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1
Dr. Ibrahim Rawabdeh (2011) Ch 6 -1
Chapter 6Strategy Analysis & Choice
Strategic Management: Concepts & Cases
13th EditionFred David
Dr. Ibrahim Rawabdeh (2011) Ch 6 -2
Chapter Outline
The Nature of Strategy & Choice
A Comprehensive Strategy-Formulation Framework
The Input Stage
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -3
Chapter Outline (cont’d)
The Matching Stage
The Decision Stage
Dr. Ibrahim Rawabdeh (2011) Ch 6 -4
To acquire or not to acquire, that is the question –Robert J. Terry
Strategy Analysis & Choice
Life is full of lousy options –General P.X. Kelley
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -5
-- Establishing long-term objectives-- Generating alternative strategies-- Selecting strategies to pursue-- Best alternative - achieve mission & objectives
Nature of Strategy Analysis & Choice
Strategy Analysis & Choice
Dr. Ibrahim Rawabdeh (2011) Ch 6 -6
Vision Mission Objectives External audit Internal audit Past successful strategies
Strategy Analysis & Choice
Alternative Strategies Derive From --
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -7
Strategy Analysis & Choice
Generating Alternatives --
Participation in generating alternative strategies should be as broad as possible
Dr. Ibrahim Rawabdeh (2011) Ch 6 -8
Comprehensive Strategy-Formulation Framework
Stage 1:The Input Stage
Stage 2:The Matching Stage
Stage 3:The Decision Stage
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -9
Strategy-Formulation Analytical Framework
Internal Factor EvaluationMatrix (IFE)
External Factor EvaluationMatrix (EFE)
Competitive Profile Matrix(CPM)
Stage 1:The Input Stage
Dr. Ibrahim Rawabdeh (2011) 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
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -11
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
Dr. Ibrahim Rawabdeh (2011) Ch 6 -12
Stage 2: The Matching Stage
Match between organization’s internal resources & skills and the opportunities & risks created by its external factors
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -13
Stage 2: The Matching Stage
Strengths
Weaknesses
Opportunities
Threats
SWOT Analysis vs. TOWS Matrix
Dr. Ibrahim Rawabdeh (2011) Ch 6 -14
SWOT Matrix
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
Four Types of Strategies
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -15
SO Strategies
Use a firm’sinternal strengthsto take advantage
of external opportunities
SOStrategies
StrengthsWeaknesses
OpportunitiesThreats
SWOT
Dr. Ibrahim Rawabdeh (2011) Ch 6 -16
WO Strategies
Improving internalweaknesses by
taking advantageof external
opportunitiesWO
Strategies
StrengthsWeaknesses
OpportunitiesThreats
SWOT
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -17
ST Strategies
Use a firm’sstrengths
to avoid orreduce the impact
of externalthreats
STStrategies
StrengthsWeaknesses
OpportunitiesThreats
SWOT
Dr. Ibrahim Rawabdeh (2011) Ch 6 -18
WT Strategies
Defensive tacticsaimed at reducing
internal weaknesses &
avoidingenvironmental
threatsWT
Strategies
StrengthsWeaknesses
OpportunitiesThreats
SWOT
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -19
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
Dr. Ibrahim Rawabdeh (2011) Ch 6 -20
TOWS Matrix
Leave BlankStrengths – 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
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -21
Develop a new employee benefits package
=Strong union activity (threat)
+Poor employee morale (weakness)
Develop new products for older adults=Decreasing numbers of
young adults (threat)+Strong R&D (strength)
Pursue horizontal integration by buying competitor's facilities
=Exit of two major foreign competitors from the industry (opportunity)
+Insufficient capacity (weakness)
Acquire Cellfone, Inc.=20% annual growth in the cell phone industry (opportunity)
+Excess working capacity (strength)
Key Internal Factor Key External Factor Resultant Strategy
Matching Key Factors to Formulate Alternative Strategies
Dr. Ibrahim Rawabdeh (2011) Ch 6 -22
Limitations with SWOT Matrix
Does not show how to achieve a competitive advantage (engineered!)
Provides a static assessment in time May lead the firm to overemphasize a single
internal or external factor in formulating strategies
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -23
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
Dr. Ibrahim Rawabdeh (2011) Ch 6 -24
SPACE Matrix
Strategic Position & Action Evaluation Matrix
Aggressive
Conservative
Defensive
Competitive
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -25
SPACE Matrix
Two Internal Dimensions
Financial Strength (FS)
Competitive Advantage (CA)
Dr. Ibrahim Rawabdeh (2011) Ch 6 -26
SPACE Matrix
Two External Dimensions
Environmental Stability (ES)
Industry Strength (IS)
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -27
SPACE Factors
Environmental Stability (ES)
Technological changesRate of inflationDemand variabilityPrice range of competing productsBarriers to entryCompetitive pressurePrice elasticity of demandEase of exit from market Risk involved in business
Financial Strength (FS)
Return on investmentLeverageLiquidityWorking capitalCash flow
External Strategic PositionInternal Strategic Position
Dr. Ibrahim Rawabdeh (2011) Ch 6 -28
SPACE Factors
Industry Strength (IS)
Growth potentialProfit potentialFinancial stabilityTechnological know-howResource utilizationEase of entry into marketProductivity, capacity utilization
Competitive Advantage CA
Market shareProduct qualityProduct life cycleCustomer loyaltyCompetition’s capacity utilizationTechnological know-howControl over suppliers & distributors
External Strategic PositionInternal Strategic Position
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -29
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 dimension2. From -1 to -6 to each ES & CA dimension
3. Compute an average score for each FS, CA, ES, & IS
Dr. Ibrahim Rawabdeh (2011) Ch 6 -30
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.
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -31
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
Dr. Ibrahim Rawabdeh (2011) Ch 6 -32
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
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Dr. Ibrahim Rawabdeh (2011) 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
Dr. Ibrahim Rawabdeh (2011) Ch 6 -34
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
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -35
BCG Matrix
DogsIV
Cash CowsIII
Question MarksI
StarsII
Relative Market Share PositionHigh1.0
Medium.50
Low0.0
Indu
stry
Sal
es G
row
th R
ate
High+20
Low-20
Medium0
Dr. Ibrahim Rawabdeh (2011) Ch 6 -36
BCG Matrix
Question Marks
Low relative market share – compete in high-growth industryCash needs are high
Cash generation is low
Decision to strengthen (intensive strategies) or divest
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -37
BCG Matrix
Stars
High relative market share and high growth rateBest long-run opportunities for growth & profitability
Substantial investment to maintain or strengthen dominant positionIntegration strategies, intensive strategies, joint ventures
Dr. Ibrahim Rawabdeh (2011) Ch 6 -38
BCG Matrix
Cash Cows
High relative market share, competes in low-growth industryGenerate cash in excess of their needs
Milked for other purposes
Maintain strong position as long as possibleProduct development, concentric diversification
If weakens—retrenchment or divestiture
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -39
BCG Matrix
Dogs
Low relative market share & compete in slow or no market growthWeak internal & external position
Liquidation, divestiture, retrenchment
Dr. Ibrahim Rawabdeh (2011) Ch 6 -40
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -41
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
Dr. Ibrahim Rawabdeh (2011) Ch 6 -42
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Dr. Ibrahim Rawabdeh (2011) 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
Dr. Ibrahim Rawabdeh (2011) Ch 6 -44
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -45
Strategy-Formulation Analytical Framework
SPACE Matrix
BCG Matrix
IE Matrix
Stage 2:The Matching Stage
SWOT Matrix
Grand Strategy Matrix
Dr. Ibrahim Rawabdeh (2011) Ch 6 -46
Grand Strategy Matrix
Tool for formulating alternative strategies
Based on two dimensions
Competitive position
Market growth
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -47
Quadrant IV1. Concentric diversification2. Horizontal diversification3. Conglomerate
diversification4. Joint ventures
Quadrant III1. Retrenchment2. Concentric diversification3. Horizontal diversification4. Conglomerate
diversification5. Liquidation
Quadrant I1. Market development2. Market penetration3. Product development4. Forward integration5. Backward integration6. Horizontal integration7. Concentric diversification
Quadrant II1. Market development2. Market penetration3. Product development4. Horizontal integration5. Divestiture6. Liquidation
RAPID MARKET GROWTH
SLOW MARKET GROWTH
WEAK COMPETITIVE
POSITION
STRONGCOMPETITIVE
POSITION
Dr. Ibrahim Rawabdeh (2011) Ch 6 -48
Grand Strategy Matrix
Excellent strategic position
Concentration on current markets/products
Take risks aggressively when necessary
Quadrant I
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -49
Grand Strategy Matrix
Evaluate present approach
How to improve competitiveness
Rapid market growth requires intensive strategy
Quadrant II
Dr. Ibrahim Rawabdeh (2011) Ch 6 -50
Grand Strategy Matrix
Compete in slow-growth industries
Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)
Quadrant III
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -51
Grand Strategy Matrix
Strong competitive position
Slow-growth industry
Diversification to more promising growth areas
Quadrant IV
Dr. Ibrahim Rawabdeh (2011) Ch 6 -52
Strategy-Formulation Analytical Framework
Stage 3:The Decision Stage
Quantitative StrategicPlanning Matrix
(QSPM)
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -53
QSPM
Technique designed to determine the relative attractiveness of feasible alternative actions
Quantitative Strategic Planning Matrix
Dr. Ibrahim Rawabdeh (2011) Ch 6 -54
QSPM
Key Internal FactorsManagementMarketingFinance/AccountingProduction/OperationsResearch and DevelopmentComputer Information Systems
Strategy 3Strategy 2Strategy 1WeightKey External FactorsEconomyPolitical/Legal/GovernmentalSocial/Cultural/Demographic/EnvironmentalTechnologicalCompetitive
Strategic Alternatives
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -55
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
Dr. Ibrahim Rawabdeh (2011) Ch 6 -56
Steps to Develop a QSPM
4. Determine the Attractiveness Scores5. Compare the Total Attractiveness Scores6. Compute the Sum Total Attractiveness
Score
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Dr. Ibrahim Rawabdeh (2011) Ch 6 -57
QSPM
Requires intuitive judgments & educated assumptions
Only as good as the prerequisite inputs
Limitations
Dr. Ibrahim Rawabdeh (2011) Ch 6 -58
QSPM
Sets of strategies considered simultaneously or sequentially
Integration of pertinent external & internal factors in the decision making process
Advantages