05. strategy formulation. strategy analysis & choice (8-10m)
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Strategy Formulation:
Strategy Analysis & Choice
ReferencesReferences
Strategic Management Concepts & CasesStrategic Management Concepts & Cases 1010thth
editionedition Fred R. DavidFred R. DavidInternetInternet
Chapter # 5
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Comprehensive Strategic Management Model
Chapter 2
Environmental
Analysis
(External
Audit)
Chapter 3
EnvironmentalAnalysis
(Internal
Audit)
Chapter 3
Chapter 4Chapter 5
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Feasible Alternatives
Chosen Alternative
Constraints
Environments (I&E)
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Strategy Analysis & Choice
The Nature of Strategy Analysis and ChoiceThe Nature of Strategy Analysis and Choice
a.a. EstablishingEstablishinglong-term objectiveslong-term objectives
a. Generate feasible alternatives
b. Evaluate alternativesc. Select specific course of action
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Generating, evaluating & selecting bestalternatives involve;
Develop set of most attractive alternative strategies Advantages & Disadvantages
Trade-offs, Costs & Benefits
Involve a broad mix of personnel Representation from each department/function
Provides vehicle to develop commitment to attainment oforganizational objectives
Evaluate each alternative Internal and external audit information
Firms mission/Vision statement
Listed in writing Ranked in order of attractiveness
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Strategy-FormulationStrateg
y-Formulation Analytical Framework
Stage 1: The Input Stage
Stage 2: The Matching Stage
Stage 3: The Decision Stage
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External Factor Evaluation
Matrix (EFE)
Competitive Profile
Matrix
Internal Factor Evaluation
Matrix (IFE)
Stage 1 provides basic Input information for
Stages 2 and 3
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SPACE Matrix
SWOT Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Stage 2 tries to create match between organizations
internal resources & skills and the opportunities
& risks created by its external factors
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Steps in developing the TOWS Matrix
1. List the firms key external opportunities
2. List the firms key external threats
3. List the firms key internal strengths4. List the firms key internal weaknesses
5. Match internal strengths with external opportunities andrecord the resultant SO Strategies
6. Match internal weaknesses with external opportunities andrecord the resultant WO Strategies
7. Match internal strengths with external threats and recordthe resultant ST Strategies
8. Match internal weaknesses with external threats and recordthe resultant WT Strategies
Stage 2: The Matching Stage:SWOT Matrix
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Four Types of Strategies
1. Strengths-Opportunities (SO):Use a firms internal strengths to take advantage of external
opportunities
1. Weaknesses-Opportunities (WO):
Improving internal weaknesses by taking advantageof external opportunities
1. Strengths-Threats (ST):
Use a firms strengths to avoid or reduce the impact of external
threats.1. Weaknesses-Threats (WT):
Defensive tactics aimed at reducing internal weaknesses and
avoiding external threats
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SWOT/TOWS Matrix
WT Strategies
Minimize weaknesses
and avoid threats
ST Strategies
Use strengths to avoid
threats
Threats-TThreats-T
List ThreatsList Threats
WO Strategies
Overcome weaknesses
by taking advantage of
opportunities
SO Strategies
Use strengths to take
advantage of opportunities
OpportunitiesOpportunities-O-O
List OpportunitiesList Opportunities
Weaknesses-WWeaknesses-W
List WeaknessesList Weaknesses
Strengths-SStrengths-S
List StrengthsList Strengths
Leave BlankLeave Blank
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Develop a new
employee benefits
package
=Strong union
activity+Poor employee morale
Develop new products for
existing population=
Brain drain in
Balochistan+Strong R&D
Pursue horizontalintegration by buying
competitor's facilities
=Exit of two majorforeign competitors
from the industry
+Insufficient workforce
Start offering MS/PhD
Programs=
Higher demand MS/PhD
in Market+15 PhDs faculty members
Key Internal Factor Key External Factor Resultant Strategy
Matching Key Factors to Formulate Alternative Strategies
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TWOS Matrix
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Strategic Position & Action
Evaluation Matrix (SPACE) SPACE matrix is a strategic management tool
that focuses on strategy formulation especiallyas related to the competitive position of an
organization Four quadrant framework helps to determines appropriatestrategies
1. Aggressive 2. Conservative
3. Defensive 4. Competitive Two Internal Dimensions
i. Financial Strength ii. [FS]Competitive Advantage [CA]
Two External Dimensions
i. Environmental Stability [ES] ii. Industry Strength [IS]
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SPACE MatrixFS
+6
+1
+5
+4
+3
+2
-6
-5
-4
-3
-2
-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6
ES
CA IS
Conservative Aggressive
Defensive Competitive
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The Steps of SPACE Matrix
Internal Dimensions Financial Strength
Return of investment Financial and operating
leverage
Liquidity Working capital Cash flows
Competitive Advantage
Market share Quality Product life cycle Customer preference Technological innovation Sound supply chain
External Dimensions Environmental Stability
Technological changes Inflation Demand elasticity
Competitors price ranges Barriers to entry Competitive pressure Ease of exit Price elasticity of demand Risk exposure
Industry Strength Growth potential Profit potential Financial stability Resource availability Ease of entry Capacity utilization
1. Select variables to define FS, CA, ES, & IS
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2. Assign numerical ranking from +1 (worst) to+6 (best) for FS and IS; Assign numerical
ranking from 1 (best) to 6 (worst) for ES andCA.
3. Compute average score for FS, CA, ES, & IS
4. Plot the average scores on the Matrix
5. Add the two scores on the x-axis and plot pointon X. Add the scores on the y-axis and plot Y.
Plot the intersection of the new xy point.6. Draw a directional vector from origin through
the new intersection point.
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In the third step the average of the values assigned toeach variable above is computed by adding the valuesand dividing by the number of variables included in theanalysis. This average is calculated for eachdimension.
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This particular SPACE matrix tells us that our companyshould pursue an aggressive strategy. Our company has a
strong competitive position it the market with rapidgrowth. It needs to use its internal strengths to develop amarket penetration and market development strategy.This can include product development, integration withother companies, acquisition of competitors, and so on.
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Aggressive quadrant (upper right quadrant) of the
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Aggressive quadrant(upper right quadrant) of theSPACE Matrix, an organization is in an excellentposition to use its internal strengths to (1) take advantageof external opportunities, (2) overcome internal
weaknesses, and (3) avoid external threats. Therefore,market penetration, market development, productdevelopment, backward integration, forward integration,horizontal integration, conglomerate diversification,
concentric diversification, horizontal diversification, or acombination strategy all can be feasible, depending onthe specific circumstances that face the firm.
Conservative quadrant(upper left quadrant) of the
SPACE Matrix, implies staying close to the firm's basiccompetencies and not taking excessive risks.Conservative strategies most often include marketpenetration, market development, product development,and concentric diversification.
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lower left or Defensive quadrantof the SPACEMatrix suggests that the firm should focus on
rectifying internal weaknesses and avoidingexternal threats by include retrenchment,divestiture, liquidation, and concentric
diversification. lower right or Competitive quadrantof the
SPACE Matrix, indicating competitive strategies.Competitive strategies include backward, forward,and horizontal integration; market penetration;market development; product development; andjoint venture.
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TheBCG matrix method(Boston Consulting Group- Bruce
Henderson in 1968) is based on theproduct life cycle theorythat can be used to determine what priorities should be given
in theproduct portfolio or product lines of a business unit.
This helps the company allocate resources and is used as an
analytical tool in brand marketing, product management,strategic management, and portfolio analysis.
It has 2 dimensions: market share and market growth. Thebasic idea behind it is that the bigger the market share a
product has or the faster the product's market grows the better
it is for the company.
BCG Matrix
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Enhances multidivisional firms efforts to formulate
strategies
Firms divisions may compete in different
industries/markets requiring separate strategy. Graphically portrays differences among divisions
Manage business portfolio through relative market share
position and industry growth rate.
Boston Consulting Group Matrix
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1 Q ti M k 3 C h C
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1. Question Marks- Low relative market share
position yet compete in high-growth industry.
Cash needs are high with lowprofit generation.
Decision to strengthen(intensive strategies) or divest
2. Stars High relative market share and
high industry growth rate.
Best long-run opportunities forgrowth and profitability
Substantial investment tomaintain or strengthendominant position
Integration strategies, intensive
strategies, joint ventures
3. 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 aspossible
Product development, concentricdiversification
If becomes weakretrenchment ordivestiture.
4. Dogs Low relative market share position
and compete in slow or no marketgrowth
Weak internal and external position
Decision to liquidate, divest,retrenchment
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BCG Matrix of BBC
Radio: 52.6% market share,47.4% growth rate;considered a STAR
TV: 37.1% market share,62.9% growth rate; rated asCASH COW
BBC Online: QUESTIONMARK This is because it
has a very low marketshare, but retains a highgrowth rate percentage.
Some limitations of theBoston ConsultingGroup Matrix include:
High market share is notthe only success factor Market growth is not the
only indicator forattractiveness of a market
Sometimes Dogs canearn even more cash asCash Cows
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Internal-External (IE) Matrix IE matrix is used to analyze working conditions and
strategic position of a business. The IE matrix is acontinuation of theEFE matrix&IFE matrixmodels.
It works on a similar manner like the BCG matrix, the IEmatrix positions an organization into a nine cell matrix.
The IE matrix is based on the following two criteria:I. EFE matrix Score - this score is plotted on the y-axis
II. IFE matrix Score- plotted on the x-axis On the x axis of the IE Matrix, an IFE total weighted score of 1.0 to
1.99 represents a weak internal position. A score of 2.0 to 2.99 isconsidered average. A score of 3.0 to 4.0 is strong.
On the y axis, an EFE total weighted score of 1.0 to 1.99 isconsidered low. A score of 2.0 to 2.99 is medium. A score of 3.0 to4.0 is high.
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http://www.maxi-pedia.com/internal+external+IE+matrix
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The IE matrix can be divided into three major
regions that have different strategy implications. Grow & Build
Intensive
Market PenetrationMarket DevelopmentProduct Development Integrative
Backward IntegrationForward IntegrationHorizontal Integration
Hold & Maintain
Market PenetrationProduct Development
Harvest or Divest
RetrenchmentDivestiture
Liquidation
IE matrix requires more information about the business than the BCG matrix
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Grand Strategy Matrix
The model defines the situation of businessthrough the market growth and their competitive
position in the market.
All organizations (or divisions) can be positionedin one of four quadrants
Based on two dimensionsCompetitive position
Market growth
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Grand Strategy Matrix
Concentric diversification
Horizontal diversification
Conglomeratediversification
Joint ventures
Retrenchment
Concentric diversification
Horizontal diversification Conglomerate
diversification
Liquidation
Market development Market penetration
Product development
Forward integration
Backward integration
Horizontal integration Concentric diversification
Market development Market penetration
Product development
Horizontal integration
Divestiture
Liquidation
RAPID MARKET GROWTH
SLOW MARKET GROWTH
WEAK
COMPETITIVE
POSITION
STRONG
COMPETITIVE
POSITION
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Four Quadrants of Grand Strategy Matrix Quadrant I
Excellent strategic position Concentration on current
markets and products
Take risks aggressively
when necessary Quadrant II
Evaluate present approach
seriously
How to change to improve
competitiveness
Rapid market growth
requires intensive strategy
Quadrant III
Compete in slow-growthindustries
Weak competitive position
Cost and asset reduction
indicated (retrenchment)
Quadrant IV
Strong competitive position
Slow-growth industry
Diversification indicated to
more promising growth areas
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GRAND STRATEGY MATRIX OF BBC
The BBC lies in Quadrant I, which indicates it ispart of a rapid market growth industry whilemaintaining a strong competitive position.
Compared to its rivals in the UK, the BBC hasmore financial strength giving it an advantageover competitors. Globally, the company canmake use of its resources/subsidiaries allowing
an increase in customer base.
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Quantitative Strategic
Planning Matrix
(QSPM)
The best thing about QSPM is that it never insist
the strategist to enter the information on
assumptions, it extracts the information from stage
1 & stage 2 and suggests appropriate strategy to
choose. The QSPM combine the intuitive thinking of
managers with the analytical process to decide the
best strategy for the organization success.
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Format of Quantitative Strategic Planning Matrix There are four main columns in QSPM, the left column list
down the key internal and external key factors which aresame as in EFE and IFE matrix. Adjacent column to keyfactors is Weight (relative importance of the factor) whichhold the numeric value obtained from EFE and IFE matrixweight column. The next to weight is AS stands for attractive
score assign priority to key factors using the numeric value 4for most importance and 1 for least importance and the lastcolumn TAS (Total attractive score) is the value calculated
by multiplying weight by AS. One thing important to note foreach strategy separate AS and TAS value added in the table,weight remain same for all set of strategies mentioned inQSPM. The topmost shows the strategies are compared in theQSPM matrix, below mentioned table illustrate the structureof QSPM matrix.
Steps to develop QSPM
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Steps to develop QSPM1. List the firms key external opportunities & threats; list the firms key internal
strengths and weaknesses (EFE Matrix and IFE Matrix). A minimum of 10external & internal critical success factors should be taken.
2. Assign weights to each external and internal critical success factor3. Examine the Stage 2 (matching) matrices and identify alternative strategies
that the organization should consider implementing. Record these strategies inthe top row of the QSPM. Group the strategies into mutually exclusive sets if
possible.
4. Determine the Attractiveness Scores (AS), defined as numerical values that
indicate the relative attractiveness of each strategy in a given set ofalternatives. The range for Attractiveness Scores is 1 = not attractive, 2 =somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive.
5. Compute the Total Attractiveness Scores. Total Attractiveness Scores aredefined as the product of multiplying the weights (Step 2) by theAttractiveness Scores (Step 4) in each row.
6. Compute the Sum Total Attractiveness Score. Add Total AttractivenessScores in each strategy column of the QSPM. The Sum Total AttractivenessScores reveal which strategy is most attractive in each set of alternatives.Higher scores indicate more attractive strategies, considering all the relevantexternal and internal factors that could affect the strategic decisions.
QSPM
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QSPM
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer InformationSystems
Strategy 3Strategy 2Strategy 1Weight
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/Environmental
Technological
Competitive
Strategic Alternatives
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