Chapter 6

Strategy Analysis & Choice

Strategic Management:
Concepts & Cases
13th Edition
Fred David

Copyright © 2011 Pearson Education, Inc. Ch 6 -1

Publishing as Prentice Hall
Review Questions

n 1. What are 2 types of strategy?

n 2. Describe all strategies included in Growth
strategies?
n 3. Describe all strategies included in
Defensive strategies?

Copyright © 2011 Pearson Education, Inc. Ch 6 -2

Publishing as Prentice Hall
Cooperative strategies
n Collusion: is the active cooperation of firms
within an industry to reduce output and raise
prices in order to get around the normal
economic law of supply and demand
n Strategic alliance: is a long-term cooperative
arrangement between two or more independent
firms or business units that engage in business
activities for mutual economic gain.
q To obtain or learn new capabilities
q To obtain access to specific markets
q To reduce financial risk
q To reduce political risk

3
Continuum of Strategic Alliances

n Mutual Service Consortia: is a partnership of similar companies in similar

industries that pool their resources to gain a benefit that is too expensive to
develop alone, such as access to advanced technology
n Joint venture: is a cooperative business activity, formed by two or more
separate organizations for strategic purposes, that creates an independent
business entity and allocates ownership, operational responsibilities, and
financial risks and rewards to each member, while preserving their separate
identity/autonomy
n Licensing arrangement: is an agreement in which the licensing firm grants
rights to another firm in another country or market to produce and/or sell a
product
n Value-chain partnership: is a strong and close alliance in which one company
or unit forms a long-term arrangement with a key supplier or distributor for
mutual advantage

4
Strategy Analysis & Choice

n Subjective decisions based on objective

information
n Generating alternative strategies
n Selecting strategies to pursue
n Best alternative course of action to
achieve mission & objectives
n Derived from vision, mission, objectives,
external audit, and internal audit
Copyright © 2011 Pearson Education, Inc. Ch 6 -5
Publishing as Prentice Hall
Strategy Analysis & Choice

Generating Alternatives –

Participation in generating alternative

strategies should be as broad as
possible

Copyright © 2011 Pearson Education, Inc. Ch 6 -6

Publishing as Prentice Hall
Comprehensive Strategy-
Formulation Framework
n Stage 1 - Input Stage
q EFE Matrix
q IFE matrix
q CPM
n Stage 2 - Matching Stage
q SWOT
q SPACE matrix
q BCG matrix
q IE Matrix
q Grand strategy matrix
n Stage 3 - Decision Stage
q QSPM
Copyright © 2011 Pearson Education, Inc. Ch 6 -7
Publishing as Prentice Hall
Comprehensive Strategy-
Formulation Framework
n As shown in the previous PowerPoint,
strategy formulation techniques can be
integrated into a three-stage decision-making
framework. The tools presented in this
framework are applicable to all sizes and
types of organizations and can help
strategists identify, evaluate, and select
strategies

Copyright © 2011 Pearson Education, Inc. Ch 6 -8

Publishing as Prentice Hall
The Strategy-Formulation Analytical
Framework
n Stage 1 (Input Stage) summarizes the basic
input information needed to formulate
strategies.
n Stage 2 (Matching Stage) focuses on
generating feasible alternative strategies by
aligning key external and internal factors.
n Stage 3 (Decision Stage) uses the QSPM to
objectively evaluate feasible alternative
strategies identified in Stage 2.
Copyright © 2011 Pearson Education, Inc. Ch 6 -9
Publishing as Prentice Hall
Strategy-Formulation Framework

External Factor Evaluation

Matrix (EFE)

Stage 1: Internal Factor Evaluation

The Input Stage Matrix (IFE)

Competitive Profile Matrix

(CPM)

Copyright © 2011 Pearson Education, Inc. Ch 6 -10

Publishing as Prentice Hall
Stage 2: The Matching Stage

nMatch between organization’s internal

resources & skills and the opportunities &
risks created by its external factors

Copyright © 2011 Pearson Education, Inc. Ch 6 -11

Publishing as Prentice Hall
Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Copyright © 2011 Pearson Education, Inc. Ch 6 -12

Publishing as Prentice Hall
Stage 2: The Matching Stage

SWOT Matrix

nStrengths

nWeaknesses

nOpportunities

nThreats

Copyright © 2011 Pearson Education, Inc. Ch 6 -13

Publishing as Prentice Hall
SWOT Matrix

Four Types of Strategies

nStrengths-Opportunities (SO)
nWeaknesses-Opportunities (WO)
nStrengths-Threats (ST)
nWeaknesses-Threats (WT)

Copyright © 2011 Pearson Education, Inc. Ch 6 -14

Publishing as Prentice Hall
SWOT Matrix

n SO strategies use a firm’s internal strengths

to take advantage of external opportunities
n WO strategies improve internal weaknesses
by taking advantage of external opportunities
n ST strategies use a firm’s strengths to avoid
or reduce the impact of external threats
n WT strategies defensive tactics aimed at
reducing internal weakness and avoiding
external threats
Copyright © 2011 Pearson Education, Inc. Ch 6 -15
Publishing as Prentice Hall
• Retrenchment • Growth
Strategies

WO SO

WT ST
• Divestiture • Diversification
• Liquidation

Copyright © 2011 Pearson Education, Inc. Ch 6 -16

Publishing as Prentice Hall
Copyright © 2011 Pearson Education, Inc. Ch 6 -17
Publishing as Prentice Hall
Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Copyright © 2011 Pearson Education, Inc. Ch 6 -18

Publishing as Prentice Hall
SPACE Matrix

How to build Strategic Position and Action Evaluation

(SPACE) matrix:
1. Select the group of variables for:
1. Financial Position (FP) / Financial Strength (FS)
2. Competitive Position (CP) / Competitive Advantage (CA)
3. Stability Position (SP) / Environmental Stability (ES), and
4. Industry Position (IP) / Industry Strength (IS)
SPACE Matrix
SPACE Matrix
2. Evaluate the levels of variables (according to uniform
scale):
1. Variable FP and IP: 1 (worst) à 7 (best)
2. Variables CP and SP: -7 (worst) à -1 (best)
3. Calculate average points for FP, CP, SP, IP
4. Add points FP + SP in Y axis and CP + IP in X axis
5. Define coordinates and draw vectors
- Aggressive quadrant: intensive, integrated, diversified
strategies.
- Conservative quadrant: firm should stay close to its core
competences and not take risks, intensive strategies.
- Competitive quadrant: combined, intensive, joint-venture
strategies.
- Defensive quadrant: declined strategies.
SPACE Matrix
SPACE Matrix: Example

Internal External
Competitive Position (CP) Industry position (IP)
Product quality -2 Market growth 3
Market share -2 Monopolistic Ability 4
X Axis

Branding -3 Entry Barrier 5

Capital Requirement 3
Average point -2.33 Average point 3.75
Total point of X Axis: 1.42
Financial Position (FP) Stability Position (SP)
ROA 4 GDP, Inflation, … -2
Capital Strength 4 Technology -1
Y Axis

Debt 4 Tax policies -2

Cash flows 5 Laws and Politics -2
Average point 4.25 Average point -1.75
Total point of Y Axis: 2.5
SPACE Matrix: Example

FP

+5

+2,5

CP IP
-5 +1,42 +5

-5
SP
Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Copyright © 2011 Pearson Education, Inc. Ch 6 -25

Publishing as Prentice Hall
BCG Matrix

n Strategic business activities: are defined as the

potential business activities that can create a significant
profit for the company.

n Strategic business activities include:

§ Strategic business field (SBF)

§ Strategic business unit (SBU)

BCG Matrix

} SBF and SBU example

Corporatio
n

SBF SBF 1 SBF 2 SBF 3

SBU SBU 1 SBU 2 SBU 3

BCG Matrix
} SBF and SBU example

Vin
Group

SBF Vin Homes Vin Pearl Vin Fast

SBU Phu Nha

Quoc Trang Da Nang
BCG Matrix

n Variables
q Market share: % Revenue of the SBU or SBF
compare with the closest competitors.
q Market growth.
n Assumptions
q Economics of scales is a very important
advantage of the SBU.
q High growth industry ð High level of competition.
BCG Matrix

Invest if there
Invest is potential;
to grow or remove if
there is no
prospect

Maintain
market Eliminate
share
BCG Matrix

n Question Marks – low relative market share

in a high-growth industry
n Stars – high relative market share in a high-
growth industry
n Cash Cows – high relative market share in a
low-growth industry
n Dogs – Low relative market share in a slow or
no growth industry
 BCG Matrix: Example
Starbucks
Top Firm Growth
Revenues
Division Divisions Rate RMSP
($ in billions)
Revenues (%)

Beverages and Teavana 14,954,900 14,954,900 0.08 1.00

Food 3,495,000 12,760,000 0.10 0.27
Packaged Coffee 2,866,000 3,860,000 0.11 0.74
BCG Matrix: Example
Starbucks
Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Copyright © 2011 Pearson Education, Inc. Ch 6 -34

Publishing as Prentice Hall
The Internal-External Matrix

n Positions an organization’s various divisions

in a nine-cell display
n Similar to BCG Matrix except the IE Matrix:
q Requires more information about the divisions
q Strategic implications of each matrix are different

Copyright © 2011 Pearson Education, Inc. Ch 6 -35

Publishing as Prentice Hall
Copyright © 2011 Pearson Education, Inc. Ch 6 -36
Publishing as Prentice Hall
IE Matrix

n Based on two key dimensions

q The IFE total weighted scores on the x-axis
q The EFE total weighted scores on the y-axis
n Divided into three major regions
q Grow and build – Cells I, II, or IV
q Hold and maintain – Cells III, V, or VII
q Harvest or divest – Cells VI, VIII, or IX

Copyright © 2011 Pearson Education, Inc. Ch 6 -37

Publishing as Prentice Hall
Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Copyright © 2011 Pearson Education, Inc. Ch 6 -38

Publishing as Prentice Hall
Grand Strategy Matrix

n Tool for formulating alternative

strategies
n Based on two dimensions
q Competitive position
q Market growth

Copyright © 2011 Pearson Education, Inc. Ch 6 -39

Publishing as Prentice Hall
 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. Related diversification
STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
1. Retrenchment 1. Related diversification
2. Related diversification 2. Unrelated diversification
3. Unrelated diversification 3. Joint ventures
4. Divestiture
5. Liquidation

SLOW MARKET GROWTH

Copyright © 2011 Pearson Education, Inc. Ch 6 -40
Publishing as Prentice Hall
BCG vs Grand vs IE

Similarities
• Quantitative tool to locate and plan business combinations
Differentiations
• Information requirement
• Measurement methods
• Level of details
Strategy-Formulation Analytical
Framework

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

Copyright © 2011 Pearson Education, Inc. Ch 6 -42

Publishing as Prentice Hall
Strategic Planning Process

Input Formation Selection

} EFE } SPACE, } QSPM
} IFE Grand
} Competitive } BCG,IE
Advantage } SWOT

n Based on the quality of the Input and Analysis:

u EFE + IFE ð SWOT, SPACE, Grand …
u EFE + IFE + Competitive Advantage ð BCG, IE…
QSPM

Quantitative Strategic Planning Matrix

nTechnique designed to determine

the relative attractiveness of feasible
alternative actions

Copyright © 2011 Pearson Education, Inc. Ch 6 -44

Publishing as Prentice Hall
Quantitative Strategic Planning Matrix (QSPM)

n Purposes
q Companies cannot execute all the strategies
because of its limited resources à need to select
the best-fit strategies à Use Quantitative
Strategic Planning Matrix (QSPM).
n Variables
q Attractiveness and effectiveness
q Suitable for external and internal factors
q Minimize the business risks
Quantitative Strategic Planning Matrix (QSPM)
n Methodology

q List strengths and weaknesses, opportunities and threats

q Assign weights to each key external and internal factor

q The top row of a QSPM consists of alternative strategies derived from each matrix in

Stage 2. These matching techniques usually generate similar feasible alternatives.

However, not every strategy suggested by the matching techniques has to be evaluated

in a QSPM. Strategists should use good intuitive judgment in selecting strategies to

include in a QSPM.

q Determine the Attractiveness Scores (AS): 1 = Not attractive at all, 2 = Slightly

attractive, 3 = Attractive, 4 = Very attractive

q Compute the Total Attractiveness Scores (TAS)

n Evaluation: Compare TAS of the alternative strategies