Introduction
Strategy analysis and choice focuses on generating and evaluating alternative strategies, as well as on selecting strategies to pursue.
Strategy analysis and choice seeks to determine alternative courses of action that could best enable the firm to achieve its mission and objectives.
The firm’s present strategies, objectives, and mission together with the external and internal audit information, provide a basis for generating and evaluating feasible alternative strategies.
The alternative strategies represent incremental steps that move the firm from its current position to a desired future state.
FACTORS INFLUENCING CHOICE
‘Strategic choice’ involves selecting from among several alternatives the most appropriate strategy which will best serve the enterprise objectives.
To choose a good strategic option, past data, current data, forecasted data, and various other factors should be examined carefully. The selection process becomes a complex job because it is influenced by various factors.
- Environmental Constraints
- Intra-Organisational Factors
- Pressures from Stakeholders
- Personal Characteristics
- Managerial Attitude towards Risk
Environmental Constraints
The dynamic elements of environment affect the way in which choice of strategy is made.
The survival and prosperity of a firm depend largely on the interaction of the elements of environment—such as shareholders, customers, suppliers, competitors, the government and the community.
These elements constitute the external constraints.
The flexibility in the choice of strategy is often governed by the extent and degree of the firm’s dependence on the environment.
Intra-Organisational Factors
Organisational factors also affect the strategic choice.
These include organisational mission, strategic intent, goals, organisation’s business definition, resources, policies, etc.
Besides these factors, organisational strengths, weaknesses, and capability to implement strategic alternatives also affect the strategic choice.
Pressures from Stakeholders
The attractiveness of a strategic alternative is affected by its perceived compatibility with the key stakeholders in a corporation’s task environment.
Creditors want to be paid on time. Unions exert pressure for comparable wage and employment security.
Governments and interest groups demand social responsibility.
Shareholders want dividends. All these pressures must be given some consideration in the selection of the best alternative.
Personal Characteristics
Personal factors like own perception, views, interests, preferences, needs, aspirations, personal disposition, ambitions, etc., are important and play a vital role in affecting strategic choice.
Even the most attractive alternative might not be selected if it is contrary to the attitude, mindset, needs, desires and personality of the selector/strategist himself.
Managerial Attitude towards Risk
Managerial attitude towards risk is an important factor that influences the choice of strategy.
Individuals differ considerably in their attitude towards risk taking. Some are risk prone, others are risk averse.
Risk is necessary for success;
Risk is a fact of life and some risk is desirable;
High risk destroys enterprises and needs to be minimized.
Strategy formulating techniques
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
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.
INPUT STAGE
1. INTERNAL FACTOR EVALUATION MATRIX (IFE)
Internal Factor Evaluation (IFE) matrix is a strategic management tool for evaluating major strengths and weaknesses in functional areas of a business.
The IFE Matrix together with the EFE matrix is a strategy-formulation tool that can be utilized to evaluate how a company is performing in regards to identified internal strengths and weaknesses of a company.
How to create the IFE matrix?
The IFE matrix can be created using the following five steps:
Key internal factors...
Conduct internal audit and identify both strengths and weaknesses in all your business areas. Identify 10 to 20 internal factors, but the more you can provide for the IFE matrix, the better. It is wise to be as specific and objective as possible. (You can for example, express in percentages, ratios, and comparative numbers.)
Weights...
Having identified strengths and weaknesses, Each key factor should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high importance).After you assign weight to individual factors, make sure the sum of all weights equals 1.
The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm's industry.
Rating...
Assign a 1 to 4 rating to each factor. Your rating scale can be per your preference. If you use the rating scale 1 to 4, then strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating.
Rating 1=a major weakness. Rating 2 = a minor weakness. Rating 3=a minor strength. Rating 4= a major strength.
Note: the weights determined in the previous step are industry based. Ratings are company based.
Multiply... Now we can get to the IFE matrix math. Multiply each factor's weight by its rating. This will give you a weighted score for each factor.
Sum...
The last step in constructing the IFE matrix is to sum the weighted scores for each factor. This provides the total weighted score for your business.
What values does the IFE matrix take?
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 (assuming you used the 1 to 4 rating scale). The average score you can possibly get is 2.5.
Total weighted scores well below 2.5 point to internally weak business. Scores significantly above 2.5 indicate a strong internal position.
It is important to note that a thorough understanding of individual factors included in the IFE matrix is still more important than the actual numbers.
2. EXTERNAL FACTOR EVALUATION MATRIX (EFE)
External Factor Evaluation (EFE) matrix method is a strategic-management tool often used for assessment of current business conditions. The EFE matrix is a good tool to visualize and prioritize the opportunities and threats that a business is facing.
The EFE matrix is very similar to the IFE matrix. The major difference between the EFE matrix and the IFE matrix is the type of factors that are included in the model. While the IFE matrix deals with internal factors, the EFE matrix is concerned solely with external factors.
External factors assessed in the EFE matrix are the ones that are subjected to the will of social, economic, political, legal, and other external forces.
How to create the EFE matrix?
List factors…..
The first step is to gather a list of external factors. Divide factors into two groups: opportunities and threats.
Assign weights………
Assign a weight to each factor. The value of each weight should be between 0.0 and 1.0. The total value of all weights together should equal 1.
Rate factors…..
Assign a rating to each factor. Rating should be between 1 and 4. Rating indicates how effective the firm’s current strategies respond to the factor. 1 = the response is poor, 2 = the response is below average. 3 = above average, 4 = superior.
Note: the weights determined in the previous step are industry based. Ratings are company based.
Multiply weights by ratings…..
Multiply each factor weight with its rating. This will calculate the weighted score for each factor.
Total all weighted scores….
Add all weighted scores for each factor. This will calculate the total weighted score for the company.
Competitive Profile Matrix (CPM)
The Competitive Profile Matrix (CPM) is a tool that compares the firm and its rivals and reveals their relative strengths and weaknesses.
In order to better understand the external environment and the competition in a particular industry, firms often use CPM.
The matrix identifies a firm’s key competitors and compares them using industry’s critical success factors.
The analysis also reveals company’s relative strengths and weaknesses against its competitors, so a company would know, which areas it should improve and, which areas to protect.
Weight..... Each critical success factor should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high importance).
Rating..... The ratings in CPM refer to how well companies are doing in each area. They range from 4 to 1, where 4 means a major strength, 3 – minor strength, 2 – minor weakness and 1 – major weakness.
Score & Total Score..... The score is the result of weight multiplied by rating. Each company receives a score on each factor. Total score is simply the sum of all individual score for the company. The firm that receives the highest total score is relatively stronger than its competitors.
MATCHING STAGE
1. SWOT Matrix
SWOT matrix is a systematic identification of the factors and the strategy that reflects the best match between them. It is based on the logic that an effective strategy maximizes the business’s strengths and opportunities but at the same time minimizes its weaknesses threats.
The SWOT matrix is a 2 x 2 four quadrant matrix. It has quadrants dedicated to
Strengths
Weaknesses
Opportunities
Threats
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
2. SPACE Matrix
The Strategic Position & Action Evaluation matrix or short a SPACE matrix is a strategic management tool that focuses on strategy formulation especially as related to the competitive position of an organization.
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]).
Internal dimensions
Financial strength (FS)
Competitive advantage (CA)
External dimensions
Environmental stability (ES)
Industry strength (IS)
SPACE Matrix Graph Quadrant
Aggressive
Conservative
Defensive
Competitive
Steps to construct a SPACE Matrix
The steps required to develop a SPACE Matrix are as follows:
1. Select a set of variables to relating to financial strength, competitive advantage, environmental
stability, and industry strength.
2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of the variables that make
up the financial strength and industry strength dimensions. Assign a numerical value ranging from -
1 (best) to -6 (worst) to each of the variables that make up the environmental stability and
competitive advantage dimensions.
3. Compute an average score by dividing by the number of variables
4. Plot the average scores 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. 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.
3. BCG Matrix / Growth Share Matrix
Boston Consulting Group (BCG) Matrix 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 its portfolio on the basis of their related market share and industry growth rates.
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.
BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate.
Using the Boston Consulting Group approach, a company classifies all its SBUs according to the growth-share matrix.
By dividing the growth-share matrix as indicated, four types of SBUs can be distinguished:
Stars- Stars 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.
Cash Cows- Cash Cows 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.
These SBU’s are the corporation’s key source of cash, and are specifically the core business.
They are the base of an organization. These businesses usually follow stability strategies.
When cash cows lose their appeal and move towards deterioration, then a retrenchment policy may be pursued.
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.
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, and then they have potential of becoming stars.
Dogs- Dogs 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.
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.
4. Internal-External (IE) Matrix
The Internal-External (IE) Matrix positions an organization’s various divisions in a nine cell matrix. The IE Matrix is a strategic management tool which is used to analyze the current position of the divisions and suggest the strategies for the future.
The Internal-External (IE) Matrix is based on an analysis of internal and external business factors which are combined into one suggestive model. The IE matrix is a continuation of the EFE matrix and IFE matrix models.
The Internal-External (IE) Matrix is based on two key dimensions: the IFE total weighted scores on the X-axis and the EFE total weighted scores on the Y-axis.
Internal-External (IE) Matrix
The total weighted scores derived from the divisions allow construction of the corporate-level IE Matrix.
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.
Similarly, 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.
5. Grand Strategy Matrix
The Grand Strategy Matrix charts two dimensions – the market growth vs the organisations competitive position.
Each of the four quadrants has a number of strategic options and the framework is designed to assist you evaluate the potential direction you decide to move in as a business.
First Quadrant:
If your business is in this quadrant then you have a strong competitive position and the market is in rapid growth.
This is the best quadrant to be in, with opportunity high and your position strong.
Second Quadrant:
If your business is in this quadrant then you have a relatively weak competitive situation as a business, but there’s a lot of opportunity to go for and a lot of success to be had within the market.
The strategies in this position are all about why you’re not taking advantage of the position.
If you’re placed in this quadrant then you know you can change to improve results.
Third Quadrant:
Being in the third quadrant means you have a weak competitive situation and the market is also quite slow. This is a tricky position because you’re already not doing well and there isn’t the huge opportunity that presents itself like the second quadrant. If you find yourself here you need to consider major changes to improve your competitive position, consider areas such as cost reduction, differentiation or diversification.
Fourth Quadrant:
If you’re placed within the fourth quadrant you have a strong competitive situation, which is great, but your market is slow to grow or in decline. This lends itself to strategies such as diversification as you have the funds to innovate in numerous areas before the market decline becomes unsustainable. Watch out for cheaper competitors entering the market to attack you as the leader.
What are the strategies in the Grand Strategy Matrix?
1. Strong Market Position + Strong Market Growth Strategies:
Market Development
Product Development
Market Penetration
Backward Integration
Forward Integration
Concentric Diversification
2. Weak Market Position + Strong Market Growth Strategies:
Market Development
Product Development
Market Penetration
Horizontal/Vertical Integration
Liquidation
Divestiture
3. Weak Market Positioning + Weak Market Growth Strategies:
Related / Unrelated Diversification
Conglomerate Diversification
Retrenchment
Liquidation
What are the strategies in the Grand Strategy Matrix?
4. Strong Market Positing + Weak Market Growth Strategies:
Related / Unrelated Diversification
Horizontal / Vertical Diversification
Joint Ventures
Conglomerate Diversification
Strategy-Formulation Framework
DECISIVE STAGE
Quantitative Strategic Planning Matrix
QSPM determines the relative attractiveness of various strategies based on key internal and external factors.
The relative attractiveness of each strategy within a set of alternatives is computed by determining the cumulative impact of each key internal and external factors.
Any number of sets of alternative strategies can comprise a given set.
For example, one set of strategies may include concentric, horizontal or conglomerate diversification
The steps involved are:
List the firm’s key internal and external strengths/weaknesses and external opportunities/threats in the left column of the QSPM. This information should be taken directly from the IFE&EFE matrix. A minimum of 5 key internal factors and 5 external factors should be included in the QSPM. Remember that each factor should be stated in specific terms.
Assign ratings to each key internal and external factor. These ratings are identical to those in the IFE and EFE matrix. The ratings are presented in a straight column just to the right of the key internal and external factor statements.
Examine state 2 (matching) matrices and identify alternative strategies that the organization should consider implementing. Record these strategies in the top row of the QSPM. Group the strategies into sets if appropriate.
Determine the attractiveness score. They are defined as numerical values that indicate the relative attractiveness of each strategy in a given set of alternatives. Attractiveness scores are determined by examining each internal and external factor, one at a time and asking a question is YES, then the strategy should be evaluated relative to the key factor.
Specifically, attractiveness scores should be assigned to each strategy in the given set of alternatives, and where
1=the strategy is not acceptable,
2=the strategy is possible acceptable,
3=the strategy is probably acceptable and
4= the strategy is most acceptable.
However, if the answer to the above question is NO, indicating that the respective key factor does not affect the specific choice being made, then do not assign attractiveness scores to the strategies in that set.
Compute the total attractiveness score, which is defined as the product of multiplying the ratings (step 2) by the attractiveness scores (step 4) in each row. The total attractiveness scores indicate the relative attractiveness of each alternative strategy, considering only the impact of the adjacent internal and external factors. The higher the total attractiveness score, the more attractive the strategic alternative.
Compute the total attractiveness score in a strategy column of the QSPM.
This reveals which strategy is most attractive in each set of alternatives. Higher scores indicate more attractive strategies, considering all the relevant internal and external factors that could impact the strategic decisions. Attractiveness scores in a given set of strategic alternatives indicate the relative desirability of one strategy over another.
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