Approaches of Strategic Analysis and Choice

Approaches of Strategic Analysis and Choice at Business Level

Approaches of Strategic Analysis and Choice at Business Level

Once a multi-industry firm has identified business units in terms of invest, hold, or harvest, each business unit may identify and evaluate its grand strategy alternatives. A single business should consider a number of approaches in selecting its grand strategy. Here we will discuss SWOT analysis, experience curve analysis, life cycle analysis, grand strategy selection matrix and grand strategy clusters.

Approach # 1. SWOT Analysis:

SWOT stands for Strengths and Weaknesses of a business and environmental Opportunities and Threats a business faces. SWOT analysis identifies systematically these factors and the strategy that reflects the best match between them. It is based on the assumption that an effective strategy maximizes a business’s strengths and opportunities and minimizes its weakness and threats.

An opportunity is a major favorable situation in the firm’s environment. Key trends, such as identification of a previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relations, are the sources of opportunities for a firm.

A threat stands for a major unfavorable situation in the firm’s environment or an impediment to the firm’s current and/or desired future position. The major threats to a firm’s future success might include the factors such as the entry of new competitor, increased bargaining power of buyer or supplier, major technological change, slow market growth and changing regulations.

For instance increasing use of personal computers was a major opportunity for IBM. An opportunity for one firm can be a strategic threat to another. If the managers of a firm clearly understand the opportunities and threats their firm is likely to face, it assists them to identify realistic strategic alternatives and clarifies the most effective niche for the firm.

Strength is a resource, skill, a distinctive competence or other advantage and the reeds of markets a firm serves or anticipates serving that gives the firm a comparative advantage relative to competitors in the marketplace. Financial resources, image, market leadership, and buyer supplier relations are examples of strength.

A weakness is a limitation or deficiency in resources, skills and capabilities that seriously impedes effective performances. Facilities financial resources, management capabilities, marketing skills, and brand image could be sources of weaknesses.

Identification of key strengths and weaknesses of the firm helps in narrowing down the choice of alternatives and choosing a strategy. While identification of distinctive competence and critical weaknesses in relation to key determinants of success for different market segments provides a useful framework for choosing the best strategy.

SWOT analysis helps in two ways in strategic choice decision-making:

  1. It provides a logical framework for guiding systematic discussions of the business’s situation, alternative strategies, and, the choice of strategy.
  2. It provides a structured approach for the systematic comparison of key external opportunities and threats with internal strengths and weaknesses.

For strategy formulation, the firm attempts to build upon its strengths and eliminate its weaknesses. When the firm does not possess the skills required to take advantage of opportunities or avoid threats, the necessary resources may be identified from the SWOT analysis and steps taken to procure the strengths or to reduce any weaknesses.

Approach # 2. Experience Curve Analysis:

The concept of experience curve refers to systematic unit-cost reductions that have been observed to occur over the life of a product. According to the experience curve concept, unit cost declines as a firm accumulates experience in terms of a cumulative volume of production.

It implies that larger firms in an industry are likely to have lower unit costs as compared to smaller firms, thereby gaining a competitive cost advantage Learning effects, economies of scale, product redesign and technological improvements underlie the experience curve phenomenon.

In other words, a company increases the accumulated volume of its output over time, it is able to realize both economies of scale and learning effect. As a result, unit cost fall with increases in accumulated output.

The experience curve is significant from strategic choice point of view. It suggests that increasing a company’s product volume and market share will also bring cost advantages over the competition.

For example Japanese semiconductor companies used such tactics to ride down the experience curve and gain a competitive advantage over their U.S. rivals in the market for DRAM chips. Hill and Jones warn companies that go further down the experience curve, should not become complacent about its cost advantages.

They give three reasons why companies should not become complacent about their efficiency-based cost advantages derived from experience effects:

  1. Neither learning effects not economies of scale go on forever, the experience curve is like to bottom out at some point. Further unit-cost reduction from learning effects and economies of scale will be difficult to derive. Other firms will also be able to reduce their costs and equalize with the cost leader. Therefore, establishing a sustainable competitive advantage must involve strategic factors as better customer, responsiveness, product quality, or innovation in addition to the minimization of production costs by utilizing existing technologies.
  2. The development of new technologies may turn competitive cost advantages of experience effects obsolete.
  3. High volume does not necessarily give a company a cost advantage.

Approach # 3. Grand Strategy Selection Matrix:

Grand strategy selection matrix is another guide to the choice of a promising grand strategy. The matrix is based upon the principal purpose of the grand strategy and the choice of an internal or external emphasis for growth and/or profitability. The early approaches to strategy selection were based on matching a concern for internal versus external growth with a principal desire to either overcome weakness or maximize strength.

Most experts are now of the opinion that the unique set of conditions that exist for the planning period and the company strengths and weaknesses guide the better selection of a strategy. This led to the development of grand strategy selection matrix.

A business firm in quadrant, the first quadrant finds itself overly committed to a particular business with limited growth opportunities or involving high risks. Vertical integration is the appropriate strategy that enables the firm to curtail risk by reducing uncertainty either about inputs or about access to customers.

Alternatively, conglomerate diversification provides a profitable option for investment without diverting management focus from the main business. However, the external orientation to overcoming weaknesses usually results in the most costly grant strategies.

The decision to acquire another business needs sizable financial investments and large initial time. Thus strategists pondering over these approaches must protect against exchanging one set of weaknesses for another.

Firms in quadrant II opt to divert resources from one business activity to another within the company. This is a more conservative approach to overcome weakness than the earlier one and does not reduce the company’s commitment to its basic mission.

It has the characteristic of rewarding success and further development of proven competitive advantages. Retrenchment is the least disruptive strategy of this quadrant and can be used as a turnaround strategy if weaknesses grew from inefficiencies. Streamlining its operations and eliminating waste, a business can achieve new strengths.

However, when the weaknesses are a major obstruction to success in the industry, and when the costs of overcoming the weaknesses are unaffordable or are not justified by a cost-benefit analysis, then eliminating the business must be considered.

Divesture offers the best possibility for recouping the company’s investment. Liquidation can be an attractive strategy when the alternatives cause unnecessary outflow of organizational resources.

People say that a company should build on its strengths. This is based on the assumption that growth and survival of a business depend on its ability to seize a market share that is large enough enable to reap benefits of economies of scale.

If a firm adopts this approach, four alternative strategic options can be considered:

  1. Concentration
  2. Market development
  3. Product development, and
  4. Innovation

When a firm adopts concentration, it is strongly committed to its existing products and markets and strives to solidify its position by reinvesting resources to fortify its strength.

With market or product development strategies the business attempts to increase its operations. If the strategists feel that the current products can be well received by new customer groups, market development is done. Product development is resorted when it is believed that existing customers possess an interest in products related to the firm’s existing lines of business.

Innovation is preferred when a business possess strengths in creative product design or unique production technologies. Peters and Water argued that innovative companies are especially adroit at continually responding to change of any sort in their environment. When the environment changes, these companies change too.

If a business attempts to maximize its strength by aggressively expanding its basis of operations, it needs to lay an external emphasis in selecting a grand strategy.

The possible options include:

  1. Horizontal integration
  2. Concentric diversification
  3. Joint venture

Horizontal integration enables a firm to quickly increase its output capability.

In concentric diversification the distinctive competencies of the diversifying firm facilitate a smooth, synergistic and profitable expansion.

Joint venture permits a business to expand its strengths into competitive fields that it would hesitate to enter alone. A partner’s capabilities in the functional areas can reduce financial investment and increase the probability of success.

Approach # 4. Grand Strategy Clusters:

Thompson and Strickland’s improvements on BCG growth share portfolio matrix provide another method of selecting a grand strategy option. The growth rate of the general market and the company’s competitive position in the market define the situation of a business.

When these factors are considered simultaneously, a business can be broadly categorized in one of the four quadrants:

  1. Strong competitive position in a rapidly growing market.
  2. Weak position in a rapidly growing market.
  3. Weak position in a slow growth market.
  4. Strong position in a slow growth market.

Each of these quadrants offers a set of promising possibilities for choice of a grand strategy.

Business in a strong competitive position which is in a rapidly growing market is in an excellent strategic position. Such businesses adopt strategy of continued concentration on their current business because consumers seem content with the firm’s current strategy and a shift from the established competitive advantage may prove to be dangerous.

However, if the resources of a business are in excess of the demands of a concentration strategy, it should consider vertical integration. Backward integration helps a business protect its profit margins by extending backward into the production of components or raw materials Forward integration assists a business in protecting its market share by moving forward into wholesaling and distribution toward end users. Another option in this quadrant might be to consider concentric diversification that diminishes the risks associated with narrow product or service. This strategy requires continuance of heavy investment in the company’s core business.

Firms in a weak competitive position in a rapidly growing market must seriously evaluate maintaining their existing approach to the market place.

It must determine if it is able to compete effectively and choose of the four grand strategic options:

  1. Formulation or reformulation of a concentration strategy,
  2. Horizontal integration
  3. Divestiture; or
  4. Liquidation

A business even with weak competitive position may be able to find a profitable niche in a rapidly growing market. In such a situation concentration strategy should be followed. Horizontal integration strategy is adopted if the firm is short of critical competitive element or sufficient economies of scale to achieve competitive cost efficiencies.

Divestiture eliminates a drain on resources and provides additional funds to promote other business activities. The option of liquidation is followed as a last resort when a business cannot be sold as a going concern and at best is worth only the value of its tangible assets.

The decision to liquidate is an undeniable admission of failure by a firm’s strategic management and is thus often delayed to the further detriment of the company. Strategic managers often do not favor divestment as it is likely to endanger their control of the firm. They may even lose their jobs.

Businesses in a slow growth market with a relatively weak competitive position likely to continue will reduce their resource commitment to that business. In this quadrant, retrenchment strategy will have the benefits of making resources available for other businesses, and operating efficiency of employees may increase.

An alternative strategy is concentric or conglomerate diversification that diverts resources for expansion through investment in more promising business. If an optimistic buyer can be found, then the divesture follow, otherwise liquidation is the only option.

Businesses in a slow-growth market with a strong competitive position tend to diversify into more promising growth areas. High cash flow and limited internal growth needs characterize these businesses. Concentric diversification into ventures that utilize their proven business acumen is an excellent option.

Conglomerate diversification is a second strategy that spreads investment risk and keeps focus of the managerial attention on the current business. Multinational firms are attracted to joint ventures. A joint venture enables a domestic firm acquire competitive advantages in promising new business areas while involving limited risks.

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