Lesson 5 Topic: Strategy Analysis and Choice

 Definition
 Strategy-Formulation Framework: Stage 1
 Strategy-Formulation Framework: Stage 2
 Strategy-Formulation Framework: Stage 3
 Influence of Organisational Culture and
Politics, and Governance Issues

Why This Topic

Scarcity is not just a word in economics. It is a real problem faced by even the biggest companies in the world.
Since resources are limited compared to the actions that companies want to take, they have to rationally choose
the optimum strategy to adopt based on their goals and conditions in their internal and external environment.
This topic presents the different methods that organisations can use to find potential strategies based on their
goals and current position and how to rationally choose among the many options.

Definition

Strategy analysis and choice is a process that joins strategic actions, market opportunities, corporate strengths,
and resources to select the “best” goal and set of strategic actions.

Four steps in strategy analysis and choice:

1. Establishing long-term objectives
2. Generating alternative strategies
3. Selecting strategies to pursue
4. Best alternative – achieve mission and objectives

Alternative forms of strategies are derived from:

 Vision
 Mission
 Objectives
 External analysis
 Internal assessment
 Past successful strategies

It is important to note that participation in a strategy generation exercise should be broad. The more people from
different levels and divisions of the organisation are involved, the less would be resistance to change.

Strategy-Formulation Framework

Strategy formulation is a process that determines the objectives and prepares the course of action to achieve
the goals.

There are 3 stages in the Strategy-Formulation Framework:

Stage 1: The Input Stage
Stage 2: The Matching Stage

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Stage 3: The Decision Stage

Strategy-Formulation Framework: Stage 1

It is the basic input information for the matching and decision stage matrices.

Internal Factor
Evaluation Matrix
(IE)

External Factor
Stage 1: The
Evaluation Matrix
Input Stage
(EFE)

Competitive Profile
Matrix (CPM)

It requires strategists to quantify subjectivity early in the process. Also, good intuitive judgment is needed to make
the stage effective.

Strategy-Formulation Framework: Stage 2

In this stage, each of the strategies will be explained in the later sub-topics. It is a match between organisation’s
internal resources and skills and the opportunities and risks created by its external factors.

The stage and its strategies can be seen in the diagram below.

SWOT Matrix

SPACE Matrix

Stage 2: The Competitive Profile

Matching Matrix (CPM)
Stage

IE Matrix

Grand Strategy
Matrix

SWOT Matrix

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A SWOT matrix is a tool that allows businesses to identify their strengths, weaknesses, opportunities, and threats.
The SWOT is developed through the keys:
 Internal strengths
 Internal weaknesses
 External opportunities
 External threats

The list can be seen in the table below and each strategy will be explained.

Strengths – S Weaknesses – W
List Strengths List Weaknesses
Opportunities – O SO Strategies WO Strategies
List Opportunities Use strengths to take Overcoming
advantage of weaknesses by taking
opportunities advantage of
opportunities
Threats – T ST Strategies WT Strategies
List Threats Use strengths to avoid Minimise weaknesses
threats and avoid threats

1. SO Strategies: Use a firm’s internal strength to take advantage of external opportunities.

2. WO Strategies: Improving internal weaknesses by taking advantage of external opportunities.
3. ST Strategies: Use a firm’s strengths to avoid or reduce the impact of external threats
4. WT Strategies: Defensive tactics aimed at reducing internal weaknesses and avoiding environmental
threats

An example of how the key factors are applied can be seen in the table below.

Key Internal Factor Key External Factor Resultant Strategy

Excess working + 20% annual growth in = Acquire Cellfone,
capacity (strengths) the cell phone Inc.
industry (opportunity)
Insufficient + Exit of two major = Pursue horizontal
capacity foreign competitors integration by
(weakness) from the industry buying competitor’s
(opportunity) facilities
Strong R&D + Decreasing numbers = Develop new
(strength) of young adults products for older
(threat) adults

The limitation of the SWOT matrix is that it does not show how to achieve a competitive advantage. It provides a
static assessment in time and may lead the firm to overemphasise a single internal or external factor in formulating
strategies.

SPACE Matrix
SPACE matrix stands for Strategic Position and Action Evaluation, which is a tool to gain high reliability. This matrix
can be used in the graph below.

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Factors of the SPACE matrix are divided into 2 categories. This can be seen in the table below.
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
 Competitive pressure
 Price elasticity of demand
 Ease of exit from market
 Risk involved in business
Competitive Advantage (CA) Industry Strength (IS)
 Market share  Growth potential
 Product quality  Profit potential
 Product life cycle  Financial stability
 Customer loyalty  Technological know-how
 Competition’s capacity utilisation  Resource utilisation
 Technological know-how  Ease of entry into market
 Control over suppliers and distributors  Productivity, capacity, utilisation

There are steps to follow when developing a SPACE Matrix:

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

2. Assign a numerical value: a) From +1 to +6 to each FS and IS dimension
b) From -1 to -6 to each ES and CA dimension

3. Compute an average score for each FS, CA, ES, and IS

4. Plot the average score on the appropriate axis

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 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

Boston Consulting Group (BCG) Matrix

BCG matrix is designed to help with long-term strategic planning or to develop products.

It enhances multi-divisional firms in formulating strategies by focusing on market-share position and industry
growth rate. One of the divisions is the autonomous division, which refers to the business portfolio. The divisions
may compete in different industries, face different challenges and contribute differently to the firm.

To determine the firm’s position, the matrix has 4 quadrants. It is seen in the diagram below.

Star Question Marks

 High relative market share and high  Low relative market share but
growth rate compete in a high-growth industry
 Best long-run opportunities for growth  Cash needs are high
and profitability  Case generation is low
 Substantial investment to maintain or  Decision to strengthen (intensive
strengthen a dominant position strategies) or divest
 Integration strategies, intensive
strategies, joint ventures
Cash Cows Dogs
 High relative market share, competes  Low relative market share and
in a low-growth industry compete in slow or no market growth
 Generate cash in excess of their  Weak internal and external position
needs  Liquidation, divestiture, retrenchment
 Milked for other purposes
 Maintain a strong position as long as
possible

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  Product development, concentric
diversification
 If weakens - retrenchment or
divestiture

Internal-External (IE) Matrix

The Internal-External (IE) matrix is a strategic management tool that is used to analyse the current position of the
divisions and suggest strategies for the future.

From the diagram above, the IE matrix positions an organisation’s various divisions in a nine-cell display.

It is similar to the BCG matrix, but it requires more information about the divisions and the strategic implications of
each matrix are different. This is based on two key dimensions:
 The IFE total weighted scores on the x-axis
 The EFE total weighted scores on the y-axis

It is also divided into 3 major regions:

 Grow and build (Integration and/or Intensive strategies) – Cells I, II, or IV
 Hold and maintain (Market Penetration and/or Product Development) – Cells III, V, or VII
 Harvest or divest (Retrenchment or divestiture) – Cells VI, VIII, or IX

An example to apply the IE matrix can be seen in the diagram below.

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Grand Strategy Matrix
A grand strategy matrix is a tool for formulating alternative strategies for a product or company within a market.
It is based on 2 dimensions:
 Competitive position
 Market growth

Each of the four quadrants has a number of strategic possibilities and the framework is designed to help the
organisation analyse the potential direction to move in as a business.

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 Quadrant II Quadrant I
 Evaluate the present approach  Excellent strategic position
 How to improve competitiveness  Concentration on current
 Rapid market growth requires an markets/products
intensive strategy  Take risks aggressively when
necessary
Quadrant III Quadrant IV
 Compete in slow-growth industries  Strong competitive position
 Weak competitive position  Slow-growth industry
 Drastic changes quickly  Diversification to more promising
 Cost and asset reduction growth areas
(retrenchment)

Strategy-Formulation Framework: Stage 3

The Quantitative Strategic Planning Matrix (QSPM) is the strategy-formulation framework, which is the decision
stage. It is a technique designed to determine the relative attractiveness of feasible alternative actions.

There are several steps to developing a QSPM. They are:

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
3. Examine the Stage 2 (matching) matrices and identify alternative strategies that the organisation should
consider implementing
4. Determine the Attractiveness Scores (AS)
5. Compare the Total Attractiveness Scores (TAS)
6. Compute the Sum Total Attractiveness Score

Advantages Limitations
 Sets of strategies considered  Requires intuitive judgments and
simultaneously or sequentially educated assumptions
 Integration of pertinent external and  Only as good as the pre-requisite
internal factors in the decision- inputs
making process

Influence of Organisational Culture and Politics, and Governance Issues

The final section discusses how strategy analysis and choice can influence organisational culture and politics as
well as governance issues.

In an organisational culture, successful strategies depend on the degree of consistency with the firm’s culture. As
for politics in the organisation, they involve:
 Management hierarchy
 Career aspiration
 Allocation of scarce resources

The tactics used by strategists to manage organisational politics in strategy selection are:

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  Equifinality
 Satisfying
 Generalisation
 Higher-order issues

Governance issues refer to the board of directors. Their roles and responsibilities are:
 Control and oversight over management
 Adherence to legal prescriptions
 Consideration of stakeholder interests
 Advancement of stockholder rights

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