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## Chapter 6 Strategy Analysis And Choice

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**Chapter 6Strategy Analysis And Choice**Strategic Management: Concepts and Cases. 9th edition Fred R. David PowerPoint Slides by Anthony F. Chelte Western New England College Fred R. David Prentice Hall**Chapter Outline**• The Nature of Strategy Analysis and Choice • A Comprehensive Strategy-Formulation Framework • The Input Stage Fred R. David Prentice Hall**Chapter Outline**• The Matching Stage • The Decision Stage • Cultural Aspects of Strategy Choice Fred R. David Prentice Hall**Chapter Outline**• The Politics of Strategy Choice • The Role of a Board of Directors Fred R. David Prentice Hall**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 Fred R. David Prentice Hall**Strategy Analysis & Choice**Strategic analysis and choice largely involves making subjective decisions based on objective information. Fred R. David Prentice Hall**Strategy Analysis & Choice**The Nature of Strategy Analysis and Choice – • Establishing long-term objectives • Generating alternative strategies • Selecting strategies to pursue • Best alternative to achieve mission and objectives Fred R. David Prentice Hall**Strategy Analysis & Choice**Alternative strategies derive from – • Vision • Mission • Objectives • External audit • Internal audit • Past successful strategies Fred R. David Prentice Hall**Strategy Analysis & Choice**Participation in generating alternative strategies should be broad – Fred R. David Prentice Hall**Strategy-Formulation Analytical Framework**Stage 1: The Input Stage Stage 2: The Matching Stage Stage 3: The Decision Stage Fred R. David Prentice Hall**Formulation Framework**Internal Factor Evaluation Matrix (IFE) Stage 1: The Input Stage External Factor Evaluation Matrix (EFE) Competitive Profile Matrix Fred R. David Prentice Hall**Input Stage**• Provides basic input information for the matching and decision stage matrices • Requires strategists to quantify subjectivity early in the process • Good intuitive judgment always needed Fred R. David Prentice Hall**Formulation Framework**TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall**Matching Stage**• Match between organization’s internal resources and skills and the opportunities and risks created by its external factors. Fred R. David Prentice Hall**Excess working capacity (strength)**+ 20% annual growth in the cell phone industry (opportunity) = Acquire Cellfone, Inc. Insufficient capacity (weakness) + Exit of two major foreign competitors form the industry (opportunity) = Pursue horizontal integration by buying competitor's facilities Strong R&D (strength) + Decreasing numbers of young adults (threat) = Develop new products for older adults Poor employee morale (weakness) + = Develop a new employee benefits package Strong union activity (threat) Matching Key Factors to Formulate Alternative Strategies Key Internal Factor Key External Factor Resultant Strategy Fred R. David Prentice Hall**Formulation Framework**TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall**Matching Stage**TOWS Matrix • Threats • Opportunities • Strengths • Weaknesses Fred R. David Prentice Hall**TOWS Matrix**Develop four types of strategies • Strengths-Opportunities (SO) • Weaknesses-Opportunities (WO) • Strengths-Threats (ST) • Weaknesses-Threats (WT) Fred R. David Prentice Hall**SO**Strategies Use a firm’s internal strengths to take advantage of external opportunities SOStrategies Threats Opportunities Weaknesses Strengths (TOWS) Fred R. David Prentice Hall**WO**Strategies Improving internal weaknesses by taking advantage of external opportunities WOStrategies Threats Opportunities Weaknesses Strengths (TOWS) Fred R. David Prentice Hall**ST**Strategies Using firm’s strengths to avoid or reduce the impact of external threats. STStrategies Threats Opportunities Weaknesses Strengths (TOWS) Fred R. David Prentice Hall**WT**Strategies Defensive tactics aimed at reducing internal weaknesses and avoiding environmental threats. WTStrategies Threats Opportunities Weaknesses Strengths (TOWS) Fred R. David Prentice Hall**TOWS Matrix**Steps in developing the TOWS Matrix • List the firm’s key external opportunities • List the firm’s key external threats • List the firm’s key internal strengths • List the firm’s key internal weaknesses Fred R. David Prentice Hall**TOWS Matrix**Developing the TOWS Matrix • Match internal strengths with external opportunities and record the resultant SO Strategies • Match internal weaknesses with external opportunities and record the resultant WO Strategies • Match internal strengths with external threats and record the resultant ST Strategies • Match internal weaknesses with external threats and record the resultant WT Strategies Fred R. David Prentice Hall**Leave Blank**Strengths-S List Strengths Weaknesses-W List Weaknesses Opportunities-O List Opportunities SO Strategies Use strengths to take advantage of opportunities WO Strategies Overcome weaknesses by taking advantage of opportunities Threats-T List Threats ST Strategies Use strengths to avoid threats WT Strategies Minimize weaknesses and avoid threats TOWS Matrix Fred R. David Prentice Hall**Formulation Framework**TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall**SPACE Matrix**Strategic Position and Action Evaluation Matrix • Four quadrant framework • Determines appropriate strategies • Aggressive • Conservative • Defensive • Competitive Fred R. David Prentice Hall**SPACE Matrix**Two Internal Dimensions • Financial Strength [FS] • Competitive Advantage [CA] Two External Dimensions • Environmental Stability [ES] • Industry Strength [IS] Fred R. David Prentice Hall**SPACE Matrix**Overall Strategic position determined by: • Financial Strength [FS] • Competitive Advantage [CA] • Environmental Stability [ES] • Industry Strength [IS] Fred R. David Prentice Hall**SPACE Matrix**Developing the SPACE Matrix: • EFE Matrix • IFE Matrix • Financial Strength • Competitive Advantage • Environmental Stability • Industry Strength Fred R. David Prentice Hall**SPACE Matrix**• Select variables to define FS, CA, ES, & IS • Assign numerical ranking from +1 (worst) to +6 (best) for FS and IS; Assign numerical ranking from –1 (best) to –6 (worst) for ES and CA. • Compute average score for FS, CA, ES, & IS Fred R. David Prentice Hall**SPACE Matrix**• Plot the average scores on the Matrix • Add the two scores on the x-axis and plot point on X. Add the scores on the y-axis and plot Y. Plot the intersection of the new xy point. • Draw a directional vector from origin through the new intersection point. Fred R. David Prentice Hall**Internal Strategic Position**External Strategic Position Financial Strength (FS) Return on investment Leverage Liquidity Working capital Cash flow Ease of exit from market Risk involved in business Environmental Stability (ES) Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand SPACE Factors Fred R. David Prentice Hall**Internal Strategic Position**External Strategic Position Competitive Advantage CA Market share Product quality Product life cycle Customer loyalty Competition’s capacity utilization Technological know-how Control over suppliers & distributors Industry Strength (IS) Growth potential Profit potential Financial stability Technological know-how Resource utilization Capital intensify Ease of entry into market Productivity, capacity utilization SPACE Factors Fred R. David Prentice Hall**SPACE Matrix**FS Conservative Aggressive +6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4 -5 Competitive Defensive -6 ES Fred R. David Prentice Hall**Formulation Framework**TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall**BCG Matrix**Boston Consulting Group Matrix • Enhances multidivisional firms’ efforts to formulate strategies • Autonomous divisions (or profit centers) constitute the business portfolio • Firm’s divisions may compete in different industries requiring separate strategy Fred R. David Prentice Hall**BCG Matrix**Boston Consulting Group Matrix • Graphically portrays differences among divisions • Focuses on market share position and industry growth rate • Manage business portfolio through relative market share position and industry growth rate Fred R. David Prentice Hall**BCG Matrix**Relative market share position defined: • Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry. Fred R. David Prentice Hall**Stars**II Question Marks I Cash Cows III Dogs IV BCG Matrix Relative Market Share Position High 1.0 Medium .50 Low 0.0 Industry Sales Growth Rate High +20 Medium 0 Low -20 Fred R. David Prentice Hall**BCG Matrix**• Question Marks • Stars • Cash Cows • Dogs Fred R. David Prentice Hall**BCG Matrix**Question Marks • Low relative market share position yet compete in high-growth industry. • Cash needs are high • Case generation is low • Decision to strengthen (intensive strategies) or divest Fred R. David Prentice Hall**BCG Matrix**Stars • High relative market share and high industry growth rate. • Best long-run opportunities for growth and profitability • Substantial investment to maintain or strengthen dominant position • Integration strategies, intensive strategies, joint ventures Fred R. David Prentice Hall**BCG Matrix**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 as possible • Product development, concentric diversification • If becomes weak—retrenchment or divestiture Fred R. David Prentice Hall**BCG Matrix**Dogs • Low relative market share position and compete in slow or no market growth • Weak internal and external position • Decision to liquidate, divest, retrenchment Fred R. David Prentice Hall**Formulation Framework**TOWS Matrix SPACE Matrix Stage 2: The Matching Stage BCG Matrix IE Matrix Grand Strategy Matrix Fred R. David Prentice Hall**Grand Strategy Matrix**• Popular tool for formulating alternative strategies • All organizations (or divisions) can be positioned in one of four quadrants • Based on two evaluative dimensions: • Competitive position • Market growth Fred R. David Prentice Hall**RAPID MARKET GROWTH**Quadrant II • Market development • Market penetration • Product development • Horizontal integration • Divestiture • Liquidation Quadrant I • Market development • Market penetration • Product development • Forward integration • Backward integration • Horizontal integration • Concentric diversification WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION Quadrant III • Retrenchment • Concentric diversification • Horizontal diversification • Conglomerate diversification • Liquidation Quadrant IV • Concentric diversification • Horizontal diversification • Conglomerate diversification • Joint ventures SLOW MARKET GROWTH Fred R. David Prentice Hall**Grand Strategy Matrix**Quadrant I • Excellent strategic position • Concentration on current markets and products • Take risks aggressively when necessary Fred R. David Prentice Hall**Grand Strategy Matrix**Quadrant II • Evaluate present approach seriously • How to change to improve competitiveness • Rapid market growth requires intensive strategy Fred R. David Prentice Hall