Strategy Analysis and Choice

© 2001 Prentice Hall
Ch. 6-1
Strategic Management
Concepts & Cases
8th edition
Fred R. David
Chapter 6:
Strategy Analysis &
Choice
PowerPoint Slides By:
Anthony F. Chelte
Western New England College

Ch. 6-2
Comprehensive Strategic Management Model
Vision
&
Mission
Statements
Chapter 2
External
Audit
Chapter 3
Strategies
In
Action
Chapter 5
Internal
Audit
Chapter 4
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

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.”
Ch. 6-3
—Peter Drucker—

Ch. 6-4
“Whether it’s broke or not, fix it—make it
better. Not just products, but the whole
company if necessary.”
—Bill Saporito—

“Planning is often doomed before it ever
starts, either because too much is
expected of it or because not enough is
put into it.”
Ch. 6-5
—T. J. Cartwright—

Ch. 6-6
Strategic Analysis and Choice:
Making subjective decisions based on
objective information

Ch. 6-7
Strategic Analysis and Choice:
• Generate feasible alternatives
• Evaluate alternatives
• Select specific course of action

Ch. 6-8
Generating & Selecting Strategies
 Develop set of most attractive alternative
strategies
 Determine for the set
• Advantages
• Disadvantages
• Trade-offs
• Costs
• Benefits

Ch. 6-9
 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

Ch. 6-10
 Evaluate each alternative
• Internal and external audit information
• Firm’s mission statement
• Listed in writing
• Ranked in order of attractiveness

Ch. 6-11
Strategy-Formulation Analytical Framework
Stage 1: The Input Stage
Stage 2: The Matching Stage
Stage 3: The Decision Stage

Ch. 6-12
External
Factor
Evaluation
Matrix (EFE)
Competitive
Profile
Matrix
Internal
Factor
Evaluation
Matrix (IFE)

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

Ch. 6-14
Stage 3: The Decision Stage
Quantitative Strategic
Planning Matrix
(QSPM)

Ch. 6-15
 Provides Basic Input for Stages 2 and 3
• External Factor Evaluation Matrix (EFE)
• Internal Factor Evaluation Matrix (IFE)
• Competitive Profile Matrix

Ch. 6-16
 Strategy is characterized by the
organizational match between
• Internal resources and skills
• Opportunities & risks created by external
factors

Ch. 6-17
Matching Key Factors
Key Internal Factor Key External Factor Resultant Strategy
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)

Ch. 6-18
Four Types of Strategies
WT
Strategies
ST
Strategies
WO
Strategies
SO
Strategies
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

Ch. 6-19
SO Strategies
SO
Strategies
Use a firm’s
internal
strengths to
take advantage
of external
opportunities
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

Ch. 6-20
WO Strategies
WO
Strategies
Improving
internal
weaknesses by
taking
advantage of
external
opportunities
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

Ch. 6-21
ST Strategies
ST
Strategies
Using firm’s
strengths to
avoid or reduce
the impact of
external threats.
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

Ch. 6-22
WT Strategies
WT
Strategies
Defensive tactics
aimed at
reducing
internal
weaknesses and
avoiding
environmental
threats.
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

Ch. 6-23
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

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

Ch. 6-25
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

Strategic Position & Action Evaluation
Ch. 6-26
Matrix (SPACE)
• Four quadrant framework
• Determines appropriate strategies
 Aggressive
 Conservative
 Defensive
 Competitive

Ch. 6-27
Matrix (SPACE)
• Two Internal Dimensions
 Financial Strength [FS]
 Competitive Advantage [CA]
• Two External Dimensions
 Environmental Stability [ES]
 Industry Strength [IS]

Ch. 6-28
Matrix (SPACE)
Overall Strategic position determined by:
• Financial Strength [FS]
• Competitive Advantage [CA]
• Environmental Stability [ES]
• Industry Strength [IS]

Ch. 6-29
Matrix (SPACE)
Developing the SPACE Matrix:
• EFE Matrix
• IFE Matrix
• Financial Strength
• Competitive Advantage
• Environmental Stability
• Industry Strength

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

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 new xy
point.
• Draw a directional vector from origin through
the new intersection point.

Internal Strategic Position External Strategic Position
Ch. 6-32
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

Internal Strategic Position External Strategic Position
Ch. 6-33
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

Conservative Aggressive
+5
+4
+3
+2
CA IS
-6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6
-2
-3
-4
-5
Defensive Competitive
Ch. 6-34
SPACE Matrix
FS
+6
+1
-6
ES

Ch. 6-35
Boston Consulting Group Matrix
(BCG)
• Enhances multidivisional firms’ efforts to
formulate strategies
• Autonomous divisions (or profit centers)
constitute the business portfolio
• Firm’s divisions may compete in different
industries requiring separate strategy

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

Ch. 6-37
(BCG)
• Relative market share position defined:
 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.

Relative Market Share Position
Ch. 6-38
BCG Matrix
Dogs
IV
Cash Cows
III
Question Marks
I
Stars
II
High
1.0
Medium
.50
Low
0.0
Industry Sales Growth Rate
High
+20
Medium
0
Low
-20

Ch. 6-39
BCG Matrix
• Question Marks
• Stars
• Cash Cows
• Dogs

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

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

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 weak—retrenchment or divestiture

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

Ch. 6-44
Grand Strategy Matrix
• Popular tool for formulating alternative
strategies
• Based on two evaluative dimensions
 Competitive position
 Market growth

RAPID MARKET GROWTH
Ch. 6-45
Quadrant IV
• Concentric diversification
• Horizontal diversification
• Conglomerate
diversification
• Joint ventures
Quadrant III
• Retrenchment
• Horizontal diversification
• Conglomerate
diversification
• Liquidation
Quadrant I
• Market development
• Market penetration
• Product development
• Forward integration
• Backward integration
• Horizontal integration
Quadrant II
• Market development
• Market penetration
• Product development
• Horizontal integration
• Divestiture
• Liquidation
SLOW MARKET GROWTH
WEAK
COMPETITIVE
POSITION
STRONG
COMPETITIVE
POSITION

Ch. 6-46
• Quadrant I
 Excellent strategic position
 Concentration on current markets and products
 Take risks aggressively when necessary

Ch. 6-47
• Quadrant II
 Evaluate present approach seriously
 How to change to improve competitiveness
 Rapid market growth requires intensive strategy

Ch. 6-48
• Quadrant III
 Compete in slow-growth industries
 Weak competitive position
 Drastic changes quickly
 Cost and asset reduction indicated (retrenchment)

Ch. 6-49
• Quadrant IV
 Strong competitive position
 Slow-growth industry
 Diversification indicated to more promising growth
areas

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

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

Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Ch. 6-52
QSPM
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems
Strategic Alternatives

Ch. 6-53
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

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)

Ch. 6-55
QSPM
• Compute the total Attractiveness Scores
• Compute the Sum Total Attractiveness
Score

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

Ch. 6-57
QSPM
Limitations:
• Requires intuitive judgments and
educated assumptions
• Only as good as the prerequisite
inputs

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)

Ch. 6-59
• Grand Strategy Matrix
• 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

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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