Chapter 6

Strategy Analysis & Choice

Strategic Management:
Concepts & Cases
11th Edition
Fred David

Ch 6 -1
Copyright 2007 Prentice Hall
 Chapter Outline

The Nature of Strategy & Choice

A Comprehensive
Strategy-Formulation Framework

The Input Stage

Ch 6 -2
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 Chapter Outline (contd)

The Matching Stage

The Decision Stage

Cultural Aspects of Strategy Choice

Ch 6 -3
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 Chapter Outline (contd)

The Politics of Strategy Choice

Governance Issues

Ch 6 -4
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 Strategy Analysis & Choice

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
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 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
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 Strategy Analysis & Choice
Alternative Strategies Derive From --

Vision
Mission
Objectives
External audit
Internal audit
Past successful strategies

Ch 6 -7
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 Strategy Analysis & Choice

Generating Alternatives --

Participation in generating alternative

strategies should be as broad as
possible

Ch 6 -8
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 Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

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

Ch 6 -9
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 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 -10
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 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
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 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -12
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 Stage 2: The Matching Stage

Match between organizations internal

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

Ch 6 -13
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 Stage 2: The Matching Stage

SWOT Matrix

Strengths
Weaknesses
Opportunities
Threats

Ch 6 -14
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 SWOT Matrix

Four Types of Strategies

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

Ch 6 -15
Copyright 2007 Prentice Hall
SO Strategies

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

Ch 6 -16
Copyright 2007 Prentice Hall
WO Strategies

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

Ch 6 -17
Copyright 2007 Prentice Hall
ST Strategies

Strengths Use a firms

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

Ch 6 -18
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WT Strategies

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

Ch 6 -19
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 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
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SWOT Matrix
Strengths S Weaknesses W
Leave Blank
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 -21
Copyright 2007 Prentice Hall
 Matching Key Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in

Excess working capacity
+ the cell phone industry = Acquire Cellfone, Inc.
(strength)
(opportunity)

Exit of two major foreign Pursue horizontal integration

Insufficient capacity
+ competitors from the = by buying competitor's
(weakness)
industry (opportunity) facilities

Decreasing numbers of Develop new products for

Strong R&D (strength) + =
young adults (threat) older adults

Develop a new
Poor employee morale Strong union
+ = employee benefits
(weakness) activity (threat) package

Ch 6 -22
Copyright 2007 Prentice Hall
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
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 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -24
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 SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive
Conservative
Defensive
Competitive

Ch 6 -25
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 SPACE Matrix

Two Internal Dimensions

Financial Strength (FS)

Competitive Advantage (CA)

Ch 6 -26
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 SPACE Matrix

Two External Dimensions

Environmental Stability (ES)

Industry Strength (IS)

Ch 6 -27
Copyright 2007 Prentice Hall
 SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Technological changes
Return on investment
Rate of inflation
Leverage
Demand variability
Liquidity
Price range of competing products
Working capital
Barriers to entry
Cash flow
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business

Ch 6 -28
Copyright 2007 Prentice Hall
 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
Competitions capacity utilization Resource utilization
Technological know-how Ease of entry into market
Control over suppliers & distributors Productivity, capacity utilization

Ch 6 -29
Copyright 2007 Prentice Hall
Steps to Developing a SPACE Matrix

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

ES, & 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, & IS

Ch 6 -30
Copyright 2007 Prentice Hall
Steps to Developing a SPACE Matrix

1. Plot the average score on the appropriate

axis
2. 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
3. Draw a directional vector from the origin
through the new intersection point.

Ch 6 -31
Copyright 2007 Prentice Hall
 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
-5
Defensive Competitive
-6
Copyright 2007 Prentice Hall
ES Ch 6 -32
 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -33
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 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
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 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
Copyright 2007 Prentice Hall
 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0

High
+20
Industry Sales Growth Rate

Stars Question Marks

II I
Medium
0

Cash Cows Dogs

III IV
Low
-20
Ch 6 -36
Copyright 2007 Prentice Hall
 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

Ch 6 -37
Copyright 2007 Prentice Hall
 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
Copyright 2007 Prentice Hall
 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 weakensretrenchment or divestiture

Ch 6 -39
Copyright 2007 Prentice Hall
 BCG Matrix

Dogs

Low relative market share & compete in slow or

no market growth
Weak internal & external position

Liquidation, divestiture, retrenchment

Ch 6 -40
Copyright 2007 Prentice Hall
 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -41
Copyright 2007 Prentice Hall
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
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 Ch 6 -43
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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
Copyright 2007 Prentice Hall
 Ch 6 -45
Copyright 2007 Prentice Hall
 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -46
Copyright 2007 Prentice Hall
 Grand Strategy Matrix

Tool for formulating alternative strategies

Based on two dimensions
Competitive position
Market growth

Ch 6 -47
Copyright 2007 Prentice Hall
 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 -48
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 Grand Strategy Matrix

Quadrant I

Excellent strategic position

Concentration on current markets/products
Take risks aggressively when necessary

Ch 6 -49
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 Grand Strategy Matrix

Quadrant II

Evaluate present approach

How to improve competitiveness
Rapid market growth requires intensive
strategy

Ch 6 -50
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 Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries

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

Ch 6 -51
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 Grand Strategy Matrix

Quadrant IV

Strong competitive position

Slow-growth industry
Diversification to more promising growth areas

Ch 6 -52
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 Strategy-Formulation Analytical
Framework

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

Ch 6 -53
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 QSPM

Quantitative Strategic Planning Matrix

Technique designed to determine the relative

attractiveness of feasible alternative actions

Ch 6 -54
Copyright 2007 Prentice Hall
 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 -55
Copyright 2007 Prentice Hall
Steps to Develop a QSPM

1. Make a list of the firms 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 -56
Copyright 2007 Prentice Hall
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 -57
Copyright 2007 Prentice Hall
 QSPM

Limitations

Requires intuitive judgments & educated

assumptions
Only as good as the prerequisite inputs

Ch 6 -58
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 QSPM

Advantages

Sets of strategies considered simultaneously or

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

Ch 6 -59
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 Cultural Aspects of Strategy
Choice

Organization Culture

Successful strategies depend on the degree of

consistency with the firms culture

Ch 6 -60
Copyright 2007 Prentice Hall
 Politics of Strategy Choice

Politics in Organizations

Management hierarchy
Career aspirations
Allocation of scarce resources

Ch 6 -61
Copyright 2007 Prentice Hall
 Politics of Strategy Choice

Political Tactics for Strategists

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

Ch 6 -62
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 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
Copyright 2007 Prentice Hall
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
Copyright 2007 Prentice Hall
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
Copyright 2007 Prentice Hall
 For Review (Chapter 6)

Key Terms & Concepts

Aggressive Quadrant Business Portfolio

Attractiveness Scores
Cash Cows
(AS)

Competitive Advantage
Boards of Directors
(CA)

Boston Consulting
Competitive Quadrant
Group (BCG) Matrix

Ch 6 -66
Copyright 2007 Prentice Hall
 For Review (Chapter 6)

Key Terms & Concepts

Conservative Quadrant Dogs

Environmental Stability
Culture
(ES)

Financial Strength
Defensive Quadrant
(FS)

Directional Vector Governance

Ch 6 -67
Copyright 2007 Prentice Hall
 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 -68
Copyright 2007 Prentice Hall
 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 -69
Copyright 2007 Prentice Hall
 For Review (Chapter 6)

Key Terms & Concepts

Strengths, Weaknesses
WO Strategies
Opportunities, Threats SWOT

Total Attractiveness
WT Strategies
Scores (TAS)

Ch 6 -70
Copyright 2007 Prentice Hall