Strategy Analysis And Choice

Chapter 6 Strategy Analysis and Choice

Strategic Analysis & Choice ■

Re-visit the Mission ◆ Revise, create, or maintain mission

Set Long-Term Objectives ■ Generate feasible alternatives ■ Evaluate alternatives ■ Choose courses of action ■

The Strategy Formulation Analytical Framework (Figure 6-2) Stage 1: The Input Stage External Analysis

SWOT Analysis

Internal Analysis

Stage 2: The Matching Stage Re-visit Mission and Set Long Term Objectives Generate feasible alternative Corporate Strategies

Stage 3: The Decision Stage Evaluate and Choose Corporate Strategies

Why Are Clear Objectives Needed? To Provide Direction

To Provide Purpose

To Allow Synergy

To Aid in Evaluations

To Establish Priorities

To Reduce Uncertainty

To Minimize Conflicts

To Stimulate Exertion

To Allocate Resources

To Design Jobs

To Motivate Managers & Employees Measurable

Realistic Understandable

Quantitative

Create, revise Mission Statement Statement of the purpose of the organization ■ Describes the organization in terms of: ■

◆ Customers ◆ Products or services ◆ Markets ◆ Basic beliefs about growth, public image, employees ■

Remember Hershey’s evolving Mission Statement

■

Purpose of Mission: ◆ Communication Tool ◆ Decision-Making Tool

Long Term Objectives - Areas ■

Quantitative Areas ◆ Profitability ◆ Productivity ◆ Growth ◆ Shareholder Wealth ◆ Market Position ◆ Technological Leadership

■

Qualitative Areas ◆ Reputation ◆ Social Responsibility ◆ Employees

Quantitative Areas ■

Profitability ◆ Net profit margin; ROI; ROE

■

Productivity ◆ Lower costs (% of sales CGS, S&A) ◆ Activity ratios

■

Growth ◆ Increases in sales, assets, net income

■

Competitive Position ◆ Market Share

Technological Leadership ■ Shareholder Wealth ◆ EPS; Dividends; Shareholder Value (stock) ■ Industry specific metrics ■

Qualitative Areas Employee Relations ■ Social Responsibility ■ Reputation ■

■

These areas have long term objectives that can be measured.

Corporate Strategies ■The overall managerial game plan. ■How management plans to achieve

mission and objectives.

Alternatives for Growth Market Penetration Market Development Product Development Expansion of existing Businesses Alternatives for Growth Diversification into new Businesses

Vertical Integration Forward & Backward Related

Unrelated

Modes of Growth Internal development ■ Acquiring firms/businesses ■ Collaborative arrangements ■

◆ Strategic Alliances ◆ Joint Ventures ◆ Licensing

Repositioning Strategies ■

Retrenchment ◆ Assets and/or costs

Divestiture ■ Spin-offs ■

Termination Strategies Liquidation ■ Merger ■ Being acquired ■

Tools for Formulating and Choosing Corporate Strategies 1. Portfolio Analysis

The BCG Matrix Relative Market Share Position in the Industry High Low High

Industry Sales Growth Rate (Percent)

+20

Medium

1.0

.50

Stars (II)

0.0

Question Marks (I)

? Medium

Low

0

-20

Cash Cows (III)

Dogs (IV)

Industry Attractiveness

GE Competitive Position (1. Market Share; 2. Technological MATRIX Know-How; 3. Product Quality; 4. Service Network; 5. Price Competitiveness; 6. Operating Costs Good High

Medium

Winner

Winner

Medium Winner

Average Business

Poor ???????

Loser

Profit Loser Low Loser Producer 1. Market growth; 2. market size; 3. Capital requirements; 4. Competitive Intensity

PRODUCT/MARKET EVOLUTION PORTFOLIO MATRIX

Development Stage of Industry

B1

Growth B4 Shakeout Maturity/ Saturation Decline

B2 B3

Competitive Position Strong Average Weak Market Share; Technological Know-How; Product Quality Service Network; Price competitiveness; operating costs

Advantages of Portfolio Analyses Encourages top management to evaluate each business individually; to set objectives; and consider resources. ■ It stimulates use of external data to supplement management’s judgment. ■ Its graphic representation makes interpretation and communication easier. ■

Limitations of Portfolio Analyses Defining product/market segments isn’t easy. ■ Using standard strategies may miss opportunities or be impractical. ■ Providing an illusion of scientific rigor masks the reality that positions are based on subjective judgments. ■ Determining what makes an industry attractive isn’t always possible. ■

More Tools ◆

2. Past Performance ◆ % increase in sales ◆ Contribution Margin ✦

Sales or profit (gross, operating, net)

◆ Continue to do what doing

◆

3. Mission and Long Term Objectives

More Tools 4. Matrices

SWOT or TOWS Matrix

Internal Analysis Strengths

SO Strategies

ST Strategies

Weaknesses

External Analysis Opportunities WO Strategies

WT Strategies

Threats

Matching Matching Key Key External External and and Internal Internal Factors Factors to to Formulate Formulate Alternative Alternative Strategies Strategies (Table (Table 6-2) 6-2) Key Internal Factor Excess working capacity (an internal strength) Insufficient capacity (an internal weakness) Strong R & D expertise (an internal strength) Poor employee morale (an internal weakness)

Resultant Strategy

Key External Factor +

20% annual growth in the cablevision industry (an external opportunity)

+

Exit of two major foreign competitors from the industry (an external opportunity

+

Decreasing numbers of young adults (an external threat)

+

Strong union activity (an external threat)

=

=

=

=

Acquire Visioncable Buy competitors’ facilities

Develop new products for older adults Develop a new employee-benefits package

The TOWS Matrix (Figure 6-3) STRENGTHS - S

List strengths OPPORTUNITIES - O

List opportunities

THREATS - T

List threats

WEAKNESSES - W

List weaknesses

SO STRATEGIES

WO STRATEGIES

Use strengths to take advantage of opportunities

Overcome weaknesses by taking advantage of opportunities

ST STRATEGIES Use strengths to avoid threats

WT STRATEGIES

Minimize weaknesses and avoid threats

Other Matrices Internal Factor Evaluation (IFE) p.165 ■ External Factor Evaluation (EFE) p. 130 ■ Competitive Profile Matrix (CPM) p. 131 ■ Strategic Position and Action Evaluation (SPACE) p. 184 ■ Internal-External p. 190 ■ Grand Strategy p. 192 ■

Other Tools Con’t 5. 6. ■ 7. ■ 8. ■

■

Economic Value Added (EVA) Scenario Analysis Game Theory Quantitative Decision Techniques Linear Programming, etc.

9.◆ Computer Assisted

■ ◆ ◆

Decision Support Systems (DSS) Artificial Intelligence (AI)

Behavioral Aspects/Tools Propensity for risk ■ Personal Agendas ■ Personalities ■ Time Pressures ■ Reputation/Integrity ■ Imagination/Conceptualizations ■ Support/Coalitions ■

Core Competencies

Core Competencies of the Corporation Real sources of advantage - not based on businesses. ■ Core competencies are collective learning in the organization, especially: ■

◆

how to coordinate diverse production skills by integrating multiple streams of technologies.

Tests to identify core competencies Provide potential access to a wide variety of markets/products/services. ■ Are difficult to imitate. ■ Are driven by knowledge and learning. ■

examples

Core Competencies ■ ■

■ ■ ■

Engines Powertrains

Products/businesses ■

Optics ■ Imaging Microprocessor controls

Cars; motorcycles; lawn mowers; generators Copiers; laser printers; cameras; image scanners; medical imaging

More kinds of core competencies: Systems Integration ■ Virtual reality ■ Bioengineering ■ Delighting the customer ■

Strategic Analysis and Choice Summary Making subjective decisions based on objective information, and subjective interpretation

Johnson Controls An example

Financial Strength

Competitive Advantage

Industry Strength

Environmental Stability

Example Example Strategy Strategy Profiles Profiles (Figure (Figure 6-6) 6-6) Aggressive Profiles FS

FS

( +1, +5)

( +4, +4) CA

IS

ES

A financially strong firm with major competitive advantages in a growing industry

CA

IS

ES

A firm whose financial strength is a dominating factor in the industry

Example Example Strategy Strategy Profiles Profiles (Figure (Figure 6-6) 6-6) Conservative Profiles FS

FS

(-2, +4) (-5, +2)

CA

IS

CA

IS

ES ES

A firm with financial strength; the firm has no major competitive advantages

A firm that suffers from major competitive disadvantages in an industry that has declining sales

The The Grand Grand Strategy Strategy Matrix Matrix (Figure (Figure 6-11) 6-11) Rapid Market Growth

Weak Competitive Position

1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation

1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification Strong

Competitiv e Position

1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate diversification 5. Divestiture 6. Liquidation

1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint ventures

Slow Market Growth

Example Example Strategy Strategy Profiles Profiles (Figure (Figure 6-6) 6-6) Competitive Profiles FS

Backward, forward and horizontal FS integration Intensive strategies; Joint Ventures

CA

IS

CA

IS

(+5, -1)

(+1, -2)

ES A firm with major competitive advantages in a high-growth industry

ES An organization that is competing fairly well in an unstable industry

Example Example Strategy Strategy Profiles Profiles (Figure (Figure 6-6) 6-6) Defensive Profiles FS

CA

FS

IS

CA

IS

(-5, -1)

ES A firm that has a very weak competitive position in a negative growth, stable industry

(-1, -5)

ES An financially troubled firm in a very unstable industry