Chap 06

Chapter 6
Strategy Analysis & Choice
Strategic Management:
Concepts & Cases
11th Edition
Fred David
Copyright 2007 Prentice Hall
Ch 6 -1
Chapter Outline
The Nature of Strategy & Choice
A Comprehensive
Strategy-Formulation Framework
The Input Stage
Ch 6 -2
Chapter Outline (contd)

The Matching Stage
The Decision Stage
Cultural Aspects of Strategy Choice
Ch 6 -3
Chapter Outline (contd)

The Politics of Strategy Choice
Governance Issues
Ch 6 -4

To acquire or not to acquire, that is the
question
Robert J. Terry
Life is full of lousy options

General P.X. Kelley
Ch 6 -5

Nature of Strategy Analysis & Choice
-- Establishing long-term objectives
-- Generating alternative strategies
-- Selecting strategies to pursue
-- Best alternative - achieve mission & objectives
Ch 6 -6

Alternative Strategies Derive From -
Vision
Mission
Objectives
External audit
Internal audit
Past successful strategies
Ch 6 -7

Generating Alternatives -Participation in generating alternative
strategies should be as broad as
possible
Ch 6 -8
Comprehensive Strategy-Formulation
Framework
Stage 1:
The Input Stage
Stage 2:
The Matching Stage
Stage 3:
The Decision Stage
Ch 6 -9
Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)
Stage 1:
The Input Stage
External Factor Evaluation

Matrix (EFE)
Competitive Profile Matrix

(CPM)
Ch 6 -10
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
Ch 6 -11
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Ch 6 -12
Stage 2: The Matching Stage
Match between organizations internal

resources & skills and the opportunities & risks
created by its external factors
Ch 6 -13
Stage 2: The Matching Stage

SWOT Matrix
Strengths
Weaknesses
Opportunities
Threats
Ch 6 -14
SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
Ch 6 -15
SO Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
SO
Strategies
Use a firms
internal strengths
to take advantage
of external
opportunities
Ch 6 -16
WO Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
WO
Strategies
Improving internal
weaknesses by
taking advantage
of external
opportunities
Ch 6 -17
ST Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
ST
Strategies
Use a firms
strengths
to avoid or
reduce the impact
of external
threats
Ch 6 -18
WT Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
WT
Strategies
Defensive tactics
aimed at reducing
internal
weaknesses &
avoiding
environmental
threats
Ch 6 -19
SWOT Matrix
Developing the SWOT
List firms key internal
Strengths
List firms key internal
Weaknesses
List firms key external
Opportunities
List firms key external
Threats
Ch 6 -20
SWOT Matrix
Strengths S
Weaknesses W
Leave Blank
List Strengths
List Weaknesses
Opportunities O
SO Strategies
WO Strategies
List Opportunities
Use strengths to take

advantage of
opportunities
Overcoming weaknesses
by taking advantage of
opportunities
Threats T
ST Strategies
WT Strategies
List Threats
Use strengths to avoid

threats
Minimize weaknesses and

avoid threats
Ch 6 -21
Matching Key Factors to Formulate Alternative Strategies

Key Internal Factor
Key External Factor
Excess working capacity

(strength)
20% annual growth in

the cell phone industry
(opportunity)
Insufficient capacity
(weakness)
Strong R&D (strength)
Poor employee morale

(weakness)
Resultant Strategy
Acquire Cellfone, Inc.
Exit of two major foreign

Pursue horizontal integration
+ competitors from the
= by buying competitor's
industry (opportunity)
facilities
Decreasing numbers of
young adults (threat)
Strong union
activity (threat)
Develop new products for

older adults
Develop a new
employee benefits
package
Ch 6 -22
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
Ch 6 -23
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Ch 6 -24
SPACE Matrix
Strategic Position & Action Evaluation Matrix
Aggressive
Conservative
Defensive
Competitive
Ch 6 -25
SPACE Matrix
Two Internal Dimensions
Financial Strength (FS)
Competitive Advantage (CA)
Ch 6 -26
SPACE Matrix
Two External Dimensions
Environmental Stability (ES)
Industry Strength (IS)
Ch 6 -27
SPACE Factors
Internal Strategic Position
Financial Strength (FS)

Return on investment
Leverage
Liquidity
Working capital
Cash flow
External Strategic Position
Environmental Stability (ES)

Technological changes
Rate of inflation
Demand variability
Price range of competing products
Barriers to entry
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business
Ch 6 -28
SPACE Factors
Internal Strategic Position
External Strategic Position
Competitive Advantage CA
Industry Strength (IS)
Market share
Product quality
Product life cycle
Customer loyalty
Competitions capacity utilization
Technological know-how
Control over suppliers & distributors
Growth potential
Profit potential
Financial stability
Technological know-how
Resource utilization
Ease of entry into market
Productivity, capacity utilization
Ch 6 -29
Steps to Developing a SPACE Matrix

Select a set of variables to define FS, CA,
ES, & IS
Assign a numerical value:
1.
2.
1.
2.
3.
From +1 to +6 to each FS & IS dimension

From -1 to -6 to each ES & CA dimension
Compute an average score for each FS,

CA, ES, & IS
Ch 6 -30
Steps to Developing a SPACE Matrix

1.
2.
3.
Plot the average score on the appropriate

axis
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
Draw a directional vector from the origin
through the new intersection point.
Ch 6 -31
SPACE Matrix
FS
Conservative
Aggressive
+6
+5
+4
+3
+2
+1
CA
IS
-6
-5
-4
-3
-2
-1
+1
-1
+2 +3
+4
+5
+6
-2
-3
-4
Defensive
-5
-6
Competitive
ES
Ch 6 -32
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Ch 6 -33
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
Ch 6 -34
BCG Matrix
Relative Market Share Position
Ratio of a divisions own market share in an
industry to the market share held by the largest
rival firm in that industry
Ch 6 -35
BCG Matrix
Relative Market Share Position
Industry Sales Growth Rate
High
1.0
High
+20
Medium
.50
Low
0.0
Stars
II
Question Marks
I
Cash Cows
III
Dogs
IV
Medium
Low
-20
Ch 6 -36
BCG Matrix
Question Marks
Low relative market share compete in highgrowth industry
Cash needs are high
Case generation is low
Decision to strengthen (intensive strategies) or

divest
Ch 6 -37
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
Ch 6 -38
BCG Matrix
Cash Cows
High relative market share, competes in lowgrowth industry
Generate cash in excess of their needs
Milked for other purposes
Maintain strong position as long as possible

Product development, concentric diversification
If weakensretrenchment or divestiture
Ch 6 -39
BCG Matrix
Dogs
Low relative market share & compete in slow or
no market growth
Weak internal & external position
Liquidation, divestiture, retrenchment
Ch 6 -40
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Ch 6 -41
The Internal-External Matrix
Positions an organizations 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 -42
Ch 6 -43
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 -44
Ch 6 -45
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Ch 6 -46
Tool for formulating alternative strategies

Based on two dimensions
Competitive position
Market growth
Ch 6 -47
RAPID MARKET GROWTH

1.
2.
3.
4.
5.
6.
WEAK
COMPETITIVE
POSITION
1.
2.
3.
4.
5.
Quadrant II
Market development
Market penetration
Product development
Horizontal integration
Divestiture
Liquidation
1.
2.
3.
4.
5.
6.
7.
Quadrant I
Market development
Market penetration
Product development
Forward integration
Backward integration
Horizontal integration
Concentric diversification
Quadrant III
Quadrant IV
Retrenchment
1.
2.
Horizontal diversification
Horizontal diversification
3.
Conglomerate
diversification
Conglomerate
diversification
4.
Joint ventures
Liquidation
SLOW MARKET GROWTH
STRONG
COMPETITIVE
POSITION
Ch 6 -48

Quadrant I
Excellent strategic position

Concentration on current markets/products
Take risks aggressively when necessary
Ch 6 -49

Quadrant II
Evaluate present approach

How to improve competitiveness
Rapid market growth requires intensive
strategy
Ch 6 -50

Quadrant III
Compete in slow-growth industries

Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)
Ch 6 -51

Quadrant IV
Strong competitive position

Slow-growth industry
Diversification to more promising growth areas
Ch 6 -52
Framework
Stage 3:
The Decision Stage
Quantitative Strategic
Planning Matrix
(QSPM)
Ch 6 -53
QSPM
Quantitative Strategic Planning Matrix
Technique designed to determine the relative

attractiveness of feasible alternative actions
Ch 6 -54
Strategic Alternatives
QSPM
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
Ch 6 -55
Steps to Develop a QSPM

1.
2.
3.
Make a list of the firms 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
Ch 6 -56
Steps to Develop a QSPM

4.
5.
6.
Determine the Attractiveness Scores

Compare the Total Attractiveness Scores
Compute the Sum Total Attractiveness
Score
Ch 6 -57
QSPM
Limitations
Requires intuitive judgments & educated

assumptions
Only as good as the prerequisite inputs
Ch 6 -58
QSPM
Advantages
Sets of strategies considered simultaneously or

sequentially
Integration of pertinent external & internal
factors in the decision making process
Ch 6 -59
Cultural Aspects of Strategy

Choice
Organization Culture
Successful strategies depend on the degree of
consistency with the firms culture
Ch 6 -60
Politics of Strategy Choice

Politics in Organizations
Management hierarchy
Career aspirations
Allocation of scarce resources
Ch 6 -61
Politics of Strategy Choice

Political Tactics for Strategists
Equifinality
Satisfying
Generalization
Higher-order issues
Political access on important issues
Ch 6 -62
Governance Issues
Board of Directors Roles & Responsibilities
Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights
Ch 6 -63
Corporate Governance Issues

Business Weeks Principles of Good Governance
1. No more than 2 directors are current or former company

executives
2. No directors do business with the company
3. Audit, compensation, and nominating committees made up
of outside directors
4. Each director owns a large equity stake in the company
5. At least one outside director with extensive experience
6. Fully employed directors sit on no more than 4 boards
Retirees on no more than 7
7. Each director attends at lest 75% of all meetings
Ch 6 -64
Corporate Governance Issues

Business Weeks principles of good governance
8. Board meets regularly without management present

9. Audit committee meets at least four times a year
10. Board is frugal on executive pay, diligent in CEO succession,
and prompt to act when trouble arises
11. CEO is not also the Chairperson of the Board
12. Shareholders have considerable power and information to
choose & replace directors
13. Stock options are considered a corporate expense
14. No interlocking directorships
Ch 6 -65
For Review (Chapter 6)

Key Terms & Concepts
Aggressive Quadrant
Business Portfolio
Attractiveness Scores
(AS)
Cash Cows
Boards of Directors
Competitive Advantage
(CA)
Boston Consulting
Group (BCG) Matrix
Competitive Quadrant
Ch 6 -66

Conservative Quadrant
Dogs
Culture
Environmental Stability
(ES)
Defensive Quadrant
Financial Strength
(FS)
Directional Vector
Governance
Ch 6 -67

Internal-External (IE)
Matrix
Halo Error
Matching
Industry Strength
(IS)
Matching Stage
Input Stage
Quantitative Strategic
Planning Matrix (QSPM)
Ch 6 -68

Question Marks
Stars
Relative Market Share

Position
Strategic Position & Action

Evaluation (SPACE)
SO Strategies
Sum Total Attractiveness

Score (STAS)
ST Strategies
Sustainability
Ch 6 -69

Strengths, Weaknesses
Opportunities, Threats SWOT
WO Strategies
Total Attractiveness
Scores (TAS)
WT Strategies
Ch 6 -70

Chap 06

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Chap 06

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Chapter 6

Strategy Analysis & Choice

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Chapter Outline (contd)

The Decision Stage

Cultural Aspects of Strategy Choice

Copyright 2007 Prentice Hall

Chapter Outline (contd)

Copyright 2007 Prentice Hall

Strategy Analysis & Choice

Life is full of lousy options

Copyright 2007 Prentice Hall

Strategy Analysis & Choice

Copyright 2007 Prentice Hall

Strategy Analysis & Choice

Copyright 2007 Prentice Hall

Strategy Analysis & Choice

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

External Factor Evaluation

Competitive Profile Matrix

Copyright 2007 Prentice Hall

Stage 1: The Input Stage

Basic input information for the matching &

Copyright 2007 Prentice Hall

Grand Strategy Matrix

Copyright 2007 Prentice Hall

Stage 2: The Matching Stage

Match between organizations internal

Copyright 2007 Prentice Hall

Stage 2: The Matching Stage

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

List firms key internal

List firms key external

List firms key external

Copyright 2007 Prentice Hall

Use strengths to take

Use strengths to avoid

Minimize weaknesses and

Copyright 2007 Prentice Hall

Matching Key Factors to Formulate Alternative Strategies

Key External Factor

Excess working capacity

20% annual growth in

Strong R&D (strength)

Poor employee morale

Acquire Cellfone, Inc.

Exit of two major foreign

Copyright 2007 Prentice Hall

Develop new products for

Limitations with SWOT Matrix

Does not show how to achieve a competitive

Copyright 2007 Prentice Hall

Grand Strategy Matrix

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall

Copyright 2007 Prentice Hall