Chap 06

2001 Prentice Hall
Ch. 6-1
Strategic Management
Concepts & Cases
8
th
edition
Fred R. David
Chapter 6:
Strategy Analysis &
Choice
PowerPoint Slides By:
Anthony F. Chelte
Western New England College
2001 Prentice Hall
Ch. 6-2
Comprehensive Strategic Management Model Comprehensive Strategic Management Model
Vision
&
Mission
Statements
Chapter 2
External
Audit
Chapter 3
I nternal
Audit
Chapter 4
Strategies
I n
Action
Chapter 5
Strategy
Analysis
&
Choice
Chapter 6
Implement
Strategies:
Mgmt Issues
Chapter 7
Implement
Strategies:
Marketing,
Fin/ Acct,
R&D, CIS
Chapter 8
Measure &
Evaluate
Performance
Chapter 9
2001 Prentice Hall
Ch. 6-3
Strategy Analysis & Choice
Strategic management is not a box of tricks or
a bundle of techniques. It is analytical
thinking and commitment of resources to
action. But quantification alone is not
planning. Some of the most important issues
in strategic management cannot be quantified
at all.
Peter Drucker
2001 Prentice Hall
Ch. 6-4
Whether its broke or not, fix itmake it
better. Not just products, but the whole
company if necessary.
Bill Saporito
2001 Prentice Hall
Ch. 6-5
Planning is often doomed before it ever
starts, either because too much is
expected of it or because not enough is
put into it.
T. J . Cartwright
2001 Prentice Hall
Ch. 6-6
Strategic Analysis and Choice:
Making subjective decisions based on
objective information
2001 Prentice Hall
Ch. 6-7
Strategic Analysis and Choice:
Generate feasible alternatives
Evaluate alternatives
Select specific course of action
2001 Prentice Hall
Ch. 6-8
Generating & Selecting Strategies
Develop set of most attractive alternative
strategies
Determine for the set
Advantages
Disadvantages
Trade-offs
Costs
Benefits
2001 Prentice Hall
Ch. 6-9
Involve a broad mix of personnel
Representation from each department/function
Provides opportunity to gain understanding of
firms direction
Provides vehicle to develop commitment to
attainment of organizational objectives
2001 Prentice Hall
Ch. 6-10
Evaluate each alternative
Internal and external audit information
Firms mission statement
Listed in writing
Ranked in order of attractiveness
2001 Prentice Hall
Ch. 6-11
Strategy-Formulation Analytical Framework
Stage 1: The Input Stage
Stage 2: The Matching Stage
Stage 3: The Decision Stage
2001 Prentice Hall
Ch. 6-12
External
Factor
Evaluation
Matrix (EFE)
Competitive
Profile
Matrix
Internal
Factor
Evaluation
Matrix (IFE)
2001 Prentice Hall
Ch. 6-13
Threats
Opportunities
Weaknesses
Strengths
(TOWS)
Strategic
Position &
Action
Evaluation
(SPACE)
Boston
Consulting
Group
Matrix
(BCG)
Internal-
External
Matrix
(IE)
Grand
Strategy
Matrix
2001 Prentice Hall
Ch. 6-14
Quantitative Strategic
Planning Matrix
(QSPM)
2001 Prentice Hall
Ch. 6-15
Provides Basic Input for Stages 2 and 3
External Factor Evaluation Matrix (EFE)
Internal Factor Evaluation Matrix (IFE)
Competitive Profile Matrix
2001 Prentice Hall
Ch. 6-16
Strategy is characterized by the
organizational match between
Internal resources and skills
Opportunities & risks created by external
factors
2001 Prentice Hall
Ch. 6-17
Matching Key Factors
Matching Key Factors
Resultant Strategy Key External Factor Key Internal Factor
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 Visioncable, Inc. =
20% annual growth
in the cablevision
industry
(opportunity)
+
Excess working
capacity (strength)
2001 Prentice Hall
Ch. 6-18
Four Types of Strategies
Four Types of Strategies
WT
Strategies
ST
Strategies
WO
Strategies
SO
Strategies
Threats
Opportunities
Weaknesses
Strengths
(TOWS)
2001 Prentice Hall
Ch. 6-19
SO
SO
Strategies
Strategies
SO
Strategies
Use a firms
internal
strengths to
take advantage
of external
opportunities
Threats
Opportunities
Weaknesses
Strengths
(TOWS)
2001 Prentice Hall
Ch. 6-20
WO
WO
Strategies
Strategies
WO
Strategies
Improving
internal
weaknesses by
taking
advantage of
external
opportunities
Threats
Opportunities
Weaknesses
Strengths
(TOWS)
2001 Prentice Hall
Ch. 6-21
ST
ST
Strategies
Strategies
ST
Strategies
Using firms
strengths to
avoid or reduce
the impact of
external threats.
Threats
Opportunities
Weaknesses
Strengths
(TOWS)
2001 Prentice Hall
Ch. 6-22
WT
WT
Strategies
Strategies
WT
Strategies
Defensive tactics
aimed at
reducing
internal
weaknesses and
avoiding
environmental
threats.
Threats
Opportunities
Weaknesses
Strengths
(TOWS)
2001 Prentice Hall
Ch. 6-23
The TOWS Matrix
List the firms key external opportunities
List the firms key external threats
List the firms key internal strengths
List the firms key internal weaknesses
2001 Prentice Hall
Ch. 6-24
The TOWS Matrix
Match internal strengths with external opportunities
and record the resultant SO Strategies
Match internal weaknesses with external
opportunities and record the resultant WO Strategies
Match internal strengths with external threats and
record the resultant ST Strategies
Match internal weaknesses with external threats and
record the resultant WT Strategies
2001 Prentice Hall
Ch. 6-25
TOWS Matrix
TOWS Matrix
WT Strategies
Minimize weaknesses
and avoid threats
ST Strategies
Use strengths to avoid
threats
Threats-T
List Threats
WO Strategies
Overcome weaknesses
by taking advantage of
opportunities
SO Strategies
Use strengths to take
advantage of
opportunities
Opportunities-O
List Opportunities
Weaknesses-W
List Weaknesses
Strengths-S
List Strengths
Leave Blank
2001 Prentice Hall
Ch. 6-26
Strategic Position & Action Evaluation
Matrix (SPACE)
Four quadrant framework
Determines appropriate strategies
Aggressive
Conservative
Defensive
Competitive
2001 Prentice Hall
Ch. 6-27
Matrix (SPACE)
Two Internal Dimensions
Financial Strength [FS]
Competitive Advantage [CA]
Two External Dimensions
Environmental Stability [ES]
Industry Strength [IS]
2001 Prentice Hall
Ch. 6-28
Matrix (SPACE)
Overall Strategic position determined by:
Financial Strength [FS]
Competitive Advantage [CA]
Environmental Stability [ES]
Industry Strength [IS]
2001 Prentice Hall
Ch. 6-29
Matrix (SPACE)
Developing the SPACE Matrix:
EFE Matrix
IFE Matrix
Financial Strength
Competitive Advantage
Environmental Stability
Industry Strength
2001 Prentice Hall
Ch. 6-30
The 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
2001 Prentice Hall
Ch. 6-31
The 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 newxy
point.
Draw a directional vector from origin through
the new intersection point.
2001 Prentice Hall
Ch. 6-32
SPACE Factors
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
Financial Strength (FS)
Return on investment
Leverage
Liquidity
Working capital
Cash flow
Ease of exit from market
Risk involved in business
External Strategic Position Internal Strategic Position
2001 Prentice Hall
Ch. 6-33
SPACE Factors
SPACE Factors
Industry Strength (IS)
Growth potential
Profit potential
Financial stability
Technological know-how
Resource utilization
Capital intensify
Ease of entry into market
Productivity, capacity
utilization
Competitive Advantage CA
Market share
Product quality
Product life cycle
Customer loyalty
Competitions capacity utilization
Technological know-how
Control over suppliers &
distributors
External Strategic Position Internal Strategic Position
2001 Prentice Hall
Ch. 6-34
SPACE Matrix
SPACE Matrix
FS
+6
+1
+5
+4
+3
+2
-6
-5
-4
-3
-2
-1
-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6
ES
CA IS
Conservative Aggressive
Defensive
Competitive
2001 Prentice Hall
Ch. 6-35
Boston Consulting Group Matrix
(BCG)
Enhances multidivisional firms efforts to
formulate strategies
Autonomous divisions (or profit centers)
constitute the business portfolio
Firms divisions may compete in different
industries requiring separate strategy
2001 Prentice Hall
Ch. 6-36
(BCG)
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
2001 Prentice Hall
Ch. 6-37
(BCG)
Relative market share position defined:
Ratio of a divisions own market share in a
particular industry to the market share held by the
largest rival firm in that industry.
2001 Prentice Hall
Ch. 6-38
BCG Matrix
BCG Matrix
Dogs
Dogs
IV
IV
Cash Cows
Cash Cows
III
III
Question Marks
Question Marks
I
I
Stars
Stars
II
II
Relative Market Share Position
High
1.0
Medium
.50
Low
0.0
I
n
d
u
s
t
r
y

S
a
l
e
s

G
r
o
w
t
h

R
a
t
e
High
+20
Low
-20
Medium
0
2001 Prentice Hall
Ch. 6-39
BCG Matrix
Question Marks
Stars
Cash Cows
Dogs
2001 Prentice Hall
Ch. 6-40
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
2001 Prentice Hall
Ch. 6-41
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
2001 Prentice Hall
Ch. 6-42
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 weakretrenchment or divestiture
2001 Prentice Hall
Ch. 6-43
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
2001 Prentice Hall
Ch. 6-44
Grand Strategy Matrix
Popular tool for formulating alternative
strategies
Based on two evaluative dimensions
Competitive position
Market growth
2001 Prentice Hall
Ch. 6-45
Quadrant I V
Concentric diversification
Horizontal diversification
Conglomerate
diversification
J oint ventures
Quadrant I I I
Retrenchment
Horizontal diversification
Conglomerate
diversification
Liquidation
Quadrant I
Market development
Market penetration
Product development
Forward integration
Backward integration
Horizontal integration
Quadrant I I
Market development
Market penetration
Product development
Horizontal integration
Divestiture
Liquidation
RAPID MARKET GROWTH
SLOW MARKET GROWTH
WEAK
COMPETITIVE
POSITION
STRONG
COMPETITIVE
POSITION
2001 Prentice Hall
Ch. 6-46
Quadrant I
Excellent strategic position
Concentration on current markets and products
Take risks aggressively when necessary
2001 Prentice Hall
Ch. 6-47
Quadrant II
Evaluate present approach seriously
How to change to improve competitiveness
Rapid market growth requires intensive strategy
2001 Prentice Hall
Ch. 6-48
Quadrant III
Compete in slow-growth industries
Weak competitive position
Drastic changes quickly
Cost and asset reduction indicated (retrenchment)
2001 Prentice Hall
Ch. 6-49
Quadrant IV
Strong competitive position
Slow-growth industry
Diversification indicated to more promising growth
areas
2001 Prentice Hall
Ch. 6-50
Quantitative Strategic Planning
Matrix (QSPM)
Comprises Stage 3 of the analytical
framework
Analytical technique designed to determine
the relative attractiveness of feasible
alternative actions.
Uses input from Stage 1 and Stage 2
2001 Prentice Hall
Ch. 6-51
Quantitative Strategic Planning
Matrix (QSPM)
Tool for objective evaluation of alternative
strategies
Based on identified external and internal
crucial success factors
Requires good intuitive judgment
2001 Prentice Hall
Ch. 6-52
QSPM
QSPM
Key I nternal 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
Strategic Alternatives
2001 Prentice Hall
Ch. 6-53
QSPM
List the firms key external
opportunities & threats; list the firms
key internal strengths and weaknesses
Assign weights to each external and
internal critical success factor
2001 Prentice Hall
Ch. 6-54
QSPM
Examine the Stage 2 (matching)
matrices and identify alternative
strategies that the organization should
consider implementing
Determine the Attractiveness Scores
(AS)
2001 Prentice Hall
Ch. 6-55
QSPM
Compute the total Attractiveness Scores
Compute the Sum Total Attractiveness
Score
2001 Prentice Hall
Ch. 6-56
QSPM
Positives:
Sets of strategies examined
simultaneously or sequentially
Requires the integration of pertinent
external and internal factors in the
decision-making process
2001 Prentice Hall
Ch. 6-57
QSPM
Limitations:
Requires intuitive judgments and
educated assumptions
Only as good as the prerequisite
inputs
2001 Prentice Hall
Ch. 6-58
Key Terms & Concepts
Aggressive quadrant
Attractiveness Scores
(AS)
Board of Directors
Boston Consulting
Group (BCG) Matrix
Business portfolio
Cash cows
Champions
Competitive Advantage
(CA)
Competitive quadrant
Conservative quadrant
Culture
Decision stage
Defensive quadrant
Directional vector
Dogs
Environmental Stability
(ES)
Financial Strength (FS)
2001 Prentice Hall
Ch. 6-59
Halo error
Industry Strength (IS)
Input stage
Internal-External (IE)
Matrix
Long-term objectives
Matching
Matching stage
Quantitative Strategic
Planning Matrix (QSPM)
Question marks
Relative market share
position
SO strategies
ST strategies
Stars
Strategic Position and
Action Evaluation
(SPACE) Matrix
Strategy-formulation
framework
2001 Prentice Hall
Ch. 6-60
Sum total attractiveness
scores
Threats-Opportunities-
Weaknesses-Strengths
(TOWS) Matrix
Total Attractiveness
Scores (TAS)
WO strategies
WT strategies

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