Strategic Management Concepts

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Strategic Management Concepts

  1. 1. Chapter 6 Strategy Analysis And Choice <ul><li>Strategic Management: </li></ul><ul><li>Concepts and Cases . 9 th edition </li></ul><ul><li>Fred R. David </li></ul><ul><li>PowerPoint Slides by </li></ul><ul><li>Anthony F. Chelte </li></ul><ul><li>Western New England College </li></ul>
  2. 2. Chapter Outline <ul><li>The Nature of Strategy Analysis and Choice </li></ul><ul><li>A Comprehensive Strategy-Formulation Framework </li></ul><ul><li>The Input Stage </li></ul>
  3. 3. Chapter Outline <ul><li>The Matching Stage </li></ul><ul><li>The Decision Stage </li></ul><ul><li>Cultural Aspects of Strategy Choice </li></ul>
  4. 4. Chapter Outline <ul><li>The Politics of Strategy Choice </li></ul><ul><li>The Role of a Board of Directors </li></ul>
  5. 5. Strategy Analysis & Choice <ul><li>Whether it’s broke or not, fix it—make it better. Not just products, but the whole company if necessary. </li></ul><ul><li>-- Bill Saporito </li></ul>
  6. 6. Strategy Analysis & Choice <ul><li>Strategic analysis and choice largely involves making subjective decisions based on objective information . </li></ul>
  7. 7. Strategy Analysis & Choice <ul><li>The Nature of Strategy Analysis and Choice – </li></ul><ul><ul><li>Establishing long-term objectives </li></ul></ul><ul><ul><li>Generating alternative strategies </li></ul></ul><ul><ul><li>Selecting strategies to pursue </li></ul></ul><ul><ul><li>Best alternative to achieve mission and objectives </li></ul></ul>
  8. 8. Strategy Analysis & Choice <ul><li>Alternative strategies derive from – </li></ul><ul><ul><li>Vision </li></ul></ul><ul><ul><li>Mission </li></ul></ul><ul><ul><li>Objectives </li></ul></ul><ul><ul><li>External audit </li></ul></ul><ul><ul><li>Internal audit </li></ul></ul><ul><ul><li>Past successful strategies </li></ul></ul>
  9. 9. Strategy Analysis & Choice <ul><li>Participation in generating alternative strategies should be broad – </li></ul>
  10. 10. Strategy-Formulation Analytical Framework Stage 1: The Input Stage Stage 2: The Matching Stage Stage 3: The Decision Stage
  11. 11. Formulation Framework External Factor Evaluation Matrix (EFE) Competitive Profile Matrix Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage
  12. 12. Input Stage <ul><li>Provides basic input information for the matching and decision stage matrices </li></ul><ul><li>Requires strategists to quantify subjectivity early in the process </li></ul><ul><li>Good intuitive judgment always needed </li></ul>
  13. 13. Formulation Framework SPACE Matrix Stage 2: The Matching Stage TOWS Matrix BCG Matrix IE Matrix Grand Strategy Matrix
  14. 14. Matching Stage <ul><li>Match between organization’s internal resources and skills and the opportunities and risks created by its external factors. </li></ul>
  15. 15. Matching Key Factors to Formulate Alternative Strategies 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 Cellfone, Inc. = 20% annual growth in the cell phone industry (opportunity) + Excess working capacity (strength)
  16. 16. Formulation Framework SPACE Matrix Stage 2: The Matching Stage TOWS Matrix BCG Matrix IE Matrix Grand Strategy Matrix
  17. 17. Matching Stage <ul><li>TOWS Matrix </li></ul><ul><ul><li>Threats </li></ul></ul><ul><ul><li>Opportunities </li></ul></ul><ul><ul><li>Strengths </li></ul></ul><ul><ul><li>Weaknesses </li></ul></ul>
  18. 18. TOWS Matrix <ul><li>Develop four types of strategies </li></ul><ul><ul><li>Strengths-Opportunities (SO) </li></ul></ul><ul><ul><li>Weaknesses-Opportunities (WO) </li></ul></ul><ul><ul><li>Strengths-Threats (ST) </li></ul></ul><ul><ul><li>Weaknesses-Threats (WT) </li></ul></ul>
  19. 19. SO Strategies Threats Opportunities Weaknesses Strengths (TOWS) SO Strategies Use a firm’s internal strengths to take advantage of external opportunities
  20. 20. WO Strategies Threats Opportunities Weaknesses Strengths (TOWS) WO Strategies Improving internal weaknesses by taking advantage of external opportunities
  21. 21. ST Strategies Threats Opportunities Weaknesses Strengths (TOWS) ST Strategies Using firm’s strengths to avoid or reduce the impact of external threats.
  22. 22. WT Strategies Threats Opportunities Weaknesses Strengths (TOWS) WT Strategies Defensive tactics aimed at reducing internal weaknesses and avoiding environmental threats.
  23. 23. TOWS Matrix <ul><li>Steps in developing the TOWS Matrix </li></ul><ul><ul><li>List the firm’s key external opportunities </li></ul></ul><ul><ul><li>List the firm’s key external threats </li></ul></ul><ul><ul><li>List the firm’s key internal strengths </li></ul></ul><ul><ul><li>List the firm’s key internal weaknesses </li></ul></ul>
  24. 24. TOWS Matrix <ul><li>Developing the TOWS Matrix </li></ul><ul><li>Match internal strengths with external opportunities and record the resultant SO Strategies </li></ul><ul><li>Match internal weaknesses with external opportunities and record the resultant WO Strategies </li></ul><ul><li>Match internal strengths with external threats and record the resultant ST Strategies </li></ul><ul><li>Match internal weaknesses with external threats and record the resultant WT Strategies </li></ul>
  25. 25. 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
  26. 26. Formulation Framework SPACE Matrix Stage 2: The Matching Stage TOWS Matrix BCG Matrix IE Matrix Grand Strategy Matrix
  27. 27. SPACE Matrix <ul><li>Strategic Position and Action Evaluation Matrix </li></ul><ul><li>Four quadrant framework </li></ul><ul><li>Determines appropriate strategies </li></ul><ul><ul><li>Aggressive </li></ul></ul><ul><ul><li>Conservative </li></ul></ul><ul><ul><li>Defensive </li></ul></ul><ul><ul><li>Competitive </li></ul></ul>
  28. 28. SPACE Matrix <ul><li>Two Internal Dimensions </li></ul><ul><ul><li>Financial Strength [FS] </li></ul></ul><ul><ul><li>Competitive Advantage [CA] </li></ul></ul><ul><li>Two External Dimensions </li></ul><ul><ul><li>Environmental Stability [ES] </li></ul></ul><ul><ul><li>Industry Strength [IS] </li></ul></ul>
  29. 29. SPACE Matrix <ul><li>Overall Strategic position determined by: </li></ul><ul><ul><li>Financial Strength [FS] </li></ul></ul><ul><ul><li>Competitive Advantage [CA] </li></ul></ul><ul><ul><li>Environmental Stability [ES] </li></ul></ul><ul><ul><li>Industry Strength [IS] </li></ul></ul>
  30. 30. SPACE Matrix <ul><li>Developing the SPACE Matrix: </li></ul><ul><li>EFE Matrix </li></ul><ul><li>IFE Matrix </li></ul><ul><li>Financial Strength </li></ul><ul><li>Competitive Advantage </li></ul><ul><li>Environmental Stability </li></ul><ul><li>Industry Strength </li></ul>
  31. 31. SPACE Matrix <ul><li>Select variables to define FS, CA, ES, & IS </li></ul><ul><li>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. </li></ul><ul><li>Compute average score for FS, CA, ES, & IS </li></ul>
  32. 32. SPACE Matrix <ul><li>Plot the average scores on the Matrix </li></ul><ul><li>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. </li></ul><ul><li>Draw a directional vector from origin through the new intersection point. </li></ul>
  33. 33. 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
  34. 34. 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 Competition’s capacity utilization Technological know-how Control over suppliers & distributors External Strategic Position Internal Strategic Position
  35. 35. 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
  36. 36. Formulation Framework SPACE Matrix Stage 2: The Matching Stage TOWS Matrix BCG Matrix IE Matrix Grand Strategy Matrix
  37. 37. BCG Matrix <ul><li>Boston Consulting Group Matrix </li></ul><ul><li>Enhances multidivisional firms’ efforts to formulate strategies </li></ul><ul><li>Autonomous divisions (or profit centers) constitute the business portfolio </li></ul><ul><li>Firm’s divisions may compete in different industries requiring separate strategy </li></ul>
  38. 38. BCG Matrix <ul><li>Boston Consulting Group Matrix </li></ul><ul><li>Graphically portrays differences among divisions </li></ul><ul><li>Focuses on market share position and industry growth rate </li></ul><ul><li>Manage business portfolio through relative market share position and industry growth rate </li></ul>
  39. 39. BCG Matrix <ul><li>Relative market share position defined: </li></ul><ul><li>Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry. </li></ul>
  40. 40. BCG Matrix Relative Market Share Position High 1.0 Medium .50 Low 0.0 Industry Sales Growth Rate High +20 Low -20 Medium 0 Dogs IV Cash Cows III Question Marks I Stars II
  41. 41. BCG Matrix <ul><li>Question Marks </li></ul><ul><li>Stars </li></ul><ul><li>Cash Cows </li></ul><ul><li>Dogs </li></ul>
  42. 42. BCG Matrix <ul><li>Question Marks </li></ul><ul><ul><li>Low relative market share position yet compete in high-growth industry. </li></ul></ul><ul><ul><ul><li>Cash needs are high </li></ul></ul></ul><ul><ul><ul><li>Case generation is low </li></ul></ul></ul><ul><ul><li>Decision to strengthen (intensive strategies) or divest </li></ul></ul>
  43. 43. BCG Matrix <ul><li>Stars </li></ul><ul><ul><li>High relative market share and high industry growth rate. </li></ul></ul><ul><ul><ul><li>Best long-run opportunities for growth and profitability </li></ul></ul></ul><ul><ul><li>Substantial investment to maintain or strengthen dominant position </li></ul></ul><ul><ul><ul><li>Integration strategies, intensive strategies, joint ventures </li></ul></ul></ul>
  44. 44. BCG Matrix <ul><li>Cash Cows </li></ul><ul><ul><li>High relative market share position, but compete in low-growth industry </li></ul></ul><ul><ul><ul><li>Generate cash in excess of their needs </li></ul></ul></ul><ul><ul><ul><li>Milked for other purposes </li></ul></ul></ul><ul><ul><li>Maintain strong position as long as possible </li></ul></ul><ul><ul><ul><li>Product development, concentric diversification </li></ul></ul></ul><ul><ul><ul><li>If becomes weak—retrenchment or divestiture </li></ul></ul></ul>
  45. 45. BCG Matrix <ul><li>Dogs </li></ul><ul><ul><li>Low relative market share position and compete in slow or no market growth </li></ul></ul><ul><ul><ul><li>Weak internal and external position </li></ul></ul></ul><ul><ul><li>Decision to liquidate, divest, retrenchment </li></ul></ul>
  46. 46. Formulation Framework SPACE Matrix Stage 2: The Matching Stage TOWS Matrix BCG Matrix IE Matrix Grand Strategy Matrix
  47. 47. Grand Strategy Matrix <ul><li>Popular tool for formulating alternative strategies </li></ul><ul><li>All organizations (or divisions) can be positioned in one of four quadrants </li></ul><ul><li>Based on two evaluative dimensions: </li></ul><ul><ul><li>Competitive position </li></ul></ul><ul><ul><li>Market growth </li></ul></ul>
  48. 48. <ul><li>Quadrant IV </li></ul><ul><li>Concentric diversification </li></ul><ul><li>Horizontal diversification </li></ul><ul><li>Conglomerate diversification </li></ul><ul><li>Joint ventures </li></ul><ul><li>Quadrant III </li></ul><ul><li>Retrenchment </li></ul><ul><li>Concentric diversification </li></ul><ul><li>Horizontal diversification </li></ul><ul><li>Conglomerate diversification </li></ul><ul><li>Liquidation </li></ul><ul><li>Quadrant I </li></ul><ul><li>Market development </li></ul><ul><li>Market penetration </li></ul><ul><li>Product development </li></ul><ul><li>Forward integration </li></ul><ul><li>Backward integration </li></ul><ul><li>Horizontal integration </li></ul><ul><li>Concentric diversification </li></ul><ul><li>Quadrant II </li></ul><ul><li>Market development </li></ul><ul><li>Market penetration </li></ul><ul><li>Product development </li></ul><ul><li>Horizontal integration </li></ul><ul><li>Divestiture </li></ul><ul><li>Liquidation </li></ul>RAPID MARKET GROWTH SLOW MARKET GROWTH WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION
  49. 49. Grand Strategy Matrix <ul><li>Quadrant I </li></ul><ul><ul><li>Excellent strategic position </li></ul></ul><ul><ul><li>Concentration on current markets and products </li></ul></ul><ul><ul><li>Take risks aggressively when necessary </li></ul></ul>
  50. 50. Grand Strategy Matrix <ul><li>Quadrant II </li></ul><ul><ul><li>Evaluate present approach seriously </li></ul></ul><ul><ul><li>How to change to improve competitiveness </li></ul></ul><ul><ul><li>Rapid market growth requires intensive strategy </li></ul></ul>
  51. 51. Grand Strategy Matrix <ul><li>Quadrant III </li></ul><ul><ul><li>Compete in slow-growth industries </li></ul></ul><ul><ul><li>Weak competitive position </li></ul></ul><ul><ul><li>Drastic changes quickly </li></ul></ul><ul><ul><li>Cost and asset reduction indicated (retrenchment) </li></ul></ul>
  52. 52. Grand Strategy Matrix <ul><li>Quadrant IV </li></ul><ul><ul><li>Strong competitive position </li></ul></ul><ul><ul><li>Slow-growth industry </li></ul></ul><ul><ul><li>Diversification indicated to more promising growth areas </li></ul></ul>
  53. 53. Formulation Framework Quantitative Strategic Planning Matrix (QSPM) Stage 3: The Decision Stage
  54. 54. QSPM <ul><li>Quantitative Strategic Planning Matrix </li></ul><ul><ul><li>Only technique designed to determine the relative attractiveness of feasible alternative actions </li></ul></ul>
  55. 55. QSPM <ul><li>Quantitative Strategic Planning Matrix </li></ul><ul><li>Tool for objective evaluation of alternative strategies </li></ul><ul><li>Based on identified external and internal crucial success factors </li></ul><ul><li>Requires good intuitive judgment </li></ul>
  56. 56. QSPM <ul><li>Quantitative Strategic Planning Matrix </li></ul><ul><li>List the firm’s key external opportunities & threats; list the firm’s key internal strengths and weaknesses </li></ul><ul><li>Assign weights to each external and internal critical success factor </li></ul>
  57. 57. QSPM <ul><li>Quantitative Strategic Planning Matrix </li></ul><ul><li>Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing </li></ul><ul><li>Determine the Attractiveness Scores (AS) </li></ul>
  58. 58. QSPM <ul><li>Quantitative Strategic Planning Matrix </li></ul><ul><li>Compute the total Attractiveness Scores </li></ul><ul><li>Compute the Sum Total Attractiveness Score </li></ul>
  59. 59. QSPM Strategic Alternatives 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
  60. 60. QSPM <ul><li>Limitations: </li></ul><ul><li>Requires intuitive judgments and educated assumptions </li></ul><ul><li>Only as good as the prerequisite inputs </li></ul>
  61. 61. QSPM <ul><li>Positives: </li></ul><ul><li>Sets of strategies examined simultaneously or sequentially </li></ul><ul><li>Requires the integration of pertinent external and internal factors in the decision-making process </li></ul>
  62. 62. Cultural Aspects of Strategy Choice <ul><li>Culture: </li></ul><ul><li>The set of shared values, beliefs, attitudes, customs, norms, personalities, heroes, and heroines that describe a firm </li></ul>
  63. 63. Cultural Aspects of Strategy Choice <ul><li>Culture: </li></ul><ul><li>Successful strategies depend on degree of support from a firm’s culture </li></ul>
  64. 64. Politics of Strategy Choice <ul><li>Politics in organizations: </li></ul><ul><li>Management hierarchy </li></ul><ul><li>Career aspirations </li></ul><ul><li>Allocation of scarce resources </li></ul>
  65. 65. Politics of Strategy Choice <ul><li>Political tactics for strategists: </li></ul><ul><li>Equifinality </li></ul><ul><li>Satisfying </li></ul><ul><li>Generalization </li></ul><ul><li>Focus on Higher-Order Issues </li></ul><ul><li>Provide Political Access on Important Issues </li></ul>
  66. 66. Role of A Board of Directors <ul><li>Duties and Responsibilities: </li></ul><ul><ul><li>Control and oversight over management </li></ul></ul><ul><ul><li>Adherence to legal prescriptions </li></ul></ul><ul><ul><li>Consideration of stakeholder interests </li></ul></ul><ul><ul><li>Advancement of stockholders’ rights </li></ul></ul>
  67. 67. Key Terms <ul><li>Aggressive quadrant </li></ul><ul><li>Attractiveness Scores (AS) </li></ul><ul><li>Board of Directors </li></ul><ul><li>Boston Consulting Group (BCG) Matrix </li></ul><ul><li>Business portfolio </li></ul><ul><li>Cash cows </li></ul><ul><li>Champions </li></ul><ul><li>Competitive Advantage (CA) </li></ul>
  68. 68. Key Terms <ul><li>Competitive quadrant </li></ul><ul><li>Conservative quadrant </li></ul><ul><li>Culture </li></ul><ul><li>Decision stage </li></ul><ul><li>Defensive quadrant </li></ul><ul><li>Directional vector </li></ul><ul><li>Dogs </li></ul><ul><li>Environmental Stability (ES) </li></ul><ul><li>Financial Strength (FS) </li></ul>
  69. 69. Key Terms <ul><li>Grand Strategy Matrix </li></ul><ul><li>Halo error </li></ul><ul><li>Industry Strength (IS) </li></ul><ul><li>Input stage </li></ul><ul><li>Internal-External (IE) Matrix </li></ul><ul><li>Long-term objectives </li></ul><ul><li>Matching </li></ul><ul><li>Matching stage </li></ul><ul><li>Quantitative Strategic Planning Matrix (QSPM) </li></ul>
  70. 70. Key Terms <ul><li>Question marks </li></ul><ul><li>Relative market share position </li></ul><ul><li>SO strategies </li></ul><ul><li>ST strategies </li></ul><ul><li>Stars </li></ul><ul><li>Strategic Position and Action Evaluation (SPACE) Matrix </li></ul><ul><li>Strategy-formulation framework </li></ul>
  71. 71. Key Terms <ul><li>Sum total attractiveness scores </li></ul><ul><li>Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix </li></ul><ul><li>Total Attractiveness Scores (TAS) </li></ul><ul><li>WO strategies </li></ul><ul><li>WT strategies </li></ul>

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