Chapter 6 Strategy Analysis & Choice: So What? What Next?

Adapted from PowerPoint Slides by Anthony F. Chelte Western New England College

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

Ch 6 -2

Strategy Analysis & Choice

Alternative Strategies Derive From -

Vision Mission Objectives External audit Internal audit Past successful strategies

Successful strategies depend on the fit with the firms culture

Strategy Analysis & Choice Generating Alternatives -Participation in generating alternative strategies should be as broad as possible Politics (vested interests) can help or hinder

Comprehensive Strategy-Formulation Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Strategy-Formulation Analytical Framework

Internal Factor Evaluation Matrix (IFE)

Stage 1: The Input Stage

External Factor Evaluation Matrix (EFE)

Competitive Profile Matrix (CPM)

PLUS PORTERS 5 FORCES

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

Strategy-Formulation Analytical Framework

MORE TOOLS! Internal/External Matrix Stage 2: The Matching Stage BCG Matrix GE/McKinsey Industry Attractiveness Matrix Grand Strategy Matrix SPACE Matrix SWOT Matrix

Stage 2: The Matching Stage

Match between organizations internal resources & skills and the opportunities & risks created by its external factors Matrices used for portfolio management

INTERNAL/EXTERNAL (IE) MATRIX

IFE SCORES
Strong 3/0-4.0 High 3-4 Avg. 2.0-2.9 Weak 1.0-1.9

GROW & BUILD GROW & BUILD HOLD & MAINTAIN

GROW & BUILD HOLD & MAINTAIN

HOLD & MAINTAIN HARVEST OR DIVEST

EFE SCORES

Avg 2-2.9

Low 1-1.9

HARVEST OR HARVEST OR DIVEST DIVEST

GROW & BUILD = INTENSIVE AND/OR INTEGRATIVE STRATEGIES HOLD & MAINTAIN = MKT PENETRATION, PRODUCT DEVELOPMENT

INTERNAL/EXTERNAL (IE) MATRIX HARRAHS

IFE SCORES
Strong 3.0-4.0 High 3-4 Avg. 2.0-2.9 Weak 1.0-1.9

FOOD & BEV. (3/3)

EFE SCORES

Avg 2-2.9

CASINOS (2.5/3)

PROP (2.5/2.5) ROOMS (2/2)

Low 1-1.9

BCG Matrix
Relative Market Share Position
High 1.0 High +20 Medium .50 Low 0.0

Stars
High relative market share and high growth rate; best long-run opportunities for growth & profitability Substantial investment required to maintain or strengthen dominant position Integration strategies, intensive strategies, joint ventures

Question Marks
Low relative market share compete in high-growth industry

Cash needs are high Cash generation is low Decision to strengthen (intensive strategies) or divest

Medium

Cash Cows
High relative market share, competes in low-growth industry Generates cash in excess of their needs; milked for other purposes

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

a S yrt s udn I

Low -20

Maintain strong position as long as possible; product development, diversification; If weakens, retrenchment or divestiture

GE-McKinsey Industry Attractiveness Matrix (Shell Directional Policy Matrix)

Competitive Strength High Low

Leader!
High

Try Harder

Double efforts or quit Phased withdrawal Divest

Growth
Market Attractiveness

Proceed with care

Low

Cash generator Phased withdrawal

GE MATRIX VARIABLES
INDUSTRY ATTRACTIVENESS (vertical axis) Market growth rate Market size Demand variability Industry profitability Industry rivalry Global opportunities Macroenvironmental factors (PEST)

COMPETITIVE STRENGTH (horizontal axis) Market share Growth in market share Brand equity Distribution channel access Production capacity Profit margins relative to competitors

Grand Strategy Matrix

Tool for formulating alternative strategies Based on two dimensions Competitive position Market growth Similar to GE Matrix (just flip the horizontal axis)

GRAND STRATEGY MATRIX COMPETITIVE POSITION

WEAK RAPID

STRONG

MARKET GROWTH

QUAD II - REEVALUATE, TAKE ACTION! 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation QUAD III - CHANGE NEEDED
1. 2.

QUAD. I - GREAT POSITION! 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Diversification QUAD IV - EXPLOIT CASH
1. 2. 3.

SLOW

3. 4.

Diversification Retrenchment Divestiture Liquidation

Diversification Joint ventures Acquisitions

SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive Conservative Defensive Competitive

SPACE Matrix Two Internal Dimensions

Financial Strength (FS) Competitive Advantage (CA)

Two External Dimensions

Environmental Stability (ES) Industry Strength (IS)

FS

C A

IS

ES

SPACE Factors
Internal Strategic Position
Financial Strength (FS) Values: +1 (worst) to Return on investment +6 (best) Leverage Liquidity Working capital Cash flow

External Strategic Position

Industry Strength (IS) Values: +1 (worst) to Growth potential +6 (best) Profit potential Financial stability Technological know-how Resource utilization Ease of entry into market Productivity, capacity utilization Environmental Stability (ES) Values: -1 (best) Technological changes -6 (worst) Risk involved in business Price elasticity of demand--demand variability Rate of inflation Price range of competing products Barriers to entry Ease of exit from market

Competitive Advantage CA Values: -1 (best) Market share Product quality Product life cycle Customer loyalty Competitions capacity utilization Technological know-how Control over suppliers & distributors to - 6

SWOT Matrix
Strengths S
List Strengths

Weaknesses W
List Weaknesses

Opportunities O
List Opportunities

SO Strategies
Use strengths to take advantage of opportunities

WO Strategies
Overcoming weaknesses by taking advantage of opportunities

Threats T
List Threats

ST Strategies
Use strengths to avoid threats

WT Strategies
Minimize weaknesses and avoid threats

Matching Key Factors to Formulate Alternative Strategies: Examples

Key Internal Factor Key External Factor Resultant Strategy

Excess working capital (strength)

20% annual growth in + the cell phone industry = (opportunity) Exit of two major foreign competitors form the industry (opportunity) Decreasing numbers of young adults (threat) Strong union activity (threat)

Acquire Cellfone, Inc.

Insufficient capacity (weakness)

Pursue horizontal integration by buying competitor's facilities Develop new products for older adults

Strong R&D (strength)

Poor employee morale (weakness)

Develop a new employee benefits package

Strategy-Formulation Analytical Framework

Stage 3: The Decision Stage

Quantitative Strategic Planning Matrix (QSPM)

QSPM
Quantitative Strategic Planning Matrix
Technique designed to determine the relative attractiveness of feasible alternative actions Uses SWOT factors, IFE and EFE weights. Choose explicit strategies suggested by SWOT, SPACE, GE, Grand Strategy, etc. and evaluate them against weighted SWOT factors

QSPM
Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Weight

Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3

QSPM
Limitations

Requires intuitive judgments & educated assumptions Only as good as the prerequisite inputs GIGO

QSPM
Advantages

Sets of strategies considered simultaneously or sequentially Integration of pertinent external & internal factors in the decision making process Still, as in all things, remember GIGO

Testing Your Strategy Test 1: Will your strategy beat the market? Test 2: Does your strategy tap a true source of advantage? Test 3: Is your strategy granular about where to compete? Test 4: Does your strategy put you ahead of trends? Test 5: Does your strategy rest on privileged insights? Test 6: Does your strategy embrace uncertainty? Test 7: Does your strategy balance commitment and flexibility? Test 8: Is your strategy contaminated by bias? Test 9: Is there conviction to act on your strategy? Test 10: Have you translated your strategy into an action plan?