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Strategy Analysis & Choice Denis Manley 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: Stage 3: The Matching Stage 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 SWOT Matrix Stage 2: BCG Matrix The Matching Stage Grand Strategy 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 Resultant Strategy Invest money (e.g. 100 02: lower interest rates S1: Own 42 bases in million) in terminal space at + on borrowing money = Europe (strength) new airports now currently (opportunity) served. Increase amount spent on W7: charge for items free Cheaper holiday’s advertising to attract on other airlines + being offered by resorts = customers only concerned (weakness) (opportunity) about price. Hedge (invest) money to S7: profits increase by Risk of increasing oil + = protect against rising oil 200%(strength) prices(threat) prices T2: increase in Spend money annually W2: Poor customer + competitors = to increase customer service (weakness) customers services services. (threat) The above is based on the internal and external evaluation of Ryanair: 9 Strengths: Weaknesses: • Over dependent on borrowings - • R and D almost complete Insufficient cash resources • Basis for strong management team • Board of Directors is too narrow • Key first major customer acquired • Lack of awareness amongst • Initial product can evolve into range prospective customers of offerings • Need to relocate to larger premises • Located near a major centre of • Absence of strong sales/marketing excellence expertise • Very focused management/staff • Overdependence on few key staff • Well-rounded and managed • Emerging new technologies may business move market in new directions Threats: Opportunities: • Major player may enter targeted market segment • Market segment is poised for rapid • New technology may make products growth obsolescent • Export markets offer great potential • Economic slowdown could reduce • Distribution channels seeking new demand products • Euro/Yen may move against $ • Scope to diversify into related • Market may become price sensitive market segments • Market segment's growth could attract major competition Key Strategies 1. Accelerate product launches by strengthening R and D team 2. Extend links with key technology centres 3. Raise additional venture capital 4. Expand senior management team in sales/marketing 5. Recruit non-executive directors 6. Strengthen human resources function and introduce share options for staff 7. Appoint advisers for intellectual property and finance 8. Seek new market segments/applications for products Limitations with SWOT Matrix • Does not show how to achieve a competitive advantage • Provides a static assessment in time (based on current internal/external environment) • 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 High Medium Low 1.0 .50 0.0 High +20 Industry Sales Growth Rate Stars Question Marks II I Medium 0 Cash Cows Dogs III IV 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: Which 14 one is Ryanair BCG Matrix Quadrant 1: Question Marks §Low relative market share – compete in high- growth industry §Cash needs are high §Case generation is low §Decision to strengthen (intensive strategies) or divest – selling part of the organisation - (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 low- growth 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 §Why do you think you would not use other generic strategies? BCG Matrix Dogs §Low relative market share & compete in slow or no market growth §Weak internal & external position §Defensive strategy: Liquidation, divestiture, retrenchment Grand Strategy Matrix RAPID MARKET GROWTH Quadrant II Quadrant I • Market development • Market development • Market penetration • Market penetration • Product development • Product development • Horizontal integration • Forward integration • Divestiture • Backward integration • Liquidation • Horizontal integration WEAK • Related diversification STRONG COMPETITIVE COMPETITIVE POSITION Quadrant III Quadrant IV POSITION • Retrenchment • Related diversification • Related diversification • Horizontal diversification • Horizontal diversification • Conglomerate (unrelated) • Conglomerate diversification diversification • Joint ventures • Liquidation SLOW MARKET GROWTH 19 Where do you think you would position Ryanair? The grand strategy matrix • The grand strategy matrix is very similar to the Boston consultants group matrix except the matrices quadrants are not in the same position: – Cash cow is equivalent to quadrant IV – Stars: is equivalent to Quadrant I – ? is equivalent to quadrant II – Dogs is equivalent to quadrant III Strategy-Formulation Analytical Framework Quantitative Strategic Stage 3: Planning Matrix The Decision Stage (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 Ryanair: Sample QSPM matrix Ryanair: Sample QSPM matrix Ryanair: Sample QSPM matrix Ryanair: Sample QSPM matrix 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 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 Questions • The SWOT analysis and the BCG matrix are two models to help an organisation derive a set of strategies. Compare and contrast each model, using suitable examples. • Discuss, using a suitable examples, a framework that would be suitable to help an organisation derive and choose suitable strategies to help ensure competitive advantage.
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