INSTRUCTOR’S MANUAL
CHAPTER 11
Evaluating and choosing strategic
alternatives
Part I Opening Case and Illustration Capsules
OPENING CASE 11
Myers strategies in an increasingly competitive market
Q1 Strategic management should involve all levels of the organisation. Discuss in
relationship to the present problems being experienced by the Coles-Myer Group.
a
Students should recognise the importance of resourcing in the development of
strategic change. Resources include more than the financial and tangible
assets. One of the most important resources in developing successful strategies
are the people who have to implement the strategies.
For those involved in upmarket stores, where customer service had previously
been a major component of the store's offerings, the change was both difficult
and, as was subsequently proved, inadvisable. As is emphasised throughout
the text, successful strategy does not just involve one level of management - to
be successful it is necessary to involve all staff members.
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Q2 What are the strategies which the Coles-Myer group brought in to its organisation
to increase competition and market appeal? Why weren’t they successful?
a
Within the Coles-Myer group there were a number of clearly defined
operations aimed at specific markets - from the upmarket Myer/Grace brothers
sector through to the affordable Target and K-Mart stores. Customers of each
group selected the stores on their perceived appeal. With the policy changes
the stores attempted to achieve a broader appeal within each of the groups
which resulted in a backlash from the traditional customer base.
The decision by the group to allow each of the chains to operate as individual
companies with no over-riding corporate level strategy resulted in the
previously clearly defined identities and target markets becoming blurred. The
end result was that competition between the stores was detrimental to the
overall success of the group.
The new strategies appeared to be sound in theory, but in practice they
resulted in a loss of identity for the individual stores. A lack of interest in the
new system from traditional customers and greater competition, not from
rivals, but from other sections within the Coles-Myer group proved
detrimental.
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ILLUSTRATION CAPSULE 11.1
Online retail market
Q1 What are the major factors contributing to successful online retailing?
a
Changing consumer habits and lifestyles are making the use of online retailing
a preferred option for many customers. Companies such as Amway already
have a strong offline presence and the capability of providing an efficient and
effective on line service. Their demographic profile is ideally suited to that of
Internet users generally and also households which are more likely to use on
line services.
Companies which already have provision for mail order sales and are backed
by an established reputation and supply chain are also well suited to taking
their sales to the online retail market.
Q2 Organisations like Wishlist and Amazon.com are yet to make a profit yet they are
still supported by investors. On what is this confidence based?
a
Despite problems with the dot com companies online retailing is seen as a
potential growth market. With increased internet usage and changing
demographics investors are looking at long term development rather than short
term gains. In this case the risk factor is seen as being an acceptable part of the
investment portfolio.
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ILLUSTRATION CAPSULE 11.2
Effectiveness doesn’t guarantee survival
Q1 The Department of Veterans Affairs have widened their product offerings (eg
health and aged care), to fit the changing demographics of its client base. Is it
appropriate for it to widen its client population, or should it cease to exist?
a
This organisation has shown it is extremely effective and is basically a strong
organisation working in a weak market. In terms of the government’s decision
as to what to do with this Department it could be argued that an organisation
which has proved itself as both efficient and effective could take over similar
roles for a wider client base. If there are Departments already providing
similar services less effectively, then they could be incorporated into the
present Department of Veterans Affairs.
Q2 As there will continue to be a need for services to veterans, has the department a
continuing role to play with its present set of programs, or should it be
incorporated into a larger portfolio?
a
With the international situation becoming increasingly volatile and Australian
military personnel being called upon to play a greater role in both overseas
police style actions and the potential for an actual war there is no doubt that
there will continue to be veterans needing assistance. The question of whether
the Department should continue to exist under its present structure is a
debatable one. The set of programs it presently offers meets the needs of a
specialised clientele, composed largely of World War II veterans; however,
one of the factors of the clientele is the age of the group. With Australia facing
the problems of an aging population the skills within this organisation can be
effectively transferred to a wider client base.
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Whether or not the programs should go to another Department or, as a result
of the effectiveness and efficiency displayed by the Department of Veterans
Affairs, other Departments could and should be incorporated into this small
but highly effective organisation is a point that can be argued
ILLUSTRATION CAPSULE 11.3
Cisco’s successful mergers and takeovers
Q1 How does Cisco’s acquisition policy differ from that of other organizations?
a
Cisco’s acquisition policy is based on five things: the company’s vision, its
short term success with its customers, its long term strategy, the compatibility
of the company’s staff with Cisco’s and its geographic location. It is also very
clear that the company itself should be compatible with Cisco and not an old
and established company.
The main factor that differentiates Cisco’s acquisition policy is that it is not
looking to take over large established companies or even competing
companies but rather is drawing on the potential expertise of new young
companies to complement or enhance their organisation. Their stated aim is
that as a general rule two thirds of new products should be sourced from
research and development within the company.
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Q2 What areas does Cisco concern itself with prior to acquisition to ensure a more
seamless integration of the organisation?
a
Compatibility in terms of location and cultural fit all play a major part in
determining acquisitions. In ensuring that the culture of a new organisation is
compatible with the established culture within the parent company it is less
likely that managerial and organisational problems will follow acquisition.
Cisco seeks to acquire organisations that have proved their worth but still are
in private ownership. In developing this policy Cisco is more likely to
encounter management that is still open to new ideas and changes in
conditions. In older more established organisation there tends to be a stronger
company culture that will make for difficulties during acquisition periods.
Part II Discussion Questions
1.
What disadvantages are associated with the use of quantitative models or
systems for evaluating strategies?
Strategy evaluation models do have some disadvantages. They imply a degree
of precision in strategy evaluation that simply does not exist. Even models such
as the BCG matrix give the impression that all that is necessary to conduct a
thorough evaluation of a strategic proposal is to allocate it a position in one of
the four quadrants of the matrix. This is obviously simplistic in view of the
complexities of strategic management.
If quantitative methods are used by
allowing different managers to select evaluation criteria and to weight them
individually, it is not uncommon for each manager to arrive at a different
conclusion. Therefore, using such systems requires a group effort and negotiated
consensus about which criteria are important and what weights should be
attached to each. Nevertheless, quantitative models or systems for evaluating
strategic alternatives compel managers to adopt a more objective and analytical
approach to strategy selection. It must be stressed that they are not the final
answer to the problem but are one approach which can be of use.
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2.
Should an organisation select different types of managers for SBU's in each
quadrant of the BCG matrix? Explain.
Like most strategic issues, there are both pros and cons to this issue. There is a
school of thought which believes that managers possess certain skills which are
more applicable to certain types of business situations than others. This means
that, for example, in the case of a Dog business which needs to be harvested, a
manager with strong accounting and finance skills, who will be able to remove
unnecessary staff from the organisation, and who generally has a 'thick skin' will
be most appropriate. Similarly, Star businesses require managers who are alert
to market changes and who are creative and innovative in the way in which they
implement their strategy. This will ensure that the organisation is well placed to
become a Cash Cow when market growth declines.
On the negative side, it must be recognised that Chief Executives are employed
for their ability to do more than simply implement a predetermined strategy.
Conceptual skills are important in identifying the position of the organisation
vis-a-vis its competitors and choosing subtle changes to the strategy used by the
organisation.
Also, strong human relation skills are necessary in order to
motivate key managers and groups within the organisation to move in the right
direction. Being able to translate overall strategies into key functional activities
and to communicate these effectively is another important part of the Chief
Executives job. If a person is capable of performing these functions then he or
she should be able to do it under a wide range of conditions, that is, whether the
organisation is a Dog or Star or whatever. In essence, provided the person has a
reasonable knowledge of the industry, a good Chief Executive is a good Chief
Executive is a good Chief Executive!
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3.
All the major strategy evaluation and matrices described in the textbook are
based on some analysis of competitive position. Can you think of any reasons
why strategies based on competitive position may be flawed?
There is an obvious question about any strategy analysis technique which is
based on the underlying assumption that strategy begins with an analysis of
competitive position. An organisation must do much more than simply react to
competitors. If this were the case, very few creative products or services would
ever reach the market because organisations would not be looking outside their
existing competitive arena.
Therefore, whilst analysis of competition is
important it should not be the first variable to consider in strategy analysis. It is
more important for management to agree on the key competencies of the
organisation - what is the major strategic weapon of the organisation is terms of
products, markets, customers and technology? This should be used to generate
new strategies in line with environmental opportunities.
4.
Do you think that portfolio models used for strategy evaluation could also be
used for strategy analysis and the generation of strategic options?
Portfolio models are definitely useable for strategy analysis and the generation of
strategic options. Positioning a unit (be it a product, division or company)
within the matrix not only evaluates whether the strategy which is currently
being applied to that unit is appropriate, but also indicates which other strategies
are possible.
That is, use of these models allows the analysis of strategy
according to the variables employed in each matrix. Also, these models allow
the choice of the most appropriate strategy. In fact, evaluation of any strategy is
inextricably linked to the analysis and choice process, a further demonstration of
the iterative nature of strategic management. In essence, the portfolio models
described in the textbook could have been used as a means of selecting strategic
objectives; see (Chapter 8), identifying corporate strategy alternatives (Chapter
9), identifying business strategy alternatives (Chapter 10) or evaluating strategic
alternatives (Chapter 11).
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5.
Of the top 100 companies in Australia, the majority are always single industry
focussed organisations. Why do you think this is the case?
The most likely explanation is the fact that these organisations were tightly
focussed around the needs of their particular markets. In this way, because they
were not spread over several industries, they were able to make use of synergy
and to charge a premium for their product or service because of their ability to
meet customer needs. Also, it could be argued that these organisations had
selected and implemented an appropriate generic strategy.
In essence,
organisations which provide good value for customers which they know very
well, are able to charge a price premium which results in strong financial
performance. On the other hand, it may be argued that tough economic times
work against unfocussed conglomerate organisations.
The performance of
highly diversified organisations is pulled down by unfavourable operating
conditions in some industries and this cannot be compensated for by favourable
conditions in others. These organisations are simply not flexible enough to shed
their bad performers in hard times quickly enough.
However, in buoyant
economic conditions conglomerates often perform very well because they able to
take advantage of strong performance in several industries (focussed
organisations have a more restricted performance base).
6.
With regard to the portfolio models described in the prescribed text, what
reasons can you think of to explain why the strategy recommended by these
models might not be the appropriate one?
It is important that students recognise that strategic management is a process and
an individualised process at that. In all areas of strategic management a great
deal of reliance is placed upon the judgement of individual managers. It is this
individuality of both organisation and managers that will determine the selection
of models and strategies. Further the models are meant to give a coherent and
organised method of analysis not an ‘ideal’ model. The circumstances under
which managers are working will determine the ‘right’ strategy factors that need
to be taken into account. These factors are so individualised that not every
alternative can be explored in any one given model or set of strategies.
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7.
If a manager believes that his/her division is pursuing the right strategy but the
position of the division within the BCG matrix suggests another strategy would
be better, what arguments can be put forward to support the current strategy?
Managers should not be too concerned if the strategy which their organisation is
pursuing does not coincide with the strategy recommended by the matrix.
Remember, the matrix can only provide guidelines for strategy evaluation and
there are many reasons why this strategy may be inappropriate:
1.
There is always some question about whether an organisation (or division)
has been correctly placed in the matrix.
Many placement criteria are
subjective in nature and some are inappropriate or difficult to apply to some
organisations. Yet position in the matrix carries with it a specific set of
strategy recommendations.
2.
Sometimes one (or a few) assessment criteria are much more important
than others are—but because all criteria are used in placing the organisation
(or division) within the matrix, the wrong positioning can occur.
3.
Some divisions are closely linked with others in the organisation. They
may share resources (staff, manufacturing facilities, distribution/storage
facilities, marketing, etc.) making an independent assessment difficult.
4.
Some products/services are not designed to stand on their own merits.
They may be part of a support function or a means of improving the image
of the organisation. Whatever the case, the product/service is not designed
to be evaluated on the basis of competitive position or market
attractiveness, hence these irrelevant evaluation criteria.
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It is important to remember that the strategy evaluation models are only a
management tool based on general relationships and guidelines. Like all general
techniques, they need to be carefully evaluated and not simply applied in a
formula based, prescriptive manner.
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Part III Multiple Choice Questions
1.
2.
Selecting the appropriate strategy for an organisation requires:
a.
knowledge of the specific contingencies facing the organisation
b.
an appreciation of market needs
c.
a knowledge of competitor capabilities
d.
all of these
e.
b and c only
Insert the appropriate strategies in the matrix below:
Attractive
Market
a.
a.
b.
b.
c.
c.
d.
d.
Strong
Competitive
Position
II
I
III
IV
Weak
Competitive
Position
a.
a.
b.
b.
c.
c.
d.
d.
Unattractive
Market
1.
consolidation
7.
joint venture
2.
related diversification
8.
liquidation
3.
conglomerate unrelated diversification
9.
international
4.
divestment
10.
withdrawal
5.
diversification
11.
vertical integration
6.
do nothing
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3.
The two most rational strategic options for a question mark division in the BCG
Matrix are:
4.
a.
a focus strategy or a differentiation strategy
b.
divestiture or a 'grow-and-build' type strategy
c.
a harvesting strategy or divestiture
d.
a turnaround strategy and a retrenchment strategy
e.
a hold-and-maintain strategy and a harvesting strategy
A 'cash cow' business is one which:
a.
generates very large increases in sales revenues
b.
produces very high profit after taxes and return on investment
c.
has very large profit margins
d.
produces large internal cash flows over and above what is needed to build
and maintain the business
e.
5.
all of the above
Which of the following is not a relevant part of corporate strategy evaluation?
a.
Construction of a business portfolio matrix
b.
The competitive strength and market position of each business in the
corporate portfolio
c.
The extent to which the organisation believes in management by objectives
d.
The nature and degree of diversification
e.
The long-term attractiveness of the industries and markets in which the firm
does business
6.
A 'star' division:
a.
is nearly always a cash cow
b.
is one which has a very large market share
c.
requires investment funds to support rapid growth and continued high
performance
d.
can be milked for the cash to pay dividends and corporate overhead and to
finance the acquisition of more starts
e.
will result from a dog business which receives suitable funding
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7.
8.
The McKinsey GE matrix is an improvement over the BCG matrix because:
a.
it allows more businesses to be included in the portfolio analysis
b.
it considers a wider variety of strategically relevant variables
c.
it eliminates the need to consider strategies for "average" businesses
d.
all of these
e.
none of these
A 'question mark' is:
a.
a cash consumer because it is in a mature industry and is locked into
pursuing a maintenance strategy
b.
a business with a weak competitive position in an industry which is
characterised by vigorous competition and low profit margins
c.
a candidate for divestiture because it does not have the potential to become
either a star or a cash cow
d.
a business with a low relative market share in a high-growth industry
e.
a marginal business in an unattractive industry, with high potential for
becoming a 'dog'
9.
10.
The A.D. Little Business Profile Matrix uses the dimensions of:
a.
relative market share and market attractiveness
b.
market growth and relative market share
c.
sector profitability and competitive capabilities
d.
stage of industry maturity and competitive position
e.
competitive strength and market attractiveness
The Directional Policy Matrix uses the dimensions of:
a.
relative market share and market attractiveness
b.
market growth and relative market share
c.
sector profitability and competitive capabilities
d.
stage of industry maturity and competitive position
e.
competitive strength and market attractiveness
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11.
Which of the following is not a standard criterion for evaluating a proposed
strategy:
12.
13.
14.
a.
compatibility with the internal and external environment
b.
consistency with the aspirations of most employees
c.
consistency with the mission statement
d.
support from key managers
e.
acceptable degree of risk
The McKinsey/General Electric Matrix is concerned with:
a.
relative market share and market attractiveness
b.
market growth and relative market share
c.
market attractiveness and competitive strength
d.
competitive position and stage of industry maturity
e.
sector profitability and stage of industry maturity
The attractiveness of a particular market can be assessed in terms of:
a.
market factors
b.
competitive factors
c.
economic factors
d.
technological factors
e.
all of the above
The competitive position of an organisation is:
a.
measured using the same dimensions for all industries
b.
measured using the same criteria as for market attractiveness
c.
measured on the basis of relative position vis-a-vis competition
d.
measured using the same rating and weighting system as the BCG matrix
e.
the primary measure of performance in all the portfolio models
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15.
Criticisms of the BCG Matrix include:
a.
relative market share is not always related to cash flow
b.
some products/divisions do not fall into any of the segments of the matrix
c.
it is relatively easy to manipulate the definition of a 'market' and thereby
change the allocation of divisions in the matrix
d.
it is difficult to use other criteria in addition to relative market share and
market growth rate to better assess the position of divisions
e.
16.
a and c only
The BCG Matrix is designed to indicate a series of strategies which will:
a.
keep the cash flow of the organisation in balance
b.
help the organisation keep track of all its multiple divisions
c.
enable management to isolate strong profit divisions as a focus for future
resources
d.
channel resources to those divisions in low growth markets
e.
withdraw resources from underperforming divisions and channel them to
'winners'
17.
A division with a high relative market share position in a low-growth industry
can be described as a:
18.
a.
star
b.
cash cow
c.
question mark
d.
dog
e.
problem child
When a division of an organisation has a high relative market share and is in a
fast growing industry, it is called a:
a.
star
b.
cash cow
c.
question mark
d.
dog
e.
problem child
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19.
When an organisation has excess production capacity and its basic
industry is
experiencing declining sales and profits, which of the following strategies could
be most effective?
20.
21.
a.
concentric diversification
b.
forward integration
c.
backward integration
d.
joint venture
e.
market development
The Boston Consulting Group (BCG) Matrix is ideal for analysing:
a.
organisations in the maturity stage of the product life cycle
b.
all organisations
c.
organisations with annual sales greater than $1 million
d.
organisations which aim to be the leaders in their industry
e.
organisations selling multiple products in multiple markets
The BCG measures relative market share position as:
a.
the sales of the division compared to the sales of all competitors in the
industry
b.
a division's market share relative to the market share of similar companies
c.
the number of products a division has on the market compared to the major
competitor
d.
the number of employees in a division compared to the number of
employees in the largest rival in the industry
e.
a division's market share divided by the market share of the largest rival in
that industry
22.
Most likely, a cash cow used to be a:
a.
dog
b.
question mark
c.
problem child
d.
star
e.
quasar
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Part IV True False Questions
1. Strategy evaluation is best used after the implementation of a strategy
2. In most industries and situations there is a ‘best’ strategy which can be used
3. Successful strategies are consistent with the organisation’s mission
4. Where possible strategy outcomes should be measurable
5. The term resources includes physical, monetary and staff skills
6. The level of commitment of employees rarely affect the strategy outcome
7. Evaluating competitive strategies is often more complex that evaluating corporate
level strategies
8. Strong organisations in unattractive markets have poor growth prospects
9. In the BCG matrix questions marks hold a low relative market share in highgrowth markets
10. The BCG matrix is a useful guide to the evaluation of corporate strategies
11. The strength of the McKinsey/General Electric matrix is that it does not rely on
subjective assessment
12. There is no ideal portfolio model
13. Strategies which optimise shareholder benefits and treats other stakeholders as
constraints is inappropriate
14. The quantitative method of evaluating strategies is not appropriate for all
organisations
15. The BCG matrix encourages management to assess proposed strategies using
important criteria
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Answers to Chapter 11
Multiple Choice Questions
1. d
2.
1.
consolidation (Ia, IIa)
7.
joint venture (IIIc)
2.
related diversification (IIc, IIIa, Ib)
8.
liquidation (Id, IVd)
3.
conglomerate unrelated diversification (IIIb)
9.
4.
divestment (Ic, IVc)
10.
withdrawal (IVa)
5.
diversification (IVb)
11.
vertical integration (IIb)
6.
do nothing (IId)
international (IIId)
3. a
4. d
5. c
6. c
7. b
8. d
9. d
10. c
11. b
12. c
13. e
14. b
15. e
16. a
17. b
18. a
19. a
20. e
21. e
22. d
True False Questions
1. F
2. F
3. T
4. T
5. T
6. F
7. F
8. T
9. T
10. T
11. F
12. T
13. T
14. T
15. T
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