Chapter 6

STRATEGY ANALYSIS AND CHOICE

Strategy Analysis & Choice

• Subjective decisions based on objective

information
• Generating alternative strategies
• Selecting strategies to pursue
• Best alternative course of action to achieve
mission & objectives
• Derived from vision, mission, objectives,
external audit, and internal audit
Strategy Analysis & Choice

Generating Alternatives -

Participation in generating alternative

strategies should be as broad as
possible
Comprehensive Strategy-Formulation Framework

• Stage 1 - Input Stage

– EFE Matrix
– IFE matrix
– CPM
• Stage 2 - Matching Stage
– SWOT
– SPACE matrix
– BCG matrix
– IE Matrix
– Grand strategy matrix
• Stage 3 - Decision Stage
– QSPM
Comprehensive Strategy-Formulation Framework

As shown in the previous PowerPoint, strategy

formulation techniques can be integrated into
a three-stage decision-making framework. The
tools presented in this framework are
applicable to all sizes and types of
organizations and can help strategists identify,
evaluate, and select strategies
The Strategy-Formulation Analytical

• Stage 1 (Input Stage) summarizes the basic

input information needed to formulate
strategies.
• Stage 2 (Matching Stage) focuses on
generating feasible alternative strategies by
aligning key external and internal factors.
• Stage 3 (Decision Stage) uses the QSPM to
objectively evaluate feasible alternative
strategies identified in Stage 2.
Strategy-Formulation Framework

External Factor Evaluation

Matrix (EFE)

Stage 1: Internal Factor Evaluation

The Input Stage Matrix (IFE)

Competitive Profile Matrix

(CPM)
Stage 2: The Matching Stage

Match between organization’s internal

resources & skills and the opportunities &
risks created by its external factors
Strategy-Formulation Framework
SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Quiz

• What are the major advantages and

disadvantages of diversification? Define
and explain “first mover advantages.”
• Compare and contrast financial objectives
with strategic objectives. Which type is
more important in your opinion? Why?
Stage 2: The Matching Stage

SWOT Matrix

Strengths

Weaknesses

Opportunities

Threats
SWOT Matrix

Four Types of Strategies

Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
SWOT Matrix

• SO strategies use a firm’s internal strengths to

take advantage of external opportunities
• WO strategies improve 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 aimed at
reducing internal weakness and avoiding
external threats
Space Matrix

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Strategic Position and Action Evaluation (SPACE) Matrix

The SPACE matrix’s four-quadrant framework

indicates whether aggressive, conservative,
defensive, or competitive strategies are most
appropriate for a given organization. Its axes
represent two internal dimensions (financial
strength [FS] and competitive advantage [CA])
and two external dimensions (environmental
stability [ES] and industry strength [IS]).
Space Matrix

Depending upon the type of organization,

numerous variables could make up each of
the dimensions represented on the axes of
the SPACE matrix. Variables that were
included in the firm’s EFE and IFE matrices
should be considered in developing a SPACE
matrix.
Example Factor for Space Matrix

•Financial Position (FP) Stability Position (SP)

•Return on investment Technological changes
•Leverage Rate of inflation
•Liquidity Demand variability
•Working capital Price range of competing products
•Cash flow Barriers to entry into market
•Inventory turnover Competitive pressure
•Earnings per share Ease of exit from market
•Price earnings ratio Price elasticity of demand
Risk involved in business
•Competitive Position (CP) Industry Position (IP)
•Market share Growth potential
•Product quality Profit potential
•Product life cycle Financial stability
•Customer loyalty Extent leveraged
•Capacity utilization Resource utilization
•Technological know-how Ease of entry into market
•Control over suppliers / distributors Productivity, capacity utilization
Space Matrix

• Internal dimensions
– Financial position (FP)
– Competitive position (CP)

• External dimensions
– Environmental position (EP)
– Industry position (IP)
Steps to Develop a SPACE Matrix

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

and IS.
2. Assign a numerical value:
1. From +1 to +6 to each FS & IS dimension
2. From -1 to -6 to each ES & CA dimension
3. Compute an average score for each FS, CA,
ES, and IS.
 Porter’s Five Generic Strategies
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. This
vector reveals the type of strategies
recommended for the organization.
The SPACE Matrix
Porter’s Five Generic Strategies
Space Matrix Examples
Strategy-Formulation Framework

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

BCG Matrix

• Relative market share position is given on the

x-axis. The mid-point on the x-axis usually is
set at .50, corresponding to a division that has
half the market share of the leading firm in
the industry. The y-axis represents the
industry growth rate in sales, measured in
percentage terms. The growth rate
percentages on the y-axis could range from
-20 to +20%, with 0.0 being the mid-point.
BCG Matrix

The BCG matrix helps multi-divisional firms

formulate strategies. It graphically portrays
differences among divisions in terms of
relative market share position and industry
growth rate. Relative market share position is
defined as the ratio of a division’s own market
share (or revenues) in a particular industry to
the market share (or revenues) held by the
largest rival firm in that industry.
BCG Matrix

Each circle represents a separate division. The size of the

circle corresponds to the proportion of corporate
revenue generated by that business unit, and the pie
slice indicates the proportion of corporate profits
generated by that division. Divisions located in Quadrant
I are called “Question Marks;” Quadrant II, “Stars;”
Quadrant III, “Cash Cows;” and Quadrant IV, “Dogs.”
BCG Matrix
BCG Matrix

• Question Marks – low relative market share in

a high-growth industry
• Stars – high relative market share in a high-
growth industry
• Cash Cows – high relative market share in a
low-growth industry
• Dogs – Low relative market share in a slow or
no growth industry
Strategy-Formulation Framework

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

The Internal-External Matrix

• Positions an organization’s various divisions in

a nine-cell display
• Similar to BCG Matrix except the IE Matrix:
– Requires more information about the divisions
– Strategic implications of each matrix are different
The Internal-External Matrix
IE Matrix

• Based on two key dimensions

– The IFE total weighted scores on the x-axis
– The EFE total weighted scores on the y-axis
• Divided into three major regions
– Grow and build – Cells I, II, or IV
– Hold and maintain – Cells III, V, or VII
– Harvest or divest – Cells VI, VIII, or IX
Strategy-Formulation Framework

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix

The Matching Stage

IE Matrix

Grand Strategy Matrix

Grand Strategy Matrix

 Tool for formulating alternative

strategies
 Based on two dimensions
 Competitive position
 Market growth
 RAPID MARKET GROWTH
Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
WEAK 7. Related diversification STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV POSITION
1. Retrenchment 1. Related diversification
2. Related diversification 2. Unrelated diversification
3. Unrelated diversification 3. Joint ventures
4. Divestiture
5. Liquidation
SLOW MARKET GROWTH
Strategy-Formulation Analytical Framework

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

Quantitative Strategic Planning Matrix

Technique designed to determine

the relative attractiveness of feasible
alternative actions
QSPM

• The QSPM is an analytical technique designed to determine

the relative attractiveness of feasible alternative strategies.
Information from each of the matrices in Stages 1 and 2 is
used to construct the QSPM.
• The left column of a QSPM consists of key external and
internal factors (from Stage 1), and the top row consists of
feasible alternative strategies (from Stage 2). Specifically, the
left column consists of information obtained directly from the
EFE matrix and the IFE matrix. In the column to the right of
the key factors, the respective weights received by each
factor in the EFE matrix and IFE matrix are recorded.
QSPM
• The top row of a QSPM consists of alternative strategies
derived from each matrix in Stage 2. These matching
techniques usually generate similar feasible alternatives.
However, not every strategy suggested by the matching
techniques has to be evaluated in a QSPM. Strategists should
use good intuitive judgment in selecting strategies to include
in a QSPM.
• The basic format of the QSPM is illustrated in the following
Power Point.
QSPM Strategic Alternatives

Key External Factors Weight Strategy 1 Strategy 2 Strategy 3

Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Management Information
Systems
Steps to Develop a QSPM

1. Make a list of the firm’s key external

opportunities/threats and internal
strengths/weaknesses in the left column
2. Assign weights to each key external and
internal factor
Steps to Develop QSPM

3. Examine the Stage 2 (matching) matrices,

and identify alternative strategies that the
organization should consider implementing
4. Determine the Attractiveness Scores
5. Compute the Total Attractiveness Scores
6. Compute the Sum Total Attractiveness Score
Example