Chapter Five

Strategy Formulation: Strategy Analysis and Choice

“Tomorrow always arrives. It is always different. And even the mightiest
company is in trouble if it has not worked for the future. Being surprised by what
happens is a risk that even the largest and richest company cannot afford, and even
the smallest business need not run.”

Peter Drucker

5.1 The Nature of Strategy Analysis and Choice

Increasingly important to firm success, strategy is concerned with making choices

among two or more alternatives. When choosing a strategy, the firm decides to
pursue one course of action instead of others. The choices made are influenced by
opportunities and threats in the firm’s external environment as well as the nature
and quality of its internal resources, capabilities, and core competencies. The
fundamental objective of using any type of strategy is to gain strategic
competitiveness and earn above-average returns. Strategies are purposeful, precede
the taking of actions to which they apply, and demonstrate a shared understanding
of the firm’s vision and mission. Strategy analysis and choice seek to determine
alternative courses of action that could best enable the firm to achieve its mission
and objectives. Strategy choice is the decision to select from among the alternative
strategies, which will best meet the enterprise’s objectives. Identifying and
evaluating alternative strategies should involve many of the managers and
employees who earlier assembled the organizational vision and mission statements,
performed the external audit, and conducted the internal audit. Representatives
from each department and division of the firm should be included in this process,
as was the case in previous strategy-formulation activities.

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5.2 The Nature of Long-Term Objectives

Objectives should be quantitative, measurable, realistic, understandable,

challenging, hierarchical, obtainable, and congruent among organizational units.
Each objective should also associate with a timeline. 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. Clearly established objectives offer
many benefits. They provide direction, allow synergy, aid in evaluation, establish
priorities, reduce uncertainty, minimize conflicts, and aid in both the allocation of
resources and the design of jobs. Objectives provide a basis for consistent decision
making by managers whose values and attitudes differ. Objectives serve as
standards by which individuals, groups, departments, divisions, and entire
organizations can be evaluated. Long-term objectives are needed at the corporate,
divisional, and functional levels of an organization. Without long-term objectives,
an organization would drift aimlessly toward some unknown end. It is hard to
imagine an organization or individual being successful without objectives. Success
only rarely occurs by accident; rather, it is the result of hard work directed toward
achieving certain objectives.

Financial versus Strategic Objectives

Two types of objectives are especially common in organizations: financial and

strategic objectives. Financial objectives include those associated with growth in
revenues, growth in earnings, higher dividends, larger profit margins, greater
return on investment, higher earnings per share, rising stock price, improved cash
flow, and so on; while strategic objectives include things such as a larger market
share, quicker on-time delivery than rivals, shorter design-to-market times than
rivals, lower costs than rivals, higher product quality than rivals, wider geographic

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coverage than rivals, achieving technological leadership, consistently getting new
or improved products to market ahead of rivals, and so on.

Although financial objectives are especially important in firms, oftentimes there is

a trade-off between financial and strategic objectives such that crucial decisions
have to be made. For example, a firm can do certain things to maximize short-term
financial objectives that would harm long-term strategic objectives. To improve
financial position in the short run through higher prices may, for example,
jeopardize long-term market share. The danger associated with trading off long-
term strategic objectives with near-term bottom-line performance are especially
severe if competitors relentlessly pursue increased market share at the expense of
short-term profitability.

5.3 Types of Strategies

Forward integration, backward integration, horizontal integration, market

penetration, market development, product development, related diversification,
unrelated diversification, retrenchment, divestiture, and liquidation. Many, if not
most, organizations simultaneously pursue a combination of two or more
strategies, but a combination strategy can be exceptionally risky if carried too far.
No organization can afford to pursue all the strategies that might benefit the firm.
Difficult decisions must be made. Priority must be established. Organizations, like
individuals, have limited resources.

1. Integration Strategies

Forward integration, backward integration, and horizontal integration are

sometimes collectively referred to as vertical integration strategies. Vertical
integration strategies allow a firm to gain control over distributors, suppliers,
and/or competitors.

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 a. Forward Integration

Forward integration involves gaining ownership or increased control over

distributors or retailers. Increasing numbers of manufacturers (suppliers) today are
pursuing a forward integration strategy by establishing Web sites to directly sell
products to consumers. An effective means of implementing forward integration is
franchising. Business can expand rapidly by franchising because costs and
opportunities are spread among many individuals. These six guidelines indicate
when forward integration may be an especially effective strategy:

o When an organization’s present distributors are especially expensive, or

unreliable, or incapable of meeting the firm’s distribution needs.
o When the availability of quality distributors is so limited as to offer a
competitive advantage to those firms that integrate forward.
o When an organization competes in an industry that is growing and is expected
to continue to grow markedly; this is a factor because forward integration
reduces an organization’s ability to diversify if its basic industry falters.
o When an organization has both the capital and human resources needed to
manage the new business of distributing its own products.
o When the advantages of stable production are particularly high; this is a
consideration because an organization can increase the predictability of the
demand for its output through forward integration.
o When present distributors or retailers have high profit margins; this situation
suggests that a company profitably could distribute its own products and price
them more competitively by integrating forward.
b. Backward Integration

Both manufacturers and retailers purchase needed materials from suppliers.

Backward integration is a strategy of seeking ownership or increased control of a

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firm’s suppliers. This strategy can be especially appropriate when a firm’s current
suppliers are unreliable, too costly, or cannot meet the firm’s needs. When you buy
a box of diapers at Wal-Mart, a scanner at the store’s checkout counter instantly
zaps an order to Proctor & Gamble Company. Seven guidelines for when backward
integration may be an especially effective strategy are:

 When an organization’s present suppliers are especially expensive, or

unreliable, or incapable of meeting the firm’s needs for parts, components,
assembles, or raw materials.
 When the number of suppliers is small and the number of competitors is large.
 When an organization competes in an industry that is growing rapidly; this is
a factor because integrative-type strategies (forward, backward, and
horizontal) reduce an organization’s ability to diversify in a declining
industry.
 When an organization has both capital and human resources to manage the
new business of supplying its own raw materials.
 When the advantages of stable prices are particularly important; this is a factor
because an organization stabilize the cost of its raw materials and the
associated price of its product(s) through backward integration.
 When present suppliers have high profit margins, which suggests that the
business of supplying products or services in the given industry is a
worthwhile venture.
 When an organization needs to quickly acquire a needed resource.
c. Horizontal Integration

Horizontal integration refers to a strategy of seeking ownership of or increased

control over a firm’s competitors. One of the most significant trends in strategic
management today is the increased use of horizontal integration as a growth
strategy. Mergers, acquisitions, and takeovers among competitors allow for

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increased economies of scale and enhanced transfer of resources and competencies.
Kenneth Davidson makes the following observation about horizontal integration:

The trend towards horizontal integration seems to reflect strategists’ misgivings

about their ability to operate many unrelated businesses. Mergers between direct
competitors are more likely to create efficiencies than mergers between unrelated
businesses, both because there is a greater potential for eliminating duplicate
facilities and because the management of the acquiring firm is more likely to
understand the business of the target.

The five guidelines indicate when horizontal integration may be an especially

effective strategy;

 When an organization can gain monopolistic characteristics in a particular

area or region without being challenged by the federal government for
“tending substantially” to reduce competition.
 When an organization competes in a growing industry.
 When increased economies of scale provide major competitive advantages.
 When an organization has both the capital and human talent needed to
successfully manage an expanded organization.
 When competitors are faltering due to a lack of managerial expertise or a
need for particular resources that an organization possesses; note that
horizontal integration would not be appropriate if competitors are doing
poorly, because in that case overall industry sales are declining.
2. Intensive Strategies

Market penetration, market development, and product development are sometimes

referred to as intensive strategies because they require intensive efforts if a firm’s
competitive position with products is to improve.

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 a. Market Penetration

A market penetration strategy seeks to increase market share for present products
or services in present markets through greater marketing efforts. This strategy is
widely used alone and in combination with other strategies. Market penetration
includes increasing the number of salespersons, increasing advertising
expenditures, offering extensive sales promotion items, or increasing publicity
efforts.

The five guidelines indicate when market penetration may be an especially

effective strategy:

 When current markets are not saturated with a particular product or service.

 When the usage rate of present customers could be increased significantly.

 When the market shares of major competitors have been declining while total

industry sales have been increasing.

 When the correlation between dollar marketing expenditures historically has

been high
 When increased economies of scale provide major competitive advantages.

b. Market Development

Market development involves introducing present products or services into new

geographic areas. The six guidelines indicate when market development may be an
especially effective strategy:

When new channels of distribution are available that are reliable, inexpensive,
and of good quality.
When an organization is very successful at what it does.
When new untapped or unsaturated markets exist.
When an organization has the needed capital and human resources to manage
expanded operations.

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 When an organization has excess production capacity.
When an organization’s basic industry is rapidly becoming global in scope.
c. Product Development

Product development is a strategy that seeks increased sales by improving or

modifying present products or services. Product development usually entails large
research and development expenditures. These five guidelines indicate when
product development may be an especially effective strategy to pursue:

 When an organization has successful products that are in the maturity stage of
the product life cycle; the idea here is to attract satisfied customers to try new
(improved) products as a result of their positive experience with the
organization’s present products or services.
 When an organization competes in an industry that is characterized by rapid
technological developments.
 When major competitors offers better-quality products at comparable prices.
 When an organization competes in a high-growth industry.
 When an organization has especially strong research and development
capabilities.
3. Diversification Strategies

There are two general types of diversification strategies: related and unrelated.
Businesses are said to be related when their value chains possess competitively
valuable cross-business strategic fit; businesses are said to be unrelated when their
value chains are so dissimilar that no competitively valuable cross-business
relationships exist. Most companies favor related diversification strategies in order
to capitalize on synergies as follows:

 Transferring competitively valuable expertise, technological know-how, or

other capabilities from one business to another.

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 Combining the related activities of separate businesses into a single operation
to achieve lower costs.
 Exploiting common use of a well-known brand name.
 Cross-business collaboration to create competitively valuable resource
strengths and capabilities.

The greatest risk of being in a single industry is having all of the firm’s eggs in one
basket. Although many firms are successful operating in a single industry, new
technologies, new products, or fast-shifting buyer preferences can decimate a
particular business. For example, digital cameras are decimating the film and film
processing industry, and cell phones have permanently altered the long-distance
telephone calling industry.

Diversification must do more than simply spread business risk across different
industries, however, because shareholders could accomplish this by simply
purchasing equity in different firms across different industries or by investing in
mutual funds. Diversification makes sense only to the extent the strategy adds
more to shareholders value than what shareholders could accomplish acting
individually. Thus, the chosen industry for diversification must be attractive
enough to yield consistently high returns on investment and offer potential across
the operating divisions for synergies greater than those entities could achieve
alone.

a. Related (Concentric) diversification

Six guidelines for when related diversification may be an effective strategy are as
follows.

o When an organization competes in a no-growth or slow-growth industry.

o When adding new, but related, products would significantly enhance the sales
of current products.

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 o When new, but related, products could be offered at highly competitive price.
o When new, bur related, products have seasonal sales levels that
counterbalance an organization’s existing peaks and valley.
o When an organization’s products are currently in the declining stage of the
product’s life cycle.
o When an organization has a strong management team

b. Unrelated (Conglomerate) diversification

An unrelated diversification strategy favors capitalizing on a portfolio of

businesses that are capable of delivering excellent financial performance in their
respective industries, rather than striving to capitalize on value chain strategic fits
among the businesses. Firms that employ unrelated diversification continually
search across different industries for companies that can be acquired for a deal and
yet have to provide a high return on investment. Ten guidelines for when unrelated
diversification may be an especially effective strategy are:

 When revenues derived from an organization’s current products or services

would increase significantly by adding the new, unrelated products.
 When an organization competes in a highly competitive and/or a no-growth
industry, as indicated by low industry profit margins and returns.
 When an organization’s present channels of distribution can be used to
market the new products to current customers.
 When the new products have countercyclical sales patterns compared to an
organization’s present products.
 When an organization’s basic industry is experiencing declining annual sales
and profits.
 When an organization has the capital and managerial talent needed to
compete successfully in a new industry.

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  When an organization has the opportunity to purchase an unrelated business
that is an attractive investment opportunity.
 When there exists financial synergy between the acquired and acquiring firm.
(Note that the key difference between related and unrelated diversification is
that the former should be based on some commonality in markets, products,
or technology, whereas the latter should be based more on profit
considerations.)
 When existing markets for an organization’s present products are saturated.
 When antirust action could be charged against an organization that
historically has concentrated on single industry.
4. Defensive Strategies

In addition to integrative, intensive, and diversification strategies, organization also

could pursue retrenchment, divestiture, or liquidation.

a. Retrenchment

Retrenchment occurs when an organization regroups through cost and asset

reduction to reverse declining sales and profits. Sometimes called a turnaround or
reorganizational strategy, retrenchment is designed to fortify an organization’s
basic distinctive competence. During retrenchment, strategists work with limited
resources and face pressure from buildings to raise needed cash, pruning product
lines, closing marginal businesses, closing obsolete factories automating processes,
reducing the number of employees, and instituting expense control system. Five
guidelines for when retrenchment may be an especially effective strategy to pursue
are as follows:

 When an organization has a clearly distinctive competence but has failed

consistently to meet its objectives and goals over time.

 When an organization is one of the weaker competitors in a given industry.

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  When an organization is plagued by inefficiency, low profitability, poor

employee morale, and pressure from stockholders to improve performance.

 When an organization has failed to capitalize on external opportunities,

minimize external threats, take advantage of internal strengths, and overcome

internal weaknesses over time; that is, when the organization’s strategic
managers have failed (and possibly will be replaced by more competent
individuals).
 When an organization has grown so large so quickly that major internal

reorganization is needed.
b. Divestment (Sell-out)

Selling a division or part of an organization is called divestiture. Divestiture often

is used to raise capital for further strategic acquisitions or investments. Divestiture
can be part of an overall retrenchment strategy to rid an organization of business
that are unprofitable, that require too much capital, or that do not fit well with the
firm’s other activities. Divestiture has also become a popular strategy for firms to
focus on their core businesses and become less diversified. Six guidelines for when
divestiture may be an especially effective strategy to pursue follow:

 When an organization has pursued a retrenchment strategy and failed to

accomplish needed improvements.
 When a division needs more resources to be competitive than the company
can provide.
 When a division is responsible for an organization’s overall poor
performance.
 When a division is a misfit with the rest of an organization; this can result
from radically different markets, customers, managers, employees, values, or
needs.

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  When a large amount of cash is needed quickly and cannot be obtained
reasonably form other sources.
 When government antitrust action threatens an organization.
c. Liquidation (Bankruptcy)

Selling of a company’s assets, in parts, for their tangible worth is called

liquidation. Liquidation is a recognition of defeat and consequently can be an
emotionally difficult strategy. However, it may be better to cease operating than to
continue losing large sums of money. These three guidelines indicate when
liquidation may be an especially effective strategy to pursue:

 When an organization has pursued both a retrenchment strategy and a

divestiture strategy, and neither has been successful.

 When an organization’s only alternative is bankruptcy. Liquidation represents

an orderly and planned means of obtaining the greatest possible cash for an
organization’s assets. A company can legally declare bankruptcy first and then
liquidate various divisions to raise needed capital.
 When the stockholders of a firm can minimize their losses by selling the

organization’s assets.

Michael Porter’s Generic Business Level Strategies

1. Cost leadership
2. Differentiation
3. Focused cost leadership
4. Focused differentiation
5. Integrated cost leadership/differentiation
1. Cost Leadership Business Strategy

A cost leadership strategy is based upon a business organizing and managing its
value adding activities to be the lowest cost producer of the product or service in

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an industry. Value chain analysis is central to identifying where cost savings can
be made at various stages in the value chain and its internal and external linkages.
A successful cost leadership strategy is likely to rest upon a number of
organizational features. Attainment of a position of cost leadership depends on the
arrangement of value chain activities so as to:
 Reduce unit costs by copying rather than originating designs, using cheaper

materials and other cheaper resources, producing products with no frills,

reducing labor costs and increasing labor productivity.
 Achieving economies of scale by high-volume sales perhaps based on

advertising and promotion, allowing high fixed costs of investment in modern

technology to be spread over a high volume of output
 Using high volume purchasing to obtain discounts for bulk buying of materials

 Locating activities in areas where costs are low or government help is available

When the competitive advantage of a firm lies in a lower cost of products or

services relative to what the competitors have to offer, it is termed as cost
leadership. Customers prefer a lower cost product particularly if it offers the same
utility to them as the comparable products available in the market offer. When all
firms offer products at comparable price, then the cost leader firm earns a higher
profit owing to the low cost of its products. Cost leadership offers a margin of
flexibility to the firm to lower price if the competition becomes stiff and yet earn
more or less the same level of profit. For companies competing in a price sensitive
market, cost leadership is a strategy imperative of the entire organization.

 Conditions under Which Cost Leadership is Used

Not every condition under which market operates is conducive to the use of the
cost leadership strategy. There are certain conditions that make such usage
meaningful. Some of such conditions are mentioned below:
 If the markets for the product/service is price based competition

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  If the product/service is standardized and its competition takes place in such a

way that differentiation is superfluous

 If the buyers may be numerous and possess a significant bargaining power to

negotiate a price reduction from the supplying firm

 If there is lesser customer loyalty and the cost of switching from one seller to

another is low.
 If there might be few ways available for differentiation to take place.

Advantages and disadvantages of cost leadership Strategy

Advantage Disadvantage
 Defend market share  Competitors may imitate the strategy, thus driving overall
 Build entry barriers industry profits down
 Increase market share  Cost advantage is temporary
 Enter new markets  Cost leadership is obviously not a market friendly
 Reduce the cost of capital approach
 Technological shifts are a greater threat to a cost leader as
these may change the ground rules on which an industry
operates

2. Differentiation Business Strategy

It is a strategy of achieving a competitive advantage by creating a product that is

perceived by customers as unique in some important way. Using a differentiation
strategy means that a firm is competing based on uniqueness rather than price and
is seeking to attract a broad market. A differentiation strategy is based on
persuading customers that a product is superior to that offered by competitors.
Differentiation can be based on premium product features or simply upon
creating consumer perceptions that a product is superior. A differentiation strategy
is likely to necessitate emphasis on innovation, design, research and
development, awareness of particular customer needs and marketing. The firm

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outperforms its competitors who are not able or willing to offer the special features
that it can and does. Customers prefer a differentiated product/service when it
offers them a utility that they value, and are willing to pay more for getting such a
utility. Profits for the differentiation firm come from the difference in the premium
price charged and the additional cost incurred in providing the differentiation. To
the extent the firm is able to offer differentiation by maintaining a balance between
its price and costs, it succeeds. However, it may fail if the customers are no longer
interested in the differentiated features, or not willing to pay extra for such
features.
Advantages and disadvantages of Differentiation Strategy
Advantages Disadvantages
 lessening competitive rivalry  Price premiums to have a limit
 Reduce bargaining power of buyers  customers will not be willing to pay extra
 Acts as a entry barrier to new entrants to obtain the unique features
 Reduce substitutability  if it is not valued by the customers it will
fail

3. Focused cost leadership

Focus business strategies essentially rely on either cost leadership or differentiation

but cater to a narrow segment of the total market. In terms of the market,
therefore, focus strategies are niche strategies. The more commonly used bases
for identifying customer groups are the demographic characteristics (age, gender,
income, occupation etc.), geographic segmentation (rural/urban), lifestyle
(traditional/modern). A focus strategy is aimed at a segment of the market for a
product rather than at the whole market or many markets. A particular group of
customers is identified on the basis of age, income, life style, sex, geographic
location, some other distinguishing segmental characteristic or a combination of

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these. For the identified market segment a focus firm uses either the lower cost or
differentiation strategy.
Focused cost leadership is the first of two focus strategies. A focused cost
leadership strategy requires competing based on price to target a narrow market. A
firm that follows this strategy does not necessarily charge the lowest prices in the
industry. Instead, it charges low prices relative to other firms that compete within
the target market.

4. Focused differentiation

Focused differentiation is the second of two focus strategies. A focused

differentiation strategy requires offering unique features that fulfill the demands of
a narrow market. As with a focused low-cost strategy, narrow markets are defined
in different ways in different settings. Some firms using a focused differentiation
strategy concentrate their efforts on a particular sales channel, such as selling over
the Internet only. Others target particular demographic groups.
Conditions under which a focus strategies are used
1. When the target market niche is large, profitable, and growing.
2. When industry leaders do not consider the niche to be crucial to their own
success.
3. When industry leaders consider it too costly or difficult to meet the
specialized needs of the target market niche while taking care of their
mainstream customers.
4. When the industry has many different niches and segments, thereby allowing
a focuser to pick a competitively attractive niche suited to its own resources.
5. When few, if any, other rivals are attempting to specialize in the same target
segment
6. When consumers have distinctive preferences or requirements and when
rival firms are not attempting to specialize in the same target segment.

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 7. When the focusing firm has the necessary skills and expertise to serve the
niche segment
8. When the focusing firm can guard its territory from other predator firms
based on customer relations and the loyalty it has developed and its
acknowledged superiority in serving the niche segments.
Advantage and disadvantage of focus strategy
Advantage Disadvantage
 It allows specialization and greater  Serving niche markets requires the
knowledge development of distinctive
 lower investment in resources competencies to serve those markets
 It makes entry to a new market less  commitment to a narrow marker
costly and simpler segment
 High cost

5. Integrated Cost Leadership/Differentiation Strategy

Most consumers have high expectations when purchasing a good or service. In

general, it seems that most consumers want to pay a low price for products with
somewhat highly differentiated features. Because of these customer expectations, a
number of firms engage in primary and support activities that allow them to
simultaneously pursue low cost and differentiation. Firm seeking to do this use the
integrated cost leadership/differentiation strategy. The objective of using this
strategy is to efficiently produce products with some differentiated features.
Efficient production is the source of maintaining low costs while differentiation is
the source of creating unique value. Firms that successfully use the integrated cost
leadership/differentiation strategy usually adapt quickly to new technologies and
rapid changes in their external environments.
This risky of strategy is risky because firms find it difficult to perform primary and
support activities in ways that allow them to produce relatively inexpensive

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products with levels of differentiation that create value for the target customer.
Moreover, too properly use this strategy across time, firms must be able to
simultaneously reduce costs incurred to produce products (as required by the cost
leadership strategy) while increasing products’ differentiation (as required by the
differentiation strategy).They may got the problem of “stuck in the middle. Being
stuck in the middle means that the firm’s cost structure is not low enough to allow
it to attractively price its products and that its products are not sufficiently
differentiated to create value for the target customer.

5.4 Levels of Strategy / The strategy hierarchy

Strategies can be divided in to three broad categories
1. Corporate strategy: 1) growth strategy, 2) stability strategy, 3) retrenchment
strategy.
2. Business unit strategy: 1) cost leadership, 2) differentiation, 3) focus cost
leadership, 4) focus differentiation,5) integrated cost leadership/
differentiation.
3. Functional strategy
In most (large) corporations there are several levels of management. Each level (of
strategy) involves different strategic decisions.
Strategic management is the conduct/ way of drafting, implementing and
evaluating cross-functional decisions that will enable an organization to achieve its
long-term objectives.
Strategic management is the process of:
 specifying the organization's mission, vision and objectives,
 developing policies and plans, often in terms of projects and programs,
which are designed to achieve these objectives, and then
 Allocating resources to implement the policies and plans, projects and
programs.

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It provides overall direction to the enterprise. It gives direction to corporate values,
corporate culture, corporate goals, and corporate missions.
There is wide diversity in the strategic management literatures attached to the
different levels of strategy that may exist in a firm. Strategy can be formulated on
different levels.
Thompson and Strickland propose four levels:
o corporate strategy,
o business strategy,
o functional area support strategy, and
o Operating-level strategy.
Each layer provides strategic guidance of the next level of subordinate managers.

Corporate-Level Managers Corporate Strategy

Business-Level General Managers Business Strategies

Heads of major Functional Areas Functional Strategies

Plant Managers, Lower-Level Operating Strategies

Supervisors

Two-way Influence
5.4.1 Corporate-Level Strategy/ Corporate strategy
Corporate level strategy refers to the overarching strategy of the diversified firm. It
answers the questions of
 "which businesses should we be in?" and
 "How does being in these businesses create synergy and/ or add to the
competitive advantage of the corporation as a whole?"
Corporate level strategy fundamentally is concerned
 With the selection of businesses in which the company should compete and
 With the development and coordination of that portfolio of businesses.

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Corporations are responsible for creating value through their businesses. They do
so by
 Managing their portfolio of businesses,
 Ensuring that the businesses are successful over the long-term,
 Developing business units, and
 Sometimes ensuring that each business is compatible with others in the
portfolio
Under this broad corporate strategy there are typically business-level competitive
strategies and functional unit strategies.
5.4.2 Business-Level Strategy/ Business Unit Level Strategy
Organizations must maintain a balance, ensuring that all business units are aligned
with the overall corporate strategy, while allowing individual business units to
proactively act to address the challenges and opportunities in their specific
businesses.
A strategic business unit (SBU) is a semi-autonomous unit that is usually
responsible for its own budgeting, new product decisions, hiring decisions, and
price setting. It may be a division, product line, or other profit center that can be
planned independently from the other business units of the firm. An SBU is treated
as an internal profit Centre by corporate headquarters.
At the business unit level, the strategic issues are less about the coordination of
operating units and more about developing and sustaining a competitive advantage
for the goods and services that are produced.
At the business level, the strategy formulation phase deals with:
 Positioning the business against rivals
 Anticipating changes in demand and technologies and adjusting the strategy
to accommodate them and
 Influencing the nature of competition through strategic actions such as
vertical integration and through political actions such as lobbying.

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Business strategy consists of action plans that relate to goals (at the business level).
It focuses on expected operational results of a business unit; and it refers to the
aggregated strategies of single business firm or a strategic business unit (SBU) in a
diversified corporation.
Michael Porter identified three generic strategies such as cost leadership,
differentiation, and focus that can be implemented at the business unit level to
create a competitive advantage and defend against the adverse effects of the five
forces
Business-level action specifications should be devolved so that collectively they
define the following elements:
o The strategic posture represented by the strategy.
o The firm’s product market scope;
o Input-output transformations in which the firm is engaged;
o What synergies are sought in the operation of the firm?
When taken together, these elements of business-level strategy should combine
uniquely to:
 Define the business of the SBU or firm, and
 Describe its competitive edge.
Thus strategy aligns the strategic business unit or firm relative to its competitors,
distinguishes it from them, and hopefully propels it beyond them.

5.4.3 Functional-level Strategy / Functional strategies

The functional level of the organization is the level of the operating divisions and
departments. The strategic issues at the functional level are related to business
processes and the value chain.
Functional units of an organization are involved in higher level strategies by
providing input into the business unit level and corporate level strategy, such as
providing information on resources and capabilities on which the higher level

22
strategies can be based. Once the higher-level strategy is developed, the functional
units translate it into discrete action-plans that each department or division must
accomplish for the strategy to succeed.
In contrast with the other levels of strategy, functional strategies serve as
guidelines for the employees of each of the firm’s subdivisions.
Functional strategies are developed for each of the functional parts of the firm to
guide the behavior of people in a way that would put the other strategies into
motion such as marketing strategies, new product development strategies, human
resource strategies, financial strategies, legal strategies, supply-chain strategies,
and information technology management strategies.

5.4.4 Operational level strategies

An additional level of strategy called operational strategy was encouraged by Peter
Drucker in his theory of management by objectives (MBO). It is very narrow in
focus and deals with day-to-day operational activities such as scheduling criteria.
Operational level strategies are informed by business level strategies which, in
turn, are informed by corporate level strategies.

5.4.5 Social Strategy/ societal level strategy

In addition to this four, one additional layer of strategy which is recently emerged
called societal level strategy is also mentioned by some other authors.
Social strategy consists of goals and action plans of which the overall purpose is to
guide the ways in which management intends the organization to respond to the
major social demands placed on it. It is an explicit definition of the organization’s
social responsibilities: how it is expected to react to the demands of particular
groups of external constituents.
The idea of social responsibility in a separate (from corporate, business, and
functional) strategy level was introduced in 1979 by Ansoff and modified by
Schendel and Hofer.

23
The development of societal legitimacy (or enterprise) strategy is Ansoff’s
proposed solution to increasing importance of … socio-political variables in the
life of the firm. Included in these variables are “new consumer attitudes new
dimensions of social control and, above all, a questioning of the firm’s role in
society.”

5.5 Strategic Formulation (options and choices)

Strategy formulation is often referred to as strategic planning of long-range
planning and is concerned with developing an organization mission, objectives,
strategies, and policies. It begins with situation analysis - the process of finding a
strategic fit between external opportunities and internal strengths while working
around external threats and internal weaknesses.

5.6 Competitive Organizational Strategy

Competitive strategy is often called Business level strategy/ business unit level
strategy. It involves deciding how the company will compete within each line of
business (LOB) or strategic business unit (SBU). Competitive strategy creates a
defendable position in an industry so that a firm can outperform competitors. It
raises the following questions:
 Should we compete on the basis of low cost (price), or
 Should we differentiate our products or services on some basis other than
cost, such as quality or service?
 Should we compete head-to-head with our competitors for the biggest but
most sought after share of the market? or
 Should we focus on a niche in which we can satisfy a less sought after but
also profitable segment of the market?
A company has competitive advantage whenever it can attract customers and
defend against competitive forces better than its rivals.

24
Successful competitive strategies usually involve building uniquely strong or
distinctive competencies in one or several areas crucial to success and using them
to maintain a competitive edge over rivals.
Some examples of distinctive competencies are
 Superior technology and/or product features,
 Better manufacturing technology and skills,
 Superior sales and distribution capabilities, and
 Better customer service and convenience.
The essence of strategy lies in creating tomorrow's competitive advantages faster
than competitors mimic the ones you possess today. (Gary Hamel & C. K.
Prahalad)
Competitive strategy is about being different. It means deliberately choosing to
perform activities differently or to perform different activities than rivals to deliver
a unique mix of value. (Michael E. Porter)
According to Michael Porter, a firm must formulate a business strategy that
incorporates three generic strategies: cost leadership, differentiation, and focus that
can be implemented at the business unit level to create a competitive advantage
and defend against the adverse effects of the five forces
Before using one of the two generic competitive strategies (lower cost or
differentiation), the firm or unit must choose
 The range of product varieties it will produce,

 The distribution channels it will employ,

 The types of buyers it will serve,

 The geographic areas in which it will sell, and

 The array of related industries in which it will also compete.

This should reflect an understanding of the firm’s unique resources.

25
5.7 A comprehensive strategy formulation framework

Important strategy-formulation techniques can be integrated into a three-stage

decision-making framework, (input stage, matching stage and the decision stage).
The tools presented in this framework are applicable to all sizes and types of
organizations and can help strategists identify, evaluate, and select

Stage one (The Input Stage)

Input stage of the formulation framework consists of the external factors evaluation
(EFE), internal factors evaluation Matrix (IFE) and Competitive Profile Matrix
(CPM). Stage 1 is called the Input Stage; stage 1 summarizes the basic input
information needed to formulate strategies.
The input tools require strategists to quantify subjectivity during early stages of the
strategy-formulation process. Making small decisions in the input matrices
regarding the relative importance of external and internal factors allows strategists
to more effectively generate and evaluate alternative strategies. Good intuitive
judgment is always needed in determining appropriate weights and ratings. Let us
see External Factor Evaluation (EFE) Matrix and the competitive profile
matrix (CPM). The internal factor evaluation matrix discussed in chapter 3&4.

External Factor Evaluation (EFE) Matrix

An External Factor Evaluation (EFE) Matrix allows strategists to summarize and

evaluate economic, social, cultural, demographic, environmental, political,
governmental, legal, technological, and competitive information. The EFE Matrix
can be developed in five steps:

1. List key external factors as identified in the external-audit process. Include a

total of 15 to 20 factors, including both opportunities and threats that affect the
firm and its industry. List the opportunities first and then the threats. Be as

26
 specific as possible, using percentages, ratios, and comparative numbers
whenever possible.
2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very
important). The weight indicates the relative importance of that factor to being
successful in the firm’s industry. Opportunities often receive higher weights
than threats, but threats can receive high weights if they are especially severe or
threatening. Appropriate weights can be determined by comparing successful
with unsuccessful competitors or by discussing the factor and reaching a group
consensus. The sum of all weights assigned to the factors must equal 1.0.
3. Assign a rating between 1 and 4 to each key external factor to indicate how
effectively the firm’s current strategies respond to the factor, where 4 = the
response is superior, 3 = the response is above average, 2 = the response is
average and 1 = the response is poor. Ratings are based on effectiveness of the
firm’s strategies. Ratings are thus company-based, whereas the weights in Step
2 are industry-based. It is important to note that both threats and opportunities
can receive a 1, 2, 3, or 4.
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score
for the organization.
Regardless of the number of key opportunities and threats included in an EFE
Matrix, the highest possible total weighted score for an organization is 4.0 and the
lowest possible total weighted score is 1.0. The average total weighted score is 2.5.
A total weighted score of 4.0 indicates that an organization is responding in an
outstanding way to existing opportunities and threats in its industry. In other
words, the firm’s strategies effectively take advantage of existing opportunities and
minimize the potential adverse effects of external threats. A total score of 1.0
indicates that the firm’s strategies are not capitalizing on opportunities or avoiding
external threats.

27
 External Factor Evaluation (EFE) Matrix - Example
Factor Weight Rating Weighted
Score

Opportunities

1 High-end in-home entertainment sales are growing nationally 0.15 4 0.60

2 Forecast for continued growth of expensive housing in Dade & 0.16 4 0.64
Broward counties

3 Wealthy foreigners buy expensive entertainment equipment for 0.07 3 0.21

their homes in South Florida

4 Current customers refer new prospects with little prompting 0.12 3 0.36

5 Direct mailing lists are available by household income 0.06 3 0.18

Threats

1 Large chains could expand upward into their niche 0.13 1 0.13

2 New technologies such as satellite broadcast compete with 0.10 1 0.10

current technologies

3 Declining incomes in South Florida versus the U.S. 0.08 2 0.16

4 South Florida highly dependent on trade with Latin America 0.07 1 0.07

5 Economy depends on air transport, a volatile industry 0.06 2 0.12

Total 1.00 2.57

28
Note that the total weighted score of 2.57 is above the average (midpoint) of 2.5,
so this cinema business is doing pretty well, taking advantage of the external
opportunities and avoiding the threats facing the firm.

The Competitive Profile Matrix (CPM)

The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and
its particular strengths and weaknesses in relation to a sample firm’s strategic
position. The weights and total weighted scores in both a CPM and an EFE have
the same meaning. However, critical success factors in a CPM include both
internal and external issues. In a CPM, the ratings and total weighted scores for
rival firms can be compared to the sample firm. This comparative analysis provides
important internal strategic information.

The first step is to find the critical success factors for the company and attach
weight to those factors according to their relative importance. In the next step,
company need to identify its major competitors and rate each competitors including
company itself on each of the critical success factors. critical success factors include
both internal and external issues and different ratings have been given from 1 to 4
considering their relative importance to the organization where 1 stands for major
weakness, 2 stands for minor weakness, 3 stands for minor strength, and 4 stands
for major strength. Same method has been applied when rating to the critical
success factors of competitors. Lastly, company has to multiply the weight by the
rating for each factor to get a weighted score and then adds up each competitor’s
weighted scores to get a total weighted score.

The Competitive Profile Matrix (CPM) example

Key Success Factors Weight

Company A Competitor 1 Competitor 2

29
 Score Weighted Score Weighted Score Weighted
Score Score Score
Innovation 0.25 4 1.00 4 1.00 3 0.75
Advertising 0.20 2 0.40 3 0.60 4 0.80
Brand Name 0.20 1 0.20 4 0.80 2 0.40
Product Quality 0.15 4 0.60 2 0.30 2 0.30
Customer Service 0.10 3 0.30 2 0.20 1 0.10
Price Competitiveness 0.05 3 0.15 3 0.15 4 0.20
Technological 0.05 3 0.15 1 0.05 2 0.10
Competence

Total 1 2.80 3.10 2.65

This table portrays the competitive scenarios of the company and its competitors in
the industry. From this table, it is found that the company A scores better (strengths)
in innovation and product quality, and assumes minor strength in customer service,
price competitiveness, and in technological competence. Albeit, company has minor
weakness in advertising and major weakness is in brand name. As a whole, its total
score is 2.80 and on the other hand, its competitor A’s and competitor B’s total
scores are 3.10, and 2.65 respectively. From this competitive profile matrix, it is
revealed that competitor 1 enjoys more competitive advantages by 0.30 than the
company itself while competitor 2 is lagging behind by 0.15.

Stage 2 (The Matching Stage)

Strategy is sometimes defined as the match an organization makes between its
internal resources and skills and the opportunities and risks created by its external
factors. The matching stage of the strategy-formulation framework consists of five
techniques that can be used in any sequence: the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action
Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the

30
Internal-External (IE) Matrix, and the Grand Strategy Matrix. These tools rely
upon information derived from the input stage to match external opportunities and
threats with internal strengths and weaknesses. Matching external and internal
critical success factors is the key to effectively generating feasible alternative
strategies.

The basic concept of matching is illustrated in Table 5-6. Any organization,

whether military, product-oriented, service-oriented, governmental, or even
athletic, must develop and execute good strategies to win. A good offense without
a good defense, or vice versa, usually leads to defeat. Developing strategies that
use strengths to capitalize on opportunities could be considered an offense,
whereas strategies designed to improve upon weaknesses while avoiding threats
could be termed defensive. Every organization has some external opportunities
threats and internal strengths and weaknesses that can be aligned to formulate
feasible alternative strategies.

Matching Key External and Internal Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy
Excess working capital (an + 20 percent annual growth Acquire Cellphones, Inc.
internal strength in the cell phone industry (an
external opportunity)
Insufficient capacity (an + Exit of two major foreign Pursue horizontal integration
internal weakness) competitors from the industry by buying
(an external opportunity) competitors’ facilities
Strong R&D expertise (an + Decreasing numbers of Develop new products for
internal strength) younger adults (an older adults
external threat)
Poor employee morale (an + Rising healthcare costs (an Develop a new wellness
internal weakness) external threat) program

The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix

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The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an important
matching tool that helps managers develop four types of strategies: SO (strengths-
opportunities) Strategies,
WO (weaknesses-opportunities) Strategies, ST (strengths-threats) Strategies, and
WT (weaknesses-threats) Strategies.
Matching key external and internal factors is the most difficult part of developing a
SWOT Matrix and requires good judgment—and there is no one best set of
matches. Note in Table 6-1 that the first, second, third, and fourth strategies are
SO, WO, ST, and WT strategies, respectively.
 SO Strategies use a firm’s internal strengths to take advantage of external
opportunities. All managers would like their organizations to be in a position in
which internal strengths can be used to take advantage of external trends and
events. For example, a firm with excess working capital (an internal strength)
could take advantage of the cell phone industry’s 20 percent annual growth rate
(an external opportunity) by acquiring cellphone, Inc., a firm in the cell phone
industry. Organizations generally will pursue WO, ST, or WT strategies to get
into a situation in which they can apply SO Strategies. When a firm has major
weaknesses, it will strive to overcome them and make them strengths. When an
organization faces major threats, it will seek to avoid them to concentrate on
opportunities.
 WO Strategies aim at improving internal weaknesses by taking advantage of
external opportunities. Sometimes key external opportunities exist, but a firm
has internal weaknesses that prevent it from exploiting those opportunities. For
example, there may be a high demand for electronic devices to control the
amount and timing of fuel injection in automobile engines (opportunity), but a
certain auto parts manufacturer may lack the technology required for producing
these devices (weakness). One possible WO Strategy would be to acquire this
technology by forming a joint venture with a firm having competency in this

32
 area. An alternative WO Strategy would be to hire and train people with the
required technical capabilities.
 ST Strategies use a firm’s strengths to avoid or reduce the impact of external
threats. This does not mean that a strong organization should always meet
threats in the external environment head-on.
 WT Strategies are defensive tactics directed at reducing internal weakness and
avoiding external threats. An organization faced with numerous external threats
and internal weaknesses may indeed be in a precarious position. In fact, such a
firm may have to fight for its survival, merge, retrench, declare bankruptcy, or
choose liquidation.
The Strategic Position and Action Evaluation (SPACE) Matrix
The Strategic Position and Action Evaluation (SPACE) Matrix, another important
Stage 2 matching tool. Its four-quadrant framework indicates whether aggressive,
conservative, defensive, or competitive strategies are most appropriate for a given
organization. The axes of the SPACE Matrix represent two internal dimensions
(financial position [FP] and competitive position [CP]) and two external
dimensions (stability position [SP] and industry position [IP]).

33
These four factors are perhaps the most important determinants of an
organization’s overall strategic position. Depending on the type of organization,
numerous variables could make up each of the dimensions represented on the axes
of the SPACE Matrix. Factors that were included earlier in the firm’s EFE and IFE
Matrices should be considered in developing a SPACE
The steps required to develop a SPACE Matrix are as follows:
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. On the FP and CP axes, make comparison to competitors.
On the IP and SP axes, make comparison to other industries.
3. Compute an average score for FP, CP, IP, and SP by summing the values given
to the variables of each dimension and then by dividing by the number of
variables included in the respective dimension.
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.
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.

34
35
The Boston Consulting Group (BCG) Matrix

Autonomous (independent) divisions (or profit centers) of an organization make up

what is called a business portfolio. When a firm’s divisions compete in different
industries, a separate strategy often must be developed for each business. The
Boston Consulting Group (BCG) Matrix designed specifically to enhance a
multidivisional firm’s efforts to formulate strategies (BCG is a private
management-consulting firm based in Boston).

36
The BCG Matrix graphically portrays differences among divisions in terms of
relative market share position and industry growth rate. The BCG Matrix allows a
multidivisional organization to manage its portfolio of businesses by examining the
relative market share position and the industry growth rate of each division relative
to all other divisions in the organization. Relative market share position is defined
as the ratio of a division’s own market share (or revenues) in a particular industry
to the market share (or revenues) held by the largest rival firm in that industry.
Relative market share position is given on the x-axis of the BCG Matrix. The
midpoint on the x-axis usually is set at .50, corresponding to a division that has
half the market share of the leading firm in the industry. The y-axis represents the
industry growth rate in sales, measured in percentage terms. The growth rate
percentages on the y-axis could range from -20 to +20 percent, with 0.0 being the
midpoint. The average annual increase in revenues for several leading firms in the
industry would be a good estimate of the value.
Divisions located in Quadrant I of the BCG Matrix are called “Question Marks,”
those located in Quadrant II are called “Stars,” those located in Quadrant III are
called “Cash Cows,” and those divisions located in Quadrant IV are called “Dogs.”

37
1. Question Marks—Divisions in Quadrant I have a low relative market share
position, yet they compete in a high-growth industry. Generally, these firms’
cash needs are high and their cash generation is low. These businesses are
called Question Marks because the organization must decide whether to
strengthen them by pursuing an intensive strategy (market penetration, market
development, or product development) or to sell them.
2. Stars: Quadrant II businesses (Stars) represent the organization’s best long-run
opportunities for growth and profitability. Divisions with a high relative market
share and a high industry growth rate should receive substantial investment to
maintain or strengthen their dominant positions. Forward, backward and
horizontal integration; market penetration; market development; and product
development are appropriate strategies for these divisions.
3. Cash Cows: Divisions positioned in Quadrant III have a high relative market
share position but compete in a low-growth industry. Called Cash Cows
because they generate cash in excess of their needs, they are often milked.

38
 Many of today’s Cash Cows were yesterday’s Stars. Cash Cow divisions should
be managed to maintain their strong position for as long as possible. Product
development or diversification may be attractive strategies for strong Cash
Cows. However, as a Cash Cow, division becomes weak, retrenchment or
divestiture can become more appropriate.
4. Dogs: Quadrant IV divisions of the organization have a low relative market
share position and compete in a slow- or no-market-growth industry; they are
Dogs in the firm’s portfolio. Because of their weak internal and external
position, these businesses are often liquidated, divested, or trimmed down
through retrenchment. When a division first becomes a Dog, retrenchment can
be the best strategy to pursue because many Dogs have bounced back, after
strenuous asset and cost reduction, to become viable, profitable divisions.
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. The
divisions of many firms evolve over time: Dogs become Question Marks, Question
Marks become Stars, Stars become Cash Cows, and Cash Cows become Dogs in
an ongoing counterclockwise motion. Less frequently, Stars become Question
Marks, Question Marks become Dogs, Dogs become Cash Cows, and Cash Cows
become Stars (in a clockwise motion). In some organizations, no cyclical motion is
apparent. Over time, organizations should strive to achieve a portfolio of divisions
that are Stars.

Stage three (The decision stage)

Stage 3, called the decision stage, and involves a single technique, the
Quantitative Strategic Planning Matrix (QSPM). A QSPM uses input information
from Stage 1 to objectively evaluate feasible alternative strategies identified in
Stage 2. A QSPM reveals the relative attractiveness of alternative strategies and
thus provides objective basis for selecting specific strategies. This technique

39
objectively indicates which alternative strategies are best. The QSPM uses input
from Stage 1 analyses and matching results from Stage 2 analyses to decide
objectively among alternative strategies. That is, the EFE Matrix, IFE Matrix, and
Competitive Profile Matrix that make up Stage 1, coupled with the SWOT Matrix,
SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix that make up
Stage 2, provide the needed information for setting up the QSPM (Stage 3). The
QSPM is a tool that allows strategists to evaluate alternative strategies objectively,
based on previously identified external and internal critical success factors. Like
other strategy-formulation analytical tools, the QSPM requires good intuitive
judgment. Six steps required to develop a QSPM are discussed:
Step 1 Make a list of the firm’s key external opportunities/threats and internal
strengths/weaknesses in the left column of the QSPM. This information should
be taken directly from the EFE Matrix and IFE Matrix. A minimum of 10 external
key success factors and 10 internal key success factors should be included in the
QSPM.
Step 2 Assign weights to each key external and internal factor. These weights
are identical to those in the EFE Matrix and the IFE Matrix. The weights are
presented in a straight column just to the right of the external and internal critical
success factors.
Step 3 Examine the Stage 2 (matching) matrices, and identify alternative
strategies that the organization should consider implementing. Record these
strategies in the top row of the QSPM. Group the strategies into mutually exclusive
sets if possible.
Step 4 Determine the Attractiveness Scores (AS) defined as numerical values
that indicate the relative attractiveness of each strategy in a given set of
alternatives.
Attractiveness Scores (AS) are determined by examining each key external or
internal factor, one at a time, and asking the question “Does this factor affect the

40
choice of strategies being made?” If the answer to this question is yes, then the
strategies should be compared relative to that key factor. Specifically,
Attractiveness Scores should be assigned to each strategy to indicate the relative
attractiveness of one strategy over others, considering the particular factor. The
range for Attractiveness Scores is 1 = not attractive, 2 = somewhat attractive, 3 =
reasonably attractive, and 4 = highly attractive. By attractive, we mean the extent
that one strategy, compared to others, enables the firm to either capitalize on the
strength, improve on the weakness, exploit the opportunity, or avoid the threat.
Work row by row in developing a QSPM. If the answer to the previous question is
no, indicating that the respective key factor has no effect upon the specific choice
being made, then do not assign Attractiveness Scores to the strategies in that set.
Use a dash to indicate that the key factor does not affect the choice being made.
Note: If you assign an
AS score to one strategy, then assign AS score(s) to the other. In other words, if
one strategy receives a dash, then all others must receive a dash in a given row.
Step 5 Compute the Total Attractiveness Scores. Total Attractiveness Scores
(TAS) are defined as the product of multiplying the weights (Step 2) by the
Attractiveness Scores (Step 4) in each row. The Total Attractiveness Scores
indicate the relative attractiveness of each alternative strategy, considering only the
impact of the adjacent external or internal critical success factor. The higher the
Total Attractiveness Score, the more attractive the strategic alternative
(considering only the adjacent critical success factor).
Step 6 Compute the Sum Total Attractiveness Score. Add Total Attractiveness
Scores in each strategy column of the QSPM. The Sum Total Attractiveness Scores
(STAS) reveal which strategy is most attractive in each set of alternatives. Higher
scores indicate more attractive strategies, considering all the relevant external and
internal factors that could affect the strategic decisions. The magnitude of the

41
difference between the Sum Total Attractiveness Scores in a given set of strategic
alternatives indicates the relative desirability of one strategy over another.

In the above table, two alternative strategies (1) buy new land and build new larger
store and (2) fully renovate existing store are being considered by a computer retail

42
store. Note by sum total attractiveness scores of 4.63 versus 3.27 that the analysis
indicates the business should buy new land and build a new larger store.

5.8 The Balanced Scorecard (BSC)

Traditional financial reporting systems provide an indication of how a firm has

performed in the past, but offer little information about how it might perform in the
future. For example, a firm might reduce its level of customer service in order to
boost current earnings, but then future earnings might be negatively impacted due
to reduced customer satisfaction. To deal with this problem, Robert Kaplan and
David Norton developed the Balanced Scorecard, a performance measurement
system that considers not only financial measures, but also customer, business
process, and learning measures. BSC provide a “balance” between financial
measures and other measures that are important for understanding
organizational activities that lead to sustained, long-term performance.
The balanced scorecard translates the organization's strategy into four perspectives,
with a balance between the following:
 Between internal and external measures
 Between objective measures and subjective measures
 Between performance results and the drivers of future results

Balanced Scorecard Perspectives

In the industrial age, most of the assets of a firm were in property, plant, and
equipment and the financial accounting system performed an adequate job of
valuing those assets. In the information age, much of the value of the firm is
embedded in innovative processes, customer relationships, and human resources.
The financial accounting system is not so good at valuing such assets. The
Balanced Scorecard goes beyond standard financial measures to include the

43
following additional perspectives: the customer perspective, the internal process
perspective, and the learning and growth perspective.

 Financial perspective - includes measures such as operating income, return

on capital employed, and economic value added.
 Customer perspective - includes measures such as customer satisfaction,
customer retention, and market share in target segments.
 Business process perspective - includes measures such as cost, throughput,
and quality. These are for business processes such as procurement,
production, and order fulfillment.
 Learning & growth perspective - includes measures such as employee
satisfaction, employee retention, skill sets, etc.

These four realms are not simply a collection of independent perspectives. Rather,
there is a logical connection between them - learning and growth lead to better
business processes, which in turn lead to increased value to the customer, which
finally leads to improved financial performance.

Balanced Scorecard as a Strategic Management System

The Balanced Scorecard originally was conceived as an improved performance

measurement system. However, it soon became evident that it could be used as a
management system to implement strategy at all levels of the organization by
facilitating the following functions:

1. Clarifying strategy - the translation of strategic objectives into quantifiable

measures clarifies the management team's understanding of the strategy and
helps to develop a coherent consensus.

44
 2. Communicating strategic objectives - the Balanced Scorecard can serve to
translate high level objectives into operational objectives and communicate
the strategy effectively throughout the organization.
3. Planning, setting targets, and aligning strategic initiatives - ambitious but
achievable targets are set for each perspective and initiatives are developed
to align efforts to reach the targets.
4. Strategic feedback and learning - executives receive feedback on whether
the strategy implementation is proceeding according to plan and on whether
the strategy itself is successful ("double-loop learning").

The 7‘S Model

How do you go about analyzing how well your organization is positioned to

achieve its intended objective? This is a question that has been asked for many
years, and there are many different answers. Some approaches look at internal
factors, others look at external ones, some combine these perspectives, and others
look for congruence between various aspects of the organization being studied.
Ultimately, the issue comes down to which factors to study. While some models of
organizational effectiveness go in and out of fashion; one that has persisted is the
McKinsey 7’s framework. Developed in the early 1980s by Tom Peters and Robert
Waterman, two consultants working at the McKinsey & Company consulting firm,
the basic premise of the model is that there are seven internal aspects of an
organization that need to be aligned if it is to be successful. The model can be
applied to elements of a team or a project as well. The alignment issues apply,
regardless of how you decide to define the scope of the areas you study.

The Seven S Elements

The McKinsey 7’s model involves seven interdependent factors which are
categorized as either "hard" or "soft" elements:

45
 Hard Elements Soft Elements

Strategy Shared Values

Structure Skills
Systems Style
Staff

The Hard S’s

The hard elements (strategy, structure and system) are easier to define or identify
and management can directly influence them. They can be found in strategy
statements, corporate plans, organizational charts and other documentations.
 Strategy: Actions a company plans in response to or anticipation of changes in

its external environment.

 Structure:Basis for specializationand co-ordination influenced primarily by

strategy and by organization size and diversity.

 Systems: Formal and informal procedures that support the strategy and

structure. (Systems are more powerful thanthey are given credit)

The Soft S’s

The four soft s’s however, are hardly feasible. They are difficult to describe since
capabilities, values and elements of corporate culture are continuously developing
and changing. They are highly determined by the people at work in the
organization. Therefore, it is much more difficult to plan or to influence the

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characteristics of the soft elements. Although the soft factors are below the surface,
they can have a great impact of the hard structures, strategies and systems of the
organization.
Style: Management Style; more a matter of what managers do than what they say;
How do a company’smanagers spend their time? What are they focusing attention
on? Symbolism –the creation and maintenance (or sometimes deconstruction) of
meaning is a fundamental responsibility of managers.
Staff: The people/human resource management – processes used to develop
managers, socialization processes, ways of shaping basic values of management
cadre, ways of introducing young recruits to the company, ways of helping to
manage the careers of employees.
Skills:The distinctive competences – what the company does best, ways of
expanding or shifting competences
Shared Values/Superordinate Goals:Guiding concepts, fundamental ideas around
which a business is built –must be simple, usually stated at abstract level, have
great meaning inside the organization even though outsiders may not see or
understand them.
How to Use the Model?

Now you know what the model covers, how can you use it?
The model is based on the theory that, for an organization to perform well, these
seven elements need to be aligned and mutually reinforcing. So, the model can be
used to help identify what needs to be realigned to improve performance, or to
maintain alignment (and performance) during other types of change. Whatever the
type of change – restructuring, new processes, organizational merger, new systems,
change of leadership, and so on – the model can be used to understand how the
organizational elements are interrelated, and so ensure that the wider impact of
changes made in one area is taken into consideration.

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