CHAPTER - 5

STRATEGY ANALYSIS &

CHOICE
5.1 The Process of strategy analysis and choice

• Generating alternative strategies

• Evaluating alternative strategies
• Selecting strategies to pursue
 Seeks to determine alternative courses of
action that could best enable the firm to
achieve its mission and objectives
 5.2 characteristics of Long-Term
Objectives
 Long-term objectives represent the results expected
from pursuing certain strategies.
 Objectives should be
• quantitative, measurable, realistic, understandable,
challenging, hierarchical, obtainable, and
congruent among organizational units
 Objectives are commonly stated in terms such as
• growth in assets, growth in sales, profitability, market
share, degree and nature of diversification, degree
and nature of vertical integration, earnings per share,
and social responsibility.
 5.3 Importance of well described
and communicated objective
 Help stakeholders understand their role in an organization's future.
 Provide a basis for consistent decision making by managers
whose values and attitudes differ.
 Serve as standards by which individuals, groups, departments,
divisions, and entire organizations can be evaluated.
 provide the basis for designing jobs and organizing activities to be
performed in an organization.
 They also provide direction and allow for organizational synergy.
 5.4 Source of alternative strategies

 Vision
 Mission
 Objectives
 External audit
 Internal audit
 Past successful strategies

Ch 7 -5 Copyright © 2011 Pearson Education

5.5 The Strategy-Formulation Analytical
Framework

6-6
 Comprehensive Strategy-Formulation Framework

Stage 1:
The Input Stage

Stage 2: Stage 3:
The Matching Stage The Decision Stage

Ch 7 -7 Copyright © 2011 Pearson Education

 A Comprehensive Strategy-Formulation
Framework

 Stage 1 - Input Stage

 Summarizes the basic input information
needed to formulate strategies
 Consists of the EFE Matrix, the IFE Matrix,
and the Competitive Profile Matrix (CPM)
 Strategy-Formulation Analytical Framework

Internal Factor Evaluation

Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile Matrix

(CPM)

Ch 7 -9 Copyright © 2011 Pearson Education

 Stage 2 - Matching Stage

 Focuses on generating feasible alternative strategies

by aligning key external and internal factors
 Techniques include the
• Strengths-Weaknesses-Opportunities-Threats (SWOT)
Matrix,
• Strategic Position and Action Evaluation (SPACE) Matrix,
• Boston Consulting Group (BCG) Matrix,
• Internal-External (IE) Matrix, and
• Grand Strategy Matrix
 Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 7 -11 Copyright © 2011 Pearson Education

Matching Key External and Internal Factors
to Formulate Alternative Strategies
 2.1 SWOT Matrix

1. List the firm’s key external opportunities

2. List the firm’s key external threats
3. List the firm’s key internal strengths
4. List the firm’s key internal weaknesses
5. Match internal strengths with external
opportunities
 The Matching Stage

 The Strengths-Weaknesses-Opportunities-
Threats (SWOT) Matrix helps managers
develop four types of strategies:
 SO (strengths-opportunities) Strategies
 WO (weaknesses-opportunities) Strategies
 ST (strengths-threats) Strategies
 WT (weaknesses-threats) Strategies
 SO Strategies

Strengths
Use a firm’s
Weaknesses
internal strengths
Opportunities
to take advantage
Threats SO
of external
Strategies
opportunities
SWOT

For example the firm enjoying a good financial position which is

strength for a firm and externally opportunity to expand business.
Ch 7 -15 Copyright © 2011 Pearson Education
 WO Strategies

Strengths
Improving internal
Weaknesses
weaknesses by
Opportunities
WO taking advantage
Threats
Strategies of external
opportunities
SWOT

For example the firm is in the critical financial problems that is

weakness and firm is availing merger with Multinational
Corporation.
Ch 7 -16 Copyright © 2011 Pearson Education
 ST Strategies

Strengths Use a firm’s

Weaknesses strengths
Opportunities to avoid or
Threats ST reduce the impact
Strategies of external
SWOT threats

Opening new branches in order to overcome competitive

threat.
Ch 7 -17 Copyright © 2011 Pearson Education
 WT Strategies

Defensive tactics
Strengths aimed at reducing
Weaknesses internal
Opportunities weaknesses &
Threats WT avoiding
Strategies environmental
SWOT threats

•For example weak distribution network creating many

problems for the firm if it strong many external threats
can be removed.
Ch 7 -18 Copyright © 2011 Pearson Education
 STEPS FOR DEVELOPING SWOT Matrix

Strengths – Weaknesses –
S W

List Strengths List Weaknesses

Opportunities – SO WO Strategies
O Strategies
Overcoming
weaknesses by taking
Use strengths to
List Opportunities take advantage of
advantage of
opportunities
opportunities

Threats – T ST WT Strategies
Strategies
Minimize weaknesses
List Threats and avoid threats
Use strengths to
avoid threats
Ch 7 -19 Copyright © 2011 Pearson Education
2.2 Strategic Position & Action Evaluation Matrix
(SPACE Matrix)
•It explains that what is our strategic position and what
possible action can be taken.
•It is prepared on graph.
•It contains four-quadrant named aggressive, conservative,
defensive, or competitive strategies.
The axes of the SPACE Matrix represent
Two internal dimensions (financial position [FP] and
competitive position [CP])
Two external dimensions (stability position [SP] and industry
position [IP])
Most important determinants of an organization’s overall strategic
position
Ch 7 -20
Factors That Make Up the
SPACE Matrix Axes
Factors That Make Up the SPACE Matrix Axes
Steps to Develop a SPACE Matrix

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.
Assign a numerical value ranging from –1 (best) to
–7 (worst) to each of the variables that make up the
SP and CP dimensions
Steps to Develop a SPACE Matrix

3. Compute an average score for FP, CP, IP, and SP and

dividing by the number of variables
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 xy point
Steps to Develop a SPACE Matrix

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
The SPACE Matrix

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 Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 7 -27 Copyright © 2011 Pearson Education

 The Boston Consulting Group (BCG) Matrix

 BCG Matrix
 is a management consulting firm founded by Harvard
Business School alum Bruce Henderson in 1963
 graphically portrays differences among divisions in
terms of relative market share position and industry
growth rate
 corporate analysts would plot a scatter graph of their
business units, ranking their relative market shares
and the growth rates of their respective industries.
 This led to a categorization of four different types
of businesses:
 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0

High
+20
Stars Question Marks
Industry Sales Growth Rate

II I
Medium
0

Cash Cows Dogs

III IV
Low
-20
The BCG Matrix
 The BCG Matrix

 Question marks – Quadrant I

 Units with low market share in a fast-growing
industry
 Such business units require large amounts of cash to
grow their market share.
 The corporate goal must be to grow the business to
become a star.
 Organization must decide whether to strengthen them
by pursuing an intensive strategy (market penetration,
market development, or product development) or to
sell them
 BCG Matrix

Stars Quadrant II
• High relative market share and high growth rate
- Best long-run opportunities for growth &
profitability
• Substantial investment to maintain or strengthen
dominant position
- Integration strategies, intensive strategies, joint
ventures
Ch 7 -32 Copyright © 2011 Pearson Education
 BCG Matrix

Cash Cows Quadrant III

• High relative market share, competes in low-growth
industry
- Generate cash in excess of their needs
- Milked for other purposes
• Maintain strong position as long as possible
- Product development, concentric diversification
- If weakens – retrenchment or divestiture
Ch 7 -33 Copyright © 2011 Pearson Education
 BCG Matrix

Dogs Quadrant IV
• Low relative market share, competes in
slow or no market growth
- Weak internal & external position
• Liquidation, divestiture, retrenchment

Ch 7 -34 Copyright © 2011 Pearson Education

 The BCG Matrix

 The major benefit of the BCG Matrix is

that it draws attention to the cash flow,
investment characteristics, and needs of
an organization’s various divisions
Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 7 -36 Copyright © 2011 Pearson Education

 The Internal-External Matrix
 Positions an organization’s various divisions in
a nine-cell display

 Similar to BCG Matrix except the IE Matrix:

- Requires more information about the divisions
- Strategic implications of each matrix are different

Ch 7 -37 Copyright © 2011 Pearson Education

The Internal-External (IE) Matrix
 IE Matrix
 Based on two key dimensions
- The IFE total weighted scores on the x-axis
- The EFE total weighted scores on the y-axis

 Divided into three major regions

- Grow and build – Cells I, II, or IV
- Hold and maintain – Cells III, V, or VII
- Harvest or divest – Cells VI, VIII, or IX

Ch 7 -39 Copyright © 2011 Pearson Education

 Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 7 -40 Copyright © 2011 Pearson Education

The Grand Strategy Matrix

 In this matrix all organization divides into

four quadrants.
 Any organization should be placed in any
one of four quadrants.
 based on two evaluative dimensions:
• competitive position and
• market (industry) growth
The Grand Strategy Matrix
 The Grand Strategy Matrix

 Quadrant I
 continued concentration on current markets
(market penetration and market development)
and products (product development) is an
appropriate strategy
 Quadrant II
 unable to compete effectively
 need to determine why the firm’s current
approach is ineffective and how the company
can best change to improve its competitiveness
 The Grand Strategy Matrix

 Quadrant III
 must make some drastic changes quickly to
avoid further decline and possible liquidation
 Extensive cost and asset reduction
(retrenchment) should be pursued first
 Quadrant IV
 have characteristically high cash-flow levels and
limited internal growth needs and often can
pursue related or unrelated diversification
successfully
Strategy-Formulation Analytical Framework

Quantitative Strategic
Stage 3:
Planning Matrix
The Decision Stage (QSPM)

Ch 7 -45 Copyright © 2011 Pearson Education

A Comprehensive Strategy-Formulation
Framework
 Stage 3 - Decision Stage
 involves the Quantitative Strategic Planning
Matrix (QSPM)
 A QSPM uses input information from Stage 1
to objectively evaluate feasible alternative
strategies identified in Stage 2
 reveals the relative attractiveness of
alternative strategies and thus provides
objective basis for selecting specific
strategies
The Quantitative Strategic Planning Matrix
(QSPM)
 Quantitative Strategic Planning Matrix
(QSPM)
 objectively indicates which alternative strategies
are best
 uses input from Stage 1 analyses and matching
results from Stage 2 analyses to decide
objectively among alternative strategies
QSPM : information from IFE and
EFE Strategic Alternatives
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
Economy/Political/Legal/
Governmental/Social/Cultural/
Demographic/Environmental/
Technological
Competitive

Key Internal Factors

Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information Systems
Sum total A.S.

AS 1 to 4 and blank if factor does not effect strategy: TAS = Weight x AS

Steps in a QSPM

1. Make a list of the firm’s key external

opportunities/threats and internal
strengths/weaknesses in the left column of the
QSPM
2. Assign weights to each key external and
internal factor
3. Examine the Stage 2 (matching) matrices, and
identify alternative strategies that the
organization should consider implementing
 Steps in a QSPM (cont.)

4. Determine the Attractiveness Scores (AS)

5. Compute the Total Attractiveness Scores
6. Compute the Sum Total Attractiveness
Score
 Positive Features of the QSPM

 Sets of strategies can be examined

sequentially or simultaneously
 Requires strategists to integrate pertinent
external and internal factors into the
decision process
 Can be adapted for use by small and
large for-profit and nonprofit organizations
 Limitations of the QSPM

 Always requires intuitive judgments and

educated assumptions
 Only as good as the prerequisite
information and matching analyses upon
which it is based
A QSPM for a Retail Computer Store
A QSPM for a Retail Computer Store
6-55