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Chapter 6 - Strategy Analysis and Choice Overview Chapter 6 explains how to formulate effective strategies once the internal and external audits are completed. Chapter 6 presents and exemplifies six widely used strategic planning matrices: SWOT (Strengths-Weaknesses-Opportunities-Threats) Matrix, BCG (Boston Consulting Group) Matrix, SPACE (Strategic Position and Action Evaluation) Matrix, IE (Internal-External) Matrix, Grand Strategy Matrix, and the QSPM (Quantitative Strategic Planning Matrix). Chapter 6 also describes the nature and role of boards of directors in strategic planning.

Learning Objectives The Chapter 6 Learning Objectives presented in the textbook are reiterated below: 1. Describe the strategy analysis and choice process. 2. Diagram and explain the three-stage strategy-formulation analytical framework. 3. Diagram and explain the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix. 4. Diagram and explain the Strategic Position and Action Evaluation (SPACE) Matrix. 5. Diagram and explain the Boston Consulting Group (BCG) Matrix. 6. Diagram and explain the Internal-External (IE) Matrix. 7. Diagram and explain the Grand Matrix. 8. Diagram and explain the Quantitative Strategic Planning Matrix (QSPM). 9. Discuss the role of organizational culture in strategic analysis and choice. 10. Identify and discuss important political considerations in strategy analysis and choice. 11. Discuss the role of a board of directors (governance) in strategic planning.

Teaching Tips 1. This is arguably the most important chapter in the book, so we usually spend three or four 1.5-hour class sessions on this chapter. Six new, important matrices are presented that are widely used in strategic planning, so you need to make sure students can develop a SWOT, BCG, IE, SPACE, GRAND, and QSPM. These new matrices reveal what to do with the underlying key strengths/weaknesses/opportunities/threats and build upon the EFEM, IFEM, and CPM in earlier chapters. 2. Definitely pull up in class the Chapter 6 videos on the author website (www.strategyclub.com) and review those with students, including why Chapter 6 is important and how to perform various analyses.

3. Figure 6-2 is very important because students need to understand the three stages in formulating strategies: Input, Matching, and Decision. Chapter 6 focuses on the Matching Stage. Make sure students understand that “matching internal with external factors” is the KEY to formulating strategies effectively. 4. The SWOT Matrix is the most widely used strategic-planning matrix in the world, so carefully go over Figure 6-3 titled “A SWOT Matrix for a Retail Computer Store.” Note the matching notation after each strategy (S4, O3) because students will need to include this notation in the SWOT for their case company. Note the two basic alternative strategies faced by this store: 1) remodel existing store or 2) build a new store in new location. The QSPM presented later in this chapter will answer which of these two alternatives is best. 5. Carefully cover the SPACE Matrix presented on pages 174 to 177. Remind students of the difference between the SP and the IP axes, and remind students that the CP and SP axes are negative such that a -1 is excellent and a -7 is terrible. 6. Carefully cover the BCG Matrix on pages 178-181. The BCG is the second most widely used strategic-planning matrix in the world, so go over the material and example BCGs in the book. Perhaps the major strategy decision large firms face annually is what divisions/segments of the firm we should devote more or less resources to in the future. Emphasize for students to be as “divisional, actionable, and specific as possible” in preparing all nine strategic planning matrices. Recommend that students prepare, if possible, a BCG by product and a BCG by region for their case company, to illustrate best where the team is taking the firm over the next three years. 7. Carefully cover the IE Matrix presented on pages 181-184. The IE Matrix is better than the BCG because the axes are more encompassing and there are nine cells instead of four. 8. Carefully cover the QSPM presented on pages 186-191. Go over the “QSPM for a Retail Computer Store” presented in Table 6-6 so students will understand the process of developing a QSPM. 9. Focus on the “Implications for Strategists” and the “Implications for Students” at the end of this chapter. These sections that end each chapter provide special, important tips for students to do well, especially on their oral case analysis presentation. 10. This chapter is so important that we usually cover all the end-of-chapter review questions and all the end-of-chapter exercises, either as homework or classwork or as a part of my lecturing. All these questions and exercises are designed to apply Chapter 6 concepts and techniques. Do one half of the review questions in class one day and the other half another day. Do the same for the end-of-chapter exercises.

Answers to End-of-Chapter 6 Review Questions

6-1. A WSJ article (7-12-14, p. B3) said Apple’s smartphone market share in China is 6.0 percent, behind the two leaders Samsung (17.8%) and Lenovo (11.4%). In regards to a BCG Matrix, what are the three firms’ relative market share position? Answer: Apple Samsung Lenovo

RMSP 6.0/17.8 = .337 = 33.7% 17.8/17.8 = 1.0 = 100% 11.4/17.8 = .640 = 64%

6-2. List five limitations of a SPACE Matrix. Answer: Six limitations of a SPACE matrix are as follows: 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 coordinate 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. 6-3. List the pros and cons of a firm disclosing by-segment corporate information in a Form 10K. Answer: 1) Transparency is a good thing in today’s world. 2) Investors will better understand the firm. 3) Managers will better understand the firm. 4) Disclosure enhances the communication process both within the firm and with outsiders. 5) Transparency promotes an environment of competitiveness among division/segment of the firm, which is a good thing. Reasons not to disclose financial information by segment include the following: 1) Less strategic information for rival firms to utilize. 2) Can hide performance failures. 3) Can reduce rivalry among segments. 6-4. What are some key differences between the BCG and the IE portfolio matrices? Answer: The axes are different. The IE axes are superior, since they are more encompassing than the BCG axes. The BCG has four quadrants whereas the IE has nine. Also, there is less chance in an IE for a circle to land in an obscure spot, such as dead center in a BCG. Finally, implications of each quadrant in terms of strategies most applicable vary for the BCG and IE. For example, there are no Question Marks or Dogs in an IE. 6-5. What is an ideal number of persons to have on a board of directors? Why? Answer: Recent research reveals that companies with fewer board members outperform larger boards, largely because fewer directors facilitates deeper debates, more nimble decision making, and greater accountability. For example, there are only eight members

of 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. Nine-person boards performed much better, for example, than 14 to 15-member boards. As a result of recent research, many companies are reducing their number of board members. Another benefit of fewer board members is that CEOs are more often reprimanded (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 committees. Netflix is another example firm with a small board, only seven members, who debate extensively before approving important management moves. Netflix is doing great. In contrast, Eli Lilly & Co. has 14 board members who find it “too big to encourage 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. In summary, companies should seek to reduce their board of directors to fewer than ten 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. 6-6. Smith & Wesson is vertically integrating. What does this mean? How could S&W vertically integrate further? Answer: Vertical integration refers to firms that use a combination of both forward and back integration, i.e., gaining control of both distributors and suppliers. To vertically integrate further, S&W could begin purchasing pawn shops (forward integration), and could begin purchasing ammo reloading equipment (backward integration). 6-7. Minorities and women each hold less than 15 percent of board seats of S&P 500 companies. Why is this not good? Answer: First of all, this situation sends the wrong message to potential customers, suppliers, distributors, investors, employees, managers, and others. Second, it makes the firm more vulnerable to legal suits alleging discrimination. Third, the firm forfeits the diverse knowledge and opinions that women and minorities bring to the table. 6-8. In developing a QSPM, if 10 strategies are being compared simultaneously, what would be a good scale for the AS scores? Why? Answer: 1 to 10, because it is best not to assign the same AS to two strategies. 6-9. In developing a BCG or IE Matrix, what would be a good surrogate for revenues for 1) Target Corp., 2) Burger King, 3) Bank of America, and 4) Spirit Airlines? Answer: 1. Target - # of stores per region 2. Burger King - # of restaurants per country

3. Bank of America - # of accounts or branches per region 4. Spirit Airlines - # of flights per hub 6-10. In developing a SPACE Matrix, what would you expect the SP average to be for 1) Apple, 2) Heinz, 3) Verizon, 4) Amazon, and 5) Kroger? Answer: -7 is very unstable; -1 is very stable 1. Apple -7 2. Heinz -3 3. Verizon - - 5 4. Amazon- - 4 5. Kroger -3 6-11. Rather than developing a QSPM, what is an alternative procedure for prioritizing the relative attractiveness of alternative strategies? Answer: As indicated in the chapter, participants could rate the strategies on a 1 to 4 scale, and simply add up those ratings to determine a prioritized list of the best strategies. 6-12. Overlay a BCG Matrix with a Grand Strategy Matrix and discuss similarities in terms of format and implications. Answer: The vertical axis is the same on both matrices. Both the BCG Matrix and the Grand Strategy Matrix are divided into four quadrants. The BCG Matrix graphically portrays differences among divisions in terms of relative market share position and industry growth rate, whereas, the Grand Strategy Matrix is based on two evaluative dimensions: competitive position and market (industry) growth. The upper left (Stars) is best on the BCG whereas the upper right is best on the Grand Strategy Matrix. Lower right is worst on the BCG, but lower left is worst on the Grand. 6-13. Why should a Board not consist of all men, or all women, or all whites, or all minorities? Answer: Women and minorities ask different questions and make different suggestions in boardrooms than white men; diverse views are needed to arrive at effective, mutually supportive strategies. Women and minorities comprise much of the consumer base everywhere. No women or no minorities would send the wrong message to the firm’s many stakeholder groups, and would make the firm more vulnerable to legal discrimination suits. 6-14. Define halo error. How can halo error inhibit selecting the best strategies to pursue? Answer: Halo error is the tendency to put too much weight on a single factor when formulating strategies. Incorporating a weight column in matrices enables strategists to appropriately weight various factors, rather than halo error resulting in an extraordinarily high weight (unknowingly) being applied to a single factor. 6-15. List six drawbacks of using only subjective information in formulating strategies.

Answer: The absence of objectivity results in drawbacks: 1) Political factors sometimes dictate strategies. 2) Halo error can cause havoc. 3) Emotions can dictate decisions. Weakly supported ideas may die before they are given a chance. 4) Lack of data means not being able to review information to learn and improve. 5) Opportunities for benchmarking are lost. 6) The magnitude of differences in attractiveness of strategies is unknown. 6-16. For a firm that you know well, give an example SO Strategy, showing how an internal strength can be matched with an external opportunity to formulate strategy. Answer: An SO strategy for a clothing retailer is to add four new in-store promotions monthly. This strategy capitalizes on a strength (in-store promotions boost sales by 20 percent) as well as an opportunity (vehicle traffic passing store is up 12 percent). 6-17. For a firm that you know well, give an example WT Strategy, showing how an internal weakness can be matched with an external threat to formulate a strategy. Answer: A WT strategy for a clothing retailer is to hire two new cashiers. This strategy attempts to correct a weakness (customer checkout is too slow) and avoid a threat (new competitor store opening nearby). 6-18. List three limitations of the SWOT Matrix and analysis. Answer: Although the most widely utilized of all strategic planning tools, the SWOT analysis does have some limitations. First, SWOT does not show how to achieve a competitive advantage, so it must not be an end in itself. Second, SWOT is a static assessment (or snapshot) in time. Third, SWOT analysis may lead the firm to overemphasize a single internal or external factor in formulating strategies. This, this textbook advocates utilizing five matching strategic planning tools in conjunction with each other. 6-19. For the following three firms using the given factors, calculate a reasonable Stability Position (SP) coordinate to go on the SPACE Matrix axis, given what you know about the nature of those industries. Factors Barriers to entry into market Seasonal nature of business Technological changes SP Score

Winnebago -3 -6 -3 -4.0

Apple -2 -4 -6 -4.0

U.S. Postal Service -1 -4 -3 -2.7

6-20. Would the angle or degrees of the vector in a SPACE Matrix be important in generating alternative strategies? Explain. Answer: YES. The angle and degrees of the vector in a SPACE Matrix may be important because the vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative. If the vector is 5 degrees into the aggressive quadrant,

strategists may begin thinking about conservative strategies, whereas if the vector is 85 degrees into the aggressive quadrant, strategists may begin thinking about competitive strategies. 6-21. On the competitive position (CP) axis of a SPACE Matrix, what level of capacity utilization would be necessary for you to give the firm a negative 1? Negative 7? Why? Answer: A capacity utilization near 100% is excellent (-1), whereas a capacity utilization near 30% would be terrible (-7). The competitive position axis shows the average scores for all CP variables. Plotting at negative 1 indicates that the firm is in the best possible position competitively when averaging all factors. Plotting at negative 7 indicates that the firm is in the worst possible position competitively when averaging all factors. 6-22. If a firm has weak financial position and competes in an unstable industry, in which quadrant will the SPACE vector lie? Answer: If a firm has weak financial position and competes in an unstable industry, its SPACE vector would lie in the lower left or right quadrant of the SPACE depending on the CP and IP axis scores. 6-23. Describe a situation where the SPACE analysis would have no vector. In other words, describe a situation where the SPACE analysis coordinate would be (0,0). What should an analyst do in this situation? Answer: Although this is not likely to occur, it is possible that when averaging the two scores on the x-axis, and the two scores on the y-axis, both points come to zero. This means that financial and stability position factors neutralize one another, while competitive and industry position factors neutralize one another as well. The analyst should add additional variables to be examined under the four axes, to in essence make the analysis more robust, while at the same time shifting the vector into a discernable quadrant. 6-24. Develop a BCG Matrix for your university. Because your college does not generate profits, what would be a good surrogate for the pie slice values? How many circles do you have and how large are they? Explain. Answer: Rather than tracking revenue, colleges generally use enrollment headcount as a measure of growth. Headcount represented within academic programs (College of Business vs. School of Nursing vs. School of Education vs. School of Engineering, for example) would be a valuable analysis, so programs can represent the circles divisions within the BCG Matrix. This matrix will identify those programs that are Cash Cows, Question Marks, Stars, and Dogs. For the pie slice, % of graduating students with full-time jobs could be meaningful to examine. 6-25. In a BCG Matrix, would the Question Mark quadrant or the Cash Cow quadrant be more desirable? Explain. Answer: An argument for the Question Mark being more desirable is that these divisions compete in a very attractive, growing industry, even though they have a low relative market share. Also, Cash Cows are usually nearing the end of their product life cycle. An argument for the Cash Cow,

however, being more desirable is that Cash Cows divisions are proven winners, and have large relative market share, but are in a slow-growing industry. Answers can vary by industry and firm. 6-26. Would a BCG Matrix and analysis be worth performing if you do not know the profits of each segment? Why? Answer: YES. The BCG Matrix allows a multidivisional organization to manage its portfolio of businesses by examining the relative market share and industry growth rate of each division relative to all other divisions in the organization. The location of segments with the matrix is very useful strategic information, even without the pie slices (profit information). Oftentimes firms will use surrogate variables for profits, such as customer retention rate or customer loyalty rate or even employee morale measures. 6-27. What major limitations of the BCG Matrix does the IE Matrix overcome? Answer: 1) Nine cells are more informative than four cells. 2) The IE axes are much more informative than the BCG axes. The IE Matrix requires more information about the divisions than the BCG Matrix, thus providing more strategic information to the analyst. 6-28. In an IE Matrix, do you believe it is more advantageous for a division to be located in quadrant II or IV? Why? Answer: In an IE Matrix, Quadrants II and IV are both placed in the “grow and build” category, so answers can vary to this question depending on one’s views regarding the relative impact of internal and external issues. Quadrant II divisions are stronger externally, whereas Quadrant IV divisions are internally stronger. 6-29. Develop a 2x2x2x2x2 QSPM for an organization of your choice (i.e., two strengths, two weaknesses, two opportunities, two threats, and two strategies). Follow all the QSPM guidelines presented in the chapter. Answer: For Artic Cat Corporation Build a New FourWheeler Factory Wt. AS TAS

Build a New SnowMobile Fa...