Copyright 2007 Prentice Hall Ch 6 -1 Chapter 6 Strategy Analysis & Choice Strategic Management: Concepts & Cases 11 th Edition Fred David

Copyright 2007 Prentice Hall Ch Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives Nature of Strategy Analysis & Choice Strategy Analysis & Choice

Copyright 2007 Prentice Hall Ch 6 -3 Comprehensive Strategy-Formulation Framework Stage 1: The Input Stage Stage 2: The Matching Stage Stage 3: The Decision Stage

Copyright 2007 Prentice Hall Ch 6 -4 Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix IE Matrix Grand Strategy Matrix Stage 2: The Matching Stage

Copyright 2007 Prentice Hall Ch 6 -5 SWOT Matrix  Strengths-Opportunities (SO)  Weaknesses-Opportunities (WO)  Strengths-Threats (ST)  Weaknesses-Threats (WT) Four Types of Strategies

Copyright 2007 Prentice Hall Ch 6 -6 SO Strategies Use a firm’s internal strengths to take advantage of external opportunities SO Strategies Strengths Weaknesses Opportunities Threats SWOT

Copyright 2007 Prentice Hall Ch 6 -7 WO Strategies Improving internal weaknesses by taking advantage of external opportunities WO Strategies Strengths Weaknesses Opportunities Threats SWOT

Copyright 2007 Prentice Hall Ch 6 -8 ST Strategies Use a firm’s strengths to avoid or reduce the impact of external threats ST Strategies Strengths Weaknesses Opportunities Threats SWOT

Copyright 2007 Prentice Hall Ch 6 -9 WT Strategies Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats WT Strategies Strengths Weaknesses Opportunities Threats SWOT

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch SPACE Matrix FS ES CAIS ConservativeAggressive DefensiveCompetitive

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch 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.

Copyright 2007 Prentice Hall Ch BCG Matrix - Boston Consulting Group Dogs IV Cash Cows III Question Marks 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

Copyright 2007 Prentice Hall Ch BCG Matrix Boston Consulting Group Matrix Graphically portrays differences among divisions Focuses on market share position and industry growth rate Manage business portfolio through relative market share position and industry growth rate

Copyright 2007 Prentice Hall Ch BCG Matrix Relative market share position defined: Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry.

Copyright 2007 Prentice Hall Ch BCG Matrix Question Marks Low relative market share position yet compete in high-growth industry. Cash needs are high Case generation is low Decision to strengthen (intensive strategies) or divest

Copyright 2007 Prentice Hall Ch BCG Matrix Stars High relative market share and high industry growth rate. Best long-run opportunities for growth and profitability Substantial investment to maintain or strengthen dominant position Integration strategies, intensive strategies, joint ventures

Copyright 2007 Prentice Hall Ch BCG Matrix Cash Cows High relative market share position, but compete 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 becomes weak—retrenchment or divestiture

Copyright 2007 Prentice Hall Ch BCG Matrix Dogs Low relative market share position and compete in slow or no market growth Weak internal and external position Decision to liquidate, divest, retrenchment

Copyright 2007 Prentice Hall Ch 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 2007 Prentice Hall Ch 6 -26

Copyright 2007 Prentice Hall Ch 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

Copyright 2007 Prentice Hall Ch Quadrant IV 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint ventures Quadrant III 1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate diversification 5. Liquidation Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation RAPID MARKET GROWTH SLOW MARKET GROWTH WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION

Copyright 2007 Prentice Hall Ch Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Quantitative Strategic Planning Matrix (QSPM)

Copyright 2007 Prentice Hall Ch QSPM Quantitative Strategic Planning Matrix Only technique designed to determine the relative attractiveness of feasible alternative actions Tool for objective evaluation of alternative strategies Based on identified external and internal crucial success factors Requires good intuitive judgment

Copyright 2007 Prentice Hall Ch QSPM Quantitative Strategic Planning Matrix List the firm’s key external opportunities & threats; list the firm’s key internal strengths and weaknesses Assign weights to each external and internal critical success factor Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing Determine the Attractiveness Scores (AS)

Copyright 2007 Prentice Hall Ch QSPM Quantitative Strategic Planning Matrix Compute the total Attractiveness Scores Compute the Sum Total Attractiveness Score

Copyright 2007 Prentice Hall Ch QSPM Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Strategy 3Strategy 2Strategy 1WeightKey External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive

Copyright 2007 Prentice Hall Ch QSPM Limitations: Requires intuitive judgments and educated assumptions Only as good as the prerequisite inputs Positives: Sets of strategies examined simultaneously or sequentially Requires the integration of pertinent external and internal factors in the decision-making process

Copyright 2007 Prentice Hall Ch QSPM Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Strategy 3Strategy 2Strategy 1WeightKey External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Strategic Alternatives

Copyright 2007 Prentice Hall Ch Corporate Governance Issues 1.No more than 2 directors are current or former company executives 2.No directors do business with the company 3.Audit, compensation, and nominating committees are made up of outside directors 4.Each director attends at lest 75% of all meetings 5.Audit committee meets at least four times a year 6.CEO is not also the Chairperson of the Board 7.Shareholders have considerable power and information to choose & replace directors 8.Stock options are considered a corporate expense 9.No interlocking directorships Business Week’s “Principles of Good Governance”