Chapter 6

Strategy Analysis & Choice

Strategic Management:
Concepts & Cases
12th Edition
Fred David

Ch 6 -1
Chapter Outline

The Nature of Strategy & Choice

A Comprehensive
Strategy-Formulation Framework

The Input Stage

Ch 6 -2
Chapter Outline (cont’d)

The Matching Stage

The Decision Stage

Cultural Aspects of Strategy Choice

Ch 6 -3
Chapter Outline (cont’d)

The Politics of Strategy Choice

Governance Issues

Ch 6 -4
Strategy Analysis & Choice

“Whether it’s broke or not, fix it – make it better.

Not just products, but the whole company if
necessary.”
– Bill Saporito

“Life is full of lousy options.”

– General P.X. Kelley

Ch 6 -5
Strategy Analysis & Choice

Nature of Strategy Analysis & Choice

– Establishing long-term objectives

– Generating alternative strategies
– Selecting strategies to pursue
– Best alternative – achieve mission & objectives

Ch 6 -6
Ch 6 -7
Strategy Analysis & Choice
Alternative Strategies Derive From –

• Vision
• Mission
• Objectives
• External audit
• Internal audit
• Past successful strategies

Ch 6 -8
Natural Environment Perspective
What Is a Sustainability Report?

• Sustainability (corporate social-responsibility) reports

disclose policies to shareholders
• Global Reporting Initiative has issued a set of detailed
reporting guidelines
• Wal-Mart and Kohl’s installing
solar panels
• Home Depot doubled
offerings of environmentally
friendly products

Ch 6 -9
Strategy Analysis & Choice

Generating Alternatives –

Participation in generating alternative

strategies should be as broad as
possible

Ch 6 -10
Ch 6 -11
Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

Stage 2: Stage 3:
The Matching Stage The Decision Stage

Ch 6 -12
Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile Matrix

(CPM)

Ch 6 -13
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 -14
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -15
Stage 2: The Matching Stage

▪Match between organization’s internal

resources & skills and the opportunities & risks
created by its external factors

Ch 6 -16
Stage 2: The Matching Stage

SWOT Matrix

▪Strengths
▪Weaknesses
▪Opportunities
▪Threats

Ch 6 -17
SWOT Matrix

Four Types of Strategies

▪Strengths-Opportunities (SO)
▪Weaknesses-Opportunities (WO)
▪Strengths-Threats (ST)
▪Weaknesses-Threats (WT)

Ch 6 -18
 SO Strategies

Strengths
Weaknesses Use a firm’s
internal strengths
Opportunities
to take advantage
Threats SO of external
Strategies opportunities
SWOT

Ch 6 -19
 WO Strategies

Strengths
Weaknesses Improving internal
weaknesses by
Opportunities
taking advantage
Threats WO of external
Strategies opportunities
SWOT

Ch 6 -20
 ST Strategies

Strengths Use a firm’s

Weaknesses strengths
Opportunities to avoid or
Threats reduce the impact
ST of external
Strategies threats
SWOT

Ch 6 -21
 WT Strategies

Defensive tactics
Strengths aimed at reducing
Weaknesses internal
Opportunities weaknesses &
Threats avoiding
WT environmental
Strategies threats
SWOT

Ch 6 -22
SWOT Matrix

Developing the SWOT

▪List firm’s key internal Strengths

▪List firm’s key internal Weaknesses
▪List firm’s key external Opportunities
▪List firm’s key external Threats

Ch 6 -23
SWOT Matrix
Strengths – S Weaknesses – W

List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Use strengths to take Overcoming weaknesses

List Opportunities advantage of by taking advantage of
opportunities opportunities

Threats – T ST Strategies WT Strategies

Use strengths to avoid Minimize weaknesses and

List Threats threats avoid threats

Ch 6 -24
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 -25
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -26
SPACE Matrix
Strategic Position & Action Evaluation Matrix

▪Aggressive
▪Conservative
▪Defensive
▪Competitive

Ch 6 -27
SPACE Matrix

Two Internal Dimensions

▪Financial Strength (FS)

▪Competitive Advantage (CA)

Ch 6 -28
SPACE Matrix

Two External Dimensions

▪Environmental Stability (ES)

▪Industry Strength (IS)

Ch 6 -29
 SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Return on investment Technological changes

Leverage Rate of inflation
Liquidity Demand variability
Working capital Price range of competing products
Cash flow Barriers to entry
Inventory turnover Competitive pressure
Earnings per share Price elasticity of demand
Price earnings ratio Ease of exit from market
Risk involved in business

Ch 6 -30
 SPACE Factors
Internal Strategic Position External Strategic Position

Competitive Advantage (CA) Industry Strength (IS)

Market share Growth potential

Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Technological know-how
Competition’s capacity utilization Resource utilization
Technological know-how Ease of entry into market
Control over suppliers & distributors Productivity, capacity utilization

Ch 6 -31
Steps to Developing a SPACE Matrix

1. Select a set of variables to define FS, CA, ES, and

IS.
2. Assign a numerical value:
1. From +1 to +6 to each FS & IS dimension
2. From -1 to -6 to each ES & CA dimension
3. Compute an average score for each FS, CA, ES,
and IS.

Ch 6 -32
Steps to Developing a SPACE Matrix

4. Plot the average score on the appropriate axis.

5. 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.
6. Draw a directional vector from the origin through
the new intersection point.

Ch 6 -33
Ch 6 -34
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -35
BCG Matrix

Boston Consulting Group Matrix

▪Enhances multidivisional firm in formulating
strategies
▪Autonomous divisions = business portfolio
▪Divisions may compete in different industries
▪Focus on market-share position & industry
growth rate

Ch 6 -36
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

Ch 6 -37
Ch 6 -38
BCG Matrix

Question Marks
▪Low relative market share, competes in high-
growth industry
▪Cash needs are high
▪Case generation is low

▪Decision to strengthen (intensive strategies) or

divest

Ch 6 -39
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 -40
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

Ch 6 -41
BCG Matrix

Dogs

▪Low relative market share, competes in slow or

no market growth
▪Weak internal & external position

▪Liquidation, divestiture, retrenchment

Ch 6 -42
Strategy-Formulation Analytical
Framework SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -43
The Internal-External Matrix

• Positions an organization’s 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 -44
Ch 6 -45
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 -46
Ch 6 -47
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -48
Grand Strategy Matrix

▪ Tool for formulating alternative strategies

▪ Based on two dimensions
▪ Competitive position
▪ Market growth

Ch 6 -49
 RAPID MARKET GROWTH
Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
WEAK 7. Concentric diversification
STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate
4. Conglomerate diversification
diversification 4. Joint ventures
5. Liquidation
SLOW MARKET GROWTH
Ch 6 -50
Grand Strategy Matrix

Quadrant I

▪Excellent strategic position

▪Concentration on current markets/products
▪Take risks aggressively when necessary

Ch 6 -51
Grand Strategy Matrix

Quadrant II

▪Evaluate present approach

▪How to improve competitiveness
▪Rapid market growth requires intensive
strategy

Ch 6 -52
Grand Strategy Matrix

Quadrant III

▪Compete in slow-growth industries

▪Weak competitive position
▪Drastic changes quickly
▪Cost & asset reduction (retrenchment)

Ch 6 -53
Grand Strategy Matrix

Quadrant IV

▪Strong competitive position

▪Slow-growth industry
▪Diversification to more promising growth areas

Ch 6 -54
Strategy-Formulation Analytical
Framework

Quantitative Strategic
Stage 3:
Planning Matrix
The Decision Stage
(QSPM)

Ch 6 -55
QSPM

Quantitative Strategic Planning Matrix

▪Technique designed to determine the relative

attractiveness of feasible alternative actions

Ch 6 -56
 QSPM Strategic Alternatives
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
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

Ch 6 -57
Steps to Develop a QSPM

1. Make a list of the firm’s key external

opportunities/threats and internal
strengths/weaknesses in the left column.
2. Assign weights to each key external and internal
factor.
3. Examine the Stage 2 (matching) matrices, and
identify alternative strategies that the
organization should consider implementing.

Ch 6 -58
Steps to Develop a QSPM

4. Determine the Attractiveness Scores.

5. Compare the Total Attractiveness Scores.
6. Compute the Sum Total Attractiveness Score.

Ch 6 -59
QSPM

Limitations

▪Requires intuitive judgments & educated

assumptions
▪Only as good as the prerequisite inputs

Ch 6 -60
QSPM

Advantages

▪Sets of strategies considered simultaneously or

sequentially
▪Integration of pertinent external & internal
factors in the decision-making process

Ch 6 -61
Cultural Aspects of Strategy
Choice

Organization Culture

▪Successful strategies depend on the degree of

consistency with the firm’s culture

Ch 6 -62
Politics of Strategy Choice

Politics in Organizations

▪Management hierarchy
▪Career aspirations
▪Allocation of scarce resources

Ch 6 -63
Politics of Strategy Choice

Political Tactics for Strategists

▪Equifinality
▪Satisfying
▪Generalization
▪Higher-order issues
▪Political access on important issues

Ch 6 -64
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 -65
Global Perspective
Corporate Tax Rates Worldwide – Europe is Lowest

• Lowest corporate tax rates reside in Europe and European

countries
• Average tax rate in EU countries is 26%
• Besides tax rates, large markets and affluent markets attract
new businesses
• Taxes can be used to reward
or penalize companies for
locating locally or moving
overseas

Ch 6 -66
 Corporate Governance Issues
BusinessWeek’s “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 least 75% of all meetings

Ch 6 -67
 Corporate Governance Issues
Business Week’s “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 -68
For Review (Chapter 6)

Key Terms & Concepts

Aggressive Quadrant Business Portfolio

Attractiveness Scores
Cash Cows
(AS)

Competitive Advantage
Board of Directors
(CA)

Boston Consulting
Competitive Quadrant
Group (BCG) Matrix

Ch 6 -69
For Review (Chapter 6)

Key Terms & Concepts

Conservative Quadrant Dogs

Environmental Stability
Culture
(ES)

Financial Strength
Defensive Quadrant
(FS)

Directional Vector Governance

Ch 6 -70
For Review (Chapter 6)

Key Terms & Concepts

Internal-External (IE)
Grand Strategy Matrix
Matrix

Halo Error Matching

Industry Strength
Matching Stage
(IS)

Quantitative Strategic
Input Stage
Planning Matrix (QSPM)

Ch 6 -71
For Review (Chapter 6)

Key Terms & Concepts

Question Marks Stars

Relative Market Share Strategic Position & Action

Position Evaluation (SPACE)

Sum Total Attractiveness

SO Strategies
Score (STAS)

ST Strategies Sustainability

Ch 6 -72
For Review (Chapter 6)

Key Terms & Concepts

Strengths, Weaknesses,
WO Strategies
Opportunities, Threats (SWOT)

Total Attractiveness
WT Strategies
Scores (TAS)

Ch 6 -73