Strategy Analysis & Choice Subjective decisions based on objective information Generating alternative strategies Selecting strategies to pursue Best alternative course of action to achieve mission & objectives Derived from vision, mission, objectives, external audit, and internal audit Ch 6 -2
Strategy Analysis & ChoiceGenerating Alternatives –Participation in generating alternativestrategies should be as broad aspossible Ch 6 -3
Comprehensive Strategy-Formulation Framework As shown in the previous PowerPoint, strategy formulation techniques can be integrated into a three-stage decision-making framework. The tools presented in this framework are applicable to all sizes and types of organizations and can help strategists identify, evaluate, and select strategies Ch 6 -5
The Strategy-Formulation AnalyticalFramework Stage 1 (Input Stage) summarizes the basic input information needed to formulate strategies. Stage 2 (Matching Stage) focuses on generating feasible alternative strategies by aligning key external and internal factors. Stage 3 (Decision Stage) uses the QSPM to objectively evaluate feasible alternative strategies identified in Stage 2. Ch 6 -6
SWOT Matrix SO strategies use a firm’s internal strengths to take advantage of external opportunities WO strategies improve internal weaknesses by taking advantage of external opportunities ST strategies use a firm’s strengths to avoid or reduce the impact of external threats WT strategies defensive tactics aimed at reducing internal weakness and avoiding external threats Ch 6 -12
Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: BCG Matrix The Matching Stage IE Matrix Grand Strategy Matrix Ch 6 -13
Strategic Position and ActionEvaluation (SPACE) Matrix The SPACE matrix’s four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are most appropriate for a given organization. Its axes represent two internal dimensions (financial strength [FS] and competitive advantage [CA]) and two external dimensions (environmental stability [ES] and industry strength [IS]). Ch 6 -14
SPACE Matrix Depending upon the type of organization, numerous variables could make up each of the dimensions represented on the axes of the SPACE matrix. Variables that were included in the firm’s EFE and IFE matrices should be considered in developing a SPACE matrix. Ch 6 -16
SPACE Matrix Internal dimensions Financial position (FP) Competitive position (CP) External dimensions Environmental position (EP) Industry position (IP) Ch 6 -17
Steps to Developing a SPACE Matrix1. Select a set of variables to define FS, CA, ES, and IS.2. Assign a numerical value: 1. From +1 to +6 to each FS & IS dimension 2. From -1 to -6 to each ES & CA dimension3. Compute an average score for each FS, CA, ES, and IS. Ch 6 -18
Steps to Developing a SPACE Matrix4. Plot the average score on the appropriate axis.5. 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.6. Draw a directional vector from the origin through the new intersection point. This vector reveals the type of strategies recommended for the organization. Ch 6 -19
Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: BCG Matrix The Matching Stage IE Matrix Grand Strategy Matrix Ch 6 -22
BCG Matrix The BCG matrix helps multi-divisional firms formulate strategies. It graphically portrays differences among divisions in terms of relative market share position and industry growth rate. Relative market share position is defined as the ratio of a division’s own market share (or revenues) in a particular industry to the market share (or revenues) held by the largest rival firm in that industry. Ch 6 -23
The BCG Matrix for ITC Ltd.Stars ?•Hotels •FMCG- Others•Paperboards/Packaging.•Agri business.Cows Dogs•FMCG-Cigarettes
Major strategies followed by ITC: Entering into less competitive or unexplored markets (ready to eat, staples, wafers) Distribution network Market differentiation ( Ready to eat, biscuits) Cost control strategy (all products) Extensive advertising (biscuits, confectionary, wafers) Regular introduction of new products (all products)
Boston Consulting Group(BCG) Matrix IT is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. Ch 6 -28
It is a two dimensional analysis on management of SBU’s (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment. According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share. Ch 6 -29
Stars- It represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures. Ch 6 -30
Cash Cows- It represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. key source of cash, and the base of an organization. These businesses usually follow stability strategies. . Ch 6 -31
Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. Ch 6 -32
There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market- share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars. Ch 6 -33
Dogs- It represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitor’s/rival firms. Ch 6 -34
These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization. Ch 6 -35
Limitations of BCG Matrix BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. Market is not clearly defined in this model. High market share does not always leads to high profits. There are high costs also involved with high market share. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. This four-celled approach is considered as to be too simplistic. Ch 6 -36
BCG Matrix An example of a BCG matrix appears in the next Power Point. Each circle represents a separate division. The size of the circle corresponds to the proportion of corporate revenue generated by that business unit, and the pie slice indicates the proportion of corporate profits generated by that division. Divisions located in Quadrant I are called “Question Marks;” Quadrant II, “Stars;” Quadrant III, “Cash Cows;” and Quadrant IV, “Dogs.” Ch 6 -38
BCG Matrix Question Marks – low relative market share in a high-growth industry Stars – high relative market share in a high- growth industry Cash Cows – high relative market share in a low-growth industry Dogs – Low relative market share in a slow or no growth industry Ch 6 -40
The Business Strength-IndustryAttractiveness Matrix To eliminate some of the limitations of the BCG growth/share matrix, a more complete matrix analysis was developed by the General Electric planners and mostly used McKinsey & Co - a management consulting firm. The primary improvement of BS/IA matrix is that it allows for the analysis of multiple variables (rather than only market share and growth) depending on the context. And, rather than focusing on cash flow , it concerns potential future return on investment.
Weight, Rating, Value? In BS/IA matrix, each of the key variables used must be given a weight, rating and value. The weight will be based on its importance to the company, relative to other selected variables. The total point must equal 10. the weights can be determined by management or, when possible, by customer surveys. A rating (or grade) will be given for each business strength variable. E.g. a strength would receive a high score, a weakness would receive a low score.
The rating for each variable is then multiplied by its weight to obtain the variable’s value. The values are individual summed for total value for business strength for that particular business. For industry attractiveness, influencing variables will be given a weight based on their importance to the business, and a rating based on favorable or unfavorable conditions in the environment (opportunity or threat?). The total value for industry attractiveness is calculated in the same manner as for business strength. The two scores for each business unit are then used to position the business on the matrix.
Business Strength Weight Rating Value (importance (performance; (Weight to the firm: 1=poor, 10= × Rating) must add up excellent) to 10)Profit 3 8 24Pro/ser qual. 3 8 24Man. Skills 2 7 14Location 1 6 6Atmosphere 1 5 5 Total value for business strength 73
Industry Weight Rating ValueAttractiveness (present trend; 1=not attractive 10=very attractive)Growth 2,5 5 12,5Profit margins 3,5 7 24,5Comp. intensity 3 5 15Remote env. 1 7 7 Total value for industry attractiveness 59
Industry Attractiveness High Medium Low Premium Selective Protective 100 invest / grow invest / grow High selectivity / earningsBusinessStrength Challenge Prime Restructure 67 invest / grow selectivity / harvest / Medium earnings divest Opportunistic Opportunity Harvest / 33 Low selectivity / harvest / divest earnings divest 100 67 33 0
Strategy Implications The position on the matrix (determined according to the weight, rating and value) will indicate the appropriate strategy (as in the BCG matrix). Green cells define the businesses that will receive the resources to grow; the so called “green light” businesses. The market is high or medium in attractiveness and the organization has high or enough skills and resources to take advantage of the market.
Red cells define the businesses that lack opportunity in terms of market and or company capabilities; the so called “red light” businesses. They are managed to harvest their resources or are just divested. Yellow cells define businesses that are to receive selective investment, and where caution (the yellow light) is the operating style.
Limitations of BS/IA Matrix Although richer and more broadly applicable than the BCG growth-share matrix, it can be more subjective in the selection and weighting of the factors. Different business units may involve different factors which makes the analysis ambiguous. As it is the case with the BCG growth-share matrix, the results are very sensitive to the definition of the product market. E.g. luxury cars, all cars?
Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: BCG Matrix The Matching Stage IE Matrix Grand Strategy Matrix Ch 6 -51
The Internal-External Matrix Positions an organization’s various divisions in a nine-cell display Similar to BCG Matrix except the IE Matrix: Requires more information about the divisions Strategic implications of each matrix are different Ch 6 -52
IE Matrix 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 Ch 6 -54
Strategy-Formulation Framework SWOT Matrix SPACE Matrix Stage 2: BCG Matrix The Matching Stage IE Matrix Grand Strategy Matrix Ch 6 -55
Grand Strategy Matrix Tool for formulating alternative strategies Based on two dimensions Competitive position Market growth Ch 6 -56
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. Related diversification STRONGCOMPETITIVE COMPETITIVE POSITION Quadrant III Quadrant IV POSITION 1. Retrenchment 1. Related diversification 2. Related diversification 2. Unrelated diversification 3. Unrelated diversification 3. Joint ventures 4. Divestiture 5. Liquidation SLOW MARKET GROWTH Ch 6 -57
QSPMQuantitative Strategic Planning MatrixTechnique designed to determinethe relative attractiveness of feasiblealternative actions Ch 6 -59
Quantitative Strategic PlanningMatrix (QSPM) The QSPM is an analytical technique designed to determine the relative attractiveness of feasible alternative strategies. Information from each of the matrices in Stages 1 and 2 is used to construct the QSPM. The left column of a QSPM consists of key external and internal factors (from Stage 1), and the top row consists of feasible alternative strategies (from Stage 2). Specifically, the left column consists of information obtained directly from the EFE matrix and the IFE matrix. In the column to the right of the key factors, the respective weights received by each factor in the EFE matrix and IFE matrix are recorded. Ch 6 -60
Quantitative Strategic Planning Matrix(QSPM) The top row of a QSPM consists of alternative strategies derived from each matrix in Stage 2. These matching techniques usually generate similar feasible alternatives. However, not every strategy suggested by the matching techniques has to be evaluated in a QSPM. Strategists should use good intuitive judgment in selecting strategies to include in a QSPM. The basic format of the QSPM is illustrated in the following Power Point. Ch 6 -61
Steps to Develop a QSPM1. Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column2. Assign weights to each key external and internal factor Ch 6 -63
Steps to Develop a QSPM3. Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing4. Determine the Attractiveness Scores5. Compute the Total Attractiveness Scores6. Compute the Sum Total Attractiveness Score Ch 6 -64