Ch 7 -1 Copyright © 2011 Pearson Education

Strategic Management: Concepts

and Cases
Arab World Edition
Fred R. David
Abbas J. Ali
Abdulrahman Y. Al-Aali

Chapter 7:
Strategy Analysis and
Choice

Ch 7 -2 Copyright © 2011 Pearson Education

 Source: Adapted from Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22,
no. 3 (June 1988) 40.

Ch 7 -3 Copyright © 2011 Pearson Education

 Strategy Analysis & Choice

Alternative Strategies Nature of Strategy

Derive From: Analysis & Choice:
• Vision
• Mission Establishing long-term
• Objectives objectives
• External audit • Generating alternative
strategies
• Internal audit
Selecting strategies to
• Past successful •

pursue
strategies
• Best alternative – achieve
mission & objectives

Ch 7 -4 Copyright © 2011 Pearson Education

Natural Environment Perspective
What Is a Sustainability Report?

• Sustainability (corporate social-responsibility) reports disclose

policies to shareholders

• Global Reporting Initiative has issued a set of detailed

reporting guidelines

• Dubai Chamber of Commerce established the Dubai Ethics

Resource Center
• National bank of Abu Dhabi issued a sustainability report
• Burgan Bank, Kuwait issues its social responsibility report
annually

Ch 7 -5 Copyright © 2011 Pearson Education

 Strategy Analysis & Choice
Generating 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 6 -6

Ch 7 -6 Copyright © 2011 Pearson Education

Ch 7 -7 Copyright © 2011 Pearson Education
 Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

Stage 2: Stage 3:
The Matching Stage The Decision Stage

Ch 6 -8

Ch 7 -8 Copyright © 2011 Pearson Education

 Strategy-Formulation Analytical Framework

Internal Factor Evaluation

Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile Matrix

(CPM)

Ch 6 -9

Ch 7 -9 Copyright © 2011 Pearson Education

 Stage 1: The Input Stage

• Basic input information for the matching & decision stage

matrices

• Requires strategists to quantify subjectivity early in the

process

• Good intuitive judgment always needed

Ch 6 -10

Ch 7 -10 Copyright © 2011 Pearson Education

 Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2:
BCG Matrix
The Matching Stage

IE Matrix

Finding the match between

organization’s internal resources & Grand Strategy Matrix
skills and the opportunities & risks
created by its external factors
Ch 6 -11

Ch 7 -11 Copyright © 2011 Pearson Education

 Stage 2: The Matching Stage
SWOT Matrix
There are four types of
strategies:
A SWOT matrix identifies:
• Strengths
• Strengths-Opportunities (SO)
• Weaknesses
• Weaknesses-Opportunities (WO)
• Opportunities • Strengths-Threats (ST)
• Threats • Weaknesses-Threats (WT)

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6 -7 -12 Copyright © 2011 Pearson Education
12
 SO Strategies

Strengths
Use a firm’s
Weaknesses
internal strengths
Opportunities
to take advantage
Threats
SO of external
Strategies opportunities
SWOT

Ch 7 -13 Copyright © 2011 Pearson Education

 WO Strategies

Strengths
Improving internal
Weaknesses
weaknesses by
Opportunities
taking advantage
Threats WO of external
Strategies opportunities
SWOT

Ch 7 -14 Copyright © 2011 Pearson Education

 ST Strategies

Strengths Use a firm’s

Weaknesses strengths
Opportunities to avoid or
Threats reduce the impact
ST
of external
Strategies
SWOT threats

Ch 7 -15 Copyright © 2011 Pearson Education

 WT Strategies

Defensive tactics
Strengths aimed at reducing
Weaknesses internal
Opportunities weaknesses &
Threats avoiding
WT
environmental
Strategies
SWOT threats

Ch 7 -16 Copyright © 2011 Pearson Education

 SWOT Matrix

Developing the Strengths – Weaknesses –

S W
SWOT
List Strengths List Weaknesses
Opportunities – SO WO Strategies
O Strategies
Overcoming
weaknesses by taking
Use strengths to
List Opportunities take advantage of
advantage of
opportunities
opportunities

Threats – T ST WT Strategies
Strategies
Minimize weaknesses
List Threats and avoid threats
Use strengths to
avoid threats
Ch 6 -17

Ch 7 -17 Copyright © 2011 Pearson Education

Limitations with SWOT Matrix

• Does not show how to achieve a competitive advantage

• Provides a static assessment in time

• May lead the firm to overemphasize a single internal or

external factor in formulating strategies

Ch 7 -18 Copyright © 2011 Pearson Education

 SPACE Matrix

Strategic Position & Two Internal Dimensions:

Action Evaluation 1. Financial Strength (FS)
Matrix 2. Competitive Advantage (CA)
4-quadrants indicate whether
the most appropriate strategy
Two External Dimensions:
is:
• Aggressive 1. Environmental Stability (ES)
• Conservative 2. Industry Strength (IS)
• Defensive
• Competitive

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19
 SPACE Factors
Internal Strategic
External Strategic Position
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
Inventory turnover Competitive pressure
Earnings per share Price elasticity of demand
Price earnings ratio Ease of exit from market
Risk involved in business

Ch 6 -20

Ch 7 -20 Copyright © 2011 Pearson Education

 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 Technological know-how
Competition’s capacity utilization Resource utilization
Technological know-how Ease of entry into market
Control over suppliers & Productivity, capacity
distributors utilization

Ch 6 -21

Ch 7 -21 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 -22 Copyright © 2011 Pearson Education

Ch 7 -23 Copyright © 2011 Pearson Education
 BCG Matrix

Boston Consulting Group Relative Market Share

Matrix Position:
• Enhances multidivisional firm
in formulating strategies Ratio of a division’s own market
• Autonomous divisions = share in an industry to the
business portfolio market share held by the
largest rival firm in that
• Divisions may compete in industry
different industries

• Focus on market-share
position & industry growth
rate

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6 -7 -24 Copyright © 2011 Pearson Education
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Ch 7 -25 Copyright © 2011 Pearson Education
 BCG Matrix
Stars: Question Mark:
• High relative market share and high growth rate • Low relative market share, competes in high-
- Best long-run opportunities for growth & profitability growth industry

• Substantial investment to maintain or strengthen - Cash needs are high

dominant position
- Case generation is low
- Integration strategies, intensive strategies, joint
• Decision to strengthen (intensive strategies) or
ventures
divest

Cash cow: Dog:

• High relative market share, competes in low-
growth industry
• Low relative market share, competes in slow or
- Generate cash in excess of their needs no market growth
- Milked for other purposes - Weak internal & external position
• Maintain strong position as long as possible • Liquidation, divestiture, retrenchment
- Product development, concentric diversification

- If weakens – retrenchment or divestiture

Ch 6 -26

Ch 7 -26 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

Ch 7 -27 Copyright © 2011 Pearson Education

Ch 7 -28 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 -29 Copyright © 2011 Pearson Education

Ch 7 -30 Copyright © 2011 Pearson Education
 Grand Strategy Matrix

Tool for formulating alternative strategies; Based on two dimensions

-Competitive position
- Market growth

Quadrant I Quadrant III

• Excellent strategic position • Compete in slow-growth industries
• Concentration on current • Weak competitive position
markets/products • Drastic changes quickly
• Take risks aggressively when necessary • Cost & asset reduction (retrenchment)

Quadrant II Quadrant IV
• Evaluate present approach • Strong competitive position
• How to improve competitiveness • Slow-growth industry
• Rapid market growth requires intensive • Diversification to more promising growth
strategy areas

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 Strategy-Formulation Analytical Framework

Quantitative Strategic
Stage 3:
Planning Matrix
The Decision Stage (QSPM)

Quantitative Strategic Planning Matrix QSPM

Technique designed to determine the relative
attractiveness of feasible alternative actions
Ch 6 -32

Ch 7 -32 Copyright © 2011 Pearson Education

Ch 7 -33 Copyright © 2011 Pearson Education
 Steps to Develop a QSPM
1. Make a list of the firm’s key external
opportunities/threats and internal Advantages:
strengths/weaknesses in the left • Sets of strategies considered
column. simultaneously or sequentially
2. Assign weights to each key external • Integration of pertinent external &
and internal factor. internal factors in the decision-making
3. Examine the Stage 2 (matching) process

matrices, and identify alternative

strategies that the organization should Limitations:
consider implementing. • Requires intuitive judgments &
educated assumptions
4. Determine the Attractiveness Scores.
• Only as good as the prerequisite
5. Compare the Total Attractiveness
inputs
Scores.
6. Compute the Sum Total Attractiveness
Score.

Ch 7 -34 Copyright © 2011 Pearson Education

 Cultural Aspects of Strategy Choice

Organizational Culture

Successful strategies depend on the degree of consistency with

the firm’s culture

Ch 6 -35

Ch 7 -35 Copyright © 2011 Pearson Education

 Politics of Strategy Choice

Politics in Organizations Political Tactics for

Strategists
• Management hierarchy
• Equifinality
• Career aspirations
• Satisfying
• Allocation of scarce
resources • Generalization
• Higher-order issues
• Political access on
important issues

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36
 Governance Issues
Board of Directors Roles & Responsibilities

• Control & oversight over management

• Adherence to legal prescriptions

• Consideration of stakeholder interests

• Advancement of stockholder rights

Ch 6 -37

Ch 7 -37 Copyright © 2011 Pearson Education

 Global Perspective
Corporate Tax Rates Worldwide

• Lowest corporate tax rates reside in Europe and

European countries
• Average tax rate in EU countries is 26%

• Besides tax rates, large markets and affluent markets

attract new businesses

• Taxes can be used to reward or penalize companies for

locating locally or moving overseas

Ch 7 -38 Copyright © 2011 Pearson Education

 Corporate Governance Issues
Ministry of Industry and Commerce and the Central Bank
in Bahrain’s “Corporate Governance Code”

1. The company shall be headed by an effective, collegial and informed

board
2. The directors and officers shall have full loyalty to company
3. The board shall have rigorous controls for financial audit, internal control
and compliance with law
4. The board shall have rigorous procedures for appointment, training and
evaluation of the board
5. The company shall remunerate directors and officers fairly and
responsibly
6. The board shall establish a clear and efficient management structure
7. The board shall communicate with shareholders and encourage their
participation
8. The company shall disclose its corporate governance
9. Companies which refer to themselves as ‘Islamic’ must follow the
principles of Islamic Shari’a

Ch 7 -39 Copyright © 2011 Pearson Education