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Strategic Management Concepts:

A Competitive Advantage Approach

Sixteenth Edition

Chapter 6

Strategy Analysis and Choice

Learning Objectives (1 of 2)

6.1 Describe the strategy analysis and choice process.

6.2 Diagram and explain the three-stage strategy-formulation

analytical framework.

6.3 Diagram and explain the Strengths-Weaknesses-

Opportunities-Threats (SWOT) Matrix.

6.4 Diagram and explain the Strategic Position and Action

Evaluation (SPACE) Matrix.

6.5 Diagram and explain the Boston Consulting Group

(BCG) Matrix.

Learning Objectives (2 of 2)

6.6 Diagram and explain the Internal-External (IE) Matrix.

6.7 Diagram and explain the Grand Matrix.

6.8 Diagram and explain the Quantitative Strategic

Planning Matrix (QSPM).

6.9 Discuss the role of organizational culture in strategic

analysis and choice.

6.10 Identify and discuss important political considerations in

strategy analysis and choice.

6.11 Discuss the role of a board of directors (governance) in

strategic planning.

Figure 6-1 A Comprehensive Strategic-

Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See

also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of David’s

Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics

and Technology, no. 4 (October 2010): 20.

The Process of Generating and Selecting

Strategies (1 of 3)

• A manageable set of the most attractive alternative

strategies must be developed.

• The advantages, disadvantages, trade-offs, costs, and

benefits of these strategies should be determined.

The Process of Generating and Selecting

Strategies (2 of 3)

• Identifying and evaluating alternative strategies should

involve many of the managers and employees who earlier

assembled the organizational vision and mission

statements, performed the external audit, and conducted

the internal audit.

The Process of Generating and Selecting

Strategies (3 of 3)

• Alternative strategies proposed by participants should be

considered and discussed in a series of meetings.

• Proposed strategies should be listed in writing.

• When all feasible strategies identified by participants are

given and understood, the strategies should be ranked in

order of attractiveness.

Figure 6-2 The Strategy-Formulation

Analytical Framework

A Comprehensive Strategy-Formulation

Framework (1 of 3)

• Stage 1 - Input Stage

– summarizes the basic input information needed to

formulate strategies

– consists of the EFE Matrix, the IFE Matrix, and the

Competitive Profile Matrix (CPM)

A Comprehensive Strategy-Formulation

Framework (2 of 3)

• Stage 2 - Matching Stage

– focuses on generating feasible alternative strategies

by aligning key external and internal factors

– techniques include the Strengths-Weaknesses-

Opportunities-Threats (SWOT) Matrix, the Strategic

Position and Action Evaluation (SPACE) Matrix, the

Boston Consulting Group (BCG) Matrix, the Internal-

External (IE) Matrix, and the Grand Strategy Matrix

A Comprehensive Strategy-Formulation

Framework (3 of 3)

• Stage 3 - Decision Stage

– involves the Quantitative Strategic Planning Matrix

(QSPM)

– reveals the relative attractiveness of alternative

strategies and thus provides objective basis for

selecting specific strategies

Table 6-1 Matching Key External and Internal

Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

Excess working capital

(an internal strength)

+ Annual growth of 20 percent in

the cell phone industry (an external

opportunity)

= Acquire Cellfone, Inc.

Insufficient capacity

(an internal weakness)

+ Exit of two major foreign

competitors from The industry (an

external opportunity)

= Pursue horizontal

integration by buying

competitors’ facilities

Strong research and

development expertise

(an internal strength)

+ Decreasing numbers of younger

adults (an external threat)

= Develop new products

for older adults

Poor employee morale

(an internal weakness)

+ Rising health-care costs (an

external threat)

= Develop a new wellness

program

The Matching Stage (1 of 3)

• The Strengths-Weaknesses-Opportunities-Threats

(SWOT) Matrix helps managers develop four types of

strategies:

– SO (strengths-opportunities) Strategies

– WO (weaknesses-opportunities) Strategies

– ST (strengths-threats) Strategies

– WT (weaknesses-threats) Strategies

The Matching Stage (2 of 3)

• SO Strategies

– use a firm’s internal strengths to take advantage

of external opportunities

• WO Strategies

– aim at improving internal weaknesses by taking

advantage of external opportunities

The Matching Stage (3 of 3)

• ST Strategies

– use a firm's strengths to avoid or reduce the impact

of external threats

• WT Strategies

– defensive tactics directed at reducing internal

weakness and avoiding external threats

SWOT Matrix (1 of 2)

1. List the firm’s key external opportunities.

2. List the firm’s key external threats.

3. List the firm’s key internal strengths.

4. List the firm’s key internal weaknesses.

5. Match internal strengths with external opportunities,

and record the resultant SO strategies.

SWOT Matrix (2 of 2)

6. Match internal weaknesses with external opportunities,

and record the resultant WO strategies.

7. Match internal strengths with external threats, and record

the resultant ST strategies.

8. Match internal weaknesses with external threats, and

record the resultant WT strategies.

Figure 6-4 The SPACE Matrix (1 of 3)

Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological

Figure 6-4 The SPACE Matrix (2 of 3)

• Strategic Position and Action Evaluation (SPACE)

Matrix

– four-quadrant framework indicates whether aggressive,

conservative, defensive, or competitive strategies are

most appropriate for a given organization

Figure 6-4 The SPACE Matrix (3 of 3)

• Two internal dimensions (financial position [FP] and

competitive position [CP])

• Two external dimensions (stability position [SP] and

industry position [IP])

• Most important determinants of an organization’s overall

strategic position

SPACE Matrix Axes (1 of 2) Table 6-2 Example Factors That Make Up the SPACE Matrix Axes

Internal Strategic Position External Strategic Position

Financial Position (FP) Stability Position (SP)

Return on investment Technological changes

Leverage Rate of inflation

Liquidity Demand variability

Working capital Price range of competing products

Cash flow Barriers to entry into market

Inventory turnover Competitive pressure

Earnings per share Ease of exit from market

Price earnings ratio Price elasticity of demand

Blank Risk involved in business

SPACE Matrix Axes (2 of 2) [Table 6-2 continued]

Internal Strategic Position External Strategic Position

Competitive Position (CP) Industry Position (IP)

Market share Growth potential

Product quality Profit potential

Product life cycle Financial stability

Customer loyalty Extent leveraged

Capacity utilization Resource utilization

Technological know-how Ease of entry into market

Control over suppliers and distributors Productivity, capacity utilization

Source: Based on H. Rowe, R. Mason, & K. Dickel, Strategic Management and Business Policy: A

Steps to Develop a SPACE Matrix (1 of 4)

1. Select a set of variables to define financial position (FP),

competitive position (CP), stability position (SP), and

industry position (IP).

Steps to Develop a SPACE Matrix (2 of 4)

2. 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.

Steps to Develop a SPACE Matrix (3 of 4)

3. Compute an average score for FP, CP, IP, and SP.

4. Plot the average scores for FP, IP, SP, and CP on the

appropriate axis.

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.

Steps to Develop a SPACE Matrix (4 of 4)

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

Figure 6-5 Example Strategy Profiles (1 of 2)

Figure 6-5 Example Strategy Profiles (2 of 2)

Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological

The Boston Consulting Group (BCG)

Matrix

• BCG Matrix

– graphically portrays differences among divisions in

terms of relative market share position and industry

growth rate

– allows a multidivisional organization to manage its

portfolio of businesses by examining the relative

market share position and the industry growth rate

of each division relative to all other divisions in the

organization

Figure 6-7 The BCG Matrix (1 of 4)

Figure 6-7 The BCG Matrix (2 of 4)

• Question Marks - Quadrant I

– Organization must decide whether to strengthen them

by pursuing an intensive strategy (market penetration,

market development, or product development) or to sell

them

• Stars - Quadrant II

– represent the organization’s best long-run opportunities

for growth and profitability

Figure 6-7 The BCG Matrix (3 of 4)

• Cash Cows - Quadrant III

– generate cash in excess of their needs

– should be managed to maintain their strong position

for as long as possible

• Dogs - Quadrant IV

– compete in a slow- or no-market-growth industry

– businesses are often liquidated, divested, or trimmed

down through retrenchment

Figure 6-7 The BCG Matrix (4 of 4)

• The major benefit of the BCG Matrix is that it draws

attention to the cash flow, investment characteristics,

and needs of an organization's various divisions.

Figure 6-10 The Internal-External (IE)

Matrix (1 of 2)

Source: Based on: The IE Matrix was developed from the General Electric (GE) Business Screen Matrix. For a

description of the GE Matrix, see Michael Allen, “Diagramming GE’s Planning for What’s WATT,” in R. Allio and M.

Pennington, eds., Corporate Planning: Techniques and Applications l par; New York: AMACOM, 1979.

Figure 6-10 The Internal-External (IE)

Matrix (2 of 2)

• The 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

• Three Major Regions

– Grow and build

– Hold and maintain

– Harvest or divest

Figure 6-11 An Example IE Matrix

The Grand Strategy Matrix (1 of 3)

• Grand Strategy Matrix

– based on two evaluative dimensions: competitive

position and market (industry) growth

Figure 6-13 The Grand Strategy Matrix

Source: Based on Roland Christensen, Norman Berg, and Malcolm Salter, Policy

Formulation and Administration (Homewood, IL: Richard D. Irwin, 1976), 16–18.

The Grand Strategy Matrix (2 of 3)

• Quadrant I

– continued concentration on current markets (market

penetration and market development) and products

(product development) is an appropriate strategy

• Quadrant II

– unable to compete effectively

– need to determine why the firm's current approach is

ineffective and how the company can best change to

improve its competitiveness

The Grand Strategy Matrix (3 of 3)

• Quadrant III

– must make some drastic changes quickly to avoid

further decline and possible liquidation

– Extensive cost and asset reduction (retrenchment)

should be pursued first

• Quadrant IV

– have characteristically high cash-flow levels and limited

internal growth needs and often can pursue related or

unrelated diversification successfully

The Quantitative Strategic Planning Matrix

(QSPM)

• Quantitative Strategic Planning Matrix (QSPM)

– objectively indicates which alternative strategies are

best

– uses input from Stage 1 analyses and matching results

from Stage 2 analyses to decide objectively among

alternative strategies

Table 6-5 The Quantitative Strategic

Planning Matrix (QSPM) Strategic Alternatives

Key Factors Weight Strategy 1 Strategy 2 Strategy 3

Key External Factors Blank Blank Blank Blank

Economy Blank Blank Blank Blank

Political/Legal/Governmental Blank Blank Blank Blank

Social/Cultural/Demographic/ Environmental Blank Blank Blank Blank

Technological Blank Blank Blank Blank

Competitive Blank Blank Blank Blank

Key Internal Factors Blank Blank Blank Blank

Management Blank Blank Blank Blank

Marketing Blank Blank Blank Blank

Finance/Accounting Blank Blank Blank Blank

Production/Operations Blank Blank Blank Blank

Research and Development Blank Blank Blank Blank

Management Information Systems Blank Blank Blank Blank

Steps in a QSPM (1 of 2)

1. Make a list of the firm’s key external opportunities and

threats and internal strengths and 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 in a QSPM (2 of 2)

4. Determine the Attractiveness Scores (AS).

5. Compute the Total Attractiveness Scores.

6. Compute the Sum Total Attractiveness Score.

Positive Features of the QSPM

• Sets of strategies can be examined sequentially or

simultaneously

• Requires strategists to integrate pertinent external and

internal factors into the decision process

• Can be adapted for use by small and large for-profit and

nonprofit organizations

Limitations of the QSPM

• Always requires informed judgments

• It is only as good as the prerequisite information and

matching analyses on which it is based

Table 6-6 A QSPM for a Retail Computer

Store (1 of 3)

Table 6-6 A QSPM for a Retail Computer

Store (2 of 3)

Table 6-6 A QSPM for a Retail Computer

Store (3 of 3)

The Culture and Politics of Strategy Choice

• Strategies that require fewer cultural changes may be

more attractive because extensive changes can take

considerable time and effort

• Political maneuvering consumes valuable time, subverts

organizational objectives, diverts human energy, and

results in the loss of some valuable employees

• Political biases and personal preferences get unduly

embedded in strategy choice decisions

Tactics to Aid Strategists

• Choose Methods That Afford Employee Commitment

• Achieve Satisfactory Results with a Popular Strategy

• Shift from Specific to General Issues

• Focus on Long-Term Issues and Concerns

• Involve Middle Level Managers in Decisions

Governance Issues

• Board of Directors

– a group of individuals who are elected by the

ownership of a corporation to have oversight and

guidance over management and who look out for

shareholders’ interests

Board of Director Duties and Responsibilities

1. Control and oversight over management

2. Adherence to legal prescriptions

3. Consideration of stakeholders/ interests

4. Advancement of stockholders’ rights

Principles of Good Governance (1 of 2)

1. No more than two directors are current or former

company executives.

2. The audit, compensation, and nominating committees are

made up solely of outside directors.

3. Each director owns a large equity stake in the company,

excluding stock options.

Principles of Good Governance (2 of 2)

4. Each director attends at least 75 percent of all meetings.

5. The board meets regularly without management present

and evaluates its own performance annually.

6. The CEO is not also the chairperson of the board.

7. There are no interlocking directorships (where a director

or CEO sits on another director's board).