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Formulation FrameworkFormulation Framework

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 StrategiesKey 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

TOWS Matrix

Develop four types of strategies

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

Fred R. David

Prentice Hall

Strategies

Use a firm’s internal strengths to take advantage of external opportunities

SOStrategiesThreats

Opportunities

Weaknesses

Strengths

(TOWS)

Fred R. David

Prentice Hall

Strategies

Improving internal weaknesses by taking advantage of external opportunities

WOStrategiesThreats

Opportunities

Weaknesses

Strengths

(TOWS)

Fred R. David

Prentice Hall

Strategies

Using firm’s strengths to avoid or reduce the impact of external threats.

STStrategiesThreats

Opportunities

Weaknesses

Strengths

(TOWS)

Fred R. David

Prentice Hall

Strategies

Defensive tactics aimed at reducing internal weaknesses and avoiding environmental threats.

WTStrategiesThreats

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

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 MatrixFred 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

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 FactorsFred R. David

Prentice Hall

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 FactorsFred 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

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

II

Question Marks

I

Cash Cows

III

Dogs

IV

BCG MatrixRelative 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

- 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

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

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

Grand Strategy Matrix

Quadrant III

- Compete in slow-growth industries
- Weak competitive position
- Drastic changes quickly
- Cost and asset reduction indicated (retrenchment)

Fred R. David

Prentice Hall

Grand Strategy Matrix

Quadrant IV

- Strong competitive position
- Slow-growth industry
- Diversification indicated to more promising growth areas

Fred R. David

Prentice Hall

Formulation Framework

Stage 3:

The Decision Stage

Quantitative Strategic

Planning Matrix

(QSPM)

Fred R. David

Prentice Hall

QSPM

Quantitative Strategic Planning Matrix

- Only technique designed to determine the relative attractiveness of feasible alternative actions

Fred R. David

Prentice Hall

QSPM

Quantitative Strategic Planning Matrix

- Tool for objective evaluation of alternative strategies
- Based on identified external and internal crucial success factors
- Requires good intuitive judgment

Fred R. David

Prentice Hall

QSPM

Quantitative Strategic Planning Matrix

- List the firm’s key external opportunities & threats; list the firm’s key internal strengths and weaknesses
- Assign weights to each external and internal critical success factor

Fred R. David

Prentice Hall

QSPM

Quantitative Strategic Planning Matrix

- Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing
- Determine the Attractiveness Scores (AS)

Fred R. David

Prentice Hall

QSPM

Quantitative Strategic Planning Matrix

- Compute the total Attractiveness Scores
- Compute the Sum Total Attractiveness Score

Fred R. David

Prentice Hall

Economy

Political/Legal/Governmental

Social/Cultural/Demographic/Environmental

Technological

Competitive

Weight

Strategy 1

Strategy 2

Strategy 3

Key Internal Factors

Management

Marketing

Finance/Accounting

Production/Operations

Research and Development

Computer Information Systems

Strategic Alternatives

QSPMFred R. David

Prentice Hall

QSPM

Limitations:

- Requires intuitive judgments and educated assumptions
- Only as good as the prerequisite inputs

Fred R. David

Prentice Hall

QSPM

Positives:

- Sets of strategies examined simultaneously or sequentially
- Requires the integration of pertinent external and internal factors in the decision-making process

Fred R. David

Prentice Hall

Cultural Aspects of Strategy Choice

Culture:

- The set of shared values, beliefs, attitudes, customs, norms, personalities, heroes, and heroines that describe a firm

Fred R. David

Prentice Hall

Cultural Aspects of Strategy Choice

Culture:

- Successful strategies depend on degree of support from a firm’s culture

Fred R. David

Prentice Hall

Politics of Strategy Choice

Politics in organizations:

- Management hierarchy
- Career aspirations
- Allocation of scarce resources

Fred R. David

Prentice Hall

Politics of Strategy Choice

Political tactics for strategists:

- Equifinality
- Satisfying
- Generalization
- Focus on Higher-Order Issues
- Provide Political Access on Important Issues

Fred R. David

Prentice Hall

Role of A Board of Directors

Duties and Responsibilities:

- Control and oversight over management
- Adherence to legal prescriptions
- Consideration of stakeholder interests
- Advancement of stockholders’ rights

Fred R. David

Prentice Hall

Key Terms

- Aggressive quadrant
- Attractiveness Scores (AS)
- Board of Directors
- Boston Consulting Group (BCG) Matrix
- Business portfolio
- Cash cows
- Champions
- Competitive Advantage (CA)

Fred R. David

Prentice Hall

Key Terms

- Competitive quadrant
- Conservative quadrant
- Culture
- Decision stage
- Defensive quadrant
- Directional vector
- Dogs
- Environmental Stability (ES)
- Financial Strength (FS)

Fred R. David

Prentice Hall

Key Terms

- Grand Strategy Matrix
- Halo error
- Industry Strength (IS)
- Input stage
- Internal-External (IE) Matrix
- Long-term objectives
- Matching
- Matching stage
- Quantitative Strategic Planning Matrix (QSPM)

Fred R. David

Prentice Hall

Key Terms

- Question marks
- Relative market share position
- SO strategies
- ST strategies
- Stars
- Strategic Position and Action Evaluation (SPACE) Matrix
- Strategy-formulation framework

Fred R. David

Prentice Hall

Key Terms

- Sum total attractiveness scores
- Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix
- Total Attractiveness Scores (TAS)
- WO strategies
- WT strategies

Fred R. David

Prentice Hall

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