SM ch6

Chapter Six
Strategy Analysis and Choice
6-1
DMU-MBA- stategic management
The Process of Generating and
Selecting Strategies
 Nature of Strategy Analysis & Choice
• Generating alternative strategies
• Selecting strategies to pursue
• Best alternative – achieve mission & objectives
6-2
Strategy Analysis & Choice
Alternative Strategies Derive From:

 Vision
 Mission
 Objectives
 External audit
 Internal audit
 Past successful strategies
Ch 6 -3
Ch 7 -3 DMU-MBA- stategic management
Copyright © 2011 Pearson Education
Strategy Analysis & Choice
Generating Alternatives
• Participation in generating alternative strategies should
be as broad as possible
• Alternative strategies proposed by participants should be
considered, discussed, and ranked in order of
attractiveness
DMU-MBA- stategic management Ch 6 -4

Ch 7 -4 Copyright © 2011 Pearson Education
The Strategy-Formulation
Analytical Framework
6-5
Comprehensive Strategy-Formulation Framework
Stage 1:
The Input Stage
Stage 2: Stage 3:
The Matching Stage The Decision Stage

A Comprehensive Strategy-
Formulation Framework
 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)
6-7
Strategy-Formulation Analytical Framework
Internal Factor Evaluation

Matrix (IFE)
Stage 1: External Factor Evaluation

The Input Stage Matrix (EFE)
Competitive Profile Matrix

(CPM)

 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
6-9
SWOT Matrix
SPACE Matrix
Stage 2: BCG Matrix

The Matching Stage
IE Matrix
Grand Strategy Matrix

Matching Key External and Internal Factors
to Formulate Alternative Strategies
6-11
SWOT 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
6-12
The Matching Stage
 The Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix
helps managers develop four types of
strategies:
 SO (strengths-opportunities) Strategies
 WO (weaknesses-opportunities) Strategies
 ST (strengths-threats) Strategies
 WT (weaknesses-threats) Strategies
6-13
SO Strategies
Strengths
Use a firm’s
Weaknesses
internal strengths
Opportunities
to take advantage
Threats SO
of external
Strategies
opportunities
SWOT
6-14
Example So Strategy
 Excess working Capital ( IS) Vs

 + 20 % Annual growth in the Cell phone
Industry( EO)
= Acquire cell phone Ico
6-15
WO Strategies
Strengths
Improving internal
Weaknesses
weaknesses by
Opportunities
WO taking advantage
Threats
Strategies of external
opportunities
SWOT
6-16
Example WO Strategy
 Insufficient capacity ( IW) vs

 Exit of two major competitors ( EO)
= Pursue horizontal integration by
purchasing the competitors facility
6-17
ST Strategies
Strengths Use a firm’s

Weaknesses strengths
Opportunities to avoid or
Threats ST reduce the impact
Strategies of external
SWOT threats
6-18
Example ST Strategy
 Strong R& D Expertise( IS)

 Decreasing number of adults ( ET)
= Develop new product for older
6-19
WT Strategies
Defensive tactics
Strengths aimed at reducing
Weaknesses internal
Opportunities weaknesses &
Threats WT avoiding
Strategies environmental
SWOT threats
6-20
Example WT Strategy
Poor employee moral( IW) Vs

Rising health care costs ( ET)
= Develop new wellness program
6-21
SWOT Matrix
Strengths – Weaknesses –
S W
List Strengths List Weaknesses

Opportunities – SO WO Strategies
O Strategies
Overcoming
weaknesses by taking
Use strengths to
List Opportunities take advantage of
advantage of
opportunities
opportunities
Threats – T ST WT Strategies
Strategies
Minimize weaknesses
List Threats and avoid threats
Use strengths to
avoid threats
A SWOT Matrix for a Retail
Computer Store
6-23
A SWOT Matrix for a Retail
Computer Store
6-24
SWOT Matrix
SPACE Matrix
Stage 2: BCG Matrix

The Matching Stage
IE Matrix

SPACE Matrix
Strategic Position & Action Evaluation Matrix
4-quadrants indicate whether the

most appropriate strategy is:
• Aggressive
• Conservative
• Defensive
• Competitive

The SPACE Matrix
6-27
The Strategic Position and Action
Evaluation (SPACE) Matrix
 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
6-28
Factors That Make Up the
SPACE Matrix Axes
6-29
Factors That Make Up the
SPACE Matrix Axes
6-30
Steps to Develop a SPACE Matrix
1. Select a set of variables to define

financial position (FP), competitive
position (CP), stability position (SP), and
industry position (IP)
6-31
2. Assign a numerical value ranging from +1

(worst) to +7 (best) to each of the
variables that make up the FP and IP
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
6-32
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 in the SPACE Matrix
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
6-33
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
6-34
Example Strategy Profiles
6-35
Example Strategy Profiles
6-36
SWOT Matrix
SPACE Matrix
Stage 2: BCG Matrix

The Matching Stage
IE Matrix

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
6-38
The BCG Matrix
6-39
The BCG Matrix
 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
6-40
BCG Matrix
Stars
• High relative market share and high growth rate

- Best long-run opportunities for growth &
profitability
• Substantial investment to maintain or
strengthen dominant position
- Integration strategies, intensive strategies,
joint ventures

BCG Matrix
Cash Cows
• High relative market share, competes 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 weakens – retrenchment or divestiture

BCG Matrix
Dogs
• Low relative market share, competes

in slow or no Industry growth
- Weak internal & external position
• Liquidation, divestiture,
retrenchment
The BCG Matrix
 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
6-44
SWOT Matrix
SPACE Matrix
Stage 2: BCG Matrix

The Matching Stage
IE 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
6-46
The Internal-External (IE) Matrix
6-47
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
6-48
The IE Matrix
6-49
SWOT Matrix
SPACE Matrix
Stage 2: BCG Matrix

The Matching Stage
IE Matrix

The Grand Strategy Matrix
 Grand Strategy Matrix

 based on two evaluative dimensions:
• competitive position and
• market (industry) growth
6-51
Reading
assignment The Grand Strategy
Matrix
6-52
Quantitative Strategic
Stage 3:
Planning Matrix
The Decision Stage (QSPM)

 Stage 3 - Decision Stage
 involves the Quantitative Strategic Planning
Matrix (QSPM)
 reveals the relative attractiveness of
alternative strategies and thus provides
objective basis for selecting specific
strategies
6-54
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
6-55
The Quantitative Strategic
Planning Matrix (QSPM)
6-56
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
3. Examine the Stage 2 (matching) matrices, and
identify alternative strategies that the
organization should consider implementing
6-57
Steps in a QSPM (cont.)
4. Determine the Attractiveness Scores (AS)
5. Compute the Total Attractiveness Scores
6. Compute the Sum Total Attractiveness Score
AS- numerical values that indicate the relative attractiveness of each
strategy in a given set of alternatives
AS Answered by asking
the question
“Does this factor affect the
choice of strategies being made?”
The range for AS is 1 = not attractive,
2 = somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive
6-58
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
6-59
Limitations of the QSPM
 Always requires intuitive judgments and

educated assumptions
 Only as good as the prerequisite
information and matching analyses upon
which it is based
6-60
A QSPM for a Retail
Computer Store
6-61
A QSPM for a Retail
Computer Store
6-62
2.List key internal factors as identified in the internal-audit process. Use a total of 20
internal
factors, including both strengths and weaknesses
3.assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor.
The weight assigned to a given factor indicates the relative importance of the factor to
being successful in the firm’s industry.
4Multiply each factor’s weight by its rating to determine a weighted score for each
variable.
5. Sum the weighted scores for each variable to determine the total weighted score for the
organization
6-63
Assign a 1-to-4 rating to each factor to indicate whether
that factor represents a major
weakness (rating = 1), a minor weakness (rating = 2) a
minor strength (rating = 3), or a
major strength (rating = 4). Note that strengths must
receive a 3 or 4 rating and weaknesses
must receive a 1 or 2 rating. Ratings are thus company-
based, whereas the weights in step 2
are industry-based.
6-64
rganization.
Regardless of how many factors are included in an IFE Matrix, the
total weighted score can
range from a low of 1.0 to a high of 4.0, with the average score being
2.5. Total weighted scores
well below 2.5 characterize organizations that are weak internally,
whereas scores significantly
above 2.5 indicate a strong internal position. Like the EFE Matrix, an
IFE Matrix should include
20 key factors. The number of factors has no effect on the range of
total weighted scores because
the weights always sum to 1.0.
6-65

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SM ch6

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Chapter Six

Strategy Analysis and Choice

Alternative Strategies Derive From:

DMU-MBA- stategic management Ch 6 -4

DMU-MBA- stategic management Ch 6 -6

Internal Factor Evaluation

Stage 1: External Factor Evaluation

Competitive Profile Matrix

DMU-MBA- stategic management Ch 6 -8

Stage 2: BCG Matrix

Grand Strategy Matrix

1. List the firm’s key external opportunities

 Excess working Capital ( IS) Vs

 Insufficient capacity ( IW) vs

Strengths Use a firm’s

 Strong R& D Expertise( IS)

Poor employee moral( IW) Vs

List Strengths List Weaknesses

Stage 2: BCG Matrix

Grand Strategy Matrix

DMU-MBA- stategic management Ch 6 -25

4-quadrants indicate whether the

DMU-MBA- stategic management Ch 6 -26

1. Select a set of variables to define

2. Assign a numerical value ranging from +1

3. Compute an average score for FP, CP, IP, and

6. Draw a directional vector from the origin

Stage 2: BCG Matrix

Grand Strategy Matrix

 Question marks – Quadrant I

• High relative market share and high growth rate

DMU-MBA- stategic management Ch 6 -41

• High relative market share, competes in low-growth

DMU-MBA- stategic management Ch 6 -42

• Low relative market share, competes

 The major benefit of the BCG Matrix is

Stage 2: BCG Matrix

Grand Strategy Matrix

 Divided into three major regions

Stage 2: BCG Matrix

Grand Strategy Matrix

 Grand Strategy Matrix

DMU-MBA- stategic management Ch 6 -53

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

 Sets of strategies can be examined

 Always requires intuitive judgments and

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