Chapter 6 Strategy Analysis & Choice

1. Chapter 6Strategy Analysis & Choice

2. Strategy Analysis & Choice --Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives Nature of Strategy Analysis & Choice

3. Strategy Analysis & Choice Alternative Strategies Derive From -- • Vision • Mission • Objectives • External audit • Internal audit • Past successful strategies

5. Comprehensive Strategy-Formulation Framework Stage 1:The Input Stage Stage 2:The Matching Stage Stage 3:The Decision Stage

6. Strategy-Formulation Analytical Framework Internal Factor EvaluationMatrix (IFE) Stage 1:The Input Stage Competitive Profile Matrix(CPM) External Factor EvaluationMatrix (EFE) Note: EFE and CPM form external and IFE from internal (assessment)

7. Stage 1: The Input Stage • Basic input information for the matching & decision stage matrices • Requires strategists to quantify subjectivity early in the process • Good intuitive judgment always needed

8. Strategy-Formulation Analytical Framework SWOT Matrix Stage 2:The Matching Stage BCG Matrix Grand Strategy Matrix

9. Stage 2: The Matching Stage • Match between organization’s internal resources & skills and the opportunities & risks created by its external factors • E.g. internal: strong R and D function • External changing demographics (population getting older) • Strategy: Develop new products for older adults (related to long term objectives financial or strategic)

10. Stage 2: The Matching Stage: SWOT Matrix • Four Types of Strategies • Strengths-Opportunities (SO): • Use a firm’s internal strengths to take advantage of external opportunities • Weaknesses-Opportunities (WO): • Improving internal weaknesses by taking advantageof external opportunities • Strengths-Threats (ST): • Use a firm’s strengths to avoid or reduce the impact of external threats. • Weaknesses-Threats (WT): • Defensive tactics aimed at reducing internal weaknesses and avoiding external threats

11. SWOT Matrix

12. Excess working capacity (strength) + 20% annual growth in the cell phone industry (opportunity) = Acquire Cellfone, Inc. Insufficient capacity (weakness) + Exit of two major foreign competitors from the industry (opportunity) = Pursue horizontal integration by buying competitor's facilities Strong R&D (strength) + Decreasing numbers of young adults (threat) = Develop new products for older adults Poor employee morale (weakness) + = Develop a new employee benefits package Strong union activity (threat) Matching Key Factors to Formulate Alternative Strategies Key Internal Factor Key External Factor Resultant Strategy Which types of strategies, e.g. intensive diversification…, are referred to above

14. Key Strategies • Accelerate product launches by strengthening R and D team • Extend links with key technology centres • Raise additional venture capital • Expand senior management team in sales/marketing • Recruit non-executive directors • Strengthen human resources function and introduce share options for staff • Appoint advisers for intellectual property and finance • Seek new market segments/applications for products

15. SWOT Matrix Inset key strategies into correct box element of the Matrix

16. Limitations with SWOT Matrix • Does not show how to achieve a competitive advantage • Provides a static assessment in time • May lead the firm to overemphasize a single internal or external factor in formulating strategies

17. BCG Matrix Boston Consulting Group Matrix • Enhances multi-divisional firm in formulating strategies • Autonomous divisions = business portfolio • Divisions may compete in different industries • Focus on market-share position & industry growth rate

18. BCG Matrix Relative Market Share Position • Ratio of a division’s own market share in an industry to the market share held by the largest rival firm in that industry

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

20. BCG Matrix Question Marks • Low relative market share – compete in high-growth industry • Cash needs are high • Case generation is low • Decision to strengthen (intensive strategies) or divest

21. BCG Matrix Stars • High relative market share and high growth rate • Best long-run opportunities for growth & profitability • Substantial investment to maintain or strengthen dominant position • Integration strategies, intensive strategies, joint ventures

22. BCG Matrix Cash Cows • High relative market share, competes 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 weakens—retrenchment or divestiture

23. BCG Matrix Dogs • Low relative market share & compete in slow or no market growth • Weak internal & external position • Liquidation, divestiture, retrenchment

24. Grand Strategy Matrix • Tool for formulating alternative strategies • Based on two dimensions • Competitive position • Market growth

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

26. Grand Strategy Matrix Quadrant I • Excellent strategic position • Concentration on current markets/products • Take risks aggressively when necessary • Which type of strategy would you suggest?

27. Grand Strategy Matrix Quadrant II • Evaluate present approach • How to improve competitiveness • Rapid market growth requires intensive strategy

28. Grand Strategy Matrix Quadrant III • Compete in slow-growth industries • Weak competitive position • Drastic changes quickly • Cost & asset reduction (retrenchment)

29. Grand Strategy Matrix Quadrant IV • Strong competitive position • Slow-growth industry • Diversification to more promising growth areas

30. Strategy-Formulation Analytical Framework Quantitative StrategicPlanning Matrix(QSPM) Stage 3:The Decision Stage • Technique designed to determine the relative attractiveness of feasible alternative actions

31. Steps to Develop a QSPM • Make a list of the firm’s key external opportunities/threats and internal strengths/weaknesses in the left column • Assign weights to each key external and internal factor • Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing • Determine the Attractiveness Scores (A.S) • Compare the Total Attractiveness Scores • Compute the Sum Total Attractiveness Score

32. Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/Environmental Technological Competitive Weight Strategy 1 Strategy 2 Strategy 3 Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Sum total A.S. Strategic Alternatives QSPM : information from IFE and EFE AS 1 to 4 and blank if factor does not effect strategy: TAS = Weight x AS

33. QSPM Limitations • Requires intuitive judgments & educated assumptions • Only as good as the prerequisite inputs Advantages • Sets of strategies considered simultaneously or sequentially • Integration of pertinent external & internal factors in the decision making process Example of a QSPM for Dell

34. Questions • Discuss 3 techniques that can be used by organisations to choose alternative paths to achieve their long term objectives. • Discuss how to choose the best of a set of alternative strategies. • Discuss, using a simple illustration for a company of your choice, how a company would choose the best of a set of strategies that were obtained from a SWOT matrix.