Analyzing alternative Strategies
and Strategy Choice
Session 6
29 October 2011
Civil Service College Dhaka
Presentation by
Dr. Muhammad G. Sarwar
Email: [email protected]
Cell: 01821443741
Strategic Management: course outline
Sl.
No.
Topic Title
1
Strategic Management: an overview
2
Strategy Formulation
Session no.
1
 Designing Vision and Mission Statements
1
• External Assessment
1
• Internal Assessment
1
• Setting Objectives and Strategic Options
1
• Strategy Analysis and Choice
1
3
Strategy Execution
1
4
5
Strategy Evaluation
Limitations of Strategic Management: why
strategy may fail ?
1
1
2
Stages of Strategic Management
Strategic Management process consists
of three stages:
1. Strategy formulation,
2. Strategy implementation, and
3. Strategy evaluation.
3
Strategy formulation
Strategy formulation includes:
 Developing a vision and mission statements
 Identifying organization’s external opportunities
and threats
 Indentifying internal strengths and weaknesses
 Setting long-term objectives and alternative
strategies
 Analyzing alternative strategies and choosing
particular strategy.
4
Presentation Contents of 6th Session
• Nature of Strategy Analysis and choice
• Process of Strategy Analysis and Choice
• A Comprehensive Strategy Formulation Framework
– Input stage: EFE Matrix, CP (Competitive Profile) Matrix, and
IFE (Internal Factor Evaluation) Matrix
– Matching stage: SWOT Matrix, SPACE Matrix, IE Matrix, GS
Matrix
– Decision stage: QSP (Quantitative Strategic Planning) Matrix
 Cultural and Political Aspects of Strategy Choice
5
Nature of Strategy Analysis and choice
• Generating and analyzing alternative
strategies and selecting a set of strategies
involve making subjective decision based on
objective information.
• Alternative strategies are derived from the
organization’s vision, mission, objectives,
external audit, and internal audit, and are
build on past strategies that have worked well.
6
Process of Strategy Analysis and Choice
• As it’s not possible to consider infinite number of
alternative strategies, a manageable set of most
attractive alternative strategies are developed.
• Identifying and evaluating alternative strategies
should involve as many managers and employees as
possible from each department who earlier
participated in formulation of organizational vision,
mission, internal and external audits.
• After identifying all feasible strategies, they must be
ranked to arrive at a list of prioritized strategies
reflecting the collective wisdom of the organization.
7
A Comprehensive Strategy-Formulation Analytical
Framework (SFAF)
Stage 1: Input Stage:
– EFE Matrix,
– IFE (Internal Factor Evaluation) Matrix, and
– CP (Competitive Profile) Matrix
Stage 2: Matching Stage
– SWOT ( Strength-Weakness-Opportunities-Threat) Matrix,
– SPACE (Strategic Position and Action Evaluation) Matrix,
– IE (Internal-External) Matrix,
– GS (Grand Strategy) Matrix
Stage 3: Decision making stage
– QSP (Quantitative Strategic Planning) Matrix
8
EFE Matrix
An EFE (external factor evaluation) Matrix summarizes and
evaluate all the external forces that affect an organization.
It is developed in 5 stages:
1. List key external factors identified in external audit;
2. Assign to each factor weight ranging from say 0.0 (not
important) to 1.0 (very important) indicating relative
importance of that factor to be successful in the
industry.
3. Assign rating say between 1 (poor response) and 4
(superior response) based on effectiveness of the
organization’s strategies.
4. Multiply weight by its rating to get weighted score
5. Sum up to get total weighted score for the organization.
9
Example of EFE Matrix
Key External Factors
Weight
Rating
Weighted
score
Opportunities
1. Domestic demand increasing 10% annually
2. Export demand increasing 15% annually
3. Input price decreasing 5% annually
Threats
1. Rival organizations increasing ad by 20%
annually
2. Govt. Tightening its regulation
3. Interest rates are increasing 3% annually
Total
10
IFE (Internal Factor Evolution) Matrix
• IFE Matrix is a management strategy formulation tool that
summarizes and evaluates major strengths and weaknesses in
functional areas of the organization.
• Five steps to construct IFE Matrix:
– List key strengths and weaknesses
– Assign weight ranging from 0.0 (not important) to 1.0 (all
important)
– Assign rating from 1 (major weakness) to 4 (major strength)
– Multiply weights and rating to get weighted score
– Sum the weighted score to get total weighted score for the
organization.
11
An example of IFE Matrix
Key Internal Factors
Weight
Rating
Weighted
Score
Strengths
1
2
3
Weaknesses
1
2
3
Total Weighted Score
12
CP (Competitive Profile) Matrix
• CP Matrix identifies a organization’s strategic
competitors and its particular strengths and weakness
in relation to the organization’s strategic position.
• CP Matrix is broader as it includes both internal and
external issues.
• CP Matrix rating refers to strengths and weakness
between I (major weakness) and 4 (major strength).
13
Example of CP Matrix
Org A
Critical success
factors
weight rating
Org B
score
rating
Org C
score
Rating
score
Product quality
Price
competitiveness
Advertising
Management
Financial position
Market share
Customer loyalty
Global expansion
Total
14
SWOT (Strength-Weakness-OpportunitiesThreat) Analysis
Resource
Strengths
Market
Opportunities
SWOT
Analysis
Threats
Resource
Weaknesses
15
SWOT Analysis (contd.)
SWOT analysis leads to:
• Drawing conclusions from the SWOT listings
about overall situation of an organization; and
• Translating these conclusions into strategic
actions to better match organization’s strategy
to its resource strengths and market
opportunities, and to correct the weaknesses
and to defend from external threats.
16
SWOT Matrix contd.
SWOT Matrix generates 4 types of strategies:
1. SO (Strength-Opportunities) Strategies: intend to use
internal strengths to take advantage of external
opportunities.
2. WO (Weakness-Opportunities) Strategies: aim at
improving internal weakness by taking advantage of
external opportunities.
3. ST (Strengths-Threat) Strategies: intend to use internal
strengths to reduce the impact of external threats.
4. WT (Weakness-Threat) Strategy: defensive strategy at
reducing internal weakness and avoiding external threats.
17
SWOT Matrix (contd.)
Strength - S
1
2
3
4
Weakness – W
1
2
3
4
Opportunities –O
1
2
3
4
SO Strategies
1
2
3
WO Strategies
1
2
3
Threats- T
1
2
3
4
ST Strategies
1
2
3
WT Strategies
1
2
3
18
SWOT Matrix contd.
Eight steps to construct a SWOT Matrix: strategies
1.
2.
3.
4.
5.
6.
7.
8.
Listing key external opportunities
Listing key external threats
Listing key internal strengths
Listing key internal weakness
Matching internal strengths with external opportunities to get the
SO
Matching internal weakness with external opportunities to get
WO strategies
Matching internal strengths with external threats to get ST
strategies
Matching internal weakness with external threats to get WT
strategies.
SPACE (Strategic Position and Action
Evaluation) Matrix
• SPACE Matrix in its 4 quadrant framework indicates
whether aggressive, conservative, defensive or
competitive strategies are appropriate for a
organization.
• Axes of the SPACE Matrix represent 2 internal and 2
external dimensions.
• Internal dimensions are:
– FS (Financial strength)
– CA (Competitive Advantage)
 External dimensions are:
 ES (Environmental Stability)
 IS (Industry Strength)
Factors of SPACE Matrix (contd.)
Internal Strategic Position External Strategic Position
FS (Financial Strengths)
ES (Environmental Stability)
1.
2.
3.
4.
5.
1. Rate of Inflation
2. Price Elasticity of Demand
3. Competitive Pressure
4. Price range of competing products
5. Technological change
Return on Investment
Leverage Ratios
Liquidity Ratios
Working Capital
Cash Flow
CA (Competitive Advantage)
IS (Industry Strength)
1.
2.
3.
4.
1.
2.
3.
4.
Market share
Product quality
Customer loyalty
Control over input suppliers
Growth potential
Profit potential
Financial stability
Productivity
SPACE Matrix (contd.)
FS +
Conservative Strategies
Aggressive Strategies
CA
• _
IS
+
Defensive Strategies
Competitive Strategies
ES _
IE (Internal-External) Matrix
• IE Matrix is based on two dimensions:
– IFE total weighted scores on x-axis, and
– EFE total weighted scores on y-axis
 IE Matrix is divided into 3 regions with different
strategic implications:
 I, II &IV : grow and build (intensive or integrative
strategies)
 III, V & VII : hold and maintain (market penetration and
product development strategies)
 VI, VIII &IX : harvest or divest (defensive strategies)
IE (Internal-External) Matrix (contd.)
IFE TW Score
EFE TW Score
IFE Strong
3.0 – 4.0
IFE Average
2.0 – 2.99
IFE Weak
1.0 – 1.99
EFE High
3.0 – 4.0
I
Grow and build
II
Grow and build
III
Hold and
maintain
EFE Medium
2.0 – 2.99
IV
Grow and build
V
Hold and
maintain
VI
Harvest or divest
EFE Low
1.0 – 1.99
VII
Hold and
maintain
VIII
Harvest or divest
IX
Harvest or divest
GS (Grand Strategy) Matrix
GS Matrix is based on two evaluative dimensions:
1. Competitive Position, and
2. Market Growth.
All organizations can be positioned in one of the four
strategy quadrants:
1. Quadrant I is an excellent strategic position for an
organization due to strong competitive position and rapid
market growth.
2. Quadrant II organizations need to evaluate their market
position as they are facing weak competitive position.
3. Quadrant III organizations are in slow growth industries and
have weak competitive position.
4. Quadrant IV organizations have strong competitive position ,
but are in a slow growth industry.
GS (Grand Strategy) Matrix (contd.)
RMG
Quadrant II
Quadrant I
Intensive strategies
Defensive strategies
Intensive strategies
Integration strategies
WCP
SCP
Quadrant III
Quadrant IV
Defensive strategies
Diversification strategies
SMG
QSP (Quantitative Strategic Planning)
Matrix
• QSP Matrix is the decision making tool of Stage 3 of
Strategy-Formulation Analytical Framework.
• QSP Matrix determines the relative attractiveness of
various strategies based on the extent to which key
external and internal success factors are capitalized
upon or improved.
• QSP Matrix is prepared using information of stage 1
(input stage) and stage 2 (matching stage) of Strategy
Formulation Analytical Framework.
QSP Matrix (contd.)
Six steps are required to prepare QSP Matrix:
•
Step 1: listing external opportunities/threats and internal
strengths/weakness from stage 1 (input stage) of SFAF;
•
Step 2: assigning weights to each external and internal
factors as from stage 1 (input stage) of SFAF;
•
Step 3: Identifying alternative strategies from stage 2
(matching stage) of SFAF;
•
Step 4: determining strategy Attractiveness Score (AS);
•
Step 5: Computing Total Attractiveness Score (TAS); and
•
Step 6: Computing Sum Total Attractiveness Score (STAS).
QSP Matrix (contd.)
Key Factors
Key External Factors
(Opportunities/Threats)
Economy
Political/legal/governance
Technology trends
Competitive environment
Key Internal Factors
(Strengths/Weakness)
Management
Marketing
Finance/Accounting
Production/Operation
R&D
MIS
Weight
Strategy 1
Strategy 2
Strategy 3
AS
AS
AS
TAS
TAS
TAS
Limitations of the Strategy
Formulation Framework
• Quantitative techniques used in Strategy
Formulation Analytical Framework (SFAF), like
any other quantitative methods are based on
simplified assumptions that may not always
realistic;
• SFAF always requires intuitive judgments
based on objective information;
• SFAF can be only as good as the inputs and
matching analysis on which it is based.
Cultural and Political aspects of
Strategy Choice
• All organization have a culture. If formulated
strategies are in conflict with organizational
culture, implementation will be slow and
difficult.
• All organization have internal power politics.
Unless internal power politics is managed
well, implementation of strategies could be
sabotaged.
Strategic Management: references
• Fred R. David (2008), Strategic
Management: Concepts and Cases, 11th
Edition, Prentice Hall (Chapter 6)
• Arthur A. Thompson, Jr. (2010) Crafting and
Executing Strategy: the quest for
comparative, 16th Edition, McGraw Hill (Chapter
5 & 6)
32
Thanks
33