STRATEGY

ANALYSIS &
CHOICE
Naning Aranti Wessiani
Industrial Management System Design
Laboratory
Department of Industrial & System Engineering
Institut Teknologi Sepuluh Nopember (ITS)
The Nature of Strategy Analysis & Choice

Strategy analysis and choice largely involve making subjective decisions based on
objective information.

Strategy analysis and choice seek to determine alternative courses of action that could
best enable the firm to achieve its mission and objectives.
Alternative strategies derive from:

Vision Mission Objectives

Past successful
External audit Internal audit
strategies
The Process of Generating and Selecting
Strategies
 Strategists never consider all feasible alternatives that could benefit the firm because there are an
infinite number of possible actions and an infinite number of ways to implement those actions.
 Therefore, a manageable set of the most attractive alternative strategies must be developed,
examined, prioritized, and selected.
 The advantages, disadvantages, trade-offs, costs, and benefits of these strategies should be
determined.
The Strategy-Formulation Analytical
Framework

1 2 3
Stage 1 Stage 2 Stage 3
• The Input Stage • The Matching • The Decision
Stage Stage
 Internal Factor Evaluation
Matrix (IFE)
The Strategy-
Formulation Stage 1:
The Input Stage
External Factor Evaluation
Matrix (EFE)
Analytical
Framework Competitive Profile
Matrix (CPM)
Input Stage
 Provides basic input information for the matching and decision stage matrices
 Requires strategists to quantify subjectivity early in the process
 Good intuitive judgment always needed
 TOWS Matrix

SPACE Matrix
The Strategy-
Formulation Stage 2:
BCG Matrix
The Matching Stage
Analytical
Framework IE Matrix

Grand Strategy
Matrix
Matching Stage
 Match between organization’s internal resources and skills and the opportunities and risks
created by its external factors.
Matching Key Factors to Formulate Alternative Strategies
Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in the

Excess working capacity
+ cell phone industry = Acquire Cellfone, Inc.
(strength)
(opportunity)

Exit of two major foreign

Insufficient capacity Pursue horizontal integration by
+ competitors form the =
(weakness) buying competitor's facilities
industry (opportunity)

Decreasing numbers of Develop new products for older

Strong R&D (strength) + =
young adults (threat) adults

Poor employee morale Strong union activity Develop a new employee

+ =
(weakness) (threat) benefits package
 TOWS Matrix

SPACE Matrix
The Strategy-
Formulation Stage 2:
BCG Matrix
The Matching Stage
Analytical
Framework IE Matrix

Grand Strategy
Matrix
 Threats Opportunities

TOWS Matrix

Weaknesses Strengths
TOWS Matrix
 Develop four types of strategies:

1) Strengths-Opportunities (SO)
2) Weaknesses-Opportunities (WO)
3) Strengths-Threats (ST)
4) Weaknesses-Threats (WT)
SO Strategies

Use a firm’s
Threats SO internal strengths
Opportunities
Weaknesses
Strategies to take advantage
Strengths of external
(TOWS) opportunities
WO Strategies

Improving
Threats WO internal
Opportunities weaknesses by
Weaknesses
Strategies
taking advantage
Strengths of external
(TOWS)
opportunities
ST Strategies

Using firm’s
Threats ST strengths to avoid
Opportunities
Weaknesses
Strategies or reduce the
Strengths impact of external
(TOWS) threats
WT Strategies

Defensive tactics
aimed at reducing
Threats WT internal
Opportunities
Weaknesses
Strategies weaknesses and
Strengths avoiding
(TOWS) environmental
threats
 1 List the firm’s key external opportunities

Steps in 2 List the firm’s key external threats

developing
the TOWS 3 List the firm’s key internal strengths

Matrix
4 List the firm’s key internal weaknesses
 5 Match internal strengths with external opportunities and
record the resultant SO Strategies

Steps in 6 Match internal weaknesses with external opportunities and

record the resultant WO Strategies

developing
the TOWS
Matrix 7 Match internal strengths with external threats and record the
resultant ST Strategies

(Cont…)
8 Match internal weaknesses with external threats and record
the resultant WT Strategies
 TOWS Matrix
Strengths-S Weaknesses-W

List Strengths List Weaknesses

Opportunities-O SO Strategies WO Strategies

List Opportunities Use strengths to take advantage Overcome weaknesses by

of opportunities taking advantage of
opportunities

Threats-T ST Strategies WT Strategies

List Threats Use strengths to avoid threats Minimize weaknesses and

avoid threats
TOWS Matrix
Example
 TOWS Matrix

SPACE Matrix
The Strategy-
Formulation Stage 2:
BCG Matrix
The Matching Stage
Analytical
Framework IE Matrix

Grand Strategy
Matrix
SPACE Matrix
Strategic Position and Action Evaluation Matrix
 Four quadrant framework
 Determines appropriate strategies
1. Aggressive
2. Conservative
3. Defensive
4. Competitive
SPACE Matrix
TWO INTERNAL DIMENSIONS TWO EXTERNAL DIMENSIONS
 Financial Strength [FS]  Environmental Stability [ES]
 Competitive Advantage [CA]  Industry Strength [IS]
Developing the SPACE Matrix:
1) Select variables to define FS, CA, ES, & IS
2) Assign numerical ranking from +1 (worst) to +6 (best) for FS and IS; Assign numerical
ranking from –1 (best) to –6 (worst) for ES and CA.
3) Compute average score for FS, CA, ES, & IS
4) Plot the average scores on the Matrix
5) Add the two scores on the x-axis and plot point on X. Add the scores on the y-axis and plot
Y. Plot the intersection of the new xy point
6) Draw a directional vector from origin through the new intersection point
SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Return on investment Technological changes

Leverage Rate of inflation
Liquidity Demand variability
Working capital Price range of competing products
Cash flow Barriers to entry
Ease of exit from market Competitive pressure
Risk involved in business Price elasticity of demand
SPACE Factors
Internal Strategic Position External Strategic Position

Competitive Advantage CA Industry Strength (IS)

Market share Growth potential

Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Technological know-how
Competition’s capacity utilization Resource utilization
Technological know-how Capital intensify
Control over suppliers & distributors Ease of entry into market
Productivity, capacity utilization
SPACE Matrix
SPACE Matrix Limitations
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.
 TOWS Matrix

SPACE Matrix
The Strategy-
Formulation Stage 2:
BCG Matrix
The Matching Stage
Analytical
Framework IE Matrix

Grand Strategy
Matrix
BCG Matrix
Boston Consulting Group Matrix
 Enhances multidivisional firms’ efforts to formulate strategies
 Autonomous divisions (or profit centers) constitute the business portfolio
 Firm’s divisions may compete in different industries requiring separate strategy
 Graphically portrays differences among divisions
 Focuses on market share position and industry growth rate
 Manage business portfolio through relative market share position and industry growth rate
BCG Matrix
Relative market share position defined:
 Ratio of a division’s own market share in a particular industry to the market share held by the
largest rival firm in that industry.
BCG Matrix
BCG Matrix:
Stars
 High relative market share and high industry growth
rate.
o Best long-run opportunities for growth and profitability
 Substantial investment to maintain or strengthen
dominant position
o Integration strategies, intensive strategies, joint ventures
BCG Matrix:
Question Marks
 Low relative market share position yet
compete in high-growth industry.
o Cash needs are high
o Case generation is low
 Decision to strengthen (intensive
strategies) or divest
BCG Matrix:
Cash Cow
 High relative market share position, but compete in low-growth industry
o Generate cash in excess of their needs
o Milked for other purposes
 Maintain strong position as long as possible
o Product development, concentric diversification
o If becomes weak—retrenchment or divestiture
BCG Matrix:
Dogs
 Low relative market share position and compete in
slow or no market growth
o Weak internal and external position
 Decision to liquidate, divest, retrenchment
 TOWS Matrix

SPACE Matrix
The Strategy-
Formulation Stage 2:
BCG Matrix
The Matching Stage
Analytical
Framework IE Matrix

Grand Strategy
Matrix
IE Matrix
 The Internal-External (IE) Matrix positions an organization’s various divisions (segments) in a
nine-cell display
 The IE Matrix is similar to the BCG Matrix in that both tools involve plotting a firm’s divisions
in a schematic diagram
 BCG and IE Matrix also can be called portfolio matrices
 Strategists in multidivisional firms often develop both the BCG Matrix and the IE Matrix in
formulating alternative strategies
IE Matrix
 TOWS Matrix

SPACE Matrix
The Strategy-
Formulation Stage 2:
BCG Matrix
The Matching Stage
Analytical
Framework IE Matrix

Grand Strategy
Matrix
Grand Strategy
Matrix
 Popular tool for formulating alternative
strategies
 All organizations (or divisions) can be
positioned in one of four quadrants
 Based on two evaluative dimensions:
1) Competitive position
2) Market growth
Grand Strategy Matrix
 Excellent strategic position

Grand Concentration on current

Strategy markets and products
Matrix:
Quadrant I Take risks aggressively
when necessary
 Evaluate present approach
seriously

Grand How to change to improve

Strategy competitiveness
Matrix:
Quadrant II Rapid market growth requires
intensive strategy
 Compete in slow-growth
industries
Weak competitive position
Grand
Strategy
Matrix: Drastic changes quickly
Quadrant III
Cost and asset reduction
indicated (retrenchment)
 Strong competitive position

Grand Slow-growth industry

Strategy
Matrix:
Quadrant IV Diversification indicated to
more promising growth areas
The Strategy-
Formulation Stage 3: Quantitative Strategic
Planning Matrix (QSPM)
The Decision Stage
Analytical
Framework
QSPM
 One analytical technique designed to determine the relative attractiveness of feasible alternative
actions
 Tool for objective evaluation of alternative strategies
 Based on identified external and internal crucial success factors
 Requires good intuitive judgment
 List the firm’s key external opportunities & threats; list the firm’s key
1 internal strengths and weaknesses

2 Assign weights to each external and internal critical success factor

Examine the Stage 2 (matching) matrices and identify alternative

3
Steps in strategies that the organization should consider implementing

Preparing 4 Determine the Attractiveness Scores (AS)

QSPM
5 Compute the total Attractiveness Scores

6 Compute the Sum Total Attractiveness Score

 Requires intuitive judgments and
educated assumptions

QSPM
Limitations Only as good as the prerequisite
inputs
 Sets of strategies examined
simultaneously or sequentially

QSPM
Positives Requires the integration of
pertinent external and internal
factors in the decision-making
process
End of Session