CHAPTER FIVE

STRATEGY ANALYSIS AND

CHOICE

By: Semu B. (Ph.D.)

06/04/2023 By: Dr. Semu B. 1

 A Comprehensive Strategy-Formulation Framework
Important strategy-formulation techniques can be integrated
into a three-stage decision-making framework.
All nine techniques included in the strategy-formulation
framework require integration of intuition and analysis.

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 A) Strengths-Weaknesses- Opportunities-Threats (SWOT) Matrix
Always Leave Blank Strengths–S Weaknesses – W
1. 1.
2. List Strengths 2. List Weaknesses
3. 3.
SO-Strategies WO-Strategies
Opportunities – O Use strengths to take advantage Overcome weaknesses by
1. of opportunities taking advantage of
2. List Opportunities Opportunities
3.
(S1, O1) E.g. W1 (financial problems), O1 (firm
is availing merger with Multinational
Corporation)

Threats – T ST-Strategies WT-Strategies

Use strengths to avoid Minimize weaknesses and
1.
Threats Avoid threats
2. List Threats
3. (S1, T2) (W1,T4)
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B) Strategic Position and Action Evaluation/SPACE/ matrix

The SPACE matrix has two axis: one measures the overall attractiveness of the
industry in which the organization operates and the other axis represents the
organization’s ability to compete in its market(s).
SPACE involves a consideration of the following dimensions:
1. Organization’s Competitive Position (CA)
2. Organization’s Financial Position (FP)
3. Industry Position (IP)
4. Stability Position (SP)

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 The steps required to develop a SPACE Matrix are as follows:
1st Select a set of variables to define financial position (FP), competitive position (CP), stability position
(SP), and industry position (IP).
2nd 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. On the FP and CP axes, make comparison to
competitors. On the IP and SP axes, make comparison to other industries.
3rd Compute an average score for FP, CP, IP, and SP by summing the values given to the variables of each
dimension and then by dividing by the number of variables included in the respective dimension.
4th Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE Matrix.
5th 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.
6th 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.

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 C) The Boston Consulting Group (BCG) Matrix
The BCG is also known as the Growth-Share Matrix and founded by Harvard
Business School alum Bruce Henderson in 1963.
It helps to identify the cash flow requirements of different businesses in a
company’s portfolio.
The BCG matrix has three main functions:
• Helps in identifying and dividing the company into SBUs
• Helps in assessing the prospects of each SBU & comparing them by
means of a matrix.
• Developing strategies for each SBU.

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In the BCG-Matrix:
 The vertical axis represents the rate of industry growth, an important environmental
factor – if the industry is growing, there are favourable prospects
 The horizontal axis shows that market share relative to that of the biggest competitor,
an indicator of strength in the market place.
 The midpoint 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 growth rate percentages on the y-axis could range from -20 to +20 percent, with 0.0
being the midpoint.
 Each product or unit is represented in the Matrix by a circle.
 The area of the circle represents the relative significance of each business unit or product
line to the corporation in terms of assets used or sales generated.
 Industry (Market) growth rate is the percentage growth of the market in the most recent
year.

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 The Growth-Share Matrix
+20 II: Stars I: Question marks
• Backward, Forward, or Horizontal • Market Penetration
Integration • Market Development
• Market Penetration • Product Development
• Market Development • Divestiture
• Product Development

High * 
0
• Product Development
Industry • Diversification
• Retrenchment • Retrenchment
Growth • Divestiture • Divestiture
rate
• Liquidation
IV: Dogs

Low III: Cash cows

-20
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By: Dr. Semu B. Share Low 13
0.5x
 Describing the SBU’s
a. STARS
• The leading SBUs in a company’s portfolio.
• They offer attractive long-term profit & growth opportunities – still
growing but not generating high profit.
b. QUESTION MARKS
• They are sometimes called “problem children or wildcats or Cash
hungry!” SBUs.
• They are new products with the potential for success, but they need a lot
of cash for development.
• If such a product is to gain enough market share to become a market
leader and thus a star, money must be taken from more mature products
and spent on the question mark. 14

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c. CASH COWS
• When a star’s market growth rate slows, it becomes a cash cow.
• They are cost leaders in their industries.
• The capital investment requirements of cash cows are not substantial– such
businesses generate a strong positive cash flow.
• Cash cows typically bring in far more money than is needed to maintain their
market share.
• In this declining stage of their life cycle, these products are “milked” for cash
that will be invested in new question marks.
• Expenses such as advertising and R&D are reduced.

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d. DOGS:
• Question marks unable to obtain dominant market share (and thus
become stars) by the time the industry growth rate inevitably slows
become dogs.
• Dogs have low market share and do not have the potential (because
they are in an unattractive industry) to bring in much cash.
• They may require substantial capital investments just to maintain
their low market share.
• Hence, dogs should be either sold off or managed carefully for the
small amount of cash they can generate.

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 Strategic Implications of the BCG-Matrix
The cash surplus from any cash cows should be used to support the
development of selected question marks & nurture stars
The long-term objective is to consolidate the positions of stars and
turn favoured question marks into stars, thus making the company’s
portfolio more attractive.
Question marks with the weakest or most uncertain long-term
prospects should be divested to reduce demands on a company’s cash
resources.

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 Limitations of BCG
a. The Model is simplistic, only two factors are assessed (market
share & industry growth).
b. The link between market share and profitability is questionable. A
business having a low market share can be very profitable & could
have a strong competitive position in certain segments of a market.
c. Many of the businesses fall in the middle of the BCG matrix.
d. The BCG-Matrix lacks the dimension of time, i.e. it doesn’t show
whether various divisions are growing over time.

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 D) The Internal-External matrix
It relate to internal (IFE) and external factor evaluation (EFE). Where
the IFE total weighted scores is placed on the x-axis and the EFE total
weighted scores on the y-axis.
• It’s 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
5 steps must be followed to apply IE matrix.

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Steps for the development of IE matrix
1st Use two key dimensions IFE and EFE.
2nd Plot IFE total weighted scores on the x-axis and the EFE total weighted scores
on the y axis
3rd On the x-axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99
represents a weak internal position; a score of 2.0 to 2.99 is considered average;
and a score of 3.0 to 4.0 is strong internal position.
4th On the y-axis, an EFE total weighted score of 1.0 to 1.99 is considered low; a
score of 2.0 to 2.99 is medium; and a score of 3.0 to 4.0 is high.
5th Decide the strategy to be followed depending on the region in which that
business exists.

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 Activity 2:

What types of strategies would you recommend for

an organization that achieves total weighted
scores of 3.6 on the IFE and 1.2 on the EFE Matrix?

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 Answer: Hold and maintain….quadrant 7

E) Grand Strategy (GS) matrix

It is also called Model of Grand Strategy Clusters and developed by Thompson
and Strickland.
• It has 4 quadrants and any organization should be placed in any one of four
quadrants.
• Appropriate strategies for an organization to consider are listed in sequential
order of attractiveness in each quadrant of the matrix.
• It is based two major dimensions
1. Market growth (Rapid and Slow) on the Y-axis
2. Competitive position (Weak and Strong on the X-axis)

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 Stage 3: The decision stage
The Quantitative Strategic Planning Matrix (QSPM)
 In this stage it is decided that which way is most appropriate or which
alternative strategy should be select.
 That is only technique designed to determine the relative
attractiveness of feasible alternative action.
 This technique objectively indicates which alternative strategies are
best.
 The QSPM uses input from Stage 1 analyses and matching results
from Stage 2 analyses to decide objectively among alternative
strategies.

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• Matching tools 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.
• After assigning the weight to strategy, determine the attractiveness
score of each and afterwards total attractiveness score.
• The highest total attractiveness score strategy is most feasible.

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 Steps in preparation of QSPM
1st List a minimum 10 firm's key external opportunities/threats and internal
strengths/weaknesses in the left column of the QSPM from IFE and EFE.
2nd Assign weights to each key external and internal factors (These weights are
identical to those in the EFE Matrix and the IFE Matrix).
3rd Examine the Stage 2 (matching) matrices and identify alternative strategies
that the organization should consider implementing
4th Determine the Attractiveness Scores (AS): Attractiveness Scores should
be assigned to each strategy to indicate the relative attractiveness
of one strategy over others, considering the particular factor. The
range for Attractiveness Scores is 1 = not attractive, 2 = somewhat
attractive, 3 = reasonably attractive, and 4 = highly attractive.
5th Compute the Total Attractiveness Scores (TAS)
6th Compute the Sum Total Attractiveness Score (STAS)
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Advantages
Sets of strategies considered simultaneously or sequentially.
Integration of pertinent external and internal factors in the decision making
process.
It can be adapted for use by small and large for-profit and nonprofit
organizations so can be applied to virtually any type of organization.
It can enhance strategic choice in MNCs because many key factors and
strategies can be considered at once.
Limitations
Requires intuitive judgments and educated assumptions.
Only as good as the prerequisite inputs (subjective decisions on the stage 1).
Only strategies within a given set are evaluated relative to each other.

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 END OF CHAPTER FIVE!

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