Chapter 6

Strategy Analysis And Choice

 chapter Outline

• The Nature of Strategy Analysis and Choice

• A Comprehensive Strategy-Formulation
Framework

• The Input Stage

 Chapter Outline

• The Matching Stage

• The Decision Stage

• Cultural Aspects of Strategy Choice

 Strategy Analysis & Choice

Whether it’s broke or not, fix it—make it

better. Not just products, but the whole
company if necessary.

-- Bill Saporito
 Strategy Analysis & Choice

Strategic analysis and choice largely

involves making subjective decisions
based on objective information.
 Strategy Analysis & Choice

The Nature of Strategy Analysis and Choice –

– Establishing long-term objectives

– Generating alternative strategies
– Selecting strategies to pursue
– Best alternative to achieve mission and objectives
 Strategy Analysis & Choice
Alternative strategies derive from –

– Vision
– Mission
– Objectives
– External audit
– Internal audit
– Past successful strategies
 Strategy Analysis & Choice

Participation in generating alternative

strategies should be broad –
Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

 Formulation Framework

Internal Factor Evaluation

Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile
Matrix
 Input Stage

• Provides basic input information for the

matching and decision stage matrices
• Good intuitive judgment always needed
 Formulation Framework

TOWS Matrix

SPACE Matrix

Stage 2:
BCG Matrix
The Matching Stage

IE Matrix

Grand Strategy Matrix

 Matching Stage

• Match between organization’s internal

resources and skills and the opportunities
and risks created by its external factors.
 Matching Key Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in the

Excess working capacity
+ cell phone industry = Acquire Cellfone, Inc.
(strength)
(opportunity)

Exit of two major foreign Pursue horizontal integration

Insufficient capacity
+ competitors form the = by buying competitor's
(weakness)
industry (opportunity) facilities

Decreasing numbers of Develop new products for

Strong R&D (strength) + =
young adults (threat) older adults

Poor employee morale Develop a new employee

+ Strong union activity =
(weakness) (threat) benefits package
 Formulation Framework

TOWS Matrix

SPACE Matrix

Stage 2:
BCG Matrix
The Matching Stage

IE Matrix

Grand Strategy Matrix

Fred R. David Ch 6-15

 Matching Stage

TOWS Matrix

– Threats
– Opportunities
– Strengths
– Weaknesses

Fred R. David Ch 6-16

 TOWS Matrix

Develop four types of strategies

– Strengths-Opportunities (SO)
– Weaknesses-Opportunities (WO)
– Strengths-Threats (ST)
– Weaknesses-Threats (WT)

Fred R. David Ch 6-17

 SO Strategies

Threats Use a firm’s

Opportunities SO internal
strengths to take
Weaknesses Strategies
advantage of
Strengths external
(TOWS) opportunities

Ch 6-18
Fred R. David
 WO Strategies

Improving
Threats internal
Opportunities WO weaknesses by
Weaknesses Strategies taking
Strengths advantage of
(TOWS) external
opportunities

Ch 6-19
Fred R. David
 ST Strategies

Threats Using firm’s

ST strengths to
Opportunities
avoid or reduce
Weaknesses Strategies the impact of
Strengths external threats.
(TOWS)

Ch 6-20
Fred R. David
 WT Strategies

Defensive
Threats tactics aimed at
Opportunities WT reducing
internal
Weaknesses Strategies
weaknesses
Strengths and avoiding
(TOWS) environmental
threats.

Ch 6-21
Fred R. David
 TOWS Matrix

Steps in developing the TOWS 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

Fred R. David Ch 6-22

 TOWS Matrix
Developing the TOWS Matrix

5. Match internal strengths with external opportunities and

record the resultant SO Strategies
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 Strategies

Fred R. David Ch 6-23

 TOWS Matrix
Leave Blank Strengths-S Weaknesses-W

List Strengths List Weaknesses

Opportunities-O SO Strategies WO Strategies

List Opportunities Use strengths to take Overcome weaknesses

advantage of opportunities by taking advantage of
opportunities

Threats-T ST Strategies WT Strategies

List Threats Use strengths to avoid Minimize weaknesses

threats and avoid threats
 TOWS Matrix Strategies
• The WT Strategy (mini-mini). In general, the aim of the
WT strategy is to minimize both weaknesses and threats. A company
faced with external threats and internal weaknesses may indeed be
in a precarious position. In fact, such a firm may have to fight for its
survival or may even have to choose liquidation. But there are, of
course, other choices. For example, such a firm may prefer a
merger, or may cut back its operations, with the intent of either
overcoming the weaknesses or hoping that the threat will diminish
over time (too often wishful thinking). Whatever strategy is
selected, the WT position is one that any firm will try to avoid.

 -25
 The WO Strategy (mini--maxi).
• The second strategy attempts to minimize the weaknesses and to
maximize tile opportunities. A company may identify opportunities in the
external environment but have organizational weaknesses which prevent
the firm from taking advantage of market demands. For example, an auto
accessory company with a great demand for electronic devices to control
the amount and timing of fuel injection in a combustion engine, may lack
the technology required for producing these microprocessors. One
possible strategy would be to acquire this technology through cooperation
with a firm having competency in this field. An alternative tactic would
be to hire and train people with the required technical capabilities. Of
course, the firm also has the choice of doing nothing, thus leaving the
opportunity to competitors. (Backward integration)

 -26
 The ST Strategy (maxi-mini).
• This strategy is based on the strengths of the organization that can deal
with threats in the environment. The aim is to maximize the former while
minimizing the latter.

 -27
 The SO Strategy (maxi-maxi).
• Any company would like to be in a position where it can maximize both,
strengths and opportunities. Such an enterprise can lead from strengths,
utilizing resources to take advantage of the market for its products and
services. For example, Mercedes Benz, with the technical know-how and
the quality image, can take advantage of the external demand for luxury
cars by an increasingly affluent public. Successful enterprises, even if they
temporarily use one of the three previously mentioned strategies, will
attempt to get into a situation where they can work from strengths to take
advantage of opportunities. If they have weaknesses, they will strive to
overcome them, making them strengths. If they face threats, they will
cope with them so that they can focus on opportunities.

 -28
An example to be shared with students

A SWOT matrix for a retail computer store, fig-

6.3, page # 180

Fred R. David Ch 6-29

 Formulation Framework

TOWS Matrix

SPACE Matrix

Stage 2:
BCG Matrix
The Matching Stage

IE Matrix

Grand Strategy Matrix

Fred R. David Ch 6-30

 SPACE Matrix
Strategic Position and Action Evaluation Matrix

 Four quadrant framework

 Determines appropriate strategies
 Aggressive
 Conservative
 Defensive
 Competitive

Fred R. David Ch 6-31

 SPACE Matrix

Two Internal Dimensions

 Financial Strength [FS]
 Competitive Advantage [CA]

Two External Dimensions

 Environmental Stability [ES]
 Industry Strength [IS] or industry position (IP)

Fred R. David Ch 6-32

 SPACE Matrix
Overall Strategic position determined by:

– Financial Strength [FS] or financial position

(FP)
– Competitive Advantage [CA] or comp.position
(CP)
– Environmental Stability [ES] or Stability
Position (SP)
– Industry Strength [IS] or industry position (IP)

Fred R. David Ch 6-33

 SPACE Matrix
Developing the SPACE Matrix:

• EFE Matrix
• IFE Matrix
• Financial Strength
• Competitive Advantage
• Environmental Stability
• Industry Strength

Fred R. David Ch 6-34

 SPACE Matrix

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

• 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

Fred R. David Ch 6-35

 SPACE Matrix

• 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.

Fred R. David Ch 6-36

 SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Return on investment Technological changes

Leverage Rate of inflation
Liquidity Demand variability
Working capital Price range of competing products
Cash flow Barriers to entry
Risk involved in business Competitive pressure
Price elasticity of demand

Ch 6-37
Fred R. David
 SPACE Factors

Internal Strategic Position External Strategic Position

Competitive Advantage CA Industry Strength (IS)

Market share Growth potential

Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Resource utilization
Competition’s capacity utilization Capital intensify
Technological know-how Ease of entry into market
Control over suppliers & distributors Productivity, capacity utilization

Ch 6-38
 SPACE Matrix
FS
Aggressive
+6
Conservative: Backward, forward, horizontal
+5
Market penetration +4 integration
• Market penetration
• Market development +3
• Market development
+2
• Product development • Product development
+1
• Related diversification • Diversification (related or unrelated
CA IS
-6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6

-2 Competitive
Defensive
-3 Backward, forward, horizonta
Retrenchment
-4 integration
• Divestiture
-5 • Market penetration
• Liquidation -6 • Market development
ES • Product development
 Example
• Page 183
• A SPACE matrix for a bank example page 184
 Formulation Framework

TOWS Matrix

SPACE Matrix

Stage 2:
BCG Matrix
The Matching Stage

IE Matrix

Grand Strategy Matrix

Fred R. David Ch 6-41

 BCG Matrix
Boston Consulting Group Matrix

• Enhances multidivisional firms’ efforts to

formulate strategies
• Autonomous divisions (or profit centers)
constitute the business portfolio
• Firm’s divisions may compete in different
industries requiring separate strategy

Fred R. Davi Ch 6-42

 BCG Matrix
Boston Consulting Group Matrix

• Graphically portrays differences among

divisions
• Focuses on market share position and
industry growth rate
• Manage business portfolio through relative
market share position and industry growth
rate

Fred R. David Ch 6-43

 BCG Matrix
Relative market share position defined:

• Ratio of a division’s own market share in a

particular industry to the market share held
by the largest rival firm in that industry.

Fred R. David Ch 6-44

 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .A50 0.0
Industry Sales Growth Rate

High
+20
Stars Question Marks
II I
Medium
0

Cash Cows Dogs

III IV
Low
-20
 BCG Matrix

• Question Marks
• Stars
• Cash Cows
• Dogs

Fred R. David Ch 6-46

 BCG Matrix
Question Marks

• Low relative market share position yet

compete in high-growth industry.
• Cash needs are high
• Case generation is low

• Decision to strengthen (intensive strategies) or

divest

Fred R. David Ch 6-47

 BCG Matrix
Stars

• High relative market share and high industry

growth rate.
• Best long-run opportunities for growth and
profitability

• Substantial investment to maintain or

strengthen dominant position
• Integration strategies, intensive strategies, joint
ventures

Fred R. David Ch 6-48

 BCG Matrix
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 weak—retrenchment or divestiture

Fred R. David Ch 6-49

 BCG Matrix
Dogs

• Low relative market share position and

compete in slow or no market growth
• Weak internal and external position

• Decision to liquidate, divest, retrenchment

Fred R. David Ch 6-50

• Example page 187

Fred R. David Ch 6-51

IE matrix
 Formulation Framework

TOWS Matrix

SPACE Matrix

Stage 2:
BCG Matrix
The Matching Stage

IE Matrix

Grand Strategy Matrix

Fred R. David Ch 6-53

 Grand Strategy Matrix
• Popular tool for formulating alternative
strategies

• All organizations (or divisions) can be

positioned in one of four quadrants

• Based on two evaluative dimensions:

– Competitive position
– Market growth

Fred R. David Ch 6-54

 RAPID MARKET GROWTH
Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
WEAK 7. Concentric diversification
STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate
4. Conglomerate diversification
diversification 4. Joint ventures
5. Liquidation
SLOW MARKET GROWTH (position)
 Grand Strategy Matrix

Quadrant I

• Excellent strategic position

• Concentration on current markets and
products
• Take risks aggressively when necessary

Fred R. David Ch 6-56

 Grand Strategy Matrix

Quadrant II

• Evaluate present approach seriously

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

Fred R. David Ch 6-57

 Grand Strategy Matrix

Quadrant III

• Compete in slow-growth industries

• Weak competitive position
• Drastic changes quickly
• Cost and asset reduction indicated
(retrenchment)

Fred R. David Ch 6-58

 Grand Strategy Matrix

Quadrant IV

• Strong competitive position

• Slow-growth industry
• Diversification indicated to more promising
growth areas

Fred R. David Ch 6-59

 Formulation Framework

Stage 3: Quantitative Strategic

The Decision Stage Planning Matrix
(QSPM)
 QSPM

Quantitative Strategic Planning Matrix

• Only technique designed to determine the

relative attractiveness of feasible alternative
actions

Fred R. David Ch 6-61

 QSPM

Quantitative Strategic Planning Matrix

• Tool for objective evaluation of alternative

strategies
• Based on identified external and internal
crucial success factors
• Requires good intuitive judgment
 QSPM

Quantitative Strategic Planning Matrix

• List the firm’s key external opportunities &

threats; list the firm’s key internal strengths and
weaknesses

• Assign weights to each external and internal

critical success factor

Fred R. David Ch 6-63

 QSPM

Quantitative Strategic Planning Matrix

• Examine the Stage 2 (matching) matrices and

identify alternative strategies that the
organization should consider implementing

• Determine the Attractiveness Scores (AS)

Fred R. David Ch 6-64

 QSPM

Quantitative Strategic Planning Matrix

• Compute the total Attractiveness Scores

• Compute the Sum Total Attractiveness

Score
 QSPM Strategic Alternatives
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
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

Fred R. David Ch 6-66

 QSPM

Limitations:

• Requires intuitive judgments and educated

assumptions

• Only as good as the prerequisite inputs

Fred R. David Ch 6-67

 QSPM

Positives:

• Sets of strategies examined simultaneously or

sequentially

• Requires the integration of pertinent external and

internal factors in the decision-making process

Fred R. David Ch 6-68

• Extra information

• http://www.scribd.com/doc/16050821/McDo
nald-s-Case-Study#scribd
 Question for class
• Given the following information, develop a
SPACE Matrix for the XYZ Corporation:
• FP = +2; SP = -6; CP = -2; IP = +4.
Given the information in the following
table, develop a BCG Matrix
• Divisions 1 2 3
• Profits $10 $15 $25
• Sales $100 $50 $100
• R. M.Share 0.2 0.5 0.8
• Ind. G.Rate +20 +10 -10
• What types of strategies would
you recommend for an
organization that achieves total
• weighted scores of 3.6 on the IFE
and 1.2 on the EFE Matrix?
 Cultural Aspects of Strategy Choice

Culture:

• The set of shared values, beliefs, attitudes,

customs, norms, personalities, heroes, and
heroines that describe a firm

Fred R. David Ch 6-73

 Cultural Aspects of Strategy Choice

Culture:

• Successful strategies depend on degree of

support from a firm’s culture

Fred R. David Ch 6-74

 Politics of Strategy Choice

Politics in organizations:

• Management hierarchy
• Career aspirations
• Allocation of scarce resources

Fred R. David Ch 6-75

 Politics of Strategy Choice

Political tactics for strategists:

• Equifinality
• Satisfying
• Generalization
• Focus on Higher-Order Issues
• Provide Political Access on Important Issues

Fred R. David Ch 6-76

 Role of A Board of Directors

Duties and Responsibilities:

1. Control and oversight over management

2. Adherence to legal prescriptions
3. Consideration of stakeholder interests
4. Advancement of stockholders’ rights

Fred R. David Ch 6-77