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Strategic Analysis & Choices

The Strategy-Formulation Analytical Framework
STAGE 1: THE INPUT STAGE

EFE MATRIX

CPM

IFE MATRIX

STAGE 2: THE MATCHING STAGE SWOT MATRIX SPACE MATRIX BCG MATRIX GE9 MATRIX

STAGE 3: THE DECISION STAGE QUANTITATIVE STARTEGIC PLANNING MATRIX (QSPM)

THE INPUT STAGE

EXTERNAL FACTOR EVALUATION

• External Factor Evaluation (EFE) matrix method is a strategic-management tool often used for assessment of current business conditions.

• The EFE matrix is a good tool to visualize and prioritize the opportunities and threats that a business is facing.

 Multiply weights by ratings: Multiply each factor weight with its rating. Zero means the factor is not important. This will calculate the weighted score for each factor. This will calculate the total weighted score for the company. Rating indicates how effective the firm’s current strategies respond to the factor. Divide factors into two groups: opportunities and threats. Weights are industry-specific. Rating should be between 1 and 4. The value of each weight should be between 0 and 1 (or alternatively between 10 and 100 if you use the 10 to 100 scale). .  Total all weighted scores: Add all weighted scores for each factor. 4 = superior. Ratings are company-specific. 2 = the response is below average. One or hundred means that the factor is the most influential and critical one. 1 = the response is poor. 3 = above average. The total value of all weights together should equal 1 or 100.  Rate factors: Assign a rating to each factor.  Assign weights: Assign a weight to each factor.EFE MATRIX  List factors: The first step is to gather a list of external factors.

EFE matrix example .

INTERNAL FACTOR EVALUATION Internal Factor Evaluation (IFE) matrix is a strategic management tool for auditing or evaluating major strengths and weaknesses in functional areas of a business. The IFE matrix method conceptually relates to the Balanced scorecard method in some aspects. IFE matrix also provides a basis for identifying and evaluating relationships among those areas. . The IFE Matrix together with the EFE matrix is a strategy-formulation tool that can be utilized to evaluate how a company is performing in regards to identified internal strengths and weaknesses of a company. The Internal Factor Evaluation matrix or short IFE matrix is used in strategy formulation.

Ratings are company-specific. Rate factors: Assign a rating to each factor indicating if it is a strength or weakness. • Assign weights: Assign a weight to each factor. Strength will be rated either 3 or 4. Zero means the factor is not important. The value of each weight should be between 0 and 1 (or alternatively between 10 and 100 if you use the 10 to 100 scale). One or hundred means that the factor is the most influential and critical one. The total value of all weights together should equal 1 or 100. Multiply weights by ratings: Multiply each factor weight with its rating. This will calculate the total weighted score for the company.IFE MATRIX • List factors: The first step is to gather a list of internal factors. This will calculate the weighted score for each factor. Weights are industryspecific. • • • . Divide factors into two groups: strengths and weaknesses. Total all weighted scores: Add all weighted scores for each factor. weakness to be rated 1 or 2.

EXAMPLE OF IFE MATRIX .

COMPETITIVE PROFILE MATRIX  It identifies a firms major competitors and it particular strength and weaknesses in relation to sample firms strategic position. 3=minor strength. .  The ratings and total scores for rival firms can be compared to the sample firm. Rating refers to strength and weaknesses.  It includes both the internal & external issues.  The critical factors are not grouped into opportunities and threats. where 4=major strength. 1=minor weakness. This comparative analysis provides important internal strategic information. 2=minor weakness.

20 .40 .30 3 2 .05 3 4 4 4 4 1 .20 Price Competitiveness Management Financial Position Customer loyalty Global Expansion Market Share .20 .30 .15 Total 1.60 .00 3.05 2 3 2 3 1 4 .45 .20 .30 .70 .15 .50 2.40 .20 .40 .10 .30 .30 .20 .10 .Company 1 Company 2 Company 3 Critical success Factors Advertising Product Quality Weight Rating Score Rating Score Rating score .80 .40 .10 1 4 .60 .40 4 3 .30 .20 .80 .15 2.20 4 3 3 2 2 3 .10 .

THE MATCHING STAGE .

GRAPHICAL REPRESENTATION .

THE SWO T MATRIX • Match internal strengths with external opportunities and record the resultant SO Strategies • Match internal weaknesses with external opportunities and record the resultant WO Strategies • Match internal strengths with external threats and record the resultant ST Strategies • Match internal weaknesses with external threats and record the resultant WT Strategies .

MATRIX Strengths-S Weaknesses-W List Strengths Opportunities-O SO Strategies Use strengths to take advantage of opportunities ST Strategies Use strengths to avoid threats List Weaknesses WO Strategies Overcome weaknesses by taking advantage of opportunities WT Strategies Minimize weaknesses and avoid threats List Opportunities Threats-T List Threats .

STRATEGIC POSITION & ACTION EVALUATION MATRIX The SPACE matrix is a management tool used to analyze a company. . It is used to determine what type of a strategy a company should undertake. The Strategic Position & Action Evaluation matrix or short a SPACE matrix is a strategic management tool that focuses on strategy formulation especially as related to the competitive position of an organization.

The SPACE matrix is broken down to four quadrants where each quadrant suggests a different type or a nature of a strategy: • Aggressive • Conservative • Defensive • Competitive .

The axes of the SPACE Matrix represents two internal dimensions:• Financial Strength(FS) • Competitive Advantage(CA) Whereas two external dimensions are:• Environmental Stability(ES) • Industry Strength(IS) .

INDUSTRY STRENGTH (IS). RATE INDUSTRY STRENGTH (IS) AND FINANCIAL STRENGTH (FS) USING RATING SCALE FROM +1 (WORST) TO +6 (BEST). STEP 3: FIND THE AVERAGE SCORES FOR COMPETITIVE ADVANTAGE (CA). THIS WILL BE YOUR FINAL POINT ON AXIS X ON THE SPACE MATRIX. AND FINANCIAL STRENGTH (FS). STEP 4: PLOT VALUES FROM STEP 3 FOR EACH DIMENSION ON THE SPACE MATRIX ON THE APPROPRIATE AXIS. . STEP 2: RATE INDIVIDUAL FACTORS USING RATING SYSTEM SPECIFIC TO EACH DIMENSION. RATE COMPETITIVE ADVANTAGE (CA) AND ENVIRONMENTAL STABILITY (ES) USING RATING SCALE FROM -6 (WORST) TO -1 (BEST). INDUSTRY STRENGTH (IS). ENVIRONMENTAL STABILITY (ES). AND FINANCIAL STRENGTH (FS). STEP 5: ADD THE AVERAGE SCORE FOR THE COMPETITIVE ADVANTAGE (CA) AND INDUSTRY STRENGTH (IS) DIMENSIONS.STEPS FOR CONSTRUCTING SPACE MATRIX STEP 1: CHOOSE A SET OF VARIABLES TO BE USED TO GAUGE THE COMPETITIVE ADVANTAGE (CA). ENVIRONMENTAL STABILITY (ES).

Step 7: Find intersection of your X and Y points. .Step 6: Add the average score for the SPACE matrix environmental stability (ES) and financial strength (FS) dimensions to find your final point on the axis Y. This line reveals the type of strategy the company should pursue. Draw a line from the center of the SPACE matrix to your point.

EXAMPLE OF SPACE MATRIX .

FINAL GRAPH .

The BCG model is based on classification of products (and implicitly also company business units) into four categories based on combinations of market growth and market share relative to the largest competitor.BOSTON CONSULTANCY GROUP MATRIX The BCG matrix model is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's. .

and the price does not change much either. The is the milking cow that brings in the constant flow of cash. This product has only limited budget for marketing. but it is a product that is expected to bring the gold in the future. . to build distribution channels. It takes some effort and resources to market it.WHEN USED??  A high-growth product is for example a new one that we are trying to get to some market. and to build sales infrastructure.  A low-growth product is for example an established product known by the market. Characteristics of this product do not change much. customers know what they are getting.

high market share) DOGS(low growth.WORKING OF BCG MATRIX Placing products in the BCG matrix results in 4 categories in a portfolio of a company:• • • • QUESTION MARKS(high growth. high market share) CASH COWS(low growth. low market share) . low market share) STARS(high growth.

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>Stars are the leaders in the business but still need a lot of support for promotion al placement. high market share) >Stars are defined by having high market share in a growing market. . Stars are likely to grow into cash cows. >If market share is kept.BCG STARS (high growth.

 Question marks have high demands and low returns due to low market share.  Question marks are essentially new products where buyers have yet to discover them.  The best way to handle Question marks is to either invest heavily in them to gain market share or to sell them. low market share)  These products are in growing markets but have low market share. .  The marketing strategy is to get markets to adopt these products.  These products need to increase their market share quickly or they become dogs.BCG QUESTION MARKS (high growth.

 If competitive advantage has been achieved.  Because of the low growth.  Investments into supporting infrastructure can improve efficiency and increase cash flow more. promotion and placement investments are low.  Cash cows are the products that businesses strive for. high market share)  Cash cows are in a position of high market share in a mature market.BCG CASH COWS (low growth. . cash cows have high profit margins and generate a lot of cash flow.

. • Dogs should be avoided and minimized. • Expensive turn-around plans usually do not help.BCG DOGS (low growth. low market share) • Dogs are in low growth markets and have low market share.

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resulting in a nine-cell 3 x 3 matrix. and business strength. In the figure below.GE NINE CELL MATRIX • This 3 x 3 matrix is an outgrowth of a framework pioneered by General Electric (GE) in the 1970s to assess its Strategic Business Units (SBUs) along two dimensions: industry attractiveness. • . three possible values of each of these two dimensions are plotted.

A Nine-Cell Industry Attractiveness-Competitive Strength Matrix .

The sum of the weightings assigned to the different factors MUST add up to 100% • Enter Industry Attractiveness Factors. • Enter Business Unit Strength Factors. For each Factor enter a corresponding weighting as a percentage.Steps • Enter the Business Unit Names. The sum of the weightings assigned to the different factors MUST add up to 100% . For each Factor enter a corresponding weighting as a percentage. • Enter the Industry Sector Names. Each Industry sector should correspond to a Business Unit.

. 5 Industry Average.• Enter Ratings for each Business Unit in terms of the Strength Factors on a scale of 1 to 9 where 1 Extremely Weak. 9 Extremely Strong representing industry best practice • Enter Ratings for each Industry Sector it terms of the Attractiveness Factors on a scale of 1 to 9. • The Business Unit Strength and corresponding Industry Attractiveness values are calculated and the GE/McKinsey Matrix chart is automatically created.

be candidates for an overhaul and reposition strategy . based on potential for good earnings and ROI.Strategy Implications of Attractiveness/Strength Matrix • Businesses in upper left corner – Accorded top investment priority – Strategic prescription – grow and build • Businesses in three diagonal cells – Given medium investment priority – Invest to maintain position • Businesses in lower right corner – Candidates for harvesting or divestiture – May.

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Stage 3: The Decision Stage .

The relative attractiveness of each strategy is computed by determining the cumulative impact of each external and internal critical success factor. .Quantitative Strategic Planning Matrix • It uses information from both the previous stages to finally decide between the various alternatives. • It determines the relative attractiveness of various strategies based on the extent to which key external and internal critical success factors are capitalized upon or improved.

Example .

7 S Structure .

• Systems: the daily activities and procedures that staff members engage in to get the job done. • Structure: the way the organization is structured and who reports to whom. .Hard S • Strategy: the plan devised to maintain and build competitive advantage over the competition.

Soft S • Shared Values: called "superordinate goals" when the model was first developed. these are the core values of the company that are evidenced in the corporate culture and the general work ethic. • Style: the style of leadership adopted. . • Skills: the actual skills and competencies of the employees working for the company. • Staff: the employees and their general capabilities.