Chapter Five

The Nature of Strategy Analysis and Choice

This chapter focuses on generating and evaluating alternative strategies, as well as selecting
strategies to pursue. Strategy analysis and choice seek to determine alternative courses of action
that could best enable the firm to achieve its mission and objectives. The firm’s present
strategies, objectives, and mission, coupled with the external and internal audit information,
provide a basis for generating and evaluating feasible alternative strategies.
Unless a desperate situation confronts the firm, alternative strategies will likely represent
incremental steps that move the firm from its present position to a desired future position.
Alternative strategies do not come out of the wild blue yonder; they are derived from the firm’s
vision, mission, objectives, external audit, and internal audit; they are consistent with, or build
on, past strategies that have worked well.
The Process of Generating and Selecting Strategies
Strategists never consider all feasible alternatives that could benefit the firm because there are an
infinite number of possible actions and an infinite number of ways to implement those actions.
Therefore, 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. This section discusses the process that many firms use to determine an appropriate
set of alternative strategies.
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. Representatives from each department and
division of the firm should be included in this process, as was the case in previous strategy-
formulation activities. Recall that involvement provides the best opportunity for managers and
employees to gain an understanding of what the firm is doing and why and to become committed
to helping the firm accomplish its objectives.
All participants in the strategy analysis and choice activity should have the firm’s external and
internal audit information by their sides. This information, coupled with the firm’s mission
statement, will help participants crystallize in their own minds particular strategies that they
believe could benefit the firm most. Creativity should be encouraged in this thought process.
Alternative strategies proposed by participants should be considered and discussed in a meeting
or 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 by all participants, with 1 = should not be implemented, 2 = possibly should be
implemented, 3 = probably should be implemented, and 4 = definitely should be implemented.
This process will result in a prioritized list of best strategies that reflects the collective wisdom of
the group.

A Comprehensive Strategy-Formulation Framework

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Important strategy-formulation techniques can be integrated into a three-stage decision making
framework. The tools presented in this framework are applicable to all sizes and types of
organizations and can help strategists identify, evaluate, and select strategies.
Stage 1 of the formulation framework consists of the EFE Matrix, the IFE Matrix, and the
Competitive Profile Matrix (CPM). Called the Input Stage, Stage 1 summarizes the basic input
information needed to formulate strategies.
Stage 2, called the Matching Stage, focuses upon generating feasible alternative strategies by
aligning key external and internal factors. Stage 2 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.
Stage 3, called the Decision Stage, and involves a single technique, the Quantitative Strategic
Planning Matrix (QSPM). A QSPM uses input information from Stage 1 to objectively evaluate
feasible alternative strategies identified in Stage 2. A QSPM reveals the relative attractiveness of
alternative strategies and thus provides objective basis for selecting specific strategies.

Strategy-Formulation Analytical Framework

Stage 1: The Input Stage

Stage 2: The Matching Stage

Stage 3: The Decision Stage

Stage 1: The Input Stage: it consists

• External Factor Evaluation Matrix (EFE).
• Internal Factor Evaluation Matrix (IFE).
• Competitive Profile Matrix (CPM)
The information derived from these three matrices provides basic input information for the
matching and decision stage matrices described later. That is it provides Basic Input for Stages 2
and 3.
Stage 1: The Input Stage
.

External Competitive Internal

Factor Profile Factor
Evaluation Evaluation
Matrix (CPM)
Matrix (EFE) Matrix (IFE)

Stage 2: The Matching Stage

 Strategy is sometimes defined as the match an organizational makes between:
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 • Internal resources and skills
• Opportunities & risks created by external factors

Every organization has some external opportunities and threats and internal strengths and
weaknesses that can be aligned to formulate feasible alternative strategies. The matching stage of
the strategy-formulation framework consists of five techniques that can be used in any sequence:
the SWOT Matrix, the SPACE Matrix, the BCG Matrix, the IE Matrix, and the Grand Strategy
Matrix. These tools rely upon information derived from the input stage to match external
opportunities and threats with internal strengths and weaknesses. Matching external and internal
critical success factors is the key to effectively generating feasible alternative strategies.
1) The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix
The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an important matching tool
that helps managers develop four types of strategies: SO (strengths-opportunities) Strategies,
WO (weaknesses-opportunities) Strategies, ST (strengths-threats) Strategies, and WT
(weaknesses-threats) Strategies. Matching key external and internal factors is the most difficult
part of developing a SWOT Matrix and requires good judgment—and there is no one best set of
matches.
SO Strategies use a firm’s internal strengths to take advantage of external opportunities. All
managers would like their organizations to be in a position in which internal strengths can be
used to take advantage of external trends and events. Organizations generally will pursue WO,
ST, or WT strategies to get into a situation in which they can apply SO Strategies. When a firm
has major weaknesses, it will strive to overcome them and make them strengths. When an
organization faces major threats, it will seek to avoid them to concentrate on opportunities.
WO Strategies aim at improving internal weaknesses by taking advantage of external
opportunities. Sometimes key external opportunities exist, but a firm has internal weaknesses
that prevent it from exploiting those opportunities.
ST Strategies use a firm’s strengths to avoid or reduce the impact of external threats. This does
not mean that a strong organization should always meet threats in the external environment head-
on.
WT Strategies are defensive tactics directed at reducing internal weakness and avoiding external
threats. An organization faced with numerous external threats and internal weaknesses may

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indeed be in a precarious position. In fact, such a firm may have to fight for its survival, merge,
retrench, declare bankruptcy, or choose liquidation.
Note that a SWOT Matrix is composed of nine cells. There are four key factor cells, four strategy
cells and, one cell is always left blank (the upper-left cell). The four strategy cells, labeled SO,
WO, ST, and WT, are developed after completing four key factor cells, labeled S, W, O, and T.
There are eight steps involved in constructing a SWOT Matrix:
1. List the firm’s key external opportunities. 3. List the firm’s key internal strengths.
2. List the firm’s key external threats. 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.
2) The Strategic Position and Action Evaluation (SPACE) Matrix
The Strategic Position and Action Evaluation (SPACE) Matrix, is another important Stage 2
matching tool. 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.
Depending on the type of organization, numerous variables could make up each of the
dimensions represented on the axes of the SPACE Matrix. Factors that were included earlier in
the firm’s EFE and IFE Matrices should be considered in developing a SPACE Matrix. Other
variables commonly included are, return on investment, leverage, liquidity, working capital, and
cash flow are commonly considered to be determining factors of an organization’s financial
strength. Like the SWOT Matrix, the SPACE Matrix should be both tailored to the particular
organization being studied and based on factual information as much as possible.
The steps required to develop a SPACE Matrix are as follows:
1. Select variables to define FS, CA, ES, & IS
2. Assign numerical ranking from +1 (worst) to +7 (best) for FS and IS; Assign numerical
ranking from –1 (best) to –7 (worst) for ES and CA.
3. Compute average score for FP, CP, IP, & SP
4. Plot the average scores for FP, CP, IP, SP on the Matrix
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.
6. Draw a directional vector from the origin of the SPACE matrix through the new
intersection point.

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 Based on the above steps we can identify
the quadrant indicating the strategy should be followed.

3) Boston Consulting Group Matrix (BCG Matrix)

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 The BCG Matrix 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. Relative market share position is
defined as the ratio of a division’s own market share (or revenues) in a particular industry to
the market share (or revenues) held by the largest rival firm in that industry. Relative market
share position is given on the x-axis of the BCG Matrix. The y-axis represents the industry
growth rate in sales, measured in percentage terms.

BCG Matrix:

• Enhances multidivisional firms’ efforts to formulate strategies

• Autonomous divisions (or profit centers) constitute the business portfolio
• Firm’s divisions may compete in different industries requiring separate strategy
• 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

• Question Marks
 Low relative market share position yet they compete in high-growth industry.
 Cash needs are high
 Case generation is low
 The organization must decide whether to strengthen them by pursuing an
intensive strategy (market penetration, market development, or product
development) or to sell them.
• Stars
 High relative market share and high industry growth rate.
 Represents best long-run opportunities for growth and profitability
 Substantial investment to maintain or strengthen dominant position
 Integration strategies, intensive strategies

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 • 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, diversification
 When it becomes weak—retrenchment or divestiture
• Dogs
 Low relative market share position and compete in slow- or no-market-growth
industry
 Weak internal and external position
 Decision to liquidate, divest, retrenchment

The BCG Matrix, like all analytical techniques, has some limitations. For example, viewing
every business as a Star, Cash Cow, Dog, or Question Mark is an oversimplification; many
businesses fall right in the middle of the BCG Matrix and thus are not easily classified.
Furthermore, the BCG Matrix does not reflect whether or not various divisions or their industries
are growing over time; that is, the matrix has no temporal qualities, but rather it is a snapshot of
an organization at a given point in time. Finally, other variables besides relative market share
position and industry growth rate in sales, such as size of the market and competitive advantages,
are important in making strategic decisions about various divisions.

4) Grand Strategy Matrix

Popular tool for formulating alternative strategies based on two evaluative dimensions:
 Competitive position  Market (industry) growth

• Quadrant I  Concentration on current markets

 Excellent strategic position and products

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  Take risks aggressively when  Compete in slow-growth
necessary industries
• Quadrant II  Weak competitive position
 Evaluate present approach to  Drastic changes quickly
market place seriously  Cost and asset reduction
 How to change the current indicated (retrenchment)
approach to improve • Quadrant IV
competitiveness  Strong competitive position
 The rapid market growth requires  Slow-growth industry
intensive strategy  Diversification indicated to more
• Quadrant III promising growth areas
 May pursue joint ventures

Stage 3: The Decision Stage

Analysis and intuition provide a basis for making strategy-formulation decisions. The matching
techniques just discussed reveal feasible alternative strategies. Many of these strategies will
likely have been proposed by managers and employees participating in the strategy analysis and
choice activity. Any additional strategies resulting from the matching analyses could be
discussed and added to the list of feasible alternative options. As indicated earlier in this chapter,
participants could rate these strategies on a 1 to 4 scale so that a prioritized list of the best
strategies could be achieved.
The Quantitative Strategic Planning Matrix (QSPM)
Other than ranking strategies to achieve the prioritized list, there is only one analytical technique
in the literature designed to determine the relative attractiveness of feasible alternative actions.
This technique is the Quantitative Strategic Planning Matrix (QSPM), which comprises Stage 3
of the strategy-formulation analytical framework. This technique objectively indicates which
alternative strategies are best. The QSPM uses input from Stage 1 analyses and matching results
from Stage 2 analyses to decide objectively among alternative strategies. That is, the EFE
Matrix, IFE Matrix, and Competitive Profile Matrix that make up Stage 1, coupled with the
SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix that make up
Stage 2, provide the needed information for setting up the QSPM (Stage 3). The QSPM is a tool
that allows strategists to evaluate alternative strategies objectively, based on previously identified
external and internal critical success factors. Like other strategy-formulation analytical tools, the
QSPM requires good intuitive judgment.
Note that the left column of a QSPM format consists of key external and internal factors (from
Stage 1), and the top row consists of feasible alternative strategies (from Stage 2). Specifically,
the left column of a QSPM consists of information obtained directly from the EFE Matrix and
IFE Matrix. In a column adjacent to the critical success factors, the respective weights received
by each factor in the EFE Matrix and the IFE Matrix are recorded.
The top row of a QSPM consists of alternative strategies derived from the SWOT Matrix,
SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix. These matching tools
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usually generate similar feasible alternatives. However, not every strategy suggested by the
matching techniques has to be evaluated in a QSPM. Strategists should use good intuitive
judgment in selecting strategies to include in a QSPM.
Conceptually, the QSPM determines the relative attractiveness of various strategies based on the
extent to which key external and internal critical success factors are capitalized upon or
improved. The relative attractiveness of each strategy within a set of alternatives is computed by
determining the cumulative impact of each external and internal critical success factor. Any
number of sets of alternative strategies can be included in the QSPM, and any number of
strategies can make up a given set, but only strategies within a given set are evaluated relative to
each other. For example, one set of strategies may include diversification, whereas another set
may include issuing stock and selling a division to raise needed capital. These two sets of
strategies are totally different, and the QSPM evaluates strategies only within sets.
The three new terms just introduced—(1) Attractiveness Scores, (2) Total Attractiveness Scores,
and (3) the Sum Total Attractiveness Score—are defined and explained as the six steps required
to develop a QSPM are discussed:
Step 1 Make a list of the firm’s key external opportunities/threats and internal
strengths/weaknesses in the left column of the QSPM. This information should be taken
directly from the EFE Matrix and IFE Matrix. A minimum of 10 external key success factors and
10 internal key success factors should be included in the QSPM.
Step 2 Assign weights to each key external and internal factor. These weights are identical to
those in the EFE Matrix and the IFE Matrix. The weights are presented in a straight column just
to the right of the external and internal critical success factors.
Step 3 Examine the Stage 2 (matching) matrices, and identify alternative strategies that the
organization should consider implementing. Record these strategies in the top row of the
QSPM. Group the strategies into mutually exclusive sets if possible.
Step 4 Determine the Attractiveness Scores (AS) defined as numerical values that indicate the
relative attractiveness of each strategy in a given set of alternatives. Attractiveness Scores (AS)
are determined by examining each key external or internal factor, one at a time, and asking the
question “Does this factor affect the choice of strategies being made?” If the answer to this
question is yes, then the strategies should be compared relative to that key factor. Specifically,
Attractiveness Scores should be assigned to each strategy to indicate the relative attractiveness of
one strategy over others, considering the particular factor. The range for Attractiveness Scores is
1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4= attractive.
Step 5 Compute the Total Attractiveness Scores. Total Attractiveness Scores (TAS) are
defined as the product of multiplying the weights (Step 2) by the Attractiveness Scores (Step 4)
in each row. The Total Attractiveness Scores indicate the relative attractiveness of each
alternative strategy, considering only the impact of the adjacent external or internal critical
success factor. The higher the Total Attractiveness Score, the more attractive the strategic
alternative is (considering only the adjacent critical success factor).
Step 6 Compute the Sum Total Attractiveness Score. Add Total Attractiveness Scores in each
strategy column of the QSPM. The Sum Total Attractiveness Scores (STAS) reveal which
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strategy is most attractive in each set of alternatives. Higher scores indicate more attractive
strategies, considering all the relevant external and internal factors that could affect the strategic
decisions. The magnitude of the difference between the Sum Total Attractiveness Scores in a
given set of strategic alternatives indicates the relative desirability of one strategy over another.

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