Strategy Analysis & Choice Week 06

W. Rofianto, ST, MSi

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

– Establishing long-term objectives

– Generating alternative strategies

– Selecting strategies to pursue

– Best alternative – achieve mission & objectives

Nature of Strategy Analysis & Choice

� Vision� Mission� Objectives� External audit� Internal audit

Alternative Strategies Derive From

Strategy Analysis & Choice

� Internal audit� Past successful strategies

Generating Alternatives

Participation in generating alternative strategies should be as broad as possible

The Strategy-Formulation Analytical Framework

Internal Factor EvaluationMatrix (IFE)

External Factor EvaluationMatrix (EFE)

Stage 1:The Input Stage

Stage 1 : The Input Stage

Competitive Profile Matrix(CPM)

�Basic input information for the matching & decision stage matrices

�Requires strategists to quantify subjectivity early in the process

�Good intuitive judgment always needed

SWOT Matrix

SPACE Matrix

BCG Matrix

Stage 2 : The Matching Stage

Stage 2:The Matching Stage

IE Matrix

Grand Strategy Matrix

The Matching Stage

Match between organization’s internal resources & skills and the opportunities & risks created by its external factors

Strengths – S

List Strengths

Weaknesses –W

List Weaknesses

Opportunities – O

List Opportunities

SO StrategiesUse strengths to take

advantage of opportunities

WO StrategiesOvercoming weaknesses by taking advantage of

opportunities

SWOT Matrix

Threats – T

List Threats

ST StrategiesUse strengths to avoid

threats

WT StrategiesMinimize weaknesses and

avoid threats

Limitations :� Does not show how to achieve a competitive advantage

� May lead to overemphasize a single internal or external factor in formulating strategies

Strategic Position & Action Evaluation Matrix

�Aggressive

�Conservative

�Defensive

�Competitive

SPACE Matrix

Two Internal Dimensions

�Financial Strength (FS)

�Competitive Advantage (CA)

Two External Dimensions

�Environmental Stability (ES)

� Industry Strength (IS)

Internal Strategic Position External Strategic Position

Financial Strength (FS)Return on investmentLeverageLiquidityWorking capitalCash flowInventory turnover

Environmental Stability (ES)Technological changesRate of inflationDemand variabilityPrice range of competing productsBarriers to entryCompetitive pressure

SPACE Factors

Inventory turnoverEarnings per sharePrice earnings ratio

Competitive pressurePrice elasticity of demandEase of exit from market Risk involved in business

Competitive Advantage (CA)Market shareProduct qualityProduct life cycleCustomer loyaltyCompetition’s capacity utilizationTechnological know-howControl over suppliers & distributors

Industry Strength (IS)Growth potentialProfit potentialFinancial stabilityTechnological know-howResource utilizationEase of entry into marketProductivity, capacity utilization

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.

Steps to Developing a SPACE Matrix

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.

SPACE Matrix

Boston Consulting Group Matrix

� Enhances multidivisional firm in formulating strategies

� Autonomous divisions = business portfolio

� Divisions may compete in different industries

� Focus on market-share position & industry growth rate

BCG Matrix

Relative Market Share PositionRelative 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

Industry Sales Growth Rate

Average annual increase in revenues for several leading firms

BCG 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

The Internal-External ( 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

The Internal-External ( IE ) Matrix

The Internal-External ( IE ) Matrix

Quadrant IMarket developmentMarket penetrationProduct developmentForward integrationBackward integrationHorizontal integration

Quadrant IIMarket development

Market penetrationProduct developmentHorizontal integration

DivestitureLiquidation

RAPID MARKET GROWTH

Weak Strong

Grand Strategy Matrix

Rapid Market Growth � Excellent strategic position

� Concentration on current

markets/products

� Take risks aggressively when

necessary

� Evaluate present approach

� Improve competitiveness

Quadrant IVConcentric diversificationHorizontal diversificationConglomerate diversificationJoint ventures

Quadrant IIIRetrenchment

Concentric diversificationHorizontal diversification

Conglomerate diversificationLiquidation

Horizontal integrationConcentric diversification

Liquidation

Slow Market Growth

Weak Competitive Position

StrongCompetitive Position

� Cost & asset reduction� Diversification to more

promising growth areas

Quantitative StrategicPlanning Matrix

(QSPM)

Stage 3:The Decision Stage

Stage 3 : The Decision Stage

Quantitative Strategic Planning Matrix

Technique designed to determine the relative attractiveness

of feasible alternative actions

Advantages

� Sets of strategies considered simultaneously or sequentially

� Integration of pertinent external & internal factors in the decision-making process

Strategy 3Strategy 2Strategy 1Weight

Key External Factors

Economy

Political/Legal/Governmental

Social/Cultural/Demographic

Environmental

Technological

Strategic Alternatives

Quantitative Strategic Planning Matrix

AS WAS AS WAS AS WAS

Key Internal Factors

Management

Marketing

Finance/Accounting

Production/Operations

Research and Development

Computer Information Systems

Technological

Competitive

TOTAL 1.00

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.

Steps to Develop a QSPM

5. Compare the Total Attractiveness Scores.

6. Compute the Sum Total Attractiveness Score.

Limitations

� Requires intuitive judgments & educated assumptions

� Only as good as the prerequisite inputs

Cultural Aspects of Strategy Choice

Successful strategies depend on the degree of consistency with the firm’s culture

Political Tactics for Strategists

� Equifinality� Satisfying

Other Issue

� Satisfying� Generalization� Higher-order issues� Political access on important issues

� Control & oversight over management

� Adherence to legal prescriptions

� Consideration of stakeholder interests

� Advancement of stockholder rights

Governance Issues - Board of Directors Roles & Responsibilities