Post on 22-Dec-2015
CHAPTER 8
STRATEGY FORMULATION;FUNCTIONAL STRATEGY & STRATEGIC CHOICE
STRATEGIC MANAGEMENT AND BUSINESS POLICY
11th Edition
Thomas L. Wheelen
J. David Hunger
Strategy Formulation
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
-- Establishing long-term objectives-- Generating alternative strategies-- Selecting strategies to pursue-- Best alternative - achieve mission & objectives
Nature of Strategy Analysis & Choice
Strategy Analysis & Choice
Strategy Formulation
Comprehensive Strategy-Formulation Framework
Stage 1:The Input Stage
Stage 2:The Matching Stage
Stage 3:The Decision Stage
Strategy Formulation
Strategy-Formulation Analytical Framework
Internal Factor EvaluationMatrix (IFE)
External Factor EvaluationMatrix (EFE)
Stage 1:The Input Stage
Strategy Formulation
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
Strategy Formulation
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
Strategy Formulation
BCG Matrix
Boston Consulting Group Matrix
BCG reveals differences among business divisions in terms of:
1- 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.
2- Market growth rate
Strategy Formulation
BCG Matrix
Strategy Formulation
BCG Matrix
Based on the observation that a company’s divisions can be classified into four categories based on combinations of market growth & market share relative to the largest competitor.
A framework assumes that an increase in relative market share will result in an increase in the generation of cash.
Strategy Formulation
BCG Matrix
Question Marks
Low relative market share – compete in high-growth industry
Cash needs are high
Cash generation is low
Organization must decide whether to: strengthen them (intensive strategies) or divest
Strategy Formulation
BCG Matrix
Stars
High relative market share and high growth rate
Best long-run opportunities for growth & profitability
Consider substantial investment to maintain or strengthen dominant position
Integration strategies, intensive strategies, joint ventures
Strategy Formulation
BCG Matrix
Cash Cows
High relative market share, competes in low-growth industry
Generate cash in excess of their needs
Milked for other purposes
Cash cow divisions should be managed to maintain strong position as long as possible
Product development, concentric diversification
If weakens—retrenchment or divestiture
Strategy Formulation
BCG Matrix
Dogs
Low relative market share & compete in slow or no market growth
Weak internal & external position
Liquidation, divestiture, retrenchment
Strategy Formulation
Limitations:
Oversimplification & inaccuracy Does not reflect if other divisions are growing
overtime A snapshot of an organization at a given point in
time. Other variables as CA & size of the market are
important in strategic decisions about divisions.
Strategy Formulation
BCG Matrix
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
Strategy Formulation
Grand Strategy Matrix
Tool for formulating alternative strategies
Based on two dimensions
Competitive position
Market growth
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Quadrant IV
1. Concentric diversification
2. Horizontal diversification
3. Conglomerate diversification
4. Joint ventures
Quadrant III
1. Retrenchment
2. Concentric diversification
3. Horizontal diversification
4. Conglomerate diversification
5. Liquidation
Quadrant I
1. Market development
2. Market penetration
3. Product development
4. Forward integration
5. Backward integration
6. Horizontal integration
7. Concentric diversification
Quadrant II
1. Market development
2. Market penetration
3. Product development
4. Horizontal integration
5. Divestiture
6. Liquidation
RAPID MARKET GROWTH
SLOW MARKET GROWTH
WEAK COMPETITIVE
POSITION
STRONGCOMPETITIVE
POSITION
Strategy Formulation
Grand Strategy Matrix
Excellent strategic position
Concentration on current markets/products
Take risks aggressively when necessary
Quadrant I
Strategy Formulation
Grand Strategy Matrix
Evaluate present approach
How to improve competitiveness
Rapid market growth requires intensive strategy
Quadrant II
Strategy Formulation
Grand Strategy Matrix
Compete in slow-growth industries
Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)
Quadrant III
Strategy Formulation
Grand Strategy Matrix
Strong competitive position
Slow-growth industry
Diversification to more promising growth areas
Quadrant IV
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Strategy-Formulation Analytical Framework
Stage 3:The Decision Stage
Quantitative StrategicPlanning Matrix
(QSPM)
Strategy Formulation
QSPM
Technique designed to determine the relative attractiveness of feasible alternative actions
Quantitative Strategic Planning Matrix
Strategy Formulation
QSPM
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information Systems
Strategy 3Strategy 2Strategy 1WeightKey External Factors
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/Environmental
Technological
Competitive
Strategic Alternatives
Strategy Formulation
QSPM – 6 Steps to Develop
(1) Make a list of the firm’s key external & internal factors from the EFAS & IFAS in the left column. A minimum of 10 external & 10 internal should be included in the QSPM.
(2) Assign weights to each key external & internal factor. Weights are identical to those in the EFAS & IFAS matrices.
(3) Examine Stage 2 matrices (matching techniques; SWOT analysis, SPACE Matrix, BCG, & Grand Strategy Matrix), and identify the alternative strategies the organization should consider implementing. Record these strategies in the top row of the QSPM.
Strategy Formulation
QSPM – 6 Steps to Develop(4) Determine the Attractiveness Score (AS) of each
strategy. AS indicates the relative attractiveness of each strategy.
AS is determined by examining each factor (external/internal), one at a time, & asking:
“Does this factor affect the choice of strategies?”
If YES: then the factors’ AS is rated as follows:
1: Slightly attractive, 2: Somewhat attractive, 3: Reasonably attractive, 4: Highly attractive.
If NO: then that factor has no effect on the choice being made, thus given a dash.
N.B.: A dash in one strategy gives a dash in all other strategies for that specific factor.
Strategy Formulation
QSPM – 6 Steps to Develop
(5) Compute the Total Attractiveness Scores (TAS). Multiply each weight by each AS. TAS indicates the relative attractiveness of each alternative strategy, considering only the impact of the adjacent external or internal factor.
(6) Compute the Sum Total Attractiveness Scores (STAS), to reveal which strategy is more attractive. Higher STAS scores indicate more attractive strategies.
Strategy Formulation
QSPM
Never work column by column, always prepare a QSPM working row by row.
Dashes are inserted all the way across the row when used.
Never duplicate AS scores in a row.
NOTE
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QSPM
Requires intuitive judgments & educated assumptions
Only as good as the prerequisite inputs
Limitations
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QSPM
Sets of strategies considered simultaneously or sequentially
Integration of pertinent external & internal factors in the decision making process
Advantages
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Cultural Aspects of Strategy Choice
Successful strategies depend on the degree of consistency with the firm’s culture
Organization Culture
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Politics of Strategy Choice
Management hierarchy
Career aspirations
Allocation of scarce resources
Politics in Organizations
Strategy Formulation
Politics of Strategy Choice
Equifinality
Satisfying
Generalization
Higher-order issues
Political access on important issues
Political tactics for strategists
Strategy Formulation
Governance Issues
Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights
Board of Directors Roles & Responsibilities
Strategy Formulation
Corporate Governance Issues
1. No more than 2 directors current or former company executives2. No directors do business with the company3. Audit, compensation, and nominating committees made up
of outside directors4. Each director attends at lest 75% of all meetings5. Audit committee meets at least four times a year6. CEO is not also the Chairperson of the Board7. Shareholders have considerable power and information to
choose & replace directors8. Stock options are considered a corporate expense9. No interlocking directorships
Business Week’s “principles of good governance”
Strategy Formulation