Copyright © 2011 Pearson Education Ch 7 -1 Copyright © 2011 Pearson Education

Strategic Management: Concepts and Cases Arab World Edition Fred R. David Abbas J. Ali Abdulrahman Y. Al-Aali Chapter 7: Strategy Analysis and Choice Ch 7 -2 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Chapter Outline The Nature of Strategy & Choice A Comprehensive Strategy-Formulation Framework The Input Stage The Matching Stage The Decision Stage Cultural Aspects of Strategy Choice The Politics of Strategy Choice Governance Issues Ch 7 -3 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Strategy Analysis & Choice “Examine diligently your options, and select judiciously” – Caliph Ali Ibn Ibi Taleb “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 Ch 7 -4 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Strategy Analysis & Choice Nature of Strategy Analysis & Choice Establishing long-term objectives – Generating alternative strategies – Selecting strategies to pursue – Best alternative – achieve mission & objectives Ch 7 -5 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Source: Adapted from Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988) 40. Ch 7 -6 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Strategy Analysis & Choice Alternative Strategies Derive From: Vision Mission Objectives External audit Internal audit Past successful strategies Ch 7 -7 Copyright © 2011 Pearson Education

Natural Environment Perspective What Is a Sustainability Report? Sustainability (corporate social-responsibility) reports disclose policies to shareholders Global Reporting Initiative has issued a set of detailed reporting guidelines Dubai Chamber of Commerce established the Dubai Ethics Resource Center National bank of Abu Dhabi issued a sustainability report Burgan Bank, Kuwait issues its social responsibility report annually Ch 7 -8 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Strategy Analysis & Choice Generating Alternatives Participation in generating alternative strategies should be as broad as possible Alternative strategies proposed by participants should be considered, discussed, and ranked in order of attractiveness Ch 7 -9 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -10 Copyright © 2011 Pearson Education

Stage 2: The Matching Stage Stage 3: The Decision Stage Comprehensive Strategy-Formulation Framework Stage 1: The Input Stage Stage 2: The Matching Stage Stage 3: The Decision Stage Ch 7 -11 Copyright © 2011 Pearson Education

Strategy-Formulation Analytical Framework Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage External Factor Evaluation Matrix (EFE) Competitive Profile Matrix (CPM) Ch 7 -12 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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 Ch 7 -13 Copyright © 2011 Pearson Education

Stage 2: The Matching Stage Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Ch 7 -14 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Stage 2: The Matching Stage Finding the match between organization’s internal resources & skills and the opportunities & risks created by its external factors Ch 7 -15 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Stage 2: The Matching Stage SWOT Matrix A SWOT matrix identifies: Strengths Weaknesses Opportunities Threats Ch 7 -16 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education SWOT Matrix There are four types of strategies: Strengths-Opportunities (SO) Weaknesses-Opportunities (WO) Strengths-Threats (ST) Weaknesses-Threats (WT) Ch 7 -17 Copyright © 2011 Pearson Education

SO Strategies Strengths Weaknesses Opportunities Threats SWOT Use a firm’s internal strengths to take advantage of external opportunities SO Strategies Ch 7 -18 Copyright © 2011 Pearson Education

WO Strategies Strengths Weaknesses Opportunities Threats SWOT Improving internal weaknesses by taking advantage of external opportunities WO Strategies Ch 7 -19 Copyright © 2011 Pearson Education

ST Strategies Strengths Weaknesses Opportunities Threats SWOT Use a firm’s strengths to avoid or reduce the impact of external threats ST Strategies Ch 7 -20 Copyright © 2011 Pearson Education

WT Strategies Strengths Weaknesses Opportunities Threats SWOT Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats WT Strategies Ch 7 -21 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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 Ch 7 -22 Copyright © 2011 Pearson Education

Strengths – S List Strengths 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 Ch 7 -23 Copyright © 2011 Pearson Education

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 Ch 7 -24 Copyright © 2011 Pearson Education

Stage 2: The Matching Stage Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Ch 7 -25 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education SPACE Matrix Strategic Position & Action Evaluation Matrix 4-quadrants indicate whether the most appropriate strategy is: Aggressive Conservative Defensive Competitive Ch 7 -26 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education SPACE Matrix Two Internal Dimensions: Financial Strength (FS) Competitive Advantage (CA) Ch 7 -27 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education SPACE Matrix Two External Dimensions: Environmental Stability (ES) Industry Strength (IS) Ch 7 -28 Copyright © 2011 Pearson Education

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 Ch 7 -29 Copyright © 2011 Pearson Education

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 Ch 7 -30 Copyright © 2011 Pearson Education

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. 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. Ch 7 -31 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -32 Copyright © 2011 Pearson Education

Stage 2: The Matching Stage Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Ch 7 -33 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education BCG Matrix Boston Consulting Group Matrix Enhances multidivisional firm in formulating strategies Autonomous divisions = business portfolio Divisions may compete in different industries Focus on market-share position & industry growth rate Ch 7 -34 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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 Ch 7 -35 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -36 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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 Ch 7 -37 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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 Ch 7 -38 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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 Ch 7 -39 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education BCG Matrix Dogs Low relative market share, competes in slow or no market growth Weak internal & external position Liquidation, divestiture, retrenchment Ch 7 -40 Copyright © 2011 Pearson Education

Stage 2: The Matching Stage Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Ch 7 -41 Copyright © 2011 Pearson Education

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 Ch 7 -42 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -43 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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 Ch 7 -44 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -45 Copyright © 2011 Pearson Education

Stage 2: The Matching Stage Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Ch 7 -46 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Grand Strategy Matrix Tool for formulating alternative strategies Based on two dimensions Competitive position Market growth Ch 7 -47 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Grand Strategy Matrix Quadrant I Excellent strategic position Concentration on current markets/products Take risks aggressively when necessary Ch 7 -48 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Grand Strategy Matrix Quadrant II Evaluate present approach How to improve competitiveness Rapid market growth requires intensive strategy Ch 7 -49 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Grand Strategy Matrix Quadrant III Compete in slow-growth industries Weak competitive position Drastic changes quickly Cost & asset reduction (retrenchment) Ch 7 -50 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Grand Strategy Matrix Quadrant IV Strong competitive position Slow-growth industry Diversification to more promising growth areas Ch 7 -51 Copyright © 2011 Pearson Education

Strategy-Formulation Analytical Framework Quantitative Strategic Planning Matrix (QSPM) Stage 3: The Decision Stage Ch 7 -52 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education QSPM Quantitative Strategic Planning Matrix Technique designed to determine the relative attractiveness of feasible alternative actions Ch 7 -53 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -54 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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. Determine the Attractiveness Scores. Compare the Total Attractiveness Scores. Compute the Sum Total Attractiveness Score. Ch 7 -55 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education QSPM Advantages Sets of strategies considered simultaneously or sequentially Integration of pertinent external & internal factors in the decision-making process Ch 7 -56 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education QSPM Limitations Requires intuitive judgments & educated assumptions Only as good as the prerequisite inputs Ch 7 -57 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Cultural Aspects of Strategy Choice Organizational Culture Successful strategies depend on the degree of consistency with the firm’s culture Ch 7 -58 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Politics of Strategy Choice Politics in Organizations Management hierarchy Career aspirations Allocation of scarce resources Ch 7 -59 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Politics of Strategy Choice Political Tactics for Strategists Equifinality Satisfying Generalization Higher-order issues Political access on important issues Ch 7 -60 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Governance Issues Board of Directors Roles & Responsibilities Control & oversight over management Adherence to legal prescriptions Consideration of stakeholder interests Advancement of stockholder rights Ch 7 -61 Copyright © 2011 Pearson Education

Global Perspective Corporate Tax Rates Worldwide Lowest corporate tax rates reside in Europe and European countries Average tax rate in EU countries is 26% Besides tax rates, large markets and affluent markets attract new businesses Taxes can be used to reward or penalize companies for locating locally or moving overseas Ch 7 -62 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Corporate Governance Issues Ministry of Industry and Commerce and the Central Bank in Bahrain’s “Corporate Governance Code” The company shall be headed by an effective, collegial and informed board 2. The directors and officers shall have full loyalty to company The board shall have rigorous controls for financial audit, internal control and compliance with law 4. The board shall have rigorous procedures for appointment, training and evaluation of the board The company shall remunerate directors and officers fairly and responsibly Ch 7 -63 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Corporate Governance Issues Ministry of Industry and Commerce and the Central Bank in Bahrain’s “Corporate Governance Code” (cont’d) 6.The board shall establish a clear and efficient management structure The board shall communicate with shareholders and encourage their participation The company shall disclose its corporate governance Companies which refer to themselves as ‘Islamic’ must follow the principles of Islamic Shari’a Ch 7 -64 Copyright © 2011 Pearson Education

For Review (Chapter 7) Key Terms & Concepts Aggressive Quadrant Business Portfolio Attractiveness Scores (AS) Cash Cows Board of Directors Competitive Advantage (CA) Boston Consulting Group (BCG) Matrix Competitive Quadrant Ch 7 -65 Copyright © 2011 Pearson Education

For Review (Chapter 7) Key Terms & Concepts Conservative Quadrant Dogs Culture Environmental Stability (ES) Defensive Quadrant Financial Strength (FS) Directional Vector Governance Ch 7 -66 Copyright © 2011 Pearson Education

For Review (Chapter 7) Key Terms & Concepts Grand Strategy Matrix Internal-External (IE) Matrix Halo Error Matching Industry Strength (IS) Matching Stage Input Stage Quantitative Strategic Planning Matrix (QSPM) Ch 7 -67 Copyright © 2011 Pearson Education

For Review (Chapter 7) Key Terms & Concepts Question Marks Stars Relative Market Share Position Strategic Position & Action Evaluation (SPACE) SO Strategies Sum Total Attractiveness Score (STAS) ST Strategies Sustainability Ch 7 -68 Copyright © 2011 Pearson Education

For Review (Chapter 7) Key Terms & Concepts WO Strategies Strengths, Weaknesses, Opportunities, Threats (SWOT) WO Strategies Total Attractiveness Scores (TAS) WT Strategies Ch 7 -69 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education This work is protected by local and international copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from this site should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Ch 7 -70 Copyright © 2011 Pearson Education