Bus 411
DAY 9
Copyright 2005 Prentice Hall
1
Agenda
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Assignment #3 due
Assignment #4 will be assigned next class
Templates available in WebCT
Discussion on Mid-term
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Before or after Spring Break?
Finish Discussion about Strategies
Start Discussion on Strategy Analysis and
choice
Copyright 2005 Prentice Hall
Ch 6 -2
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Copyright 2005 Prentice Hall
Ch 6 -3
Generic Strategies
Cost Leadership
In conjunction with differentiation
Economies or diseconomies of
scale
Capacity utilization achieved
Linkages w/ suppliers & distributors
Copyright 2005 Prentice Hall
Ch 6 -4
Generic Strategies
Low Cost Producer Advantage
Many price-sensitive buyers
Few ways of achieving differentiation
Buyers not sensitive to brand
differences
Large # of buyers w/bargaining power
Copyright 2005 Prentice Hall
Ch 6 -5
Generic Strategies
Differentiation
Greater product flexibility
Greater compatibility
Improved service
Greater convenience
More features
Copyright 2005 Prentice Hall
Ch 6 -6
Generic Strategies
Focus
Industry segment of sufficient size
Good growth potential
Not crucial to success of major competitors
Copyright 2005 Prentice Hall
Ch 6 -7
Means for Achieving Strategies
Joint Venture/Partnering 
Two or more companies form a temporary
partnership or consortium for purpose of
capitalizing on some opportunity.
Copyright 2005 Prentice Hall
Ch 6 -8
Means for Achieving Strategies
Cooperative Arrangements 
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R&D partnerships
Cross-distribution agreements
Cross-licensing agreements
Cross-manufacturing agreements
Joint-bidding consortia
Copyright 2005 Prentice Hall
Ch 6 -9
Means for Achieving Strategies
Why Joint Ventures Fail 
Managers who must collaborate daily; not
involved in developing the venture
 Benefits the company not the customers
 Not supported equally by both partners
 May begin to compete with one of the
partners
Copyright 2005 Prentice Hall
Ch 6 -10
Joint Ventures
Guidelines -Synergies between private and publicly held
Domestic with foreign firm, local management can
reduce risk
Complementary distinctive competencies
Resources & risks where project is highly profitable
(e.g. Alaska Pipeline)
Two or more smaller firms competing w/larger firm
Need to introduce new technology quickly
Copyright 2005 Prentice Hall
Ch 6 -11
Means for Achieving Strategies
Mergers & Acquisitions
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Provide improved capacity utilization
 Better use of existing sales force
 Reduce managerial staff
 Gain economies of scale
 Smooth out seasonal trends in sales
 Gain new technology
 Access to new suppliers, distributors, customers,
products, creditors
Copyright 2005 Prentice Hall
Ch 6 -12
Recent Mergers
Acquiring Firm
IBM
Yahoo
U.S. Steel
Pfizer
Krispy Kreme Doughnuts
Oracle
Palm
Nike
Copyright 2005 Prentice Hall
Acquired Firm
Rational Software Corp
Inktomi Corp
National Steel Corp
Pharmacia
Montana Mills
People Soft
Handspring
Converse
Ch 6 -13
First Mover Advantages
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Benefits a firm may achieve by entering a
new market or developing a new product or
service prior to rival firms.
Copyright 2005 Prentice Hall
Ch 6 -14
First Mover Advantages
Potential Advantages

Securing access to rare resources
 Gaining new knowledge of key factors &
issues
 Carving out market share
 Easy to defend position & costly for rival
firms to overtake
Copyright 2005 Prentice Hall
Ch 6 -15
Outsourcing
Business-process outsourcing
(BPO)
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Companies taking over the functional
operations of other firms
Copyright 2005 Prentice Hall
Ch 6 -16
Outsourcing
Benefits
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Less expensive
 Allows firm to focus on core business
 Enables firm to provide better services
Copyright 2005 Prentice Hall
Ch 6 -17
Chapter 6
Strategy Analysis & Choice
Strategic Management:
Concepts & Cases
10th Edition
Fred David
PowerPoint Slides by
Anthony F. Chelte
Western New England College
Copyright 2005 Prentice Hall
Ch 6 -18
Chapter Outline
The Nature of Strategy & Choice
A Comprehensive
Strategy-Formulation Framework
The Input Stage
Copyright 2005 Prentice Hall
Ch 6 -19
Chapter Outline (cont’d)
The Matching Stage
The Decision Stage
Cultural Aspects of Strategy Choice
Copyright 2005 Prentice Hall
Ch 6 -20
Chapter Outline (cont’d)
The Politics of Strategy Choice
Governance Issues
Copyright 2005 Prentice Hall
Ch 6 -21
Strategy Analysis & Choice
To acquire or not to acquire, that is the
question –
Robert J. Terry
Life is full of lousy options -General P.X. Kelley
Copyright 2005 Prentice Hall
Ch 6 -22
Strategy Analysis & Choice
Nature of Strategy Analysis & Choice
-- Establishing long-term objectives
-- Generating alternative strategies
-- Selecting strategies to pursue
-- Best alternative - achieve mission & objectives
Copyright 2005 Prentice Hall
Ch 6 -23
Strategy Analysis & Choice
Alternative Strategies Derive From -
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Vision
Mission
Objectives
External audit
Internal audit
Past successful strategies
Copyright 2005 Prentice Hall
Ch 6 -24
Strategy Analysis & Choice
Generating Alternatives -Participation in generating alternative
strategies should be as broad as
possible
Copyright 2005 Prentice Hall
Ch 6 -25
Comprehensive Strategy-Formulation
Framework
Stage 1:
The Input Stage
Stage 2:
The Matching Stage
Copyright 2005 Prentice Hall
Stage 3:
The Decision Stage
Ch 6 -26
Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)
Stage 1:
The Input Stage
External Factor Evaluation
Matrix (EFE)
Competitive Profile Matrix
(CPM)
Copyright 2005 Prentice Hall
Ch 6 -27
Stage 1: The Input Stage
Basic input information for the matching &
decision stage matrices
Requires strategists to quantify subjectivity
early in the process
Good intuitive judgment always needed
Copyright 2005 Prentice Hall
Ch 6 -28
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2005 Prentice Hall
Ch 6 -29
Stage 2: The Matching Stage
Match between organization’s internal
resources & skills and the opportunities & risks
created by its external factors
Copyright 2005 Prentice Hall
Ch 6 -30
Stage 2: The Matching Stage
SWOT Matrix
Strengths
Weaknesses
Opportunities
Threats
Copyright 2005 Prentice Hall
Ch 6 -31
SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
Copyright 2005 Prentice Hall
Ch 6 -32
SO Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
Copyright 2005 Prentice Hall
SO
Strategies
Use a firm’s
internal strengths
to take advantage
of external
opportunities
Ch 6 -33
WO Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
Copyright 2005 Prentice Hall
WO
Strategies
Improving internal
weaknesses by
taking advantage
of external
opportunities
Ch 6 -34
ST Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
Copyright 2005 Prentice Hall
ST
Strategies
Use a firm’s
strengths
to avoid or
reduce the impact
of external
threats
Ch 6 -35
WT Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
Copyright 2005 Prentice Hall
WT
Strategies
Defensive tactics
aimed at reducing
internal
weaknesses &
avoiding
environmental
threats
Ch 6 -36
SWOT Matrix
Developing the SWOT
List firm’s key internal
Strengths
List firm’s key internal
Weaknesses
List firm’s key external
Opportunities
List firm’s key external
Threats
Copyright 2005 Prentice Hall
Ch 6 -37
SWOT Matrix
Strengths – S
Weaknesses – W
List Strengths
List Weaknesses
Opportunities – O
SO Strategies
WO Strategies
List Opportunities
Use strengths to take
advantage of
opportunities
Overcoming weaknesses
by taking advantage of
opportunities
Threats – T
ST Strategies
WT Strategies
List Threats
Use strengths to avoid
threats
Minimize weaknesses and
avoid threats
Leave Blank
Copyright 2005 Prentice Hall
Ch 6 -38
Matching Key Factors to Formulate Alternative Strategies
Key Internal Factor
Key External Factor
Excess working capacity
(strength)
20% annual growth in
the cell phone industry
(opportunity)
Insufficient capacity
(weakness)
Strong R&D (strength)
Poor employee morale
(weakness)
+
Resultant Strategy
=
Acquire Cellfone, Inc.
Exit of two major foreign
+ competitors form the
=
industry (opportunity)
Pursue horizontal integration
by buying competitor's
facilities
Decreasing numbers of
young adults (threat)
Develop new products for
older adults
+
+
Strong union
activity (threat)
=
=
Develop a new
employee benefits
package
Ch 6 -39
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2005 Prentice Hall
Ch 6 -40
SPACE Matrix
Strategic Position & Action Evaluation Matrix
Aggressive
Conservative
Defensive
Competitive
Copyright 2005 Prentice Hall
Ch 6 -41
SPACE Matrix
Two Internal Dimensions
Financial Strength (FS)
Competitive Advantage (CA)
Two External Dimensions
Environmental Stability (ES)
Industry Strength (IS)
Copyright 2005 Prentice Hall
Ch 6 -42
SPACE Factors
Internal Strategic Position
Financial Strength (FS)
Return on investment
Leverage
Liquidity
Working capital
Cash flow
External Strategic Position
Environmental Stability (ES)
Technological changes
Rate of inflation
Demand variability
Price range of competing products
Barriers to entry
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business
Ch 6 -43
SPACE Factors
Internal Strategic Position
External Strategic Position
Competitive Advantage CA
Industry Strength (IS)
Market share
Product quality
Product life cycle
Customer loyalty
Competition’s capacity utilization
Technological know-how
Control over suppliers & distributors
Growth potential
Profit potential
Financial stability
Technological know-how
Resource utilization
Ease of entry into market
Productivity, capacity utilization
Ch 6 -44
SPACE Matrix
FS
Conservative
Aggressive
+6
+5
+4
+3
+2
+1
CA
IS
-6
-5
-4
-3
-2
-1
+1
-1
+2 +3
+4
+5
+6
-2
-3
-4
Defensive
-5
Competitive
-6
ES
Ch 6 -45
The steps to develop a SPACE Matrix:
Select a set of variables to define financial strength (FS), competitive advantage (CA),
environmental stability (ES), and industry strength (IS).
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Assign a numerical value ranging from 1 (worst) to 6 (best) for the variables that make
up the FS and IS dimensions. Assign a number between –1 (best) to –6 (worst) for
variables that make up the ES and CA dimensions. On the FS and CA axes, make
comparison to competitors. On the IS and ES axes, make comparison to other
industries.
Compute an average score for FS, CA, IS, and ES by summing the values given to the
variables and dividing by the number of variables included in each dimension.
Plot the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE
Matrix.
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.
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.
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Table 6-2 provides Good examples
Aggressive
Competitive
Defensive
Conservative
Lets try with Data in table 6-3
Copyright 2005 Prentice Hall
Ch 6 -46
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2005 Prentice Hall
Ch 6 -47
BCG Matrix
Boston Consulting Group Matrix
Enhances multi-divisional firm in formulating
strategies
Autonomous divisions = business portfolio
Divisions may compete in different industries
Focus on market-share position & industry
growth rate
Copyright 2005 Prentice Hall
Ch 6 -48
BCG Matrix
Relative Market Share Position
Ratio of a division’s own market share in an
industry to the market share held by the largest
rival firm in that industry.
Copyright 2005 Prentice Hall
Ch 6 -49
BCG Matrix
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Data required
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Relative market Share for each Division
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Industry growth pattern
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Vertical axis
Percentage of Corporate Revenues generated by division
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Horizontal axis
Compare to leading firm (1 means you are the leading firm)
Size of circle
Percentage of Corporate Profits generated by division
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Size of pie slice
Copyright 2005 Prentice Hall
Ch 6 -50
BCG Matrix
Relative Market Share Position
Industry Sales Growth Rate
High
1.0
Medium
.50
Low
0.0
High
+20
Stars
II
Question Marks
I
Cash Cows
III
Dogs
IV
Medium
0
Low
-20
Ch 6 -51
BCG Matrix
Question Marks
Low relative market share – compete in highgrowth industry
Cash needs are high
Case generation is low
Decision to strengthen (intensive strategies) or
divest
Copyright 2005 Prentice Hall
Ch 6 -52
BCG Matrix
Stars
High relative market share and high growth rate
Best long-run opportunities for growth & profitability
Substantial investment to maintain or
strengthen dominant position
Integration strategies, intensive strategies, joint
ventures
Copyright 2005 Prentice Hall
Ch 6 -53
BCG Matrix
Cash Cows
High relative market share, competes in lowgrowth industry
Generate cash in excess of their needs
Milked for other purposes
Maintain strong position as long as possible
Product development, concentric diversification
If weakens—retrenchment or divestiture
Copyright 2005 Prentice Hall
Ch 6 -54
BCG Matrix
Dogs
Low relative market share & compete in slow or
no market growth
Weak internal & external position
Liquidation, divestiture, retrenchment
Copyright 2005 Prentice Hall
Ch 6 -55
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2005 Prentice Hall
Ch 6 -56
IE Matrix
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The IE Matrix positions an organization’s various
divisions in a nine-cell display illustrated in Figure 610.
The IE Matrix is similar to the BCG Matrix in that
both tools involve plotting organization divisions in a
schematic diagram; this is why they are called
portfolio matrices.
Differences between the IE Matrix and the BCG
Matrix
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Axes are different.
IE Matrix requires more information about divisions than
BCG.
Strategic implications of each matrix are different.
Copyright 2005 Prentice Hall
Ch 6 -57
IE Matrix
IFE Scores
Average
2-2.99
Strong
3-4
EFE
Scores
High
3-4
Medium
2-2.99
Weak
1-1.99
I
II
III
IV
V
VI
VII
VIII
IX
Low
1-1.99
Copyright 2005 Prentice Hall
Ch 6 -58
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2005 Prentice Hall
Ch 6 -59
Grand Strategy Matrix
Tool for formulating alternative strategies
Based on two dimensions
Competitive position
Market growth
Copyright 2005 Prentice Hall
Ch 6 -60
RAPID MARKET GROWTH
1.
2.
3.
4.
5.
6.
WEAK
COMPETITIVE
POSITION
1.
2.
3.
4.
5.
Quadrant II
Market development
Market penetration
Product development
Horizontal integration
Divestiture
Liquidation
1.
2.
3.
4.
5.
6.
7.
Quadrant III
Retrenchment
1.
Concentric diversification
2.
Horizontal diversification
3.
Conglomerate
diversification
4.
Liquidation
SLOW MARKET
Quadrant I
Market development
Market penetration
Product development
Forward integration
Backward integration
Horizontal integration
Concentric diversification
Quadrant IV
Concentric diversification
Horizontal diversification
Conglomerate
diversification
Joint ventures
STRONG
COMPETITIVE
POSITION
GROWTH
Ch 6 -61
Grand Strategy Matrix
Quadrant I
Excellent strategic position
Concentration on current markets/products
Take risks aggressively when necessary
Copyright 2005 Prentice Hall
Ch 6 -62
Grand Strategy Matrix
Quadrant II
Evaluate present approach
How to improve competitiveness
Rapid market growth requires intensive
strategy
Copyright 2005 Prentice Hall
Ch 6 -63
Grand Strategy Matrix
Quadrant III
Compete in slow-growth industries
Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)
Copyright 2005 Prentice Hall
Ch 6 -64
Grand Strategy Matrix
Quadrant IV
Strong competitive position
Slow-growth industry
Diversification to more promising growth areas
Copyright 2005 Prentice Hall
Ch 6 -65
Strategy-Formulation Analytical
Framework
Stage 3:
The Decision Stage
Copyright 2005 Prentice Hall
Quantitative Strategic
Planning Matrix
(QSPM)
Ch 6 -66
QSPM
Quantitative Strategic Planning Matrix
Technique designed to determine the relative
attractiveness of feasible alternative actions
Copyright 2005 Prentice Hall
Ch 6 -67
Strategic Alternatives
QSPM
Key External Factors
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Weight
Strategy 1
Strategy 2
Strategy 3
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems
Ch 6 -68
QSPM
Limitations
Requires intuitive judgments & educated
assumptions
Only as good as the prerequisite inputs
Copyright 2005 Prentice Hall
Ch 6 -69
QSPM
Advantages
Sets of strategies considered simultaneously or
sequentially
Integration of pertinent external & internal
factors in the decision making process
Copyright 2005 Prentice Hall
Ch 6 -70
Cultural Aspects of Strategy
Choice
Organization Culture
Successful strategies depend on the degree of
consistency with the firm’s culture
Copyright 2005 Prentice Hall
Ch 6 -71
Politics of Strategy Choice
Politics in Organizations
Management hierarchy
Career aspirations
Allocation of scarce resources
Copyright 2005 Prentice Hall
Ch 6 -72
Politics of Strategy Choice
Political tactics for strategists
Equifinality
Satisfying
Generalization
Higher-order issues
Political access on important issues
Copyright 2005 Prentice Hall
Ch 6 -73
Governance Issues
Board of Directors Roles & Responsibilities
Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
 Advancement of stockholder rights
Copyright 2005 Prentice Hall
Ch 6 -74
Corporate Governance Issues
Business Week’s “principles of good governance”
1. No more than 2 directors current or former company executives
2. No directors do business with the company
3. Audit, compensation, and nominating committees made up
of outside directors
4. Each director attends at lest 75% of all meetings
5. Audit committee meets at least four times a year
6. CEO is not also the Chairperson of the Board
7. Shareholders have considerable power and information to
choose & replace directors
8. Stock options are considered a corporate expense
9. No interlocking directorships
Copyright 2005 Prentice Hall
Ch 6 -75