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 Nature of Strategy Analysis & Choice This process seek to determine alternative courses of action that could best enable the firm to best achieve its mission and long run objectives Ch 7 -4 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 -5 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 -6 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 -7 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 -8 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -9 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 -10 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Stage 1: The Input Stage Basic input information for the matching & decision stage matrices Good intuitive judgment always needed Ch 7 -11 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 -12 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 -13 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Stage 2: The Matching Stage SWOT Matrix A SWOT matrix :it is an important matching tool that help managers develop four types of strategies WO SO WT ST Ch 7 -14 Copyright © 2011 Pearson Education

internal external SO WO Threats – T ST WT SWOT Matrix internal external 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 defensive strategy aim at Minimize weaknesses and avoid threats Ch 7 -15 Copyright © 2011 Pearson Education

SWOT Example Resultant strategy Key external factor Key internal factor Acquire Cell phone ,Inc. (SO) 20% annual growth in the cell phone industry (opportunity ) Excess working capacity (strength ) Pursue horizontal integration by buying competitors ‘s facilities (WO) Exit of two major foreign competitors (opportunity ) Insufficient capacity (weakness) Develop new products for older adults (ST) Decreasing number of younger adults (threat ) Strong R&D expertise (strength ) Develop a new employees benefits package (WT) Strong union activity (threat) Poor employees morale (weakness)

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 -17 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 -18 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education SPACE Matrix Two Internal Dimensions: Financial Strength (FS) Competitive Advantage (CA) Ch 7 -19 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education SPACE Matrix Two External Dimensions: Environmental Stability (ES) Industry Strength (IS) Ch 7 -20 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 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 -21 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 -22 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 -23 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education 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 BCG Matrix Boston Consulting Group Matrix Enhances multidivisional firm in formulating strategies Divisions may compete in different industries Focus on market-share position & industry growth rate Ch 7 -26 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 -27 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -28 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 Cash generation is low Decision to strengthen (intensive strategies) or divest Ch 7 -29 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 -30 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 -31 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 -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

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 -34 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -35 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 -36 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -37 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 -38 Copyright © 2011 Pearson Education

Strategy-Formulation Analytical Framework Quantitative Strategic Planning Matrix (QSPM) Stage 3: The Decision Stage Ch 7 -39 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 -40 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education Ch 7 -41 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 -42 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 -43 Copyright © 2011 Pearson Education

Copyright © 2011 Pearson Education QSPM Limitations Requires intuitive judgments & educated assumptions Only as good as the prerequisite inputs Ch 7 -44 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 -45 Copyright © 2011 Pearson Education