Strategic and Crises Management - Strategy Analysis and Choice

Strategy Analysis and Choice

Strategy analysis and choice involve generating and evaluating alternative strategies and selecting the best one to achieve the firm's mission and objectives.

This chapter focuses on:

• Generating & evaluating alternative strategies

• Selecting strategies to pursue

• Identifying the best alternative to achieve mission & objectives

Strategy analysis and choice seek to determine alternative courses of action that could best enable the firm to achieve its mission and objectives. The firm's strategies, objectives, and mission, combined with external and internal audit information, provide a basis for generating and evaluating feasible alternative strategies. These alternative strategies represent incremental steps that move the firm from its present position to a desired future position.

Comprehensive Strategy-Formulation Framework

The strategy-formulation framework consists of three stages:

• Stage 1: The Input Stage

• Stage 2: The Matching Stage

• Stage 3: The Decision Stage

Strategy-Formulation Analytical Framework

• Stage 1: The Input Stage:

  • Internal Factor Evaluation Matrix (IFE)

  • External Factor Evaluation Matrix (EFE)

  • Competitive Profile Matrix (CPM)

The input stage summarizes the basic information needed to formulate strategies.

• Stage 2: The Matching Stage:

  • SWOT Matrix

  • SPACE Matrix (Strategic Position and Action Evaluation)

  • BCG Matrix (Boston Consulting Group)

  • IE Matrix (Internal-External Matrix)

  • Grand Strategy Matrix

Stage 2 focuses on generating feasible alternative strategies by aligning key external and internal factors. Strategy is sometimes defined as the match an organization makes between its internal resources and skills and the opportunities and risks created by its external factors.

SWOT Matrix

The SWOT matrix helps managers develop four types of strategies:

• Strengths-Opportunities (SO)

• Weaknesses-Opportunities (WO)

• Strengths-Threats (ST)

• Weaknesses-Threats (WT)

SO Strategies

SO strategies use a firm's internal strengths to take advantage of external opportunities. Managers want their organizations to be in a position where internal strengths can be used to capitalize on external trends and events.

Organizations generally pursue WO, ST, or WT strategies to achieve a position where they can apply SO strategies. When a firm has major weaknesses, it will strive to overcome them and make them strengths. When an organization faces major threats, it will seek to avoid them to concentrate on opportunities.

WO Strategies

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

Sometimes key external opportunities exist, but a firm has internal weaknesses that prevent it from exploiting those opportunities. For example, there may be high demand for an electronic device that controls fuel injection in automobile engines (opportunity), but an auto parts manufacturer may lack the technology required to produce these devices (weakness).

One possible WO strategy would be to acquire this technology by forming a joint venture with a firm having competency in this area. Another WO strategy would be to hire and train people with the required technical capabilities.

ST Strategies

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

An example of an ST strategy occurred when Texas Instruments used its excellent legal department (a strength) to collect nearly 700 million in damages and royalties from nine Japanese and Korean firms that infringed on patents for semiconductor memory chips (threat). Rival firms that copy ideas, innovations, and patented products are a major threat in many industries; this is still a significant problem for U.S. firms selling products in China.

WT Strategies

WT strategies are defensive tactics aimed at reducing internal weaknesses and avoiding environmental threats.

An organization faced with numerous external threats and internal weaknesses may be in a precarious position. Such a firm may have to fight for its survival, merge, retrench, or choose liquidation.

SWOT Matrix Structure

The SWOT matrix is composed of nine cells: a blank cell, four key factor cells, and four strategy cells.

Constructing a SWOT Matrix

Eight steps in constructing a SWOT 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.

5. Match internal strengths with external opportunities and record the resultant SO strategies in the appropriate cell.

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.

Limitations of SWOT Matrix

Although the SWOT Matrix is widely used in strategic planning, it has some limitations:

• First: SWOT does not show how to achieve a competitive advantage. So, it must be the starting point for a discussion on how proposed strategies could be implemented as well as cost-benefit considerations.

• Second: SWOT is a static assessment (or a snapshot) in time.

Matching Key Factors to Formulate Alternative Strategies

• Develop new employee benefits package = Strong union activity (threat) + Poor employee morale (weakness)

• Develop new products for older adults = Decreasing numbers of young adults (threat) + Strong R&D (strength)

• Pursue horizontal integration by buying competitor's facilities = Exit of two major foreign competitors from the industry (opportunity) + Insufficient capacity (weakness)

• Acquire Cellfone, Inc. = 20\% annual growth in the cell phone industry (opportunity) + Excess working capacity (strength)

SPACE Matrix

The Strategic Position and Action Evaluation (SPACE) matrix:

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

• The axes represent two internal dimensions (Financial position FP, competitive position CP) and two external dimensions (Stability position SP, industry position IP).

• Depending on the type of organization, numerous variables could make up each of the dimensions in the SPACE Matrix.

• Factors that were included earlier in the firm’s EFE and IFE Matrices could be considered in developing a SPACE Matrix.

SPACE Matrix Layout

Conservative, Aggressive, Defensive, Competitive quadrants.

SPACE Factors

Stability Position (SP) - Environmental

• Technological changes

• Rate of inflation

• Demand variability

• Price range of competing products

• Barriers to entry

• Competitive pressure

• Price elasticity of demand

• Ease of exit from market

• Risk involved in business

Financial Strength (FP) - Internal

• Return on investment

• Leverage

• Liquidity

• Working capital

• Cash flow

Industry Position (IP) - External

• Growth potential

• Profit potential

• Financial stability

• Technological know-how

• Resource utilization

• Ease of entry into market

• Productivity, capacity utilization

Competitive Position (CP) - Internal

• Market share

• Product quality

• Product life cycle

• Customer loyalty

• Competition’s capacity utilization

• Technological know-how

• Control over suppliers & distributors

BCG Matrix

The Boston Consulting Group (BCG) Matrix:

When a firm's divisions compete in different industries, a separate strategy often must be developed for each business. The BCG Matrix and the Internal-External Matrix are designed specifically to enhance multi-divisional firms.

BCG graphically portrays differences among divisions in terms of relative market share position and industry growth rate. BCG allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share position and industry growth rate of each division relative to all other divisions in the organization.

BCG Matrix Layout

Industry Sales Growth Rate
High +20

Medium 0

Low -20

Relative Market Share Position
High 1.0

Medium .50

Low 0.0

Quadrants: Question Marks (I), Stars (II), Cash Cows (III), Dogs (IV).

• Relative market share position is given on the X-axis; the midpoint on the X-axis is set at 0.50, corresponding to a division that has half of the market share of the leading firm in the industry.

• The Y-axis represents the industry growth rate in sales, measured in percentage terms from -20 to +20 percent, with 0.0 being the midpoint.

BCG Matrix Quadrants

• Question Marks (Quadrant I): Divisions in this part have a low relative market share position yet they compete in a high-growth industry. Generally, these firms’ cash needs are high, and their cash generation is low. These businesses are called Question Marks because the organization must decide whether to strengthen them by pursuing an intensive strategy (market penetration, product development, market development) or to sell them.

• Stars (Quadrant II): Represent the organization’s best long-run opportunities for growth and profitability. Divisions with a high relative market share and a high-industry growth rate should receive substantial investment to maintain or strengthen their dominant position (forward, backward, horizontal integration, market penetration, market development, or product development).

• Cash Cows (Quadrant III): Divisions in this quadrant have a high relative market share but compete in a low-growth industry. Called cash cows because they generate cash in excess of their needs. Product development or diversification may be attractive strategies.

• Dogs (Quadrant IV): Divisions of the organization that have a low relative market share position and compete in a slow- or no-market-growth industry. They have weak internal and external positions. They are often liquidated, divested, or trimmed down through retrenchment.