CHAPTER FIVE

STRATEGIC ANALYSIS AND CHOICE

Habtamu Abebaw (PhD)

LONG TERM OBJECTIVES

• LTOs are the results expected from pursuing certain

strategies.
• Strategies represent the actions to be taken to
accomplish long-term objectives.
• The time frame for objectives and strategies should
be consistent, usually from two to five years.
The Nature of Long-Term Objectives
• Objectives should be quantitative, measurable,
realistic, understandable, challenging, hierarchical,
obtainable, and congruent among organizational
units.
 Cont…

• Each objective should also be associated with a time

line.
• Objectives are commonly stated in terms such as
growth in assets, growth in sales, profitability, market
share, degree and nature of diversification, degree
and nature of vertical integration, earnings per share,
and social responsibility.
• Long-term objectives are needed at the corporate,
divisional, and functional levels in an organization.
• They are an important measure of managerial
performance
Importance of long-term objectives

• help stakeholders understand their role in an

organization's future.
• provide a basis for consistent decision making
• set forth organizational priorities and stimulate
exertion and accomplishment.
• serve as standards by which evaluation can be made.
• serve as the basis for designing jobs and organizing
activities to be performed in an organization
• provide direction and allow for organizational
synergy
Types of Strategies

Alternative strategies can be categorized into thirteen actions:—

1. forward integration,
2. backward integration,
3. horizontal integration,
4. market penetration,
5. market development,
6. product development,
7. concentric diversification,
8. conglomerate diversification,
9. horizontal diversification,
10. retrenchment,
11. divestiture,
12. liquidation , and
13. joint venture,
1. INTEGRATION STRATEGIES

It includes:
a. Forward integration,
b. backward integration, and
c. horizontal integration
• are sometimes collectively referred to as vertical
integration strategies.
• Vertical integration strategies allow a firm to gain
control over distributors, suppliers, and/or
competitors.
a) Forward integration strategy

• It refers to the transactions between the customers and

firm.
• the function for the particular supply which the firm is
being intended to involve itself is called backward
integration.
• When the firm looks that other firm which may be taken
over within the area of its own activity is called horizontal
integration.
• Forward integration strategy involves gaining ownership
or increased control over distributors or retailers.
 Cont…

Guidelines for using forward integration strategies:

– Present distributors are expensive, unreliable, or
incapable of meeting firm’s needs
– Availability of quality distributors is limited
– When firm competes in an industry that is expected to
grow markedly
– Organization has both capital and human resources
needed to manage new business of distribution
– Advantages of stable production are high [stable
supply is needed]
– Present distributors have high profit margins [do it
yourself]
b) Backward Integration
• Seeking ownership or increased control of a firm’s
suppliers.
Guidelines for Backward Integration: Appropriate:
• When present suppliers are expensive, unreliable, or
incapable of meeting needs.
• Advantages of stable prices are important
• When the number of suppliers is small and the number
of competitors is large .
• When an organization competes in an industry that is
growing rapidly (ability to diversify may be reduced)
• When an organization has both capital and human
resources to manage supplying its own raw materials
c) Horizontal Integration

• Seeking ownership or increased control over

competitors.
• Mergers, acquisitions, and takeovers among
competitors allow for increased economies of scale
• Looking for new opportunities either by the hostile
take over the other firm.
• One organization gains control of other which
functioning within the same industry.
• It should be done that every firm wants to increase its
area of influence, market share and business.
 Cont…
Guidelines for Horizontal Integration:
• When firms can gain anticompetitive (monopolistic)
characteristics without being challenged by federal
government
• When a firm competes in growing industry
• When increased economies of scale provide major
competitive advantages
• When competitors are faltering due to lack of
managerial expertise or particular resources that an
organization possesses
NB: can not be appropriate if competitors are doing
poorly because overall industry sales are declining.
2. INTENSIVE STRATEGIES

• Include market penetration, market development,

and product development strategies
• they require intensive efforts to improve a firm's
competitive position with existing products.
a) Market Penetration
• Seeks to increase market share for present products
in present markets through greater marketing
efforts.
• Through personal selling, advertising, sales
promotion items, or publicity efforts.
Guidelines for Market Penetration

• Current markets not saturated

• Usage rate of present customers can be increased
significantly
• Market shares of competitors declining while total
industry sales increasing
• Increased economies of scale provide major
competitive advantage.
 Cont…
• Two aspects of market penetration:
❖Rapid market penetration: based on two
assumptions:
✓to lower the price and promotional activities
can be increased.
❖Slow market penetration: also based on two
assumptions:
✓to lower the price but promotional activities
are not changed.
 Cont…

b) Market Development
• Introducing present products or services into new
geographic areas.
• The climate for international market development is
becoming more favorable.
• In many industries, such as airlines, it is going to be
hard to maintain a competitive edge by staying
close to home.
 Cont…

Guidelines for Market Development

• New channels of distribution that are reliable,
inexpensive, and good quality
• Firm is very successful at what it does
• Untapped or unsaturated markets
• Capital and human resources necessary to manage
expanded operations
• Excess production capacity
• Basic industry rapidly becoming global
c) Product Development
• a strategy that seeks increased sales by improving or
modifying present products or services.
• It usually entails large research and development
expenditures.
Guidelines for Product Development
• Products in maturity stage of life cycle
• Competes by rapid technological developments
• Major competitors offer better-quality products at
comparable prices
• Compete in high-growth industry
• Strong research and development capabilities
3. DIVERSIFICATION STRATEGIES

• There are three general types of diversification

strategies:
– concentric, horizontal, and conglomerate.
• are becoming less popular as organizations are
finding it more difficult to manage diverse business
activities.
• In the 1960s and 1970s, the trend was to diversify
so as not to be dependent on any single industry, but
the 1980s saw a general reversal of that thinking.
• Diversification is now on the retreat.
a) Concentric Diversification

• Adding new, but related, products or services.

– An example of this strategy is AT&T recently
spending $120 billion acquiring cable television
companies in order to wire America with fast
Internet service over cable rather than telephone
lines.
Guidelines for Concentric Diversification
• Competes in no- or slow-growth industry
• Adding new & related products increases sales of
current products
b) Conglomerate Diversification

• Adding new, unrelated products or services.

• Sell part of the firm on an expectation of profits from
breaking up acquired firms and selling divisions
piecemeal.
Guidelines for Conglomerate Diversification
• Declining annual sales and profits
• Capital and managerial talent to compete
successfully in a new industry
• Financial synergy between the acquired and
acquiring firms
• Exiting markets for present products are saturated
c) Horizontal Diversification
• Adding new, unrelated products or services for present
customers
• This strategy is not as risky as conglomerate diversification
because a firm already should be familiar with its present
customers.
Guidelines for Horizontal Diversification
• Revenues would increase by adding new unrelated products
• Highly competitive and/or no-growth industry with low
margins and returns
• Present distribution channels can be used to market new
products to current customers
• New products have counter cyclical sales patterns compared
to existing products
4. DEFENSIVE STRATEGIES
• Include the retrenchment, divestiture, or liquidation
strategies
a) Retrenchment
• occurs when an organization regroups through cost
and asset reduction to reverse declining sales and
profits.
• Sometimes called a turnaround or reorganization
strategy
• is designed to fortify an organization's basic
distinctive competence.
 Cont…

Guidelines for Retrenchment

• Firm has failed to meet its objectives but has
distinctive competencies
• Firm is one of the weaker competitors
• Inefficiency, low profitability, poor employee morale
• When an organization’s strategic managers have failed
• Very quick growth to large organization where a major
internal reorganization is needed
b) Divestiture

• Selling a division or part of an organization.

• Is used to raise capital for further strategic
acquisitions or investments.
• Can be part of an overall retrenchment strategy to
clear businesses that are:
– Unprofitable,
– require too much capital, or
– do not fit well with the firm's other activities.
 Cont…

Guidelines for Divestiture

• When firm has pursued retrenchment but failed to
attain needed improvements
• When a division needs more resources than the firm
can provide
• When a division is responsible for the firm’s overall
poor performance
• When a division is a misfit with the organization
• When a large amount of cash is needed and cannot
be obtained from other sources.
c) Liquidation
• Selling all of a company’s assets, in parts, for their
tangible worth.
• is recognition of defeat and, consequently, can be an
emotionally difficult strategy.
Guidelines for Liquidation
• When both retrenchment and divestiture have been
pursued unsuccessfully
• If the only alternative is bankruptcy, liquidation is an
orderly alternative
• When stockholders can minimize their losses by
selling the firm’s assets
d) Joint Venture

• Two or more companies form a temporary JOINT for

purpose of capitalizing on some opportunity.
• the two or more sponsoring firms form a separate
organization and have shared equity ownership in
the new entity.
• Other types of cooperative arrangements include:
– research and development partnerships,
– cross-distribution agreements,
– cross-licensing agreements,
– cross-manufacturing agreements, and
– joint-bidding consortia.
 Cont…
Guidelines for Joint Ventures
• Combination of privately held and publicly held can be
synergistically combined
• Domestic firms joint venture with foreign firm, can
obtain local management to reduce certain risks
• Distinctive competencies of two or more firms are
complementary
• Overwhelming resources and risks where project is
potentially very profitable
• Two or more smaller firms have trouble competing with
larger firm
• A need exists to introduce a new technology quickly
STRATEGY-FORMULATION FRAMEWORK
• Important strategy-formulation techniques can be integrated
into a three-stage decision-making framework, as shown
below.
• Stage-1 (The input stage)Formulation Framework
1. External Factor Evaluation (EFE)
2. Competitive Profile Matrix (CPM)
3. Internal Factor Evaluation Matrix (IFE)
• Stage-2 (Matching stage)
1. TWOS Matrix (Threats-Opportunities-Weaknesses-
Strengths)
2. BCG Matrix (Boston Consulting Group)
3. IE Matrix (Internal and external matrix)
• Stage-3 (Decision stage)
1. Quantitative Strategic Planning Matrix (QSPM)
 Cont…
• Stage 1: Summarizes the basic input information needed to
formulate strategies.
• Stage 2: Focuses upon generating feasible alternative
strategies by aligning key external and internal factors.
– Stage 2 techniques include the TOWS Matrix, the Strategic
Position and Action Evaluation (SPACE) Matrix, the BCG
Matrix, the IE Matrix, and the Grand Strategy Matrix.
• Stage 3: involves a single technique, the Quantitative Strategic
Planning Matrix (QSPM).
– A QSPM uses input information from Stage 1 to objectively
evaluate feasible alternatives identified in Stage 2.
– It reveals the relative attractiveness of strategies and, thus,
provides an objective basis for selecting specific strategies.
1. The Threats-Opportunities-Weaknesses-Strengths
(TOWS) Matrix
• A TWOS (SWOT) Analysis is a strategic planning tool
used to evaluate the Threats, Opportunities and
Strengths, Weaknesses, in a business venture requiring
a decision.
• This Matrix is an important matching tool that helps
managers develop four types of strategies:
A. SO Strategies (strength-opportunities),
B. WO Strategies (weakness- opportunities),
C. ST Strategies (strength-threats), and
D. WT Strategies (weakness-threats).
 Cont…

TOWS are defined precisely as follows:

• Strengths are attributes of the organization that are
helpful to the achievement of the objective.
• Weaknesses are attributes of the organization that
are harmful to the achievement of the objective.
• Opportunities are external conditions that are
helpful to the achievement of the objective.
• Threats are external conditions that are harmful to
the achievement of the objective.
 Cont…
❑SO Strategies: Every firm desires to obtain benefit
form its resources.
– Such benefit can only be obtained if it utilize its
strength to take external opportunity.
– For example: The strong financial position
provides an opportunity to expand the business.
❑WO Strategies: aim at improving internal
weaknesses by taking advantage of external
opportunities.
– For example: the firm is in the critical financial
problems that is weakness and firm is availing
merger with Multinational Corporation.
 Cont…

❑ ST Strategies: use a firm’s strengths to avoid or reduce

the impact of external threats.
– This strategy is adopted by various colleges by opening new
branches in order to overcome competitive threat.
❑ WT Strategies: Are defensive tactics used to overcome
firm’s weakness and reduce threats.
• This type of strategy helpful when weaknesses are
removed to overcome external threats.
• It is difficult to target WT strategy.
– In fact, such a firm may have to fight for its survival,
merge, divesture, retrench, declare bankruptcy, or
choose liquidation.
2. Boston Consulting Group (BCG) Matrix
• The Boston Consulting Group (BCG) is a
management consulting firm founded by Harvard
Business School in 1963.
• The growth-share matrix is a chart created by group
in 1970 to help corporation analyze their business
units, and decide where to allocate cash.
• a separate strategy often must be developed when a
firm’s divisions compete in different industries.
• Autonomous divisions of an organization make up
what is called a business portfolio.
 Cont…

• The BCG Matrix graphically portrays differences

among divisions in terms of relative market share
position and industry growth rate.
• BSG puts a category of four different types of
businesses:
• Divisions located in Quadrant I of the BCG Matrix are
called “Question Marks,” those located in Quadrant II
are called “Stars,” those located in Quadrant III are
called “Cash Cows,” and those divisions located in
Quadrant IV are called “Dogs.”
BCG Growth-Share Matrix
A. Cash cows

– Units with high market share in a slow-growing

industry.
– These units typically generate cash in excess of the
amount of cash needed to maintain the business.
– They are regarded as staid and boring, in a
"mature" market, and every corporation would be
thrilled to own as many as possible.
– They are to be "milked" continuously with as little
investment as possible, since such investment
would be wasted in an industry with low growth.
B. Dogs
– More charitably called pets, units with low market share
in a mature, slow-growing industry.
– These units typically "break even", generating barely
enough cash to maintain the business's market share.
– Though owning a break-even unit provides the social
benefit of providing jobs and possible synergies that
assist other business units, from an accounting point of
view such a unit is worthless, not generating cash for
the company.
– They depress a profitable company's return on assets
ratio, used by many investors to judge how well a
company is being managed.
– Dogs, it is thought, should be sold off.
C. Question Marks

– Units with low market share in a fast-growing

industry.
– Such business units require large amounts of
cash to grow their market share.
– The corporate goal must be to grow the
business to become a star.
– Otherwise, when the industry matures and
growth slows, the unit will fall down into the
dog’s category.
C. Stars
– Units with a high market share in a fast-growing
industry.
– The hope is that stars become the next cash
cows.
– Sustaining the business unit's market leadership
may require extra cash, but this is worthwhile if
that's what it takes for the unit to remain a leader.
– When growth slows, stars become cash cows if
they have been able to maintain their category
leadership
 Cont…
• As a particular industry matures and its growth slows, all
business units become either cash cows or dogs.
• The overall goal of this ranking was to help corporate analysts
decide which of their business units to fund, and how much;
and which units to sell.
• Managers use money generated by the cash cows to fund the
stars and, possibly, the question marks.
• As the BCG stated in 1970: Only a diversified company with a
balanced portfolio can use its strengths to truly capitalize on its
growth opportunities.
• The balanced portfolio has:
– Stars whose high share and high growth assure the future;
– Cash cows that supply funds for that future growth; and
– Question marks to be converted into stars with added fund.
Relative Market share
• One of the main indicators of cash generation is relative market
share, and one which pointed to cash usage is that of market
growth rate.
• This indicates likely cash generation, because the higher the
share the more cash will be generated.
• As a result of 'economies of scale' (a basic assumption of the
Boston Matrix), it is assumed that these earnings will grow
faster the higher the share.
• The exact measure is the brand's share relative to its largest
competitor.
• Thus, if the brand had a share of 20 per cent, and the largest
competitor had the same, the ratio would be 1:1. if 60% then
1:3 (weak position), and if 5% its ratio would be 4:1(strong). If
• this scale is logarithmic, not linear (if in practice).
 Cont…
Limitations
• Viewing every business as a star, cash cow, dog, or
question mark is overly simplistic.
• Many businesses fall right in the middle of the BCG
matrix and thus are not easily classified.
• The BCG matrix does not reflect whether or not
various divisions or their industries are growing over
time.
• Other variables besides relative market share
position and industry growth rate in sales are
overlooked.
3. The Internal-External (IE) Matrix

• It is related to internal (IFE) and external factor

evaluation (EFE).
• It contains nine cells. (positions for divisions)
• It is developed based on two key dimensions
– The IFE total weighted scores on the x-axis
– The EFE total weighted scores on the y-axis
• Divided into three major regions
1. Grow and build
2. Hold and maintain
3. Harvest or divest
Cont…
4. MICHAEL PORTER'S GENERIC STRATEGIES
• According to Porter, strategies allow organizations to
gain competitive advantage from three different bases:
cost leadership, differentiation, and focus.
• Porter calls these bases generic strategies.
– Cost leadership emphasizes producing standardized
products at very low per-unit cost for consumers who
are price-sensitive.
– Differentiation is a strategy aimed at producing
products and services considered unique industry wide
and directed at consumers who are relatively price-
insensitive.
– Focus means producing products and services that
fulfill the needs of small groups of consumers.
 Cont….
• Porter's strategies imply different organizational
arrangements, control procedures, and incentive
systems.
• Larger firms with greater access to resources typically
compete on a cost leadership and/or differentiation
basis, whereas smaller firms often compete on a focus
basis.
• Sharing activities and resources enhances competitive
advantage by lowering costs or raising differentiation.
• Depending upon factors such as type of industry, size
of firm, and nature of competition, various strategies
could yield advantages in cost leadership,
differentiation, and focus.
1. Cost Leadership Strategies;
• This strategy emphasizes on efficiency.
• By producing high volumes of standardized products, the firm
hopes to take advantage of economies of scale.
• The product is a basic economic product produced at a
relatively low cost and made available to a very large customer
base.
• Maintaining this strategy requires:-
– a continuous search for cost reductions
– most extensive distribution possible.
– Promotional strategy shall cover low cost product features.
– a considerable market share advantage
– referential access to raw materials, components, labor, or
some other important input.
2. Differentiation Strategies;
• It involves creating a product that is perceived as
unique.
• The unique features or benefits should provide superior
value for the customer if this strategy is to be
successful.
• Because customers see the product as unrivaled and
unequaled, the price elasticity of demand tends to be
reduced and customers tend to be more brands loyal.
• May require a premium pricing strategy.
• There must be a valid basis for differentiation - and
that existing competitor products are not meeting
those needs and wants.
3. Focus Strategies
• In this strategy the firm concentrates on selected few target
markets. It is also called a niche strategy.
• Helps to better meet the needs of that target market.
• The firm typically looks to gain a competitive advantage through
effectiveness rather than efficiency.
• It is most suitable for relatively small firms but can be used by
any company.
• Firms shall select targets that are less vulnerable to substitutes
– Industry segment of sufficient size
– Good growth potential
– Not crucial to success of major competitors
– Consumers have distinctive preferences
– Rival firms not attempting to specialize in the same target
segment
Niche strategies
• Here the organization focuses its effort on one
particular segment and becomes well known within
the segment.
• Competitive advantage for this niche market can be
obtained by either being a low cost producer or
differentiator.
Criticisms of Generic Strategies
– lack specificity,
– lack flexibility, and
– are limiting.
Balanced scorecard (BSC)
• An improved strategic planning process for focusing on
the most important things
• A framework for breaking strategy into actionable
strategic objectives.
• In other words, BSC is an integrated strategic planning
and management system, not just a measurement
system
Major pillars of BSC
• The balanced scorecard is a comprehensive management
control system that balances traditional financial
measures with operational measures relating to a
company‘s critical success factors
 Cont…
1. Financial performance perspective
– It includes traditional measures such as net income
and return on investment.
2. Customer Perspective
– how customers view the organization, as well as
customer retention and satisfaction.
3. Business process perspective
– focuses on production and operating statistics,
internal operations and core competencies.
4. learning and growth Perspective
– focusing on how well resources and human capital
are being developed.
Cont…
McKinsey 7S Model
• This model was developed in the 1980's by Robert
Waterman, Tom Peters and Julien Philips whilst working for
McKinsey.
• Intellectually all managers and consultants know that much
more goes on in the process of organizing than the charts,
boxes, dotted lines, position descriptions, and matrices can
possibly depict.
• Diagnosing and solving organizational problems means
looking not merely to structural reorganization but to a
framework that includes structure and related factors.
• The 7S Model which they developed is one of the
cornerstones of organizational analysis.
 Cont…
Essentially the model says that any organization can be best
described by the seven interrelated elements shown above:
1. Strategy
– Plans for the allocation of a firm's resources to reach goals.
(Environment, competition, customers).
2. Structure
– The way the organization's units relate to each other:
centralized, functional divisions; matrix, decentralized (the
trend in larger organizations); network, holding..
3. Systems
– The procedures, processes and routines that characterize
how important work is to be done: (financial systems;
hiring, promotion, PA systems; information systems).
 Cont…
4. Skills
– Distinctive capabilities of personnel or of the organization
as a whole.
5. Staff
– Numbers and types of personnel within the organization.
6. Style
– Cultural style of the organization and how key managers
behave in achieving the organization’s goals.
7. Shared Value
– The interconnecting center of McKinsey's model is: Shared
Values. What the organization stands for and what it
believes in.
– Central beliefs and attitudes.
THE END!