Chapter 6

Strategy Analysis & Choice

The Nature of Strategy Analysis and Choice –

– Establishing long-term objectives

– Generating alternative strategies
– Selecting strategies to pursue
– Best alternative to achieve mission and objectives
Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

 Input Stage
Provides basic input information for the
matching and decision stage matrices
Requires strategists to quantify subjectivity
early in the process
Good intuitive judgment always needed

summarizes the basic input information

needed to formulate strategies
 Formulation Framework

Internal Factor Evaluation

Matrix (IFE)

Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)

Competitive Profile
Matrix
1.The External Factor Evaluation (EFE)
Matrix

Summarize & Evaluate

Economic Demographic Governmental

Social Environmental Technological

Cultural Political Competitive

Industry Analysis EFE

Total weighted score of 4.0

• Organization response is outstanding to threats
and weaknesses

Total weighted score of 1.0

• Firm’s strategies not capitalizing on opportunities
or avoiding threats
2. Competitive Profile Matrix (CPM)

Identifies firm’s major competitors

and their strengths & weaknesses in
relation to a sample firm’s strategic
positions
 Gateway Apple Dell
CSF’s Wt Rating Wt’d
Score
Ratin
g
Wt’d
Score
Rating Wt’d
Score

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin. position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
 Gateway Apple Dell
CSF’s (cont’d) Wt Rating Wt’d
Score
Ratin
g
Wt’d
Score
Rating Wt’d
Score

Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12

E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40

Price
0.02 4 0.08 1 0.02 3 0.06
competitive
Mgt. 0.01 2 0.02 4 0.04 2 0.02
experience

Total 1.00 2.83 2.47 3.49

3. The Internal Factor Evaluation (IFE) Matrix

• An internal strategic-management analysis

• Evaluation of strengths and weaknesses

• Basis for identifying and evaluating relationships

• Intuitive judgments are required

 Matching Stage
 Match between organization’s internal
resources and skills and the opportunities
and risks created by its external factors.

 focuses on generating feasible alternative

strategies by aligning key external and
internal factors
 Formulation Framework

TOWS Matrix

SPACE Matrix

Stage 2:
BCG Matrix
The Matching Stage

IE Matrix

Grand Strategy Matrix

 1.TOWS Matrix
 Develop four types of strategies

– Strengths-Opportunities (SO)
– Weaknesses-Opportunities (WO)
– Strengths-Threats (ST)
– Weaknesses-Threats (WT)
 SO Strategies

Use a firm’s
Threats internal
SO
Opportunities strengths to take
Strategies
Weaknesses advantage of
Strengths external
(TOWS) opportunities
 WO Strategies

Improving
Threats internal
Opportunities WO weaknesses by
Weaknesses Strategies taking
Strengths advantage of
(TOWS) external
opportunities
 ST Strategies

Threats Using firm’s

strengths to
Opportunities ST
avoid or reduce
Weaknesses Strategies the impact of
Strengths external threats.
(TOWS)
 WT Strategies

Defensive
Threats tactics aimed at
Opportunities WT reducing internal
Weaknesses Strategies weaknesses
Strengths and avoiding
(TOWS) environmental
threats.
 Steps in developing the TOWS Matrix
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
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
 TOWS Matrix
Leave Blank Strengths-S Weaknesses-W

List Strengths List Weaknesses

Opportunities-O SO Strategies WO Strategies

List Opportunities Use strengths to take Overcome weaknesses

advantage of opportunities by taking advantage of
opportunities

Threats-T ST Strategies WT Strategies

List Threats Use strengths to avoid Minimize weaknesses

threats and avoid threats
 2. SPACE Matrix
Strategic Position and Action Evaluation Matrix

 Four quadrant framework

 Determines appropriate strategies
 Aggressive
 Conservative
 Defensive
 Competitive

Ch 6-24
 SPACE Matrix
Two Internal Dimensions
 Financial Strength [FS]
 Competitive Advantage [CA]

Two External Dimensions

 Environmental Stability [ES]
 Industry Strength [IS]

Ch 6-25
 SPACE Matrix
Overall Strategic position determined by:

– Financial Strength [FS]

– Competitive Advantage [CA]
– Environmental Stability [ES]
– Industry Strength [IS]

Ch 6-26
 Developing the SPACE Matrix:

1. Select variables to define FS, CA, ES, & IS

2. Assign numerical ranking from +1 (worst) to +6

(best) for FS and IS; Assign numerical ranking from –
1 (best) to –6 (worst) for ES and CA.

3. Compute average score for FS, CA, ES, & IS

Ch 6-27
 Cont......
4. Plot the average scores on the Matrix

5. Add the two scores on the x-axis and plot point

on X. Add the scores on the y-axis and plot Y. Plot
the intersection of the new xy point.

6. Draw a directional vector from origin through the

new intersection point.

Ch 6-28
 SPACE Factors
Internal Strategic Position External Strategic Position

Financial Strength (FS) Environmental Stability (ES)

Return on investment Technological changes

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

Ch 6-29
 SPACE Factors
Internal Strategic Position
Competitive Advantage CA
Market share
Product quality
Product life cycle
Customer loyalty
Competition’s capacity utilization
Technological know-how
Control over suppliers & distributors
External Strategic Position
Industry Strength (IS)
Growth potential
Profit potential
Financial stability
Technological know-how
Resource utilization
Capital intensify
Ease of entry into market
Productivity, capacity utilization
Ch 6-30
 SPACE Matrix
FS
Conservative Aggressive
+6
+5
+4
+3
+2
+1

CA IS
-6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6

-2
-3
-4
-5
Defensive -6 Competitive
ES Ch 6-31
 3. BCG Matrix
Boston Consulting Group Matrix

 Enhances multidivisional firms’ efforts to

formulate strategies
 Autonomous divisions (or profit centers)
constitute the business portfolio

 Firm’s divisions may compete in different

industries requiring separate strategy

Ch 6-32
 BCG Matrix
Boston Consulting Group Matrix

 Graphically portrays differences among

divisions
 Focuses on market share position and
industry growth rate

 Manage business portfolio through relative

market share position and industry growth
rate
Ch 6-33
 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0
Industry Sales Growth Rate

High
+20
Stars Question Marks
II I
Medium
0

Cash Cows Dogs

III IV
Low
-20 Ch 6-34
 BCG Matrix
Question Marks

 Low relative market share position yet

compete in high-growth industry.
• Cash needs are high

• Decision to strengthen (intensive strategies)

or divest)

Ch 6-35
 BCG Matrix
Stars

 High relative market share and high

industry growth rate.
 Best long-run opportunities for growth and
profitability

 Substantial investment to maintain or

strengthen dominant position
• Integration strategies, intensive strategies, joint
ventures

Ch 6-36
 BCG Matrix
Cash Cows

 High relative market share position, but compete

in low-growth industry
 Generate cash in excess of their needs
 Milked for other purposes

• Maintain strong position as long as possible

• Product development, concentric diversification
• If becomes weak—retrenchment or divestiture

Ch 6-37
 BCG Matrix
Dogs

 Low relative market share position and

compete in slow or no market growth
 Weak internal and external position

• Decision to liquidate, divest, retrenchment

Ch 6-38
 4. Grand Strategy Matrix
 Popular tool for formulating alternative
strategies

 Allorganizations (or divisions) can be

positioned in one of four quadrants

 Based on two evaluative dimensions:

– Competitive position
– Market growth

Ch 6-39
 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
7. Concentric diversification
WEAK STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate
4. Conglomerate diversification
diversification 4. Joint ventures
5. Liquidation

SLOW MARKET GROWTH Ch 6-40

 Grand Strategy Matrix

Quadrant I
– Excellent strategic position
– Concentration on current markets and
products
– Take risks aggressively when necessary
Quadrant II
• Evaluate present approach seriously
• How to change to improve competitiveness
• Rapid market growth requires intensive
strategy
Ch 6-41
 Cont...
Quadrant III
•Compete in slow-growth industries
•Weak competitive position
•Drastic changes quickly
•Cost and asset reduction indicated (retrenchment)
Quadrant IV
• Strong competitive position
• Slow-growth industry
• Diversification indicated to more promising growth
areas

Ch 6-42
 Formulation Framework

Stage 3: Quantitative Strategic

The Decision Stage Planning Matrix
(QSPM)
 QSPM

Quantitative Strategic Planning Matrix

 Only technique designed to determine the
relative attractiveness of feasible alternative
actions
 Reveals the relative attractiveness of
alternative strategies and thus provides
objective basis for selecting specific
strategies
 QSPM

Quantitative Strategic Planning Matrix

• Tool for objective evaluation of

alternative strategies
• Based on identified external and
internal crucial success factors
• Requires good intuitive judgment

Ch 6-45
 Steps of Quantitative Strategic Planning
Matrix

1. List the firm’s key external opportunities &

threats; list the firm’s key internal strengths and
weaknesses

2. Assign weights to each external and internal

critical success factor

3. Examine the Stage 2 (matching) matrices and

identify alternative strategies that the organization
should consider implementing

Ch 6-46
 Cont....

4.Determine the Attractiveness Scores (AS)

5.Compute the total Attractiveness Scores

6.Compute the Sum Total Attractiveness

Score

Ch 6-47
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
Computer Information
Systems

Ch 6-48