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Business Policy and Strategy

Lecture 27

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Recap

• MEANS FOR ACHIEVING STRATEGIES– Joint Venture– Mergers and acquisitions– Leveraged Buyouts (LBOs)– First Mover Advantages– Outsourcing

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Today’s Lecture

• Nature of Strategy Analysis & Choice• Comprehensive Strategy-Formulation Framework– SWOT Matrix– Strategic Position and Action Evaluation (SPACE)

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-- Establishing long-term objectives-- Generating alternative strategies-- Selecting strategies to pursue-- Best alternative - achieve mission & objectives

Nature of Strategy Analysis & Choice

Strategy Analysis & Choice

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Comprehensive Strategy-Formulation Framework

Stage 1:The Input Stage

Stage 2:The Matching Stage

Stage 3:The Decision Stage

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Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

BCG Matrix

IE Matrix

Grand Strategy Matrix

Stage 2:The Matching Stage

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SWOT Matrix

Strengths-Opportunities (SO)Weaknesses-Opportunities (WO)

Strengths-Threats (ST)Weaknesses-Threats (WT)

Four Types of Strategies

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SO Strategies

Use a firm’sinternal strengthsto take advantage

of external opportunities

SOStrategies

StrengthsWeaknesses

OpportunitiesThreats

SWOT

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WO Strategies

Improving internalweaknesses by

taking advantageof external

opportunitiesWO

Strategies

StrengthsWeaknesses

OpportunitiesThreats

SWOT

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ST Strategies

Use a firm’s strengthsto avoid or

reduce the impactof external

threats

STStrategies

StrengthsWeaknesses

OpportunitiesThreats

SWOT

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WT Strategies

Defensive tacticsaimed at reducing

internal weaknesses &

avoidingenvironmental

threats

WTStrategies

StrengthsWeaknesses

OpportunitiesThreats

SWOT

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SWOT Matrix

Leave Blank

Strengths – S

List Strengths

Weaknesses – W

List Weaknesses

Opportunities – O

List Opportunities

SO Strategies

Use strengths to take advantage of opportunities

WO Strategies

Overcoming weaknesses by taking advantage of

opportunities

Threats – T

List Threats

ST Strategies

Use strengths to avoid threats

WT Strategies

Minimize weaknesses and avoid threats

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Develop a new employee benefits package= Strong union activity 

(threat)+Poor employee morale 

(weakness)

Develop new products for older adults=Decreasing numbers of 

young adults (threat)+Strong R&D (strength)

Pursue horizontal integration by buying competitor's facilities=

Exit of two major foreign competitors form the industry (opportunity)

+Insufficient capacity (weakness)

Acquire Cellfone, Inc.=20% annual growth in the cell phone industry (opportunity)

+Excess working capacity (strength)

Key Internal Factor Key External Factor Resultant Strategy

Matching Key Factors to Formulate Alternative Strategies

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SPACE Factors - Strategic Position and Action Evaluation

Environmental Stability (ES)

Technological changesRate of inflationDemand variabilityPrice range of competing productsBarriers to entryCompetitive pressurePrice elasticity of demandEase of exit from market Risk involved in business

Financial Strength (FS)

Return on investmentLeverageLiquidityWorking capitalCash flow

External Strategic PositionInternal Strategic Position

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SPACE Factors

Industry Strength (IS)

Growth potentialProfit potentialFinancial stabilityTechnological know-howResource utilizationEase of entry into marketProductivity, capacity utilization

Competitive Advantage CA

Market shareProduct qualityProduct life cycleCustomer loyaltyCompetition’s capacity utilizationTechnological know-howControl over suppliers & distributors

External Strategic PositionInternal Strategic Position

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SPACE Matrix

• Select variables to define FS, CA, ES, & IS• Assign numerical ranking from +1 (worst) to 

+6  (best)  for  FS  and  IS;  Assign  numerical ranking from –1 (best) to –6 (worst)  for ES and CA.

• Compute average score for FS, CA, ES, & IS

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SPACE MatrixFS

+6

+1

+5+4+3

+2

-6

-5

-4

-3

-2

-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6

ES

CA IS

Conservative Aggressive

Defensive Competitive

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SPACE Matrix

• Plot the average scores on the Matrix• Add  the  two  scores on  the  x-axis  and plot 

point  on  X.    Add  the  scores  on  the  y-axis and plot Y.  Plot the intersection of the new xy point.

• Draw  a  directional  vector  from  origin through the new intersection point.

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SPACE Matrix

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Summary

• Nature of Strategy Analysis & Choice• Comprehensive Strategy-Formulation Framework– SWOT Matrix– Strategic Position and Action Evaluation (SPACE)

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Next Lecture

• BCG Matrix• The Internal-External Matrix• Quantitative Strategic Planning Matrix