Chapter 6
Strategy Analysis & Choice
Strategy Analysis & Choice
Nature of Strategy Analysis & Choice
-- Establishing long-term objectives
-- Generating alternative strategies
-- Selecting best alternative to achieve
mission & objectives
Comprehensive Strategy-Formulation
Framework
Stage 1:
The Input Stage
Stage 2:
The Matching Stage
Stage 3:
The Decision Stage
Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)
Stage 1:
The Input Stage
External Factor Evaluation
Matrix (EFE)
Stage 1: The Input Stage
Basic input information comes from the internal
/external evaluation (matrices)
Requires strategists to quantify subjectivity
early in the process: the assigned weights…
Good intuitive judgment always needed
Strategy-Formulation Analytical
Framework
Stage 2:
The Matching Stage
SWOT Matrix
BCG Matrix
Stage 2: The Matching Stage: SWOT
analysis
Match between organization’s internal
strengths and weaknesses and the opportunities
& risks created by its external factors
E.g. internal: strong R and D function
External changing demographics (e.g.
population getting older)
Strategy: Develop new products for older
adults (related to long term objectives
financial or strategic)
Stage 2: The Matching Stage: SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO):
Use a firm’s internal strengths to take advantage of external
opportunities
Weaknesses-Opportunities (WO):
Improving internal weaknesses by taking advantage
of external opportunities
Strengths-Threats (ST):
Use a firm’s strengths to avoid or reduce the impact of external
threats.
Weaknesses-Threats (WT):
Defensive tactics aimed at reducing internal weaknesses and
avoiding external threats
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 from 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
Which types of strategies, e.g. intensive diversification…, are referred to above
9
Ryanair : Matching Key Factors to Formulate Alternative Strategies
Key Internal Factor
Key External Factor
S1: Own 42 bases in
Europe (strength)
+
02: lower interest rates
on borrowing money
(opportunity)
+
Cheaper holiday’s
being offered by resorts
(opportunity)
+
Risk of increasing oil
prices(threat)
W7: charge for items free
on other airlines
(weakness)
S7: profits increase by
200%(strength)
W2: Poor customer
service (weakness)
T2: increase in
+ competitors
customers services
(threat)
Resultant Strategy
=
Invest money (e.g. 100
million) in terminal space at
new airports now currently
served.
=
Increase amount spent on
advertising to attract
customers only concerned
about price.
=
Hedge (invest) money to
protect against rising oil
prices
=
Spend money annually
to increase customer
services.
The above is based on the internal and external evaluation of Ryanair:
10
Limitations with SWOT Matrix
• Does not show how to achieve a
competitive advantage
• Provides a static assessment in time
• May lead the firm to overemphasize a
single internal or external factor in
formulating strategies
Boston Consulting Group (BCG)
Matrix
Enhances multi-divisional firm in formulating
strategies
Divisions may compete in different industries
Focus on market-share position & industry
growth rate
BCG Matrix
Relative Market Share Position
Industry Sales Growth Rate
High
1.0
Medium
.50
High
+20
Low
0.0
Stars
II
Question Marks
(problem child)
I
Cash Cows
III
Dogs
IV
Medium
0
Low
-20
Ratio of a division’s own market share in an industry to the
market share held by the largest rival firm in that industry
13
BCG Matrix
Quadrant 1: Question Marks or
Problem child
Low relative market share – compete in highgrowth industry
Cash needs are high
Case generation is low
Decision to strengthen (intensive strategies)
or divest (a defensive strategy)
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
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, Related diversification
If weakens—retrenchment or divestiture
BCG Matrix
Dogs
Low relative market share & compete in slow or
no market growth
Weak internal & external position
Liquidation, divestiture, retrenchment
Strategy-Formulation Analytical
Framework
Stage 3:
The Decision Stage
Quantitative Strategic
Planning Matrix
(QSPM)
Technique designed to determine the relative
attractiveness of feasible alternative actions
Steps to Develop a QSPM
1. Make a list of the firm’s key external
opportunities/threats and internal
strengths/weaknesses in the left column
2. Assign weights to each key external and
internal factor
3. Examine the Stage 2 (matching) matrices, and
identify alternative strategies that the
organization should consider implementing
4. Determine the Attractiveness Scores (A.S)
5. Compare the Total Attractiveness Scores
6. Compute the Sum Total Attractiveness Score
QSPM : information from IFE and
EFE
Key External Factors
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Weight
Strategic Alternatives
Strategy 1
Strategy 2
Strategy 3
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems
Sum total A.S.
AS 1 to 4 and blank if factor does not effect strategy: TAS = Weight x AS
20
Ryanair: Sample QSPM matrix
Increase
terminal
space at
airports
Increase
advertising
Opportunities
1. Local competitors’ going bankrupt allows Ryanair to capture
their customers and possibly buy equipment they are forced to
sell.
Weight
AS
TAS
AS
TAS
0.08
4
0.32
3
0.24
2. Lower interest rate on borrowing money.
3. Down cycle of economy has increased potential profit because
people are most cost sensitive.
4. Potential increase in investors due to high dividend payout $500 million dividend.
5. The economy is recovering.
6. Cheaper vacation prices are being offered by resorts.
0.05
3
0.15
2
0.10
0.06
2
0.12
3
0.18
0.05
0
0.00
0
0.00
0.05
2
0.10
3
0.15
0.05
2
0.10
3
0.15
0.07
0
0.00
0
0.00
0.09
4
0.36
3
0.27
7. European countries lowering or doing away with tourist taxes
will attract more vacationers.
8. Passengers expected to grow to 73.5 million by the beginning of
2012.
Ryanair: Sample QSPM matrix
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Threats
Regulatory rules in Europe can change that would restrain the
way Ryanair does business.
Increase in competitor customer service could attract customers
to their airlines.
Cost increase at Dublin airport will lower passenger traffic
through Dublin airport.
Weather threats operating in Europe during winter.
Fluctuations of foreign currency and longevity of the Euro.
Heavily unionized labor force.
Risk of oil rising back over $100 a barrel.
Weaking of the global economy.
Internet has led to more competitive pricing and more price
sensitivity to industry.
Continued threat to industry’s human relations concerning
displeasure over carbon dioxide emissions.
Weight
AS
TAS
AS
TAS
0.08
0
0.00
0
0.00
0.05
3
0.15
4
0.20
0.03
0
0.00
0
0.00
0.04
0.06
0.07
0.07
0.04
0
0
0
0
2
0.00
0.00
0.00
0.00
0.08
0
0
0
0
3
0.00
0.00
0.00
0.00
0.12
0.04
2
0.08
4
0.16
0.02
0
0.00
0
0.00
Ryanair: Sample QSPM matrix
Increase
terminal
space at
airports
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Weight
Strengths
Owning 42 bases allows Ryanair to operate at a lower cost then
0.06
competitors.
92% of bookings being done over the internet lower cost by
0.04
lower workers needed and telephone usage.
Ryanair being the second largest airlines in Europe is a well
0.07
known company among European flyers.
90% of Ryanair’s flights arrive on time.
0.04
Ryanair has created a niche in the market by offering many direct
0.04
flights.
284 new routes will allow Ryanair to capture new passenger
0.05
business.
Profits increased by 204% due to an increase in planes, routes
0.10
and passengers.
The down turn in the economic cycle and low fares has lead to
0.05
an increase in traffic growth by 14%.
Ryanair forecast generating over $1 billion in surplus cash.
0.10
Have 51 new planes.
0.05
Increase
advertising
AS
TAS
AS
TAS
4
0.24
2
0.12
2
0.08
4
0.16
4
0.28
3
0.21
1
0.04
3
0.12
4
0.16
2
0.08
4
0.20
3
0.15
4
0.40
2
0.20
4
0.20
3
0.15
3
4
0.30
0.20
2
2
0.20
0.10
Ryanair: Sample QSPM matrix
1.
2.
3.
4.
5.
6.
7.
8.
Weaknesses
Low customer loyalty because of a no refund policy and relax
attitude on canceling of flights.
Poor customer service leaves an opening for competitors to
capture our customers.
Ryanair advertisements may be viewed as poor do to the use of
vulgar, explicit, and sexual material.
Ryanair’s lack of major city destinations.
Low market growth opportunities.
Staff cost increased by 8%.
Ryanair charges customers for many ancillaries items that are
free on most other airlines.
Maintenance cost increased by 29%.
TOTALS
Weight
AS
TAS
AS
TAS
0.05
0
0.00
0
0.00
0.06
0
0.00
0
0.00
0.02
2
0.04
4
0.08
0.05
0.05
0.04
4
3
0
0.20
0.15
0.00
2
2
0
0.10
0.10
0.00
0.06
0
0.00
0
0.00
0.07
0
0.00
0
0.00
3.95
Recommendations:
Invest $100 million in terminal space annually at new airports
not currently serviced. What is this type of “generic”
strategy; does it correspond to the proposed strategies of
the grand strategy and BCG matrix
3.34
QSPM
Limitations
Requires intuitive judgments & educated
assumptions
Only as good as the prerequisite inputs
Advantages
Sets of strategies considered simultaneously or
sequentially
Integration of pertinent external & internal
factors in the decision making process
Example of a QSPM for Dell
Questions
• Explain, using suitable examples, how you would use a SWOT
analysis in strategic formulation.
(10 marks).
• What are the main limitation associated with using this analysis
(2 marks)
• Describe, the relationship between the quadrants of the BCG matrix
and the growth of an industry and the organisations market share.
(8 marks)
• Explain, using an example, the types of strategies a firm could adopt
in any three of these quadrants.
(10 marks)
• How would you choose the most appropriate strategy given you
have performed an internal and external evaluation. (10 marks)