Chapter 6

Strategy Analysis & Choice

 Chapter 6

Strategy Analysis & Choice

Copyright 2007 Prentice Hall Ch 6 -2

 Strategy Analysis & Choice
"Objectives are not commands; they are commitments. They do
not determine the future; they are the means to mobilize
resources and energies of an organization for the making of
the future."
—Peter Drucker

"When a crisis forces choosing among alternatives, most people

will choose the worst possible one."
—Rudin’s Law
Strategy Analysis & Choice

Nature of Strategy Analysis & Choice

-- Establishing long-term objectives

-- Generating alternative strategies
-- Evaluating strategies
-- Selecting strategies to pursue
-- Best alternative - achieve mission & objectives
Strategy Analysis & Choice
Alternative Strategies Derive From --

• Vision
• Mission
• External audit
• Internal audit
• Objectives
• Past successful strategies
The Process of Generating and
Selecting Strategies
• All participants in the strategy analysis and choice
activity should have the firm’s external and internal
audit information by their sides.
• This information, coupled with the firm’s vision and
mission statement
• Proposed strategies should be listed in writing.
• Strategists never consider all feasible alternatives that
could benefit the firm because there are an infinite
number of possible actions and an infinite number of
ways to implement those actions.
• Therefore, a manageable set of the most attractive
alternative strategies must be developed.
The Process of Generating and
Selecting Strategies
• When all feasible strategies identified by participants
are given and understood, the strategies should be
ranked in order of attractiveness by all participants,
with
 1 = should not be implemented,
 2 = possibly should be implemented,
 3 = probably should be implemented, and
 4 = definitely should be implemented.
• This process will result in a prioritized list of best
strategies that reflects the collective wisdom of the
group.
Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

Stage 2: Stage 3:
The Matching Stage The Decision Stage
 Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Information derived from the three Competitive Profile Matrix

matrices we learnt in Chapters 3 and 4 (CPM)
provides basic information
 Strategy-Formulation Analytical
Framework SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Match between organization’s internal

resources & skills and the opportunities &
Grand Strategy Matrix
risks created by its external factors
SWOT Matrix
Every organization has some external opportunities
and threats and internal strengths and weaknesses
that can be aligned to formulate feasible
alternative strategies.
Four Types of Strategies
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
 SO Strategies

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

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

Strengths Use a firm’s

Weaknesses strengths
Opportunities to avoid or
Threats ST reduce the impact
Strategies of external
threats
SWOT
 WT Strategies

Defensive tactics
Strengths aimed at reducing
Weaknesses internal
Opportunities weaknesses &
Threats WT avoiding
Strategies environmental
threats
SWOT
 SWOT Matrix results in four strategies
(SO, WO, ST & WT)
Strengths – S Weaknesses – W
ABC Organization
List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Use strengths to take Overcoming weaknesses

List Opportunities advantage of by taking advantage of
opportunities opportunities

Threats – T ST Strategies WT Strategies

Use strengths to avoid Minimize weaknesses and

List Threats threats avoid threats
 Examples of matching Key Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in

Excess working capacity
+ the cell phone industry = Acquire Cellfone, Inc.
(strength)
(opportunity)

Exit of two major foreign Pursue horizontal integration

Insufficient capacity
+ competitors from the = by buying competitor's
(weakness)
industry (opportunity) facilities

Decreasing numbers of Develop new products for

Strong R&D (strength) + =
young adults (threat) older adults

Develop a new
Poor employee morale Strong union laws
+ = employee benefits
(weakness) (threat) package
 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
SPACE Matrix
Strategic Position & Action Evaluation Matrix
Focus on strategy formulation especially as related
to competitive position of an organization

Aggressive
Conservative
Defensive
Competitive
SPACE Matrix

Two Internal Dimensions

Financial Strength (FS)
Competitive Advantage (CA)

Two External Dimensions

Business Environment Stability (ES)
Industry Strength (IS)
 Examples of SPACE Factors-1
Internal Strategic Position External Strategic Position

Financial Strength (FS) Business Environment

Stability (ES)
Return on investment
Technological changes
Leverage
Rate of inflation
Liquidity
Demand variability
Working capital
Price range of competing products
Cash flow
Barriers to entry
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business
 Examples of SPACE Factors-2
Internal Strategic Position External Strategic Position

Competitive Advantage CA Industry Strength (IS)

Market share Growth potential

Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Technological know-how
Competition’s capacity utilization Resource utilization
Technological know-how Ease of entry into market
Control over suppliers & distributors Productivity, capacity utilization
 Steps to Developing a SPACE Matrix
1. Select a set of variables to define FS, CA, ES, & IS
2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of
the variables that make up the FS and IS dimensions.
3. Assign a numerical value ranging from -1 (best) to -6 (worst) to each of
the variables that make up the ES and CA dimensions.
4. On the FS and CA axes, make comparison to competitors. On the IS and
ES axes, make comparison to other industries.
5. Plot the average score on the appropriate axis
6. 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
7. Draw a directional vector from the origin through the new intersection
point
8. Compute an average score for FS, CA, IS, and ES by summing the values
given to the variables of each dimension and then by dividing by the
number of variables included in the respective dimension.
 SPACE Matrix
FS
Conservative Aggressive
+6
+5 • Backward, forward, horizontal
• Market penetration integration
+4
• Market development • Market penetration
• Product development +3 • Market development
• Related diversification +2 • Product development
• Diversification (related or
+1 unrelated)

CA IS
-6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6

-2 • Backward, forward, horizontal

• Retrenchment integration
-3 • Market penetration
• Divestiture
• Liquidation • Market development
-4 • Product development
-5
Defensive Competitive
-6
ES
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy 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
Based on two dimensions of relative market share &
industry sales growth rate
Relative market share is the 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
Relative Market Share Position
High Medium Low
1.0 .50 0.0

High
+20
Industry Sales Growth Rate

Stars Question Marks

II I
Medium
0

Cash Cows Dogs

III IV
Low
-20
 BCG Matrix QUESTION MARKS
High relative market share and high growth
rate
Low relative market share – compete in
Best long-run opportunities for growth & high-growth industry
profitability
Cash needs are high
Substantial investment to maintain or
STARS

strengthen dominant position Case generation is low

Integration strategies, intensive strategies, Decision to strengthen (intensive
joint ventures
strategies) or divest

High relative market share, competes in low-

growth industry
Low relative market share &
compete in slow or no market growth
Generate cash in excess of their needs
Milked for other purposes Weak internal & external position
Maintain strong position as long as possible Liquidation, divestiture,
COWS
CASH

Product development, concentric retrenchment

diversification
If weakens—retrenchment or divestiture DOGS
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

 The Internal-External Matrix
• Positions an organization’s various divisions in a nine-cell display

 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

Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

GRAND STRATEGY MATRIX
RAPID MARKET GROWTH
Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
WEAK 7. Concentric diversification
STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate
4. Conglomerate diversification
diversification 4. Joint ventures
5. Liquidation
SLOW MARKET GROWTH
Strategy-Formulation Analytical
Framework

Quantitative Strategic
Stage 3:
Planning Matrix
The Decision Stage
(QSPM)

Technique designed to determine the relative

attractiveness of feasible alternative actions
 QSPM Strategic Alternatives
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
AS TAS AS TAS AS TAS

Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems
 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.
These weights should be identical to those in the EFE
Matrix and the IFE Matrix.
3. Examine the Stage 2 (matching) matrices, and identify
alternative strategies that the organization should
consider implementing
4. Determine the Attractiveness Scores
5. Compare the Total Attractiveness Scores
6. Compute the Sum Total Attractiveness Score
Steps to Develop a QSPM

Copyright 2007 Prentice Hall Ch 6 -37

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

Limitations
Requires intuitive judgments & educated
assumptions
Only as good as the prerequisite inputs
Cultural Aspects of Strategy Choice

Organization Culture

Successful strategies depend on the degree of

consistency with the firm’s culture
Strategies that require fewer cultural changes may
be more attractive
Culture becomes especially important when
mergers takes place
Politics of Strategy Choice

All organizations are political. Unless

managed
Politics in organizations results from:

Management/command hierarchy
Career aspirations
Allocation of scarce resources
 Politics of Strategy Choice
Politics affects strategies of organizations:
 Political biases and personal preferences get unduly
embedded in strategy choice decisions
 Internal politics affects the choice of strategies
 Coalitions of individuals often form around key strategic
issues that face an enterprise
 Lack of objectivity encourages more politics in strategy
choice
Politics of Strategy Choice
Political Tactics for Strategists

Equifinality: Achieving same results using different means;

stressing achievement rather than the means for achieving
Satisfying: Achieving satisfactory results with an acceptable
strategy
Generalization: Shifting focus from specific to general issues
Higher-order issues: Shifting focus from short-term to higher-order
and long-term issues
Political access on important issues: Issues having negative
consequences for employees should be communicated properly and
enable feedback
Governance Issues
Governance is “the characteristic of ensuring that long-term
strategic objectives and plans are established and that the
proper management structure is in place to achieve those
objectives, while at the same time making sure that the
structure functions to maintain the corporation’s integrity,
reputation, and responsibility to its various constituencies.”

Board of Directors Roles & Responsibilities

Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights
 Corporate Governance Issues
Business Week’s “principles of good governance”

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
 SOME IMPORTANT ISSUES IN CORPORATE
GOVERNANCE
• Boards of directors are held responsible for
the performance of firms
• Ethics and social responsibility is a significant
issue in the corporate world
• Corporate governance codes are being
developed around the world
• Transparency in accounting rules is being
developed
QUESTIONS