1 / 49

Chapter 7 Generating Alternative Strategies through Use of Strategic management Models

Chapter 7 Generating Alternative Strategies through Use of Strategic management Models. LEARNING OBJECTIVES. After reading this whole chapter, the student is expected to able to: Use some common models in order to generate strategies rationally

cato
Download Presentation

Chapter 7 Generating Alternative Strategies through Use of Strategic management Models

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 7Generating Alternative Strategies through Use of Strategic management Models

  2. LEARNING OBJECTIVES After reading this whole chapter, the student is expected to able to: • Use some common models in order to generate strategies rationally • Explain how different models perform well under different settings and how different strategies are generated • Apply SWOT model and generate about five strategies from each quadrant

  3. LEARNING OBJECTIVES (cont.) • Apply SPACE model to generate from the determined quadrant • Know when to use other models and to generate the appropriate strategies • Use subjective judgements systematically

  4. INTRODUCTION • Strategies to be generated through a rational method • No more “gut feeling”, “hunch” or even “from my past experience” methodologies • For today’s management staffs are: • Educated • Well exposed • Knowledgeable • Require much more rationality • Would like to participate • Contribute towards any strategic decisions

  5. INTRODUCTION (cont.) • Its derivation had better be: • Clear and systematic • Rationally derived • Acceptable by the majority if it is to be implemented successfully

  6. VARIOUS STRATEGY MODELS 8. Big Think Strategy a. Portfolio Models (discussed in Chapter 8) b. BCG c. General Electric d. SHELL e. IE Matrix f. Grand Strategy Matrix 1. SWOT 2. SPACE 3. Experience curve 4. Break-even point 5. Product life cycle 6. Porter’s Five factor 7. Blue Ocean Strategy

  7. 1. SWOT MODEL • Basic model incorporating about 10 external and internal factors • External factors made up of about 5 opportunities and 5 threats • Internal factors made up of 5 strengths and 5 weaknesses • The factors are drawn into a matrix as shown in next slide

  8. TABLE 7.1 SWOT MATRIX

  9. CONSOLIDATING THE STRATEGIES From 20 strategies generated, They can be further reduced through a condensation or consolidation process Where similar, complementary, sysnergistic or compatible strategies could be merged and reword to encompass the important components

  10. CONDENSATION OF THE STRATEGIES

  11. 2. SPACE MODEL • Strategic Positioning ACtion Evaluation Model • Looks at the external and internal environmental factors and bring them together in a 4-dimension chart • SPACE allocates two dimensions each for the external and internal group of factors: • 1. For external factors, SPACE grouped them to Industrial Attractiveness (IA) and Environmental Stability (ES) dimensions • 2. For internal factors were classified into Financial Strengths (FS) and Competitive Advantages (CA) dimensions • SPACE proposed a full extension of the X and Y axis together with the positive and negative scale range

  12. THE SPACE CHART

  13. DERIVATION OF SPACE FACTORS For each dimension there should be at least 6 to 7 factors: With a 1– 6 score for each where 1 denotes weak or worst and 6 denotes strong or best Finally for each dimension, the average score will be calculated and demarcated at the corresponding axis To illustrate, if the average of the 7 scores of the FS dimension is 4.2, then it is marked at the y axis

  14. THE SPACE MODEL At the end of the analysis all the four dimensions will have their own respective average scores By joining the respective average score of each axis, a space will be created and the quadrant with the largest space will be the dominant strategy

  15. THE SPACE MODEL (cont.) • Labelled the four quadrants as: • Aggressive • Defensive • Competitive • Conservative

  16. THE SPACE QUADRANT

  17. THE AGGRESSIVE QUADRANT • Lies between the financial strength and Industrial Attractiveness dimensions • All the four dimensions show high scores • High scores of both CA and IA will push the average towards the top of the x-axis • While high scores in both FS and ES will push the average of the y- axis towards the right • The company is in a comfortable position • Strategic Choice: • An aggressive strategy is appropriate • It covers growth and expansion as of high priority • Requires the drive to get more market share and new markets

  18. THE COMPETITIVE QUADRANT • Is at the south east quadrant • FS and ES are weak: average scores pulled down • But CA and IA are strong: average score pushed to right • Strategic Choice: Competitive • Strong IA and CA • Rational choice: further development in the same industry • Product development strategy (high CA) • Consolidation of the resources (weak FS) • Concentric diversification will also be wise • But because of the weak FS, a search for a partner (strong financially) will also be wise

  19. THE CONSERVATIVE QUADRANT • Is at the north west quadrant • CA is weak but not its FS • ES is healthy but IA is also not that stable • Strategic Choice: Conservative • Exit the industry as IA is weak • Adopt a conglomerate diversification strategy as CA and IA is weak • Continue business as ES is supportive • New product development in a different industry • Since FS is strong, a joint venture or an acquisition of a company outside the present industry would be highly rationale

  20. THE DEFENSIVE QUADRANT • requires a drastic and bold decision • Hopefully there are some parts of the operations that can be dependent upon to continue the business (divestiture) • Thus defensive strategy quadrant portrays a company that is generally weak in all the four dimensions

  21. THE DEFENSIVE QUADRANT (cont.) Strategic Choice: Defensive • Retrenchment or cost cutting actions • Divestiture if there are potential sections • Do a turnaround if it has the potential to do so • Doing it organically might be difficult, • But looking for a compatible partner would be a survival gesture Liquidation strategy where realization of assets can be done and a new business is planned

  22. SUGGESTED STRATEGIES FOR VARIOUS QUADRANT

  23. NON PROFIT MAKING SITUATION • Principles to be maintained: • Two internal and two external dimensions: • 1. Dimensions’ scores must be the average of more than six factors • 2. Scores be calibrated on a preferred common scale (6 or 10 or of one’s choice) • A university for example • Need not use FS and CA as its internal dimensions These could be academic programme strength (for FS) and its CA measures could focus on its available facilities • The IA and ES could still be relevant

  24. SWOT AND SPACE COMPATIBILITY • The 5 opportunities and threats are derived from EFE whilst the 5 strengths and weaknesses from IFE tables • SPACE considers FS and CA as its two internal dimensions which should come from IFE (finance and non finance) • Whilst ES and IA are similar to STEEP and CCSS as in IFE

  25. SWOT AND SPACE COMPATIBILITY (cont.) • Refer to attachments (7.1–7.3) to illustrate how the same data from EFE and IFE of SWOT are used in SPACE • The same capability column score would be averaged and the same scale of 1–10 is used (instead of the 1–6 range as originally recommended). As for the negative scores for CA and ES, the average scores will then be added with –10 to align it to the negative value of the axes respectively

  26. THE EXPERIENCE CURVE CHART

  27. THE EXPERIENCE CURVE • Also referred to as the learning curveCharacteristics • Company will gain experience and learn from the process as it continues in its production operations • As a company increases its production outputs, the costs per unit are going to be decreased • It was commonly thought that the cost per unit reduction dropped by 1/7 every time the volume is doubled • But this ratio was found to be not consistent as the drop in costs would depend a lot on other factors as well such as the industry itself

  28. THE BREAK-EVEN POINT (BEP) MODEL

  29. CHARACTERISTICS OF THE BEP MODEL • A basic economic model used widely in several instances and not only in economics but also in finance, marketing and management • For strategic decision purposes, the variable cost line is drawn first and followed by the fixed costs. The dotted line is the revenue line • The break-even point is that intersection where the lines of total revenue meet that of total cost

  30. THE BEP FORMULAE • A general formula used is • BE Point Volume = Fixed Cost • Contribution Margin/Unit • Or FC • (Unit Price–VC/ Unit) • BE Point Sales = Fixed Costs • Gross Profit/ Dollar Sales • Or FC • (1 – VC/ Dollar Sales)

  31. THE BEP SCENARIOS • A company when in a stable position should be operating beyond the break-even point • A new company is not expected to reach its BEP production and sales immediately. Thus applying an BEP model to generate strategic alternatives for such companies might not be appropriate • Situation: A company is experiencing sales below its BEP. Then the following scenarios can be assumed

  32. THE BEP SOLUTION NO 1 • 1. An SME company with a large stock of finished goods as its inventories • The high inventory suggests that it is not saleable at the current price • Price is too high for the quality of the product available • Costing could be the main issue

  33. THE BEP SOLUTION NO 1 (cont.) Action • Clear the stock quickly, to convert them into cash • Reduce the price to a saleable value. • Pricing to be reviewed • If all the direct costs of the product are already at its optimum (best available price from the suppliers) then the only option left is the reduction of the fixed costs • Variable costs reduction is not an option as it is assumed to be at its optimum state and needed to continue production • A, B, and C are fixed costs that are arranged in order of priority to be removed if need be

  34. THE BEP SOLUTION NO 2 • 2. An SME with almost no stock in the inventory • This scenario indicates that the price is acceptable by the customers • Is the price too low or are there some hidden costs not included? • Ensure all costs brought into the costing of the product sold • SMEs commonly do not allocate family labour as part of the costs including the salary of the entrepreneur himself • Determine new price

  35. THE BEP SOLUTION NO 3 • An SME positioned to the left of the critical point • Below the critical point, the variable cost is higher than the price • If the price cannot be increased further (market leader’s price) and the variable costs cannot be reduced too, then it is high time that the operation be closed or sold off to an interested buyer • No amount of sales will contribute to the fixed costs

  36. PRODUCT LIFE CYCLE MODEL • Some products go through a life cycle • Made up of 4 phases as depicted in Figure 7.5

  37. PRODUCT LIFE CYCLE MODEL (cont.) Four Phases Phase 1: Introductory phase Phase 2: Development phase Phase 3: Maturity phase Phase 4: Decline phase

  38. PRODUCT LIFE CYCLE MODEL (cont.) • Phase 1: Introductory Phase • Newly introduced in the market • Growth is slow • Takes time for product to be accepted by the consumers • Rate of sales is lower than rate of production • Marginal growth rate is less than 1 • The phase ends when the growth rate reaches 1

  39. PRODUCT LIFE CYCLE MODEL (cont.) • Phase 2: Development Phase • The value of the ratio begins with 1 • Sales pick up after an effective marketing and promotion effort • The rate increases until it comes down back to 1 • Rate of sales is higher than the rate or production

  40. PRODUCT LIFE CYCLE MODEL (cont.) • Phase 3: Maturity Phase • The ratio starts at 1 again and goes below 1 • The reason is the majority of the customers that needs the product have already bought them • From this point the rate of sales declines relative to the rate of production • Sales are probably more for replacement. • This decline will continue until the value becomes zero

  41. PRODUCT LIFE CYCLE MODEL (cont.) • Phase 4: Decline Phase • The product is experiencing a negative marginal rate • The net volume of sales is actually negative because there are very little new sales relative to the number of returns and repairs and disposal • Rarely a product can achieve positive growth rate again unless the product is transformed and be considered new and thus starts a new product life cycle • Example: Transistor radio to a walkman, diskette to thumb drive, hand phones from 1G to 2G to 3G and then to 4G

  42. PRODUCT LIFE CYCLE MODEL (cont.) • Strategic Decisions • The appropriate strategic decisions will depend on the phase that the product is in and they are: • Phase 1: Expansion with aggressive promotion • Phase 2: Still expansion with increasing promotion and after sales activities. At the later half, product development can slowly be done • Phase 3: Product development and vertical integration. The latter to cut costs. Concentric diversification to be done to prepare for the decline phase • Phase 4: Here conglomerate diversification is suggested to begin a new life cycle and then to divest and later to liquidate the original activities

  43. PORTER’S FIVE FACTOR MODEL

  44. PORTER’S FIVE FACTOR MODEL (cont.) • The terms ‘competitive advantage’ and ‘industrial attractiveness’ have been used in other models (SWOT, SPACE, GE and BCG) too • How they are analysed and used differ in methodology and intensity but in the end they help managers come out with a better strategic decision • Relatively, Porter’s five main competitive forces are analysed quite in detail • But the strategic decision is limited to only four alternatives as depicted in Figure 7.8

  45. PORTER’S FIVE FACTOR MODEL (cont.)

  46. PORTER’S FIVE FACTOR MODEL (cont.) • Three Resulting Generic Strategies are: • Cost leadership: A firm survives based on its cost advantage obtained from various possibilities such as economies of scale, preferential supplies, low overheads and many others. Other players are not able to enjoy this uniqueness • Differentiation: A firm is able to determine a uniqueness that it has and is of value to the customers. Competitors in the same industry could show different differentiation attributes as long as they are of value to the customers

  47. PORTER’S FIVE FACTOR MODEL (cont.) • h • h • Focus: a firm would narrow its concentration on a smaller market niche and decide on whether to go for a cost or differentiation focus. The latter is easier as a firm would target a smaller market segment and serve the clients need fully.

  48. APPENDICES 1 & 2 For Project Manager: 2 Appendices in IM file but that Missing in PDF files, do check & clear their Status

More Related