Strategies of strategic management

Chapter 4
Strategy Analysis & Choice

 P SIVAKUMAR

Ch 6 -1


 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
Ch 6 -2


Generating Alternatives –

Participation in generating alternative
strategies should be as broad as
possible

Ch 6 -3

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
Ch 6 -4

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

Ch 6 -5

The Strategy-Formulation Analytical
Framework
 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.
Ch 6 -6

Strategy-Formulation Framework

External Factor Evaluation
Matrix (EFE)

Stage 1: Internal Factor Evaluation
The Input Stage Matrix (IFE)

Competitive Profile Matrix
(CPM)

Ch 6 -7

Stage 2: The Matching Stage

Match between organization’s internal
resources & skills and the opportunities &
risks created by its external factors

Ch 6 -8

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix
The Matching Stage

IE Matrix

Grand Strategy Matrix

Ch 6 -9

Stage 2: The Matching Stage

SWOT Matrix

Strengths

Weaknesses

Opportunities

Threats

Ch 6 -10

SWOT Matrix

Four Types of Strategies

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

Ch 6 -11

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
Ch 6 -12

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix
The Matching Stage

IE Matrix


Ch 6 -13

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]).

Ch 6 -14

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.

Ch 6 -16

SPACE Matrix

 Internal dimensions
 Financial position (FP)
 Competitive position (CP)

 External dimensions
 Environmental position (EP)
 Industry position (IP)

Ch 6 -17

Steps to Developing 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.

Ch 6 -18

Steps to Developing a SPACE Matrix
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.

Ch 6 -19

Copyright © 2011 Pearson Education, Inc. Ch 6 -21
Publishing as Prentice Hall

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix
The Matching Stage

IE Matrix


Ch 6 -22

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. Ch 6 -23

BCG MATRIX
STARS QUESTION MARKS
1.Milo
BUSINESS GROWTH RATE

Nescafe 2.Nestle Kitkat/Barone/ Munch
HIGH

Maggi Noodles 3.Maggi Sauces
4.Maggi Soups
5.Nestle Butter
6.Nesvita
7.Milk

8.Nestle Maggi Pickles
LOW

9.Nestle Butter
CASH COWS DOGS
Ceralac 1.Nestea
2.Milky Bar
3.Nestle Crunch

HIGH LOW
MARKET SHARE

The BCG Matrix for ITC Ltd.

Stars ?
•Hotels •FMCG- Others
•Paperboards/
Packaging.
•Agri business.
Cows Dogs
•FMCG-Cigarettes

Major strategies followed by ITC:

 Entering into less competitive or unexplored
markets (ready to eat, staples, wafers)
 Distribution network
 Market differentiation ( Ready to eat, biscuits)
 Cost control strategy (all products)
 Extensive advertising (biscuits, confectionary,
wafers)
 Regular introduction of new products (all
products)

Boston Consulting Group
(BCG) Matrix
 IT is a four celled matrix (a 2 * 2 matrix)
developed by BCG, USA.
 It is the most renowned corporate portfolio
analysis tool.
 It provides a graphic representation for an
organization to examine different businesses
in it’s portfolio on the basis of their related
market share and industry growth rates.


Ch 6 -28

 It is a two dimensional analysis on
management of SBU’s (Strategic Business
Units).
 In other words, it is a comparative analysis of
business potential and the evaluation of
environment.
 According to this matrix, business could be
classified as high or low according to their
industry growth rate and relative market
share.
Ch 6 -29

Stars-
 It represent business units having large
market share in a fast growing industry.
 They may generate cash but because of fast
growing market, stars require huge
investments to maintain their lead.
 Net cash flow is usually modest.
 SBU’s located in this cell are attractive as
they are located in a robust industry and
these business units are highly competitive in
the industry. If successful, a star will become
a cash cow when the industry matures. Ch 6 -30

Cash Cows-
 It represents business units having a large
market share in a mature, slow growing
industry.
 Cash cows require little investment and
generate cash that can be utilized for
investment in other business units.
 key source of cash, and the base of an
organization.
 These businesses usually follow stability
strategies.
 . Ch 6 -31

Question Marks-

 Question marks represent business units
having low relative market share and located
in a high growth industry.
 They require huge amount of cash to
maintain or gain market share.
 They require attention to determine if the
venture can be viable.
 Question marks are generally new goods and
services which have a good commercial
prospective. Ch 6 -32

 There is no specific strategy which can be
adopted.
 If the firm thinks it has dominant market
share, then it can adopt expansion strategy,
else retrenchment strategy can be adopted.
 Most businesses start as question marks as
the company tries to enter a high growth
market in which there is already a market-
share.
 If ignored, then question marks may become
dogs, while if huge investment is made, then
they have potential of becoming stars.
Ch 6 -33

Dogs-

 It represent businesses having weak market
shares in low-growth markets.
 They neither generate cash nor require huge
amount of cash.
 Due to low market share, these business
units face cost disadvantages.
 Generally retrenchment strategies are
adopted because these firms can gain
market share only at the expense of
competitor’s/rival firms. Ch 6 -34

 These business firms have weak market
share because of high costs, poor quality,
ineffective marketing, etc.
 Unless a dog has some other strategic aim,
it should be liquidated if there is fewer
prospects for it to gain market share.
 Number of dogs should be avoided and
minimized in an organization.

Ch 6 -35

Limitations of BCG Matrix
 BCG matrix classifies businesses as low and high, but generally businesses
can be medium also. Thus, the true nature of business may not be reflected.
 Market is not clearly defined in this model.
 High market share does not always leads to high profits. There are high
costs also involved with high market share.
 Growth rate and relative market share are not the only indicators of
profitability. This model ignores and overlooks other indicators of profitability.
 At times, dogs may help other businesses in gaining competitive advantage.
They can earn even more than cash cows sometimes.
 This four-celled approach is considered as to be too simplistic.

Ch 6 -36

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
 An example of a BCG matrix appears in the next
Power Point. 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.”

Ch 6 -38

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

Ch 6 -40

The Business Strength-Industry
Attractiveness Matrix
 To eliminate some of the limitations of the BCG
growth/share matrix, a more complete matrix
analysis was developed by the General Electric
planners and mostly used McKinsey & Co - a
management consulting firm.
 The primary improvement of BS/IA matrix is that
it allows for the analysis of multiple variables
(rather than only market share and growth)
depending on the context.
 And, rather than focusing on cash flow , it
concerns potential future return on investment.

Business Strength and Industry
Attractiveness Dimensions
 Horizontal axis – market  Vertical axis – business
attractiveness; strength;
 Size  Size
 Growth  Growth
 Customer satisfaction levels  Share of segment
 Competition; quantity, types,  Customer loyalty
effectiveness, commitment  Margins
 Price levels  Distribution
 Profitability  Technology skills
 Technology  Patents
 Government regulations  Marketing
 Sensitivity to economic trends  Flexibility
 Organization

Weight, Rating, Value?

In BS/IA matrix, each of the key variables used
must be given a weight, rating and value.
 The weight will be based on its importance to the
company, relative to other selected variables.
The total point must equal 10. the weights can
be determined by management or, when
possible, by customer surveys.
 A rating (or grade) will be given for each
business strength variable. E.g. a strength would
receive a high score, a weakness would receive
a low score.

 The rating for each variable is then multiplied by
its weight to obtain the variable’s value.
 The values are individual summed for total value
for business strength for that particular business.
 For industry attractiveness, influencing variables
will be given a weight based on their importance
to the business, and a rating based on favorable
or unfavorable conditions in the environment
(opportunity or threat?).
 The total value for industry attractiveness is
calculated in the same manner as for business
strength.
 The two scores for each business unit are then
used to position the business on the matrix.

Business Strength Weight Rating
Value
(importance (performance;
(Weight
to the firm: 1=poor, 10= ×
Rating)
must add up excellent)
to 10)

Profit 3 8 24
Pro/ser qual. 3 8 24
Man. Skills 2 7 14
Location 1 6 6
Atmosphere 1 5 5
Total value for business strength 73

Industry Weight Rating
Value
Attractiveness (present trend;
1=not attractive
10=very attractive)

Growth 2,5 5 12,5
Profit margins 3,5 7 24,5
Comp. intensity 3 5 15
Remote env. 1 7 7
Total value for industry attractiveness 59

Industry Attractiveness

High Medium Low
Premium Selective Protective 100
invest / grow invest / grow
High selectivity /
earnings
Business
Strength Challenge Prime Restructure 67
invest / grow selectivity / harvest /
Medium earnings divest

Opportunistic Opportunity Harvest / 33
Low selectivity / harvest / divest
earnings divest

100 67 33 0

Strategy Implications

The position on the matrix (determined
according to the weight, rating and value) will
indicate the appropriate strategy (as in the
BCG matrix).
 Green cells define the businesses that will
receive the resources to grow; the so called
“green light” businesses. The market is high
or medium in attractiveness and the
organization has high or enough skills and
resources to take advantage of the market.

 Red cells define the businesses that lack
opportunity in terms of market and or
company capabilities; the so called “red light”
businesses. They are managed to harvest
their resources or are just divested.
 Yellow cells define businesses that are to
receive selective investment, and where
caution (the yellow light) is the operating
style.

Limitations of BS/IA Matrix
 Although richer and more broadly applicable
than the BCG growth-share matrix, it can be
more subjective in the selection and weighting
of the factors.
 Different business units may involve different
factors which makes the analysis ambiguous.
 As it is the case with the BCG growth-share
matrix, the results are very sensitive to the
definition of the product market. E.g. luxury
cars, all cars?

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix
The Matching Stage

IE Matrix


Ch 6 -51

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

Ch 6 -52

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

Ch 6 -54

SWOT Matrix

SPACE Matrix

Stage 2: BCG Matrix
The Matching Stage

IE Matrix


Ch 6 -55


 Tool for formulating alternative
strategies
 Based on two dimensions
 Competitive position
 Market growth

Ch 6 -56

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
Ch 6 -57

Strategy-Formulation Analytical
Framework

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

Ch 6 -58

QSPM

Quantitative Strategic Planning Matrix

Technique designed to determine
the relative attractiveness of feasible
alternative actions

Ch 6 -59

Quantitative Strategic Planning
Matrix (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.

Ch 6 -60

Quantitative Strategic Planning Matrix
(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.
Ch 6 -61

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

Ch 6 -62

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

Ch 6 -63

Steps to Develop a 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

Ch 6 -64

Strategies of strategic management

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