STRATEGY

ANALYSIS AND
CHOICE

Gopal Salim
UAE

Strategic Management
DEFINITION
ANALYSIS, DECISIONS, AND ACTIONS AN
ORGANIZATION UNDERTAKES IN ORDER TO CREATE
AND SUSTAIN COMPETITIVE ADVANTAGES
There are two main elements in the above definition
1. Analysis, Decisions and Actions
2. Create and Sustain Competitive Advantages

1.Analysis, Decisions & Actions

ANALYSIS
Analysis of Strategic Goals (Vision, Mission, Strategic
Objectives)
Analysis of Internal and External Environment of the
organization

DECISIONS ( Addresses 2 Questions)

What industries should we compete in?
How should we compete in those industries?

ACTIONS
Allocate resources to achieve the objectives
Design an organization to make the intended strategy a
reality

2.Create & Sustain Competitive Advantage

This focus on two major questions
1. How should an organization compete to
create competitive advantage in the market
place or industry ?
2. How can an organization create competitive
advantage that is not only unique and
valuable , but difficult for competitors to
copy?

Strategic Process
The above definition of strategic management
brings in a series of actions in an organization
that is intended towards achieving the
organizational goals so that the organization
can sustain its competitive advantage in the
long run.
The whole series of actions can be
summarized in the form of a chart as given in
the next power point

Strategic Management Process (Single SBU)

Defining VISION, MISSION, BUSINESS

Environmental Analysis
Reset if
Required

Organizational Analysis
Setting Objectives &Goals

Identification &Development of
Alternative Strategies
Reformulate if
required

Re-implement
if required

Choice of Strategy

Implementation of Strategy

Strategy Evaluation & Control

Feedback

Analysis of Objectives & Goals

Organizational Vision

Vision serves the purpose of stating what an

organization wishes to achieve in the long run
It is more of a dream than articulated idea and
it should be massively inspring, overarching
and long term.
It is powerful motivator to action
Vision articulates the position of an
organization which it may retain in distant
future

Analysis of Objectives & Goals

Organizational Vision

ENVISIONING
This is the process of creating vision
A well conceived vision should have:
Core ideology
This remains unchanged and has enduring character

Envisioned Future
This shows the long term objectives of the organization
Clear description of articulated future

Analysis of Objectives & Goals

Organizational Vision

Advantages of having a Vision

1. It promotes experimentation
2. Promotes long term thinking of the
management
3. It promotes risk taking
4. It makes organization competitive, original
and unique
5. It is inspiring and motivating to people

Analysis of Objectives & Goals

Organizational Mission

It is the purpose or reason for the organization

to exist
It answers why the organization is in
existence.
It is the basis of awareness of a sense of
purpose

Analysis of Objectives & Goals

Organizational Mission

Characteristics of Mission Statement

The mission of an organization is always stated by Mission
Statement. A mission statement should have the following
characteristics:
It should be SMART (Specific, Measurable, Appropriate,
Realistic and Timely)
Neither be too broad nor too narrow
Should not be ambiguous
Should be distinct
Should have societal linkage
Should be motivating

Analysis of Objectives & Goals

Business Definition

Explains business of an organization in terms

of the following:
CUSTOMER NEEDS
CUSTOMER GROUPS
ALTERNATIVE TECHNOLOGIES

Example of Business Definition

The business definition of a watch making can
be as follows:
Customer groups are individual customers ,
commercial organizations, sports organizations,
educational institutions
Customer functions are record time, finding time,
alarm services, gift to somebody , vanity value etc
Alternative technologies are manual, mechanical,
automatic, digital etc

Objectives and Goals

Objectives are ultimate end results which is
used to operationalize the mission statement
They are more specific than mission
It is the ultimate end results which are to be
accomplished by overall plan over a specific
period of time
Objectives are open ended and when they are
stated in specific terms, it becomes goal

Difference between Objectives and

Goals
Goals are broad, while objectives specific
Goals set for relatively longer period of time
Goals are more affected by external
environment
Goals are not quantified, but objectives are
quantified

What objectives should be set?

Profit objective
Marketing objective
Productivity objective
Product objective
Social objective
Financial objective
HR Objective

Analyzing External Environment

The external environment is the totality of
forces that is external to the business and it
interact with the business in the market place.
The external environment provides the
OPPORTUNITY for the firm to do business and
at the same time it generates THREAT from
the market.

Creating an Environmentally Aware

Organization
A firm need to forecasts its environment for
developing a strategy that create sustained
competitive advantage
The inputs for forecasting are :
Environmental Scanning
Environmental Monitoring
Competitive Intelligence

Creating an Environmentally Aware

Organization
Role of Environment Scanning
This involves the surveillance of a firms
external environment to predict
environmental changes, and detect changes
that is already underway.
For Environmental Scanning, we can use a
framework which is known as PESTEL
framework
An example of Pestel framework is given
below:

PESTEL FRAMEWORK

Find out the impact of general

environmental factors on your business
Environmental
Factors

Nature of
business

Demographic
Age of Population
Rising Affluence

Healthcare
Airways
Fast foods
Financial Services

Socio Cultural
More women in
workforce
Greater concern for
health and fitness

Clothing
Baking Product (staples)
Home exercise
equipment
Meat products

Political/Legal
Change in Govt.,
Changes in Govt., Rules

Retail industry
Manufacturing
Service industry

Technological
Genetic engineering
ERP

Pharmaceutical business
Retail business
Software and computers

Economic Factors
Change in rate of interest
Availability of loans
Central Bank Monetary
Policy

Demand for cars

Housing demands
Level of inflation

Positive Impact

Neutral

Negative
Impact

Find out the impact of general

environmental factors on your business
Consider the table given overleaf.
If the impact of a factors is positive, then it
has got some positive influence on your
business
If the impact is negative, then it has got some
negative impact on your business
If it is neutral, then the factor is unimportant
for you now

COMPETITIVE FORCES
One of the most uncertain environmental
forces that affect the business is the
competitive framework in the market.
One of the models that is highly acclaimed in
assessing competitive framework is Michael E.
Porters Five Forces Model.

Porters Five Forces Model

COMPETITIVE FORCES

THREAT OF NEW ENTRANTS IS HIGH WHEN:

HIGH

LOW

Economies of scale are

low

Product differentiation

low

Capital requirements are

low

Switching costs are

low

Control of distribution channels are

low

Proprietary knowledge is (intellectual

property right)

low

Access to raw materials are

low

POWER OF BUYER IS HIGH WHEN:

HIGH

Concentration of buyers relative to

suppliers is

High

LOW

Switching costs are

low

Production differentiation of supplier is

low

Threat of backward integration by buyer is

Extent of buyers profit is

High

low

Power of supplier is high when

HIGH

Concentration of supplier relative to buyer

is

High

LOW

Availability of substitute product is

low

Importance of customer to the supplier is

low

Differentiation of the suppliers product

and services is

High

Switching costs of buyers are

High

Threat of Substitute Products is high when

HIGH

Differentiation of substitute product is

High

Rate of improvement in price-performance

relationship of substitute product is

High

LOW

Trade barriers is

Low

Safeguarding of intellectual property right

is

Low

Technological changes and imitation of

technology is

High

Intensity of competitive rivalry is high when

HIGH

Number of competitors is

High

Industry growth rate is

Low

Fixed costs are

High

Storage costs are

High

Production differentiation is

LOW

Low

Firms Internal Analysis

Many of the issues of strategy development
are concerned with changing strategic
capability better to fit a changing environment
The methods used for assessing internal
capabilities and weaknesses are:
1. Resource Based View of the Firm (RBV)
2. Study of Critical Success Factors (CSF)
3. The Value Chain Framework
4. The Balance Scorecard

STRATEGY FORMULATION
FRAMEWORK
: TOOLS AND TECHNIQUES

Comprehensive Strategy-Formulation
Framework
Stage 1:
The Input Stage

Stage 2:
The Matching Stage

Stage 3:
The Decision Stage

Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)

Stage 1:
The Input Stage

External Factor Evaluation

Matrix (EFE)

Competitive Profile Matrix

(CPM)

Stage 1: The Input Stage

Basic input information for the matching &

decision stage matrices
Requires strategists to quantify subjectivity
early in the process
Good intuitive judgment always needed

IFE Matrix (Internal Factor Evaluation)

Internal Factor Evaluation (IFE) matrix is a
strategic management tool for auditing or
evaluating major strengths and weaknesses in
functional areas of a business.
IFE matrix also provides a basis for identifying
and evaluating relationships among those
areas.
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.

IFE Matrix (Internal Factor Evaluation)

IFE MATRIX can be created by using 5 steps:
1. Conduct and internal audit and find out the
strengths and weaknesses of the company
There is no limit on the number of factors that can
be considered as strengths and weaknesses
2. Assign Weights to each factor ranging from 0.00 to
100 scale
The weights assigned shows the importance of that
factor. The most important factor is given highest
percentage and least importance is given least
percentage
The sum of all the weights should be equal to 1.00
or 100 %

IFE Matrix (Internal Factor Evaluation)

3. Rating
Give the rating as below:
Major Weakness 1
Minor Weakness 2
Minor Strength - 3
Major Strength - 4
Multiply each factor rating with the weights. This will give the
weighted score for each factor. Sum the total weights score
for each factor which give weighted score for your business.
Weighted score below 2.5 shows that you are internally weak
and above 2.5 shows that you are internally strong.
Example is given in the next PPT

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.

Development of EFE Matrix

1. List Opportunities and Threats
List one by one the opportunities and threats
of the business
2. Assign Weightage
Assign a weight to each factor
The value of weight should be between 0 and
1 ( or use a scale on 0 to 100)
Zero means factors is unimportant. If it is
nearing either one or 100, it is important
The total value of weight will be 1 or 100

Development of EFE Matrix

3. Rate Factors
Assign a rating to each factor.
Rating should be between 1 and 4
Ratings indicate the effectiveness of the present
strategy of the firm to the factor under
consideration
Rating should be given as follows:
Poor Response 1
Below Average Response -2
Above Average Response 3
Superior Response - 4

Development of EFE Matrix

4. Find Weighted Score
Multiply each factor weight with its rating. This
will give weighted score for each factor
5. Sum up the Weighted Score
Add all weighted score for each factor. This will
give total weighted score for the company.
Weighted score below 2.5 shows that the
companys response is weak and above 2.5
shows that the response is strong.

EXTERNAL FACTOR EVALUATION MATRIX - EXAMPLE

Opportunities

Weight

Rating

Weighted
Score

1.Industry Consolidation

11%

0.44

2.Increase in air travel

12%

0.36

3.Privatization of business

10%

0.20

4.Growth of low cost sector

8%

0.32

5.Increase in demand for air travel

16%

0.48

1.Decling margins in business

10%

0.10

2.Government oversight

5%

0.15

3.Increase in cost of key inputs

8%

0.16

4.New taxes

5%

0.10

5.Economic recession

15%

0.15

TOTAL WEIGHTED SCORE

100%

Threats

Poor 1/ Below Average 2/ Above Average 3/Superior 4

2.46

Factors to be included in EFE Matrix

Political Factors
Economic Factors
Socio-Cultural Factors
Technological Factors
Environmental Factors
Legal Factors

Competitive Profile Matrix (CPM)

CPM identifies a firms major competitors and their strengths
and weaknesses in relation to the sample firms strategic
position.
The weights and total weighted scores in both CPM and EFE
have the same meaning.
The factors that are considered are strengths and weaknesses
and the rating will be as follows:
Major Strengths 4
Minor Strengths 3
Minor Weaknesses 2
Major Weaknesses -1

Strategy-Formulation Analytical
Framework

SWOT Matrix

SPACE Matrix

Stage 2:
The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

Stage 2: The Matching Stage

Match between organizations internal

resources & skills and the opportunities & risks
created by its external factors

Stage 2: The Matching Stage

SWOT Matrix
Strengths
Weaknesses
Opportunities
Threats

SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)

SO Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT

SO
Strategies

Use a firms
internal strengths
to take advantage
of external
opportunities

WO Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT

WO
Strategies

Improving internal
weaknesses by
taking advantage
of external
opportunities

ST Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT

ST
Strategies

Use a firms
strengths
to avoid or
reduce the impact
of external
threats

WT Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT

WT
Strategies

Defensive tactics
aimed at reducing
internal
weaknesses &
avoiding
environmental
threats

SWOT Matrix
Developing the SWOT
List firms key internal

Strengths

List firms key internal

Weaknesses

List firms key external

Opportunities

List firms key external

Threats

SWOT Matrix
Strengths S

Weaknesses W

List Strengths

List Weaknesses

Opportunities O

SO Strategies

WO Strategies

List Opportunities

Use strengths to take

advantage of
opportunities

Overcoming weaknesses
by taking advantage of
opportunities

Threats T

ST Strategies

WT Strategies

List Threats

Use strengths to avoid

threats

Minimize weaknesses and

avoid threats

BLANK SPACE

Example of Matching Key Factors to Formulate

Alternative Strategies
Key Internal Factor
Key External Factor
Resultant Strategy

Excess working capacity

(strength)

Insufficient capacity
(weakness)

Strong R&D (strength)

Poor employee morale

(weakness)

20% annual growth in

aviation (opportunity)

Acquire a company.

Exit of two major foreign

+ competitors from the
=
industry (opportunity)

Pursue horizontal integration

by buying competitor's
facilities

Decreasing numbers of
young adults (threat)

Develop new products for

older adults

Strong union
activity (threat)

Develop a new
employee benefits
package

Limitations with SWOT Matrix

Does not show how to achieve a competitive
advantage
Provides a static assessment in time
May lead the firm to overemphasize a single
internal or external factor in formulating
strategies

Strategy-Formulation Analytical
Framework

SWOT Matrix

SPACE Matrix

Stage 2:
The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive
Conservative
Defensive
Competitive

SPACE Matrix
Two Internal Dimensions
Financial Strength (FS)
Competitive Advantage (CA)

Two External Dimensions

Environmental Stability (ES)

Industry Strength (IS)

SPACE Factors
Internal Strategic Position

External Strategic Position

Financial Strength (FS)

Environmental Stability (ES)

Return on investment
Leverage
Liquidity
Working capital
Cash flow
Strong Equity Basis

Technological changes
Rate of inflation
Demand variability
Price range of competing products
Barriers to entry
Competitive pressure
Price elasticity of demand
Ease of exit from market

SPACE Factors
Internal Strategic Position

External Strategic Position

Competitive Advantage CA

Industry Strength (IS)

Market share
Product quality
Product life cycle
Customer loyalty
Competitions capacity utilization
Technological know-how
Control over suppliers & distributors

Growth potential
Profit potential
Financial stability
Technological know-how
Resource utilization
Ease of entry into market
Productivity, capacity utilization

Steps to Developing a SPACE Matrix

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

Steps to Developing a SPACE Matrix

1. Plot the average score on the appropriate
axis
2. 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
3. Draw a directional vector from the origin
through the new intersection point.

SPACE Matrix
FS

Conservative

Aggressive

+6
+5
+4
+3
+2
+1

CA

IS
-6

-5

-4

-3

-2

-1

+1

-1

+2 +3

+4

+5

+6

-2
-3
-4

Defensive

-5

Competitive

-6

ES

Strategy-Formulation Analytical
Framework

SWOT Matrix

SPACE Matrix

Stage 2:
The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

BCG Matrix
Boston Consulting Group Matrix
Enhances multi-divisional firm in formulating
strategies
Autonomous divisions = business portfolio
Divisions may compete in different industries
Focus on market-share position & industry
growth rate

BCG Matrix
Relative Market Share Position
Ratio of a divisions own market share in an
industry to the market share held by the largest
rival firm in that industry

BCG Matrix
Relative Market Share Position

Industry Sales Growth Rate

High
1.0

Medium
.50

Low
0.0

High
+20

Stars
II

Question Marks
I

Cash Cows
III

Dogs
IV

Medium

Low
-20

BCG Matrix
Question Marks
Low relative market share compete in highgrowth industry
Cash needs are high

Case generation is low

Decision to strengthen (intensive strategies) or

divest

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 lowgrowth industry
Generate cash in excess of their needs

Milked for other purposes

Maintain strong position as long as possible

Product development, concentric diversification

If weakensretrenchment or divestiture

BCG Matrix
Dogs
Low relative market share & compete in slow or
no market growth
Weak internal & external position

Liquidation, divestiture, retrenchment

Strategy-Formulation Analytical
Framework

SWOT Matrix

SPACE Matrix

Stage 2:
The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

The Internal-External Matrix

Positions an organizations 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

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

Strategy-Formulation Analytical
Framework

SWOT Matrix

SPACE Matrix

Stage 2:
The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

Grand Strategy Matrix

Tool for formulating alternative strategies

Based on two dimensions

Competitive position
Market growth

RAPID MARKET GROWTH

1.
2.

3.
4.
5.
6.

WEAK
COMPETITIVE
POSITION
1.
2.
3.
4.
5.

Quadrant II
Market development
Market penetration
Product development
Horizontal integration
Divestiture
Liquidation

1.
2.

3.
4.
5.
6.
7.

Quadrant III
Retrenchment
1.
Concentric diversification
2.
Horizontal diversification
3.
Conglomerate
diversification
4.
Liquidation
SLOW MARKET

Quadrant I
Market development
Market penetration
Product development
Forward integration
Backward integration
Horizontal integration
Concentric diversification
Quadrant IV
Concentric diversification
Horizontal diversification
Conglomerate
diversification
Joint ventures
GROWTH

STRONG
COMPETITIVE
POSITION

Grand Strategy Matrix

Quadrant I

Excellent strategic position

Concentration on current markets/products
Take risks aggressively when necessary

Grand Strategy Matrix

Quadrant II

Evaluate present approach

How to improve competitiveness
Rapid market growth requires intensive
strategy

Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries

Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)

Grand Strategy Matrix

Quadrant IV

Strong competitive position

Slow-growth industry
Diversification to more promising growth areas

Strategy-Formulation Analytical
Framework

Stage 3:
The Decision Stage

Quantitative Strategic
Planning Matrix
(QSPM)

QASP Matrix
The Quantitative Strategic Planning Matrix is a
strategic tool which is used to evaluate
alternative set of strategies.
The QSPM incorporate earlier stage details in
an organized way to calculate the score of
multiple strategies in order to find the best
matching strategy for the organization.

Format of Quantitative Strategic Planning Matrix

There are four main columns in QSPM, the left column list down the key
internal and external key factors which are same as in EFE and IFE matrix.
Adjacent column to key factors is Weight (relative importance of the
factor) which hold the numeric value obtained from EFE and IFE matrix
weight column.
The next to weight is AS stands for attractive score assign priority to key
factors using the numeric value 4 for most importance and 1 for least
importance and the last column Total attractive score, is the value
calculated by multiplying weight by attractive score
One thing important to note for each strategy separate AS and TAS value
added in the table, weight remain same for all set of strategies mentioned
in QSPM.
The topmost shows the strategies are compared in the QSPM matrix,
below mentioned table illustrate the structure of QSPM matrix.

Strategic Alternatives

QSPM
Key External Factors
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems

Weight

Strategy 1

Strategy 2

Strategy 3

Steps to Develop a QSPM

1. Make a list of the firms 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
organization should consider implementing

Steps to Develop a QSPM

4. Determine the Attractiveness Scores
5. Compare the Total Attractiveness Scores
6. Compute the Sum Total Attractiveness Score