STRATEGIC CHOICE

Contents

1. Introduction 2. Check against critical criteria 3. Assess the level of strategic fit 3.1. Boston Consulting Group matrix 3.2. GE Business Screen 3.3. Product / Market Evolution matrix 3.4. TOWS analysis 3.5 Puttick's Grid 4. Making the choice 5. Conclusion 6. References Revised by Tim Perry

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Copyright 2000 University of Warwick

Warwick Manufacturing Group

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STRATEGIC CHOICE
1. Introduction
Having generated several alternative strategies these must now be evaluated against the company's mission statement and objectives and the most appropriate strategy chosen. Again there are a large number of tools available and only 3 of the common approaches are shown. Luffman et al (1990 p 123) proposed a model to help do this and shown below is a modified version of this model. There are four main stages ; check against critical criteria, assess the level of strategic fit, consider timing and likely reaction of others and decide. Considering each of these.

Mission statement + objectives Ethos & Culture

Internal & external analysis

Risk

Critical Criteria

Strategic Fit Business strengths & comparative advantage Industry Attractiveness Timing Choice Decide and activate strategic choice Analysis of competitive & other reactions

Figure 1 - Process of strategic choice

2. Check against critical criteria

The diagram illustrates the key criteria against which strategies must be checked. This check ensures that each strategic alternative is consistent with a number of key criteria as follows:Mission statement and objectives - having described what business the company wants to be in and how progress will be measured it is vital to check back to ensure that the strategy will achieve the specified objectives. Financial objectives are likely to be of particular importance. In a recession when it is difficult to increase sales and money for new product development is Warwick Manufacturing Group

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scarce a company with a policy of no redundancies may have to consider backward or forward integration to ensure all employees are fully utilised. Hence a policy of no redundancies limits the range of acceptable strategies. Ethos and culture - these are 'soft' aspects of a company and yet can have a huge impact on the ability of an organisation to implement change. For example before apartheid ended many companies would not consider doing business with South Africa. Many older organisations with a very strong culture can find it very difficult to adapt to change. IBM may be an example of this and in the UK the Government is attempting to improve the management of the National Health Service which is seen as very bureaucratic. A strategy which requires fast, rapid responses may simply not be possible. Large companies often set up new divisions to try to overcome these problems. Internal and external analysis - having carried out all this analysis it is vital to check that the alternatives proposed actually make use of strengths, exploit opportunities, overcome threats and improve weaknesses. The Tesco strategy mentioned earlier of repackaging own brand goods to give a low cost product range is clearly a response to the threat from new competitors. Risk - this element has not been mentioned yet but is of vital importance. There are two aspects to consider ; the company's attitude to risk and the actual level of risk associated with the strategy. All individuals have different approaches to risk. For example a low risk taker would put their money in a bank whilst a high risk taker might gamble their money on a horse race. Different companies will have different attitudes to risk. Considering the strategies themselves ; all strategies are based on unknown and uncertain information. For example sales forecasts for new products are very difficult to produce. The level of risk associated with a particular strategy must be assessed and checked to see if this is acceptable to the company. In a large company a number of different strategies may be selected because they have a range of different risks associated with them ; both high and low. Having checked each alternative strategy against the key criteria there may still be a range of viable alternatives to chose from and hence further analysis is required.

3. Assess the level of strategic fit

The next test is against two dimensions ; business strengths & comparative advantage and industry attractiveness. Will the strategy exploit the company's strengths and give it an advantage relative to the competition and is the targeted industry worth entering ? A company may have a very strong competitive advantage but if the industry is in decline success will be limited. The following section gives five models to help check for strategic fit: BCG matrix enables relative competitive position to be compared to business growth rate; the GE matrix enables strategies to be plotted against relative competitive position and industry attractiveness; the product / market evolution matrix effectively combines elements of both the BCG and the GE matrix; TOWS is an extension of the SWOT analysis as it uses the bringing together of the Strengths and Weaknesses with the Opportunities and Threats to Warwick Manufacturing Group

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assist in strategy development; and finally the Puttick Grid relates the levels of market uncertainty to levels of product complexity.

3.1. Boston Consulting Group matrix

Companies may have a portfolio of products or strategic businesses and so a further set of techniques or tools have been developed to review alternative strategies to ensure that a balanced portfolio of products/businesses is maintained, with respect to business growth rate. For example a pharmaceuticals company must ensure that it has a mix of old drugs to generate cash for profits and to invest in research & development to look for new drugs. The search for a new drug is long and many new products may fail to reach the market. Consequently pharmaceutical companies need to ensure they have a balanced portfolio of products. One of the most famous strategy tools is the matrix developed by the Boston Consulting Group for this analysis and is shown below. This model is also consistent with the product life cycle model introduced in a previous section. Relative Market Share High High Market or Business Growth Rate Low
Figure 2 - BCG matrix

or Competitive Position Low

STAR

QUESTION MARK

CASH COW

DOG

Based on these 4 groups of product/business category the following general characteristics apply. The impact on cash flow now becomes apparent with a cash flow crisis likely if the company has too many question marks and stars. Business Category STARS CASH COWS QUESTION MARKS DOGS Market Share Thrust Hold/Increase Hold/Increase Increase Harvest/Divest Business Profitability High High None or -ve Low or -ve Investment Required High Low Very High Disinvest Net Cash Flow

Around zero or slightly -ve Highly +ve Highly -ve Positive

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A company would plot the position of its existing products or businesses on the chart together with the position of any proposed strategies to identify if there is a balance ; ideally between question marks, stars and cash cows. A further sophistication of this technique is to plot the relative market sizes and shares of the different products/businesses as shown below and is taken from Hedley (1977 p 12). In the example the business growth rate is given as a percentage and the company's relative competitive position is determined by comparing the size of its market share to that of the market leader. Note - the scale for relative competitive position is not linear.

Figure 3 - BCG with Relative Market Size and Share

However, this model has been criticised for being too simple and the following assumptions have been made. If these assumptions are not true then the use of this tool may be misleading. The market can be defined in terms of size and relative competitive strength A higher market share means greater profits There are no barriers to entry or exit exist The stage of maturity, with respect to the life cycle, can be defined The market is still growing

3.2. GE Business Screen

The BCG model has been criticised for being over simplified and so the GE model attempts to overcome these limitations by examining two slightly different dimensions ; competitive position and industry attractiveness. It was developed by GE to assess a large company which has a portfolio of different business and products and consequently is unlikely to be relevant to a small company. The first step is obviously to define what we mean by these two terms. Warwick Manufacturing Group

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Dimensions of industry attractiveness Industry and market analysis was discussed in the external analysis section from this analysis key features of industry attractiveness can be identified. The firm needs to consider both the current situation and to forecast what is likely to happen in the future. The 11 key features to be assessed are :-

Factor
1. Growth potential 2. Market diversity 3. Profitability 4. Vulnerability 5. Concentration 6. Product sales 7. Specialisation 8. Brand identification 9. Distribution 10. Price policy 11. Cost position 12. Service 13. Technology 14. Integration 15. Ease of entry & exit

Force
Increasing or decreasing size Number of markets served Increasing, steady, decreasing Competitors, recession Number of dominant players Cyclic, continuous Focus, differentiation, uniqueness Ease of switching, substitution etc. Channels, support required Learning effect, elasticity, ind. Norms Competitive, high/low cost Timing, reliability, guarrantees Leadership, uniqueness Vertical, horizontal, ease of control Barriers

Having assessed these features each individual business must be ranked with respect to overall industry attractiveness on a scale of high, medium and low. This process can be done qualitatively or quantitatively. Features could be given weights and then individual businesses/products awarded scores. The aim being to derive an overall total score for each business to enable them to be ranked in a more systematic and scientific manner. Dimensions of business strength To identify business strength the firm needs to review its strengths and weaknesses as described in section 6. Key areas to review include :Management Finance Marketing People and organisation Production Research and development Each business or product must be ranked with respect to overall business strength on a scale of high, medium and low in the same manner as ranking the level of industry attractiveness.

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Competitive Position Strong A t I t High n r d a u c s t t i r v Medium y e n e s s Low

grow seek dominance maximise investment

Average evaluate potential for leadership via segmentation identify weaknesses build strengths
identify growth

Weak specialise seek niches consider acquisitions

identify growth

segments
invest strongly maintain position

segments
specialise invest selectively prune lines minimise investment position to divest

specialise seek niches consider exit

elsewhere maintain overall position seek cash flow invest at maintenance levels

trust

leadership's statesmanship sic on competitors cash generators time exit and divest

Figure 4 - GE Business Screen

Using the GE Business Screen Each individual business or product can then be positioned on the matrix shown above. In each box are suggestions as to the possible actions which can be taken. Companies can be successful in any box on the matrix provided the right actions are taken but is naturally desirable to be nearer the top left with a strong competitive position and in an attractive market.

3.3. Product / Market Evolution matrix

This is taken from Hofer and Schendel (1978) and is based on the belief that the stage in the product or market life cycle is more important than business growth and that competitive position is more important than cash generation/need.

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Product/Market Evolution Matrix

Competitive Position Strong Development Growth Stage of Product / Market Evolution Shakeout Maturity Position individual products or markets. Relative size of sales/profit can be shown by plotting different sized circles to represent each one. Average Weak

Decline

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With all 3 matrices described the products or markets can be plotted just as names. However the matrix can be used to show one of two extra details: The relative contribution of each product/market where contribution can be defined as sales or profits. By plotting different size circles to represent the size of contribution vulnerability to individual products or markets can be shown. The total market size and the current market share for the business. This can be shown by plotting circles to represent the total market size for each individual product or market and then shading a portion to represent the percentage market share currently captured by the company. This shows relative importance and competitiveness.

3.4. TOWS analysis

Ideally a company would want to use its strengths to exploit the opportunities. In practice this is not always possible and it can be useful to consider whether to exploit the opportunities the company will be using strengths or weaknesses. The TOWS matrix is a variation of traditional SWOT analysis which enables this matching of strengths, weaknesses, opportunities and threats to specific strategies. The different alternative strategies should be positioned on the chart.

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STRENGTHS - S 1. 2. 3. List Strengths 4. etc. SO STRATEGIES Maxi-Maxi Use strengths to take advantage of opportunities ST STRATEGIES Maxi-Mini Use strengths to avoid threats
Figure 6 - TOWS matrix

WEAKNESSES - W 1. 2. 3. List Weaknesses 4. etc. WO STRATEGIES Mini-Maxi Overcome weaknesses by taking advantage of opportunities WT STRATEGIES Mini-Mini Minimise weaknesses and avoid threats

Always leave blank

OPPORTUNITIES - O 1. 2. 3. List Opportunities 4. etc. THREATS - T 1. 2. 3. List Threats 4. etc.

This helps the company assess if all the important elements identified by SWOT are being tackled by the strategy or strategies proposed and helps to evaluate the likely success of different strategies. The strategies which appear most attractive and offer the highest chance of success are obviously the SO (Strength/Opportunity) strategies which take advantage of external opportunity whilst exploiting an internal strength. A current example is the opportunity presented by the UK recession for low cost producers to increase their market share and this opportunity has been seized by supermarket chains like Aldi who have built up internal expertise in this area in Germany. The choice between taking a ST (Strength/Threat) strategy or a WO (Weakness/Opportunity) strategy may depend on an assessment of how aggressive the company is towards the marketplace in comparison to the organisation's ability to make internal change. In practice when using the TOWS matrix it is common to find that a strategy will not fit cleanly into one of the four central boxes; for example because it exploits both strengths and weaknesses. In this case it may be sensible to combine the 4 individual boxes. However, the TOWS matrix is still an extremely useful presentation aid to link individual strategic alternatives to strengths, weaknesses, opportunities and threats.

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3.5 Puttick Grid

This means of "positioning" or "characterising" a business was devised by John Puttick, formerly of PA Consulting and now a Principal Fellow with WMG. In this analysis he creates four notional groups of businesses, which are initially characterised by the complexity of the product and the uncertainty of the business.

HIGH PRODUCT COMPLEXITY HIGH UNCERTAINTY

LOW PRODUCT COMPLEXITY HIGH UNCERTAINTY

Aerospace Major Capital Projects Major Computer Systems HIGH PRODUCT COMPLEXITY LOW UNCERTAINTY

Fashion Packaging

LOW PRODUCT COMPLEXITY LOW UNCERTAINTY

Cars White Goods Cameras

Chemicals Metals Light bulbs

The characteristics and behaviours of the businesses in these four groups are very different. Some of these are shown in the chart below. These are not all, and it is essential that during The lecture you note down further characteristics on such as finance and logistics control in the space provided. This grid of business behaviours or process types can be used to characterise any business. Even though a business does not manufacture a commodity product, it may have many or all of the behaviours and values of a "commodity" business e.g. frugality, control, sweating the physical assets, conformity etc. Regardless of its actual product, the action it must take are those of any other "commodity" company. In this grouping are those companies most at risk from low wage, low energy economies. There is a saying "if you are successfully competing against a third world company then you are one". There are many ways to avoid the pernicious decline into the commodity situation. All of these are effected by hard work and careful and deliberate thinking.

Warwick Manufacturing Group

Strategic Choice PRODUCT COMPLEXITY High M A R K E T 1. Fitness for purpose 2. Service 3. Price 1. Fashionability 2. Availability 3. Price High

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Low

Super Value Goods

Fashion / Jobbing

Knowledge acquisition & product creation Knowledge acquisition & product creation Product Design & Development IT Market vision & time to market Entrepreneurship

U N C E R T A N T Y Low

Innovation

Consumer Durables

Commodities

1. Fitness for purpose 2. Service 3. Price Knowledge acquisition & product supply (flexibility) Time to market & flexible manufacture Discipline

1. Price 2. Service 3. Fitness for purpose Knowledge acquisition & product supply (cost) Manufacturing productivity & logistics Frugality

There is a natural progression over time. All products move towards "commodities" as their other differentiation factors are eroded by competition. There is therefore a general move of all commodity businesses to countries with low energy costs and cheap labour. Even products which were high tech. And differentiated a few years ago, are now commodities. Mobile phones for example were high profit margin and made in Japan or the USA. As they became commodities the manufacture moved to Malaysia, Indonesia, etc. and now to China. In order to get out of the commodities trap, Nokia have turned the phone into a fashion item by having multiple covers with fashion colours. Consider the industries below:

Warwick Manufacturing Group

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PRODUCT COMPLEXITY High M A R K E T U N C E R T A I N T Y High Low

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Nike Trainers Machine tools

Watches

Cameras Mobile phones

Low

Light bulbs

Sneakerisation

Plimsolls

The movement of the commodity plimsoll sports shoe to a fashion trainer is well known, as is its fall back to commodity status. This process is known in the USA as "sneakerisation" of a product. There are many examples of these repositionings of products and companies

4.Making the choice

These are just five of the many tools which can be used to help assess which of the possible alternative strategies offers the best strategic fit. The final check is against the timing implications and analysis of competitive reactions. For example a strategy may be delayed pending the release of new legislation or in anticipation of a move by a competitor.

5. Conclusion
The area of business strategy is a relatively new academic field. This results in many different viewpoints as to what the subject is about and what the best tools and techniques are to use. As a subject it is very prone to fashions and trends and is continually being updated. We will finish with a look at some of the recent trends which include : The popularity of Michael Porter's work and concentration on the customer and competition. A move away from planning to implementation with a concentration on the people and structure in organisations. (The latest trend being Business Process Reengineering).

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Rejection of the large diversified corporation with many unrelated businesses to concentration on core skills and competencies. (It is better to do a few things well rather than a lot of things badly.) Recognition that successful strategy requires more than just an understanding of how to use the tools and techniques.

Strategy as an academic discipline can only rely on examining successful companies and attempting to identify the reasons for their success. This is in effect a form of 'benchmarking' the past and can provide some useful lessons for companies. However, we always need to remember that the most successful companies and entrepreneurs are those that spot a gap in the market or a new trend before the competition. Innovation, originality and luck can all make a contribution to a company's success and these elements can not be taught.

6. References
Hedley B. (1977) "Strategy and the Business Portfolio" Long Range Planning, February 1977, p 2. Hofer C. W. and Schendel D. (1978) Strategy Formulation: Analytical Concepts, West. Luffman G., Sanderson S., Lea E. and Kenny B. (1990) "Business Policy - An Analytical Introduction" Basil Blackwell Publications, Oxford and Cambridge MA .Alexander David - Positioning the Business

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