Ch 7 -1 Copyright © 2011 Pearson Education
Strategic Management: Concepts and CasesArab World EditionFred R. DavidAbbas J. AliAbdulrahman Y. Al-Aali
Chapter 7: Strategy Analysis andChoice
Ch 7 -2 Copyright © 2011 Pearson Education
Chapter Outline
Ch 7 -3 Copyright © 2011 Pearson Education
• The Nature of Strategy & 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
• Governance Issues
Nature of Strategy Analysis & ChoiceStrategy Analysis & Choice
Ch 7 -4 Copyright © 2011 Pearson Education
This process seek to determine alternative courses of action that could best enable the firm to best achieve its mission and long run objectives
Ch 7 -5 Copyright © 2011 Pearson Education
Source: Adapted from Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988) 40.
• Vision• Mission• Objectives• External audit• Internal audit• Past successful strategies
Strategy Analysis & Choice
Alternative Strategies Derive From:
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Ch 6 -7
Strategy Analysis & ChoiceGenerating Alternatives
• Participation in generating alternative strategies should be as broad as possible
• Alternative strategies proposed by participants should be considered, discussed, and ranked in order of attractiveness
Ch 7 -7 Copyright © 2011 Pearson Education
Ch 6 -8
Comprehensive Strategy-Formulation Framework
Stage 1:The Input Stage
Stage 2:The Matching Stage
Stage 3:The Decision Stage
Ch 7 -8 Copyright © 2011 Pearson Education
Ch 7 -9 Copyright © 2011 Pearson Education
Ch 6 -10
Strategy-Formulation Analytical Framework
Internal Factor EvaluationMatrix (IFE)
External Factor EvaluationMatrix (EFE)
Competitive Profile Matrix(CPM)
Stage 1:The Input Stage
Ch 7 -10 Copyright © 2011 Pearson Education
Ch 6 -11
Stage 1: The Input Stage
• Basic input information for the matching & decision stage matrices
• Good intuitive judgment always needed
Ch 7 -11 Copyright © 2011 Pearson Education
Ch 6 -12
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
Ch 7 -12 Copyright © 2011 Pearson Education
Ch 6 -13
Stage 2: The Matching Stage
Finding the match between organization’s internal resources & skills and the opportunities & risks created by its external factors
Ch 7 -13 Copyright © 2011 Pearson Education
Ch 6 -14
Stage 2: The Matching Stage
SWOT Matrix
A SWOT matrix :it is an important matching tool that help managers develop four types of strategies
Ch 7 -14 Copyright © 2011 Pearson Education
SO WO
ST WT
SWOT Matrix
internal
external
Strengths – S
List Strengths
Weaknesses – W
List Weaknesses
Opportunities – O
List Opportunities
SO Strategies
Use strengths to take advantage of opportunities
WO Strategies
Overcoming weaknesses by taking advantage of
opportunities
Threats – T
List Threats
ST Strategies
Use strengths to avoid threats
WT Strategies
defensive strategy aim at
Minimize weaknesses and avoid threats
Ch 7 -15 Copyright © 2011 Pearson Education
SWOT Example
Key internal factor Key external factor
Resultant strategy
Excess working capacity (strength )
20% annual growth in the cell phone industry (opportunity )
Acquire Cell phone ,Inc.(SO)
Insufficient capacity (weakness)
Exit of two major foreign competitors (opportunity )
Pursue horizontal integration by buying competitors ‘s facilities (WO)
Strong R&D expertise (strength )
Decreasing number of younger adults (threat )
Develop new products for older adults (ST)
Poor employees morale (weakness)
Strong union activity (threat)
Develop a new employees benefits package (WT)
Ch 6 -16
Ch 6 -17
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
Ch 7 -17 Copyright © 2011 Pearson Education
Ch 6 -18
SPACE Matrix
Strategic Position & Action Evaluation Matrix
4-quadrants indicate whether the most appropriate strategy is:• Aggressive• Conservative• Defensive• Competitive
Ch 7 -18 Copyright © 2011 Pearson Education
Ch 6 -19
SPACE Matrix
Two Internal Dimensions:
1. Financial Strength (FS)
2. Competitive Advantage (CA)
Ch 7 -19 Copyright © 2011 Pearson Education
Ch 6 -20
SPACE Matrix
Two External Dimensions:
1. Environmental Stability (ES)
2. Industry Strength (IS)
Ch 7 -20 Copyright © 2011 Pearson Education
SPACE Factors
Ch 6 -21
Environmental Stability (ES)
Technological changesRate of inflationDemand variabilityPrice range of competing productsBarriers to entryCompetitive pressure
Ease of exit from market Risk involved in business
Financial Strength (FS)
Return on investmentLeverageLiquidityWorking capitalCash flowInventory turnoverEarnings per sharePrice earnings ratio
External Strategic PositionInternal Strategic
Position
Ch 7 -21 Copyright © 2011 Pearson Education
SPACE Factors
Ch 6 -22
Industry Strength (IS)
Growth potentialProfit potentialFinancial stabilityTechnological know-howResource utilizationEase of entry into marketProductivity, capacity utilization
Competitive Advantage (CA)
Market shareProduct qualityProduct life cycleCustomer loyaltyCompetition’s capacity utilizationTechnological know-howControl over suppliers & distributors
External Strategic PositionInternal Strategic Position
Ch 7 -22 Copyright © 2011 Pearson Education
Steps to Developing a SPACE Matrix
1. Select a set of variables to define FS, CA, ES, and IS.
2. Assign a numerical value:
• From +1 to +6 to each FS & IS dimension
• From -1 to -6 to each ES & CA dimension
3. Compute an average score for each FS, CA, ES, and IS.
4. Plot the average score on the appropriate axis.
5. Add the two scores on the x-axis and plot the point. Add the two scores on the y-axis and plot the point. Plot the intersection of the new xy point.
6. Draw a directional vector from the origin through the new intersection point.
Ch 7 -23 Copyright © 2011 Pearson Education
Ch 7 -24 Copyright © 2011 Pearson Education
Ch 6 -25
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
Ch 7 -25 Copyright © 2011 Pearson Education
Ch 6 -26
BCG Matrix
Boston Consulting Group Matrix
• Enhances multidivisional firm in formulating strategies
• Divisions may compete in different industries
• Focus on market-share position & industry growth rate
Ch 7 -26 Copyright © 2011 Pearson Education
Ch 6 -27
BCG Matrix
Relative 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
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Ch 7 -28 Copyright © 2011 Pearson Education
Ch 6 -29
BCG Matrix
Question Marks
• Low relative market share, competes in high-growth industry
- Cash needs are high
- Cash generation is low
• Decision to strengthen (intensive strategies) or divest
Ch 7 -29 Copyright © 2011 Pearson Education
Ch 6 -30
BCG Matrix
Stars
• High relative market share and high growth rate
- Best long-run opportunities for growth & profitability
• Substantial investment to maintain or strengthen dominant position
- Integration strategies, intensive strategies, joint ventures
Ch 7 -30 Copyright © 2011 Pearson Education
Ch 6 -31
BCG Matrix
Cash Cows
• High relative market share, competes 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 weakens – retrenchment or divestiture
Ch 7 -31 Copyright © 2011 Pearson Education
Ch 6 -32
BCG Matrix
Dogs
• Low relative market share, competes in slow or no market growth
- Weak internal & external position
• Liquidation, divestiture, retrenchment
Ch 7 -32 Copyright © 2011 Pearson Education
Ch 6 -33
Strategy-Formulation Analytical Framework
SWOT Matrix
SPACE Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2:The Matching Stage
Ch 7 -33 Copyright © 2011 Pearson Education
The Internal-External Matrix
• Positions an organization’s various divisions in a nine-cell display
• Similar to BCG Matrix except the IE Matrix:
- Requires more information about the divisions
- Strategic implications of each matrix are different
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Ch 7 -35 Copyright © 2011 Pearson Education
IE Matrix
• Based on two key dimensions
- The IFE total weighted scores on the x-axis
- The EFE total weighted scores on the y-axis
• Divided into three major regions
- Grow and build – Cells I, II, or IV
- Hold and maintain – Cells III, V, or VII
- Harvest or divest – Cells VI, VIII, or IX
Ch 7 -36 Copyright © 2011 Pearson Education
Ch 7 -37 Copyright © 2011 Pearson Education
Ch 6 -38
Strategy-Formulation Analytical Framework
SPACE Matrix
BCG Matrix
IE Matrix
Stage 2:The Matching Stage
SWOT Matrix
Grand Strategy Matrix
Ch 7 -38 Copyright © 2011 Pearson Education
Ch 6 -39
Strategy-Formulation Analytical Framework
Stage 3:The Decision Stage
Quantitative StrategicPlanning Matrix
(QSPM)
Ch 7 -39 Copyright © 2011 Pearson Education
Ch 6 -40
QSPM
Quantitative Strategic Planning Matrix
Technique designed to determine the relative attractiveness of feasible alternative actions
Ch 7 -40 Copyright © 2011 Pearson Education
Ch 7 -41 Copyright © 2011 Pearson Education
Steps to Develop a QSPM
1. Make a list of the firm’s key external opportunities/threats
and internal strengths/weaknesses in the left column.
2. Assign weights to each key external and internal factor.
3. Examine the Stage 2 (matching) matrices, and identify
alternative strategies that the organization should consider
implementing.
4. Determine the Attractiveness Scores.
5. Compare the Total Attractiveness Scores.
6. Compute the Sum Total Attractiveness Score.
Ch 7 -42 Copyright © 2011 Pearson Education
Ch 6 -43
QSPM
Advantages
• Sets of strategies considered simultaneously or sequentially
• Integration of pertinent external & internal factors in the decision-making process
Ch 7 -43 Copyright © 2011 Pearson Education
Ch 6 -44
QSPM
Limitations
• Requires intuitive judgments & educated assumptions
• Only as good as the prerequisite inputs
Copyright © 2011 Pearson EducationCh 7 -44
Ch 6 -45
Cultural Aspects of Strategy Choice
Organizational Culture
Successful strategies depend on the degree of consistency with the firm’s culture
Ch 7 -45 Copyright © 2011 Pearson Education
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