Chapter 6 Strategy Analysis & Choice

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

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

Strategy-Formulation Analytical Framework Internal Factor Evaluation Matrix (IFE) External Factor Evaluation Matrix (EFE) Stage 1: The Input Stage

 Basic input information comes from the internal /external evaluation (matrices)  Requires strategists to quantify subjectivity early in the process: the assigned weights…  Good intuitive judgment always needed

Strategy-Formulation Analytical Framework SWOT Matrix BCG Matrix Stage 2: The Matching Stage

Stage 2: The Matching Stage: SWOT analysis  Match between organization’s internal strengths and weaknesses and the opportunities & risks created by its external factors  E.g. internal: strong R and D function  External changing demographics (e.g. population getting older)  Strategy: Develop new products for older adults (related to long term objectives financial or strategic)

Stage 2: The Matching Stage: SWOT Matrix Four Types of Strategies Strengths-Opportunities (SO): Use a firm’s internal strengths to take advantage of external opportunities Weaknesses-Opportunities (WO): Improving internal weaknesses by taking advantage of external opportunities Strengths-Threats (ST): Use a firm’s strengths to avoid or reduce the impact of external threats. Weaknesses-Threats (WT): Defensive tactics aimed at reducing internal weaknesses and avoiding external threats

9 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 from 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 Which types of strategies, e.g. intensive diversification…, are referred to above

10 Spend money annually to increase customer services. = T2: increase in competitors customers services (threat) + W2: Poor customer service (weakness) Hedge (invest) money to protect against rising oil prices = Risk of increasing oil prices(threat) + S7: profits increase by 200%(strength) Increase amount spent on advertising to attract customers only concerned about price. = Cheaper holiday’s being offered by resorts (opportunity) + W7: charge for items free on other airlines (weakness) Invest money (e.g. 100 million) in terminal space at new airports now currently served. = 02: lower interest rates on borrowing money (opportunity) + S1: Own 42 bases in Europe (strength) Key Internal FactorKey External FactorResultant Strategy Ryanair : Matching Key Factors to Formulate Alternative Strategies The above is based on the internal and external evaluation of Ryanair:

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

Boston Consulting Group (BCG) Matrix  Enhances multi-divisional firm in formulating strategies  Divisions may compete in different industries  Focus on market-share position & industry growth rate

13 BCG Matrix Dogs IV Cash Cows III Question Marks (problem child) I Stars II Relative Market Share Position High 1.0 Medium.50 Low 0.0 Industry Sales Growth Rate High +20 Low -20 Medium 0  Ratio of a division’s own market share in an industry to the market share held by the largest rival firm in that industry

BCG Matrix Quadrant 1: Question Marks or Problem child  Low relative market share – compete in high- growth industry  Cash needs are high  Case generation is low  Decision to strengthen (intensive strategies) or divest (a defensive strategy)

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

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, Related diversification  If weakens—retrenchment or divestiture

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

Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Quantitative Strategic Planning Matrix (QSPM)  Technique designed to determine the relative attractiveness of feasible alternative actions

Steps to Develop a QSPM 1.Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column 2.Assign weights to each key external and internal factor 3.Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing 4.Determine the Attractiveness Scores (A.S) 5.Compare the Total Attractiveness Scores 6.Compute the Sum Total Attractiveness Score

20 QSPM : information from IFE and EFE Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Sum total A.S. Strategy 3Strategy 2Strategy 1WeightKey External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Strategic Alternatives AS 1 to 4 and blank if factor does not effect strategy: TAS = Weight x AS

Ryanair: Sample QSPM matrix

Recommendations: Invest $100 million in terminal space annually at new airports not currently serviced. What is this type of “generic” strategy; does it correspond to the proposed strategies of the grand strategy and BCG matrix

QSPM  Requires intuitive judgments & educated assumptions  Only as good as the prerequisite inputs Limitations Advantages  Sets of strategies considered simultaneously or sequentially  Integration of pertinent external & internal factors in the decision making process Example of a QSPM for Dell

Questions Explain, using suitable examples, how you would use a SWOT analysis in strategic formulation. (10 marks). What are the main limitation associated with using this analysis (2 marks) Describe, the relationship between the quadrants of the BCG matrix and the growth of an industry and the organisations market share. (8 marks) Explain, using an example, the types of strategies a firm could adopt in any three of these quadrants. (10 marks) How would you choose the most appropriate strategy given you have performed an internal and external evaluation. (10 marks)