Strategic Management

Session 6
Strategy Analysis & Choice

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 Comprehensive Strategic Management Model

External
Audit

Chapter 3

Vision Strategy Implement

Strategies Implement Measure &
& Analysis Strategies:
In Strategies: Evaluate
Mission & Mgmt Issues
Marketing, Performance
Statements Action Fin/Acct,
Choice
R&D, CIS
Chapter 5 Chapter 7 Chapter 9
Chapter 2 Chapter 6 Chapter 8

Internal
Audit

Chapter 4

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 Strategy Analysis & Choice

Strategic Analysis and Choice:

Making subjective decisions based on

objective information

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 Strategy Analysis & Choice

Strategic Analysis and Choice:

• Generate feasible alternatives

• Evaluate alternatives
• Select specific course of action

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 Strategy Analysis & Choice
Generating & Selecting Strategies

 Develop set of most attractive alternative

strategies
 Determine for the set
• Advantages
• Disadvantages
• Trade-offs
• Costs
• Benefits
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 Strategy Analysis & Choice
Generating & Selecting Strategies

 Involve a broad mix of personnel

• Representation from each department/function
• Provides opportunity to gain understanding of
firm’s direction
• Provides vehicle to develop commitment to
attainment of organizational objectives

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 Strategy Analysis & Choice
Generating & Selecting Strategies

 Evaluate each alternative

• Internal and external audit information
• Firm’s mission statement
• Listed in writing
• Ranked in order of attractiveness

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Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

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Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

External Internal
Factor Factor
Evaluation Evaluation
Matrix (EFE) Matrix (IFE)

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 Strategy-Formulation Analytical Framework

Stage 2: The Matching Stage

Threats Strategic Internal-

Opportunities Position & External Grand
Weaknesses Action Matrix Strategy
Strengths Evaluation (IE) Matrix
(TOWS) (SPACE)

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Strategy-Formulation Analytical Framework

Stage 3: The Decision Stage

Quantitative Strategic
Planning Matrix
(QSPM)

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 Strategy Analysis & Choice
Stage 1: The Input Stage

 Provides Basic Input for Stages 2 and 3

• External Factor Evaluation Matrix (EFE)
• Internal Factor Evaluation Matrix (IFE)

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 Strategy Analysis & Choice
Stage 2: The Matching Stage

 Strategy is characterized by the

organizational match between

• Internal resources and skills

• Opportunities & risks created by external
factors

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 Matching Key Factors
Key Internal Key External Resultant Strategy
Factor 20%Factor
annual
Excess working growth in the
Acquire
capacity + cablevision =
industry Visioncable, Inc.
(strength)
(opportunity)
Exit of two major Pursue horizontal
Insufficient foreign integration by
capacity + competitors form = buying
(weakness) the industry competitor's
(opportunity) facilities
Decreasing
Develop new
Strong R&D numbers of
+ = products for older
(strength) young adults
(threat) adults
Develop a new
Poor employee Strong union employee
morale + activity =
benefits
(weakness) (threat)
package 14
 Four Types of Strategies

SO WO
Threats
Opportunities Strategies Strategies
Weaknesses
Strengths ST WT
(TOWS)
Strategies Strategies

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 SO Strategies

Use a firm’s
Threats internal
Opportunities SO strengths to
Weaknesses Strategies take
Strengths advantage of
(TOWS) external
opportunities

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 WO Strategies

Improving
Threats internal
Opportunities WO weaknesses
Weaknesses Strategies by taking
Strengths advantage of
(TOWS) external
opportunities

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 ST Strategies

Using firm’s
Threats strengths to
Opportunities ST avoid or
Weaknesses Strategies reduce the
Strengths impact of
(TOWS) external
threats.

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 WT Strategies

Defensive
Threats tactics aimed
Opportunities WT at reducing
internal
Weaknesses Strategies
weaknesses
Strengths and avoiding
(TOWS) environmental
threats.

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 Strategy Analysis & Choice
The TOWS Matrix

 List the firm’s key external opportunities

 List the firm’s key external threats
 List the firm’s key internal strengths
 List the firm’s key internal weaknesses

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 Strategy Analysis & Choice
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

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 TOWS Matrix
Leave Blank Strengths-S Weaknesses-W

List Strengths List Weaknesses

Opportunities SO Strategies WO Strategies

-O
Use strengths to take Overcome
List Opportunities advantage of weaknesses by
opportunities taking advantage of
opportunities
Threats-T ST Strategies WT Strategies

List Threats Use strengths to avoid Minimize

threats weaknesses and
avoid threats 22
 Strategy Analysis & Choice
Strategic Position & Action Evaluation
Matrix (SPACE)

 Four quadrant framework

 Determines appropriate strategies
 Aggressive
 Conservative
 Defensive
 Competitive

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 Strategy Analysis & Choice
Strategic Position & Action Evaluation
Matrix (SPACE)

 Two Internal Dimensions

 FinancialStrength [FS]
 Competitive Advantage [CA]

 Two External Dimensions

 Environmental Stability [ES]
 Industry Strength [IS]

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 Strategy Analysis & Choice
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

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 Strategy Analysis & Choice
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 new xy point.
 Draw a directional vector from origin through the
new intersection point.

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 SPACE Factors
Internal External
Strategic Strategic
Position
Financial Strength Position
Environmental Stability
(FS) (ES)
Return on Technological changes
investment Rate of inflation
Leverage Demand variability
Liquidity Price range of
Working capital competing products
Cash flow Barriers to entry
Ease of exit from Competitive pressure
market Price elasticity of
Risk involved in demand
business
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 SPACE Factors
External
Internal Strategic
Strategic
Position
Competitive Advantage CA Position
Industry Strength (IS)
Market share Growth potential
Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Technological know-how
Competition’s capacity Resource utilization
utilization Capital intensify
Technological know-how Ease of entry into market
Control over suppliers & Productivity, capacity
distributors utilization

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 SPACE Matrix
FS
Conservative Aggressive
+6
+5
+4
+3
+2
+1

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

-2
-3

-4
-5
Defensive -6 Competitive
ES 29
 Strategy Analysis & Choice
Grand Strategy Matrix

 Popular tool for formulating alternative strategies

 Based on two evaluative dimensions
 Competitiveposition
 Market growth

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 Grand Strategy Matrix
RAPID MARKET GROWTH
Quadrant II Quadrant I
• Market development • Market development
• Market penetration • Market penetration
• Product development • Product development
• Horizontal integration • Forward integration
• Divestiture • Backward integration
• Liquidation • Horizontal integration
WEAK • Concentric STRONG
COMPETITIVE diversification COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
• Retrenchment • Concentric
• Concentric diversification
diversification • Horizontal
• Horizontal diversification
diversification • Conglomerate
• Conglomerate diversification
diversification • Joint ventures
• Liquidation SLOW MARKET GROWTH 31
 Strategy Analysis & Choice
Grand Strategy Matrix

 Quadrant I
 Excellent strategic position
 Concentration on current markets and products
 Take risks aggressively when necessary

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 Strategy Analysis & Choice
Grand Strategy Matrix

 Quadrant II
 Evaluatepresent approach seriously
 How to change to improve competitiveness
 Rapid market growth requires intensive strategy

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 Strategy Analysis & Choice
Grand Strategy Matrix

 Quadrant III
 Compete in slow-growth industries
 Weak competitive position
 Drastic changes quickly
 Cost and asset reduction indicated (retrenchment)

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 Strategy Analysis & Choice
Grand Strategy Matrix

 Quadrant IV
 Strong competitive position
 Slow-growth industry
 Diversification indicated to more promising growth
areas

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 Strategy Analysis & Choice
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

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 Strategy Analysis & Choice
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

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QSPM Strategic Alternatives

Key External Weight Strategy Strategy Strategy 3

1 2
Factors
Economy
Political/Legal/Governmen
tal
Social/Cultural/Demograp
hic/Environmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and
Development
Computer Information
Systems

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 Strategy Analysis & Choice

QSPM

 List the firm’s key external opportunities &

threats; list the firm’s key internal strengths
and weaknesses
 Assign weights to each external and
internal critical success factor

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 Strategy Analysis & Choice

QSPM

 Examine the Stage 2 (matching) matrices

and identify alternative strategies that the
organization should consider implementing
 Determine the Attractiveness Scores (AS)

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 Strategy Analysis & Choice

QSPM

 Compute the total Attractiveness Scores

 Compute the Sum Total Attractiveness
Score

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