Chapter 1 The Nature of Strategic Management

What Is Strategic Management?

Formulation, implementation, and evaluation of strategy activities occur at three hierarchical
Strategic management is the art and science of formulating, implementing, and levels in a large organization: corporate, divisional or strategic business unit, and functional. By
evaluating cross-functional decisions that enable an organization to achieve its fostering communication and interaction among managers and employees across hierarchical
objectives. levels

Stages of Strategic Management Integrating Analysis and Intuition

The process of formulating, implementing, and evaluating strategies as revealed in The strategic-management process can be described as an objective, logical, systematic
the comprehensive model approach for making major decisions in an organization. It attempts to organize qualitative
and quantitative information in a way that allows effective decisions to be made under
The strategic-management process consists of three stages:
conditions of uncertainty.
Strategy formulation includes developing a vision and mission, identifying an
organization's external opportunities and threats, determining internal strengths and Based on past experiences, judgment, and feelings, most people recognize that intuition
weaknesses, establishing long-term objectives, generating alternative strategies, and is essential to making good strategic decisions.
choosing particular strategies to pursue.
Programmed Decisions:
• Repetitive in nature.
Strategy-formulation issues include deciding what new businesses to enter, what
• Easiest to make.
businesses to abandon, whether to expand operations or diversify, whether to
• Usually, these decisions are taken in consultation with the existing policy, rule or procedure.
enter international markets, whether to merge or form a joint venture
Ex: making purchase orders or maintenance of the equipment

Strategy implementation requires a firm to establish annual objectives, devise policies,

motivate employees, and allocate resources so that formulated strategies can be Non-Programmed Decisions:
executed efficiently. • Not repetitive in nature
Ex: Issues related to handling a serious industrial relations problem, declining market share,
known as the action stage of strategic management, involves mobilizing employees increasing competition etc.
and managers to execute formulated strategies. It is often the most challenging • The solutions may widely differ in the case of non-programmed decisions.
phase, requiring discipline, commitment, and strong interpersonal skills. • The effectiveness of the manager lies in handling exceptional situations.

Strategy evaluation is the final stage of strategic management, helping managers

determine whether strategies are effective. Since internal and external factors
constantly change, strategies may need modification. The three key activities in
strategy evaluation are: (1) reviewing internal and external factors influencing
current strategies, (2) measuring performance, and (3) taking corrective actions.
Key Terms in Strategic Management Annual Objectives

Competitive Advantage Annual objectives are short-term, measurable milestones that help organizations progress
toward long-term goals. They should be quantitative, challenging, realistic, consistent, and
Strategic management is all about gaining and maintaining competitive advantage.
prioritized, and must be set across corporate, divisional, and functional levels in large
This term can be defined as any activity a firm does especially well compared with
organizations.
activities done by rival firms, or any resource a firm possesses that rival firms desire.
Policies
Strategists
Policies are the means by which annual objectives will be achieved. Policies include
Strategists are the individuals most responsible for the success or failure of an guidelines, rules, and procedures established to support efforts to achieve stated objectives.
organization.Strategists help an organization gather, analyze, and organize information.
They track industry and competitive trends, develop forecasting models and scenario
analyses, evaluate corporate and divisional performance.

Vision and Mission Statements

vision statement answers the question "What do we want to become?" the first step
in strategic planning, preceding even development of a mission statement.

A mission statement identifies the scope of a firm's operations in product and

market terms." It addresses the basic question that faces all strategists: "What is
our business?" describes the values and priorities of an organization.

External Opportunities and Threats

External opportunities and external threats refer to economic, social, cultural,

demographic, environmental, political, legal, governmental, technological, and
competitive trends and events that could significantly benefit or harm an organization
in the future.

Strategies

Strategies are the means by which long-term objectives will be achieved. Business
strategies may include geographic expansion, diversification, acquisition, product
development, market penetration, retrenchment, divestiture, liquidation, and joint
venture.
 Chapter 2: Business vision and mission

Vision Statement: What do we want to become?

A vision statement should answer the basic question, “What do we want to become?” A clear vision provides the
foundation for developing a comprehensive mission statement.

A strong vision statement clearly defines the type of business and what the company aims to become. an
effective vision statement must be Clear – Identifies the industry and company goals, Futuristic – Projects a
five-year vision, Concise – One sentence, Unique – Shows competitive advantage, Inspiring – Encourages
support and motivation.

Mission Statements: What Is Our Business?

An enduring statement of purpose that distinguishes one organization from other similar enterprises, is a
declaration of an organization's "reason for being." It answers the pivotal question "What is our business?" A
clear mission statement is essential for effectively establishing objectives and formulating strategies.

A mission statement should (1) define what the organization is, (2) be limited enough to exclude some ventures
and broad enough to allow for creative growth, (3) distinguish a given organization from all others, (4) serve as
a framework for evaluating both current and prospective activities, and (5) be stated in terms sufficiently clear
to be widely understood throughout the organization.

Components of a Mission Statement

1) Customers-Who are the firm's present and potential customers?

2) Products or services-What are the firm's major products or services?
3) Markets-Geographically, where does the firm compete?
4) Technology-Is the firm technologically current?
5) Concern for survival, growth, and profitability-Is the firm committed to growth and
financial soundness?
6) Philosophy—What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
7) Distinctive competence —What is the firm's major competitive advantage?
8) Concern for public image -Is the firm responsive to social, community, and environmental concerns?
9) Concern for employees — Are employees a valuable asset of the firm?
 Chapter 3: the external assessment

External audit: focuses on identifying and evaluating trends and events beyond the control of a single firm.
reveals key opportunities and threats confronting an organization so that managers can formulate strategies to
take advantage of the opportunities and avoid or reduce the impact of threats

The Purpose of an External Audit

The external audit is aimed at identifying key variables that offer actionable responses.Firms should be able to
respond either offensively or defensively to the factors by formulating strategies that take advantage of external
opportunities or that minimize the impact of potential threats.

The AQCD Test

When identifying and prioritizing key external factors in strategic planning, the following 4 factors are important:
Actionable, Quantitative, Comparative ,Divisional.The AQCD is a measure of the quality of an external factor.

Key External Forces

There are 10 external forces that can be divided into 5 broad categories: (1) economic forces; (2) social, cultural,
demographic, and environment (SCDE) forces; (3) political, governmental, and legal forces; (4) technological
forces; and (5) competitive forces.

Economic

Economic factors directly influence the attractiveness and success of strategic options. Favorable economic
conditions—like growth in GDP, lower unemployment, and higher disposable income—can create strategic
opportunities by improving consumer demand.

Key Economic Variables to Be Monitored:

-Shift to service economy -Inflation rates
-Availability of credit -GDP trends
-Level of disposable income -Consumption patterns
-Propensity of people to spend -Unemployment trends
-Interest rates -Value of the dollar

(SCDE) Forces

SCDE forces impact strategic decisions on virtually all products, services, markets, and customers. Small, large,
for-profit, and nonprofit organizations in all industries are being staggered and challenged by the opportunities
and threats arising from changes in SCDE variables. These forces are shaping the way people live, work,
produce, and consume.
Key SCDE Variables:

-Population changes by race, age, and geographic area -Immigration and emigration rates
-Regional changes in tastes and preferences -Social Security programs
-Number of marriages, divorces, births, deaths -Life expectancy rates
-Per capita income

Political, Governmental, and Legal Forces

Politics, governments, and legislators can and often do impact strategic decisions. Political, governmental, and legal
factors, therefore, can represent major opportunities or threats for both small and large organizations. For industries
and firms that depend heavily on government contracts or subsidies, political forecasts can be the most important
part of an external audit.
Political, Government, and Legal Variables :

-Natural environmental regulations -Level of defense expenditures

-Protectionist actions by countries -Unionization trends
-Changes in patent laws -Antitrust legislation
-Equal employment opportunity laws
 Technological Forces

Technological advancements are rapidly reshaping industries and influencing strategic planning decisions.
Innovations such as the Internet of Things (IoT), 3D printing, predictive analytics, quantum computing, robotics,
and artificial intelligence (AI) are creating both opportunities and challenges for businesses.

Many firms now have a Chief Information Officer (CIO) and a Chief Technology Officer (CTO) who work together
to ensure that information needed to formulate, implement, and evaluate strategies is available where and when it
is needed

Competitive forces

An important part of an external audit is identifying rival firms and determining their strengths, weaknesses,
capabilities, opportunities, threats, objectives, and strategies.

Competitive intelligence (CI)

systematic and ethical process for gathering and analyzing information about the competition's activities and
general business trends to further a business's own goals (SCIP website).

Legal and ethical ways to obtain competitive intelligence:

-Reverse-engineer rival firms' products.

-Use surveys and interviews of customers, suppliers, and distributors of rival firms.
- Analyze rival firm's Form 10-K.
-Conduct fly-over and drive-by visits to rival firm operations.
-Search online databases.
-Contact government agencies for public information about rival firms.
-Monitor relevant trade publications, magazines, and newspapers.
-Purchase social-media data about customers of all firms in the industry.
-Hire top executives from rival firms.

Porter's Five-Forces Model

• Identify key aspects or elements of each competitive force that impact the firm.
• Evaluate how strong and important each element is for the firm.
• Decide whether the collective strength of the elements is worth the firm entering or staying in the industry.

Rivalry Among Competing Firms

the strongest and most direct force. It reflects the intensity of competition within an industry and is heavily
influenced by the other four forces and focus on competitive advantage of strategies over other firms

• Intense rivalry often leads to price wars, higher marketing costs, and lower profit margins, which
may benefit consumers but reduce industry profitability.

Conditions That Cause High Rivalry Among Competing Firms:

1. When the number of competing firms is high

2. When competing firms are of similar size
3. When competing firms have similar capabilities
4. When demand for the industry's products is changing rapidly
5. When price cuts are common in the industry
6. When consumers can switch brands easily
7. When barriers to leaving the market are high
8. When barriers to entering the market are low
Potential Entry of New Competitors

The threat of new entrants refers to how easily new firms can enter an industry and compete with existing
businesses and reduce their market share and profitability by offering better quality and lower prices.

Barriers to entry include:

Need to gain economies of scale quickly
Need to gain technology and specialized know-how
Lack of experience
Strong customer loyalty and brand reputation
Large capital requirements

Potential Development of Substitute Products

The threat of substitute products arises when customers can fulfill their needs using products from outside
the industry. These substitutes create competitive pressure by offering alternative solutions, often at lower
cost or with greater convenience.

Bargaining Power of Suppliers

The bargaining power of suppliers reflects their ability to influence the price and terms of inputs they
provide to an industry. This power becomes stronger when:
• Few suppliers exist
• Few or no substitutes for the input are available
• Switching costs for buyers are high

Strong supplier power can increase costs and reduce profitability for firms. In response, companies may
pursue backward integration—producing their own inputs—to reduce dependency.

Bargaining Power of Consumers

The bargaining power of consumers (buyers) reflects their ability to influence prices and terms offered by
companies. This force becomes strong when:
-Buyers can easily switch to competing products or brands
-Buyers are few but purchase in large volumes
-Switching costs are low
-Buyers are well-informed about product options and pricing
-Demand is weak, making sellers more desperate for sales
 Chapter 4: The internal assessment
The internal audit
- Requires gathering, assimilating, and prioritizing information about the firm's management, marketing,
finance, accounting, production/operations, research and development, and management information
systems operations.

- Provides more opportunity for participants to understand how their jobs, departments, and
divisions fit into the whole firm

The Resource-Based View (RBV)

(RBV) Approach: contends that internal resources are more important for a firm than external factors in
achieving and sustaining competitive advantage

performance largely depends on the firm’s ability to use its resources both tangible and intangible to exploit
opportunities and counter threats. Intangible resources are often more valuable since they are harder to
acquire and replicate.

Resources are considered valuable if they are:

• Rare – not widely possessed by competitors,
• Hard to imitate – difficult to replicate or copy,
• Not easily substitutable – not replaceable by other resources or products.

These enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a
sustainable competitive advantage.

Key Internal Forces

Internal strategic management involves evaluating how well a firm performs across all functional business
areas—such as management, marketing, finance, accounting, and MIS—to identify strengths and
weaknesses. Strengths that are unique and hard to imitate are referred to as distinctive competencies,
which are crucial for gaining competitive advantage.

The Basic Functions of Management

Planning: forecasting, establishing objectives, devising strategies, and developing policies.

Organizing: organizational design, job specialization, job descriptions, span of control, coordination, job
design, and job analysis.
Motivating: leadership, communication, work groups, behavior modification, delegation of authority, job
enrichment, job satisfaction, needs fulfillment, organizational change, employee morale, and managerial
morale.
Controlling: quality control, financial control, sales control, inventory control, expense control, analysis of
variances, rewards, and sanctions.

Production/Operation Functions:
It consists of all those activities that transform inputs into goods and services .Production and operations
involve five key decision areas: process, capacity, inventory, workforce, and quality. Strengths or weaknesses
in any of these five areas can significantly impact a firm’s overall success or failure.

Integrating Strategy and Culture

Effective management requires aligning a firm’s strategy with its organizational culture. Organizational
Culture is the unique pattern of behavior developed as the organization adapts to internal and external
challenges. It strongly influences strategic decisions and the success of strategic planning.
Marketing
the process of defining, anticipating, creating, and fulfilling customers' needs and wants.

Marketing Research and Target Market Analysis

the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods
and services, can uncover critical strengths and weaknesses

Target Market Analysis

An important use of marketing research involves target market analysis—the examination and evaluation
of consumer needs and wants. Marketing research involves methods such as customer surveys, analyzing
consumer information, developing customer profiles, all of which contribute to effective customer analysis.

Product Planning

includes activities such as test marketing; product and brand positioning; devising warranties; packaging;
determining product options, features, style, and quality; deleting old products; and providing for customer
service, important when a company is pursuing product development or diversification

Two major components of product planning are:

-Test Marketing: Used to evaluate new products or marketing strategies before full-scale launch.
-Research and Development (R&D): Vital for innovation, especially in high-tech and competitive industries

Pricing

Refers to deciding the amount an individual must exchange to receive a firm's product offering.Pricing
strategies are often based on costs, demand, the competition, or on customers' needs. Common pricing
objectives include maximizing profit, increasing market share or sales, weakening competitors, improving
customer satisfaction

Promotion

Includes many marketing activities, such as advertising, sales promotion, public relations, personal
selling, and direct marketing. Common promotional tools designed to inform consumers about
products include TV advertising, magazine ads, billboards, websites, and public relations, among
others.

Channels of Distribution

Channels of distribution refer to the intermediaries that move a product from the producer to the final
consumer, such as wholesalers, retailers, brokers, and agents. Key decisions involve warehousing,
transportation, distribution coverage, retail site selection, and inventory management. These choices
are crucial to ensuring that products are available where and when customers want them.

Finance&Accounting Functions
The functions of finance/accounting comprise three decisions:

Investment Decision (Capital Budgeting)

the allocation and reallocation of capital and resources to projects, products, assets, and divisions of
an organization

Financing Decision
determines the best capital structure for the firm and includes examining various methods by which
the firm can raise capital

Dividend Decisions
concern issues such as the percentage of earnings paid to stockholders, the stability of dividends
paid over time, and the repurchase or issuance of stock determine the amount of funds that are
retained in a firm compared to the amount paid out to stockholders
Management Information Systems
Collects, codes, stores, synthesizes, and presents information in such a manner that it answers
important operating and strategic questions

-Receives raw material from both external and internal evaluation of an organization
-Improves the performance of an enterprise by improving the quality of managerial decisions

Business analytics
Business analytics involves using software tools to analyze large volumes of data to support
executive decision-making. Also known as predictive analytics, machine learning, or data mining, it
leverages a company’s historical interactions with stakeholders—customers, suppliers, employees,
competitors—to create predictive models that guide strategy.

The Internal Factor Evaluation (IFE) Matrix

-List key internal factors as identified in the internal-audit process.

- Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor.
- Assign a 1-to-4 rating to each factor to indicate whether that factor represents a strength or
weakness.
- Multiply each factor's weight by its rating to determine a weighted score for each variable.
- Sum the weighted scores for each variable to determine
 Chapter 5: strategies in action

Integration Strategies Types of Strategies

guidelines for when forward integration may be especially effective:

1) Current distributors are ineffective – they’re costly, unreliable, or can’t meet the company’s needs.
2) Scarce quality distributors – competitors might secure exclusive contracts, gaining an edge.
3) High industry growth – forward integration is more viable in expanding markets, despite limiting diversification.
4) Sufficient resources – the firm has the capital and talent to handle distribution internally.
5) Need for stable production – controlling distribution helps stabilize demand and production.

guidelines for when backward integration may be especially effective:

1) Current suppliers are ineffective – they’re costly, unreliable, or unable to meet the firm’s needs.
2) Few suppliers, many competitors – limited supplier options and high competition increase risk.
3) Industry is rapidly growing – backward integration suits growth but limits diversification in downturns.
4) Sufficient resources – the company has the capital and talent to handle its own supply operations.
5) Stable raw material prices are crucial – controlling supply helps manage cost fluctuations.
6) Need for fast access to resources – integrating backward ensures quicker availability.

Horizontal integration may be especially effective when:

1) Monopoly-like advantages are possible without triggering antitrust issues.

2) An organization competes in a growing industry.
3) Economies of scale offer strong competitive benefits.
4) The firm has the capital and management capability to handle expansion.
5) Competitors are struggling and can be acquired cheaply.
6) The firm wants rapid entry into a new geographic market.

intensive strategies

intensive strategies demand strong efforts to improve a firm’s position with existing products. These
strategies are often preferred since they focus on a firm’s core strengths:

guidelines indicate when market penetration may be an especially effective strategy:

1) Current markets are not saturated with a particular product or service.

2) The usage rate of present customers could be increased significantly.
3) The market shares of major competitors have been declining, whereas total industry sales have been
increasing.
4) Increased economies of scale provide major competitive advantages.
 Market development is a suitable strategy when:

1) New, reliable, and cost-effective distribution channels are available.

2) The organization is already successful in its current operations.
3) There are untapped or unsaturated markets.
4) The firm has sufficient capital and talent to support expansion.
5) There is excess production capacity.
6) The industry is becoming increasingly global.

Product development is especially effective when:

1) Current products are in the maturity stage and can help attract loyal customers to new offerings.
2) organization competes in an industry experiences rapid technological change.
3) Competitors offer better-quality products at similar prices.
4) The industry is experiencing high growth.
5) The firm has strong research and development capabilities.

Diversification Strategies

There are two main types of diversification strategies: related and unrelated.

Related diversification involves businesses with value chains that share strategic connections.

Related diversification is likely effective when:

1) The firm operates in a no-growth or slow-growth industry.
2) Related new products can boost sales of current offerings.
3) New related products can be competitively priced.
4) Seasonal sales of new products can balance existing demand fluctuations.
5) The organization has a strong management team to handle expansion.

Unrelated diversification involves businesses with little to no strategic linkages.

Unrelated diversification may be especially effective when:

1) Current markets are saturated.
2) The firm operates in a highly competitive or stagnant industry with low profits.
3) Existing distribution channels can be used to sell new products.
4) New products have countercyclical sales that balance current product demand.
5) The organization has the capital and management talent to succeed in a new industry.

Defensive Strategies:

Retrenchment may be an effective strategy when:

1) The organization suffers from inefficiency, low profits, poor morale, and stockholder pressure.
2) Leadership has failed to address internal weaknesses or respond to external opportunities and threats.
3) The company has grown too rapidly and requires major internal restructuring.
 Divestiture may be an effective strategy when:
1) Retrenchment efforts have failed to bring necessary improvements.
2) A specific division is causing poor overall performance.
3) A division doesn’t align with the rest of the organization due to major differences.
4) The organization urgently needs cash and other sources are not viable.
5)Antitrust actions from the government pose a threat.

Liquidation may be an effective strategy when:

1) Both retrenchment and divestiture strategies have failed.
2) Selling the organization’s assets would help stockholders minimize their losses.

Levels of Strategies

Strategy-making isn’t limited to top executives—middle- and lower-level managers should also be involved in
the process.

In large firms, there are four strategy levels:

• Corporate – led by the CEO
• Divisional – led by division presidents
• Functional – led by executives like the CFO, CIO, CMO, and HRM
• Operational – led by managers such as plant or regional sales managers

In small firms, there are three levels:

• Company
• Functional
• Operational

Involving managers at all levels promotes coordination, commitment, and clarity, and helps prevent
inconsistency, inefficiency, and miscommunication.
 Chapter 5: strategies in action
Porter's Five Generic Strategies

Cost Leadership Strategies (Type 1 & 2)

Type 1 is a low-cost strategy that offers products or services to a wide range of customers at the lowest price
available on the market.

For example:

Fawry as a Type 1 ( Low-Cost Provider)

1) Undisputed Price Leader: Charges 0 fees for most basic transactions (vs. banks' 2-5% fees)
2) Mass Market Focus: Serves 40+ million transactions/month from all economic segments

Type 2 is a best-value strategy that offers products or services to a wide range of customers at the best price-
value available on the market; the best-value strategy aims to offer customers a range of products or services
at the lowest price available compared to a rival's products with similar attributes.

For example: black and decker- carrefour- easy jet

COST LEADERSHIP TYPE 1 AND 2 To employ this type of strategy a firm must:

Be More Efficient Than Competitors:

Perform activities like production, marketing, and delivery better and cheaper. Use methods such as better
plant layout, new technologies, shared parts across products, simpler designs, and running at full capacity.

Change the Value Chain to Cut Costs:

Find cheaper suppliers or distributors, Sell products online, Move factories to cheaper locations, Avoid costly
practices like union labor.

TYPE THREE (DIFFERENTIATION STRATEGY -TARGET SMALL AND LARGE GROUPS)

Porter's Type 3 generic strategy is differentiation, a strategy aimed at producing products and services
considered unique industry wide and directed at consumers who are relatively price-insensitive.

Differentiation Strategy:

The best way to stand out is by offering something hard or costly for competitors to copy. Competitors are
continually trying to imitate, duplicate, and outperform rivals.

Differentiation doesn’t always lead to success, especially if regular products already meet customer needs or if
competitors can quickly copy new features.Before trying to differentiate, companies must carefully study what
customers want and see if they can create a unique product with the right features.

Examples (Apple, Harley-Davidson, Nespresso, LEGO, Nike and Starbucks.)

TYPE FOUR (FOCUS STRATEGY-TARGET SMALL GROUPS

Type 4 is a low-cost focus strategy that offers products or services to a small range (niche group) of customers at
the lowest price available on the market. An examples of a firm that use the Type 4 strategy: Pizza Hut, corona,
Ikea, Oreo.

TYPE FIVE (FOCUS STRATEGY-TARGET SMALL GROUPS

Type 5 is a best-value focus strategy that offers products or services to a small range of customers at the best
price-value available on the market. Sometimes called "focused differentiation," the best-value focus strategy
aims to offer a niche group of customers products or services that meet their tastes and requirements better
than rivals' products do. Example: LV
FOCUS STRATEGY - TYPE FOUR AND FIVE

A successful focus strategy depends on an industry segment that is of sufficient size, has good growth potential,
and is not crucial to the success of other major competitors.

Example: Harrods, Russell and Bromley

Focus strategies are most effective when consumers have distinctive preferences or requirements and when rival
firms are not attempting to specialize in the same target segment.

TYPE 1 OR 2 COST LEADERSHIP STRATEGY CONDITIONS

Vigorous price competition

Plentiful supply of identical products
Little product differentiation
Products used in same ways
Low cost to switch
Large buyers with power
Industry newcomers use low prices to attract buyers

TYPE 3 DIFFERENTIATION STRATEGY CONDITIONS

Many ways to differentiate and buyers perceive the differences as having value
Diverse buyer needs and uses
Few rival firms following similar differentiation approach
Fast paced technological change and evolving product features

TYPE 4 OR 5 FOCUS STRATEGY CONDITIONS

Large, profitable, and growing target market niche

Industry leaders do not consider the niche crucial to their success
Industry leaders consider it costly or difficult to meet the needs of this niche
Industry has many niches and segments
Few rivals are specializing on this target segment

Ways to Achieve Strategies:

Joint Venture: Two or more companies team up to work on a project or business together.
Merger/Acquisition: Companies combine (merger) or one company buys another (acquisition) to grow stronger.
First Mover Advantages: Being the first to enter a market to gain early customers and a strong position.
Outsourcing: Hiring outside companies to handle certain tasks or services to save money and focus on core
activities.
 chapter 6: Strategy Analysis and Choice

Strategy Analysis and Choice

Strategy analysis and choice involve identifying alternative actions that help the firm achieve its mission and
objectives. A firm’s current strategies, objectives, and mission, combined with internal and external audit
information, form the foundation for generating and evaluating possible strategies.

Strategy Analysis & Choice: Generating Alternatives

Strategists cannot consider every possible alternative due to the infinite number of potential actions and
methods for implementing them. Therefore, participation in generating alternatives should be as wide-ranging
as possible.

The Strategy-Formulation Analytical Framework

Stage 1 of the strategy-formulation analytical framework consists of the External Factor Evaluation (EFE)
Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive Profile Matrix (CPM).

Stage 2: The Matching Stage

Stage 2, involves creating feasible alternative strategies by aligning key external and internal factors. Techniques
used in this stage include the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix.

The SWOT Matrix develops four sets of strategies: SO, WO, ST, and WT.

SO strategies use a firm’s strengths to take advantage of external opportunities. Ideally, organizations aim to be
in a position in which internal Strengths can be used to take advantage of external trends and events.

WO strategies focus on overcoming internal weaknesses to exploit external opportunities. Sometimes key external
opportunities exist, but a firm has internal weaknesses that prevent it from exploiting those opportunities. For
instance, a firm lacking battery products (internal weakness) could develop new batteries to meet rising electric
car demand (external opportunity).

ST strategies leverage a firm’s strengths to counter external threats. For example, a strong legal department
(strength) can help a firm defend against patent infringements (threats). This does not mean that a strong
organization should always meet threats in the external environment head-on. Rival firms that copy ideas
innovations, and patented products are a major threat in many industries.

WT strategies are defensive, aimed at minimizing weaknesses and avoiding threats. Firms in faced with numerous
external threats might need to retrench, merge, declare bankruptcy, or liquidate. For instance, firms may stop
working with unethical suppliers (internal weakness) in response to public concerns (external threat), or diversify
if facing declining industry sales.
GUIDELINES WHEN DEVELOPING SWOT MATRIX

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 in the
appropriate cell.
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.
9) Include the “S1, O2” type notation after each strategy in the SWOT Matrix to show the rationale for each
alternative strategy.

LIMITATIONS WITH SWOT MATRIX

• Does not show how to achieve a competitive advantage

• Provides a static assessment (snapshot) in time. It is like studying a single frame in motion picture.
• May lead the firm to overemphasize a single internal or external factor in formulating strategies

SPACE Matrix Strategic Position & Action Evaluation Matrix

Its four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are
most appropriate for a given organization.

The axes of the SPACE Matrix represent two internal dimensions (financial position [FP] and competitive position
[CP] ) and two external dimensions (stability position [SP] and industry position [IP] ). These four factors are
perhaps the most important determinants of an organization's overall strategic position.

STEPS REQUIRED TO DEVELOP A SPACE MATRIX

Example Factors That Make Up the SPACE Matrix Axes