CHAPTER IV: Strategy Analysis and choice

• Learning objectives
• After studying this chapter you should be
able to ;
• Explain the nature of strategic choice
• Understand the nature of generating and
selecting choices
• Discuss testing of strategic options and
choice

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 Strategic choice definition

What is strategy choice?

• Strategic choice is the decision to select strategies from
the grand strategies, the strategy which will best meet
the firm’s objectives.
• Identifying and evaluating alternative strategies should
involve managers and employees.
• All representatives or participants should have the firm’s
external and internal audit information.
• This information coupled with the firm’s mission
statement will help participants to generate ideas in the
meetings.
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 Strategy Analysis & Choice
Nature of Strategy Analysis & Choice
-- Establishing long-term objectives
-- Generating alternative strategies
-- Selecting strategies to pursue
-- Best alternative - achieve mission & objectives

Alternative Strategies Derive From --

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

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 2. The process of strategic choice as follows
1.Emphasizing on strategic alternatives

• The decision maker should emphasize on the

reasonable alternatives and should neglect the other
alternatives.
• The alternatives can be emphasized by imagining the
future condition and by working backwards .
• It is very essential for the firms to understand,
 the industry conditions
 and evaluate the risks
 and benefits associated with its competitive
positioning before a final selection
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Alternative strategies proposed by participants should
be considered and discussed in a meeting or series of
meetings. Proposed strategies should be listed in
writing. When all feasible strategies identified by
participants are given and understood, the strategies
should be ranked in order of attractiveness by all
participants, with 1 = should not be implemented, 2 =
possibly should be implemented, 3 = probably should
be implemented, and 4 = definitely should be
implemented. This process will result in a prioritized list
of best strategies that reflects the collective wisdom of
the group.

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 2.Assessing the strategic alternatives.

criteria for strategic choice are:

1. Objective factor
• The objective factor is also referred to as rational,
normative, or prescriptive factors.
• These factors depends on the analytical techniques
and are hard facts or data which helps in making a
strategic choice.
2. Subjective factors
• A subjective factor relies on the individual’s personal
judgment and also are called collective or descriptive
factor.
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Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

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

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Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile Matrix

(CPM)

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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

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Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

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Stage 2: The Matching Stage

Match between organization’s internal

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

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Stage 2: The Matching Stage

SWOT Matrix

Strengths
Weaknesses
Opportunities
Threats

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SWOT Matrix

Four Types of Strategies

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

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 SO Strategies

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

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 WO Strategies

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

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 ST Strategies

Strengths Use a firm’s

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

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 WT Strategies

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

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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

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 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

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 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 form 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

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Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

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SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive
Conservative
Defensive
Competitive

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SPACE Matrix

Two Internal Dimensions

Financial Strength (FS)

Competitive Advantage (CA)

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SPACE Matrix

Two External Dimensions

Environmental Stability (ES)

Industry Strength (IS)

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 SPACE Factors
Internal Strategic Position External Strategic 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
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business

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 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

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 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
ES
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Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

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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

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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.

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 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0

High
+20
Stars Question Marks
Industry Sales Growth Rate

II I
Medium
0

Cash Cows Dogs

III IV
Low
-20

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BCG Matrix

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

Decision to strengthen (intensive strategies) or

divest

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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

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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

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BCG Matrix

Dogs

Low relative market share & compete in slow or

no market growth
 Weak internal & external position

Liquidation, divestiture, retrenchment

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Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

Grand Strategy Matrix

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Grand Strategy Matrix

Tool for formulating alternative strategies

Based on two dimensions
 Competitive position
 Market growth

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 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
7. Concentric diversification
WEAK 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

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Grand Strategy Matrix

Quadrant I

Excellent strategic position

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

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Grand Strategy Matrix

Quadrant II

Evaluate present approach

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

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Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries

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

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Grand Strategy Matrix

Quadrant IV

Strong competitive position

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

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Strategy-Formulation Analytical
Framework

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

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QSPM

Quantitative Strategic Planning Matrix

Technique designed to determine the relative

attractiveness of feasible alternative actions

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 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

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QSPM

Limitations

Requires intuitive judgments & educated

assumptions
Only as good as the prerequisite inputs

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QSPM

Advantages

Sets of strategies considered simultaneously or

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

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Cultural Aspects of Strategy
Choice

Organization Culture

Successful strategies depend on the degree of

consistency with the firm’s culture

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Politics of Strategy Choice

Politics in Organizations

Management hierarchy
Career aspirations
Allocation of scarce resources

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Politics of Strategy Choice

Political tactics for strategists

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

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Governance Issues

Board of Directors Roles & Responsibilities

Control & oversight over management

Adherence to legal prescriptions
Consideration of stakeholder interests
 Advancement of stockholder rights

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 Corporate Governance Issues
Business Week’s “principles of good governance”

1. No more than 2 directors current or former company executives

2. No directors do business with the company
3. Audit, compensation, and nominating committees made up
of outside directors
4. Each director attends at lest 75% of all meetings
5. Audit committee meets at least four times a year
6. CEO is not also the Chairperson of the Board
7. Shareholders have considerable power and information to
choose & replace directors
8. Stock options are considered a corporate expense
9. No interlocking directorships

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 .
3.Evaluating the strategic alternatives

• The feasible alternatives are evaluated so that

its capability can assist the organization to
attain its objective.
• The evaluation process primarily deals with
bringing the complete analysis together
based on the subjective factors and objective
factors.

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 4. Testing for suitability, feasibility and acceptability

• The suitability of proposed strategy can be assessed by

the extent to which it matches the needs identified
from a strategic analysis

• The test for feasibility of a proposed strategy will consider

how well it would work in practice and how difficult it might
be to achieve. The question to be asked would include:
• How will the completion react and how will the organization
cope with that reaction?
• Test for acceptability address the issue of how shareholders
might feel about the expected outcome of the strategy in
terms of risk, profitability, reward, ethics and the effect on
relationships.
• The three test of suitability, feasibility, and acceptability
provide an initial set of screening tools for strategic
choice. 59
 5. Risk and uncertainty in strategic choice

• Strategy is about charting a course for the future.

• Risk is concerned with assessing the probability of
foreseen outcomes.
• Uncertainty , is to do with outcomes that may be
unforeseen ,or those which are foreseen but against
which a degree of estimated risk cannot be set.
• In making choices about strategy acceptance of
different degrees of risk is often a matter of
personal preferences .
• Some individuals are very risk-averse ,other take
risks almost a matter of routine. 60
 6.Selecting from among the strategic alternatives

• The evaluation of strategic choice helps in

choosing the highly relevant alternative in the
prevalent conditions.
• Hence, the final step involves making the
strategic choice and chooses one or more
strategies for the implementation
• Finally, blue print which elucidates the strategies
and conditions under which they ( strategies)
operate is developed along with some
contingency strategies 61
End of the chapter
Thanks

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