Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Fred R. David
Prentice Hall

Ch 6-1

Formulation Framework
Internal Factor Evaluation
Matrix (IFE)
External Factor Evaluation
Matrix (EFE)

Stage 1:
The Input Stage

Competitive Profile
Matrix
Fred R. David
Prentice Hall

Ch 6-2

Input Stage
Provides basic input information for the
matching and decision stage matrices
Requires strategists to quantify
subjectivity early in the process
Good intuitive judgment always needed

Fred R. David
Prentice Hall

Ch 6-3

Formulation Framework
TOWS Matrix
SPACE Matrix
Stage 2:
The Matching Stage

BCG Matrix
IE Matrix
Grand Strategy Matrix

Fred R. David
Prentice Hall

Ch 6-4

Matching Stage

Match between organizations internal

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

Fred R. David
Prentice Hall

Ch 6-5

Matching Key Factors to Formulate Alternative Strategies

Key Internal Factor

Key External Factor

Resultant Strategy

20% annual growth in the

cell phone industry
=
(opportunity)

Insufficient capacity
(weakness)

Exit of two major foreign

competitors form the
industry (opportunity)

Pursue horizontal integration

by buying competitor's
facilities

Strong R&D (strength)

Decreasing numbers of
young adults (threat)

Develop new products for

older adults

Poor employee morale

(weakness)

+ Strong union activity

(threat)

Excess working capacity

(strength)

Fred R. David
Prentice Hall

Acquire Cellfone, Inc.

Develop a new employee

benefits package
Ch 6-6

Formulation Framework
TOWS Matrix
SPACE Matrix
Stage 2:
The Matching Stage

BCG Matrix
IE Matrix
Grand Strategy Matrix

Fred R. David
Prentice Hall

Ch 6-7

Matching Stage
TOWS Matrix
Threats
Opportunities
Strengths
Weaknesses

Fred R. David
Prentice Hall

Ch 6-8

TOWS Matrix
Develop four types of strategies
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)

Fred R. David
Prentice Hall

Ch 6-9

SO Strategies

Threats
Opportunities
Weaknesses
Strengths
(TOWS)

SO
Strategies

Fred R. David
Prentice Hall

Use a firms
internal
strengths to take
advantage of
external
opportunities

Ch 6-10

WO Strategies

Threats
Opportunities
Weaknesses
Strengths
(TOWS)

WO
Strategies

Fred R. David
Prentice Hall

Improving
internal
weaknesses by
taking
advantage of
external
opportunities
Ch 6-11

ST Strategies

Threats
Opportunities
Weaknesses
Strengths
(TOWS)

ST
Strategies

Fred R. David
Prentice Hall

Using firms
strengths to
avoid or reduce
the impact of
external threats.

Ch 6-12

WT Strategies

Threats
Opportunities
Weaknesses
Strengths
(TOWS)

WT
Strategies

Fred R. David
Prentice Hall

Defensive
tactics aimed at
reducing internal
weaknesses
and avoiding
environmental
threats.
Ch 6-13

TOWS Matrix
Steps in developing the TOWS Matrix
1.
2.
3.
4.

List the firms key external opportunities

List the firms key external threats
List the firms key internal strengths
List the firms key internal weaknesses

Fred R. David
Prentice Hall

Ch 6-14

TOWS Matrix
Developing the TOWS Matrix

5.
6.
7.
8.

Match internal strengths with external opportunities

and record the resultant SO Strategies
Match internal weaknesses with external
opportunities and record the resultant WO Strategies
Match internal strengths with external threats and
record the resultant ST Strategies
Match internal weaknesses with external threats and
record the resultant WT Strategies
Fred R. David
Prentice Hall

Ch 6-15

TOWS Matrix
Leave Blank

Strengths-S

Weaknesses-W

List Strengths

List Weaknesses

Opportunities-O

SO Strategies

WO Strategies

List Opportunities

Use strengths to take

advantage of opportunities

Overcome weaknesses
by taking advantage of
opportunities

Threats-T

ST Strategies

WT Strategies

List Threats

Use strengths to avoid

threats

Minimize weaknesses
and avoid threats

Fred R. David
Prentice Hall

Ch 6-16

Formulation Framework
TOWS Matrix
SPACE Matrix
Stage 2:
The Matching Stage

BCG Matrix
IE Matrix
Grand Strategy Matrix

Fred R. David
Prentice Hall

Ch 6-17

SPACE Matrix
Strategic Position and Action Evaluation Matrix

Four quadrant framework

Determines appropriate strategies

Aggressive
Conservative
Defensive
Competitive

Fred R. David
Prentice Hall

Ch 6-18

SPACE Matrix
Two Internal Dimensions

Financial Strength [FS]

Competitive Advantage [CA]

Two External Dimensions

Environmental Stability [ES]

Industry Strength [IS]

Fred R. David
Prentice Hall

Ch 6-19

SPACE Matrix
Overall Strategic position determined by:

Financial Strength [FS]

Competitive Advantage [CA]
Environmental Stability [ES]
Industry Strength [IS]

Fred R. David
Prentice Hall

Ch 6-20

SPACE Matrix
Developing the SPACE Matrix:

EFE Matrix
IFE Matrix
Financial Strength
Competitive Advantage
Environmental Stability
Industry Strength
Fred R. David
Prentice Hall

Ch 6-21

SPACE Matrix

Select variables to define FS, CA, ES,

& IS
Assign numerical ranking from +1
(worst) to +6 (best) for FS and IS;
Assign numerical ranking from 1
(best) to 6 (worst) for ES and CA.
Compute average score for FS, CA,
ES, & IS
Fred R. David
Prentice Hall

Ch 6-22

SPACE Matrix

Plot the average scores on the Matrix

Add the two scores on the x-axis and
plot point on X. Add the scores on the
y-axis and plot Y. Plot the intersection
of the new xy point.
Draw a directional vector from origin
through the new intersection point.

Fred R. David
Prentice Hall

Ch 6-23

SPACE Factors
Internal Strategic Position

External Strategic Position

Financial Strength (FS)

Environmental Stability (ES)

Return on investment
Leverage
Liquidity
Working capital
Cash flow
Ease of exit from market
Risk involved in business

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

Fred R. David
Prentice Hall

Ch 6-24

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
Capital intensify
Ease of entry into market
Productivity, capacity utilization

Fred R. David
Prentice Hall

Ch 6-25

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
-5

Defensive

-6
Fred R. David
Prentice Hall

ES

Competitive
Ch 6-26

Formulation Framework
TOWS Matrix
SPACE Matrix
Stage 2:
The Matching Stage

BCG Matrix
IE Matrix
Grand Strategy Matrix

Fred R. David
Prentice Hall

Ch 6-27

BCG Matrix
Boston Consulting Group Matrix

Enhances multidivisional firms efforts

to formulate strategies
Autonomous divisions (or profit centers)
constitute the business portfolio
Firms divisions may compete in
different industries requiring separate
strategy
Fred R. David
Prentice Hall

Ch 6-28

BCG Matrix
Boston Consulting Group Matrix

Graphically portrays differences among

divisions
Focuses on market share position and
industry growth rate
Manage business portfolio through
relative market share position and
industry growth rate
Fred R. David
Prentice Hall

Ch 6-29

BCG Matrix
Relative market share position defined:

Ratio of a divisions own market share

in a particular industry to the market
share held by the largest rival firm in
that industry.

Fred R. David
Prentice Hall

Ch 6-30

BCG Matrix
Relative Market Share Position
Industry Sales Growth Rate

High
1.0
High
+20

Medium
.50

Low
0.0

Stars
II

Question Marks
I

Cash Cows
III

Dogs
IV

Medium
0

Low
-20
Fred R. David
Prentice Hall

Ch 6-31

BCG Matrix

Question Marks
Stars
Cash Cows
Dogs

Fred R. David
Prentice Hall

Ch 6-32

BCG Matrix
Question Marks

Low relative market share position yet

compete in high-growth industry.

Cash needs are high

Case generation is low

Decision to strengthen (intensive

strategies) or divest
Fred R. David
Prentice Hall

Ch 6-33

BCG Matrix
Stars

High relative market share and high

industry growth rate.

Best long-run opportunities for growth and

profitability

Substantial investment to maintain or

strengthen dominant position

Integration strategies, intensive strategies, joint

ventures
Fred R. David
Prentice Hall

Ch 6-34

BCG Matrix
Cash Cows

High relative market share position, but compete

in low-growth industry

Generate cash in excess of their needs

Milked for other purposes

Maintain strong position as long as possible

Product development, concentric diversification

If becomes weakretrenchment or divestiture

Fred R. David
Prentice Hall

Ch 6-35

BCG Matrix
Dogs

Low relative market share position and

compete in slow or no market growth

Weak internal and external position

Decision to liquidate, divest, retrenchment

Fred R. David
Prentice Hall

Ch 6-36

Formulation Framework
TOWS Matrix
SPACE Matrix
Stage 2:
The Matching Stage

BCG Matrix
IE Matrix
Grand Strategy Matrix

Fred R. David
Prentice Hall

Ch 6-37

Grand Strategy Matrix

Popular tool for formulating alternative

strategies

All organizations (or divisions) can be

positioned in one of four quadrants

Based on two evaluative dimensions:

Competitive position
Market growth
Fred R. David
Prentice Hall

Ch 6-38

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 I
Market development
Market penetration
Product development
Forward integration
Backward integration
Horizontal integration
Concentric diversification

Quadrant III
Quadrant IV
Retrenchment
1.
Concentric diversification
Concentric diversification
2.
Horizontal diversification
Horizontal diversification
3.
Conglomerate
diversification
Conglomerate
diversification
4.
Joint ventures
Liquidation
SLOW MARKET GROWTH
Fred R. David
Prentice Hall

Ch 6-39

STRONG
COMPETITIVE
POSITION

Grand Strategy Matrix

Quadrant I

Excellent strategic position

Concentration on current markets and
products
Take risks aggressively when necessary

Fred R. David
Prentice Hall

Ch 6-40

Grand Strategy Matrix

Quadrant II
Evaluate present approach seriously
How to change to improve competitiveness
Rapid market growth requires intensive
strategy

Fred R. David
Prentice Hall

Ch 6-41

Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries

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

Fred R. David
Prentice Hall

Ch 6-42

Grand Strategy Matrix

Quadrant IV

Strong competitive position

Slow-growth industry
Diversification indicated to more promising
growth areas

Fred R. David
Prentice Hall

Ch 6-43

SUMMARY OF STRATEGIES
Strategy Options

TOWS
matrix

IE matrix

GSM

Total

Integration Strategies
1.Forward integration

2.Backward integration

3.Horizontal integration

Intensive Strategies
1.Market penetration

2.Market Development

3.Product Development

Diversification Strategies
1.Related Diversification

2.Unrelated Diversification

3.Conglomeration Diversification

Defensive Strategies
1.Joint Venture

2.Retrenchment

3.Divestiture

4.Liquidation

Fred R. David
Prentice Hall

Ch 6-44

Strategy Options

INTEGRATIVE STRATEGIES

Used in business are vertical integration,

horizontal integration and functional
integration. In vertical integration, a
company is controlling the upstream
and/or downstream elements in their
supply stream. Upward to suppliers while
downward
to
buyers.
Horizontal
integration
involves
a
company
expanding into or acquiring diversified
product lines. Functional integration is a
marketing
approach
in
which
an
interconnected and expanding system of
servicesINTENSIVE
and
products
increases
STRATEGIES
customer
entry points,
participation and
It is a strategy
of "aggregation"
or
brand
loyalty.
expansion under which growth is
achieved by expanding the scale of
operations. This strategy involves
expansion of firm's product range and
market. Three alternative strategies in
this regard are as follows:

Market
Penetration
seeking
increased market share for present
products in present markets

Market Development - introducing

present
products
in
new
geographic areas

DIVERSIFICATION STRATEGY

A corporate strategy to enter into a new market

or industry which the business is not currently in,
whilst also creating a new product for that new
market. This is most risky as the business has no
experience in the new market and does not know
if the product is going to be successful.
Diversification strategies involve widening an
organizations scope across different products and
market sectors. It is associated with higher risks
as it requires an organization to take on new
experience and knowledge outside its existing
markets and
products. STRATEGY
Options are Related,
DEFENSIVE
Unrelated
and Conglomerate designed
Diversification,
A managementtapproach
to reduce

the risk of loss. There are two approaches: The

first
approach
is
aimed
at
blocking
competitors who are attempting to take over
part of your business's market share. Cutting the
price of your products, adding incentives or
discounts to encourage customers to buy from
you or increasing your advertising and
marketing campaigns are the best common
ways of going about this. The second approach
is new product innovations, plan a company
expansion by opening a new chain or reconnect
with old customers to encourage them to buy

Formulation Framework

Quantitative Strategic
Planning Matrix
(QSPM)

Stage 3:
The Decision Stage

Fred R. David
Prentice Hall

Ch 6-46

QSPM
Quantitative Strategic Planning Matrix

Only technique designed to determine the

relative attractiveness of feasible
alternative actions

Fred R. David
Prentice Hall

Ch 6-47

QSPM
Quantitative Strategic Planning Matrix

Tool for objective evaluation of

alternative strategies
Based on identified external and
internal crucial success factors
Requires good intuitive judgment

Fred R. David
Prentice Hall

Ch 6-48

QSPM
Quantitative Strategic Planning Matrix

List the firms key external opportunities &

threats; list the firms key internal strengths
and weaknesses

Assign weights to each external and internal

critical success factor

Fred R. David
Prentice Hall

Ch 6-49

QSPM
Quantitative Strategic Planning Matrix

Examine the Stage 2 (matching) matrices

and identify alternative strategies that the
organization should consider implementing

Determine the Attractiveness Scores (AS)

Fred R. David
Prentice Hall

Ch 6-50

QSPM
Quantitative Strategic Planning Matrix

Compute the total Attractiveness

Scores

Compute the Sum Total Attractiveness

Score

Fred R. David
Prentice Hall

Ch 6-51

QSPM

Strategic Alternatives

Key External Factors

Economy
Political/Legal/Governmen
tal
Social/Cultural/Demograp
hic/Environmental
Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and
Development
Computer Information
Systems

Weight

Fred R. David
Prentice Hall

Strategy
1

Strategy
2

Ch 6-52

Strategy 3

QSPM
Limitations:

Requires intuitive judgments and

educated assumptions

Only as good as the prerequisite inputs

Fred R. David
Prentice Hall

Ch 6-53

QSPM
Positives:

Sets of strategies examined simultaneously

or sequentially

Requires the integration of pertinent external

and internal factors in the decision-making
process

Fred R. David
Prentice Hall

Ch 6-54

Cultural Aspects of Strategy

Choice
Culture:

The set of shared values, beliefs,

attitudes, customs, norms,
personalities, heroes, and heroines that
describe a firm
Fred R. David
Prentice Hall

Ch 6-55

PORTERS 5 FORCES
Evaluating Industry Environment

Fred R. David
Prentice Hall