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Strategy Generation and

Selection

Chapter Eight

8-1

Learning Objectives 1. Describe the strategy analysis and choice process.

2. Diagram and explain the three-stage strategy-formulation analytical framework.

3. Diagram and explain the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix.

4. Diagram and explain the Strategic Position and Action Evaluation (SPACE) Matrix.

5. Diagram and explain the Boston Consulting Group (BCG) Matrix.

Learning Objectives (cont.) 6. Diagram and explain the Internal-External (IE) Matrix. 7. Diagram and explain the Grand Matrix. 8. Diagram and explain the Quantitative Strategic

Planning Matrix (QSPM). 9. Discuss the role of organizational culture in strategic

analysis and choice. 10. Identify and discuss important political

considerations in strategy analysis and choice. 11. Discuss the role of a board of directors (governance)

in strategic planning.

A Comprehensive Strategic-Management Model

The Process of Generating and Selecting Strategies

❖ A manageable set of the most attractive alternative strategies must be developed.

❖ The advantages, disadvantages, trade-offs, costs, and benefits of these strategies should be determined.

The Process of Generating and Selecting Strategies

❖ Identifying and evaluating alternative strategies should involve many of the managers and employees who earlier assembled the organizational vision and mission statements, performed the external audit, and conducted the internal audit.

The Process of Generating and Selecting Strategies

❖ Alternative strategies proposed by participants should be considered and discussed in a series of meetings.

❖ Proposed strategies should be listed in writing.

❖ When all feasible strategies identified by participants are given and understood, the strategies should be ranked in order of attractiveness.

The Strategy-Formulation Analytical Framework

A Comprehensive Strategy-Formulation Framework

❖ Stage 1 - Input Stage ❖ summarizes the basic input information

needed to formulate strategies ❖ consists of the EFE Matrix, the IFE Matrix,

and the Competitive Profile Matrix (CPM)

A Comprehensive Strategy-Formulation Framework

❖ Stage 2 - Matching Stage ❖ focuses on generating feasible alternative

strategies by aligning key external and internal factors

❖ techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix

Matching Key External and Internal Factors to Formulate Alternative Strategies

A Comprehensive Strategy-Formulation Framework

❖ Stage 3 - Decision Stage ❖ involves the Quantitative Strategic Planning

Matrix (QSPM) ❖ reveals the relative attractiveness of

alternative strategies and thus provides objective basis for selecting specific strategies

The Matching Stage

❖ The Strengths-Weaknesses-Opportunities-T hreats (SWOT) Matrix helps managers develop four types of strategies: ❖ SO (strengths-opportunities) Strategies ❖ WO (weaknesses-opportunities) Strategies ❖ ST (strengths-threats) Strategies ❖ WT (weaknesses-threats) Strategies

The Matching Stage

❖ SO Strategies ❖ use a firm's internal

strengths to take advantage of external opportunities

❖ WO Strategies ❖ aim at improving

internal weaknesses by taking advantage of external opportunities

The Matching Stage

❖ ST Strategies ❖ use a firm's strengths

to avoid or reduce the impact of external threats

❖ WT Strategies ❖ defensive tactics

directed at reducing internal weakness and avoiding external threats

SWOT 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.

SWOT Matrix (cont.)

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

The SPACE Matrix

❖ Strategic Position and Action Evaluation (SPACE) Matrix ❖ four-quadrant framework indicates whether

aggressive, conservative, defensive, or competitive strategies are most appropriate for a given organization

The SPACE Matrix

❖ Two internal dimensions (financial position [FP] and competitive position [CP])

❖ Two external dimensions (stability position [SP] and industry position [IP])

❖ Most important determinants of an organization's overall strategic position

The SPACE Matrix

SPACE Matrix Axes

Steps to Develop a SPACE Matrix

1. Select a set of variables to define financial position (FP), competitive position (CP), stability position (SP), and industry position (IP).

Steps to Develop a SPACE Matrix

2. Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the

variables that make up the FP and IP dimensions.

Assign a numerical value ranging from –1 (best) to –7 (worst) to each of the

variables that make up the SP and CP dimensions.

Steps to Develop a SPACE Matrix

3. Compute an average score for FP, CP, IP, and SP. 4. Plot the average scores for FP, IP, SP, and CP on the appropriate axis. 5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point.

Steps to Develop a SPACE Matrix

6. Draw a directional vector from the origin of the SPACE Matrix through the new

intersection point. ► This vector reveals the type of strategies

recommended for the organization: aggressive, competitive, defensive, or conservative

Example Strategy Profiles

The Boston Consulting Group (BCG) Matrix

❖ BCG Matrix ❖ graphically portrays differences among

divisions in terms of relative market share position and industry growth rate

❖ allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share position and the industry growth rate of each division relative to all other divisions in the organization

The BCG Matrix

❖ Question Marks – Quadrant I ❖ Organization must decide whether to

strengthen them by pursuing an intensive strategy (market penetration, market development, or product development) or to sell them

❖ Stars – Quadrant II ❖ represent the organization’s best long-run

opportunities for growth and profitability

The BCG Matrix

❖ Cash Cows – Quadrant III ❖ generate cash in excess of their needs ❖ should be managed to maintain their strong

position for as long as possible ❖ Dogs – Quadrant IV ❖ compete in a slow- or no-market-growth

industry ❖ businesses are often liquidated, divested, or

trimmed down through retrenchment

The BCG Matrix

❖ The major benefit of the BCG Matrix is that it draws attention to the cash flow, investment characteristics, and needs of an organization's various divisions.

The Internal-External (IE) Matrix

❖ The IE Matrix is based on two key dimensions: the IFE total weighted scores on the x-axis and the EFE total weighted scores on the y-axis

❖ Three Major Regions ❖ Grow and build ❖ Hold and maintain ❖ Harvest or divest

The IE Matrix

The Grand Strategy Matrix

❖ Grand Strategy Matrix ❖ based on two evaluative dimensions:

competitive position and market (industry) growth

The Grand Strategy Matrix

❖ Quadrant I ❖ continued concentration on current markets

(market penetration and market development) and products (product development) is an appropriate strategy

❖ Quadrant II ❖ unable to compete effectively ❖ need to determine why the firm's current

approach is ineffective and how the company can best change to improve its competitiveness

The Grand Strategy Matrix

❖ Quadrant III ❖ must make some drastic changes quickly to avoid

further decline and possible liquidation ❖ Extensive cost and asset reduction

(retrenchment) should be pursued first ❖ Quadrant IV ❖ have characteristically high cash-flow levels and

limited internal growth needs and often can pursue related or unrelated diversification successfully

The Quantitative Strategic Planning Matrix (QSPM)

❖ Quantitative Strategic Planning Matrix (QSPM) ❖ objectively indicates which alternative

strategies are best ❖ uses input from Stage 1 analyses and

matching results from Stage 2 analyses to decide objectively among alternative strategies

The Quantitative Strategic Planning Matrix (QSPM)

Steps in a QSPM 1. Make a list of the firm's key external opportunities

and threats and internal strengths and 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.

Steps in a QSPM (cont.) 4. Determine the Attractiveness Scores (AS).

5. Compute the Total Attractiveness Scores.

6. Compute the Sum Total Attractiveness

Score.

Positive Features of the QSPM

❖ Sets of strategies can be examined sequentially or simultaneously

❖ Requires strategists to integrate pertinent external and internal factors into the decision process

❖ Can be adapted for use by small and large for-profit and nonprofit organizations

Limitations of the QSPM

❖ Always requires informed judgments ❖ It is only as good as the prerequisite

information and matching analyses on which it is based

A QSPM for a Retail Computer Store

A QSPM for a Retail Computer Store (cont.)

The Culture and Politics of Strategy Choice

❖ Strategies that require fewer cultural changes may be more attractive because extensive changes can take considerable time and effort

❖ Political maneuvering consumes valuable time, subverts organizational objectives, diverts human energy, and results in the loss of some valuable employees

❖ Political biases and personal preferences get unduly embedded in strategy choice decisions

Tactics to Aid Strategists

Choose Methods That Afford Employee Commitment

Achieve Satisfactory Results with a Popular Strategy

Shift from Specific to General Issues

Focus on Long-Term Issues and Concerns

Involve Middle Level Managers in Decisions

Governance Issues

❖ Board of Directors ❖ a group of individuals who are elected by the

ownership of a corporation to have oversight and guidance over management and who look out for shareholders’ interests

Board of Director Duties and Responsibilities

1. Control and oversight over management

2. Adherence to legal prescriptions

3. Consideration of stakeholders/ interests

4. Advancement of stockholders’ rights

Principles of Good Governance

1. No more than two directors are current or former company executives.

2. The audit, compensation, and nominating committees are made up solely of outside directors.

3. Each director owns a large equity stake in the company, excluding stock options.

Principles of Good Governance

4. Each director attends at least 75 percent of all meetings.

5. The board meets regularly without management present and evaluates its own performance annually.

6. The CEO is not also the chairperson of the board. 7. There are no interlocking directorships (where a

director or CEO sits on another director's board).