Current Readings
Arkadiy, V. Sakhartov. “Economies of Scope, Resource Relatedness, and the Dynamics of Corporate
Diversification.” Strategic Management Journal 38, no. 11 (November 2017): 2168–2188.
Greve, Henrich R., and Cyndi Man Zhang. “Institutional Logics and Power Sources: Merger and Acquisition Decisions.” Academy of Management Journal 60, no. 2 (April 2017): 671–694.
Huang, Zhi, Hong (Susan) Zhu, and Daniel J. Brass. “Cross- Border Acquisitions and the Asymmetric Effect of Power Distance Value Difference on Long-Term Post-Acquisition Performance.” Strategic Management Journal 38, no. 4 (April 2017): 972–991.
Jap, Sandy, A. Noel Gould, and Annie H. Liu. “Managing Mergers: Why People First Can Improve Brand and IT Consolidations.” Business Horizons 60, no. 1 (January 2017): 123–134.
Jiang, Han, Jun Xia, Albert Cannella, and Ting Xiao. “Do Ongoing Networks Block Out New Friends? Reconciling the Embeddedness Constraint Dilemma on New Alliance Partner Addition.” Strategic Management Journal 39, Issue 1 (January 2018): 217–241.
Kistruck, Geoffrey M., Robert B. Lount Jr., Brett R Smith, Brian J. Bergman Jr., and Todd W. Moss. “Cooperation vs.
Competition: Alternative Goal Structures for Motivating Groups in a Resource Scarce Environment.” Academy of Management Journal 59, no. 4 (August 2016):
1174–1198.
Kuusela, Pasi, Thomas Keil, and Markku Maula. “Driven by Aspirations, But in What Direction? Performance Shortfalls, Slack Resources, and Resource-Consuming vs. Resource-Freeing Organizational Change.” Strategic Management Journal 38, no. 5 (May 2017): 1101–1120.
Li, Jing, Jun Xia, and Zhouyu Lin. “Cross-Border
Acquisitions by State-Owned Firms: How do Legitimacy Concerns Affect the Completion and Duration of Their Acquisitions?” Strategic Management Journal 38, no. 9 (September 2017): 1915–1934.
Lieberman, Marvine B., Roberto Garcia-Castro, and Natarajan Balasubramanian. “Measuring Value Creation and Appropriation in Firms: The VCA Model.” Strategic Management Journal 38, no. 6 (June 2017): 1193–1211.
Lyons, Elizabeth, and Laurina Zhang. “Who Does (Not) Benefit from Entrepreneurship Programs?” Strategic Management Journal 39, no. 1 (January 2018): 85–112.
Mackey, Tyson B., Jay B. Barney, and Jeffrey P. Dotson.
“Corporate Diversification and the Value of Individual Firms: A Bayesian Approach.” Strategic Management Journal 38, no. 2 (February 2017): 322–341.
Marks, Mitchell Lee, Philip Mirvis, and Ron Ashkenas.
“Surviving M&A.” Harvard Business Review 95, Issue 2 (March–April 2017): 145–149.
McCann, Brian T., and Mona Bahl. “The Influence of Competition from Informal Firms on New Product Development.” Strategic Management Journal 38, no. 7 (July 2017): 1518–1535.
Mellewigt, Thomas, Adeline Thomas, Ingo Weller, and Edward Zajac. “Alliance or Acquisition? A Mechanisms-Based, Policy-Capturing Analysis.” Strategic Management Journal 38, no. 12 (December 2017): 235–2369.
Moeen, Mahka. “Entry into Nascent Industries: Disentangling a Firm’s Capability Portfolio at the Time of Investment Versus Market Entry.” Strategic Management Journal 38, no. 10 (October 2017): 1986–2004.
Panico, Claudio. “Strategic Interaction in Alliances.” Strategic Management Journal 38, Issue 8 (August 2017):
1646–1667.
Rabier, Maryiane. “Acquisition Motives and the Distribution of Acquisition Performance.” Strategic Management Journal 38, no. 13 (December 2017): 2666–2681.
Vidal, Elena, and Will Mitchell. “Virtuous or Vicious Cycles?
The Role of Divestitures as a Complementary Penrose Effect within Resource-Based Theory.” Strategic Management Journal 39, no. 1 (January 2018): 131–154.
Wassmer, Ulrich, Sali Li, and Anoop Madhok. “Resource Ambidexterity Through Alliance Portfolios and Firm Performance.” Strategic Management Journal 38, no. 2 (February 2017): 384–394.
Zhou, Yue M., and Xiang Wan. “Product Variety, Sourcing Complexity, and the Bottleneck of Coordination.” Strategic Management Journal 38, no. 8 (August 2017): 1569–1587.
Zhou, Yue Maggie, and Xiang Wan. “Product Variety and Vertical Integration.” Strategic Management Journal 38, no. 5 (May 2017): 1134–1150.
Endnotes
1. John Byrne, “Strategic Planning—It’s Back,”
BusinessWeek (August 26, 1996): 46.
2. Steven C. Brandt, Strategic Planning in Emerging Companies (Reading, MA: Addison-Wesley, 1981).
Reprinted with permission of the publisher.
3. F. Hansen and M. Smith, “Crisis in Corporate America:
The Role of Strategy,” Business Horizons (January–
February 2003): 9.
4. Based on F. R. David, “How Do We Choose among Alternative Growth Strategies?” Managerial Planning 33, no. 4 (January–February 1985): 14–17, 22.
5. Ibid.
6. Kenneth Davidson, “Do Megamergers Make Sense?”
Journal of Business Strategy 7, no. 3 (Winter 1987): 45.
7. David, “How Do We Choose.”
8. Ibid.
9. Ibid.
10. Ibid.
11. Arthur Thompson Jr., A. J. Strickland III, and John Gamble, Crafting and Executing Strategy: Text and Readings (New York: McGraw-Hill/Irwin, 2005), 241.
12. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), 53–57, 318–319.
13. David, “How Do We Choose.”
14. Ibid.
15. Ibid.
16. Ibid.
17. Ibid
18. Porter, Competitive Advantage, 34-44.
19. Porter, Competitive Advantage, 160–162.
20. Porter, Competitive Advantage, 160–162.
21. https://www.audible.com/pd/Business/
Summary-of-Blue-Ocean-Strategy-by-W-Chan- Kim-and-Renee-A-Mauborgne-Audiobook/
B01L06M29Y?gclid=Cj0KCQiA_5_QBRC9ARI sADVww15mWwiWvtZ5ci2wnBjmZlXczGUkKktkDj WHt9wQ7pzwDYIi_R3UxSkaAt7QEALw_wcB&
pcrid=158258695641&cvo_pid=5075902449
&mkwid=DSATitle_dc&pmt=b&cvosrc=ppc+dynamic+
search.google.97175169&cvo_crid=158258695641&
pkw=&source_code=GO1GB907OSH060513 22. Kathryn Rudie Harrigan, “Joint Ventures: Linking for a
Leap Forward,” Planning Review 14, no. 4 (July–August 1986): 10.
23. Matthew Schifrin, “Partner or Perish,” Forbes (May 21, 2001): 32.
24. David, “How Do We Choose.”
25. Gary Hamel, Yves Doz, and C. K. Prahalad, “Collaborate with Your Competitors—and Win,” Harvard Business Review 67, no. 1 (January–February 1989): 133.
26. Kelsey Gee, “Do Free Business Courses Pay Off?” Wall Street Journal, September 7, 2017, B6.
190
6
Strategy Formulation
Feedback Loop
Strategy Implementation
Strategy Evaluation Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility
Chapter 11: Global and International Issues
Strategy Evaluation
and Governance
Chapter 9 Implementing
Strategies:
Finance and Accounting
Issues Chapter 8 Implementing
Strategies:
Management and Marketing
Issues Chapter 7 Business
Vision and Mission Chapter 2
Strategies in Action Chapter 5
Strategy Analysis and
Choice Chapter 6
The Internal Assessment
Chapter 4 The External
Assessment Chapter 3
FIGURE 6- 1
The Comprehensive, Integrative Strategic-Management Model Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for
National Construction Contractor of Indonesia,” Journal of Mathematics and Technology , no. 4, (October 2010): 20.
191
LEARNING OBJECTIVES
After studying this chapter, you should be able to do the following:
6- 1. Describe the strategy analysis and choice process.
6- 2. Diagram and explain the three-stage strategy-formulation analytical framework.
6- 3. Construct and apply the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix.
6- 4. Construct and apply the Strategic Position and Action Evaluation (SPACE) Matrix.
6- 5. Construct and apply the Boston Consulting Group (BCG) Matrix.
6- 6. Construct and apply the Internal-External (IE) Matrix.
6- 7. Construct and apply the Grand Strategy Matrix.
6- 8. Construct and apply the Quantitative Strategic Planning Matrix (QSPM).
6- 9. Explain how to estimate costs associated with recommendations.
6- 10. Discuss the role of organizational culture in strategic analysis and choice.
6- 11. Identify and discuss important political considerations in strategy analysis and choice.
ASSURANCE-OF-LEARNING EXERCISES
The following exercises are found at the end of this chapter:
SET 1: Strategic Planning for Coca-Cola
EXERCISE 6A: Perform a SWOT Analysis for Coca-Cola
EXERCISE 6B: Develop a SPACE Matrix for Coca-Cola
EXERCISE 6C: Develop a BCG Matrix for Coca-Cola
EXERCISE 6D: Develop a QSPM for Coca-Cola
SET 2: Strategic Planning for My University
EXERCISE 6E: Develop a BCG Matrix for My University
SET 3: Strategic Planning to Enhance My Employability
EXERCISE 6F: Perform QSPM Analysis on Myself
EXERCISE 6G: A Template Competency Test
SET 4: Individual versus Group Strategic Planning
EXERCISE 6H: How Severe Are Various Subjective Threats in Strategic Planning?
Strategy Analysis and Choice
MyLab Management
Improve Your Grade!
If your instructor is using MyLab Management, visit www.pearson.com/mylab/management for videos, simulations, and writing exercises.
S
trategy analysis and choice largely involve making subjective decisions based on objective information. Prior chapters in this text focused on obtaining the objective information needed in this chapter to formulate strategies and decide upon particular strategies to implement. This chapter introduces important concepts that enable strategists to generate fea- sible alternatives, evaluate those alternatives, and choose a specific course of action. Behavioral aspects of strategy formulation are also covered in this chapter, including politics, culture, ethics, and social responsibility considerations. Modern tools for formulating strategies are described. Material in this chapter, as well as in prior chapters, largely follows the flow of the Excel strategic-planning template at www.strategyclub.com that is available for students to use freely, if desired.The CEO of Hobby Lobby, David Green, is an exemplary strategist performing strategic planning “right by the book.”
Strategy Analysis and Choice
As indicated by Figure 6-1 with white shading, this chapter focuses on generating and evaluat- ing 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 mis- sion 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 strategies. This systematic approach is an effective 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 underlying EFE, CPM, and IFE matrices produced really low total weighted scores, alternative strategies will likely represent incremental steps that move the firm from its present position to a desired future position. Alternative strategies should 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.
LO 6.1
EXEMPLARY STRATEGIST SHOWCASED
David Green, CEO of Hobby Lobby
The largest arts-and-crafts home décor company in the world, Hobby Lobby is a privately held, U.S. firm with $4.3 billion in annual sales from 750 stores. CEO David Green heads up Hobby Lobby and says
“the secret to being a great manager is to manage by the book.” The book Mr. Green refers to is the Bible, as evidenced by his company being closed on Sundays to allow employees to be with their families and attend a house of worship. All Hobby Lobby employees earn more than twice the federal minimum wage; the company offers generous employee benefits; and all stores close at 8 pm. Mr. Green says “The Bible has everything one needs to know about good lead- ership.” Hobby Lobby employees are trained to always be positive;
there is very little employee turnover, even though turnover among other retail company’s hourly employees is about 65 percent. Hobby Lobby has zero long-term debt since Mr. Green says: “The Bible warns against becoming a slave to debt.” About one-half of Hobby Lobby’s pretax earnings are donated to charities as Mr. Green reveals in his new book “Giving It All Away ... And Getting It Back Again.”
Mr. Green’s leadership guides include to: “always put integrity at the core of your business; never compromise principles to make more money; and make sure you never stop thinking about the customer’s perspective.” CEO Green is an American icon and an “exemplary strategist.”
Source: Based on Scott Smith, “Why Retail’s David Green Manages By ‘The Book,’ Investor’s Business Daily (May 22, 2017): A4.
ArchiVIZ/Shutterstock
The Process of Generating and Selecting Strategies
Strategists never consider all feasible strategies that could benefit the firm because there is 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 developed, ex- amined, prioritized, and selected. The advantages, disadvantages, trade-offs, costs, and benefits of these strategies should be determined.
Identifying and evaluating strategies should involve many of the managers and employees who previously assembled the organizational vision and mission statements, performed the external audit, and conducted the internal audit. Representatives from each department 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. At a bare minimum, SWOT analysis should be performed by participants as described in this chapter. Additionally, BCG, IE, SPACE, GRAND, and QSPM analyses are always im- mensely helpful in strategic planning.
The Strategy-Formulation Analytical Framework
Important strategy-formulation techniques can be integrated into a three-stage decision-making framework, as shown in Figure 6-2. The tools presented in this framework are applicable to all sizes and types of organizations and can help strategists identify, evaluate, and select strategies.
The tools enable firms to break down complex data and ultimately establish an effective strategic plan. The tools shown anchor the analytical strategic-planning process advocated by the authors and this text.
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 analytical tools, are always responsible and accountable for strategic decisions. Lenz emphasized that the shift from a words-oriented to a numbers- oriented planning process can give rise to a false sense of certainty; it can reduce dialogue,
LO 6.2
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 6-2
The Strategy-Formulation Analytical Framework
discussion, and argument as a means for exploring understandings, testing assumptions, and fostering organizational learning.1 Strategists, therefore, must be wary of this possibility and use analytical tools wisely to facilitate, rather than to diminish, communication. Without objective information and analysis, however, personal biases, politics, prejudices, emotions, personalities, and halo error (the tendency to put too much weight on a single factor) often play too dominant of a role in the strategy-formulation process, undermining effectiveness. Thus, an analytical ap- proach is essential for achieving maximum effectiveness in strategic planning.
Stage 1: The Input Stage
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. Procedures for developing an EFE, CPM, and IFE Matrix were presented in Chapters 3 and 4, respectively. Information derived from those analytical tools 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 importance of external and internal factors allows strategists to more effectively generate, priori- tize, 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 larger than a rating of 2, so small differences matter.
Stage 2: The Matching Stage
Stage 2, called the matching stage, focuses on generating feasible alternative strategies by align- ing 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.
Strategy is sometimes defined as the match an organization makes between its internal resources and skills and the external opportunities and risks facing the firm.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 essential for effectively generating feasible alternative strategies. In most situations, external and internal relationships are complex, and matching requires multiple alignments for each strategy generated. Successful matching of key external and internal factors depends on those underlying key factors being actionable, quantitative, comparative, and divi- sional (AQCD) to the extent possible. (Recall that the basic concept of matching was introduced in Chapter 1).
Stage 3: The Decision Stage
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 alterna- tive strategies and thus provides an objective basis for selecting specific strategies. The QSPM is a more robust way to determine the relative attractiveness of strategies than the summed ranking method described previously.
Alternative strategies proposed by SWOT, BCG, IE, SPACE, and GRAND analyses 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 stated in specific terms and understood, the strategies should be individually rated in order of attractiveness by each participant, with 1 = should not be implemented, 2 = possibly should be implemented, 3 = probably should be implemented, and 4 = definitely should be implemented. Then, collect the participants’ rating sheets and sum the ratings given for each strategy to end up with a useful
ranking of the strategies. Strategies with the highest sums are deemed the most attractive, so this process results in a prioritized list of best strategies that reflects the collective wisdom of the group. Rather than, or in conjunction with, this ranking method, the QSPM, described later in this chapter, offers a more robust procedure to determine the relative attractiveness of alternative strategies.
The SWOT Matrix
Recall that SWOT analysis was introduced in Chapter 1 (p. 42). There are four sets of strate- gies developed in SWOT analysis: SO, WO, ST, and WT. 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, or WT strategies to more effectively position themselves into situations in which they can apply SO strategies.
WO strategies aim at improving internal weaknesses by taking advantage of external op- portunities. Sometimes key external opportunities exist, but a firm has internal weaknesses that prevent it from exploiting those opportunities. For example, for an auto parts manufacturer, the rising demand for electric cars (external opportunity), coupled with the firm having limited bat- teries to offer (internal weakness), suggests that the firm should consider developing and pro- ducing a new line of batteries.
ST strategies use a firm’s strengths to avoid or reduce the impact of external threats. An example ST strategy could be when a firm uses its excellent legal department (a strength) to col- lect millions of dollars in damages from rival firms that infringe on its patents. Rival firms that copy ideas, innovations, and patented products are a threat to many industries. When an organi- zation faces major threats, it will seek to avoid them while concentrating on opportunities. For example, when an organization has both the capital and human resources needed to distribute its own products (internal strengths) and distributors are unreliable, costly, or incapable of meeting the firm’s needs (external threats), forward integration (gaining control of distributors) can be an attractive ST strategy.
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 to liquidate. For example, some restaurant chains do business with suppliers that treat livestock inhumanely (internal weakness) and face grow- ing customer awareness of the need to preserve wildlife and treat animals with respect (external threat)—resulting in a WT strategy to cease using certain suppliers. As another example, when a firm has excess production capacity (internal weakness) and its basic industry is experiencing declining annual sales and profits (external threat), related diversification can be an effective WT strategy.
Whatever strategies are ultimately chosen for implementation, ethics issues are a consider- ation. For example, as indicated in Ethics Capsule 6 on the next page, consumers are more sensi- tive to how animals are treated than ever before.
An example SWOT Matrix is illustrated in Figure 6-3, on the next page. As shown, there are nine cells: 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. (Author comment: The strategic-planning template at www.strategyclub.com simply leaves a space to type in SO, WO, ST, and WT strategies.
The process of constructing a SWOT Matrix can be summarized in eight steps, as follows:
1. List the firm’s key internal strengths.
2. List the firm’s key internal weaknesses.
3. List the firm’s key external opportunities.
4. List the firm’s key external threats.
5. Match internal strengths with external opportunities to develop specific SO strategies.
6. Match internal weaknesses with external opportunities to develop specific WO strategies.
7. Match internal strengths with external threats to develop specific ST strategies.
8. Match internal weaknesses with external threats to develop specific WT strategies.
LO 6.3