05. strategy formulation. strategy analysis & choice (8-10m)

7/31/2019 05. Strategy Formulation. Strategy Analysis & Choice (8-10M)

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Strategy Formulation:

Strategy Analysis & Choice

ReferencesReferences

Strategic Management Concepts & CasesStrategic Management Concepts & Cases 1010thth

editionedition Fred R. DavidFred R. DavidInternetInternet

Chapter # 5


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2

Comprehensive Strategic Management Model

Chapter 2

Environmental

Analysis

(External

Audit)

Chapter 3

EnvironmentalAnalysis

(Internal

Audit)

Chapter 3

Chapter 4Chapter 5


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Feasible Alternatives

Chosen Alternative

Constraints

Environments (I&E)


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Strategy Analysis & Choice

The Nature of Strategy Analysis and ChoiceThe Nature of Strategy Analysis and Choice

a.a. EstablishingEstablishinglong-term objectiveslong-term objectives

a. Generate feasible alternatives

b. Evaluate alternativesc. Select specific course of action


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5

Generating, evaluating & selecting bestalternatives involve;

Develop set of most attractive alternative strategies Advantages & Disadvantages

Trade-offs, Costs & Benefits

Involve a broad mix of personnel Representation from each department/function

Provides vehicle to develop commitment to attainment oforganizational objectives

Evaluate each alternative Internal and external audit information

Firms mission/Vision statement

Listed in writing Ranked in order of attractiveness


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Strategy-FormulationStrateg

y-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage


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External Factor Evaluation

Matrix (EFE)

Competitive Profile

Matrix

Internal Factor Evaluation

Matrix (IFE)

Stage 1 provides basic Input information for

Stages 2 and 3


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SPACE Matrix

SWOT Matrix

BCG Matrix

IE Matrix

Grand Strategy Matrix

Stage 2 tries to create match between organizations

internal resources & skills and the opportunities

& risks created by its external factors


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Steps in developing the TOWS Matrix

1. List the firms key external opportunities

2. List the firms key external threats

3. List the firms key internal strengths4. List the firms key internal weaknesses

5. Match internal strengths with external opportunities andrecord the resultant SO Strategies

6. Match internal weaknesses with external opportunities andrecord the resultant WO Strategies

7. Match internal strengths with external threats and recordthe resultant ST Strategies

8. Match internal weaknesses with external threats and recordthe resultant WT Strategies

Stage 2: The Matching Stage:SWOT Matrix


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Four Types of Strategies

1. Strengths-Opportunities (SO):Use a firms internal strengths to take advantage of external

opportunities

1. Weaknesses-Opportunities (WO):

Improving internal weaknesses by taking advantageof external opportunities

1. Strengths-Threats (ST):

Use a firms strengths to avoid or reduce the impact of external

threats.1. Weaknesses-Threats (WT):

Defensive tactics aimed at reducing internal weaknesses and

avoiding external threats


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SWOT/TOWS Matrix

WT Strategies

Minimize weaknesses

and avoid threats

ST Strategies

Use strengths to avoid

threats

Threats-TThreats-T

List ThreatsList Threats

WO Strategies

Overcome weaknesses

by taking advantage of

opportunities

SO Strategies

Use strengths to take

advantage of opportunities

OpportunitiesOpportunities-O-O

List OpportunitiesList Opportunities

Weaknesses-WWeaknesses-W

List WeaknessesList Weaknesses

Strengths-SStrengths-S

List StrengthsList Strengths

Leave BlankLeave Blank


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12

Develop a new

employee benefits

package

=Strong union

activity+Poor employee morale

Develop new products for

existing population=

Brain drain in

Balochistan+Strong R&D

Pursue horizontalintegration by buying

competitor's facilities

=Exit of two majorforeign competitors

from the industry

+Insufficient workforce

Start offering MS/PhD

Programs=

Higher demand MS/PhD

in Market+15 PhDs faculty members

Key Internal Factor Key External Factor Resultant Strategy

Matching Key Factors to Formulate Alternative Strategies


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TWOS Matrix


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Strategic Position & Action

Evaluation Matrix (SPACE) SPACE matrix is a strategic management tool

that focuses on strategy formulation especiallyas related to the competitive position of an

organization Four quadrant framework helps to determines appropriatestrategies

1. Aggressive 2. Conservative

3. Defensive 4. Competitive Two Internal Dimensions

i. Financial Strength ii. [FS]Competitive Advantage [CA]

Two External Dimensions

i. Environmental Stability [ES] ii. Industry Strength [IS]


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SPACE MatrixFS

+6

+1

+5

+4

+3

+2

-6

-5

-4

-3

-2

-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6

ES

CA IS

Conservative Aggressive

Defensive Competitive


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The Steps of SPACE Matrix

Internal Dimensions Financial Strength

Return of investment Financial and operating

leverage

Liquidity Working capital Cash flows

Competitive Advantage

Market share Quality Product life cycle Customer preference Technological innovation Sound supply chain

External Dimensions Environmental Stability

Technological changes Inflation Demand elasticity

Competitors price ranges Barriers to entry Competitive pressure Ease of exit Price elasticity of demand Risk exposure

Industry Strength Growth potential Profit potential Financial stability Resource availability Ease of entry Capacity utilization

1. Select variables to define FS, CA, ES, & IS


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2. Assign numerical ranking from +1 (worst) to+6 (best) for FS and IS; Assign numerical

ranking from 1 (best) to 6 (worst) for ES andCA.

3. Compute average score for FS, CA, ES, & IS

4. Plot the average scores on the Matrix

5. Add the two scores on the x-axis and plot pointon X. Add the scores on the y-axis and plot Y.

Plot the intersection of the new xy point.6. Draw a directional vector from origin through

the new intersection point.


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In the third step the average of the values assigned toeach variable above is computed by adding the valuesand dividing by the number of variables included in theanalysis. This average is calculated for eachdimension.


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This particular SPACE matrix tells us that our companyshould pursue an aggressive strategy. Our company has a

strong competitive position it the market with rapidgrowth. It needs to use its internal strengths to develop amarket penetration and market development strategy.This can include product development, integration withother companies, acquisition of competitors, and so on.


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Aggressive quadrant (upper right quadrant) of the


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Aggressive quadrant(upper right quadrant) of theSPACE Matrix, an organization is in an excellentposition to use its internal strengths to (1) take advantageof external opportunities, (2) overcome internal

weaknesses, and (3) avoid external threats. Therefore,market penetration, market development, productdevelopment, backward integration, forward integration,horizontal integration, conglomerate diversification,

concentric diversification, horizontal diversification, or acombination strategy all can be feasible, depending onthe specific circumstances that face the firm.

Conservative quadrant(upper left quadrant) of the

SPACE Matrix, implies staying close to the firm's basiccompetencies and not taking excessive risks.Conservative strategies most often include marketpenetration, market development, product development,and concentric diversification.


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lower left or Defensive quadrantof the SPACEMatrix suggests that the firm should focus on

rectifying internal weaknesses and avoidingexternal threats by include retrenchment,divestiture, liquidation, and concentric

diversification. lower right or Competitive quadrantof the

SPACE Matrix, indicating competitive strategies.Competitive strategies include backward, forward,and horizontal integration; market penetration;market development; product development; andjoint venture.


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TheBCG matrix method(Boston Consulting Group- Bruce

Henderson in 1968) is based on theproduct life cycle theorythat can be used to determine what priorities should be given

in theproduct portfolio or product lines of a business unit.

This helps the company allocate resources and is used as an

analytical tool in brand marketing, product management,strategic management, and portfolio analysis.

It has 2 dimensions: market share and market growth. Thebasic idea behind it is that the bigger the market share a

product has or the faster the product's market grows the better

it is for the company.

BCG Matrix


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Enhances multidivisional firms efforts to formulate

strategies

Firms divisions may compete in different

industries/markets requiring separate strategy. Graphically portrays differences among divisions

Manage business portfolio through relative market share

position and industry growth rate.

Boston Consulting Group Matrix


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1 Q ti M k 3 C h C


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1. Question Marks- Low relative market share

position yet compete in high-growth industry.

Cash needs are high with lowprofit generation.

Decision to strengthen(intensive strategies) or divest

2. Stars High relative market share and

high industry growth rate.

Best long-run opportunities forgrowth and profitability

Substantial investment tomaintain or strengthendominant position

Integration strategies, intensive

strategies, joint ventures

3. Cash Cows High relative market share position,

but compete in low-growth industry

Generate cash in excess of their

needs Milked for other purposes

Maintain strong position as long aspossible

Product development, concentricdiversification

If becomes weakretrenchment ordivestiture.

4. Dogs Low relative market share position

and compete in slow or no marketgrowth

Weak internal and external position

Decision to liquidate, divest,retrenchment


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BCG Matrix of BBC

Radio: 52.6% market share,47.4% growth rate;considered a STAR

TV: 37.1% market share,62.9% growth rate; rated asCASH COW

BBC Online: QUESTIONMARK This is because it

has a very low marketshare, but retains a highgrowth rate percentage.

Some limitations of theBoston ConsultingGroup Matrix include:

High market share is notthe only success factor Market growth is not the

only indicator forattractiveness of a market

Sometimes Dogs canearn even more cash asCash Cows


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Internal-External (IE) Matrix IE matrix is used to analyze working conditions and

strategic position of a business. The IE matrix is acontinuation of theEFE matrix&IFE matrixmodels.

It works on a similar manner like the BCG matrix, the IEmatrix positions an organization into a nine cell matrix.

The IE matrix is based on the following two criteria:I. EFE matrix Score - this score is plotted on the y-axis

II. IFE matrix Score- plotted on the x-axis On the x axis of the IE Matrix, an IFE total weighted score of 1.0 to

1.99 represents a weak internal position. A score of 2.0 to 2.99 isconsidered average. A score of 3.0 to 4.0 is strong.

On the y axis, an EFE total weighted score of 1.0 to 1.99 isconsidered low. A score of 2.0 to 2.99 is medium. A score of 3.0 to4.0 is high.


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http://www.maxi-pedia.com/internal+external+IE+matrix


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The IE matrix can be divided into three major

regions that have different strategy implications. Grow & Build

Intensive

Market PenetrationMarket DevelopmentProduct Development Integrative

Backward IntegrationForward IntegrationHorizontal Integration

Hold & Maintain

Market PenetrationProduct Development

Harvest or Divest

RetrenchmentDivestiture

Liquidation

IE matrix requires more information about the business than the BCG matrix


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The model defines the situation of businessthrough the market growth and their competitive

position in the market.

All organizations (or divisions) can be positionedin one of four quadrants

Based on two dimensionsCompetitive position

Market growth


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Concentric diversification

Horizontal diversification

Conglomeratediversification

Joint ventures

Retrenchment

Concentric diversification

Horizontal diversification Conglomerate

diversification

Liquidation

Market development Market penetration

Product development

Forward integration

Backward integration

Horizontal integration Concentric diversification

Market development Market penetration

Product development

Horizontal integration

Divestiture

Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK

COMPETITIVE

POSITION

STRONG

COMPETITIVE

POSITION


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Four Quadrants of Grand Strategy Matrix Quadrant I

Excellent strategic position Concentration on current

markets and products

Take risks aggressively

when necessary Quadrant II

Evaluate present approach

seriously

How to change to improve

competitiveness

Rapid market growth

requires intensive strategy

Quadrant III

Compete in slow-growthindustries

Weak competitive position

Cost and asset reduction

indicated (retrenchment)

Quadrant IV

Strong competitive position

Slow-growth industry

Diversification indicated to

more promising growth areas


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GRAND STRATEGY MATRIX OF BBC

The BBC lies in Quadrant I, which indicates it ispart of a rapid market growth industry whilemaintaining a strong competitive position.

Compared to its rivals in the UK, the BBC hasmore financial strength giving it an advantageover competitors. Globally, the company canmake use of its resources/subsidiaries allowing

an increase in customer base.


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Quantitative Strategic

Planning Matrix

(QSPM)

The best thing about QSPM is that it never insist

the strategist to enter the information on

assumptions, it extracts the information from stage

1 & stage 2 and suggests appropriate strategy to

choose. The QSPM combine the intuitive thinking of

managers with the analytical process to decide the

best strategy for the organization success.


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Format of Quantitative Strategic Planning Matrix There are four main columns in QSPM, the left column list

down the key internal and external key factors which aresame as in EFE and IFE matrix. Adjacent column to keyfactors is Weight (relative importance of the factor) whichhold the numeric value obtained from EFE and IFE matrixweight column. The next to weight is AS stands for attractive

score assign priority to key factors using the numeric value 4for most importance and 1 for least importance and the lastcolumn TAS (Total attractive score) is the value calculated

by multiplying weight by AS. One thing important to note foreach strategy separate AS and TAS value added in the table,weight remain same for all set of strategies mentioned inQSPM. The topmost shows the strategies are compared in theQSPM matrix, below mentioned table illustrate the structureof QSPM matrix.

Steps to develop QSPM


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Steps to develop QSPM1. List the firms key external opportunities & threats; list the firms key internal

strengths and weaknesses (EFE Matrix and IFE Matrix). A minimum of 10external & internal critical success factors should be taken.

2. Assign weights to each external and internal critical success factor3. Examine the Stage 2 (matching) matrices and identify alternative strategies

that the organization should consider implementing. Record these strategies inthe top row of the QSPM. Group the strategies into mutually exclusive sets if

possible.

4. Determine the Attractiveness Scores (AS), defined as numerical values that

indicate the relative attractiveness of each strategy in a given set ofalternatives. The range for Attractiveness Scores is 1 = not attractive, 2 =somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive.

5. Compute the Total Attractiveness Scores. Total Attractiveness Scores aredefined as the product of multiplying the weights (Step 2) by theAttractiveness Scores (Step 4) in each row.

6. Compute the Sum Total Attractiveness Score. Add Total AttractivenessScores in each strategy column of the QSPM. The Sum Total AttractivenessScores reveal which strategy is most attractive in each set of alternatives.Higher scores indicate more attractive strategies, considering all the relevantexternal and internal factors that could affect the strategic decisions.

QSPM


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QSPM

Management

Marketing

Finance/Accounting

Production/Operations

Research and Development

Computer InformationSystems

Strategy 3Strategy 2Strategy 1Weight

Economy

Political/Legal/Governmental

Social/Cultural/Demographic/Environmental

Technological

Competitive

Strategic Alternatives


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05. strategy formulation. strategy analysis & choice (8-10m)

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