SOLUTION: SDM5 UC Company Strategic Evaluation

Strategic Management Concepts: A
Competitive Advantage Approach
Sixteenth Edition
Chapter 6
Strategy Analysis and Choice
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
6.1 Describe the strategy analysis and choice process.
6.2 Diagram and explain the three-stage strategy-formulation
analytical framework.
6.3 Diagram and explain the Strengths-WeaknessesOpportunities-Threats (SWOT) Matrix.
6.4 Diagram and explain the Strategic Position and Action
Evaluation (SPACE) Matrix.
6.5 Diagram and explain the Boston Consulting Group (BC
G) Matrix.
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Learning Objectives (2 of 2)
6.6 Diagram and explain the Internal-External (IE) Matrix.
6.7 Diagram and explain the Grand Matrix.
6.8 Diagram and explain the Quantitative Strategic Planning
Matrix (QSPM).
6.9 Discuss the role of organizational culture in strategic
analysis and choice.
6.10 Identify and discuss important political considerations in
strategy analysis and choice.
6.11 Discuss the role of a board of directors (governance) in
strategic planning.
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Figure 6-1 A Comprehensive StrategicManagement Model
Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See
also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s
Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics
and Technology, no. 4 (October 2010): 20.
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The Process of Generating and Selecting
Strategies (1 of 3)
• A manageable set of the most attractive alternative
strategies must be developed.
• The advantages, disadvantages, trade-offs, costs, and
benefits of these strategies should be determined.
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The Process of Generating and Selecting
Strategies (2 of 3)
• Identifying and evaluating alternative strategies should
involve many of the managers and employees who earlier
assembled the organizational vision and mission
statements, performed the external audit, and conducted
the internal audit.
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The Process of Generating and Selecting
Strategies (3 of 3)
• Alternative strategies proposed by participants should be
considered and discussed in a 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.
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Figure 6-2 The Strategy-Formulation
Analytical Framework
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A Comprehensive Strategy-Formulation
Framework (1 of 3)
• Stage 1 – Input Stage
– summarizes the basic input information needed to
formulate strategies
– consists of the EFE Matrix, the IFE Matrix, and the
Competitive Profile Matrix (CPM)
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A Comprehensive Strategy-Formulation
Framework (2 of 3)
• Stage 2 – Matching Stage
– focuses on generating feasible alternative strategies
by aligning key external and internal factors
– techniques include the Strengths-WeaknessesOpportunities-Threats (SWOT) Matrix, the Strategic
Position and Action Evaluation (SPACE) Matrix, the
Boston Consulting Group (BCG) Matrix, the InternalExternal (IE) Matrix, and the Grand Strategy Matrix
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A Comprehensive Strategy-Formulation
Framework (3 of 3)
• Stage 3 – Decision Stage
– involves the Quantitative Strategic Planning Matrix (QS
PM)
– reveals the relative attractiveness of alternative
strategies and thus provides objective basis for
selecting specific strategies
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Table 6-1 Matching Key External and Internal
Factors to Formulate Alternative Strategies
Key Internal Factor
Key External Factor
Resultant Strategy
Excess working capital
(an internal strength)
+ Annual growth of 20
percent in the cell phone
industry (an external
opportunity)
= Acquire Cellfone, Inc.
Insufficient capacity (an
internal weakness)
+ Exit of two major
foreign competitors from
The industry (an external
opportunity)
= Pursue horizontal
integration by buying
competitors’ facilities
Strong research and
development expertise
(an internal strength)
+ Decreasing numbers
of younger adults (an
external threat)
= Develop new products
for older adults
Poor employee morale
(an internal weakness)
+ Rising health-care
costs (an external threat)
= Develop a new
wellness program
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The Matching Stage (1 of 3)
• The Strengths-Weaknesses-Opportunities-Threats (SW
OT) Matrix helps managers develop four types of
strategies:
– SO (strengths-opportunities) Strategies
– WO (weaknesses-opportunities) Strategies
– ST (strengths-threats) Strategies
– WT (weaknesses-threats) Strategies
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The Matching Stage (2 of 3)
• SO Strategies
– use a firm’s internal strengths to take advantage
of external opportunities
• WO Strategies
– aim at improving internal weaknesses by taking
advantage of external opportunities
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The Matching Stage (3 of 3)
• ST Strategies
– use a firm’s strengths to avoid or reduce the impact
of external threats
• WT Strategies
– defensive tactics directed at reducing internal
weakness and avoiding external threats
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SWOT Matrix (1 of 2)
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.
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SWOT Matrix (2 of 2)
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.
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Figure 6-4 The SPACE Matrix (1 of 3)
Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological
Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155
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Figure 6-4 The SPACE Matrix (2 of 3)
• Strategic Position and Action Evaluation (SPACE)
Matrix
– four-quadrant framework indicates whether aggressive,
conservative, defensive, or competitive strategies are
most appropriate for a given organization
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Figure 6-4 The SPACE Matrix (3 of 3)
• Two internal dimensions (financial position [FP] and
competitive position [CP])
• Two external dimensions (stability position [SP] and
industry position [IP])
• Most important determinants of an organization’s overall
strategic position
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Table 6-2 SPACE Matrix Axes (1 of 2)
Internal Strategic Position
External Strategic Position
Financial Position (FP)
Stability Position (SP)
Return on investment
Technological changes
Leverage
Rate of inflation
Liquidity
Demand variability
Working capital
Price range of competing products
Cash flow
Barriers to entry into market
Inventory turnover
Competitive pressure
Earnings per share
Ease of exit from market
Price earnings ratio
Price elasticity of demand
Blank
Risk involved in business
Example Factors That Make Up the SPACE Matrix Axes
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Table 6-2 SPACE Matrix Axes (2 of 2)
Internal Strategic Position
External Strategic Position
Competitive Position (CP)
Industry Position (IP)
Market share
Growth potential
Product quality
Profit potential
Product life cycle
Financial stability
Customer loyalty
Extent leveraged
Capacity utilization
Resource utilization
Technological know-how
Ease of entry into market
Control over suppliers and distributors
Productivity, capacity utilization
Source: Based on H. Rowe, R. Mason, & K. Dickel, Strategic Management and Business Policy: A
Methodological Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155-156.
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Steps to Develop a SPACE Matrix (1 of 4)
1. Select a set of variables to define financial position (FP),
competitive position (CP), stability position (SP), and
industry position (IP).
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Steps to Develop a SPACE Matrix (2 of 4)
2. Assign a numerical value ranging from +1 (worst) to +7
(best) to each of the variables that make up the FP and I
P dimensions.
Assign a numerical value ranging from –1 (best) to –7
(worst) to each of the variables that make up the SP and CP
dimensions.
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Steps to Develop a SPACE Matrix (3 of 4)
3. Compute an average score for FP, CP, IP, and SP.
4. Plot the average scores for FP, IP, SP, and CP on the
appropriate axis.
5. Add the two scores on the x-axis and plot the resultant
point on X. Add the two scores on the y-axis and plot the
resultant point on Y. Plot the intersection of the new xy
point.
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Steps to Develop a SPACE Matrix (4 of 4)
6. Draw a directional vector from the origin of the SPACE
Matrix through the new intersection point.
– This vector reveals the type of strategies
recommended for the organization: aggressive,
competitive, defensive, or conservative
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Figure 6-5 Example Strategy Profiles (1 of 2)
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Figure 6-5 Example Strategy Profiles (2 of 2)
Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological
Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155.
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
The Boston Consulting Group (BCG)
Matrix
• BCG Matrix
– graphically portrays differences among divisions in
terms of relative market share position and industry
growth rate
– allows a multidivisional organization to manage its
portfolio of businesses by examining the relative
market share position and the industry growth rate
of each division relative to all other divisions in the
organization
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Figure 6-7 The BCG Matrix (1 of 4)
Source: Based on the BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group
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Figure 6-7 The BCG Matrix (2 of 4)
• Question Marks – Quadrant I
– Organization must decide whether to strengthen them
by pursuing an intensive strategy (market penetration,
market development, or product development) or to sell
them
• Stars – Quadrant II
– represent the organization’s best long-run opportunities
for growth and profitability
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Figure 6-7 The BCG Matrix (3 of 4)
• Cash Cows – Quadrant III
– generate cash in excess of their needs
– should be managed to maintain their strong position
for as long as possible
• Dogs – Quadrant IV
– compete in a slow- or no-market-growth industry
– businesses are often liquidated, divested, or trimmed
down through retrenchment
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Figure 6-7 The BCG Matrix (4 of 4)
• The major benefit of the BCG Matrix is that it draws
attention to the cash flow, investment characteristics,
and needs of an organization’s various divisions.
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Figure 6-10 The Internal-External (IE)
Matrix (1 of 2)
Source: Based on: The IE Matrix was developed from the General Electric (GE) Business Screen Matrix. For a
description of the GE Matrix, see Michael Allen, “Diagramming GE’s Planning for What’s WATT,” in R. Allio and M.
Pennington, eds., Corporate Planning: Techniques and Applications l par; New York: AMACOM, 1979.
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Figure 6-10 The Internal-External (IE)
Matrix (2 of 2)
• The IE Matrix is based on two key dimensions: the IFE
total weighted scores on the x-axis and the EFE total
weighted scores on the y-axis
• Three Major Regions
– Grow and build
– Hold and maintain
– Harvest or divest
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Figure 6-11 An Example IE Matrix
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The Grand Strategy Matrix (1 of 3)
• Grand Strategy Matrix
– based on two evaluative dimensions: competitive
position and market (industry) growth
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Figure 6-13 The Grand Strategy Matrix
Source: Based on Roland Christensen, Norman Berg, and Malcolm Salter, Policy Formulation and Administration
(Homewood, IL: Richard D. Irwin, 1976), 16-18.
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The Grand Strategy Matrix (2 of 3)
• Quadrant I
– continued concentration on current markets (market
penetration and market development) and products
(product development) is an appropriate strategy
• Quadrant II
– unable to compete effectively
– need to determine why the firm’s current approach is
ineffective and how the company can best change to
improve its competitiveness
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The Grand Strategy Matrix (3 of 3)
• Quadrant III
– must make some drastic changes quickly to avoid
further decline and possible liquidation
– Extensive cost and asset reduction (retrenchment)
should be pursued first
• Quadrant IV
– have characteristically high cash-flow levels and limited
internal growth needs and often can pursue related or
unrelated diversification successfully
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The Quantitative Strategic Planning Matrix
(QSPM)
• Quantitative Strategic Planning Matrix (QSPM)
– objectively indicates which alternative strategies are
best
– uses input from Stage 1 analyses and matching results
from Stage 2 analyses to decide objectively among
alternative strategies
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Table 6-5 The Quantitative Strategic
Planning Matrix (QSPM)
Key Factors
Weight
Strategy 1
Strategy 2
Strategy 3
Key External Factors
Blank
Blank
Blank
Blank
Economy
Blank
Blank
Blank
Blank
Political/Legal/Governmental
Blank
Blank
Blank
Blank
Social/Cultural/Demographic/ Environmental
Blank
Blank
Blank
Blank
Technological
Blank
Blank
Blank
Blank
Competitive
Blank
Blank
Blank
Blank
Key Internal Factors
Blank
Blank
Blank
Blank
Management
Blank
Blank
Blank
Blank
Marketing
Blank
Blank
Blank
Blank
Finance/Accounting
Blank
Blank
Blank
Blank
Production/Operations
Blank
Blank
Blank
Blank
Research and Development
Blank
Blank
Blank
Blank
Management Information Systems
Blank
Blank
Blank
Blank
Strategic Alternatives
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Steps in a QSPM (1 of 2)
1. Make a list of the firm’s key external opportunities and
threats and internal strengths and 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.
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Steps in a QSPM (2 of 2)
4. Determine the Attractiveness Scores (AS).
5. Compute the Total Attractiveness Scores.
6. Compute the Sum Total Attractiveness Score.
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Positive Features of the QSPM
• Sets of strategies can be examined sequentially or
simultaneously
• Requires strategists to integrate pertinent external and
internal factors into the decision process
• Can be adapted for use by small and large for-profit and
nonprofit organizations
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Limitations of the QSPM
• Always requires informed judgments
• It is only as good as the prerequisite information and
matching analyses on which it is based
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Table 6-6 A QSPM for a Retail Computer
Store (1 of 3)
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Table 6-6 A QSPM for a Retail Computer
Store (2 of 3)
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Table 6-6 A QSPM for a Retail Computer
Store (3 of 3)
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The Culture and Politics of Strategy Choice
• Strategies that require fewer cultural changes may be
more attractive because extensive changes can take
considerable time and effort
• Political maneuvering consumes valuable time, subverts
organizational objectives, diverts human energy, and
results in the loss of some valuable employees
• Political biases and personal preferences get unduly
embedded in strategy choice decisions
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Tactics to Aid Strategists
• Choose Methods That Afford Employee Commitment
• Achieve Satisfactory Results with a Popular Strategy
• Shift from Specific to General Issues
• Focus on Long-Term Issues and Concerns
• Involve Middle Level Managers in Decisions
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Governance Issues
• Board of Directors
– a group of individuals who are elected by the
ownership of a corporation to have oversight and
guidance over management and who look out for
shareholders’ interests
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Board of Director Duties and Responsibilities
1. Control and oversight over management
2. Adherence to legal prescriptions
3. Consideration of stakeholders/ interests
4. Advancement of stockholders’ rights
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Principles of Good Governance (1 of 2)
1. No more than two directors are current or former
company executives.
2. The audit, compensation, and nominating committees are
made up solely of outside directors.
3. Each director owns a large equity stake in the company,
excluding stock options.
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Principles of Good Governan…
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