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

2. Chapter Outline The Nature of Strategy & Choice
A Comprehensive Strategy-Formulation Framework
The Input Stage
Copyright 2007 Prentice Hall

3. Chapter Outline (cont’d)
The Matching Stage
The Decision Stage
Cultural Aspects of Strategy Choice
Copyright 2007 Prentice Hall

4. Chapter Outline (cont’d)
The Politics of Strategy Choice
Governance Issues
Copyright 2007 Prentice Hall

5. Strategy Analysis & Choice
To acquire or not to acquire, that is the question – Robert J. Terry
Life is full of lousy options – General P.X. Kelley
Copyright 2007 Prentice Hall

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

7. Strategy Analysis & Choice
Alternative Strategies Derive From --
Vision
Mission
Objectives
External audit
Internal audit
Past successful strategies
Copyright 2007 Prentice Hall

8. Strategy Analysis & Choice
Generating Alternatives --
Participation in generating alternative strategies should be as broad as possible
Copyright 2007 Prentice Hall

9. 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
Copyright 2007 Prentice Hall

10. Strategy-Formulation Analytical Framework
Internal Factor Evaluation Matrix (IFE)
Stage 1: The Input Stage
External Factor Evaluation Matrix (EFE)
Competitive Profile Matrix (CPM)
Copyright 2007 Prentice Hall

11. 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
Copyright 2007 Prentice Hall

12. 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
Copyright 2007 Prentice Hall

13. Stage 2: The Matching Stage
Match between organization’s internal resources & skills and the opportunities & risks created by its external factors
Copyright 2007 Prentice Hall

14. Stage 2: The Matching Stage
SWOT Matrix
Strengths
Weaknesses
Opportunities
Threats
Copyright 2007 Prentice Hall

15. Four Types of Strategies
SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
Copyright 2007 Prentice Hall

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

17. Strengths Weaknesses Opportunities
WO Strategies
Strengths Weaknesses Opportunities
Threats SWOT
Improving internal weaknesses by taking advantage of external opportunities
WO Strategies
Copyright 2007 Prentice Hall

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

19. Strengths Weaknesses Opportunities
WT Strategies
Strengths Weaknesses Opportunities
Threats SWOT
Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats
WT Strategies
Copyright 2007 Prentice Hall

20. 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
Copyright 2007 Prentice Hall

21. 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

22. Matching Key Factors to Formulate Alternative Strategies
Key Internal Factor
Key External Factor
Resultant Strategy
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)
Copyright 2007 Prentice Hall

23. 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
Copyright 2007 Prentice Hall

24. 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
Copyright 2007 Prentice Hall

25. SPACE Matrix Strategic Position & Action Evaluation Matrix Aggressive
Conservative
Defensive
Competitive
Copyright 2007 Prentice Hall

26. Two Internal Dimensions
SPACE Matrix
Two Internal Dimensions
Financial Strength (FS)
Competitive Advantage (CA)
Copyright 2007 Prentice Hall

27. Two External Dimensions
SPACE Matrix
Two External Dimensions
Environmental Stability (ES)
Industry Strength (IS)
Copyright 2007 Prentice Hall

28. 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
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 Position
Internal Strategic Position
Copyright 2007 Prentice Hall

29. 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
Copyright 2007 Prentice Hall

30. Steps to Developing a SPACE Matrix
Select a set of variables to define FS, CA, ES, & 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, & IS
Copyright 2007 Prentice Hall

31. Steps to Developing a SPACE Matrix
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.
Copyright 2007 Prentice Hall

32. SPACE Matrix FS Conservative Aggressive CA IS Defensive Competitive ES+6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4
Defensive -5
Competitive -6 ES
Copyright 2007 Prentice Hall

33. 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
Copyright 2007 Prentice Hall

34. Boston Consulting Group Matrix
BCG Matrix
Boston Consulting Group Matrix
Enhances multi-divisional firm in formulating strategies
Autonomous divisions = business portfolio
Divisions may compete in different industries
Focus on market-share position & industry growth rate
Copyright 2007 Prentice Hall

35. Relative Market Share Position
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
Copyright 2007 Prentice Hall

36. Relative Market Share Position Industry Sales Growth Rate
BCG Matrix
Relative Market Share Position
High
1.0
Medium
.50
Low
0.0
Dogs IV
Cash Cows
III
Question Marks I
Stars II
Industry Sales Growth Rate
High
+20
Medium
Low
-20
Copyright 2007 Prentice Hall

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

38. 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
Copyright 2007 Prentice Hall

39. 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
Copyright 2007 Prentice Hall

40. BCG Matrix
Dogs
Low relative market share & compete in slow or no market growth
Weak internal & external position
Liquidation, divestiture, retrenchment
Copyright 2007 Prentice Hall

41. 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
Copyright 2007 Prentice Hall

42. 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

43. Copyright 2007 Prentice Hall

44. IE Matrix Based on two key dimensions Divided into three major regions
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

45. Copyright 2007 Prentice Hall

46. 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
Copyright 2007 Prentice Hall

47. Grand Strategy Matrix Tool for formulating alternative strategies
Based on two dimensions
Competitive position
Market growth
Copyright 2007 Prentice Hall

48. RAPID MARKET GROWTH Quadrant II Market development Market penetration
Product development
Horizontal integration
Divestiture
Liquidation
Quadrant I
Market development
Market penetration
Product development
Forward integration
Backward integration
Horizontal integration
Concentric diversification
WEAK
COMPETITIVE
POSITION
STRONG
COMPETITIVE
POSITION
Quadrant III
Retrenchment
Concentric diversification
Horizontal diversification
Conglomerate diversification
Liquidation
Quadrant IV
Concentric diversification
Horizontal diversification
Conglomerate diversification
Joint ventures
SLOW MARKET GROWTH
Copyright 2007 Prentice Hall

49. Grand Strategy Matrix Quadrant I Excellent strategic position
Concentration on current markets/products
Take risks aggressively when necessary
Copyright 2007 Prentice Hall

50. Grand Strategy Matrix Quadrant II Evaluate present approach
How to improve competitiveness
Rapid market growth requires intensive strategy
Copyright 2007 Prentice Hall

51. Grand Strategy Matrix Quadrant III Compete in slow-growth industries
Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)
Copyright 2007 Prentice Hall

52. Grand Strategy Matrix Quadrant IV Strong competitive position
Slow-growth industry
Diversification to more promising growth areas
Copyright 2007 Prentice Hall

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

54. QSPM Quantitative Strategic Planning Matrix
Technique designed to determine the relative attractiveness of feasible alternative actions
Copyright 2007 Prentice Hall

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

56. 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
Copyright 2007 Prentice Hall

57. Steps to Develop a QSPM Determine the Attractiveness Scores
Compare the Total Attractiveness Scores
Compute the Sum Total Attractiveness Score
Copyright 2007 Prentice Hall

58. QSPM Limitations Requires intuitive judgments & educated assumptions
Only as good as the prerequisite inputs
Copyright 2007 Prentice Hall

59. QSPM
Advantages
Sets of strategies considered simultaneously or sequentially
Integration of pertinent external & internal factors in the decision making process
Copyright 2007 Prentice Hall

60. Cultural Aspects of Strategy Choice
Organization Culture
Successful strategies depend on the degree of consistency with the firm’s culture
Copyright 2007 Prentice Hall

61. Politics of Strategy Choice
Politics in Organizations
Management hierarchy
Career aspirations
Allocation of scarce resources
Copyright 2007 Prentice Hall

62. Politics of Strategy Choice
Political Tactics for Strategists
Equifinality
Satisfying
Generalization
Higher-order issues
Political access on important issues
Copyright 2007 Prentice Hall

63. Governance Issues Board of Directors Roles & Responsibilities
Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights
Copyright 2007 Prentice Hall

64. Corporate Governance Issues
Business Week’s “Principles of Good Governance”
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 lest 75% of all meetings
Copyright 2007 Prentice Hall

65. Corporate Governance Issues
Business Week’s “principles of good governance”
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
Copyright 2007 Prentice Hall

66. For Review (Chapter 6) Key Terms & Concepts Aggressive Quadrant
Business Portfolio
Attractiveness Scores (AS)
Cash Cows
Boards of Directors
Competitive Advantage (CA)
Boston Consulting Group (BCG) Matrix
Competitive Quadrant
Copyright 2007 Prentice Hall

67. For Review (Chapter 6) Key Terms & Concepts Conservative Quadrant Dogs
Culture
Environmental Stability (ES)
Defensive Quadrant
Financial Strength (FS)
Directional Vector
Governance
Copyright 2007 Prentice Hall

68. For Review (Chapter 6) Key Terms & Concepts Grand Strategy Matrix
Internal-External (IE) Matrix
Halo Error
Matching
Industry Strength (IS)
Matching Stage
Input Stage
Quantitative Strategic Planning Matrix (QSPM)
Copyright 2007 Prentice Hall

69. For Review (Chapter 6) Key Terms & Concepts Question Marks Stars
Relative Market Share Position
Strategic Position & Action Evaluation (SPACE)
SO Strategies
Sum Total Attractiveness Score (STAS)
ST Strategies
Sustainability
Copyright 2007 Prentice Hall

70. For Review (Chapter 6) Key Terms & Concepts
Strengths, Weaknesses Opportunities, Threats SWOT
WO Strategies
Total Attractiveness Scores (TAS)
WT Strategies
Copyright 2007 Prentice Hall