SM - Ch6

Strategic Management Concepts: A
Competitive Advantage Approach

Sixteenth Edition
Chapter 6
Strategy Analysis and Choice
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
6.1 Describe the strategy analysis and choice process.
6.2 Diagram and explain the three-stage strategy-formulation
analytical framework.
6.3 Diagram and explain the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix.
6.4 Diagram and explain the Strategic Position and Action
Evaluation (SPACE) Matrix.
6.5 Diagram and explain the Boston Consulting Group (BC
G) Matrix.
Learning Objectives (2 of 2)
6.6 Diagram and explain the Internal-External (IE) Matrix.
6.7 Diagram and explain the Grand Matrix.
6.8 Diagram and explain the Quantitative Strategic Planning
Matrix (QSPM).
6.9 Discuss the role of organizational culture in strategic
analysis and choice.
6.10 Identify and discuss important political considerations in
strategy analysis and choice.
6.11 Discuss the role of a board of directors (governance) in
strategic planning.
The Process of Generating and Selecting
Strategies (1 of 3)
• A manageable set of the most attractive alternative
strategies must be developed.
• The advantages, disadvantages, trade-offs, costs, and
benefits of these strategies should be determined.
Strategies (2 of 3)
• 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.
Strategies (3 of 3)
• Alternative strategies proposed by participants should be
considered and discussed in a series of meetings.
• Proposed strategies should be listed in writing.
• When all feasible strategies identified by participants are
given and understood, the strategies should be ranked in
order of attractiveness.
Figure 6-2 The Strategy-Formulation
Analytical Framework
A Comprehensive Strategy-Formulation
Framework (1 of 3)
• Stage 1 - Input Stage
– summarizes the basic input information needed to
formulate strategies
– consists of the EFE Matrix, the IFE Matrix, and the
Competitive Profile Matrix (CPM)
Framework (2 of 3)
• Stage 2 - Matching Stage
– focuses on generating feasible alternative strategies
by aligning key external and internal factors
– techniques include the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix, the Strategic
Position and Action Evaluation (SPACE) Matrix, the
Boston Consulting Group (BCG) Matrix, the Internal-
External (IE) Matrix, and the Grand Strategy Matrix
Framework (3 of 3)
• Stage 3 - Decision Stage
– involves the Quantitative Strategic Planning Matrix (QS
PM)
– reveals the relative attractiveness of alternative
strategies and thus provides objective basis for
selecting specific strategies
The Matching Stage (1 of 3)
• The Strengths-Weaknesses-Opportunities-Threats (SW
OT) Matrix helps managers develop four types of
strategies:
– SO (strengths-opportunities) Strategies
– WO (weaknesses-opportunities) Strategies
– ST (strengths-threats) Strategies
– WT (weaknesses-threats) Strategies
• SO Strategies
– use a firm’s internal strengths to take advantage
of external opportunities
• WO Strategies
– aim at improving internal weaknesses by taking
advantage of external opportunities
• ST Strategies
– use a firm's strengths to avoid or reduce the impact
of external threats
• WT Strategies
– defensive tactics directed at reducing internal
weakness and avoiding external threats
SWOT Matrix (1 of 2)
1. List the firm’s key external opportunities.
2. List the firm’s key external threats.
3. List the firm’s key internal strengths.
4. List the firm’s key internal weaknesses.
5. Match internal strengths with external opportunities,
and record the resultant SO strategies.
SWOT Matrix (2 of 2)
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.
Table 6-1 Matching Key External and Internal
Factors to Formulate Alternative Strategies
Key Internal Factor Key External Factor Resultant Strategy

Excess working capital + Annual growth of 20 = Acquire Cellfone, Inc.
(an internal strength) percent in the cell phone
industry (an external
opportunity)
Insufficient capacity (an + Exit of two major = Pursue horizontal
internal weakness) foreign competitors from integration by buying
The industry (an external competitors’ facilities
opportunity)
Strong research and + Decreasing numbers = Develop new products
development expertise of younger adults (an for older adults
(an internal strength) external threat)
Poor employee morale + Rising health-care = Develop a new
(an internal weakness) costs (an external threat) wellness program
TWOS Matrix Example
Source: Strategic management: concepts and cases / Fred R. David.—15th ed. (2013)
TWOS Matrix Example-Audi
TWOS Matrix Example-Kipas Textile
Group
Strategic Position and Action Evaluation
(SPACE) Matrix
– four-quadrant framework indicates

whether aggressive, conservative,
defensive, or competitive strategies are
most appropriate for a given organization
Figure 6-4 The SPACE Matrix (3 of 3)
• Two internal dimensions (financial position [FP] and
competitive position [CP])
• Two external dimensions (stability position [SP] and
industry position [IP])
• Most important determinants of an organization’s overall
strategic position
The Strategic Position and Action Evaluation
(SPACE) Matrix
• Two internal dimensions
• Financial Position [FP] and
• competitive position [CP]
• Two external dimensions

• Environmental stability position [SP] and
• Industry Strength position [IP]
Most important determinants of an organization’s overall
strategic position
The SPACE Matrix
Figure 6-4 The SPACE Matrix (1 of 3)
Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological
Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155
(SPACE) Matrix
• Two internal dimensions
• Financial position [FP]
It includes everything that refers to the financials of the company. We can
consider the Return on Investment (ROI), which is how much money is
recovered from each unit of money invested, the liquidity of the company –
it means how easy a company can make cash all his assets- and the cash
flow.
• Competitive position [CP]

It considers market share, quality of the product, product life cycle,
customer loyalty, the know-how and the power of company over its
suppliers and intermediaries are some of the variables to be considered.
(SPACE) Matrix
• Two external dimensions
• Environmental Stability Position [SP]
It refers to how stable is the market where the company operates. Things
like rate of technological change, inflation, demand variability, price range
of competing products, risks of the industry and the barriers to enter or exit
the market are considered. The more stable is the market; more favorable
is for the company to operate in it.
• Industry Potential Position [IP]

It considers external forces that belong to the industry where the company
develops its activities. Variables as growth potential, profit potential,
financial stability, resource utilization and productivity are considered.
Factors That Make Up the SPACE Matrix
Axes
Steps to Develop a SPACE Matrix (1 of 4)
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 I
P 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.
3. Compute an average score for FP, CP, IP, and SP.
4. Plot the average scores for FP, IP, SP, and CP on the
appropriate axis.
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
Figure 6-5 Example Strategy Profiles (1 of 2)
Figure 6-5 Example Strategy Profiles (2 of 2)
Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological
Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155.
Example SPACE Matrix
Source: Strategic management: concepts and cases / Fred R. David.—15th ed. (2013)
The Boston Consulting Group (BCG)
Matrix
• BCG Matrix
– graphically portrays differences among divisions in
terms of relative market share position and industry
growth rate
– 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
Figure 6-7 The BCG Matrix (1 of 4)
Source: Based on the BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group
• Question Marks - Quadrant I
– Organization must decide whether to strengthen them
by pursuing an intensive strategy (market penetration,
market development, or product development) or to sell
them
• Stars - Quadrant II
– represent the organization’s best long-run opportunities
for growth and profitability
• Cash Cows - Quadrant III
– generate cash in excess of their needs
– should be managed to maintain their strong position
for as long as possible
• Dogs - Quadrant IV
– compete in a slow- or no-market-growth industry
– businesses are often liquidated, divested, or trimmed
down through retrenchment
• 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.
Figure 6-10 The Internal-External (IE)
Matrix (1 of 2)
Source: Based on: The IE Matrix was developed from the General Electric (GE) Business Screen Matrix. For a
description of the GE Matrix, see Michael Allen, “Diagramming GE’s Planning for What’s WATT,” in R. Allio and M.
Pennington, eds., Corporate Planning: Techniques and Applications l par; New York: AMACOM, 1979.
Figure 6-10 The Internal-External (IE)
Matrix (2 of 2)
• 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
• Three Major Regions
– Grow and build
– Hold and maintain
– Harvest or divest
The Internal-External (IE) Matrix Example
The Grand Strategy Matrix (1 of 3)
• Grand Strategy Matrix
– based on two evaluative dimensions: competitive
position and market (industry) growth
Figure 6-13 The Grand Strategy Matrix
Source: Based on Roland Christensen, Norman Berg, and Malcolm Salter, Policy Formulation and Administration
(Homewood, IL: Richard D. Irwin, 1976), 16-18.
• Quadrant I
– continued concentration on current markets (market
penetration and market development) and products
(product development) is an appropriate strategy
• Quadrant II
– unable to compete effectively
– need to determine why the firm's current approach is
ineffective and how the company can best change to
improve its competitiveness
• Quadrant III
– must make some drastic changes quickly to avoid
further decline and possible liquidation
– Extensive cost and asset reduction (retrenchment)
should be pursued first
• Quadrant IV
– have characteristically high cash-flow levels and limited
internal growth needs and often can pursue related or
unrelated diversification successfully
The Grand Strategy Matrix Example
The Grand Strategy Matrix Example
The Quantitative Strategic Planning Matrix
(QSPM)
• Quantitative Strategic Planning Matrix (QSPM)
– objectively indicates which alternative strategies are
best
– uses input from Stage 1 analyses and matching results
from Stage 2 analyses to decide objectively among
alternative strategies
Steps in a QSPM
1. Make a list of the firm’s key external
opportunities/threats and internal strengths/
weaknesses in the left column of the QSPM.
2. Assign weights to each key external and internal factor

(from 0.0 to 1.0).
3. Examine the Stage 2 (matching) matrices, and

identify alternative strategies that the organization
should consider implementing.
Steps in a QSPM (cont.)
4. Determine the Attractiveness Scores (AS) (Attractiveness

Scores (AS) determines how each factor is important or
attractive to each alternative strategy 1-2-3-4). This should
answer the questions of: Does this factor make a difference
in our decision about which strategy to pursue?
5. Compute the Total Attractiveness Scores.
6. Compute the Sum Total Attractiveness Score.
EXAMPLE QSPM
(Attractiveness Score: 1 = not acceptable; 2 = possibly acceptable; 3 = probably acceptable; 4 = most acceptable; 0 = not relevant)
EXAMPLE QSPM
EXAMPLE QSPM
Positive Features of the QSPM
• Sets of strategies can be examined sequentially or
simultaneously
• Requires strategists to integrate pertinent external and
internal factors into the decision process
• Can be adapted for use by small and large for-profit and
nonprofit organizations
Limitations of the QSPM
• Always requires informed judgments
• It is only as good as the prerequisite information and
matching analyses on which it is based
The Culture and Politics of Strategy Choice
• Strategies that require fewer cultural changes may be
more attractive because extensive changes can take
considerable time and effort
• Political maneuvering consumes valuable time, subverts
organizational objectives, diverts human energy, and
results in the loss of some valuable employees
• Political biases and personal preferences get unduly
embedded in strategy choice decisions
Tactics to Aid Strategists
• Choose Methods That Afford Employee Commitment
• Achieve Satisfactory Results with a Popular Strategy
• Shift from Specific to General Issues
• Focus on Long-Term Issues and Concerns
• Involve Middle Level Managers in Decisions
REVIEW QUESTIONS
Questions to Review
1) Which stage in the strategy-formulation framework
focuses on generating feasible alternative strategies?
A) Throughput
B) Input
C) Matching
D) Decision
E) Output
Questions to Review
2) Which strategy-formulation technique reveals the
relative attractiveness of alternative strategies and thus
provides an objective basis for selecting specific
strategies? 2) _______
A) QSPM
B) CPM
C) SWOT
D) IFE
E) SPACE
Questions to Review
3) Which stage of the strategy-formulation framework
includes an IFE Matrix and a Competitive Profile Matrix?
3) _______
A) Matching
B) Penetration
C) Input
D) Decision
E) Research
Questions to Review
4) Which section of the SWOT Matrix involves matching
internal strengths with external opportunities? 4) _______
A) The WT cell
B) The SW cell
C) The SO cell
D) The ST cell
E) The WO cell
Questions to Review
5) Which of these is NOT a SPACE Matrix quadrant? 5)

_______
A) Offensive
B) Aggressive
C) Competitive
D) Conservative
E) Defensive
Questions to Review
6) What type of strategy would divestiture be classified as?

6) _______
A) Offensive
B) Conservative
C) Defensive
D) Aggressive
E) Competitive
Questions to Review
7) The two internal dimensions represented on the axes of

the SPACE Matrix are 7) _______
A) industry position and internationalization.
B) stability position and industry position.
C) financial position and stability position.
D) competitive position and financial position.
E) internationalization and competitive position.
Questions to Review
8) What are the two external dimensions of the SPACE
Matrix? 8) _______
A) Stability position and industry position
B) Financial position and industry position
C) Competitive position and financial position
D) Industry position and competitive position
E) Stability position and competitive position
Questions to Review
9) The two positive-rated dimensions on the SPACE Matrix
are 9) _______
A) CP and SP.
B) FP and CP.
C) IP and SP.
D) FP and SP.
E) FP and IP.
Questions to Review
10) What type of strategies would you recommend

when a firm's SPACE Matrix directional vector has the
coordinates (-2, +3)? 10) ______
A) Integrative
B) Aggressive
C) Defensive
D) Competitive
E) Conservative
Questions to Review
11) In the SPACE analysis, what does a (+6, +3) strategy
profile portray? 11) ______
A) A strong industry position
B) An unstable environment
C) A weak financial position
D) A stable environment
E) A weak industry position
Questions to Review
12) What analytical tool has four quadrants based on two
dimensions: competitive position and market growth?
A) SPACE Matrix
B) QSPM
C) Internal-External Matrix
D) Competitive Profile Matrix
E) Grand Strategy Matrix
Questions to Review
13) Which of the following analytical tools consists of a

nine-cell matrix? 13) ______
A) SPACE Matrix
B) Competitive Profile Matrix
C) Internal-External Matrix
D) BCG Matrix
E) Grand Strategy Matrix
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SM - Ch6

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Strategic Management Concepts: A

Competitive Advantage Approach

Key Internal Factor Key External Factor Resultant Strategy

– four-quadrant framework indicates

• Two external dimensions

• Competitive position [CP]

• Industry Potential Position [IP]

2. Assign weights to each key external and internal factor

3. Examine the Stage 2 (matching) matrices, and

4. Determine the Attractiveness Scores (AS) (Attractiveness

5) Which of these is NOT a SPACE Matrix quadrant? 5)

6) What type of strategy would divestiture be classified as?

7) The two internal dimensions represented on the axes of

10) What type of strategies would you recommend

13) Which of the following analytical tools consists of a

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