Strategic Management:

Concepts & Cases

12th Edition
Fred David

Ch 6 -1
The Nature of Strategy & Choice

A Comprehensive
Strategy-Formulation Framework

The Input Stage

Ch 6 -2
 The Matching Stage

The Decision Stage

Cultural Aspects of Strategy Choice

Ch 6 -3
The Politics of Strategy Choice

Governance Issues

Ch 6 -4
Strategy Analysis & Choice

“Whether it’s broke or not, fix it – make it

better. Not just products, but the whole
company if necessary.”
– Bill Saporito

“Life is full of lousy options.”

– General P.X. Kelley

Ch 6 -5
Strategy Analysis & Choice

Nature of Strategy Analysis & Choice

– Establishing long-term objectives

– Generating alternative strategies
– Selecting strategies to pursue
– Best alternative – achieve mission & objectives

Ch 6 -6
Ch 6 -7
Strategy Analysis & Choice
Alternative Strategies Derive From –

 Vision
 Mission
 Objectives
 External audit
 Internal audit
 Past successful strategies

Ch 6 -8
Strategy Analysis & Choice
Participants in the strategy making process

1. Managers and employees who made the

vision and mission and who performed the
external and internal audit,

2. Representatives from each department and

division should be included.

3. Creativity should be managed.

Ch 6 -9
Here one requires the integration of intuition and analysis.
 Number based as well as word based analysis should be given importance,
Number based analytical procedure give rise to false sense of certainty and
reduce the frequency of general communication.
Personal biases, politics, emotions, personalities, halo error may hinder a
proper strategy analysis and formulation process.
Ch 6 -10
Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

Stage 2: Stage 3:
The Matching Stage The Decision Stage

Ch 6 -11
Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile Matrix

(CPM)

Ch 6 -12
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

Ch 6 -13
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -14
Stage 2: The Matching Stage

Match between organization’s internal

resources & skills and the opportunities & risks
created by its external factors.
Ex: A firm with excess working capital (idle
liquid resource) may go for acquisition in a
fiercely competitive market).

Ch 6 -15
Stage 2: The Matching Stage
Key Internal Factor Key External Factor Resultant Strategy

Excess Working Capital 20% annual growth in the Acquire Cellfone Inc.
(An Internal Strength) cell phone industry (An
external opportunity)

Insufficient Capacity Exit of two major foreign Pursue Horizontal

(An internal Weakness) competitors from the Integration by buying
industry ( An external competitors’ facilities
Opportunity)
Strong R& D expertise Decreasing numbers of Develop new products for
(An internal strength) younger adults (An external older adults
threat)

Poor employee morale Strong Union Activity (An Develop a new employee
(An internal weakness) external threat) benefit package

Ch 6 -16
Stage 2: The Matching Stage

SWOT Matrix

Strengths
Weaknesses
Opportunities
Threats

Ch 6 -17
SWOT Matrix

Four Types of Strategies

Strengths-Opportunities (SO) (Intensive)

Weaknesses-Opportunities (WO) (Integration)
Strengths-Threats (ST) (Diversification)
Weaknesses-Threats (WT) (Defensive)

Ch 6 -18
Stage 2: The Matching Stage
Key Internal Factor Key External Factor Resultant Strategy

Excess Working Capital 20% annual growth in the Acquire Cellfone Inc.
(An internal Strength) cell phone industry (An
external opportunity)

Insufficient Capacity Exit of two major foreign Pursue Horizontal

(An internal Weakness) competitors from the Integration by buying
industry ( An external competitors’ facilities
Opportunity)
Strong R& D expertise Decreasing numbers of Develop new products for
(An internal strength) younger adults (An external older adults
threat)

Poor employee morale Strong Union Activity (An Develop a new employee
(An internal weakness) external threat) benefit package

Ch 6 -19
 Strengths
Weaknesses Use a firm’s
internal strengths
Opportunities
to take advantage
Threats SO of external
Strategies opportunities
SWOT

Ch 6 -20
 Strengths
Weaknesses Improving internal
weaknesses by
Opportunities
taking advantage
Threats WO of external
Strategies opportunities
SWOT

Ch 6 -21
 Strengths Use a firm’s
Weaknesses strengths
Opportunities to avoid or
Threats ST reduce the impact
Strategies of external
threats
SWOT

Ch 6 -22
 Defensive tactics
Strengths aimed at reducing
Weaknesses internal
Opportunities weaknesses &
Threats WT avoiding
Strategies environmental
threats
SWOT

Ch 6 -23
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

Ch 6 -24
 Strengths – S Weaknesses – W

List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Use strengths to take Overcoming weaknesses

List Opportunities advantage of by taking advantage of
opportunities opportunities

Threats – T ST Strategies WT Strategies

Use strengths to avoid Minimize weaknesses and

List Threats threats avoid threats

Ch 6 -25
 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

Ch 6 -26
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -27
SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive
Conservative
Defensive
Competitive

Ch 6 -28
SPACE Matrix

Two Internal Dimensions

Financial Strength (FS)

Competitive Advantage (CA)

Ch 6 -29
SPACE Matrix

Two External Dimensions

Environmental Stability (ES)

Industry Strength (IS)

Ch 6 -30
 Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Return on investment Technological changes

Leverage Rate of inflation
Liquidity Demand variability
Working capital Price range of competing products
Cash flow Barriers to entry
Inventory turnover Competitive pressure
Earnings per share Price elasticity of demand
Price earnings ratio Ease of exit from market
Risk involved in business

Ch 6 -31
 Internal Strategic Position
Competitive Advantage (CA)
Market share
Product quality
Product life cycle
Customer loyalty
Competition’s capacity utilization
Technological know-how
Control over suppliers & distributors
External Strategic Position
Industry Strength (IS)
Growth potential
Profit potential
Financial stability
Technological know-how
Resource utilization
Ease of entry into market
Productivity, capacity utilization
Ch 6 -32
1. Select a set of variables to define FS, CA,
ES, and IS.
2. Assign a numerical value:
1. From +1 to +6 to each FS & IS dimension
2. From -1 to -6 to each ES & CA dimension
3. Compute an average score for each FS,
CA, ES, and IS.

Ch 6 -33
4. Plot the average score on the appropriate
axis.
5. Add the two scores on the x-axis and plot
the point. Add the two scores on the y-
axis and plot the point. Plot the
intersection of the new xy point.
6. Draw a directional vector from the origin
through the new intersection point.

Ch 6 -34
Financial Strength (Y axes +) Ratings
Capital Ratio is 7.23% which is 1.23% over the required ratio of 6% 1.0
ROA is (-.77) whereas industry average ratio is (+.70) 1.0
Net Income was $183 million, down 9% from a year earlier 3.0
Revenue increased 7% to $3.46 billion 4.0
Total 9.0
Industry Strength (X axes +) Ratings
Deregulation provides geographic and product freedom 4.0
Deregulation increases competition in the banking industry 2.0
New interstate banking law allows this firm acquire to other banks 4.0
Total 10.0

Environmental Stability (Y axes -) Ratings

LDC’s are experiencing high inflation and political instability -4.0
Bank is heavily dependent on the steel, oil & gas industries, These -5.0
industries are currently depressed.
Banking deregulation created instability through out the industry -4.0
Ch 6 -35
Competitive advantage (X axes -) Ratings
This Bank provides data processing services for more than 450 institutions -2.0
in 38 states
Superregional Banks, International banks are becoming increasingly -5.0
competitive
This banks has a large customer base -2.0
Total -9.0

Conclusion:
ES avg. is -13.0/3 = -4.33, IS avg. is +10.00/3 = 3.33
CA avg. is -9.0/3 = -3.00, FS avg. is +9.00/4 = 2.25
Directional Vector coordinates : X axes: -3.00 + (+3.33) = +0.33
Y axes: -4.33 + (+2.25) = -2.08
The Bank should pursue competitive strategies.
Ch 6 -36
Ch 6 -37
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -38
BCG Matrix

Boston Consulting Group Matrix

Enhances multidivisional firm in formulating
strategies
Autonomous divisions = business portfolio
Divisions may compete in different industries
Focus on market-share position & industry
growth rate

Ch 6 -39
BCG Matrix
Two aspects are highlighted in the BCG matrix.
One is the Relative market share and sales growth
rate.
X axes = Relative market share (midpoint set @ .
50) (Ratio of a division’s own market share in an
industry to the market share held by the largest
rival firm in that industry).
Y axes = Sales growth (midpoint set @ 0.00,
range is set @ -20 % to +20%)
Overall size of the circle represents the proportion
of corporate revenue generated by that particular
SBU, Pie-slice represents the amount of profit
generated by that particular amount of sales. Ch 6 -40
Ch 6 -41
BCG Matrix

Question Marks
Low relative market share, competes in high-
growth industry
Cash needs are high
Case generation is low

Decision to strengthen (intensive strategies like

market penetration, market development,
product development) or divest.

Ch 6 -42
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 (forward, backward, horizontal),
intensive strategies (market development, product
development, market penetration), joint ventures

Ch 6 -43
BCG Matrix

Cash Cows
High relative market share, competes in low-
growth 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

Ch 6 -44
BCG Matrix

Dogs

Low relative market share, competes in slow or

no market growth
Weak internal & external position

retrenchment first, if fails then go for

Liquidation, divestiture,

Ch 6 -45
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -46
 Positions an organization’s various divisions in
a nine-cell display
 Similar to BCG Matrix except the IE Matrix:
 Requires more information about the divisions
 Strategic implications of each matrix are different

Ch 6 -47
Ch 6 -48
 Based on two key dimensions
 The IFE total weighted scores on the x-axis
 The EFE total weighted scores on the y-axis
 Divided into three major regions
 Grow and build – Cells I, II, or IV
 Hold and maintain – Cells III, V, or VII
 Harvest or divest – Cells VI, VIII, or IX

Ch 6 -49
Ch 6 -50
Strategy-Formulation Analytical
Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -51
Grand Strategy Matrix

 Tool for formulating alternative strategies

 Based on two dimensions
 Competitive position

 Market growth

Ch 6 -52
 RAPID MARKET GROWTH
Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
WEAK 7. Concentric diversification
STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate
4. Conglomerate diversification
diversification 4. Joint ventures
5. Liquidation
SLOW MARKET GROWTH

Ch 6 -53
Grand Strategy Matrix

Quadrant I

Excellent strategic position

Concentration on current markets/products
Take risks aggressively when necessary

Ch 6 -54
Grand Strategy Matrix

Quadrant II

Evaluate present approach

How to improve competitiveness
Rapid market growth requires intensive strategy

Ch 6 -55
Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries

Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)

Ch 6 -56
Grand Strategy Matrix

Quadrant IV

Strong competitive position

Slow-growth industry
Diversification to more promising growth areas

Ch 6 -57
Strategy-Formulation Analytical
Framework

Quantitative Strategic
Stage 3:
Planning Matrix
The Decision Stage
(QSPM)

Ch 6 -58
QSPM

Quantitative Strategic Planning Matrix

Technique designed to determine the relative

attractiveness of feasible alternative actions

Ch 6 -59
 Strategic Alternatives
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems

Ch 6 -60
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.

Ch 6 -61
4. Determine the Attractiveness Scores.
5. Compare the Total Attractiveness Scores.
6. Compute the Sum Total Attractiveness Score.

Ch 6 -62
QSPM

Limitations

Requires intuitive judgments & educated

assumptions
Only as good as the prerequisite inputs

Ch 6 -63
QSPM

Advantages

Sets of strategies considered simultaneously or

sequentially
Integration of pertinent external & internal
factors in the decision-making process

Ch 6 -64
Cultural Aspects of Strategy
Choice

Organization Culture

Successful strategies depend on the degree of

consistency with the firm’s culture

Ch 6 -65
Politics of Strategy Choice

Politics in Organizations

Management hierarchy
Career aspirations
Allocation of scarce resources

Ch 6 -66
Politics of Strategy Choice

Political Tactics for Strategists

Equifinality
Satisfying
Generalization
Higher-order issues
Political access on important issues

Ch 6 -67
Governance Issues

Board of Directors Roles & Responsibilities

Control & oversight over management

Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights

Ch 6 -68
 Lowest corporate tax rates reside in Europe and
European countries
 Average tax rate in EU countries is 26%
 Besides tax rates, large markets and affluent markets
attract new businesses
 Taxes can be used to reward
or penalize companies for
locating locally or moving
overseas

Ch 6 -69
 BusinessWeek’s “Principles of Good Governance”

1. No more than 2 directors are 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 owns a large equity stake in the company
5. At least one outside director with extensive experience
6. Fully employed directors sit on no more than 4 boards,
retirees on no more than 7
7. Each director attends at least 75% of all meetings

Ch 6 -70
 Business Week’s “principles of good governance”

8. Board meets regularly without management present

9. Audit committee meets at least four times a year
10. Board is frugal on executive pay, diligent in CEO succession,
and prompt to act when trouble arises
11. CEO is not also the chairperson of the board
12. Shareholders have considerable power and information to
choose & replace directors
13. Stock options are considered a corporate expense
14. No interlocking directorships

Ch 6 -71
For Review (Chapter 6)

Key Terms & Concepts

Aggressive Quadrant Business Portfolio

Attractiveness Scores
Cash Cows
(AS)

Competitive Advantage
Board of Directors
(CA)

Boston Consulting
Competitive Quadrant
Group (BCG) Matrix

Ch 6 -72
For Review (Chapter 6)

Key Terms & Concepts

Conservative Quadrant Dogs

Environmental Stability
Culture
(ES)

Financial Strength
Defensive Quadrant
(FS)

Directional Vector Governance

Ch 6 -73
For Review (Chapter 6)

Key Terms & Concepts

Internal-External (IE)
Grand Strategy Matrix
Matrix

Halo Error Matching

Industry Strength
Matching Stage
(IS)

Quantitative Strategic
Input Stage
Planning Matrix (QSPM)

Ch 6 -74
For Review (Chapter 6)

Key Terms & Concepts

Question Marks Stars

Relative Market Share Strategic Position & Action

Position Evaluation (SPACE)

Sum Total Attractiveness

SO Strategies
Score (STAS)

ST Strategies Sustainability

Ch 6 -75
For Review (Chapter 6)

Key Terms & Concepts

Strengths, Weaknesses,
WO Strategies
Opportunities, Threats (SWOT)

Total Attractiveness
WT Strategies
Scores (TAS)

Ch 6 -76