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Strategic Management Concepts: A Competitive Advantage Approach

Sixteenth Edition

Chapter 6

Strategy Analysis and Choice

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Learning Objectives (1 of 2)

6.1 Describe the strategy analysis and choice process.

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

6.3 Diagram and explain the Strengths-Weaknesses-Opportunities-Threats (S W O T) Matrix.

6.4 Diagram and explain the Strategic Position and Action Evaluation (S P A C E) Matrix.

6.5 Diagram and explain the Boston Consulting Group (B C G) Matrix.

After studying this chapter, you should be able to do the following:

6-1. Describe the strategy analysis and choice process.

6-2. Diagram and explain the three-stage strategy-formulation analytical framework.

6-3. Diagram and explain the Strengths-Weaknesses-Opportunities-Threats (SWOT)

Matrix.

6-4. Diagram and explain the Strategic Position and Action Evaluation (SPACE) Matrix.

6-5. Diagram and explain the Boston Consulting Group (BCG) Matrix.

6-6. Diagram and explain the Internal-External (IE) Matrix.

6-7. Diagram and explain the Grand Strategy Matrix.

6-8. Diagram and explain the Quantitative Strategic Planning Matrix (QSPM).

6-9. Discuss the role of organizational culture in strategic analysis and choice.

6-10. Identify and discuss important political considerations in strategy analysis and choice.

6-11. Discuss the role of a board of directors (governance) in strategic planning.

Learning Objectives (2 of 2)

6.6 Diagram and explain the Internal-External (I E) Matrix.

6.7 Diagram and explain the Grand Matrix.

6.8 Diagram and explain the Quantitative Strategic Planning Matrix (Q S P M).

6.9 Discuss the role of organizational culture in strategic analysis and choice.

6.10 Identify and discuss important political considerations in strategy analysis and choice.

6.11 Discuss the role of a board of directors (governance) in strategic planning.

Figure 6-1 A Comprehensive Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.

This chapter focuses on generating and evaluating alternative strategies, as well as selecting strategies to pursue.

The Process of Generating and Selecting Strategies (1 of 3)

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.

Strategy analysis and choice seek to determine alternative courses of action that could best enable the firm to achieve its mission and objectives. Strategists never consider all feasible alternatives that could benefit the firm because there

are an infinite number of possible actions and an infinite number of ways to implement those actions.

The Process of Generating and Selecting Strategies (2 of 3)

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.

Involvement provides the best opportunity for managers and employees to gain an understanding of what the firm is doing and why and to become committed to helping the firm accomplish its objectives.

The Process of Generating and Selecting Strategies (3 of 3)

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.

Creativity should be encouraged in the proposals of alternative strategies.

Figure 6-2 The Strategy-Formulation Analytical Framework

Called the input stage, Stage 1 summarizes the basic input information needed to formulate strategies. Stage 2, called the matching stage, focuses on generating feasible alternative strategies by aligning key external and internal factors. Stage 3, called the decision stage, involves a single technique, the Quantitative Strategic Planning Matrix (QSPM).

A Comprehensive Strategy-Formulation Framework (1 of 3)

Stage 1 - Input Stage

summarizes the basic input information needed to formulate strategies

consists of the E F E Matrix, the I F E Matrix, and the Competitive Profile Matrix (C P M)

Stage 1 of the strategy-formulation analytical framework consists of the External Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive Profile Matrix (CPM).

A Comprehensive Strategy-Formulation Framework (2 of 3)

Stage 2 - Matching Stage

focuses on generating feasible alternative strategies by aligning key external and internal factors

techniques include the Strengths-Weaknesses-Opportunities-Threats (S W O T) Matrix, the Strategic Position and Action Evaluation (S P A C E) Matrix, the Boston Consulting Group (B C G) Matrix, the Internal-External (I E) Matrix, and the Grand Strategy Matrix

Stage 2 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.

A Comprehensive Strategy-Formulation Framework (3 of 3)

Stage 3 - Decision Stage

involves the Quantitative Strategic Planning Matrix (Q S P M)

reveals the relative attractiveness of alternative strategies and thus provides objective basis for selecting specific strategies

A QSPM uses input information from Stage 1 to objectively evaluate feasible alternative strategies identified in Stage 2. It reveals the relative attractiveness of alternative strategies and thus provides an objective basis for selecting specific strategies.

Table 6-1 Matching Key External and Internal Factors to Formulate Alternative Strategies

Key Internal Factor	Key External Factor	Resultant Strategy
Excess working capital (an internal strength)	+ Annual growth of 20 percent in the cell phone industry (an external opportunity)	= Acquire Cellfone, Inc.
Insufficient capacity (an internal weakness)	+ Exit of two major foreign competitors from The industry (an external opportunity)	= Pursue horizontal integration by buying competitors’ facilities
Strong research and development expertise (an internal strength)	+ Decreasing numbers of younger adults (an external threat)	= Develop new products for older adults
Poor employee morale (an internal weakness)	+ Rising health-care costs (an external threat)	= Develop a new wellness program

The Matching Stage (1 of 3)

The Strengths-Weaknesses-Opportunities-Threats (S W O T) Matrix helps managers develop four types of strategies:

S O (strengths-opportunities) Strategies

W O (weaknesses-opportunities) Strategies

S T (strengths-threats) Strategies

W T (weaknesses-threats) Strategies

The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an important matching tool that helps managers develop four types of strategies.

The Matching Stage (2 of 3)

S O Strategies

use a firm’s internal strengths to take advantage of external opportunities

W O Strategies

aim at improving internal weaknesses by taking advantage of external opportunities

SO strategies use a firm’s internal strengths to take advantage of external opportunities. All managers would like their organization to be in a position in which internal strengths can be used to take advantage of external trends and events.

WO strategies aim at improving internal weaknesses by taking advantage of external opportunities.

The Matching Stage (3 of 3)

S T Strategies

use a firm's strengths to avoid or reduce the impact of external threats

W T Strategies

defensive tactics directed at reducing internal weakness and avoiding external threats

ST strategies use a firm’s strengths to avoid or reduce the impact of external threats. This does not mean that a strong organization should always meet threats in the external environment head-on.

WT strategies are defensive tactics directed at reducing internal weakness and avoiding external threats. An organization faced with numerous external threats and internal weaknesses may indeed be in a precarious position.

S W O T Matrix (1 of 2)

List the firm’s key external opportunities.

List the firm’s key external threats.

List the firm’s key internal strengths.

List the firm’s key internal weaknesses.

Match internal strengths with external opportunities, and record the resultant S O strategies.

The process of constructing a SWOT Matrix can be summarized in eight steps.

S W O T Matrix (2 of 2)

Match internal weaknesses with external opportunities, and record the resultant W O strategies.

Match internal strengths with external threats, and record the resultant S T strategies.

Match internal weaknesses with external threats, and record the resultant W T strategies.

Figure 6-4 The S P A C E Matrix (1 of 3)

The Strategic Position and Action Evaluation (SPACE) Matrix, another important Stage 2 matching tool, is illustrated on this slide. Its four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are most appropriate for a given organization.

Figure 6-4 The S P A C E Matrix (2 of 3)

Strategic Position and Action Evaluation (S P A C E) Matrix

four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are most appropriate for a given organization

Figure 6-4 The S P A C E Matrix (3 of 3)

Two internal dimensions (financial position [F P] and competitive position [C P])

Two external dimensions (stability position [S P] and industry position [I P])

Most important determinants of an organization’s overall strategic position

Like the SWOT Matrix, the SPACE Matrix should be both tailored to the particular organization being studied and based on factual information to the extent possible.

Table 6-2 S P A C E Matrix Axes (1 of 2)

Internal Strategic Position	External Strategic Position
Financial Position (F P)	Stability Position (S P)
Return on investment	Technological changes
Leverage	Rate of inflation
Liquidity	Demand variability
Working capital	Price range of competing products
Cash flow	Barriers to entry into market
Inventory turnover	Competitive pressure
Earnings per share	Ease of exit from market
Price earnings ratio	Price elasticity of demand
Blank	Risk involved in business

Example Factors That Make Up the S P A C E Matrix Axes

Variables commonly included on a SPACE matrix are listed on this slide.

Table 6-2 S P A C E Matrix Axes (2 of 2)

Internal Strategic Position	External Strategic Position
Competitive Position (C P)	Industry Position (I P)
Market share	Growth potential
Product quality	Profit potential
Product life cycle	Financial stability
Customer loyalty	Extent leveraged
Capacity utilization	Resource utilization
Technological know-how	Ease of entry into market
Control over suppliers and distributors	Productivity, capacity utilization

Variables commonly included on a SPACE matrix are listed on this slide.

Steps to Develop a S P A C E Matrix (1 of 4)

Select a set of variables to define financial position (F P), competitive position (C P), stability position (S P), and industry position (I P).

The six steps to develop a SPACE matrix are outlined on the next few slides.

Steps to Develop a S P A C E Matrix (2 of 4)

Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables that make up the F P and I P dimensions.

Assign a numerical value ranging from –1 (best) to –7 (worst) to each of the variables that make up the S P and C P dimensions.

Steps to Develop a S P A C E Matrix (3 of 4)

Compute an average score for F P, C P, I P, and S P.

Plot the average scores for F P, I P, S P, and C P on the appropriate axis.

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 S P A C E Matrix (4 of 4)

Draw a directional vector from the origin of the S P A C E Matrix through the new intersection point.

This vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative

Figure 6-5 Example Strategy Profiles (1 of 2)

Some example strategy profiles that can emerge from SPACE analysis are shown in Figure 6-5. The directional vector associated with each profile suggests the type of strategies to pursue: aggressive, conservative, defensive, or competitive.

Figure 6-5 Example Strategy Profiles (2 of 2)

Additional strategy profiles are shown on this slide.

The Boston Consulting Group (B C G) Matrix

B C G 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

Autonomous divisions (also called segments or profit centers) of an organization make up what is called a business portfolio. When a firm’s divisions compete in different industries, a separate strategy often must be developed for each business.

Figure 6-7 The B C G Matrix (1 of 4)

Based on each division’s respective (x, y) coordinate, each segment can be properly positioned (centered) in a BCG Matrix. Each circle represents a separate division. The size of the circle corresponds to the proportion of corporate revenue generated by that business unit, and the pie slice indicates the proportion of corporate profits generated by that division.

Figure 6-7 The B C G Matrix (2 of 4)

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

Divisions in Quadrant I (upper right) have a low relative market share position, yet they compete in a high-growth industry.

Divisions in Quadrant II (upper left) represent the organization’s best long-run opportunities for growth and profitability, and are therefore called stars.

Figure 6-7 The BCG Matrix (3 of 4)

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

Divisions in Quadrant III (lower left) have a high relative market share position but compete in a low-growth industry.

Divisions in Quadrant IV (lower right) have a low relative market share position and compete in a slow- or no-market-growth industry

Figure 6-7 The B C G Matrix (4 of 4)

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

Over time, organizations should strive to achieve a portfolio of divisions that are stars.

Figure 6-10 The Internal-External (I E) Matrix (1 of 2)

Source: Based on: The IE Matrix was developed from the General Electric (GE) Business Screen Matrix. For a description of the GE Matrix, see Michael Allen, “Diagramming GE’s Planning for What’s WATT,” in R. Allio and M. Pennington, eds., Corporate Planning: Techniques and Applications l par; New York: AMACOM, 1979.

But there are four important differences between the BCG Matrix and the IE Matrix, as follows:

1. The x and y axes are different.

2. The IE Matrix requires more information about the divisions than does the BCG Matrix.

3. The strategic implications of each matrix are different. For these reasons,

4. The IE Matrix has nine quadrants versus four in a BCG Matrix.

Figure 6-10 The Internal-External (I E) Matrix (2 of 2)

The I E Matrix is based on two key dimensions: the I F E total weighted scores on the x-axis and the E F E total weighted scores on the y-axis

Three Major Regions

Grow and build

Hold and maintain

Harvest or divest

Figure 6-11 An Example IE Matrix

As indicated by the positioning of the four circles, grow and build strategies are appropriate for Divisions 1, 2, and 3. But Division 4 is a candidate for harvest or divest. Division 2 contributes the greatest percentage of company sales and thus is represented by the largest circle. Division 1 contributes the greatest proportion of total profits; it has the largest-percentage pie slice.

The Grand Strategy Matrix (1 of 3)

Grand Strategy Matrix

based on two evaluative dimensions: competitive position and market (industry) growth

All organizations can be positioned in one of the Grand Strategy Matrix’s four strategy quadrants.

Figure 6-13 The Grand Strategy Matrix

Source: Based on Roland Christensen, Norman Berg, and Malcolm Salter, Policy Formulation and Administration (Homewood, IL: Richard D. Irwin, 1976), 16-18.

The Grand Strategy Matrix is based on two evaluative dimensions: (1) competitive position on the x-axis and (2) market (industry) growth on the y-axis. Appropriate strategies for an organization to consider are listed in sequential order of attractiveness in each quadrant of the Grand Strategy Matrix.

The Grand Strategy Matrix (2 of 3)

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

Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic position.

Firms positioned in Quadrant II need to evaluate their present approach to the marketplace seriously.

The Grand Strategy Matrix (3 of 3)

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

Quadrant III organizations compete in slow-growth industries and have weak competitive positions.

Quadrant IV businesses have a strong competitive position but are in a slow-growth industry.

The Quantitative Strategic Planning Matrix (Q S P M)

Quantitative Strategic Planning Matrix (Q S P M)

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

Other than ranking strategies to achieve the prioritized list, there is only one analytical technique in the literature designed to determine the relative attractiveness of feasible alternative actions, the QSPM.

Table 6-5 The Quantitative Strategic Planning Matrix (Q S P M)

Key Factors	Weight	Strategy 1	Strategy 2	Strategy 3
Key External Factors	Blank	Blank	Blank	Blank
Economy	Blank	Blank	Blank	Blank
Political/Legal/Governmental	Blank	Blank	Blank	Blank
Social/Cultural/Demographic/ Environmental	Blank	Blank	Blank	Blank
Technological	Blank	Blank	Blank	Blank
Competitive	Blank	Blank	Blank	Blank
Key Internal Factors	Blank	Blank	Blank	Blank
Management	Blank	Blank	Blank	Blank
Marketing	Blank	Blank	Blank	Blank
Finance/Accounting	Blank	Blank	Blank	Blank
Production/Operations	Blank	Blank	Blank	Blank
Research and Development	Blank	Blank	Blank	Blank
Management Information Systems	Blank	Blank	Blank	Blank

Strategic Alternatives

The left column of a QSPM consists of key external and internal factors (from Stage 1), and the top row consists of feasible alternative strategies (from Stage 2). Specifically, the left column of a QSPM consists of information obtained directly from the EFE Matrix and IFE Matrix. In a column adjacent to the key success factors, the respective weights received by each factor in the EFE Matrix and the IFE Matrix are recorded.

Steps in a Q S P M (1 of 2)

Make a list of the firm’s key external opportunities and threats and internal strengths and weaknesses in the left column.

Assign weights to each key external and internal factor.

Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing.

There are 6 steps to developing a QSPM.

Steps in a Q S P M (2 of 2)

Determine the Attractiveness Scores (A S).

Compute the Total Attractiveness Scores.

Compute the Sum Total Attractiveness Score.

Positive Features of the Q S P M

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

Developing a Quantitative Strategic Planning Matrix makes it less likely that key factors will be overlooked or weighted inappropriately.

Limitations of the Q S P M

Always requires informed judgments

It is only as good as the prerequisite information and matching analyses on which it is based

The Quantitative Strategic Planning Matrix has two limitations.

Table 6-6 A QSPM for a Retail Computer Store (1 of 3)

A Quantitative Strategic Planning Matrix for a retail computer store is provided on the next 2 slides. This example illustrates all the components of the QSPM: strategic alternatives, key factors, weights, attractiveness scores (AS), total attractiveness scores (TAS), and the sum total attractiveness score.

Table 6-6 A QSPM for a Retail Computer Store (2 of 3)

Table 6-6 A QSPM for a Retail Computer Store (3 of 3)

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

All organizations are political. Unless managed, political maneuvering consumes valuable time, subverts organizational objectives, diverts human energy, and results in the loss of some valuable employees.

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

Because strategies must be effective in the marketplace and capable of gaining internal commitment, these tactics used by politicians for centuries can aid strategists.

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

The act of oversight and direction is referred to as governance.

Board of Director Duties and Responsibilities

Control and oversight over management

Adherence to legal prescriptions

Consideration of stakeholders/ interests

Advancement of stockholders’ rights

Boards have four major duties and responsibilities.

Principles of Good Governance (1 of 2)

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

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

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

BusinessWeek recently evaluated the boards of most large U.S. companies and provided the included “principles of good governance.”

Principles of Good Governance (2 of 2)

Each director attends at least 75 percent of all meetings.

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

The C E O is not also the chairperson of the board.

There are no interlocking directorships (where a director or C E O sits on another director's board).