Strategic Management Concepts: A Competitive

Advantage Approach, Concepts and Cases

Seventeenth Edition

Chapter 6
Strategy Analysis and Choice

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 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 Construct and apply the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix.
6.4 Construct and apply the Strategic Position and Action
Evaluation (SPACE) Matrix.
6.5 Construct and apply the Boston Consulting Group (BCG)
Matrix.

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 Learning Objectives (2 of 2)
6.6 Construct and apply the Internal-External (IE) Matrix.
6.7 Construct and apply the Grand Strategy Matrix.
6.8 Construct and apply the Quantitative Strategic Planning
Matrix (QSPM).
6.9 Explain how to estimate costs associated with
recommendations.
6.10 Discuss the role of organizational culture in strategic analysis
and choice.
6.11 Identify and discuss important political considerations in
strategy analysis and choice.

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 Figure 6.1 The Comprehensive, Integrative Strategic-
Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. 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.

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 5
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 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.

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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.

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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.

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Figure 6.2 The Strategy-Formulation Analytical
Framework

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 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)

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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

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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

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 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

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 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

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 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

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Figure 6.3 A SWOT Matrix for a Retail Computer Store

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 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.

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 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.

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 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 Approach (Reading, MA:
Addison-Wesley Publishing Co. Inc., © 1982), 155.

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 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

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 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

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 Table 6.2 SPACE Matrix Axes (1 of 2)

Internal Strategic Position External Strategic Position

Financial Position (FP) Stability Position (S P)
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 Risk involved in business

Example Factors That Make Up the S P A C E Matrix Axes

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 Table 6.2 SPACE Matrix Axes (2 of 2)
Internal Strategic Position External Strategic Position
Competitive Position (C P) Industry Position (I P)
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 Methodological Approach
(Reading, MA: Addison-Wesley Publishing Co. Inc., 1982); 155-
156.
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 Steps in Performing SPACE Analysis
(1 of 4)

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

competitive position (CP), stability position (SP), and industry
position (IP).

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 Steps in Performing SPACE Analysis
(2 of 4)

2. Assign a numerical value ranging from +1 (worst) to +7 (best) to

each of the variables that make up the F P and IP dimensions.

Assign a numerical value ranging from −1 (best) to −7 (worst) to

each of the variables that make up the S P and C P dimensions.

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 Steps in Performing SPACE Analysis
(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.

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 Steps in Performing SPACE Analysis
(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

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Figure 6.5 Example Strategy Profiles (1 of 2)

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 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 Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155.

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Figure 6.6 A SPACE Matrix for Facebook

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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

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 Figure 6.7 The BCG Matrix (1 of 4)

Source: Based on the BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group.

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 Boston’s Consulting Group Matrix (BCG)

Market Share
High Low
High Question Mark

(Moderate,
?
Safe,
Product/ Star Positive (Large negative cash flow)
Cash-flow)
Market
Growth
DOG
(Large
Cash Cow
Low positive (Negative cash flow)
Cash-flow)

SAM/ UPSA/STRATEGY/MBA/2019 -'20

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 The BCG Matrix – Characteristic & Strategies
(Question Mark)

Characteristics Strategies
• Capable of Rapid Growth 1.Market Penetration
• Low Profit Margin
2.Market Development
• High Cash Required for Promotion
3.Product Development
• High growth industry
• Low Market Share 4.Divertiture
• Already a leader in the market
1.Heavy investments in assets & training
by virtue of being an innovative
product
• Requires large investments to 2.Heavy investments in promotion & adverts
finance growth
3.Adapt niche focus initially with a skimming
pricing approach

Represents best future prospects NOTE!

Organization must decide whether to strengthen them by pursuing an
intensive strategy (market penetration, market development, or
product development) or to sell them

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 The BCG Matrix – Characteristic & Strategies (Stars)

Characteristics Strategies
• Market Leaders 1.Backward/ Forward Vertical Integration
• Fast Growing 2.Horizontal Integration
• Accruing substantial profits
• High growth industry 3.Market Penetration
• Requires large investments to 4.Market Development
finance growth
5.Product Development

1.Protect Existing Market

Represents best future prospects 2.Re-invest earnings
3.Obtain new users & uses
4.Reduce price, improve quality
5.Increase market share

NOTE!

Represent the organization’s best long-run opportunities

for growth and profitability

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 The BCG Matrix – Characteristic & Strategies - Cash Cow(s)

Characteristics Strategies
• Profitable Products 1.Product Development
• Generate more cash than is
needed to maintain market share/ 2.Diversification
Large positive cashflow
• High relative market share in low 3.Retrenchment
growth industry
• 4.Divestiture
Period of high growth has ended
1.Maintain Market Dominance

2.Invest in Process Improvement

3.Use excess cash for R & D in low growth

industry

4.Maintain Price Leadership

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 The BCG Matrix – Characteristic & Strategies - DOGS

Characteristics Strategies
• Limited Opportunities for Growth 1.Retrenchment
• Operate at cost disadvantage
• Market incapable of growth 2.Divestiture
• Low relative market share
in low growth industry 3.Liquidation
• Product at maturity stage of life-
cycle 4.Harvest

1.Focus on market segment &

promote
2.Offer additional Features
3.Harvest
4.Abandon

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 Notes On The BCG Matrix

Significance
 Allows for efficient resource allocation
 Triggers product re-launch needs

Criticisms
1. Too simplistic with only two dimensions – market growth & market share
2. Not all products go through the 4 quadrants
3. Assumes that market share provides profit maximization – link between market
share and profit may be weak
4. Not all dogs should be condemned
5. The link between quadrants and cash-flow is not particularly strong as there
could be many exceptions
6. Too limited as a basis for policy decision

Note!
a. Models provides meaningful indicators
b. Uncritical (rigid & stereotype) use of model could generate difficulties
c. Ought to be used as a means to an end and not as representing an end in itself

SAM/ UPSA/STRATEGY/MBA/2019 -'20

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 Figure 6.7 The BCG Matrix (1 of 4)

Source: Based on the BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group.

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 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

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 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

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 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.

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Figure 6.8 An Example BCG Matrix

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Figure 6.9 An Example BCG Matrix

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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.

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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

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Figure 6.11 An Example IE Matrix

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Figure 6.12 The IE Matrix

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 The Grand Strategy Matrix (1 of 3)

• Grand Strategy Matrix

– based on two evaluative dimensions: competitive position
and market (industry) growth

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 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.

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 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

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 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

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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

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 Table 6.4 The Quantitative Strategic Planning Matrix (QSPM)

Strategic Alternatives
Key Factors Weight Strategy 1 Strategy 2 Strategy 3
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
Management Information Systems

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 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.

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 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.

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 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

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 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

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Table 6.5 A QSPM for a Retail Computer Store
(1 of 3)

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Table 6.5 A QSPM for a Retail Computer Store
(2 of 3)

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Table 6.5 A QSPM for a Retail Computer Store
(3 of 3)

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 Estimating Costs Associated With
Recommendations
• The term recommendation is used to refer to “any alternative
strategy that is selected for implementation.”
• Due to monetary and/or non-monetary constraints, no firm
can implement all alternative strategies proposed in the
matching matrices, so firms utilize the QSPM and expert
judgment to select particular strategies.

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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

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 Some Theories, Concepts & Tools To Know

1.Vision/ Mission Statement 1.Culture – Corporate/ Organization & Business

2.Goals & Objectives (SMART) 2.BCG Matrix
3.Strategy Formulation (Analysis and Choice) 3.The SPACE Matrix
4.Internal Environmental Analysis 4.Strategy Formulation & Analytical Framework
5.External Environmental Analysis - PESTLE 5.The SWOT Matrix
6.Porters 5 Forces Framework 6.The Grand Strategy Matrix
7.SWOT Analysis 7.Business Process Re-engineering
8.Mendelow’s Stakeholder Matrix/ Analysis 8.CSR
9.Ansoff’s Product/ Market Matrix 9.Corporate Governance/ BODs
10.Porter’s Generic Strategies 10.Globalization
11.Strategic Group alliance 11.Business Ethics
12.Strategic Positioning 12.Change Management
13.Value Chain Analysis 13.Marketing Strategy
14.Bench-Marking 14.Competitive Positioning/ Strategies
15.Forward/ Backward Vertical Integration 15.Balance Scorecard
16.Horizontal Integration 16.Strategy Implementation
17.Synergy 17.Strategy Evaluation ( Control/ Review)
18.Related/ Unrelated Diversification 18. The Perceptual Map
19.VRIN Criteria 19.Corporate Valuation
20.Market Cycles (Slow/ Fast/ Standard) 20.Structure – Strategy Relationship
21.Mergers & Acquisition/ Organic Growth
22.Key Performance Indicators

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 65
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