Business Policy and Strategy Lecture 27 1

Recap MEANS FOR ACHIEVING STRATEGIES – Joint Venture – Mergers and acquisitions – Leveraged Buyouts (LBOs) – First Mover Advantages – Outsourcing 2

Today’s Lecture Nature of Strategy Analysis & Choice Comprehensive Strategy-Formulation Framework – SWOT Matrix – Strategic Position and Action Evaluation (SPACE) 3

4 -- Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives Nature of Strategy Analysis & Choice Strategy Analysis & Choice

-5 Comprehensive Strategy-Formulation Framework Stage 1: The Input Stage Stage 2: The Matching Stage Stage 3: The Decision Stage

6 Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix IE Matrix Grand Strategy Matrix Stage 2: The Matching Stage

7 SWOT Matrix  Strengths-Opportunities (SO)  Weaknesses-Opportunities (WO)  Strengths-Threats (ST)  Weaknesses-Threats (WT) Four Types of Strategies

-8 SO Strategies Use a firm’s internal strengths to take advantage of external opportunities SO Strategies Strengths Weaknesses Opportunities Threats SWOT

-9 WO Strategies Improving internal weaknesses by taking advantage of external opportunities WO Strategies Strengths Weaknesses Opportunities Threats SWOT

-10 ST Strategies Use a firm’s strengths to avoid or reduce the impact of external threats ST Strategies Strengths Weaknesses Opportunities Threats SWOT

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

12 SWOT Matrix Leave Blank 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

-13 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 Cellfone, Inc.= 20% annual growth in the cell phone industry (opportunity) + Excess working capacity (strength) Key Internal FactorKey External FactorResultant Strategy Matching Key Factors to Formulate Alternative Strategies

14 SPACE Factors - Strategic Position and Action Evaluation 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 External Strategic PositionInternal Strategic Position

15 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 Technological know-how Control over suppliers & distributors External Strategic PositionInternal Strategic Position

16 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

17 SPACE Matrix FS ES CAIS ConservativeAggressive DefensiveCompetitive

18 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.

SPACE Matrix 19

Summary Nature of Strategy Analysis & Choice Comprehensive Strategy-Formulation Framework – SWOT Matrix – Strategic Position and Action Evaluation (SPACE) 20

Next Lecture BCG Matrix The Internal-External Matrix Quantitative Strategic Planning Matrix 21