrant III Retrenchment Related diversification Unrelated diversification Divestiture Liquidation Quadrant IV Related diversification Unrelated diversification Joint ventures SLOW MARKET GROWTH Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Excellent strategic position Concentration on current markets/products Grand Strategy Matrix Quadrant I Excellent strategic position Concentration on current markets/products Take risks aggressively when necessary Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Evaluate present approach How to improve competitiveness Grand Strategy Matrix Quadrant II Evaluate present approach How to improve competitiveness Rapid market growth requires intensive strategy Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Compete in slow-growth industries Weak competitive position Grand Strategy Matrix Quadrant III Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost & asset reduction (retrenchment) Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Strong competitive position Slow-growth industry Grand Strategy Matrix Quadrant IV Strong competitive position Slow-growth industry Diversification to more promising growth areas Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Stage 3: The Decision Stage Strategy-Formulation Analytical Framework Quantitative Strategic Planning Matrix (QSPM) Stage 3: The Decision Stage Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Quantitative Strategic Planning Matrix QSPM Quantitative Strategic Planning Matrix Technique designed to determine the relative attractiveness of feasible alternative actions Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Strategic Alternatives QSPM Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Management Information Systems Strategy 3 Strategy 2 Strategy 1 Weight Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/Environmental Technological Competitive Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Sets of strategies considered simultaneously or sequentially QSPM Advantages Sets of strategies considered simultaneously or sequentially Integration of pertinent external & internal factors in the decision-making process Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Requires intuitive judgments & educated assumptions QSPM Limitations Requires intuitive judgments & educated assumptions Only as good as the prerequisite inputs Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 firm’s culture Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Politics of Strategy Choice Politics in Organizations Hierarchy of command Career aspirations Allocation of scarce resources Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Politics of Strategy Choice Political Tactics for Strategists Equifinality Satisfying Generalization Higher-order issues Political access on important issues Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Control & oversight over management Adherence to legal prescriptions Governance Issues Board of Directors Roles & Responsibilities Control & oversight over management Adherence to legal prescriptions Consideration of stakeholders’ interests Advancement of stockholders’ rights Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall