CHAPTER 5

STRATEGY ANALYSIS & CHOICE

Ch5
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Strategy Analysis & Choice

 Focuses on generating and evaluating

alternative strategies as well as selecting
strategies to pursue.
 It involves:
◦ Establishing long-term objectives
◦ Generating alternative strategies
◦ Selecting strategies to pursue
◦ Best alternative - achieve mission & objectives

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Strategy Analysis & Choice

 Alternative Strategies Derive From

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

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Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

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

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Strategy-Formulation Analytical Framework

Internal Factor Evaluation

Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile Matrix

(CPM)

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Stage 1: The Input Stage

Basic input information for the matching &

decision stage matrices
Requires strategists to quantify subjectivity
early in the process
Good intuitive judgment always needed

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Business portfolio/Strategy Analysis
matrices SWOT Matrix

SPACE Matrix

BCG Matrix
The Matching Stage

GE Matrix

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Strategy Analysis and Choice
 The Matching stage  Single business unit
matrices can be used analysis tool
to determine the ◦ SWOT
feasibility of a ◦ SPACE
strategy for a
business unit or  Portfolio analysis
business portfolio tool:
◦ BCG
◦ GE
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Business portfolio/Strategy Analysis
matrices SWOT Matrix

SPACE Matrix

BCG Matrix
The Matching Stage

GE Matrix

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Strategy-Formulation Framework

SWOT Matrix

Strengths

Weaknesses

Opportunities

Threats

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 SO Strategies

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

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 WO Strategies

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

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 ST Strategies

Strengths Use a firm’s

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

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 WT Strategies

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

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SWOT Matrix

Developing the SWOT

List firm’s key internal Strengths

List firm’s key internal Weaknesses
List firm’s key external Opportunities
List firm’s key external Threats

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SWOT Matrix
Strengths – S Weaknesses – W
Leave Blank
List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Use strengths to take Overcoming weaknesses

List Opportunities advantage of by taking advantage of
opportunities opportunities

Threats – T ST Strategies WT Strategies

Use strengths to avoid Minimize weaknesses and

List Threats threats avoid threats

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 Matching Key Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

20% annual growth in the

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

Exit of two major foreign

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

Decreasing numbers of Develop new products for older

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

Poor employee morale Strong union activity Develop a new employee

+ =
(weakness) (threat) benefits package

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Limitations with SWOT Matrix

 Does not show how to achieve a

competitive advantage
 Provides a static assessment in time
 May lead the firm to overemphasize a
single internal or external factor in
formulating strategies

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Business portfolio/Strategy Analysis
matrices SWOT Matrix

SPACE Matrix

BCG Matrix
The Matching Stage

GE Matrix

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SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive

Conservative

Defensive

Competitive

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SPACE Matrix
 Internal dimensions
◦ Financial position (FP)
◦ Competitive position (CP)

 External dimensions
◦ Stable Environmental position (SP)
◦ Industry position (IP)

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 SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Technological changes
Return on investment
Rate of inflation
Leverage
Demand variability
Liquidity
Price range of competing products
Working capital
Barriers to entry
Cash flow
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business

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 SPACE Factors
Internal Strategic Position External Strategic Position

Competitive Advantage CA Industry Strength (IS)

Market share Growth potential

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

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Steps to Developing a SPACE Matrix

1. Select a set of variables to define FS, CA,

ES, & IS
2. Assign a numerical value:
- From +1 to +7 to each FS & IS dimension
- From -1 to -7 to each ES & CA dimension
3. Compute an average score for each FS,
CA, ES, & IS

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Steps to Developing a SPACE Matrix

4. Plot the average score on the

appropriate axis
5. Add the two scores on the x-axis and
plot the point. Add the two scores on
the y-axis and plot the point. Plot the
intersection of the new xy point
6. Draw a directional vector from the
origin through the new intersection
point.
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 1-
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Business portfolio/Strategy Analysis
matrices SWOT Matrix

SPACE Matrix

BCG Matrix
The Matching Stage

GE Matrix

Ch 6
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Business Portfolio
 The business portfolio is the collection of
businesses & products that make up the
company.

 A SBU:
◦ Is a unit of the company that has a separate mission &
objectives
◦ Can be a company division, a product line or even
individual brands

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Business Portfolio
 The best business portfolio is one that fits
the company’s strengths & helps exploit
the most attractive opportunities

 There are different types of portfolio

techniques in use, the most well known of
which are:
◦ BCG and GE matrices

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Boston consulting group (BCG)
(BCG)
 The BCG:
◦ is also known as The Growth-Share Matrix or
Product Portfolio Matrix
◦ helps to identify the cash flow requirements of
different businesses in a company’s portfolio
◦ has three main steps:
 Dividing the company into SBUs
 Assessing the prospects of each SBU &
comparing them by means of a matrix
 Developing strategic objectives for each1-
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SBU
Boston consulting group (BCG
 The criteria of assessing SBUs in BCG;
 The SBU’s relative market share-Ratio of a
division’s own market share in an industry
to the market share held by the largest
rival firm in that industry

 The growth rate of the SBU’s industry /

stages of the industry life-cycle

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 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0

High
+20

Stars Question Marks

Industry Sales Growth Rate

II I
Medium
?
0

Cash Cows Dogs

III IV
Low
-20

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BCG matrix …
 Stars: The leading SBUs in a company’s
portfolio. They offer attractive long-term
profit & growth opportunities – still
growing but not generating high profit
 Substantial investment to maintain or strengthen
dominant position
 Integration strategies, intensive strategies, joint ventures

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BCG matrix …
 Question marks: can become a star if
nurtured properly. To become a market
leader, a question mark requires
substantial net injections of cash – it is
cash hungry.
 Decision to strengthen (intensive
strategies) or divest


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BCG matrix …
 Cash cows: are cost leaders in their industries.
The capital investment requirements of cash
cows are not substantial – such businesses
generate a strong positive cash flow
 Generate cash in excess of their needs
 Milked for other purposes

 Maintain strong position as long as possible

 Product development, concentric
diversification
 If weakens—retrenchment or divestiture 1-
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BCG matrix …
 Dogs: are unlikely to generate a positive
cash flow & may become cash dogs. They
may require substantial capital
investments just to maintain their low
market share.
 Liquidation, divestiture, retrenchment

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Strategic Implications of BCG
matrix
 The cash surplus from any cash cows should be
used to support the development of selected
question marks & nurture stars

 The long-term objective is to consolidate the

positions of stars and turn favoured question
marks into stars, thus making the company’s
portfolio more attractive

 Question marks with the weakest or most

uncertain long-term prospects should be
divested to reduce demands on a company’s
cash resources
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Strategic Implications of BCG
matrix
 Dogs having reached the end of their useful life,
are generally best put to sleep unless they are
still performing a useful function – not merely
making a contribution to overheads.

 The portfolio must be balanced – when there

are sufficient cash cows, stars & question marks
◦ If the company lacks sufficient number of
these businesses, it should consider
acquisitions & new ventures to build a
more balanced portfolio 1-
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Limitations of BCG
 The Model is simplistic, only two factors are
assessed (market share & industry growth)
 The connection between relative market share &
cost savings is not as straightforward as BCG
suggests
◦ A business having a low market share can be very
profitable & could have a strong competitive position
in certain segments of a market (e.g., The motor
vehicle manufacturer BMW is in this position)
◦ A high market share in a low-growth industry does
not necessarily result in the large positive cash flow
characteristic - cash cow business
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Limitations of BCG
 The BCG-Matrix lacks the dimension of time. In
order to overcome this problem, some add
arrows showing the direction in which the
product is moving

 The names in the cells used as descriptions only,

in order to assign strategic roles to products or
services – stars, dogs, etc.

 The BCG-Matrix shows the position of each

portfolio instead of their sizes
◦ to get the full picture of the portfolio, in
addition to positions of products, circles are
used in which their sizes are proportional to1-
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Limitations of BCG
 Consider each SBU/division as
autonomous/ independent unit which is
completely wrong in the practical world
 It neglects the learning curve synergy
among the different set of divisions with
in the corporate firm

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Business portfolio Analysis matrices
SWOT Matrix

SPACE Matrix

BCG Matrix
The Matching Stage

GE Matrix

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GE Matrix
 The GE Nine-Cell Planning Grid is an
adaptation of the BCG

 The GE attempts to overcome some of the

limitations of BCG

 In the GE-Screen, the two main dimensions are

presented by:
◦ Industry (product-market) attractiveness
◦ Business (competitive) Strength

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GE Matrix
 In GE matrix each of the company’s business
units is rated on multiple sets of strategic
factors within each axis of the grid:

 Factors identified as enhancing

Industry Attractiveness include:
 Sales/market growth
 Size & industry profitability
 Demand cyclicality
 Social, environmental, legal, etc.,
 Competition: Porter’s Five-force model
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GE Matrix
 Factors identified as enhancing
business/competitive strength:
◦ Market share
◦ Profit margin
◦ Customer & market knowledge
◦ Technological know-how &
management caliber
◦ Brand image
◦ Cost structure & distinctive
1-
competencies etc.
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GE Matrix …
 Thus, in contrast to the BCG, the GE
uses composite measures

 Accordingly, quantitative measures of

industry attractiveness & business
strength are used to plot location of
each business in the matrix

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GE Matrix …
 The calculation is done subjectively by identifying the
two dimensions
◦ First, the strategist has to identify those important
factors contributing much to industry
attractiveness & business strength
◦ Second, assigning each factor a weight that reflects
its perceived importance relative to other factors
◦ Third, unfavorable & favorable future conditions
for those factors are forecasted & rated based on
some scale (0 to 1 scale)
◦ Finally, a weighted composite score is then
obtained for a business
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GE Matrix …
◦ Example for Industry Attractiveness
Industry attractiveness factor Weight Rating Score
◦ Market size 20 0.5 10
◦ Industry profitability 35 1.0 35
◦ A few large competitors 30 0 0
◦ Political & regulatory factors 15 1.0 15
Total 100 60

Note: 1.0 = High; 0.5 = Medium; 0 = Low

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GE Matrix …
Example for Industry Attractiveness

Business strength Weight Rating Score

◦ Relative market share 20 0.5 10
◦ Production
 Capacity 10 1.0 10
 Efficiency 10 1.0 10
 Location 20 0.0 0
◦ Technological capability 20 0.5 10
◦ Marketing
 Sales organization 15 1.0 15
 Promotion advantage 5 0 0
Total 100 55

 Source: Pearce & Robinson, 1996:289 1-

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GE Matrix …
 These examples illustrate how one
business within a corporate portfolio
might be assessed using the GE
planning grid.

 It is a matter of management
judgment:
◦ What should be included or
excluded as a factor
◦ How it should be rated & weighted
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GE Matrix …
 What matters is, after rating &
weighting all strategic business units,
they will be positioned in the nine
cells accordingly
 Each business unit appears as a
circle in its respective cell & position
◦ Area of a circle is positioned to size of
business as a percent of company
revenues or relative size of industry
with pie slice showing the company’s
market share.
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Strategic implications of the GE
matrix
 Three basic strategic approaches are
suggested for any business depending on
its location within the grid:
 Businesses in upper left corner
 Accorded top investment priority
 Strategic prescription – invest to
grow & build
 Businesses in three diagonal cells
 Given medium investment priority
 Invest selectively to maintain
position & manage for earnings
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Strategic implications of the GE
matrix
Businesses in lower right corner
 Candidates for harvesting or divestiture
 May, on occasion, be candidates for an
overhaul & repositioning strategy
Resource Allocation - the resource allocation
decisions remain quite similar to those in
the BCG approach:
 Businesses classified as invest to grow
would be treated like the stars in the
BCG-Matrix – to pursue growth-oriented
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 Strategic Implication cont’d …

 Businesses classified in the invest

selectively to maintain position would
either be managed as cash cows –
providing maximum earnings or as
question marks – selectively chosen
for investment or divestment.

 Businesses classified in the harvest /

divest category would be managed like
dogs – provide net resources for use in
other business units.
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Strategic Implication cont’d …

 While the strategic recommendations of both GE &

BCG are similar, the GE-Matrix has three
fundamental improvements & advantages:

1. The terminology associated with the GE grid is

preferable because it is less offensive & more
universally understood – Build, hold, harvest,
withdraw, etc.

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 Strategic Implication cont’d …
2. Use of more multiple measures
(incorporating several factors) associated
with each dimensions (market attractiveness
& business strength) of the GE than simply
market share & market growth of BCG –
broader assessment

3. The nine-cell format allows finer distinction

b/n portfolio positions than does the four-cell
BCG format

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Strategy-Formulation Analytical Framework

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

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QSPM

Quantitative Strategic Planning Matrix

Technique designed to determine the

relative attractiveness of feasible
alternative actions

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 QSPM Strategic Alternatives
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/En
vironmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information Systems

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END OF CHAPTER 5

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