Strategy Analysis And Choice

Fred R David
Chapter Outline
▪ The Nature of Strategy Analysis and Choice
▪ A Comprehensive Strategy-Formulation Framework
▪ The Input Stage
▪ The Matching Stage
▪ The Decision Stage
▪ Cultural Aspects of Strategy Choice
▪ The Politics of Strategy Choice
Strategy Analysis & Choice
The Nature of Strategy Analysis and Choice
Strategic analysis and choice largely involves making subjective decisions based on objective information.

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

Alternative strategies derive from –

• Vision
• Mission
• Objectives
• External audit
• Internal audit
• Past successful strategies
Strategy-Formulation Analytical
Framework
A Comprehensive Strategy-Formulation Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Formulation Framework
The Input Stage
1. Provides basic input information for the matching
External Factor Evaluation and decision stage matrices
Matrix (EFE)
2. Requires strategists to quantify subjectivity early
Internal Factor Evaluation in the process
Matrix (IFE)
3. Good intuitive judgment always needed
Competitive Profile
Matrix
Industry Analysis: The External
Factor Evaluation (EFE) Matrix
The Input Stage
1. List key external factors as identified in the external-audit process.
▪ Include a total of15 to 20 factors, including both opportunities and threats, that affect the firm and its
industry.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important).
▪ The weight indicates the relative importance of that factor to being successful in the firm’s industry.
▪ Opportunities often receive higher weights than threats, but threats can receive high weights if they
are especially severe or threatening.
▪ Appropriate weights can be determined by comparing successful with unsuccessful competitors or by
discussing the factor and reaching a group consensus.
▪ The sum of all weights assigned to the factors must equal 1.0.
Industry Analysis: The External
Factor Evaluation (EFE) Matrix
The Input Stage
3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the
firm’s current strategies respond to the factor,
–4 = the response is superior,
–3 = the response is above average,
–2 = the response is average, and
–1 = the response is poor. Ratings are based on effectiveness of the firm’s strategies.
–Ratings are thus company-based, whereas the weights in Step 2 are industry-based. It is important to
note that both threats and opportunities can receive a 1, 2, 3, or 4.
4. Multiply each factor’s weight by its rating to determine a weighted score.
Industry Analysis: The External
Factor Evaluation (EFE) Matrix
The Input Stage
5. Sum the weighted scores for each variable to determine the total weighted score for the organization.
▪ Regardless of the number of key opportunities and threats included in an EFE Matrix, the highest
possible total weighted score for an organization is 4.0 and the lowest possible total weighted score is
1.0.
▪ The average total weighted score is 2.5.
▪ A total weighted score of 4.0 indicates that an organization is responding in an outstanding way to
existing opportunities and threats in its industry. In other words, the firm’s strategies effectively take
advantage of existing opportunities and minimize the potential adverse effects of external threats.
▪ A total score of 1.0 indicates that the firm’s strategies are not capitalizing on opportunities or avoiding
external threats.
Industry Analysis: The External
Factor Evaluation (EFE) Matrix
The Input Stage
The Internal Factor Evaluation
(IFE) Matrix
The Input Stage
1. List key internal factors as identified in the internal-audit process. Use a total of from 10 to
20 internal factors, including both strengths and weaknesses.
2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor.
– The weight assigned to a given factor indicates the relative importance of the factor to being successful
in the firm’s industry.
– Regardless of whether a key factor is an internal strength or weakness, factors considered to have the
greatest effect on organizational performance should be assigned the highest weights.
– The sum of all weights must equal 1.0.
The Internal Factor Evaluation
(IFE) Matrix
The Input Stage
3. Assign a 1-to-4 rating to each factor
– represents a major weakness (rating = 1),
– a minor weakness (rating = 2),
– a minor strength (rating = 3), or
– a major strength (rating = 4).
– Note that strengths must receive a 3 or 4 rating and weaknesses must receive a 1 or 2 rating.
– Ratings are thus company-based, whereas the weights in step 2 are industry-based.
4. Multiply each factor’s weight by its rating to determine a weighted score for each variable.
The Internal Factor Evaluation
(IFE) Matrix
The Input Stage
5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.
– Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from a
low of 1.0 to a high of 4.0, with the average score being 2.5.
– Total weighted scores well below 2.5 characterize organizations that are weak internally,
– whereas scores significantly above 2.5 indicate a strong internal position.
– When a key internal factor is both a strength and a weakness, the factor should be included twice in the
IFE Matrix, and a weight and rating should be assigned to each statement.
The Internal Factor Evaluation
(IFE) Matrix
The Input Stage
The Competitive Profile Matrix
(CPM)
The Input Stage
• The weights and total weighted scores in both a CPM and an EFE have the same meaning.
• Critical success factors in a CPM include both internal and external issues;
– 4 = major strength, 3 = minor strength, 2 = minor weakness, and 1 = major weakness.
• Avoid assigning the same rating to firms included in your CPM analysis.
The Competitive Profile Matrix
(CPM)
The Input Stage
Matching Stage

Match between organization’s internal resources and skills and the opportunities and risks created by its
external factors.

Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in the

Excess working capital
+ cell phone industry = Acquire Cellfone, Inc.
(strength)
(opportunity)
Exit of two major foreign
Insufficient capacity Pursue horizontal integration by
+ competitors form the =
(weakness) buying competitor's facilities
industry (opportunity)
Decreasing numbers of Develop new products for older
Strong R&D (strength) + =
young adults (threat) adults
Poor employee morale Strong union activity Develop a new employee
+ =
(weakness) (threat) benefits package
Matching Stage
TOWS Matrix
Steps in developing the TOWS Matrix
1. List the firm’s key external opportunities
2. List the firm’s key external threats
3. List the firm’s key internal strengths
4. List the firm’s key internal weaknesses
5. Match internal strengths with external opportunities and record the resultant SO
Strategies
6. Match internal weaknesses with external opportunities and record the resultant WO
Strategies
7. Match internal strengths with external threats and record the resultant ST Strategies
8. Match internal weaknesses with external threats and record the resultant WT Strategies
Matching Stage
TOWS Matrix
Matching Stage
TOWS Matrix
Matching
SPACE MATRIX
Strategic Position and Action Evaluation Matrix
• Four quadrant framework
• Determines appropriate strategies
– Aggressive
– Conservative
– Defensive
– Competitive

• Two Internal Dimensions

▪ Financial Strength [FS]
▪ Competitive Advantage [CA]
• Two External Dimensions
▪ Environmental Stability [ES]
▪ Industry Strength [IS]
Matching
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
• 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.
Matching
SPACE MATRIX – Space Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Return on investment Technological changes

Leverage Rate of inflation
Liquidity Demand variability
Working capital Price range of competing products
Cash flow Barriers to entry
Ease of exit from market Competitive pressure
Risk involved in business Price elasticity of demand
Matching
SPACE MATRIX – 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
Capacity utilization Resource utilization
Technological know-how Capital intensify
Control over suppliers & distributors Ease of entry into market
Productivity, capacity utilization
Matching
SPACE MATRIX – Space Factors
F
Conservative +S Aggressive
+6
+5
+4
+3
+2
C 1
- - - - - - + + + + + + IS
A -
6 5 4 3 2 1 1- 1 2 3 4 5 6
2-
3-
4-
5- Competitive
Defensive 6 E
S
Matching
SPACE MATRIX – Space Factors
Matching
SPACE MATRIX – Space Factors
Matching
SPACE MATRIX – Strategy Alternatives
Conservative Aggressive
Market penetration Backward, forward, horizontal integration
Market development Market penetration
Product development Market development
Related diversification Product development
Diversification (related or unrelated

Defensive Competitive
Retrenchment Backward, forward, horizontal integration
Divesture Market penetration
Liquidation Market development
Product development
Matching Stage
BCG 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
• 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

• https://www.youtube.com/watch?v=lc36fK38pLA
Matching Stage
The Internal-External (IE) Matrix
– IE Matrix positions an organization’s various divisions in a nine cell display,
– the size of each circle represents the percentage sales contribution of each division, and pie slices reveal
the percentage profit contribution of each division
– Differences between the BCG Matrix and the IE Matrix
–the axes are different
–the IE Matrix requires more information about the divisions than the BCG Matrix
–the strategic implications of each matrix are different.
Matching Stage
The Internal-External (IE) Matrix
Matching Stage
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
Matching Stage
Grand Strategy Matrix
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
WEAK 5. Divestiture 5. Backward integration STRONG
COMPETITIVE 6. Liquidation 6. Horizontal integration COMPETITIVE
POSITION 7. Concentric diversification POSITION
Quadrant III Quadrant IV
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate diversification
4. Conglomerate diversification 4. Joint ventures
5. Liquidation
SLOW MARKET
GROWTH
Decision Stage
Quantitative Strategic Planning Matrix (QSPM)
• Only technique designed to determine the relative attractiveness of feasible alternative actions
• Tool for objective evaluation of alternative strategies
• Based on identified external and internal crucial success factors
• Requires good intuitive judgment

• Limitations:
– Requires intuitive judgments and educated assumptions
– Only as good as the prerequisite inputs
• Positives:
– Sets of strategies examined simultaneously or sequentially
– Requires the integration of pertinent external and internal factors in the decision-making process
Decision Stage
Quantitative Strategic Planning Matrix (QSPM)
QSPM - Steps
• 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
• Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should
consider implementing
• Determine the Attractiveness Scores (AS)
• Compute the total Attractiveness Scores
• Compute the Sum Total Attractiveness Score
Decision Stage
Quantitative Strategic Planning Matrix (QSPM)
Cultural Aspects of Strategy Choice

• Culture:
The set of shared values, beliefs, attitudes, customs, norms, personalities, heroes, and heroines that
describe a firm
• Successful strategies depend on degree of support from a firm’s culture

Culture Eats Strategy for Breakfast

• https://www.youtube.com/watch?v=AYVUDw_DMKE
Politics of Strategy Choice
Politics in organizations:
• Management hierarchy
• Career aspirations
• Allocation of scarce resources

Political tactics for strategists:

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