CBME 2

Strategy Formulation:
SWOT Analysis

• A way to analyze competitive position of the firm

• This is a framework that allows managers to
synthesize insights obtain from the
environmental analysis
- Build up
strengths
-Shore up
Weaknesses
-Invest in
Opportunities
-Monitor
Threats
Strategy Formulation Framework

Stage 1. Stage II. Stage III.

Input Stage Matching Stage Decision Stage

• External Factor Evaluation • SWOT Matrix • Quantitative Strategic
(EFE) • Space Matrix Planning Matrix
• Internal Factor Evaluation • BCG Matrix
(IFE) • IE Matrix
• Competitive Profile Matrix • Balance Scorecard
The Input Stage
• . 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, prioritize, evaluate, and select among alternative
strategies.
• Good intuitive judgment is always needed in determining appropriate
weights and ratings, but keep in mind that a rating of 3, for example,
is mathematically 50 percent more important than with a rating of 2,
so small differences matter.
External Factor
Evaluation (EFE)

Summarizes and
evaluates the PESTLE
and its competitive
information
External Factor Evaluation (EFE)
• 1. List 20 key external factors as identified in the external-audit process, including both
opportunities and threats that affect the firm and its industry. List the opportunities first and then
the threats. Be as specific as possible, using percentages, ratios, and comparative numbers
whenever possible. Recall that Edward Deming said, “In God we trust. Everyone else bring data.”
In addition, utilize “actionable” factors as defined earlier in this chapter.
• 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 weig
EFE STEP 1:
• List down external factors
(opportunities first then threats)
EFE STEP 2:
• Assign each factor a weight that ranges from 0.0 to 1.0 (not important
to very important)
EFE STEP 3:
• Assign a rating between 1-4 (4 superior, 3 above average, 2 average, 1
poor) (4 major O, 3 minor O, 2 minor T, 1 major T)
EFE STEP 4 & 5
STEP 4: Multiply each factor
STEP 5: Get the sum to determine the total weighted score for the
organization
 Lowest total weighted score is 1 Lowest
you are not capitalizing on opportunities
or you are avoiding external threats

INTERPRETATION : Average total weighted score is 2.5

Highest total weighted score is 4.0 Highest

you are responding in an outstanding way
to existing opportunities and threats
 A summary steps in
conducting an internal
strategic management audit.
Internal
Factor
Evaluation It summarizes and evaluates
the major strength and
weaknesses in the functional
areas of the business.
 INTERNAL FACTOR EVALUATION
Weight
from 0.0 to 1.0 (not
important to very
important)

Rating :
4 points - major S
3 points - minor S
2 points - minor W
1 point - major W
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; therefore,
the ratings refer to strengths and weaknesses,
 Weight
from 0.0 to 1.0 (low importance
to high importance)

Where :

RATING :
4 =major 3 = minor 2 = minor 1 = 5 major
strength, strength, weakness, weakness.
SAMPLE CPM
IE (Internal – • A strategic management tool used to analyze
working conditions and strategic position of a
external) business. The matrix is based on an analysis of
internal and external business factors which are
Evaluation combined into one suggestive model
Matrix
STEP 1: Plot the results of EFE matrix in
the Y axis
TOTAL WEIGHT
IFE = 2.5
EFE = 3.2
STEP 2: Plot the results of IFE matrix in
the X axis
TOTAL WEIGHT
IFE = 2.5
EFE = 3.2
STEP 3: Connect the points to see the
directional vector/cell
TOTAL WEIGHT
IFE = 2.5
EFE = 3.2
SUGGESTED STRATEGIES
• Grow and Build
• Focus on Market penetration
• Market development
• product development
• Hold and Maintain
• Market Penetration
• Product Development
• Divest or Harvest
• Retrenchment
• Divestiture
 • A matching tool that helps managers develop 4
SWOT MATRIX types of strategies
SWOT MATRIX
• SO Strategy: use a firm’s internal strength to take advantage of
external opportunities
• WO Strategy: aim at improving internal weakness by taking
advantage of external opportunities
• ST Strategy: use a firm’s strength to avoid or reduce the impact of
external threats
• WT Strategy: defensive tactics directed at reducing internal weakness
and avoiding external threats
Strategic Questions Opportunity Threats

Strengths How can managers use How can managers use

Strengths to take strength to reduce the
advantage of impact of threats
opportunities

S,O S,T

Weaknesses How can managers How can managers

overcome weaknesses overcome weaknesses
that prevent the firm from that make threats a reality
taking advantage of
opportunities
W,T
W,O
 OPPORTUNITY THREAT
1. INCREASE INTEREST 1. CHANGE IN GOV.
RATE REGULATION
2. SHIFT TO 2. COMPETITORS THAT
MULTIPURPOSE COOP DO NOT HAVE
3. EXPAND TARGET RESTRICTION ON THEIR
MARKET MARKET
3.
STRENGTHS
1. LOCATION IS 1. O2,O3 1. O1
ACCESSIBLE 2. O3 2.
2. MINIMUM CAPITAL INV. 3. O1 3.
3. ZERO BAD DEBTS
WEAKNESS
1. LIMITED TO TEACHERS 1. O3 1. O2
2. LIMITED CREDIT 2. O1,O2 2.
SERVICE
TOWS STRATEGIC ALTERNATIVES MATRIX
OPPORTUNITY THREATS
1. 1.
10. 10
STRENGTHS SO (MAXI-MAXI) ST (MAXI-MINI)
1.
10.
WEAKNESS WO (MINI-MAXI) WT (MINI-MINI)
1.
10
 • Created by the Boston Consulting
Group, the BCG matrix – also
known as the Boston or growth
BCG MATRIX share matrix
• provides a framework for analyzing
products according to growth and
market share
STARS
• Backward
• The business units or Forward or
products that have Horizontal
the best market share Integration
and generate the
most cash are • Market
considered stars. Penetration
Monopolies and first- • Market
to-market products Development
are frequently
termed stars. • Product
Development
 CASH COW
• Cash cows are the leaders in
the marketplace and generate
more cash than they consume. • Product
• According to NetMBA, cash Development
cows provide the cash • Diversification
required to turn question • Retrenchment
marks into market leaders, • Divestiture
cover the administrative costs
of the company, fund research
and development, service the
corporate debt, and pay
dividends to shareholders
DOGS
• They frequently break even,
neither earning nor
consuming a great deal of
cash

• Retrenchment
• Divestiture
• Liquidation
 Question Marks
• These parts of a business
have high growth prospects
but a low market share
• known as problem children,
lose money.
• However, since these
business units are growing
rapidly, they have the • Market Penetration
potential to turn into stars
• Market Development
• Product Development
• Divestiture
 • Strategic Position and Action Evaluation (SPACE)
SPACE Matrix: • Based on four important elements called four
Strategic quadrants of SPACE Matrix which is further
group into two dimensions:
Position and ▪ Internal dimension
a. Financial Strength (FS)
Action b. Competitive Advantage (CA)
Evaluation ▪ External dimension
c. Environmental Stability (ES)
(SPACE) d. Industry Strength (IS)
SPACE Matrix Factors (Internal Dimensions)
SPACE Matrix Factors (External Dimensions)
How to Construct SPACE Matrix
Steps:
• Step 1: Choose a set of variables to be used to gauge the dimensions
COMPETITIVE ADVAMNAGE INDUSTRY STRENGTH
Product Quality Barriers to entry
Market Share Growth Potential
Brand and Image Access to Financing
Product Life Cycle Consolidation
Financial Strength Environmental Strength
ROA Inflation
Leverage Technology
Liquidity Demand Elasticity
Cash Flow Taxation
 Step 2: Step 2: Rate individual factors using
rating system specific to each dimension.
• Technical COMPETITIVE INDUSTRY STRENGTH
Assumption ADVAMNAGE
• (CA) and (ES) Product Quality -1 Barriers to entry +6
Market Share -1 Growth Potential +4
• -6 (worst) to -1 Brand and Image - 3 Access to Financing +4
(best) Product Life Cycle -2 Consolidation +5
• (IS) and (FS) Financial Strength Environmental Strength
• +1 (worst) to +6 ROA +5 Inflation -2
(best). Leverage +4 Technology -1
Liquidity +6 Demand Elasticity -2
Cash Flow +5 Taxation -4
Step 3: Find the average scores
COMPETITIVE INDUSTRY STRENGTH
ADVAMNAGE
Product Quality -1 Barriers to entry +6
Market Share -1 Growth Potential +4
Brand and Image - 3 Access to Financing +4
Product Life Cycle - 2 Consolidation +5
AVERAGE = -1.75 AVERAGE 4.75
Financial Strength Environmental Strength
ROA +5 Inflation -2
Leverage +4 Technology -1
Liquidity +6 Demand Elasticity -2
Cash Flow +5 Taxation -4
AVERAGE = 5 AVERAGE = -2.25
STEP 4: Compute for X and Y
• How to compute for X X = IS + CA
X = IS + CA
How to compute for Y = 4.75 + (1.75)
Y = FS + ES = 3

CA = - 1.75 Y = FS + ES
IS = 4.75
FS = 5 = 5 + (2.25)
ES = -2.25 = 2.75
 STEP 5: Plot the values from step 3

X=3
Y = 2.75
STEP 5: Find
intersection of
your X and Y points.
Draw a line from the
center of the SPACE
matrix to your point.
This line reveals
the type of strategy
the company should
pursue.
CONSERVATIVE CLUSTER
- STRATEGY :
- MARKET DEVELOPMENT
- MARKET PENETRATION
- PRODUCT DEVELOPMENT
- Related diversification
DEFENSIVE CLUSTER

STRATEGY
• Retrenchment
• Divestiture and
• Liquidation
• AGGRESSIVE CLUSTER

STRATEGY
• Backward, forward, horizontal
integration
• Market penetration
• Market development
• Product development
• Diversification (related or unrelated)
COMPETITIVE CLUSTER

• STRATEGIES

• Backward, forward, horizontal

integration
• Market penetration
• Market development
• Product development
Grand Strategy Matrix