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Business Policy and Strategic

Management
Lecture 8: AUGUST 13, 2016

Recap of Lecture 7
Describe Organizational Analysis or Internal Audit in one sentence?
What are the characteristics of resources under RBV approach and
what are the resources?
Describe Value-Chain Analysis?

Recap of Lecture 7
Organizational Analysis is to use information to build strategies which will turn
the firms weaknesses into strengths and turn strengths into distinctive
competencies and eventually into competitive advantage.
Under Resource-based View approach, the characteristics of resource which
meets the conditions of Empirical Indicators are rare, hard to imitate, and not
easy to substitute; the resources are physical, human, and organizational.
Value-chain Analysis identifies where low-cost advantages or disadvantages exist
anywhere along the value chain from raw material to customer service activities,
develops and nurtures a core competence and convert this competence into a
distinctive competence.

Review of Strategy Formulation

Review of Strategy Formulation (cont)


Framework

Review of Strategy Formulation (cont)


Pitfalls of Strategy Formulation Framework
Shift from a words-oriented to a numbers-oriented planning process can give
rise to a false sense of certainty
Number-oriented planning process could reduce dialogue, discussion, and
argument as a means for exploring understandings, testing assumptions, and
fostering organizational learning

Strategies for Different Positions (cont)


Two types of Integration Strategy
1) Vertical
Vertical integration is a competitive strategy by which a company takes complete control over
one or more stages in the production or distribution of a product
Vertical integration integrates a company with the units supplying raw materials to it
(backward integration), or with the distribution channels that carry its products to the endconsumers (forward integration)
For examples:
A supermarket may acquire control of farms to ensure supply of fresh vegetables (backward
integration) or may buy vehicles to smoothen the distribution of its products (forward integration)
A car manufacturer may acquire tire and electrical-component factories (backward integration) or
open its own showrooms to sell its vehicle models or provide after-sales service (forward
integration)

There is a third type of vertical integration, called balanced integration, which is a judicious
mix of backward and forward integration strategies

Strategies for Different Positions Vertical


Example

Strategies for Different Positions (cont)


Advantages of Vertical Integration
1) Smoothen its supply chain
For example: by ensuring ready supply of tires and electrical components in the exact
specifications that it requires

2) Make its distribution and after-sales service more efficient


For example: by opening its own showrooms

3) Absorb for itself upstream and downstream profits


For example: profits that would have gone to the tire and electrical companies and
showrooms owned by others

4) Increase entry barriers for new entrants


For example: by being able to reduce costs through its own suppliers and distributors

5) Invest in specific functions


For example: tire-making and develop its core competencies

Strategies for Different Positions (cont)


Disadvantages of Vertical Integration
1) The quality of goods supplied earlier by external sources may fall
because of a lack of competition
2) Flexibility to increase or decrease production of raw materials or
components may be lost as the company may need to sustain a
level of production in pursuit of economies of scale
3) It may be difficult for the company to sustain core competencies as
it focuses on the integration of the new units

Strategies for Different Positions (cont)


Timing to use Vertical Integration
The current suppliers of the companys raw materials or components, or the
distributors of its end products, are unreliable
The prices of raw materials are unstable or the distributors charge high fees
The suppliers or distributors earn big margins
The company has the resources to manage the new business that is currently
being taken care of by the suppliers or distributors
The industry is expected to grow significantly

Strategies for Different Positions (cont)


Two types of Integration Strategy
2) Horizontal
Horizontal integration is the acquisition of business activities that are at the same level
of the value chain in similar or different industries
A companys acquisition of a similar or a competitive businessit may acquire, but it
may also merge with or takeover, another company to strengthen itselfto grow in size
or capacity, to achieve economies of scale or product uniqueness, to reduce competition
and risks, to increase markets, or to enter new markets
For examples:
A fast-food restaurant chain merging with a similar business in another country to gain a
foothold in foreign markets
HP acquired Compaq

Strategies for Different Positions Horizontal


Example

Strategies for Different Positions (cont)


Advantages of Horizontal Integration
1) Economies of scale: The bigger, horizontally integrated company can achieve
a higher production than the companies merged, at a lower cost
2) Increased differentiation: The company will be able to offer more product
features to customers
3) Increased market power: The new company, because of the merger of
companies, will become a bigger customer for its old suppliers. It will
command a bigger end-product market and will have greater power over
distributors
4) Ability to enter new markets: If the merger is with an organization abroad,
the new company will have an additional foreign market

Strategies for Different Positions


Disadvantages of Horizontal Integration
1) Legal ramifications will have to be studied as there are strict antimonopoly laws in many countries: if the merged entity threatens to oust
competitors from the market, these laws will be used against it
2) As a company grows bigger with horizontal integration, it might become
too rigid, and its procedures and practices may become unfriendly to
change. This could prove dangerous to it
3) Synergies between companies that may have been predicted may prove
elusive or non-existent (for example, the failed horizontal integration of
hardware and software companies merged in the expectation of
synergies between their products)

Strategies for Different Positions (cont)


Timing to use Horizontal Integration

When the industry is growing


When rivals lack the expertise that the company has already achieved
When economies of scale can be achieved
When the company can manage the operations of the bigger organization
efficiently, after the integration

Situation Analysis
A systematic collection and evaluation of past and present
economical, political, social, and technological data, aimed at
1) Identification of internal and external forces that may influence the
organization's performance and choice of strategies
2) Assessment of the organization's current and future strengths, weaknesses,
opportunities, and threats

Situation Analysis
Input Stage
Quantify subjectivity
Making small decisions in the input matrices regarding the relative
importance of external and internal factors allows strategists to more
effectively generate and evaluate alternative strategies

Matching Stage
Tools rely on information derived from the input stage to match external
opportunities and threats with internal strengths and weaknesses
Matching external and internal critical success factors is the key to effectively
generating feasible alternative strategies

Situation Analysis (cont)

Situation Analysis - SWOT Matrix


Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an important matching
tool that helps managers develop four types of strategies:

SO (strengths-opportunities)
WO (weaknesses-opportunities)
ST (strengths-threats)
WT (weaknesses-threats)

Matching key external and internal factors is the most difficult part of developing a SWOT
Matrix and requires good judgmentand there is no one best set of matches
When a firm has major weaknesses, it will strive to overcome them and make them
strengths
When an organization faces major threats, it will seek to avoid them to concentrate on
opportunities
The SWOT is not the audit, the audit is not the SWOT, the SWOT and the audit are
different

Situation Analysis - SWOT Matrix (cont)


Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an
important matching tool that helps managers develop four types of
strategies:
SO (strengths-opportunities)
Use a firms internal strengths to take advantage of external opportunities
Organizations generally will pursue WO, ST, or WT strategies to get into a situation in
which they can apply SO strategies

Situation Analysis - SWOT Matrix (cont)


Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an
important matching tool that helps managers develop four types of
strategies:
WO (weaknesses-opportunities)
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: 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 producing these devices (weakness)
Possible WO strategies:
Acquire this technology by forming a joint venture with a firm having competency in this
area
Hire and train people with the required technical capabilities

Situation Analysis - SWOT Matrix (cont)


Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an
important matching tool that helps managers develop four types of
strategies:
ST (strengths-threats)
Use a firms strengths to avoid or reduce the impact of external threat
This does not mean that a strong organization should always meet threats in the external
environment head-on
For example: 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 major threat in
many industries
This is still a major problem for U.S. firms selling products in china

Situation Analysis - SWOT Matrix (cont)


Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an
important matching tool that helps managers develop four types of
strategies:
WT (weaknesses-threats)
Defensive tactics directed at reducing internal weakness and avoiding external threats
Organization faced with numerous external threats and internal weaknesses may indeed
be in a precarious position
For example: A firm may have to fight for its survival, merge, retrench, declare bankruptcy, or
choose liquidation

Situation Analysis - SWOT Matrix (cont)


Eight steps involved in constructing a SWOT Matrix
1)

List the firms key external opportunities

When identifying and prioritizing key external factors in Strategic Planning, make sure the factors selected are
specific, i.e. quantified to the extent possible
Make sure the factors selected are ACTIONABLE, i.e. meaningful in terms of having Strategic implications
For example, regarding actionable, to say the stock market is rising is not actionable because there is no apparent
strategy that the firm could formulate to capitalize on that factor. in contrast, a factor such as the GDP of Brazil is 6.8
percent is actionable because the firm should perhaps open 100 new stores in Brazil.

Select factors that will be helpful in deciding what to recommend the firm to do, rather than selecting nebulous
factors

2)
3)
4)
5)
6)
7)
8)

List the firms key external threats


List the firms key internal strengths
List the firms key internal weaknesses
Match internal strengths with external opportunities, and record the resultant SO strategies in
the appropriate cell
Match internal weaknesses with external opportunities, and record the resultant WO strategies
Match internal strengths with external threats, and record the resultant ST strategies
Match internal weaknesses with external threats, and record the resultant WT strategies

Situation Analysis - SWOT Matrix (cont)


STRENGTHS (S)

WEAKNESSES (W)

OPPORTUNITIES
(O)

STRENGTHS
OPPORTUNITIES
(SO)

WEAKNESSES
OPPORTUNITIES
(WO)

THREATS (T)

STRENGTHS
THREATS (ST)

WEAKNESSES
THREATS (WT)

Situation Analysis SWOT Matrix Example

Situation Analysis SWOT Matrix Example


(cont)

Situation Analysis SWOT Matrix Example


(cont)

Situation Analysis - SWOT Matrix (cont)


Key notes:
Internal and External factors and the SO, ST, WO, and WT strategies are stated
in quantitative terms to the extent possible
Always be specific to the extent possible in stating factors and strategies
Type notation after each strategy in a SWOT Matrix because notation reveals
the rationale for each alternative strategy
Notation reveals the Internal and External factors that were matched to
formulate desirable strategies
For example, the retail computer store business may need to purchase land to build
new store (stated in WO 1 and ST 2) because a new Highway 34 will make its location
less desirable (Weakness 2). The notation (W2, O2) used in WO Strategy 1 and (S8, T3)
used in ST Strategy 2 exemplifies this matching process

Situation Analysis - SWOT Matrix (cont)


Key notes:
The purpose of each Stage 2 matching tool is to generate feasible alternative
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

Situation Analysis - SWOT Matrix (cont)


Pitfalls of SWOT Matrix
1) 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 competitive advantage

2) SWOT is a static assessment (or snapshot) in time


Environments can change drastically and SWOT will need to be reviewed to meet the
changes

Situation Analysis - SPACE Matrix


Strategic Position and Action Evaluation (SPACE) Matrix is an important tool to determine an
organizations overall strategic position
Four-quadrant framework indicates which of the following strategies are most appropriate for a
given organization:
1)
2)
3)
4)

Aggressive
Conservative
Defensive
Competitive

Axes of the SPACE Matrix represent


Two internal dimensions
1)
2)

Financial position (FP)


Competitive position (CP)

1)
2)

Stability position (SP)


Industry position (IP)

Two external dimensions

Factors that were included earlier in the firms EFE and IFE Matrices should be considered in
developing a SPACE Matrix

Situation Analysis - SPACE Matrix (cont)

Situation Analysis - SPACE Matrix (cont)

Situation Analysis - SPACE Matrix (cont)


The six steps required to develop a SPACE Matrix are as follows:
1) Select a set of variables to define financial position (FP), competitive
position (CP), stability 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 and 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 comparison to Competitors
On the IP and SP axes, make comparison to Other Industries

3) Compute an average score for FP, CP, IP, and SP by summing the values given
to the variables of each dimension and then by dividing by the number of
variables included in the respective dimension

Situation Analysis - SPACE Matrix (cont)


The six steps required to develop a SPACE Matrix are as follows:
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 point
6) Draw a directional vector from the origin of the SPACE Matrix through the
new intersection point. This vector reveals the type of strategies
recommended for the organization: aggressive, competitive, defensive, or
conservative

Situation Analysis - SPACE Matrix (cont)

Situation Analysis - SPACE Matrix (cont)

Situation Analysis - SPACE Matrix Example

Situation Analysis - SPACE Matrix (cont)


Difference between the SP and IP axes
SP refers to the volatility of profits and revenues for firms in a given industry
SP volatility (stability) is based on the expected impact of changes in core
external factors such as technology, economy, demographic, seasonality, etc.
The higher frequency and magnitude of the changes the more unstable on SP
An industry can be stable or unstable on SP, yet high or low on IP
For examples:
The smartphone industry would be unstable on SP yet high growth on IP
The carbonated beverage industry would be stable on SP yet low growth on IP

Situation Analysis - SPACE Matrix (cont)


When a particular company is known, the analyst must be much more
specific in terms of recommended strategies
Be specific to the extent possible
For example:
Instead of saying market penetration is a recommended strategy when your vector goes
in the Conservative quadrant, say that adding 34 new stores in India is a recommended
strategy
A particular company is generally known, and 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

Situation Analysis - SPACE Matrix (cont)


Aggressive Quadrant (Upper-right)
An organization is in an excellent position to use its internal strengths to
1) Take advantage of external opportunities
2) Overcome internal weaknesses
3) Avoid external threats

An attractive and relatively stable industry, the company has a competitive


advantage and it can protect it, a critical factor is the possible entry of new
competitors into the industry, it may be considered new acquisitions,
increasing market share and focusing on competitive products
Strategies:
Market penetration, market development, product development, backward integration,
forward integration, horizontal integration, or diversification, can be feasible, depending
on the specific circumstances that face the firm

Situation Analysis - SPACE Matrix (cont)


Competitive Quadrant (Lower-right)
An attractive and relatively unstable environment, the company has some
competitive advantage, a critical factor is the companys financial strength the company should look for ways of their attachment, the solution is the
possibility of joining another company, increasing production efficiency and
strengthening cash flow
Strategies:
Backward, forward, and horizontal integration; market penetration; market development
and product development

Situation Analysis - SPACE Matrix (cont)


Conservative Quadrant (Upper-left)
An organization should be staying close to the firms basic competencies and
not taking excessive risks
A stable industry with low growth rate and financially stable company, a
critical factor is in the product competitiveness, company should protect its
successful products and develop new ones and think about the possibilities of
the penetration into the industry more attractive and reduce costs
Strategies:
Market penetration, market development, product development, and related
diversification

Situation Analysis - SPACE Matrix (cont)


Defensive Quadrant (Lower-left)
Firm should focus on rectifying internal weaknesses and avoiding external
threats
An unattractive industry, the company lacks competitive products and
financial resources, a critical factor is the competitiveness, the company
should reduce costs, reduce investment and consider leaving the industry
Strategies:
Retrenchment, divestiture, liquidation, and related diversification

Situation Analysis - SPACE Matrix Example 2

Situation Analysis - SPACE Matrix Example 2


(cont)

Situation Analysis - SPACE Matrix Example 2


(cont)

Situation Analysis - SPACE Matrix Example 2


(cont)