Ebook Strategic management - Concepts and cases (16th edition): Part 2

(BQ) Part 2 book Strategic management - Concepts and cases has contents: Strategy generation and selection, strategy implementation, strategy implementation, strategy implementation.

8

The following exercises are found at the end of this chapter:

exerCiSe 8A Should Unilever Penetrate Southeast Asia Further?

exerCiSe 8b Perform a SWOT Analysis for Unilever’s Global Operations

exerCiSe 8C Prepare a BCG Matrix for Unilever

exerCiSe 8d Develop a SWOT Matrix for Nestlé S.A.

exerCiSe 8e Develop a SPACE Matrix for Nestlé S.A.

exerCiSe 8F Develop a BCG Matrix for Nestlé S.A.

exerCiSe 8g Develop a QSPM for Nestlé S.A.

exerCiSe 8h Develop a SPACE Matrix for Unilever

exerCiSe 8i Develop a BCG Matrix for Your College or University

exerCiSe 8J Develop a QSPM for a Company That You Are Familiar With

exerCiSe 8K Formulate Individual Strategies

leArning obJeCtiveS

After studying this chapter, you should be able to do the following:

8-1 Describe the strategy analysis and choice process.

8-2 Diagram and explain the three-stage strategy-formulation analytical framework.

8-3 Diagram and explain the Strengths-Weaknesses-Opportunities-Threats (SWOT)

Matrix

8-4 Diagram and explain the Strategic Position and Action Evaluation (SPACE) Matrix.

8-5 Diagram and explain the Boston Consulting Group (BCG) Matrix.

8-6 Diagram and explain the Internal-External (IE) Matrix.

8-7 Diagram and explain the Grand Strategy Matrix.

8-8 Diagram and explain the Quantitative Strategic Planning Matrix (QSPM).

8-9 Discuss the role of organizational culture in strategic analysis and choice.

8-10 Identify and discuss important political considerations in strategy analysis and choice.

8-11 Discuss the role of a board of directors (governance) in strategic planning.

Strategy Generation

and Selection

248 Strategic ManageMent

Strategy analysis and choice largely involve making subjective decisions based on objective

information This chapter introduces important concepts that can help strategists ate feasible alternatives, evaluate those alternatives, and choose a specific course of action Behavioral aspects of strategy formulation are featured, including politics, culture, ethics, and social responsibility considerations Modern tools for formulating strategies are described, and the appropriate role of a board of directors is discussed As showcased next, Unilever Plc launched the Unilever Sustainable Living Plan, a part of the company’s larger goal to double the size of its business while reducing our environmental footprint, and increasing its positive social impact

gener-The Strategy Analysis and Choice Process

As indicated by Figure 8-1 with white shading, this chapter focuses on generating and evaluating alternative strategies, as well as selecting strategies to pursue Strategy analysis and choice seek to determine alternative courses of action that could best enable the firm to achieve its mission and objectives The firm’s present strategies, objectives, vision, and mission, coupled with the external and internal audit information, provide a basis for generating and evaluating feasible alternative strat-egies This systematic approach is the best way to avoid an organizational crisis Rudin’s Law states,

“When a crisis forces choosing among alternatives, most people choose the worst possible one.”Unless a desperate situation confronts the firm, alternative strategies will likely repre-sent incremental steps that move the firm from its present position to a desired future position Alternative strategies do not come out of the wild blue yonder; they are derived from the firm’s vision, mission, objectives, external audit, and internal audit; they are consistent with, or build

on, past strategies that have worked well

The Process of Generating and Selecting Strategies

Strategists never consider all feasible alternatives that could benefit the firm because there are an infinite number of possible actions and an infinite number of ways to implement those actions Therefore, a manageable set of the most attractive alternative strategies must be devel-oped, examined, prioritized, and selected The advantages, disadvantages, trade-offs, costs, and benefits of these strategies should be determined This section discusses the process that many

Unilever Plc (UL)

The Anglo–Dutch Unilever is the world’s third-largest consumer goods

company behind Procter & Gamble and Nestlé, offering a product

port-folio that ranges from food and beverages to personal care products

While operating as a single business entity and under the same

direc-tors, Unilever is a dual listed company comprising Unilever N.V based in

Rotterdam, Netherlands, and Unilever Plc, London Of its 450 brands,

some of Unilever’s best selling products include Aviance, Ben & Jerry’s,

Dove, Knorr, Lipton, Heartbrand ice creams, Hellmann’s, Sunsilk, and

PG Tips In an effort to help the marine environment, the use of

micro-plastics in all personal care products was phased out by Unilever Their

strategies focus on sustainable and ethical activities

After selling selling its Slim-Fast brand to Kainos Capital, Unilever

recently acquired Talenti Gelato & Sorbetto, a Minneapolis-based

pack-aged gelato company in the United States Unilever acquired Procter &

Gamble’s Zest brand outside of North America and the Caribbean, and

it also acquired Camay and its global operations, which resulted in $225

million turnover for Unilever in the most recent fiscal year.

For the fourth year in a row, Unilever received an ‘A’ for Performance

by global NGO CDP (formally the Carbon Disclosure Project) and was

included in

‘The A List: The CDP Climate Performance

L e a d e r s h i p Index 2015’

(CPLI) The company also achieved the maximum disclosure score of 100, up from 99 in 2014 and 85 in 2013 Only 11 companies received an ‘A’ in the Consumer Staples sector, and only 113 (5%) participating companies have ever been awarded an ‘A’ Performance Band rating Also, Unilever was recently included among CDP’s elite UK FTSE 350 Climate Performance Leadership companies Unilever’s Chief Sustainability Officer, Jeff Seabright, was featured in a short film marking the release of the CDP Climate 2015 results.

Source: Based on company documents.

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 249

Strategy

Chapter 2: Outside-USA Strategic Planning

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Monitoring Chapter 11

Strategy Execution Chapter 10

Strategy Implementation Chapter 9

Types of

Strategies

Chapter 4

Vision and Mission Analysis Chapter 5

Strategy Generation and Selection Chapter 8

The External

Audit Chapter 7

The Internal

Audit Chapter 6

Figure 8-1

A Comprehensive Strategic-Management Model

Source: Fred R David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no 3 (June 1988): 40,

© Fred R David.

firms use to determine an appropriate set of alternative strategies Recommendations (strategies

selected to pursue) come from alternative strategies formulated

Identifying and evaluating alternative strategies should involve many of the managers and

employees who previously assembled the organizational vision and mission statements,

per-formed the external audit, and conducted the internal audit Representatives from each

depart-ment and division of the firm should be included in this process, as was the case in previous

strategy-formulation activities Involvement provides the best opportunity for managers and

employees to gain an understanding of what the firm is doing and why and to become committed

to helping the firm accomplish its objectives

All participants in the strategy analysis and choice activity should have the firm’s external

and internal audit information available This information, coupled with the firm’s vision and

mission statements, will help participants crystallize in their own minds particular strategies that

they believe could benefit the firm most Creativity should be encouraged in this thought process

Alternative strategies proposed by participants should be considered and discussed in a

meeting or series of meetings Proposed strategies should be listed in writing When all feasible

strategies identified by participants are given and understood, the strategies should be

individu-ally ranked in order of attractiveness by each participant, with 1 = should not be implemented,

250 Strategic ManageMent

2 = possibly should be implemented, 3 = probably should be implemented, and 4 = definitely

should be implemented Then, collect the participants’ ranking sheets and sum the ratings given

for each strategy Strategies with the highest sums are deemed the best, so this process results in

a prioritized list of best strategies that reflects the collective wisdom of the group

The Strategy-Formulation Analytical FrameworkImportant strategy-formulation techniques can be integrated into a three-stage decision-making framework, as shown in Figure 8-2 The tools presented in this framework are applicable to all sizes and types of organizations and can help strategists identify, evaluate, and select strategies.Stage 1 of the strategy-formulation analytical framework consists of the External Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive

Profile Matrix (CPM) Called the input stage, Stage 1 summarizes the basic input information needed to formulate strategies Stage 2, called the matching stage, focuses on generating feasible

alternative strategies by aligning key external and internal factors Stage 2 techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External

(IE) Matrix, and the Grand Strategy Matrix Stage 3, called the decision stage, involves a single

technique, the Quantitative Strategic Planning Matrix (QSPM) A QSPM uses input information from Stage 1 to objectively evaluate feasible alternative strategies identified in Stage 2 It reveals the relative attractiveness of alternative strategies and thus provides an objective basis for select-ing specific strategies The QSPM is a more robust way to determine the relative attractiveness

of strategies than the 1) summed ranking method described above, or the 2) individual vs group ranking method described on pages 394–395 in Appendix)

All nine techniques included in the strategy-formulation analytical framework require

the integration of intuition and analysis Autonomous divisions in an organization commonly use strategy-formulation techniques to develop strategies and objectives Divisional analyses provide

a basis for identifying, evaluating, and selecting among alternative corporate-level strategies.Strategists themselves, not analytic tools, are always responsible and accountable for strate-gic decisions Lenz emphasized that the shift from a words-oriented to a numbers-oriented plan-ning process can give rise to a false sense of certainty; it can reduce dialogue, discussion, and argument as a means for exploring understandings, testing assumptions, and fostering organiza-tional learning.1 Strategists, therefore, must be wary of this possibility and use analytical tools to facilitate, rather than to diminish, communication Without objective information and analysis, personal biases, politics, prejudices, emotions, personalities, and halo error (the tendency to put too much weight on a single factor) oftentimes play a dominant role in the strategy-formulation process, undermining effectiveness Thus, an analytical approach is essential for achieving maxi-mum effectiveness in strategic planning

STAGE 1: THE INPUT STAGE Competitive Profile Matrix (CPM)

External Factor

Evaluation (EFE)

Matrix

Internal Factor Evaluation (IFE) Matrix STAGE 2: THE MATCHING STAGE

Strategic Position and Action Evaluation (SPACE) Matrix

Boston Consulting Group (BCG) Matrix

Internal-External (IE) Matrix

Strengths-Weaknesses-Opportunities-Threats

(SWOT) Matrix

Grand Strategy Matrix

STAGE 3: THE DECISION STAGE Quantitative Strategic Planning Matrix (QSPM)

Figure 8-2

The Strategy-Formulation Analytical Framework

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 251

The Input Stage

Procedures for developing an EFE Matrix, an IFE Matrix, and a CPM were presented in Chapters 6

and 7 Information derived from the EFE Matrix, IFE Matrix, and CPM provides basic input

information for the matching and decision stage matrices described in this chapter

The input tools require strategists to quantify subjectivity during early stages of the

strategy-formulation process Making small decisions in the input matrices regarding the relative

impor-tance of external and internal factors allows strategists to more effectively generate, prioritize,

evaluate, and select among alternative strategies Good intuitive judgment is always needed in

determining appropriate weights and ratings, but keep in mind that a rating of 3, for example, is

mathematically 50 percent more important than with a rating of 2, so small differences matter

The Matching Stage

Strategy is sometimes defined as the match an organization makes between its internal resources

and skills and the opportunities and risks created by its external factors.2 The matching stage of the

strategy-formulation framework consists of five techniques that can be used in any sequence: the

SWOT Matrix, the SPACE Matrix, the BCG Matrix, the IE Matrix, and the Grand Strategy Matrix

These tools rely on information derived from the input stage to match external opportunities and

threats with internal strengths and weaknesses Matching external and internal key factors is the

essential for effectively generating feasible alternative strategies For example, a firm with excess

working capital (an internal strength) could take advantage of the cell phone industry’s 20 percent

annual growth rate (an external opportunity) by acquiring Cellfone, Inc This example portrays

sim-ple one-to-one matching In most situations, external and internal relationships are more comsim-plex,

and the matching requires multiple alignments for each strategy generated Successful matching of

key external and internal factors depends on those underlying key factors being specific, actionable,

and divisional to the extent possible The basic concept of matching is illustrated in Table 8-1.

The Decision Stage

As indicated above, participants could individually rate strategies on a 1-to-4 scale as to

desir-ability, and then sum the ratings from all participants, so that a prioritized list of the best

strate-gies could be achieved However, the QSPM, described later in this chapter, offers a more robust

procedure to determine the relative attractiveness of alternative strategies

The SWOT Matrix

The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an important matching

tool that helps managers develop four types of strategies: SO (strengths-opportunities) strategies,

WO opportunities) strategies, ST (strengths-threats) strategies, and WT

(weaknesses-threats) strategies.3 Matching key external and internal factors is the most difficult part of developing

a SWOT Matrix, as it requires good judgment—and there is no one best set of matches Note in Table

8-1 that the first, second, third, and fourth strategies are SO, WO, ST, and WT strategies, respectively

SO strategies use a firm’s internal strengths to take advantage of external opportunities All

managers would like their organization to be in a position in which internal strengths can be used

to take advantage of external trends and events Organizations generally will pursue WO, ST,

Table 8-1 Matching Key External and Internal Factors to Formulate Alternative Strategies

Key internal Factor Key external Factor resultant Strategy

Excess working capital (an internal

strength)

+ Annual growth of 20 percent in the cell phone industry (an external opportunity)

= Acquire Cellfone, Inc.

Insufficient capacity (an internal

Strong research and development expertise

(an internal strength)

+ Decreasing numbers of younger adults (an external threat)

= Develop new products for older adults Poor employee morale (an internal

weakness)

+ Rising health-care costs (an external threat) = Develop a new wellness program

252 Strategic ManageMent

or WT strategies to get into a situation in which they can apply SO strategies When a firm has major weaknesses, it will strive to overcome them and make them strengths When an organiza-tion faces major threats, it will seek to avoid them to concentrate on opportunities

WO strategies aim at improving internal weaknesses by taking advantage of external

opportunities Sometimes key external opportunities exist, but a firm has internal weaknesses that prevent it from exploiting those opportunities For example, there may be a high demand for electronic devices to control the amount and timing of fuel injection in automobile engines (opportunity), but a certain auto parts manufacturer may lack the technology required for pro-ducing these devices (weakness) One possible WO strategy would be to acquire this technology

by forming a joint venture with a firm having competency in this area An alternative WO egy would be to hire and train people with the required technical capabilities

strat-ST strategies use a firm’s strengths to avoid or reduce the impact of external threats This

does not mean that a strong organization should always meet threats in the external ment head-on An example ST strategy occurred when Texas Instruments used an excellent legal department (a strength) to collect nearly $700 million in damages and royalties from nine Japanese and Korean firms that infringed on patents for semiconductor memory chips (threat) Rival firms that copy ideas, innovations, and patented products are a threat in many industries

environ-WT strategies are defensive tactics directed at reducing internal weakness and avoiding

external threats An organization faced with numerous external threats and internal weaknesses may indeed be in a precarious position In fact, such a firm may have to fight for its survival, merge, retrench, declare bankruptcy, or choose liquidation

A schematic representation of the SWOT Matrix is provided in Figure 8-3 Note that a SWOT Matrix is composed of nine cells As shown, there are four key factor cells, four strategy cells, and one cell that is always left blank (the upper-left cell) The four strategy cells, labeled

SO, WO, ST, and WT, are developed after completing four key factor cells, labeled S, W, O, and

T The process of constructing a SWOT Matrix can be summarized in eight steps, as follows:

1 List the firm’s key external opportunities.

2 List the firm’s key external threats.

3 List the firm’s key internal strengths.

4 List the firm’s key internal weaknesses.

5 Match internal strengths with external opportunities, and record the resultant SO strategies

in the appropriate cell

6 Match internal weaknesses with external opportunities, and record the resultant WO strategies.

7 Match internal strengths with external threats, and record the resultant ST strategies.

8 Match internal weaknesses with external threats, and record the resultant WT strategies.

Some important aspects of a SWOT Matrix are evidenced in Figure 8-3 For example, note that both the internal and external factors and the SO, ST, WO, and WT strategies are stated in quantitative terms This is important! For example, regarding the second SO number 2 and ST number 1 strategies, if the analyst just said, “Add new repair and service persons,” the reader might think that 20 new repair and service persons are needed Actually only 2 are needed So,

with strategies, as with the underlying key external and internal factors, be specific, actionable,

and divisional to the extent possible.

It is also important to include the “S1, O2” type notation after each strategy in a SWOT Matrix This notation reveals the rationale for each alternative strategy Strategies do not appear out

of the blue Note in Figure 8-3 how this notation reveals the internal and external factors that were matched to formulate desirable strategies For example, note that this retail computer store business may need to “purchase land to build new store” because a new Highway 34 will make its location less desirable The notation (W2, O2) and (S8, T3) in Figure 8-3 exemplifies this matching process.The purpose of SWOT analysis and each Stage 2 matching tool is to generate feasible alter-native strategies, not to select or determine which strategies are best Not all of the strategies developed in the SWOT Matrix will be selected for implementation No firm has sufficient capi-tal or resources to implement every strategy formulated

The strategy-formulation guidelines provided in Chapter 4 can enhance the process of ing key external and internal factors For example, when an organization has both the capital and human resources needed to distribute its own products (internal strength) and distributors are unreliable, costly, or incapable of meeting the firm’s needs (external threat), forward integration can be an attractive ST strategy When a firm has excess production capacity (internal weakness)

3 Employee morale is excellent

4 In-store promotions = 20 percent increase in sales

5 Newspaper advertising expenditures down 10 percent

6 Revenues from repair and service

2 Location of store hurt by new Hwy 34

3 Carpet and paint in store in disrepair

4 Bathroom in store needs refurbishing

5 Total store revenues down 8 percent

6 Store has no website

7 Supplier on-time-delivery up to 2.4 days

8 Customer checkout process too slow

9 Revenues per employee up 19 percent

1 Population of city growing 10 percent

2 Rival computer store opening one mile

1 Best Buy opening new store in one

year nearby

2 Local university offers computer repair

3 New bypass Hwy 34 in 1 year will

divert traffic

4 New mall being built nearby

5 Gas prices up 14 percent

6 Vendors raising prices 8 percent

1 Hire two more repair persons and market these new services (S6, S7, T1)

2 Purchase land to build new store (S8, T3)

3 Raise out-of-store service calls from

$60 to $80 (S6, T5)

1 Hire two new cashiers (W8, T1, T4)

2 Install new carpet, paint, and bath (W3, W4, T1)

and its basic industry is experiencing declining annual sales and profits (external threat), related

diversification can be an effective WT strategy

Although the SWOT Matrix is widely used in strategic planning, the analysis does have some

limitations.4 First, SWOT does not show how to achieve a competitive advantage, so it must not be

an end in itself The matrix should be the starting point for a discussion on how proposed strategies

could be implemented as well as cost/benefit considerations that ultimately could lead to

competi-tive advantage Second, SWOT is a static assessment (or snapshot) in time A SWOT Matrix can be

like studying a single frame of a motion picture where you see the lead characters and the setting but

have no clue as to the plot As circumstances, capabilities, threats, and strategies change, the

dynam-ics of a competitive environment may not be revealed in a single matrix Third, SWOT analysis

254 Strategic ManageMent

may lead the firm to overemphasize a single internal or external factor in formulating strategies There are interrelationships among the key internal and external factors that SWOT does not reveal that may be important in devising strategies Fourth, there are no weights, ratings, or numbers in a SWOT analysis Finally, the relative attractiveness of alternative strategies is not provided

The Strategic Position and Action Evaluation (SPACE) Matrix

The Strategic Position and Action Evaluation (SPACE) Matrix, another important Stage 2

matching tool, is illustrated in Figure 8-4 Its four-quadrant framework indicates whether sive, conservative, defensive, or competitive strategies are most appropriate for a given organi-

aggres-zation The axes of the SPACE Matrix represent two internal dimensions (financial position [FP] and competitive position [CP]) and two external dimensions (stability position [SP] and industry position [IP]) These four factors are perhaps the most important determinants of an

organization’s overall strategic position.5

It is helpful here to elaborate on the difference between the SP and IP axes The term SP refers

to the volatility of profits and revenues for firms in a given industry Thus, SP volatility (stability)

is based on the expected impact of changes in core external factors such as technology, economy, demographic, seasonality, and so on The higher the frequency and magnitude of changes in a given industry, the more unstable the SP becomes An industry can be stable or unstable on SP, yet high or low on IP The smartphone industry, for instance, would be unstable (–6 or –7) on SP yet high growth

on IP, whereas the canned food industry would be stable (–1 or –2) on SP yet low growth on IP.Depending on the type of organization, numerous variables could make up each of the dimen-sions represented on the axes of the SPACE Matrix Factors that were included in the firm’s EFE

SP

FP Conservative

• Diversification (related or unrelated)

• Backward, forward, horizontal integration

+6 +5 +4 +3 +2 +1 0 0 –1 –2 –3 –4 –5 –6 –7

The SpACE Matrix

Source: Based on H Rowe, R Mason, and K Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading, MA: Addison-Wesley Publishing Co Inc., © 1982), 155.

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 255

and IFE Matrices should be considered in developing a SPACE Matrix Other variables commonly

included are given in Table 8-2 For example, return on investment, leverage, liquidity, working

capital, and cash flow are commonly considered to be determining factors of an organization’s

financial position (FP) Like the SWOT Matrix, the SPACE Matrix should be both tailored to the

particular organization being studied and based on factual information to the extent possible

The process of developing a SPACE Matrix can be summarized in six steps, as follows:

1 Select a set of variables to define financial position (FP), competitive position (CP),

stabil-ity position (SP), and industry position (IP)

2 Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables that

make up the FP and IP dimensions Assign a numerical value ranging from –1 (best) to –7

(worst) to each of the variables that make up the SP and CP dimensions On the FP and CP

axes, make comparisons to competitors On the IP and SP axes, make comparisons to other

industries On the SP axis, know that a –7 denotes highly unstable industry conditions,

whereas –1 denotes highly stable

3 Compute an average score for FP, CP, IP, and SP by summing the values given to the

vari-ables of each dimension and then by dividing by the number of varivari-ables included in the

respective dimension

4 Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE Matrix

5 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 (x, y) coordinate.

6 Draw a directional vector from the origin of the SPACE Matrix (0,0) through the new (x, y)

coordinate That vector, being located in a particular quadrant, reveals particular strategies

the organization should consider

Some example strategy profiles that can emerge from SPACE analysis are shown in Figure

8-5 The directional vector associated with each profile suggests the type of strategies to pursue:

aggressive, conservative, defensive, or competitive Specifically, when a firm’s directional vector

is located in the Aggressive Quadrant (upper right) of the SPACE Matrix, an organization is in an

excellent position to use its internal strengths to (1) take advantage of external opportunities, (2)

overcome internal weaknesses, and (3) avoid external threats Therefore, market penetration, market

Table 8-2 Example Factors That Make Up the SpACE Matrix Axes

internal Strategic Position external Strategic Position

Financial Position (FP) Stability Position (SP)

Return on investment Technological changes

Liquidity Demand variability

Working capital Price range of competing products

Cash flow Barriers to entry into market

Inventory turnover Competitive pressure

Earnings per share Ease of exit from market

Price earnings ratio Risk involved in business

Competitive Position (CP) Industry Position (IP)

Market share Growth potential

Product quality Profit potential

Product life cycle Financial stability

Customer loyalty Extent leveraged

Capacity utilization Resource utilization

Technological know-how Ease of entry into market

Control over suppliers and distributors Productivity, capacity utilization

Source: Based on H Rowe, R Mason, & K Dickel, Strategic Management and Business Policy: A

Methodological Approach (Reading, MA: Addison-Wesley Publishing Co Inc., © 1982), 155–156.

256 Strategic ManageMent

development, product development, backward integration, forward integration, horizontal tion, or diversification, can be feasible, depending on the specific circumstances that face the firm.When a particular company is known, the analyst must be much more specific in terms of recommended strategies For example, instead of saying market penetration is a recommended

integra-Defensive Profiles

A financially strong firm that has achieved

major competitive advantages in a growing

and stable industry

A firm that has achieved financial strength

in a stable industry that is not growing; the

firm has few competitive advantages

A firm that has a very weak competitive

position in a negative growth, stable industry

An organization that is competing fairly well in an unstable industry

A financially troubled firm in a very unstable industry

IP FP

SP

CP (–5,–1)

IP FP

SP

CP

(–1,–5)

Figure 8-5

Example Strategy profiles

Source: Based on H Rowe, R Mason, and K Dickel, Strategic Management and Business Policy: A Methodological Approach

(Reading, MA: Addison-Wesley Publishing Co Inc., © 1982), 155.

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 257

strategy when your vector is located in the Conservative Quadrant, say that adding 34 new stores

in India is a recommended strategy This is an important point for students doing case analyses

because whenever a particular company is known, then terms such as market development are

too vague to use That term could refer to adding a manufacturing plant in Thailand or Mexico

or South Africa Thus, be specific to the extent possible regarding implications of all the matrices

presented herein this chapter Vagueness can be disastrous in strategic management Avoid terms

such as expand, increase, decrease, and grow—be more specific than that! Reveal how your

proposed strategies could enable your company to rotate/shift its SPACE vector more toward the

Aggressive Quadrant.

The directional vector may appear in the Conservative Quadrant (upper left) of the SPACE

Matrix, which implies staying close to the firm’s basic competencies and not taking

exces-sive risks Conservative strategies most often include market penetration, market development,

product development, and related diversification The directional vector may be located in the

Defensive Quadrant (lower left) of the SPACE Matrix, which suggests the firm should focus

on improving internal weaknesses and avoiding external threats Defensive strategies include

retrenchment, divestiture, liquidation, and related diversification Finally, the directional vector

may be located in the Competitive Quadrant (lower right) of the SPACE Matrix, indicating

competitive strategies Competitive strategies include backward, forward, and horizontal

integra-tion; market penetraintegra-tion; market development; and product development

Note that a SPACE Matrix has some limitations:

1 It is a snapshot in time.

2 There are more than four dimensions that firms could/should be rated on.

3 The directional vector could fall directly on an axis, or could even go nowhere if the

coor-dinate is (0,0)

4 Implications of the exact angle of the vector within a quadrant are unclear.

5 The relative attractiveness of alternative strategies generated is unclear.

6 Key underlying internal and external factors are not explicitly considered.

A SPACE Matrix for Domino’s Pizza, Inc is provided in Figure 8-6 Note the SPACE

vector for Domino’s is located in the Competitive Quadrant (lower right), based primarily on

+6 +7

+5 +4 +3 +2 +1 0 0 –1 –2 –3 –4 –5 –6 –7

258 Strategic ManageMent

three factors: (1) the company’s $1.5 billion in long-term debt, (2) intense competition within the fast-food industry, and (3) offering products that are generally not a healthy food choice Domino’s should consider adding a line of salads to their menu to shift the SPACE vector into the Aggressive Quadrant (upper right); adding salads would likely benefit Domino’s financially, thus

moving the SPACE point on the vertical (y-axis) up.

In performing strategic-management case analysis, prepare the SPACE Matrix (and all matrices) based on the point in time of your analysis rather than a desired future point in time However, in your discussion of implications, be sure to comment on what you recommend the firm should do to improve its situation Focus more on implications of matrices than on “number crunching” in your actual oral delivery of a case analysis

The Boston Consulting Group (BCG) MatrixBased in Boston and having 6,200 consultants worldwide, the Boston Consulting Group (BCG)

has 87 offices in 45 countries, and annually ranks in the top five of Fortune’s list of the “100 Best

Companies to Work For.” The Boston Consulting Group is a private management consulting firm that specializes in strategic planning

Autonomous divisions (also called segments or profit centers) of an organization make up

what is called a business portfolio When a firm’s divisions compete in different industries, a separate strategy often must be developed for each business The Boston Consulting Group (BCG) Matrix and the Internal-External (IE) Matrix are designed specifically to enhance a mul-

tidivisional firm’s efforts to formulate strategies Allocating resources across divisions is ably the most important strategic decision facing multidivisional firms Multidivisional firms range in size from small, three-restaurant, mom-and-pop firms, to huge conglomerates such as Walt Disney Company, to universities that have various schools or colleges—and they all need

argu-to use portfolio analysis

In a Form 10K or Annual Report, some companies do not disclose financial information by

segment, in which case a BCG portfolio analysis may not be possible by persons external to the

firm However, reasons to disclose by segment financial information in a Form 10K more than

offset the reasons not to disclose, as indicated in Table 8-3

The BCG Matrix graphically portrays differences among divisions based on two

dimen-sions: (1) relative market share position on the x-axis and (2) industry growth rate on the y-axis

The BCG Matrix allows a multidivisional organization to manage its portfolio of businesses by examining these two dimensions for each division relative to other divisions in the organization

Relative market share position (RMSP) is defined as the ratio of a division’s own market share

(or revenues) in a particular industry to the market share (or revenues) held by the largest rival firm in that industry Other variables can be used in this analysis besides revenues For example, number of stores, or number of restaurants, or, in the airline industry, number of airplanes could

Table 8-3 Reasons to (or Not to) Disclose Financial Information by Segment

4 Disclosure enhances the communication process both within the firm and with outsiders.

1 Rival firms can obtain free competitive information.

2 Performance failures can be hidden.

3 Rivalry among segments can be reduced.

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 259

be used for comparative purposes to determine relative market share position In the cigarette

industry, for example, Newport’s relative market share position is 12.2/40.2 = 0.303, and Miller

Lite’s relative market share position is 137/381 = 0.359 (see Table 8-4)

Relative market share position is given on the x-axis of the BCG Matrix The midpoint on the

x-axis usually is set at 0.50, corresponding to a division that has half the market share of the

lead-ing firm in the industry The y-axis represents the industry growth rate (IGR) in sales, measured

in percentage terms—that is, the average annual increase in revenue for all firms in an industry

The growth rate percentages on the y-axis could range from −20 to +20 percent, with 0.0 being

the midpoint The average annual increase in revenues for several leading firms in the industry

would be a good estimate of the value Also, various sources such as the S&P Industry Surveys

and www.finance.yahoo.com (click on Competitors) would provide this value These numerical

ranges on the x- and y-axes are often used, but other numerical values could be established as

deemed appropriate for particular organizations, such as –10 to +10 percent on the y-axis.

Based on each division’s respective (x, y) coordinate, each segment can be properly

posi-tioned (centered) in a BCG Matrix Divisions located in Quadrant I (upper right) of the BCG

Matrix are called “Question Marks,” those located in Quadrant II (upper left) are called “Stars,”

those located in Quadrant III (lower left) are called “Cash Cows,” and those divisions located

in Quadrant IV (lower right) are called “Dogs.” The following list describes the four BCG

quadrants

• Question Marks—Divisions in Quadrant I (upper right) have a low relative market share

position, yet they compete in a high-growth industry Generally these firms’ cash needs

are high and their cash generation is low These businesses are called question marks

because the organization must decide whether to strengthen them by pursuing an

inten-sive strategy (market penetration, market development, or product development) or to

sell them

• Stars—Divisions in Quadrant II (upper left) represent the organizations’ best long-run

opportunities for growth and profitability, and are therefore called stars Divisions with

a high relative market share and a high industry growth rate should receive substantial

investment to maintain or strengthen their dominant positions Forward, backward, and

horizontal integration; market penetration; market development; and product development

are appropriate strategies for these divisions to consider, as indicated in Figure 8-7

• Cash Cows—Divisions in Quadrant III (lower left) have a high relative market share

position but compete in a low-growth industry Called cash cows because they

gener-ate cash in excess of their needs, they are often milked Many of today’s cash cows were

Table 8-4 Current Market Share Data for Cigarette and Beer Brands

What Percentage of People Smoke

What cigarette Brands in the USa? What Beer Brands annually Sell the Most Million Barrels in the USa?

Source: Based on M Esterl & P Evans, “Reynolds, Lorillard Strike a Match,” Wall Street Journal, July

6, 2014, B4 See also M Esterl & T Mickle, “Beer Conglomerates Cultivate Their Crafty Side,” Wall

Street Journal, December 29, 2014, B1.

260 Strategic ManageMent

yesterday’s stars Cash cow divisions should be managed to maintain their strong position for as long as possible Product development or diversification may be attractive strategies for strong cash cows However, as a cash cow division becomes weak, retrenchment or divestiture can become more appropriate

• Dogs—Divisions in Quadrant IV (lower right) have a low relative market share position

and compete in a slow- or no-market-growth industry; they are dogs in the firm’s

portfo-lio Because of their weak internal and external position, these businesses are often dated, divested, or trimmed down through retrenchment When a division first becomes

liqui-a dog, retrenchment cliqui-an be the best strliqui-ategy to pursue becliqui-ause mliqui-any dogs hliqui-ave bounced back, after strenuous asset and cost reduction, to become viable, profitable divisions.The basic BCG Matrix appears in Figure 8-7 Each circle represents a separate division The size of the circle corresponds to the proportion of corporate revenue generated by that business unit, and the pie slice indicates the proportion of corporate profits generated by that division

The major benefit of the BCG Matrix is that it draws attention to the cash flow, ment characteristics, and needs of an organization’s various divisions The divisions of many firms evolve over time: dogs become question marks, question marks become stars, stars become cash cows, and cash cows become dogs in an ongoing counterclockwise motion Less frequently, stars become question marks, question marks become dogs, dogs become cash cows, and cash cows become stars (in a clockwise motion) In some organizations, no cyclical motion is apparent Over time, organizations should strive to achieve a portfolio of divisions that are stars

invest-An example of a BCG Matrix is provided in Figure 8-8, which illustrates an organization composed of five divisions with annual sales ranging from $5,000 to $60,000 Division 1 has the greatest sales volume, so the circle representing that division is the largest one in the matrix The circle corresponding to Division 5 is the smallest because its sales volume ($5,000) is least among all the divisions The pie slices within the circles reveal the percent of corporate profits contributed by each division As shown, Division 1 contributes the highest profit percentage,

39 percent, as indicated by 39 percent of the area within circle 1 being shaded Notice in the diagram that Division 1 is considered a star, Division 2 is a question mark, Division 3 is also a question mark, Division 4 is a cash cow, and Division 5 is a dog

The BCG Matrix, like all analytical techniques, has some limitations For example, viewing every business as a star, cash cow, dog, or question mark is an oversimplification; many businesses

RELATIVE MARKET SHARE POSITION

Question MarksI

DogsIV

Cash CowsIII

• Backward, Forward, or Horizontal Integration

Source: Based on the BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The

Boston Consulting Group.

100

Profits

$10,000 5,000 2,000 8,000 –500

$25,500

Percent Profits

39 20 8 31

100

Relative Market Share

.80 40 10 60 05

—

Industry Growth Rate (%)

+15 +10 +1 –20 –10

fall right in the middle of the BCG Matrix and thus are not easily classified Furthermore, the

BCG Matrix does not reflect if various divisions or their industries are growing over time; that is,

the matrix has no temporal qualities, but rather it is a snapshot of an organization at a given point

in time Finally, other variables besides relative market share position and industry growth rate in

sales, such as size of the market and competitive advantages, are important in making strategic

decisions about various divisions

Another example BCG Matrix is provided in Figure 8-9 As you can see, Division 5 had an

operating loss of $188 million

The Internal-External (IE) Matrix

The Internal-External (IE) Matrix positions an organization’s various divisions (segments) in

a nine-cell display, illustrated in Figure 8-10 The IE Matrix is similar to the BCG Matrix in that

both tools involve plotting a firm’s divisions in a schematic diagram; this is why they are both

called portfolio matrices Also, in both the BCG and IE Matrices, the size of each circle

repre-sents the percentage of sales contribution of each division, and pie slices reveal the percentage of

profit contribution of each division But there are four important differences between the BCG

Matrix and the IE Matrix, as follows:

1 The x and y axes are different.

2 The IE Matrix requires more information about the divisions than does the BCG Matrix.

3 The strategic implications of each matrix are different For these reasons,

4 The IE Matrix has nine quadrants versus four in a BCG Matrix.

For the previous four reasons, strategists in multidivisional firms often develop both the

BCG Matrix and the IE Matrix in formulating alternative strategies A common practice is to

develop a BCG Matrix and an IE Matrix for the present, and then develop projected matrices to

reflect expectations of the future This before-and-after analysis can be very effective in an oral

presentation, enabling students (or strategists) to pave the way for (justify or give some rationale

for) their recommendations across divisions of the firm

+20 +15 +10 +5 0

–20 –15 –10 –5

799 400 12 4 –188

$1,027

0.8 0.4 0.2 0.5 02

10 05 00 –05 –10

68.0 39.0 1.2 0.1 (18.3)

100.0

51.5 25.6 17.5 4.9 0.5

100.0

$5,139 2,556 1,749 493 42

4.0

3.0

2.0

1.0

Hold and Maintain

Grow and Build

The Internal-External (IE) Matrix

Source: The IE Matrix was developed from the General Electric (GE) Business Screen Matrix For a description of the GE Matrix, see Michael

Allen, “Diagramming GE’s Planning for What’s WATT,” in R Allio and M Pennington, eds., Corporate Planning: Techniques and Applications

l par; New York: AMACOM, 1979.

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 263

The IE Matrix is based on two key dimensions: (1) the IFE total weighted scores on the

x-axis and (2) the EFE total weighted scores on the y-axis Recall that each division of an

orga-nization should construct an IFE Matrix and an EFE Matrix for its part of the orgaorga-nization,

but oftentimes in performing case analysis, strategic-management students are asked to simply

estimate divisional IFE and EFE scores, rather than prepare those underlying matrices for every

division Anyway, the total weighted scores derived from the divisions allow construction of the

corporate-level IE Matrix On the x-axis of the IE Matrix, an IFE total weighted score of 1.0 to

1.99 represents a weak internal position; a score of 2.0 to 2.99 is considered average; and a score

of 3.0 to 4.0 is strong Similarly, on the y-axis, an EFE total weighted score of 1.0 to 1.99 is

con-sidered low; a score of 2.0 to 2.99 is medium; and a score of 3.0 to 4.0 is high Circles,

represent-ing divisions, are positioned in an IE Matrix based on their (x, y) coordinate.

Despite having nine cells (or quadrants), the IE Matrix has three major regions that have

different strategy implications, as follows:

• Region 1—The prescription for divisions that fall into cells I, II, or IV can be described as

grow and build Intensive (market penetration, market development, and product

develop-ment) or integrative (backward integration, forward integration, and horizontal integration)

strategies can be most appropriate for these divisions This is the best region for divisions,

given their high IFE and EFE scores Successful organizations are able to achieve a

portfo-lio of businesses positioned in Region 1

• Region 2—The prescription for divisions that fall into cells III, V, or VII can be described

as hold and maintain strategies; market penetration and product development are two

commonly employed strategies for these types of divisions

• Region 3—The prescription for divisions that fall into cells VI, VIII, or IX can be

de-scribed as harvest or divest.

An example of a four-division IE Matrix is given in Figure 8-11 As indicated by the

posi-tioning of the four circles, grow and build strategies are appropriate for Divisions 1, 2, and 3 But

Division 4 is a candidate for harvest or divest Division 2 contributes the greatest percentage of

company sales and thus is represented by the largest circle Division 1 contributes the greatest

proportion of total profits; it has the largest-percentage pie slice

Total

Sales

$100 200 50 50

$400

$10 5 4 1

$20

Percent Profits

50 25 20 5

100

IFE Scores

3.6 2.1 3.1 1.8

EFE Scores

3.2 3.5 2.1 2.5

THE IFE TOTAL WEIGHTED SCORES

100.0

Figure 8-11

An Example IE Matrix

264 Strategic ManageMent

An example five-division IE Matrix is given in Figure 8-12 Note that Division 1 has the largest revenues (as indicated by the largest circle) and the largest profits (as indicated by the largest pie slice) in the matrix It is common for organizations to develop both geographic and product-based IE Matrices to more effectively formulate strategies and allocate resources among divisions Firms often prepare a “before and after” IE (or BCG) Matrix to reveal the situation at present versus the expected situation after one year This latter idea minimizes the limitation of these matrices being a “snapshot in time.”

The Academic Research Capsule 8-1 discusses some thoughts on a new IE Matrix

2 1

$5,100

3 2 3 2.5 2

—

2.5 2 3 2.5 3

Portfolio analysis is critically significant in strategic planning

be-cause allocation of resources across divisions is arguably the most

important strategic decision facing multidivisional firms each year

Two recent journal articles merged the EFE and IFE Matrices with the

CPM to propose a new External Competitive Profile Matrix (ECPM)

and an Internal Competitive Profile Matrix (ICPM) In their articles

cited in the source, Cassidy, Glissmeyer, and Capps present a

re-vised IE Matrix developed based on the new ECPM and ICPM scores

Cassidy, Glissmeyer, and Capps contend that the new nine-cell

matrix improves on Fred David’s original IE Matrix, first offered in

1987 and based on the General Electric (GE) Business Screen.

Source: Based on C Cassidy, M Glissmeyer, & C Capps III, “Mapping

an Internal-External (IE) Matrix Using Tradition and Extended Matrix

Concepts,” Journal of Applied Business Research, 29, no 5 (September/

October 2013): 1523–1528 See also C Capps III and M Glissmeyer,

“Extending the Competitive Profile Matrix Using Internal Factor Evaluation

and External Factor Evaluation Matrix Concepts,” Journal of Applied

Business Research, 28, no 5 (2012): 1062

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 265

The Grand Strategy Matrix

In addition to the SWOT Matrix, SPACE Matrix, BCG Matrix, and IE Matrix, the Grand

Strategy Matrix has become a popular tool for formulating alternative strategies All

orga-nizations can be positioned in one of the Grand Strategy Matrix’s four strategy quadrants

A firm’s divisions likewise could be positioned As illustrated in Figure 8-13, the Grand

Strategy Matrix is based on two evaluative dimensions: (1) competitive position on the x-axis

and (2) market (industry) growth on the y-axis Any industry whose annual growth in sales

exceeds 5 percent could be considered to have rapid growth Appropriate strategies for an

organization to consider are listed in sequential order of attractiveness in each quadrant of the

Grand Strategy Matrix

Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic

posi-tion For these companies, continued concentration on current markets (market penetration

and market development) and products (product development) is an appropriate strategy It is

unwise for a Quadrant I firm to shift notably from its established competitive advantages When

a Quadrant I organization has excessive resources, then backward, forward, or horizontal

inte-gration may be effective strategies When a Quadrant I firm is too heavily committed to a single

product, then related diversification may reduce the risks associated with a narrow product line

Quadrant I firms can afford to take advantage of external opportunities in several areas They can

take risks aggressively when necessary

Firms positioned in Quadrant II need to evaluate their present approach to the marketplace

seriously Although their industry is growing, they are unable to compete effectively; they need

to determine why the firm’s current approach is ineffective and how the company can best

change to improve its competitiveness Because Quadrant II organizations are in a rapid market

growth industry, an intensive strategy (as opposed to integrative or diversification) is usually the

first option that should be considered However, if the firm is lacking a distinctive competence

RAPID MARKET GROWTH

SLOW MARKET GROWTH

STRONG COMPETITIVE POSITION

The Grand Strategy Matrix

Source: Based on Roland Christensen, Norman Berg, and Malcolm Salter, Policy Formulation and Administration (Homewood, IL: Richard D

Irwin, 1976), 16–18.

266 Strategic ManageMent

or competitive advantage, then horizontal integration is often a desirable alternative As a last resort, divestiture or liquidation should be considered Divestiture can provide funds needed to acquire other businesses or buy back shares of stock

Quadrant III organizations compete in slow-growth industries and have weak tive positions These firms must make some drastic changes quickly to avoid further decline and possible liquidation Extensive cost and asset reduction (retrenchment) should be pursued first An alternative strategy is to shift resources away from the current business into different areas (diversify) If all else fails, the final options for Quadrant III businesses are divestiture

competi-or liquidation

Finally, Quadrant IV businesses have a strong competitive position but are in a slow-growth industry These firms have the strength to launch diversified programs into more promising growth areas: Quadrant IV businesses have characteristically high cash-flow levels and lim-ited internal growth needs and often can pursue related or unrelated diversification successfully Quadrant IV firms also may pursue joint ventures

Even with the Grand Strategy Matrix, be certain that you always, whenever possible, state

your alternative strategies in specific, actionable, and divisional terms to the extent possible

When you know the particular firm, such as in strategic-management case analysis, avoid using

terms such as divestiture, for example Rather, specify the exact division to be sold Also, be sure

to use the free Excel student template at www.strategyclub.com that facilitates construction of all strategic planning matrices

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

Other than ranking strategies to achieve the prioritized list, there is only one analytical nique in the literature designed to determine the relative attractiveness of feasible alternative

tech-actions The Quantitative Strategic Planning Matrix (QSPM), which comprises Stage 3 of

the strategy-formulation analytical framework, objectively indicates which alternative gies are best.6 The QSPM uses input from Stage 1 analyses and matching results from Stage

strate-2 analyses to decide objectively among alternative strategies That is, the EFE Matrix, IFE Matrix, and CPM that comprise Stage 1, coupled with the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix that comprise Stage 2, provide the needed information for setting up the QSPM (Stage 3) The QSPM is a tool that allows strategists to evaluate alternative strategies objectively, based on previously identified external and inter-nal key success factors Like other strategy-formulation analytical tools, the QSPM requires assignment of ratings (called attractiveness scores), but making “small” rating decisions enables strategists to make effective “big” decisions, such as which country to spend a billion dollars in to sell a product

The basic format of the QSPM is illustrated in Table 8-5 Note that the left column of a QSPM consists of key external and internal factors (from Stage 1), and the top row consists of feasible alternative strategies (from Stage 2) Specifically, the left column of a QSPM consists of information obtained directly from the EFE Matrix and IFE Matrix In a column adjacent to the key success factors, the respective weights received by each factor in the EFE Matrix and the IFE Matrix are recorded

The top row of a QSPM consists of alternative strategies derived from the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix These matching tools usu-ally generate similar feasible alternatives However, not every strategy suggested by the match-ing techniques has to be evaluated in a QSPM Strategists should compare several viable alterna-tive strategies in a QSPM Make sure your strategies are stated in specific terms, such as “Open

275 new stores in Indonesia” rather than “Expand globally” or “Open new stores in Africa.” Ultimately, a dollar value must be established for each recommended strategy; it would be impossible to establish a dollar value for “expand globally.”

Conceptually, the QSPM determines the relative attractiveness of various strategies based

on the extent that key external and internal factors are capitalized on or improved The relative attractiveness of each strategy within a set of alternatives is computed by determining the cumu-lative impact of each external and internal factor Any number of sets of alternative strategies can

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 267

Table 8-5 The Quantitative Strategic planning Matrix (QSpM)

Strategic alternatives Key Factors Weight Strategy 1 Strategy 2 Strategy 3

Key External Factors

Research and Development

Management Information Systems

be included in the QSPM, and any number of strategies can make up a given set, but only

strate-gies within a given set are evaluated relative to each other For example, one set of stratestrate-gies may

include diversification, whereas another set may include issuing stock and selling a division to

raise needed capital These two sets of strategies are totally different, and the QSPM evaluates

strategies only within sets Note in Table 8-5 that three strategies are included, and they make up

just one set

A Quantitative Strategic Planning Matrix for a retail computer store is provided in Table 8-6

This example illustrates all the components of the QSPM: strategic alternatives, key factors, weights,

attractiveness scores (AS), total attractiveness scores (TAS), and the sum total attractiveness score

The three new terms just introduced—(1) attractiveness scores, (2) total attractiveness scores, and

(3) the sum total attractiveness score—are defined and explained as the six steps required to develop

a QSPM are discussed:

strengths and weaknesses in the left column of the QSPM This information

should be taken directly from the EFE Matrix and IFE Matrix (The Excel

tem-plate at www.strategyclub.com can facilitate this process.)

identical to those in the EFE Matrix and IFE Matrix The weights are presented in

a straight column just to the right of the external and internal factors

that the organization should consider implementing Record these strategies

in the top row of the QSPM Group the strategies into mutually exclusive sets if

possible

indicate the relative attractiveness of each strategy considering a single external

or internal factor Attractiveness Scores (AS) are determined by examining

each key external or internal factor, one at a time, and asking the question,

“Does this factor affect the choice of strategies being made?” If the answer to

this question is yes, then the strategies should be compared relative to that key

factor Specifically, AS should be assigned to each strategy to indicate the

rela-tive attracrela-tiveness of one strategy over others, considering the particular factor

The range for AS is 1 = not attractive, 2 = somewhat attractive, 3 =

reason-ably attractive, and 4 = highly attractive By “attractive,” we mean the extent

BuildnewlargerStore Fully renovate existing Store

Opportunities

2 Rival computer store opening one mile away 0.10 2 0.20 4 0.40

3 Vehicle traffic passing store up 12% 0.08 1 0.08 4 0.32

4 Vendors average six new products/year 0.05 — —

5 Senior citizen use of computers up 8% 0.05 — —

6 Small business growth in area up 10% 0.05 — —

7 Desire for websites up 18% by realtors 0.04 — —

8 Desire for websites up 12% by small firms 0.03 — —

Threats

1 Best Buy opening new store nearby in one year 0.15 4 0.60 3 0.45

2 Local university offers computer repair 0.08 — —

3 New bypass for Hwy 34 in one year will divert traffic 0.12 4 0.48 1 0.12

Strengths

1 Inventory turnover increased from 5.8 to 6.7 0.05 — —

2 Average customer purchase increased from $97 to $128 0.07 2 0.14 4 0.28

4 In-store promotions resulted in 20% increase in sales 0.05 — —

5 Newspaper advertising expenditures increased 10% 0.02 — —

6 Revenues from repair/service segment of store up 16% 0.15 4 0.60 3 0.45

7 In-store technical support personnel have MIS college degrees 0.05 — —

8 Store’s debt-to-total-assets ratio declined to 34% 0.03 4 0.12 2 0.06

Weaknesses

1 Revenues from software segment of store down 12% 0.10 — —

2 Location of store negatively impacted by new Highway 34 0.15 4 0.60 1 0.15

3 Carpet and paint in store somewhat in disrepair 0.02 1 0.02 4 0.08

4 Bathroom in store needs refurbishing 0.02 1 0.02 4 0.08

5 Revenues from businesses down 8% 0.04 3 0.12 4 0.16

7 Supplier on-time delivery increased to 2.4 days 0.03 — —

8 Often customers have to wait to check out 0.05 2 0.10 4 0.20

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 269

that one strategy, compared to others, enables the firm to either capitalize on

the strength, improve on the weakness, exploit the opportunity, or avoid the

threat Work row by row in developing a QSPM If the answer to the previous

question is no, indicating that the respective key factor has no effect on the

specific choice being made, then do not assign AS to the strategies in that set

Use a dash to indicate that the key factor does not affect the choice being made

Note: If you assign an AS score to one strategy, then assign an AS score(s) to

the other—in other words, if one strategy receives a dash—then all others must

receive a dash in a given row Also, in the Excel template provided at www

strategyclub.com, zeros are used instead of dashes

are defined as the product of multiplying the weights (Step 2) by the AS (Step

4) in each row The TAS indicate the relative attractiveness of each alternative

strategy, considering only the impact of the adjacent external or internal critical

success factor The higher the TAS, the more attractive the strategic alternative

(considering only the adjacent critical success factor)

col-umn of the QSPM The Sum Total Attractiveness Scores (STAS) reveal which

strategy is most attractive in each set of alternatives Higher scores indicate more

attractive strategies, considering all the relevant external and internal factors that

could affect the strategic decisions The magnitude of the difference between the

STAS in a given set of strategic alternatives indicates the relative desirability of

one strategy over another

In Table 8-6, two alternative strategies—(1) buy new land and build new larger store and

(2) fully renovate existing store—are being considered by a computer retail store Note by the

Sum Total Attractiveness Scores of 3.64 versus 3.27 that the analysis indicates the business

should buy new land and build a new larger store Note the use of dashes to indicate which

factors do not affect the strategy choice being considered If a particular factor affects one

strategy, but not the other, it affects the choice being made, so AS should be recorded for both

strategies Never rate one strategy and not the other Note also in Table 8-6 that there are no

consecutive 1s, 2s, 3s, or 4s across any row in a QSPM; never assign the same AS score across

a row Always prepare a QSPM working row by row Also, if you have more than one strategy

in the QSPM, then let the AS scores range from 1 to “the number of strategies being

evalu-ated.” This will enable you to have a different AS score for each strategy These are all

impor-tant guidelines to follow in developing a QSPM In actual practice, the store did purchase the

new land and build a new store; the business also did some minor refurbishing until the new

store was operational

There should be a rationale for each AS score assigned Note in the first row of Table 8-6

that the “Population of city growing 10 percent” opportunity could be capitalized on best by

Strategy 1, “Buy New Land and Build New, Larger Store,” so an AS score of 4 was assigned

to Strategy 1 Attractiveness Scores, therefore, are not mere guesses; they should be rational,

defensible, and reasonable Mathematically, the AS score of 4 in row 1 suggests Strategy 1 is 100

percent more attractive than Strategy 2, whose AS score was 2 (since 4 – 2 = 2 and 2 divided by

2 = 100 percent)

Positive Features and Limitations of the QSPM

A positive feature of the QSPM is that sets of strategies can be examined sequentially or

simultaneously For example, corporate-level strategies could be evaluated first, followed by

division-level strategies, and then function-level strategies There is no limit to the number of

strategies that can be evaluated or the number of sets of strategies that can be examined at once

using the QSPM

Another positive feature of the QSPM is that it requires strategists to integrate pertinent

exter-nal and interexter-nal factors into the decision process Developing a Quantitative Strategic Planning

Matrix makes it less likely that key factors will be overlooked or weighted inappropriately It

270 Strategic ManageMent

draws attention to important relationships that affect strategy decisions Although developing a QSPM requires Attractiveness Scores (AS) decisions, those small decisions enhance the prob-ability that the final strategic decisions will be best for the organization A QSPM can be used by small and large, for-profit and nonprofit organizations.7

The Quantitative Strategic Planning Matrix has two limitations First, it always requires informed judgments regarding AS scores, but quantification is helpful throughout the strategic-planning process to minimize halo error and various biases Attractiveness Scores are not mere guesses Be reminded that a 4 is 33 percent more important than a 3; making good small deci-sions is important for making good big decisions, such as deciding among various strategies to implement Second, a limitation of the QSPM is that it can be only as good as the prerequisite information and matching analyses on which it is based

Cultural Aspects of Strategy Analysis and Choice

As defined in Chapter 6, organizational culture includes the set of shared values, beliefs, tudes, customs, norms, rites, rituals, personalities, heroes, and heroines that describe a firm Culture is the unique way an organization does business It is the human dimension that creates solidarity and meaning, and it inspires commitment and productivity in an organization when strategy changes are made All human beings have a basic need to make sense of the world, to feel in control, and to make meaning When events threaten meaning, individuals react defen-sively Managers and employees may even sabotage new strategies in an effort to recapture the status quo For these reasons, it is beneficial to view strategy analysis and choice from a cultural perspective, because success often rests on the degree of support that strategies receive from a firm’s culture If a firm’s strategies are supported by an organization’s culture, then managers often can implement changes swiftly and easily However, if a supportive culture does not exist and is not cultivated, then strategy changes may be ineffective or even counterproductive A firm’s culture can become antagonistic to new strategies, and the result of that antagonism may

atti-be confusion and disarray

Strategies that require fewer cultural changes may be more attractive because extensive changes can take considerable time and effort Whenever two firms merge, it becomes especially important to evaluate and consider culture-strategy linkages Organizational culture can be the primary reason for difficulties a firm encounters when it attempts to shift its strategic direction,

as the following statement explains:

Not only has the “right” corporate culture become the essence and foundation of corporate excellence, but success or failure of needed corporate reforms hinges on management’s sagacity and ability to change the firm’s driving culture in time and in tune with required changes in strategies.8

The Politics of Strategy Analysis and ChoiceAll organizations are political Unless managed, political maneuvering consumes valuable time, subverts organizational objectives, diverts human energy, and results in the loss of some valuable employees Sometimes political biases and personal preferences get unduly embed-ded in strategy choice decisions Internal politics affect the choice of strategies in all organiza-tions The hierarchy of command in an organization, combined with the career aspirations of different people and the need to allocate scarce resources, guarantees the formation of coali-tions of individuals who strive to take care of themselves first and the organization second, third, or fourth Coalitions of individuals often form around key strategy issues that face an enterprise A major responsibility of strategists is to guide the development of coalitions, to nurture an overall team concept, and to gain the support of key individuals and groups of individuals

In the absence of objective analyses, strategy decisions too often are based on the politics

of the moment With development of improved strategy-formation analytical tools, political tors become less important in making strategic decisions In the absence of objectivity, political

fac- CHAPTER8 • STRATEgygEnERATionAnd SElECTion 271

factors sometimes dictate strategies, and this is unfortunate Managing political relationships is

an integral part of building enthusiasm and esprit de corps in an organization

A classic study of strategic management in nine large corporations examined the political

tactics of successful strategists.9 Successful strategists were found to let weakly supported ideas

and proposals die through inaction and to establish additional hurdles or tests for strongly

sup-ported ideas considered unacceptable but not openly opposed Successful strategists kept a low

political profile on unacceptable proposals and strived to let most negative decisions come from

subordinates or a group consensus, thereby reserving their personal vetoes for big issues and

crucial moments Successful strategists did a lot of chatting and informal questioning to stay

abreast of how things were progressing and to know when to intervene They led strategy but

did not dictate it They gave few orders, announced few decisions, depended heavily on informal

questioning, and sought to probe and clarify until a consensus emerged

Successful strategists generously and visibly rewarded key thrusts that succeeded They

assigned responsibility for major new thrusts to champions, the individuals most strongly

identi-fied with the idea or product and whose futures were linked to its success They stayed alert to

the symbolic impact of their own actions and statements so as not to send false signals that could

stimulate movements in unwanted directions

Successful strategists ensured that all major power bases within an organization were

rep-resented in, or had access to, top management They interjected new faces and new views

into considerations of major changes This is important because new employees and

manag-ers generally have more enthusiasm and drive than employees who have been with the firm a

long time New employees do not see the world the same old way; nor do they act as screens

against changes Successful strategists minimized their own political exposure on highly

con-troversial issues and in circumstances in which major opposition from key power centers was

likely In combination, these findings provide a basis for managing political relationships in an

organization

Because strategies must be effective in the marketplace and capable of gaining internal

com-mitment, the following tactics used by politicians for centuries can aid strategists:

1 Achieving desired results is more important that imposing a particular method; therefore,

consider various methods and choose, whenever possible, the one(s) that will afford the

greatest commitment from employees/managers

2 Achieving satisfactory results with a popular strategy is generally better than trying to

achieve optimal results with an unpopular strategy

3 Often, an effective way to gain commitment and achieve desired results is to shift from

specific to general issues and concerns

4 Often, an effective way to gain commitment and achieve desired results is to shift from

short-term to long-term issues and concerns

5 Middle-level managers must be genuinely involved in and supportive of strategic decisions,

because successful implementation will hinge on their support.10

Boards of Directors: Governance Issues

A board of directors is a group of individuals elected by the ownership of a corporation to have

oversight and guidance over management and to look out for shareholders’ interests The act

of oversight and direction is referred to as governance The National Association of Corporate

Directors defines governance as “the characteristic of ensuring that long-term strategic

objec-tives and plans are established and that the proper management structure is in place to achieve

those objectives, while at the same time making sure that the structure functions to maintain the

corporation’s integrity, reputation, and responsibility to its various constituencies.” Boards are

held accountable for the entire performance of an organization Boards of directors are

increas-ingly sued by shareholders for mismanaging their interests New accounting rules in the United

States and Europe now enhance corporate-governance codes and require much more extensive

financial disclosure among publicly held firms The roles and duties of a board of directors can

be divided into four broad categories, as indicated in Table 8-7

Shareholders are increasingly wary of boards of directors Most directors globally have

ended their image as rubber-stamping friends of CEOs Boards are more autonomous than

272 Strategic ManageMent

Table 8-7 Board of Director Duties and Responsibilities

1 CONTROL AND OVERSIGHT OVER MANAGEMENT

a Select the Chief Executive Officer (CEO).

b Sanction the CEO’s team.

c Provide the CEO with a forum.

d Ensure managerial competency.

e Evaluate management’s performance.

f Set management’s salary levels, including fringe benefits.

g Guarantee managerial integrity through continuous auditing.

h Chart the corporate course.

i Devise and revise policies to be implemented by management.

2 ADHERENCE TO LEGAL PRESCRIPTIONS

a Keep abreast of new laws.

b Ensure the entire organization fulfils legal prescriptions.

c Pass bylaws and related resolutions.

d Select new directors.

e Approve capital budgets.

f Authorize borrowing, new stock issues, bonds, and so on.

3 CONSIDERATION OF STAKEHOLDERS’ INTERESTS

a Monitor product quality.

b Facilitate upward progression in employee quality of work life.

c Review labor policies and practices.

d Improve the customer climate.

e Keep community relations at the highest level.

f Use influence to better governmental, professional association, and educational contacts.

g Maintain good public image.

4 ADVANCEMENT OF STOCKHOLDERS’ RIGHTS

a Preserve stockholders’ equity.

b Stimulate corporate growth so that the firm will survive and flourish.

c Guard against equity dilution.

d Ensure equitable stockholder representation.

e Inform stockholders through letters, reports, and meetings.

f Declare proper dividends.

g Guarantee corporate survival.

ever and continually mindful of and responsive to legal and institutional-investor scrutiny Boards are more cognizant of auditing and compliance issues and more reluctant to approve excessive compensation and perks Boards stay much more abreast today of public scan-dals that attract shareholder and media attention Increasingly, boards of directors monitor and review executive performance carefully without favoritism to executives, representing shareholders rather than the CEO Boards are more proactive today, whereas in years past they were often merely reactive These are all reasons why the chair of the board of direc-tors should not also serve as the firm’s CEO In North America, the number of new incoming CEOs that also serve as Chair of the Board has declined to about 10 percent today from about

50 percent in 2001 Academic Research Capsule 8-2 reveals “how many” board of director members are ideal

Until recently, individuals serving on boards of directors did most of their work sitting around polished mahogany tables However, Hewlett-Packard’s directors, among many others, now log on to their own special board website twice a week and conduct business based on

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 273

AcADemic reseArcH cApsuLe 8-2

How Many Board of Directors Members Are Ideal?

Recent research reveals that companies with fewer board

mem-bers outperform larger boards, largely because having fewer

di-rectors facilitates deeper debates, more nimble decision making,

and greater accountability For example, there are only 8

mem-bers on Apple’s board, and Apple is doing great Recent research

reveals that among companies with a market capitalization of at

least $10 billion, smaller boards produced substantially higher

shareholder returns between 2011 and 2014 Research also shows

that 9-person boards perform much better, for example, than 14-

to 15-member boards As a result of this recent research, many

companies are reducing their number of board members Another

benefit of fewer board members is that CEOs are more often

rep-rimanded (or dismissed) if needed Dr David Yermack, a finance

professor at New York University’s business school, reports that

smaller boards are generally more decisive, more cohesive, more

hands-on, and have more informal meetings and fewer

commit-tees Netflix is another example of a company with a small board,

only 7 members, who debate extensively before approving tant management moves Netflix is doing great In contrast, Eli Lilly & Co has 14 board members who find it “too big to encour- age the kinds of discussions you want, because drilling down on different issues simply takes too long; members feel constrained even asking a second or third question.” Bank of America has 15 directors—too many to be efficient In addition, the chair of the board should rarely, if ever, be the same person as the CEO, as dis- cussed In summary, companies should seek to reduce their board

impor-of directors to fewer than 10 persons, whenever possible—and strategy students should examine this issue in their assigned case companies.

Source: Based on Joann Lublin, “Are Smaller Boards Better for Investors?” Wall Street Journal, August 27, 2014 Also based on Den Favaro, Per-Ola

Karlsson, and Gary Neilson, “The $112 Billion CEO Succession Problem,”

Strategy + Business, PwC Strategy (May 4, 2015).

extensive confidential briefing information posted there by the firm’s top management team

Then the board members meet face-to-face fully informed every two months to discuss the

big-gest issues facing the firm New board involvement policies are aimed at curtailing lawsuits

against board members

Today, boards of directors are composed mostly of outsiders who are becoming more

involved in organizations’ strategic management The trend in the United States is toward much

greater board member accountability with smaller boards, now averaging 12 members rather

than 18 as they did a few years ago BusinessWeek recently evaluated the boards of most large

U.S companies and provided the following “principles of good governance”:

1 Never have more than two of the firm’s executives (current or past) on the board.

2 Never allow a firm’s executives to serve on the board’s audit, compensation, or nominating

committee

3 Require all board members to own a large amount of the firm’s equity.

4 Require all board members to attend at least 75 percent of all meetings.

5 Require the board to meet annually to evaluate its own performance, without the CEO,

COO, or top management in attendance

6 Never allow the CEO to be chairperson of the board.

7 Never allow interlocking directorships (where a director or CEO sits on another director’s

board).11

Jeff Sonnerfeld, associate dean of the Yale School of Management, comments, “Boards of

directors are now rolling up their sleeves and becoming much more closely involved with

man-agement decision making.” Company CEOs and boards are required to personally certify

finan-cial statements; company loans to company executives and directors are illegal; and there is faster

reporting of insider stock transactions Just as directors place more emphasis on staying informed

about an organization’s health and operations, they are also taking a more active role in ensuring

that publicly issued documents are accurate representations of a firm’s status Failure to accept

responsibility for auditing or evaluating a firm’s strategy is considered a serious breach of a

direc-tor’s duties Legal suits are becoming more common against directors for fraud, omissions,

inac-curate disclosures, lack of due diligence, and culpable ignorance about a firm’s operations

274 Strategic ManageMent

impLicAtions for strAtegists

This chapter has revealed six new matrices widely used by

strate-gists to gain and sustain a firm’s competitive advantages, the core

purpose of strategic planning, as illustrated in Figure 8-14 Five of

the six are matching tools, SWOT, SPACE, BCG, IE, and GRAND,

coupled with the single decision-making tool, QSPM Whereas

some consulting firms and some textbooks advocate using only

one or two matrices in strategic planning, our experience is that all

six tools introduced in this chapter are uniquely valuable Coupled

with the External Factor Evaluation Matrix, the Competitive Profile

Matrix, and the Internal Factor Evaluation Matrix from earlier

chapters, the nine tools together give strategists the best means for leading a firm down the narrow path to success Rarely is the path to success wide or easy, due to parity, commoditization, imi- tation, duplication, substitute products, global competitors, and the willingness and ability of consumers to switch allegiances and loyalties Employees expect strategists to formulate a superior

“game plan,” so their hard work implementing the strategic plan will yield job security, good compensation, and ultimately happi- ness for employees.

Establish A Clear Vision & Mission

Evaluate & Monitor Results:

Take Corrective Actions; Adapt

To Change

Gain & Sustain Competitive Advantages

Formulate Strategies:

Collect, Analyze, &

Prioritize Data Using Matrices; Establish A Clear Strategic Plan

In preparing the strategy-formulation matrices presented in this

chapter, it is important to avoid “wild guesses,” but at the same

time to become comfortable with “excellent estimates,” as needed,

based on research, to move forward with appropriate matrices

Sometimes students are so accustomed (due to their accounting and

finance classes especially) to being counted wrong if their answer is

off at the third decimal place, that it takes a while in a strategic agement class to realize that businesses make “excellent estimates based on research” all the time, because no one is sure what tomor- row will bring So, if you can make reasonable estimates, move for- ward with particular matrices For example, with the BCG Matrix, if segment information is not provided, enter only a single circle in the

man- CHAPTER8 • STRATEgygEnERATionAnd SElECTion 275

matrix for the overall firm, rather than two or more circles for the

di-visions But be mindful that multiple circles could be included based

on the number of stores, or the number of customers, rather than

traditional dollar revenue numbers, so do not rush to the conclusion

that portfolio information is not available.

To generate and decide on alternative strategies that will best

gain and sustain competitive advantages, your SWOT, SPACE, BCG,

IE, Grand, and QSPM need to be developed accurately However, in

covering those matrices in an oral presentation, focus more on the

implications of those analyses than the nuts-and-bolts calculations

In other words, as you go through those matrices in a presentation,

your goal is not to prove to the class that you did the calculations

correctly They expect accuracy and clarity and certainly you should

have that covered It is the implications of each matrix that your dience will be most interested in, so use these matrices to pave the way for your recommendations with costs, which generally come just a page or two deeper into the project A good rule of thumb is

au-to spend at least an equal amount of time on the implications as the actual calculations of each matrix when presented This approach will improve the delivery aspect of your presentation or paper by maintaining the high interest level of your audience Focusing on implications rather than calculations will also encourage questions from the audience when you finish Silence from an audience is a bad sign because silence could mean your audience was asleep, dis- interested, or did not feel you did a good job Also, utilize the free Excel student template at www.strategyclub.com as needed.

The Sarbanes-Oxley Act resulted in scores of boardroom overhauls among publicly traded

companies Board audit committees must now have at least one financial expert as a member,

and meet 10 or more times per year, rather than 3 of 4 times as they did prior to the act The act

put an end to the “country club” atmosphere of most boards and shifted power from CEOs to

directors Although aimed at public companies, the act has also had a similar impact on privately

owned companies A board of directors should conduct an annual strategy audit in much the

same fashion that it reviews the annual financial audit

Recent research reveals that about 31 percent of boards of directors have served a decade

or longer, and there is a movement nationwide to replace highly tenured board members with

fresh, new talent.12 Many companies have a mandatory retirement age of 75 for board members,

but analysts expect that age limit to drop due to new technological prowess and the tendency to

investigate new ideas

Women make up only 19.2 percent of board members at companies in the S&P 500, but in

2014, 29 percent of new board members appointed were women, and the number of companies

with no women on the board dropped to 18 from 25 the prior year.13 Analysts say it is no longer

acceptable for a company to have zero board members who are women For example, Twitter’s

board was all men at the time of its initial public offering (IPO) and this fact drew widespread

criticism, and makes a firm more vulnerable to discrimination lawsuits

Chapter Summary

The essence of strategy formulation is an assessment of whether an organization is doing the

right things and how it can be more effective in what it does Every organization should be wary

of becoming a prisoner of its own strategy, for even the best strategies become obsolete sooner

or later Regular reappraisal of strategy helps management avoid complacency Objectives and

strategies should be consciously developed and coordinated and should not merely evolve out of

day-to-day operating decisions

An organization with no sense of direction and no coherent strategy precipitates its own

demise When an organization does not know where it wants to go, it usually ends up some

place it does not want to be Every organization needs to consciously establish and communicate

clear objectives and strategies Any organization, whether military, product-oriented,

service-oriented, governmental, or even athletic, must develop and execute good strategies to win A

good offense without a good defense, or vice versa, usually leads to defeat Developing strategies

that use strengths to capitalize on opportunities could be considered an offense, whereas

strate-gies designed to improve on weaknesses while avoiding threats could be termed defensive Every

organization has some external opportunities and threats and internal strengths and weaknesses

that can be aligned to formulate feasible alternative strategies

276 Strategic ManageMent

Issues for Review and Discussion

8-1 Unilever has done really well for decades How

does Unilever do so well? How can they continue to

prosper?

8-2 Give an internal and external strength of Unilever

Show how those two factors are related to reveal a

fea-sible alternative strategy

8-3 What do you believe are the three major external

op-portunities that Unilever faces?

8-4 Develop a SPACE Matrix for Unilever Explain the plications of your Matrix

8-5 Develop a BCG Matrix for Unilever Explain the cations of your Matrix

8-6 Develop a QSPM for Unilever that includes two gies, six internal factors, and six external factors What strategy appears to be best for Unilever to pursue?

strate-My Management Lab ®

To complete the problems with the , go to EOC Discussion Questions in the MyLab

Key Terms and Concepts

industry growth rate (p 259)

industry position (IP) (p 254)

input stage (p 250)Internal-External (IE) Matrix (p 261)matching (p 251)

matching stage (p 250)Quantitative Strategic Planning Matrix (QSPM) (p 266)question marks (p 259)

relative market share position (RMSP) (p 258)

SO strategies (p 251)stability position (SP) (p 254)stars (p 259)

Strategic Position and Action Evaluation (SPACE) Matrix (p 254)

strategy-formulation analytical framework (p 250)Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix (p 251)

ST strategies (p 252)Sum Total Attractiveness Scores (STAS) (p 269)Total Attractiveness Scores (TAS) (p 269)

WO strategies (p 252)

WT strategies (p 252)

Modern strategy-formulation tools and concepts described in this chapter are integrated into a practical three-stage framework Tools such as the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and QSPM can significantly enhance the quality of strategic decisions, but they should never be used to dictate the choice of strategies Behavioral, cultural, and politi-cal aspects of strategy generation and selection are always important to consider and manage Because of increased legal pressure from outside groups, boards of directors are assuming a more active role in strategy analysis and choice This is a positive trend for organizations

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 277

8-7 Do a Google search using the key terms “boards of

di-rectors.” What new information did you learn that was

not given in the chapter?

8-8 In preparing a SPACE Matrix, which axis would the

European political and economic unrest fall under?

8-9 In preparing a BCG Matrix, what would be the best

range for the IGR axis as applied to the beverage

industry?

8-10 List four reasons why the IE Matrix is widely

consid-ered to be superior to the BCG Matrix

8-11 Is there a limit to the number of strategies that could be

examined in a QSPM? Why?

8-12 Go to Adidas’ website and examine what you can find

about the company’s board of directors Evaluate Adidas’

board based on guidelines presented in the chapter

8-13 Explain why the CEO of a firm should not also be

chairperson of the board of directors

8-14 In preparing a QSPM, what should be done if the TAS

for each strategy are identical?

8-15 Understand the “Implications for Students” section and

discuss what is to be in mind while preparing

strategy-formulation matrices

8-16 Develop a Grand Strategy Matrix for Unilever and include

one rival firm

8-17 Explain what should be done if the SPACE vector

co-ordinate point is (0,0)

8-18 Why is it important to work row by row instead of

col-umn by colcol-umn in preparing a QSPM?

8-19 When constructing a SPACE Matrix, would it be

ap-propriate to use a 1 to 10 scale for all axes?

8-20 If Unilever has the leading market share in Russia,

where along the top axis of a BCG Matrix would their

Russia Operations be plotted?

8-21 Develop a SWOT Matrix for yourself.

8-22 Why is “matching” internal with external factors such

an important strategic management activity?

8-23 Illustrate the strategy formulation framework that

in-cludes three stages and nine analytical tools Which

stage and tool do you feel is most important? Why?

8-24 Develop an example SWOT Matrix for your college or

university with two items in each quadrant Make sure

your strategies clearly exemplify “matching” and show

this with (S1, T2) type notation

8-25 Develop an example SPACE Matrix for a global

com-pany that you are familiar with Include two factors for

each of the four axes (SP, IP, SP, and CP)

8-26 What would be an appropriate SP rating for Unilever?

8-27 Discuss the pros and cons of divulging divisional

infor-mation to stakeholders

8-28 Develop an example BCG Matrix for a company that

has three divisions with revenues of 4, 8, and 12 and

profits of 5, 3, and 2, respectively

8-29 Develop a SPACE Matrix for a firm that is a weak

competitor competing in a slow growing and unstable industry Label axes and quadrants clearly

8-30 Discuss the limitations of a BCG analysis and the

limi-tations of a SPACE analysis

8-31 Prepare an IE Matrix for a company with two divisions

that have 30 and 60 in revenues to go with 10 and 15 in profits

8-32 Develop a Grand Strategy Matrix with two example

companies in each quadrant, i.e., companies that you know something about and that you would place in those quadrants

8-33 Develop a QSPM for yourself—given two strategies:

1) go to graduate school or 2) begin working full-time

8-34 Would a QSPM analysis be useful without the weight

column? Why or why not?

8-35 Discuss the characteristics of successful strategists in

terms of political factions within the firm

8-36 In order of attractiveness to you, rank the political

Tactics presented in Chapter 9

8-37 For a business in your city, list in order of importance

the top eight board-of-director duties and ties listed in the chapter

8-38 Discuss the pros and cons of Sweden’s new board-of

director rule regarding women

8-39 Develop a SPACE Matrix for your college or

8-43 Write a short essay that reveals your recommendations

to firms, regarding disclosure of financial information

8-44 Explain why a before and after BCG and IE

analy-sis can be useful in presenting a strategic plan for consideration

8-45 Find an example of a company, on the Internet, which

has both a Cash Cow and a Question Mark division

8-46 Regarding a Grand Strategy Matrix, identify two

com-panies that would be located in your judgment in each quadrant—identify eight firms total

8-47 For a non-profit company, list in order of importance

the top 10 board-of-director duties and responsibilities

8-48 Regarding the principles of good governance in the

chapter, list in order of importance the top seven guidelines

8-49 List some limitations of the SPACE Matrix.

8-50 Since 40.2 percent of all cigarettes sold are Marlboro,

fol-lowed by 12.2 percent for Newport, what is Newport’s relative market share position in a BCG Matrix sense?

8-51 How many board of directors members are ideal?

278 Strategic ManageMent

My Management Lab ®

Go to the Assignments section of your MyLab to complete these writing exercises

8-52 Explain the steps involved in developing a QSPM 8-53 How are the SWOT Matrix, SPACE Matrix, BCG

Matrix, IE Matrix, and Grand Strategy Matrix similar? How are they different?

AssurAnce of LeArning exercises

plan-to Myanmar plan-to help kick-start its operations in the country

instructions

Step 1 Go to the Unilever website and download the company’s most recent Annual Report Examine

the narrative and tables related to their operations in Southeast Asia.

Step 2 Research the competitive climate and business culture of Myanmar and two other countries

in Southeast Asia as well as the operations of rival Nestlé.

Step 3 Develop six recommendations for Unilever based on your assessment of their present and

potential operations in Southeast Asia.

an-instructions

Step 1 Review Unilever’s global operations as described in the company’s most recent Annual

Report Unilever recently acquired 82 percent of the Russia-based beauty company Kalina.

Step 2 Review industry and competitive information pertaining to Unilever’s global operations,

es-pecially as compared to rival Procter & Gamble.

Step 3 Join with two other students in class Together, develop a global SWOT Matrix for Unilever’s

global business segment Follow all the SWOT guidelines provided in the chapter, including (S4, T3)-type notation at the end of each strategy Include three strategies in each of the four (SO, ST, WT, WO) quadrants Avoid generic strategy terms such as Forward Integration.

Step 4 Turn in your team-developed SWOT Matrix to your professor for a class work grade.

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 279

Home Care The company also has three major geographic segments: Europe, The Americas, and

Asia/AMET/RUB

Instructions

Step 1 Review Unilever’s global operations as described in the company’s most recent Annual

Report and Form 10K.

Step 2 Prepare a up-to-date BCG matrices for Unilever’s 1) four product categories and 2) three

The most widely used strategy formulation technique among firms worldwide is the SWOT Matrix

This exercise requires development of a SWOT Matrix for Nestlé Matching key external and internal

factors in a SWOT Matrix requires good intuitive and conceptual skills You will improve with

prac-tice in developing a SWOT Matrix

Instructions

Recall from Exercise 7B that you already may have determined Nestlé’s external opportunities/threats

and internal strengths/weaknesses This information could be used to complete this exercise Follow

the steps outlined as follows:

Step 1 On a separate sheet of paper, construct a large nine-cell diagram that will represent your

SWOT Matrix Appropriately label the cells.

Step 2 Record Nestlé’s opportunities/threats and strengths/weaknesses in your diagram.

Step 3 Match key external and internal factors to generate feasible alternative strategies for Nestlé

Record SO, WO, ST, and WT strategies in appropriate cells of the SWOT Matrix Use the

proper notation to indicate the rationale for the strategies Try to include four strategies in

each of the four strategy cells.

Step 4 Compare your SWOT Matrix to other students’ SWOT Matrices Discuss any major

differences.

exercise 8e

Develop a SPACE Matrix for Nestlé S.A.

Purpose

Should Nestlé pursue aggressive, conservative, competitive, or defensive strategies? Develop a SPACE

Matrix for Nestlé to answer this question Elaborate on the strategic implications of your directional

vector Be specific in terms of strategies that could benefit Nestlé

Instructions

Step 1 Join with two other persons in your class and develop a joint SPACE Matrix for Nestlé.

Step 2 Diagram your SPACE Matrix on the board Compare your matrix with other teams’ matrices.

Step 3 Discuss the implications of your SPACE Matrix.

exercise 8f

Develop a BCG Matrix for Nestlé S.A.

Purpose

Portfolio matrices are widely used by multidivisional organizations to help identify and select

strate-gies to pursue A BCG analysis identifies particular divisions that should receive fewer resources than

others It may identify some divisions to be divested This exercise can give you practice developing

a BCG Matrix

Instructions

Step 1 Place the following five column headings at the top of a separate sheet of paper: Divisions,

Revenues, Profits, Relative Market Share Position, and Industry Growth Rate Down the far

280 Strategic ManageMent

left of your page, list Nestlé’s by-product segments Turn back to the Cohesion Case and find information to fill in all the cells in your data table.

Step 2 Complete 1) a BCG and 2) an IE Matrix for Nestlé.

Step 3 Compare your BCG Matrix to other students’ matrices Discuss any major differences.

Step 2 Go to the board and record your strategies and their Sum Total Attractiveness Scores

Compare your team’s strategies and sum total attractiveness scores to those of other teams

Be sure not to assign the same AS score in a given row Recall that dashes should be inserted all the way across a given row when used.

Step 3 Discuss any major differences.

Instructions Step 1 Join with two other persons in class and develop a joint SPACE Matrix for Unilever.

Step 2 Diagram your SPACE Matrix on the board Compare your matrix with other teams’ matrices.

Step 3 Discuss the implications of your SPACE Matrix.

Instructions Step 1 Develop a BCG Matrix for your university Include all academic schools, departments, or

colleges.

Step 2 Diagram your BCG Matrix on the blackboard.

Step 3 Discuss differences among the BCG Matrices on the board.

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 281

Instructions

Step 1 Join with two other students in class to develop a joint QSPM for a company that all of you

are familiar with.

Step 2 Record your strategies and their Sum Total Attractiveness Scores Compare your team’s

strategies and sum total attractiveness scores to those of other teams Be sure not to assign

the same AS score in a given row Recall that dashes should be inserted all the way across a

given row when used.

Step 3 Discuss any major differences.

exercise 8k

Formulate Individual Strategies

Purpose

Individuals and organizations are alike in many ways Each has competitors, and each should plan for

the future Every individual and organization faces some external opportunities and threats and has

some internal strengths and weaknesses Both individuals and organizations establish objectives and

allocate resources These and other similarities make it possible for individuals to use many strategic

management concepts and tools This exercise is designed to demonstrate how the SWOT Matrix can

be used by an individual to plan his or her future As one nears completion of a college degree and

begins interviewing for jobs, planning can be particularly important

Instructions

Construct a SWOT Matrix Include what you consider to be your major external opportunities, your

major external threats, your major strengths, and your major weaknesses An internal weakness may

be a low grade point average An external opportunity may be that your university offers a graduate

program that interests you Match key external and internal factors by recording in the

appropri-ate cell of the matrix alternative strappropri-ategies or actions that would allow you to capitalize on your

strengths, overcome your weaknesses, take advantage of your external opportunities, and minimize

the impact of external threats Be sure to use the appropriate matching notation in the strategy cells

of the matrix Because every individual (and organization) is unique, there is no one right answer to

Hyundai Motor Company is a large multinational automotive manufacturer based in Seoul, South

Korea, that also owns a 32.8 percent of Kia Motors Currently the fourth largest vehicle

manu-facturer in the world, Hyundai operates the world’s largest integrated automobile manufacturing

facility in Ulsan, South Korea With around 75,000 employees globally, Hyundai sells automobiles

across 193 countries with the help of around 6,000 dealerships and showrooms

In August 2015, the five largest auto brands in China are Volkswagen, General Motors, Nissan

Motor, Hyundai Motor, and Toyota Motor Among these five companies, only Toyota is on track to

meet its full-year 2015 target, while Hyundai is performing the worst Specifically, in the first-half of

2015, Toyota’s China sales rose 10 percent, on track to meet their 20 percent full-year’s growth

tar-get In contrast, Hyundai’s China sales fell 8 percent although the company has a 3 percent full-year

growth target Hyundai recently posted its lowest monthly China sales figure in four years, selling

Source: © ronfromyork

Shutterstock

282 Strategic ManageMent

Endnotes

1 R T Lenz, “Managing the Evolution of the Strategic

Planning Process,” Business Horizons 30, no 1 (January–

February 1987): 37

2 Robert Grant, “The Resource-Based Theory of

Competitive Advantage: Implications for Strategy

Formulation,” California Management Review (Spring

1991): 114

3 Heinz Weihrich, “The TOWS Matrix: A Tool for

Situational Analysis,” Long Range Planning 15, no

2 (April 1982): 61 Note: Although Dr Weihrich first

modified SWOT analysis to form the TOWS matrix, the

acronym SWOT is much more widely used than TOWS

in practice See also Marilyn Helms and Judy Nixon,

“Exploring SWOT Analysis—Where Are We Now?”

Journal of Strategy and Management 3, no 3 (2010):

215–251

4 Greg Dess, G T Lumpkin, and Alan Eisner, Strategic

Management: Text and Cases (New York: McGraw-Hill/

Irwin, 2006), 72

5 Adapted from H Rowe, R Mason, and K Dickel,

Strategic Management and Business Policy: A Methodological Approach (Reading, MA: Addison-

Wesley, 1982), 155–156

6 Fred David, “The Strategic Planning Matrix—A

Quantitative Approach,” Long Range Planning 19, no 5

(October 1986): 102; Andre Gib and Robert Margulies,

“Making Competitive Intelligence Relevant to the User,”

Planning Review 19, no 3 (May–June 1991): 21.

Current Readings

Barton, Dominic, and Mark Wiseman “Where Boards Fall

Short.” Harvard Business Review (January–February

2015)

Beckman, Christine M., et al “Relational Pluralism in De

Novo Organizations: Boards of Directors as Bridges or

Barriers to Diverse Alliance Portfolios?” Academy of

Management Journal 57, no 2 (2014): 460–483.

Donaldson, Lex, Steven D Charlier, and Jane X J Qiu

“Corrigendum to Organizational Portfolio Analysis:

Focusing on Risk Inside the Corporation.” Long Range

Planning 45, no 4 (2012): 235–257.

Hacklin, F., B Battistini, and G Von Krogh “Strategic

Choices in Converging Industries.” MIT Sloan

Management Review 55, no 1 (2013): 65–73.

Joseph, John, William Ocasio, and Mary-Hunter McDonnell

“The Structural Elaboration of Board Independence:

Executive Power, Institutional Logics, and the Adoption

of CEO-Only Board Structures in U.S Corporate

Governance.” Academy of Management Journal 57

(December 2014): 1834–1858

Misangyi, Vilmos F., and Abhijith G Acharya “Substitutes

or Complements? A Configurational Examination

of Corporate Governance Mechanisms.” Academy of

Management Journal 57 (December 2014): 1681–1705.

Reuer, J J., E Klijn, and C S Lioukas.“Board Involvement

in International Joint Ventures.” Strategic Management

Journal, 35, no 11 (November 2014): 1626–1644.

Tihanyi, Laszio, Scott Graffin, and Gerard George

“Rethinking Governance in Management Research.”

Academy of Management Journal 57 (December 2014):

1535–1543

Zhu, David H., and James D Westphal “How Directors’ Prior Experience with Other Demographically Similar CEOs Affects Their Appointments onto Corporate Boards and

the Consequences for CEO Compensation.” Academy of

Management Journal 57, no 3 (2014): 791–813.

54,160 cars in July, 2015, down 32 percent from a year ago Hyundai Motor stock price dropped 4.1 percent in Seoul in one day due to weak China data and strong Korean won Currency movements of the won versus the Japanese yen and the Chinese yuan heavily impact automobile sales

 CHAPTER8 • STRATEgygEnERATionAnd SElECTion 283

7 Meredith E David, Forest R David, and Fred R David,

“The QSPM: A New Marketing Tool,” Presented at

the International Academy of Business and Public

Administration Disciplines (IABPAD) Meeting in Dallas,

Texas, April 2015

8 Y Allarie and M Firsirotu, “How to Implement Radical

Strategies in Large Organizations,” Sloan Management

Review 26, no 3 (Spring 1985): 19 Another excellent

article is P Shrivastava, “Integrating Strategy Formulation

with Organizational Culture,” Journal of Business

Stratgegy 5, no 3 (Winter 1985): 103–111.

9 James Brian Quinn, Strategies for Changes: Logical

Incrementalism (Homewood, IL: Irwin, 1980), 128–145

These political tactics are listed in A Thompson and A

Strickland, Strategic Management: Concepts and Cases

(Plano, TX: Business Publications, 1984), 261

10 William Guth and Ian Macmillan, “Strategy Implementation versus Middle Management Self-

Interest,” Strategic Management Journal 7, no 4 (July–

August 1986): 321

11 Louis Lavelle, “The Best and Worst Boards,”

BusinessWeek, October 7, 2002, 104–110.

12 Joann Lublin, “Boards’ Longtimers Face Pressure to

Move On,” Wall Street Journal, December 24, 2014, B6.

13 Rachel Feintzeig, “Changes Ahead for Women on

Boards,” Wall Street Journal, January 13, 2015, B1.

9

The following exercises are found at the end of this chapter:

exerCiSe 9A Prepare an EPS/EBIT Analysis for Royal Dutch Shell Plc

exerCiSe 9b Develop a Product-Positioning Map for Nestlé S.A.

exerCiSe 9C Perform an EPS/EBIT Analysis for Nestlé S.A.

exerCiSe 9d Prepare Projected Financial Statements for Nestlé S.A.

exerCiSe 9e Determine the Cash Value of Nestlé S.A.

exerCiSe 9F Develop a Product-Positioning Map for Your College

exerCiSe 9g Do Banks Require Projected Financial Statements?

leArning obJeCtiveS

After studying this chapter, you should be able to do the following:

9-1 Identify and describe strategic marketing issues vital for strategy implementation.

9-2 Explain why social media marketing is an important strategy-implementation tool.

9-3 Explain why market segmentation is an important strategy-implementation tool.

9-4 Explain how to use product positioning (perceptual mapping) as a strategy-

implementation tool

9-5 Identify and describe strategic finance/accounting issues vital for strategy

implementation

9-6 Perform EPS/EBIT analysis to evaluate the attractiveness of debt versus stock as a

source of capital to implement strategies

9-7 Develop projected financial statements to reveal the impact of strategy

recommendations

9-8 Determine the cash value of any business using four corporate evaluation methods.

9-9 Discuss IPOs, keeping cash offshore, and issuing corporate bonds as strategic

decisions that face many firms

9-10 Discuss the nature and role of research and development (R&D) in strategy

implementation

9-11 Explain how management information systems (MISs) impact

strategy-implementa-tion efforts

Strategy Implementation