ISL457U-STRATEGIC MANAGEMENT
Chapter 6: Strategy Generation and Selection
Strategy Generation and Selection Process
The strategy selection process is a process that can help the continuation of the firm’s lives in the future by covering all the activities of the firms. Therefore, this process is an essential management tool and decision- making activity for the managers.
The strategy formulation process consists of the input stage, the matching stage, and the decision stage. The first stage is the stage where the firm collects data from its internal and external environment. The second stage is the stage of using this data in strategy generating processes. Alternative strategies occur at this stage. Managerial tools such as the SWOT matrix and the BCG matrix might be used at this stage. The last stage is the stage of choosing the most appropriate alternative strategy. At this stage, QSPM is one of the commonly used managerial tools.
The SWOT Matrix
SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company’s competitive position and to develop strategic planning. SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company’s competitive position and to develop strategic planning. SWOT analysis aims to relate the strengths (S) and weaknesses (W) of the firm (based on an internal audit of the firm’s capabilities) against the opportunities (O) and threats (T) thrown up by the analysis of the external environment.
SWOT analysis not only enables the firm to analyze its status but also provides information about the future of the firm as it shows the opportunities and threats arising from the environment. While making the SWOT analysis, first, the firm should determine and list its strengths and weaknesses. At this stage, it should also discover opportunities and threats arising from the environment. The information obtained from these four dimensions is used in the SWOT matrix.
Strengths: Strengths are the features of the firm that distinguish itself from other competitors. We may list the strengths of a firm as a strong brand, a strong balance sheet, an effective business process, human capital, excellent customer service, knowledge, experience, networks, technology, patents, a significant market share, reputation, and high integrity.
Weaknesses: The weakness of the firm is the factors that cause it to fall behind in the competition and decrease its performance. Weaknesses are areas that need improvement or development. A weak brand, lack of capital, lack the resources, being new to the industry, bad location, and the high turnover rate can be regarded as weaknesses.
Opportunities: Opportunities refer to favorable external factors that could give the firm a competitive advantage. Factors such as possible new markets, growing markets,
new technologies, changing customer trends may be examples of some opportunities.
Threats: Threats refer to factors that have the potential to harm a firm. Factors such as market saturation, demographic shifts, economic uncertainty, competitors’ market power, political ambiguity, pressure groups can be considered as threats. For example, strong competitors who will enter the market in which the firm operates are new threats.
The SWOT matrix creates alternative strategies for the firm to take advantage of opportunities or avoid threats, considering its strengths and weaknesses. This matrix helps managers develop four different types of strategies. These are SO strategies, WO strategies, ST strategies, and WT strategies.
SO strategies are suitable for using the strengths of the firm to take advantage of opportunities.
WO strategies aim to eliminate weaknesses and make use of opportunities.
ST strategies, on the other hand, use the firm’s strength to deal with external threats.
WT strategies aim to minimize weaknesses and threats. Strategies to overcome them at the same time are developed by considering weaknesses and threats.
BCG Matrix
BCG matrix is an analytical management tool for firms to allocate resources in their portfolio correctly. The matrix consists of the placing of business units in four boxes formed in two dimensions. Two essential dimensions make up the matrix. The first is the industry sales growth rate (i.e. growth rate of the market). In simple terms, the market growth rate is the rate of increase in sales in the market compared to the previous year. The second dimension is the relative market share position. This dimension is the market share of the business unit or product in the portfolio compared to its rival competitors.
The relative market share position is on the x-axis, and the market growth rate is on the y-axis in the BCG Matrx.
According to BCG, a firm with a significant market share gains a competitive strategic advantage in terms of production costs because of its experience. The firm needs financial resources for its development to operate in a growing market. Firms need financial resources for expanding production, improving processes and increasing marketing activities. However, if the growth rate of the market is low in which the firm operates, the product does not need a significant fund. In mature markets, less investment will be required in products/business units than in emerging markets. In this case, there are four product/ unit markets with varying financial needs and strategies. These are cash cows, dogs, question marks, and stars.
The BCG matrix is ideal to use to decide on planned market positions and the distribution of strategic funds between different business units in the future.
Each business unit/product is positioned in the matrix according to its relative market share and market growth. The strategy to be applied to business units/products is decided according to their position in the matrix. Hold, Harvest, Divest, and Build strategies are used according to their location for products/units.
Build: The purpose of this strategy is to improve the unit’s position in the market. The best way to do this is to transfer the funds from cash cows to competitive units with high potential. For example, transferring funds from cash cows to the stars and then to question marks are examples of this strategy. In this way, question marks are tried to be moved to star status.
Hold: This strategy is designed to maintain the long-term market position of the unit. This strategy is particularly suitable for cash cows so that their funding capacities can be extended as much as possible.
Harvest: This strategy is not long term; it aims to provide funding in the short term. It is suitable for a weak cash cow that approaches the end of its life cycle. It may also be applied to question marks and dogs that have uncertain future prospects in the market.
Divest: Divest strategy is the complete sale of the business unit. The funds from here can be used to grow stars or potential question marks. We can use the strategy for dogs or question marks that have no potential (Morden, 2016).
Thanks to the BCG matrix, managers manage the flow of funds between units in the portfolio more efficiently. At the same time, BCG helps the generation of strategic alternatives by showing the situation between the
units/products to the managers.
Choosing The Appropriate Strategy
One of the most important choices firms make to gain a competitive advantage is to determine the appropriate strategy. Not every strategy is expected to be successful. One of the most widely used methods in the selection of strategic alternatives is the Quantitative Strategic Planning Matrix (QSPM) method.
QSPM is a key designed on the firm’s internal and external factors. The basic working principle of this management tool is based on comparing the attractiveness of the alternatives among themselves. It is possible to examine many strategic alternatives together within QSPM. The relative appeal of each strategy is calculated on the matrix. There are six stages to creating the QSPM table. The steps are;
• Step 1: List key external and internal factors. • Step 2: Assign importance weights to external and internal factors.
• Step 3: List potential strategies. • Step 4: Assign attractiveness score to each strategy. • Step 5: Calculate the total ASs. • Step 6: Sum the attractiveness and TAS.
Critical Issues in Determining Strategy
There are some factors that will prevent managers from making objective choices in the strategy selection process. This process is full of strategic decisions as well as judgments and politics.
There are some factors that will prevent managers from making objective choices in this process. As a result, this process is full of strategic decisions as well as judgments and politics. It is possible to list many factors that affect the process in which the strategic choice is made. However, we may gather the most critical ones under three headings. These are;
• the business culture, • intra-business political factors, and • the structure of the board of directors.
The business culture consists of values that determine how a firm interacts with employees, vendors, partners, and customers. Firms’ strategies are the way they use to reach their goals. Since business culture is a driving force in the way the firm does business, it has an impact on the selection of strategies. The business culture determines how much risk a firm wants to take in research and development, marketing activities, investment, and other activities. Business culture is a crucial factor that affects the motivation and creativity of the employees. Since business culture affects the success of the firms in their activities, it should be taken into consideration while generating and selecting a strategy.
The interaction between people in firms is important in the process of generating and selecting strategies. Firms, like any organization, are political. Therefore, political behaviors that affect this process are seen in firms. People maneuver to do a job or strengthen their positions. Political behavior can be seen at various levels within the firm. Managers use their authority to increase their political power. Accordingly, managers need to act politically to be successful strategists. Some political tips that managers should pay attention to are as follows (Hardy, 1993).
• Taking Counsel: Skilled managers know how to get advice. • Alliances: Smart managers have alliances that support their power inside and outside the firm. • Maneuverability: Wise managers maintain flexibility. The manager should not remain in positions that put himself in a difficult position.
• Communication: In recent years, various communication channels (vertical or horizontal) are considered to be very important. Information
is an important tactical weapon and should be considered as such. • Compromising: Managers may take a compromising attitude to protect their power from time to time. They usually make concessions during negotiations at the firm.
The Board of Directors, on the other hand, is the firm’s top-level executive, and decisions of high-level strategies are made here. Therefore, the structure of this board, the expectations, and the relationships of the people on the board are essential because these variables affect the strategy selection process.