Copyright 2005 Prentice Hall1 Bus 411 Day 10

Copyright 2005 Prentice Hall Ch 3 -2 Agenda Assignment 3 corrected  2 A’s, 3 C’s, 2 F’s & 1 MIA Many incomplete assignments- read the question 2 failed for submitting identical answers Assignment 4 posted  Due March 2:05 Pm Assignment 5 (last one) will be due after break No lecture on March 3 Begin Discussion on Strategy Analysis & Choice

Copyright 2005 Prentice Hall Ch 3 -3 Get Big Fast When … “Winner-take-all” dynamics apply  Network effects (i.e., “viral”)  Scale economies (i.e., “scalable”)  Customer retention (i.e., “sticky”) And, competitive risks are “reasonable” And, lifetime value of customer exceeds acquisition cost And, you can fund aggressive growth McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.

Copyright 2005 Prentice Hall Ch 3 -4 Phases of Investment Manias (Kindleberger) McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Euphoria Overtrading - Entrants fight wars of escalation and attrition - Early movers expand scope to exploit/sustain valuation Revulsion - “Babies out with bathwater” - Opportunities for those with cash, courage

Copyright 2005 Prentice Hall Ch 3 -5 Get It Right First When… Protecting quality/brand is paramount “Learning by doing” is important  The first mover provides the “lessons learned”

Ch 6 -6 Chapter 6 Strategy Analysis & Choice Strategic Management: Concepts & Cases 12 th Edition Fred David

Copyright 2007 Prentice Hall Ch 6 -7 External Audit Chapter 3 Internal Audit Chapter 4 Long-Term Objectives Chapter 5 Generate, Evaluate, Select Strategies Chapter 6 Implement Strategies: Mgmt Issues Chapter 7 Implement Strategies: Marketing, Fin/Acct, R&D, CIS Chapter 8 Measure & Evaluate Performance Chapter 9 Vision & Mission Chapter 2 Comprehensive strategic management model

Ch 6 -8 Chapter Outline The Nature of Strategy & Choice A Comprehensive Strategy-Formulation Framework The Input Stage

Ch 6 -9 Chapter Outline ( cont’d ) The Matching Stage The Decision Stage Cultural Aspects of Strategy Choice

Ch Chapter Outline ( cont’d ) The Politics of Strategy Choice Governance Issues

Ch “Whether it’s broke or not, fix it – make it better. Not just products, but the whole company if necessary.” – Bill Saporito Strategy Analysis & Choice “Life is full of lousy options.” – General P.X. Kelley

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

Ch Vision Mission Objectives External audit Internal audit Past successful strategies Strategy Analysis & Choice Alternative Strategies Derive From –

Ch 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 Wal-Mart and Kohl’s installing solar panels Home Depot doubled offerings of environmentally friendly products

Ch Strategy Analysis & Choice Generating Alternatives – Participation in generating alternative strategies should be as broad as possible

Ch 6 -16

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

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

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

Ch Stage 2: The Matching Stage  Match between organization’s internal resources & skills and the opportunities & risks created by its external factors

Ch Stage 2: The Matching Stage  Strengths  Weaknesses  Opportunities  Threats SWOT Matrix

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

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

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

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

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

Ch 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 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

17-Apr-06 ® 2006, Tony Gauvin, UMFK 30 SWOT Matrix S-O StrategiesW-O Strategies 1.Focus on store layouts with selected items (S1, O1, O3, O5) 2.Enhance online sales/services, such as floral, etc. (S6, S8, S3, O2, O7, O8). 3.Incorporate more self-checkouts (S9, S5, O1, O10) 4.Continue to expand, including globally (S4, S5, S8, S10, O3, O5 O6, O9) 5.Focus on organic grocery items (S2, S3, O2, O6) 1.Expand Kroger grocery locations into Canada and/or Mexico, etc. (W1, W3, W, W7, O1, O3, O5, O6, O9) 2.Neutralize convenience stores (O1, O3, O4, W2, W10) 3.Increase stores (W2, W3, W5, W6, W7, W8-10, O1, O3, O5, O6, O9) 4.Resolve disputes (W4, O1, O2, O3, O5, O6, O9) 5.Include all departments in all store (W3, W5, W6, O1, O3, O5, O8, O9) 6.Enter lesser populated markets (W2, W5, W6, W7-10, O1, O3, O5-6, O8- 10) S-T StrategiesW-T Strategies 1. Increase locations with easier check-out and more departments (S1-5, S7, T1-4, T6-10) 2. Increase locations (S3-5, S10, T1-2, T7, T9-10) 3. Increase store brand-name products (S1, S3, T3-4, T6) 4. Reconfigure online webpage to include increased visitations (S1, S9- 10, T1, T10) 1. Cautiously enter international markets (W1, T2, T10) 2. Slightly decrease cashiers as self check-out lanes are installed (W4, T3, T6) 3. Incorporate health item area within grocery departments to include organic items, when possible (W5-6, T8-9) 4. Keep an eye on direct competitors and stabilize U.S. growth and convenience store operations (W1-2, W5-10, T2, T10)

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

Ch SPACE Matrix Strategic Position & Action Evaluation Matrix  Aggressive  Conservative  Defensive  Competitive

Ch SPACE Matrix Two Internal Dimensions  Financial Strength (FS)  Competitive Advantage (CA)

Ch SPACE Matrix Two External Dimensions  Environmental Stability (ES)  Industry Strength (IS)

Ch 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 PositionInternal Strategic Position

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

Ch Steps to Developing a SPACE Matrix 1. Select a set of variables to define FS, CA, ES, and IS. 2. Assign a numerical value: 1. From +1 to +6 to each FS & IS dimension 2. From -1 to -6 to each ES & CA dimension 3. Compute an average score for each FS, CA, ES, and IS.

Ch Steps to Developing a SPACE Matrix 4. Plot the average score on the appropriate axis. 5. 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. 6. Draw a directional vector from the origin through the new intersection point.

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

Copyright 2007 Prentice Hall Ch The steps to develop a SPACE Matrix: Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS).  Table 6-2 provides Good examples Assign a numerical value ranging from 1 (worst) to 6 (best) for the variables that make up the FS and IS dimensions. Assign a number between –1 (best) to –6 (worst) for variables that make up the ES and CA dimensions. On the FS and CA axes, make comparison to competitors. On the IS and ES axes, make comparison to other industries. Compute an average score for FS, CA, IS, and ES by summing the values given to the variables and dividing by the number of variables included in each dimension. Plot the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE Matrix. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point. Draw a directional vector from the origin of the SPACE matrix through the new intersection point. This vector reveals the type of strategies recommended for the organization.  Aggressive  Competitive  Defensive  Conservative templates\Space_matrix.xlt

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Copyright 2007 Prentice Hall Ch Results from SPACE Conservative  Market penetration  Market development  Product development  Concentric diversification Defensive  Retrenchment  Divestiture  Liquidation  Concentric diversification Aggressive  Market penetration  Market development  Product development  Integration (all types)  Diversification (all types) Competitive  Integration (all types)  Market penetration  Market development  Product development  Joint ventures

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

Ch 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 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

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

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

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

Ch 6 -54

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

Ch 6 -56

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

Ch Grand Strategy Matrix  Tool for formulating alternative strategies  Based on two dimensions  Competitive position  Market growth

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

Ch Grand Strategy Matrix  Excellent strategic position  Concentration on current markets/products  Take risks aggressively when necessary Quadrant I

Ch Grand Strategy Matrix  Evaluate present approach  How to improve competitiveness  Rapid market growth requires intensive strategy Quadrant II

Ch Grand Strategy Matrix  Compete in slow-growth industries  Weak competitive position  Drastic changes quickly  Cost & asset reduction (retrenchment) Quadrant III

Ch Grand Strategy Matrix  Strong competitive position  Slow-growth industry  Diversification to more promising growth areas Quadrant IV

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

Ch QSPM  Technique designed to determine the relative attractiveness of feasible alternative actions Quantitative Strategic Planning Matrix

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

Ch 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.

Ch Steps to Develop a QSPM 4. Determine the Attractiveness Scores. 5. Compare the Total Attractiveness Scores. 6. Compute the Sum Total Attractiveness Score.

Ch QSPM  Requires intuitive judgments & educated assumptions  Only as good as the prerequisite inputs Limitations

Ch QSPM  Sets of strategies considered simultaneously or sequentially  Integration of pertinent external & internal factors in the decision-making process Advantages

Ch Cultural Aspects of Strategy Choice  Successful strategies depend on the degree of consistency with the firm’s culture Organization Culture

Ch Politics of Strategy Choice  Management hierarchy  Career aspirations  Allocation of scarce resources Politics in Organizations

Ch Politics of Strategy Choice  Equifinality  Satisfying  Generalization  Higher-order issues  Political access on important issues Political Tactics for Strategists

Ch Governance Issues  Control & oversight over management  Adherence to legal prescriptions  Consideration of stakeholder interests  Advancement of stockholder rights Board of Directors Roles & Responsibilities

Ch Global Perspective Corporate Tax Rates Worldwide – Europe is Lowest 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 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 made up of outside directors 4.Each director owns a large equity stake in the company 5.At least one outside director with extensive experience 6.Fully employed directors sit on no more than 4 boards, retirees on no more than 7 7.Each director attends at least 75% of all meetings BusinessWeek’s “Principles of Good Governance”

Ch Corporate Governance Issues 8.Board meets regularly without management present 9.Audit committee meets at least four times a year 10.Board is frugal on executive pay, diligent in CEO succession, and prompt to act when trouble arises 11.CEO is not also the chairperson of the board 12.Shareholders have considerable power and information to choose & replace directors 13.Stock options are considered a corporate expense 14.No interlocking directorships Business Week’s “principles of good governance”

Ch Key Terms & Concepts For Review (Chapter 6) Aggressive QuadrantBusiness Portfolio Attractiveness Scores (AS) Cash Cows Board of Directors Competitive Advantage (CA) Boston Consulting Group (BCG) Matrix Competitive Quadrant

Ch Key Terms & Concepts For Review (Chapter 6) Conservative QuadrantDogs Culture Environmental Stability (ES) Defensive Quadrant Financial Strength (FS) Directional VectorGovernance

Ch Key Terms & Concepts For Review (Chapter 6) Grand Strategy Matrix Internal-External (IE) Matrix Halo ErrorMatching Industry Strength (IS) Matching Stage Input Stage Quantitative Strategic Planning Matrix (QSPM)

Ch Key Terms & Concepts For Review (Chapter 6) Question MarksStars Relative Market Share Position Strategic Position & Action Evaluation (SPACE) SO Strategies Sum Total Attractiveness Score (STAS) ST StrategiesSustainability

Ch Key Terms & Concepts For Review (Chapter 6) Total Attractiveness Scores (TAS) WO Strategies WT Strategies Strengths, Weaknesses, Opportunities, Threats (SWOT)