Analyzing alternative Strategies and Strategy Choice

Session 629 October 2011

Civil Service College Dhaka

Presentation byDr. Muhammad G. Sarwar

Email: sarwar_mg@yahoo.comCell: 01821443741

Strategic Management: course outlineSl. No.

Topic Title Session no.

1 Strategic Management: an overview 1

2 Strategy Formulation 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 Strategy Evaluation 1

5 Limitations of Strategic Management: why strategy may fail ?

12

Stages of Strategic Management

Strategic Management process consists of three stages:

1.Strategy formulation,2.Strategy implementation, and3.Strategy evaluation.

3

Strategy formulation

Strategy formulation includes:Developing a vision and mission statementsIdentifying organization’s external opportunities

and threatsIndentifying internal strengths and weaknessesSetting long-term objectives and alternative

strategiesAnalyzing 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) MatrixStage 3: Decision making stage– QSP (Quantitative Strategic Planning) Matrix

8

EFE MatrixAn 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 score5. 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 MatrixKey Internal Factors Weight Rating Weighted

Score

Strengths

1

2

3

Weaknesses

1

2

3

Total Weighted Score12

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 MatrixOrg A Org B Org C

Critical success factors

weight rating score rating score Rating score

Product quality

Price competitiveness

Advertising

Management

Financial position

Market share

Customer loyalty

Global expansion

Total14

SWOT (Strength-Weakness-Opportunities-Threat) Analysis

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 - S1234

Weakness – W1234

Opportunities –O1234

SO Strategies123

WO Strategies123

Threats- T1234

ST Strategies123

WT Strategies123

18

SWOT Matrix contd.

Eight steps to construct a SWOT Matrix: strategies1. Listing key external opportunities2. Listing key external threats3. Listing key internal strengths4. Listing key internal weakness5. Matching internal strengths with external opportunities to get the

SO6. Matching internal weakness with external opportunities to get WO

strategies7. Matching internal strengths with external threats to get ST

strategies8. 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. Return on Investment2. Leverage Ratios3. Liquidity Ratios4. Working Capital5. Cash Flow

1. Rate of Inflation2. Price Elasticity of Demand3. Competitive Pressure4. Price range of competing products5. Technological change

CA (Competitive Advantage) IS (Industry Strength)

1. Market share2. Product quality3. Customer loyalty4. Control over input suppliers

1. Growth potential2. Profit potential3. Financial stability4. 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 ScoreEFE TW Score

IFE Strong3.0 – 4.0

IFE Average2.0 – 2.99

IFE Weak1.0 – 1.99

EFE High3.0 – 4.0

IGrow and build

IIGrow and build

IIIHold and maintain

EFE Medium2.0 – 2.99

IVGrow and build

VHold and maintain

VIHarvest or divest

EFE Low1.0 – 1.99

VIIHold and maintain

VIIIHarvest or divest

IXHarvest or divest

GS (Grand Strategy) MatrixGS Matrix is based on two evaluative dimensions:1. Competitive Position, and2. 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 Intensive strategies Defensive 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 Weight Strategy 1 Strategy 2 Strategy 3

AS TAS AS TAS AS TAS

Key External Factors(Opportunities/Threats)

EconomyPolitical/legal/governanceTechnology trendsCompetitive environment

Key Internal Factors(Strengths/Weakness)

ManagementMarketingFinance/AccountingProduction/OperationR&DMIS

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