1. C HAPTER 8 S TRATEGY F ORMULATION ; F UNCTIONAL S TRATEGY & S TRATEGIC C HOICE S TRATEGIC M ANAGEMENT AND B USINESS P OLICY 11 th Edition Thomas L. Wheelen J. David Hunger

2. Strategy Formulation To acquire or not to acquire, that is the question – Robert J. Terry Strategy Analysis & Choice Life is full of lousy options -- General P.X. Kelley

3. -- Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives Nature of Strategy Analysis & Choice Strategy Analysis & Choice Strategy Formulation

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

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

6. 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 Strategy Formulation

7. Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix Grand Strategy Matrix Stage 2: The Matching Stage Strategy Formulation

8. BCG Matrix Boston Consulting Group Matrix  BCG reveals differences among business divisions in terms of: 1- 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. 2- Market growth rate Strategy Formulation

9. BCG Matrix Strategy Formulation

10. BCG Matrix Based on the observation that a company’s divisions can be classified into four categories based on combinations of market growth & market share relative to the largest competitor. A framework assumes that an increase in relative market share will result in an increase in the generation of cash. Strategy Formulation

11. BCG Matrix Question Marks  Low relative market share – compete in high- growth industry  Cash needs are high  Cash generation is low  Organization must decide whether to: strengthen them (intensive strategies) or divest Strategy Formulation

12. BCG Matrix Stars  High relative market share and high growth rate  Best long-run opportunities for growth & profitability  Consider substantial investment to maintain or strengthen dominant position  Integration strategies, intensive strategies, joint ventures Strategy Formulation

13. BCG Matrix Cash Cows  High relative market share, competes in low- growth industry  Generate cash in excess of their needs  Milked for other purposes  Cash cow divisions should be managed to maintain strong position as long as possible  Product development, concentric diversification  If weakens—retrenchment or divestiture Strategy Formulation

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

15. Limitations: Oversimplification & inaccuracy Does not reflect if other divisions are growing overtime A snapshot of an organization at a given point in time. Other variables as CA & size of the market are important in strategic decisions about divisions. Strategy Formulation BCG Matrix

16. Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix Grand Strategy Matrix Stage 2: The Matching Stage Strategy Formulation

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

18. 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 Strategy Formulation

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

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

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

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

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

24. QSPM  Technique designed to determine the relative attractiveness of feasible alternative actions Quantitative Strategic Planning Matrix Strategy Formulation

25. 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 Strategy Formulation

26. QSPM – 6 Steps to Develop (1)Make a list of the firm’s key external & internal factors from the EFAS & IFAS in the left column. A minimum of 10 external & 10 internal should be included in the QSPM. (2)Assign weights to each key external & internal factor. Weights are identical to those in the EFAS & IFAS matrices. (3)Examine Stage 2 matrices (matching techniques; SWOT analysis, SPACE Matrix, BCG, & Grand Strategy Matrix), and identify the alternative strategies the organization should consider implementing. Record these strategies in the top row of the QSPM. Strategy Formulation

27. QSPM – 6 Steps to Develop (4)Determine the Attractiveness Score (AS) of each strategy. AS indicates the relative attractiveness of each strategy. AS is determined by examining each factor (external/internal), one at a time, & asking: “Does this factor affect the choice of strategies?” If YES: then the factors’ AS is rated as follows: 1: Slightly attractive, 2: Somewhat attractive, 3: Reasonably attractive, 4: Highly attractive. If NO: then that factor has no effect on the choice being made, thus given a dash. N.B.: A dash in one strategy gives a dash in all other strategies for that specific factor. Strategy Formulation

28. QSPM – 6 Steps to Develop (5)Compute the Total Attractiveness Scores (TAS). Multiply each weight by each AS. TAS indicates the relative attractiveness of each alternative strategy, considering only the impact of the adjacent external or internal factor. (6)Compute the Sum Total Attractiveness Scores (STAS), to reveal which strategy is more attractive. Higher STAS scores indicate more attractive strategies. Strategy Formulation

29. QSPM  Never work column by column, always prepare a QSPM working row by row.  Dashes are inserted all the way across the row when used.  Never duplicate AS scores in a row. NOTE Strategy Formulation

30. QSPM  Requires intuitive judgments & educated assumptions  Only as good as the prerequisite inputs Limitations Strategy Formulation

31. QSPM  Sets of strategies considered simultaneously or sequentially  Integration of pertinent external & internal factors in the decision making process Advantages Strategy Formulation

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

33. Politics of Strategy Choice  Management hierarchy  Career aspirations  Allocation of scarce resources Politics in Organizations Strategy Formulation

34. Politics of Strategy Choice  Equifinality  Satisfying  Generalization  Higher-order issues  Political access on important issues Political tactics for strategists Strategy Formulation

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

36. Corporate Governance Issues 1.No more than 2 directors 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 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” Strategy Formulation