Chapter 5

Strategy Analysis & Choice

 Nature of Strategy Analysis & Choice

• This chapter focuses on generating and evaluating

alternative strategies, as well as selecting
strategies to pursue.

• Strategy analysis and choice seek to determine

alternative courses of action that could best enable
the firm to achieve its mission and objectives.
 Contd..

• Alternative Strategies Derive From --

• Vision
• Mission
• Objectives
• External audit
• Internal audit
• Past successful strategies
 Contd…

• While generating alternative and selecting

strategies, strategist must be considered
advantages, disadvantages, trade-offs, costs, and
benefits of these strategies.

• 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.
 Contd..

• Representatives from each department and

division of the firm should be included in this
process, as was the case in previous strategy-
formulation activities.

• Proposed strategies should be listed in writing.

 Contd…
• When all feasible strategies identified by participants
are given and understood, the strategies should be
ranked in order of attractiveness by all participants,
with:
1 = should not be implemented,
2 = possibly should be implemented,
3 = probably should be implemented, and
4 = definitely should be implemented.

• This process will result in a prioritized list of best

strategies that reflects the collective wisdom of the
group.
Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

Stage 2: Stage 3:
The Matching Stage The Decision Stage
 Contd…

• Stage 1 of the formulation framework consists

of the EFE Matrix, the IFE Matrix, and the
Competitive Profile Matrix (CPM) and called
the Input Stage.

• Stage 1 summarizes the basic input

information needed to formulate strategies.
 Contd…
• Stage 2, called the Matching Stage, focuses upon
generating feasible alternative strategies by aligning key
external and internal factors.

• Stage 2 techniques includes:

 The Strengths-Weaknesses-Opportunities-Threats (SWOT)
Matrix,
 The Strategic Position and Action Evaluation (SPACE)
Matrix,
 the Boston Consulting Group (BCG) Matrix,
 The Internal-External (IE) Matrix, and
 The Grand Strategy Matrix.
 Contd…
• Stage 3, called the Decision Stage, 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.
 Strategy-Formulation Analytical Framework

Internal Factor Evaluation

Matrix (IFE)

Stage 1: External Factor Evaluation

Matrix (EFE)
The Input Stage

Competitive Profile Matrix

(CPM)
 Stage 1: The Input Stage

• The information derived from EFE Matrix, an IFE Matrix,

and a CPM were provides basic input information for the
matching and decision stage matrices.

• The input tools require strategists to quantify subjectivity

during early stages of the strategy-formulation process.

• Making decisions in the input matrices regarding the

relative importance of external and internal factors allows
strategists to more effectively generate and evaluate
alternative strategies.
 Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

 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 SWOT Matrix
 The SPACE Matrix
 The BCG Matrix
 The IE Matrix, and
 The Grand Strategy Matrix.
 Contd…
• 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.
 Contd..

• 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
Cellfone, Inc., a firm in the cell phone industry.
 SWOT Matrix

• The Strengths-Weaknesses-Opportunities-
Threats (SWOT) Matrix is an important
matching tool that helps managers develop
four types of strategies:

Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
 Contd…
SO Strategies

Strengths
Weaknesses Use a firm’s
internal strengths
Opportunities
to take advantage
Threats SO of external
Strategies opportunities
SWOT
 Contd…
• For Instance,
Key internal factor key external factor strategy
Excess working Capital 20% annual growth in cell acquire cellphone
(an internal strength) industry ( an external opportunity )
 Contd…

WO Strategies

Strengths
Weaknesses Improving internal
weaknesses by
Opportunities
taking advantage
Threats WO of external
Strategies opportunities
SWOT
 Contd…
• 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).
 Contd…

• One possible WO Strategy would be to acquire

this technology by forming a joint venture
with a firm having competency in this area.

• An alternative WO Strategy would be to hire

and train people with the required technical
capabilities.
 Contd…

ST Strategies

Strengths Use a firm’s

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

WT Strategies

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

• 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.

• WT Strategies are defensive tactics directed at reducing

internal weakness and avoiding external threats.

• In fact, such a firm may have to fight for its survival,

merge, retrench, declare bankruptcy, or choose
liquidation.
 Contd…
• There are eight steps involved in constructing a
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.
 Contd…

5. Match internal strengths with external opportunities,

and record the resultant SO Strategies in the
appropriate cell.

6. Match internal weaknesses with external

opportunities, and record the resultant WO
Strategies.

7. Match internal strengths with external threats, and

record the resultant ST Strategies.

8. Match internal weaknesses with external threats, and

record the resultant WT Strategies
SWOT Matrix
 Matching Key Factors to Formulate Alternative Strategies
Key Internal Factor Key External Factor Resultant Strategy
SPACE (Strategic Position & Action Evaluation )Matrix

• It have four-quadrant framework indicates

whether aggressive, conservative, defensive,
or competitive strategies are most appropriate
for a given organization.

• It explains that what is our strategic position

and what possible action can be taken.
 Contd..

• The axes of the SPACE Matrix represents:

Two internal dimensions:

Financial Strength (FS)

Competitive Advantage (CA)
 Contd…

• Two external dimensions:

Environmental Stability (ES)

Industry Strength (IS)
 Contd…

• These four factors are the most important

determinants of an organization's overall
strategic position.
SPACE Factors
 Contd…

• This frame work determines appropriate set of

strategies for each quadrant.
BCG Matrix

Boston Consulting Group Matrix

Enhances multi-divisional firm in formulating

strategies
Autonomous divisions = business portfolio
Divisions may compete in different industries
Focus on market-share position & industry
growth rate
 Contd…

• The BCG growth-share matrix is the simplest way

to portray a corporation’s portfolio of
investments.

• Using the BCG approach, a company classifies its

different businesses on a two-dimensional
growth-share matrix.

• Using the matrix, organizations can identify four

different types of products or SBU as follows:
BCG Matrix
 Contd…
Stars- are high growth businesses or products
competing in markets where they are
relatively strong compared with the
competition.

• star generate large amounts of cash b/c of

their strong relative market share, but also
consume large amounts of cash b/c of their
high growth rate).
 Contd…

• Eventually their growth will slow and,

assuming they maintain their relative market
share, will become cash cows.

• The most widely used strategy here is that;

Hold; the company invests just enough to
keep the SBU in its present position
 Contd…
Cash Cows-are low-growth businesses or
products with a relatively high market share.

• These are mature, successful businesses with

relatively little need for investment.

• They need to be managed for continued profit

- so that they continue to generate the strong
cash flows that the company needs for its
Stars.
 Contd..
• Generate cash in excess of their needs
• Milked for other purposes

• The strategy followed is that Harvest; i.e.,

such business units should be “milked”,
extracting the profits and investing as little
cash as possible.
Contd..
Question Marks
• Low relative market share – compete in high-
growth industry
 Cash needs are high
 Cash generation is low
Contd..

• This suggests that they have potential, but

may require substantial investment in order to
grow market share at the expense of more
powerful competitors.

• Management have to think hard about

"question marks" - which ones should they
invest in? Which ones should they allow to fail
or shrink?
 Contd…

Dogs

Low relative market share & compete in slow or

no market growth
 Weak internal & external position

Liquidation, divestiture, retrenchment

 The Internal-External(IE) Matrix

• The Internal-External (IE) Matrix positions an

organization’s various divisions in a nine cell
display.

• The IE Matrix is similar to the BCG Matrix in that

Both tools involve plotting organization divisions.

• Also, the size of each circle represents the

percentage sales contribution of each division, and
pie slices reveal the percentage profit contribution
of each division in both the BCG and IE Matrix.
 Contd…
• But there are some important differences
between the BCG Matrix and the IE Matrix.

• First, the axes are different. Furthermore, the

strategic implications of each matrix are different.

• For these reasons, strategists in multidivisional

firms often develop both the BCG Matrix and the
IE Matrix in formulating alternative strategies.
 Cont…
• A common practice is to develop a BCG Matrix
and an IE Matrix for the present and then
develop projected matrices to reflect
expectations of the future.

• This before-and-after analysis forecasts the

expected effect of strategic decisions on an
organization’s portfolio of divisions.
 Contd…
• The IE Matrix is based on two key dimensions:
the IFE total weighted scores on the x-axis and
the EFE total weighted scores on the y-axis.

• The total weighted scores derived from the

divisions allow construction of the corporate-
level IE Matrix.
 Contd…

• On the x-axis of the IE Matrix, an IFE total

weighted score of 1.0 to 1.99 represents a
weak internal position; a score of 2.0 to 2.99 is
considered average; and a score of 3.0 to 4.0 is
strong.

• Similarly, on the y-axis, an EFE total weighted

score of 1. to 1.99 is considered low; a score of
2.0 to 2.99 is medium; and a score of 3.0 to
4.0 is high.
 Contd…

• The IE Matrix can be divided into three major

regions that have different strategy implications.

• First, the prescription for divisions that fall into

cells I, II, or IV can be described as grow and
build. Intensive (market penetration, market
development, and product development) or
integrative (backward integration, forward
integration, and horizontal integration)
strategies can be most appropriate for these
divisions.
 Contd…
• Second, divisions that fall into cells III, V, or VII can be
managed best with hold and maintain strategies;
market penetration and product development are
two commonly employed strategies for these types of
divisions.

• Third, a common prescription for divisions that fall

into cells VI, VIII, or IX is harvest or divest.

• Successful organizations are able to achieve a

portfolio of businesses positioned in or around cell I
in the IE Matrix.
Grand Strategy Matrix

 Tool for formulating alternative strategies

 Based on two dimensions
 Competitive position
 Market growth
 Grand Strategy Matrix

• Quadrant I

Excellent strategic position

Concentration on current markets/products
Take risks aggressively when necessary
Grand Strategy Matrix

• Quadrant II

Evaluate present approach

How to improve competitiveness
Rapid market growth requires intensive strategy
Grand Strategy Matrix

• Quadrant III

Compete in slow-growth industries

Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)
Grand Strategy Matrix

• Quadrant IV

Strong competitive position

Slow-growth industry
Diversification to more promising growth areas
Strategy-Formulation Analytical Framework

Stage 3: Quantitative Strategic

The Decision Stage Planning Matrix
(QSPM)
QSPM

Quantitative Strategic Planning Matrix

Technique designed to determine the relative

attractiveness of feasible alternative actions
 Strategic Alternatives

Key External Factors

Economy Weight Strategy 1 Strategy 2 Strategy 3
Political/Legal/Governmental
Social/Cultural/Demographic/Environmental
Technological
Competitive

Key Internal Factors

Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems
 Contd…

• In Table 6-7, 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 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.
 Contd…
• Note the use of dashes to indicate which factors
do not affect the strategy choice being
considered.

• If a particular factor affects one strategy but not

the other, it affects the choice being made, so
attractiveness scores should be recorded for both
strategies.

• Never rate one strategy and not the other