Chapter 5

Strategy Analysis & Choice

Ch 5 -1
Asres Abitie (PhD)
 Chapter Outline

The Nature of Strategy & Choice

A Comprehensive
Strategy-Formulation Framework

The Input Stage

Ch 5 -2
Asres Abitie (PhD)
 Chapter Outline (cont’d)

The Matching Stage

The Decision Stage

Cultural Aspects of Strategy Choice

Ch 5 -3
Asres Abitie (PhD)
 Chapter Outline (cont’d)

The Politics of Strategy Choice

Governance Issues

Ch 5 -4
Asres Abitie (PhD)
 Strategy Analysis & Choice

To acquire or not to acquire, that is the

question –
Robert J. Terry

Life is full of lousy options –

General P.X. Kelley

Ch 5 -5
Asres Abitie (PhD)
 Strategy Analysis & Choice

Nature of Strategy Analysis & Choice

-- Establishing long-term objectives

-- Generating alternative strategies
-- Selecting strategies to pursue
-- Best alternative - achieve mission & objectives

Ch 5 -6
Asres Abitie (PhD)
 Strategy Analysis & Choice
Alternative Strategies Derive From --

 Vision
 Mission
 Objectives
 External audit
 Internal audit
 Past successful strategies

Ch 5 -7
Asres Abitie (PhD)
Asres Abitie (PhD) Ch 5 -8
 Factors in Strategic Analysis

 Product situation
 Competitive situation
 Distribution situation
 Environmental factors
 Opportunity and issue analysis

Ch 5 -9
Asres Abitie (PhD)
 Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

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

Ch 5 -10
Asres Abitie (PhD)
 Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile Matrix

(CPM)

Ch 5 -11
Asres Abitie (PhD)
 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 5 -12
Asres Abitie (PhD)
 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 5 -13
Asres Abitie (PhD)
Stage 2: The Matching Stage

 Match between organization’s internal

resources & skills and the opportunities &
risks created by its external factors
 E.g. internal: strong R and D function
 External changing demographics (population
getting older)
 Strategy: Develop new products for older adults
(related to long term objectives financial or
strategic)

Ch 5 -14
Asres Abitie (PhD)
 Stage 2: The Matching Stage

SWOT Matrix

Strengths
Weaknesses
Opportunities
Threats

Ch 5 -15
Asres Abitie (PhD)
 SWOT Matrix

Four Types of Strategies

Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)

Ch 5 -16
Asres Abitie (PhD)
SO Strategies

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

Ch 5 -17
Asres Abitie (PhD)
WO Strategies

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

Ch 5 -18
Asres Abitie (PhD)
ST Strategies

Strengths Use a firm’s

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

Ch 5 -19
Asres Abitie (PhD)
WT Strategies

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

Ch 5 -20
Asres Abitie (PhD)
 SWOT Matrix

Developing the SWOT

List firm’s key internal Strengths

List firm’s key internal Weaknesses
List firm’s key external Opportunities
List firm’s key external Threats

Ch 5 -21
Asres Abitie (PhD)
SWOT Matrix
Strengths – S Weaknesses – W
Leave Blank
List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Use strengths to take Overcoming weaknesses

List Opportunities advantage of by taking advantage of
opportunities opportunities

Threats – T ST Strategies WT Strategies

Use strengths to avoid Minimize weaknesses and

List Threats threats avoid threats

Ch 5 -22
Asres Abitie (PhD)
 Matching Key Factors to Formulate Alternative Strategies
Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in

Excess working capacity
+ the cell phone industry = Acquire Cellfone, Inc.
(strength)
(opportunity)

Exit of two major foreign Pursue horizontal integration

Insufficient capacity
+ competitors from the = by buying competitor's
(weakness)
industry (opportunity) facilities

Decreasing numbers of Develop new products for

Strong R&D (strength) + =
young adults (threat) older adults

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

Ch 5 -23
Asres Abitie (PhD)
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 5 -24
Asres Abitie (PhD)
 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 5 -25
Asres Abitie (PhD)
 SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive
Conservative
Defensive
Competitive

Ch 5 -26
Asres Abitie (PhD)
 SPACE Matrix

Two Internal Dimensions

Financial Strength (FS)

Competitive Advantage (CA)

Ch 5 -27
Asres Abitie (PhD)
 SPACE Matrix

Two External Dimensions

Environmental Stability (ES)

Industry Strength (IS)

Ch 5 -28
Asres Abitie (PhD)
 SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Technological changes
Return on investment
Rate of inflation
Leverage
Demand variability
Liquidity
Price range of competing products
Working capital
Barriers to entry
Cash flow
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business

Ch 5 -29
Asres Abitie (PhD)
 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 & distributors Productivity, capacity utilization

Ch 5 -30
Asres Abitie (PhD)
Steps to Developing a SPACE Matrix

1. Select a set of variables to define FS, CA,

ES, & IS
2. Assign a numerical value:
1. From +1 to +6 to each FS & IS dimension
2. From -1 to -6 to each ES & CA dimension
3. Compute an average score for each FS,
CA, ES, & IS

Ch 5 -31
Asres Abitie (PhD)
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.

Ch 5 -32
Asres Abitie (PhD)
 SPACE Matrix
FS
Conservative Aggressive
+6
+5
+4
+3
+2
+1

CA IS
-6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6

-2
-3

-4
-5
Defensive Competitive
-6
Asres Abitie (PhD)
ES Ch 5 -33
 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 5 -34
Asres Abitie (PhD)
 BCG Matrix

Boston Consulting Group Matrix

Enhances multi-divisional firm in formulating
strategies
Autonomous divisions = business portfolio
Divisions may compete in different industries
Focus on market-share position & industry
growth rate

Ch 5 -35
Asres Abitie (PhD)
 BCG Matrix

Relative 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

Ch 5 -36
Asres Abitie (PhD)
 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0

High
+20
Industry Sales Growth Rate

Stars Question Marks

II I
Medium
?
0

Cash Cows Dogs

III IV
Low
-20

Asres Abitie (PhD) Ch 5 -37

 BCG Matrix

Question Marks
Low relative market share – compete in high-
growth industry
Cash needs are high
Case generation is low

Decision to strengthen (intensive strategies) or

divest

Ch 5 -38
Asres Abitie (PhD)
 BCG Matrix

Stars
High relative market share and high growth rate
Best long-run opportunities for growth & profitability

Substantial investment to maintain or

strengthen dominant position
Integration strategies, intensive strategies, joint
ventures

Ch 5 -39
Asres Abitie (PhD)
 BCG Matrix

Cash Cows
High relative market share, competes in low-
growth industry
Generate cash in excess of their needs
Milked for other purposes
Maintain strong position as long as possible
Product development, concentric diversification
If weakens—retrenchment or divestiture

Ch 5 -40
Asres Abitie (PhD)
 BCG Matrix

Dogs

Low relative market share & compete in slow or

no market growth
Weak internal & external position

Liquidation, divestiture, retrenchment

Ch 5 -41
Asres Abitie (PhD)
 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix (GE)

Grand Strategy Matrix

Ch 5 -42
Asres Abitie (PhD)
The Internal-External Matrix (GE Model)

 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 5 -43
Asres Abitie (PhD)
Asres Abitie (PhD)
Ch 5 - 44
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 5 -45
Asres Abitie (PhD)
 Ch 5 -46
Asres Abitie (PhD)
 Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 5 -47
Asres Abitie (PhD)
 Grand Strategy Matrix

Tool for formulating alternative strategies

Based on two dimensions
Competitive position
Market growth

Ch 5 -48
Asres Abitie (PhD)
 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. Concentric diversification
STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate
4. Conglomerate diversification
diversification 4. Joint ventures
5. Liquidation
SLOW MARKET GROWTH
Ch 5 -49
Asres Abitie (PhD)
 Grand Strategy Matrix

Quadrant I

Excellent strategic position

Concentration on current markets/products
Take risks aggressively when necessary

Ch 5 -50
Asres Abitie (PhD)
 Grand Strategy Matrix

Quadrant II

Evaluate present approach

How to improve competitiveness
Rapid market growth requires intensive
strategy

Ch 5 -51
Asres Abitie (PhD)
 Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries

Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)

Ch 5 -52
Asres Abitie (PhD)
 Grand Strategy Matrix

Quadrant IV

Strong competitive position

Slow-growth industry
Diversification to more promising growth areas

Ch 5 -53
Asres Abitie (PhD)
 Strategy-Formulation Analytical
Framework

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

Ch 5 -54
Asres Abitie (PhD)
 QSPM

Quantitative Strategic Planning Matrix

Technique designed to determine the relative

attractiveness of feasible alternative actions

Ch 5 -55
Asres Abitie (PhD)
 QSPM Strategic Alternatives
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems

Ch 5 -56
Asres Abitie (PhD)
Steps to Develop a QSPM

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

Ch 5 -57
Asres Abitie (PhD)
Steps to Develop a QSPM

4. Determine the Attractiveness Scores

5. Compare the Total Attractiveness Scores
6. Compute the Sum Total Attractiveness
Score

Ch 5 -58
Asres Abitie (PhD)
 QSPM

Limitations

Requires intuitive judgments & educated

assumptions
Only as good as the prerequisite inputs

Ch 5 -59
Asres Abitie (PhD)
 QSPM

Advantages

Sets of strategies considered simultaneously or

sequentially
Integration of pertinent external & internal
factors in the decision making process

Ch 5 -60
Asres Abitie (PhD)
 Cultural Aspects of Strategy
Choice

Organization Culture

Successful strategies depend on the degree of

consistency with the firm’s culture

Ch 5 -61
Asres Abitie (PhD)
 Politics of Strategy Choice

Politics in Organizations

Management hierarchy
Career aspirations
Allocation of scarce resources

Ch 5 -62
Asres Abitie (PhD)
 Politics of Strategy Choice

Political Tactics for Strategists

Equifinality
Satisfying
Generalization
Higher-order issues
Political access on important issues

Ch 5 -63
Asres Abitie (PhD)