Chapter # 5

Strategy Formulation:

Strategy Analysis & Choice

References
Strategic Management Concepts & Cases 10th edition Fred R. David Internet

Comprehensive Strategic Management Model

Environmental Analysis (External Audit) Chapter 3 Strategy Analysis & Choice Chapter 5

Vision & Mission Statements

Strategies In Action Chapter 4

Implement Strategies: Mgmt Issues

Implement Strategies: Marketing, Fin/Acct, R&D, CIS

Measure & Evaluate Performance

Chapter 2

Environmental Analysis (Internal Audit) Chapter 3

Feasible Alternatives Chosen Alternative Constraints Environments (I&E)

Strategy Analysis & Choice

The Nature of Strategy Analysis and Choice

a. a. b. c.

Establishing long-term objectives Generate feasible alternatives Evaluate alternatives Select specific course of action

Generating, evaluating & selecting best alternatives 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 of organizational objectives Internal and external audit information Firms mission/Vision statement Listed in writing Ranked in order of attractiveness

Evaluate each alternative

Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Internal Factor Evaluation Matrix (IFE)

Stage 1: The Input Stage

External Factor Evaluation Matrix (EFE)

Competitive Profile Matrix

Stage 1 provides basic Input information for Stages 2 and 3

SWOT Matrix SPACE Matrix

Stage 2: The Matching Stage

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

Stage 2: The Matching Stage: SWOT Matrix

Steps in developing the TOWS Matrix
1. 2. 3. 4. 5. 6. 7. 8.

List the firms key external opportunities List the firms key external threats List the firms key internal strengths List the firms key internal weaknesses 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

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 advantage of 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

SWOT/TOWS Matrix
Strengths-S Leave Blank
List Strengths List Weaknesses

Weaknesses-W

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

Matching Key Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

15 PhDs faculty members

Higher demand MS/PhD = in Market

Start offering MS/PhD Programs

Insufficient workforce

Exit of two major foreign competitors from the industry

Pursue horizontal integration by buying competitor's facilities

Strong R&D

Brain drain in Balochistan

Develop new products for existing population

Poor employee morale

Strong union activity

Develop a new employee benefits package

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TWOS Matrix

Strategic Position & Action Evaluation Matrix (SPACE)

SPACE matrix is a strategic management tool that focuses on strategy formulation especially as related to the competitive position of an organization
Four quadrant framework helps to determines appropriate strategies 1. Aggressive 2. Conservative 3. Defensive 4. Competitive Two Internal Dimensions i. Financial Strength ii. [FS]Competitive Advantage [CA] Two External Dimensions 14 i. Environmental Stability [ES] ii. Industry Strength [IS]

SPACE Matrix
Conservative
+6 +5 +4 +3 +2 +1

FS

Aggressive

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

IS

Defensive

-6

ES

Competitive
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The Steps of SPACE Matrix

1.

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

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

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2.

3. 4. 5.

6.

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.

In the third step the average of the values assigned to each variable above is computed by adding the values and dividing by the number of variables included in the analysis. This average is calculated for each dimension.

This particular SPACE matrix tells us that our company should pursue an aggressive strategy. Our company has a strong competitive position it the market with rapid growth. It needs to use its internal strengths to develop a market penetration and market development strategy. This can include product development, integration with other companies, acquisition of competitors, and so on.

Aggressive quadrant (upper right quadrant) of the SPACE Matrix, an organization is in an excellent position to use its internal strengths to (1) take advantage of external opportunities, (2) overcome internal weaknesses, and (3) avoid external threats. Therefore, market penetration, market development, product development, backward integration, forward integration, horizontal integration, conglomerate diversification, concentric diversification, horizontal diversification, or a combination strategy all can be feasible, depending on the specific circumstances that face the firm. Conservative quadrant (upperleft quadrant) of the SPACE Matrix, implies staying close to the firm's basic competencies and not taking excessive risks. Conservative strategies most often include market penetration, market development, product development, and concentric diversification.

 lower

left or Defensive quadrant of the SPACE Matrix suggests that the firm should focus on rectifying internal weaknesses and avoiding external threats by include retrenchment, divestiture, liquidation, and concentric diversification. lowerright or Competitive quadrant of the SPACE Matrix, indicating competitive strategies. Competitive strategies include backward, forward, and horizontal integration; market penetration; market development; product development; and joint venture.

BCG Matrix

The BCG matrix method (Boston Consulting Group- Bruce Henderson in 1968) is based on the product life cycle theory that can be used to determine what priorities should be given in the product 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. The basic 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.

Boston Consulting Group Matrix

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.

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1.

Question MarksLow relative market share position yet compete in highgrowth industry. Cash needs are high with low profit generation. Decision to strengthen (intensive strategies) or divest

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 as possible Product development, concentric diversification If becomes weakretrenchment or divestiture.

2.

Stars

High relative market share and high industry growth rate. Best long-run opportunities for 4. Dogs growth and profitability Low relative market share position Substantial investment to and compete in slow or no market maintain or strengthen growth dominant position Weak internal and external position Integration strategies, intensive Decision to liquidate, divest, strategies, joint ventures 27 retrenchment

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 as CASH COW BBC Online: QUESTION MARK This is because it has a very low market share, but retains a high growth rate percentage.

Some limitations of the Boston Consulting Group Matrix include: High market share is not the only success factor Market growth is not the only indicator for attractiveness of a market Sometimes Dogs can earn even more cash as Cash Cows

Internal-External (IE) Matrix

I. II.

IE matrix is used to analyze working conditions and strategic position of a business. The IE matrix is a continuation of the EFE matrix & IFE matrix models. It works on a similar manner like the BCG matrix, the IE matrix positions an organization into a nine cell matrix. The IE matrix is based on the following two criteria: EFE matrix Score - this score is plotted on the y-axis 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 is considered 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 is considered low. A score of 2.0 to 2.99 is medium. A score of 3.0 to 4.0 is high.

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

The IE matrix can be divided into three major regions that have different strategy implications.

Grow & Build

Intensive

Market Penetration Market Development Product Development

Integrative

Backward Integration Forward Integration Horizontal Integration

Hold & Maintain Market Penetration Product Development Harvest or Divest Retrenchment Divestiture Liquidation

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

Grand Strategy Matrix

The model defines the situation of business through the market growth and their competitive position in the market. All organizations (or divisions) can be positioned in one of four quadrants Based on two dimensions Competitive position Market growth
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Grand Strategy Matrix

RAPID MARKET GROWTH

Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation Quadrant III Retrenchment Concentric diversification Horizontal diversification Conglomerate diversification Liquidation

WEAK COMPETITIVE POSITION

Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification Quadrant IV Concentric diversification Horizontal diversification Conglomerate diversification Joint ventures

STRONG COMPETITIVE POSITION

SLOW MARKET GROWTH

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Four Quadrants of Grand Strategy Matrix

Quadrant I
Excellent

Quadrant III

strategic position Concentration on current markets and products Take risks aggressively when necessary

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

Quadrant II
Evaluate

present approach

Quadrant IV

seriously How to change to improve competitiveness Rapid market growth requires intensive strategy

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 is part of a rapid market growth industry while maintaining a strong competitive position. Compared to its rivals in the UK, the BBC has more financial strength giving it an advantage over competitors. Globally, the company can make use of its resources/subsidiaries allowing an increase in customer base.

Stage 3: The Decision Stage

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.

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 are same as in EFE and IFE matrix. Adjacent column to key factors is Weight (relative importance of the factor) which hold the numeric value obtained from EFE and IFE matrix weight column. The next to weight is AS stands for attractive score assign priority to key factors using the numeric value 4 for most importance and 1 for least importance and the last column TAS (Total attractive score) is the value calculated by multiplying weight by AS. One thing important to note for each strategy separate AS and TAS value added in the table, weight remain same for all set of strategies mentioned in QSPM. The topmost shows the strategies are compared in the QSPM matrix, below mentioned table illustrate the structure of QSPM matrix.

1.

2. 3.

4.

5.

6.

List the firms key external opportunities & threats; list the firms key internal strengths and weaknesses (EFE Matrix and IFE Matrix). A minimum of 10 external & internal critical success factors should be taken. 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. Record these strategies in the top row of the QSPM. Group the strategies into mutually exclusive sets if possible. Determine the Attractiveness Scores (AS), defined as numerical values that indicate the relative attractiveness of each strategy in a given set of alternatives. The range for Attractiveness Scores is 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive. Compute the Total Attractiveness Scores. Total Attractiveness Scores are defined as the product of multiplying the weights (Step 2) by the Attractiveness Scores (Step 4) in each row. Compute the Sum Total Attractiveness Score. Add Total Attractiveness Scores in each strategy column of the QSPM. The Sum Total Attractiveness Scores reveal which strategy is most attractive in each set of alternatives. Higher scores indicate more attractive strategies, considering all the relevant external and internal factors that could affect the strategic decisions.

Steps to develop QSPM

QSPM
Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Weight

Strategic Alternatives
Strategy 1 Strategy 2 Strategy 3

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