Chapter 6 - Strategy Analysis and Choice

Strategic analysis is the process of conducting research on the business environment within
which an organization operates and on the organization itself, in order to formulate strategy.
Why use it?
- To take advantage of the path of least resistance to achieve your goal.
When to use it?
- When you are planning to make a change in your organization, and you need to
determine the best path to take.

6.1 The Nature of Strategy Analysis and Choice

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.
6.2 Long-Term Objectives
Long-term objectives represent the results expected from pursuing certain strategies. Strategies
represent the actions to be taken to accomplish long-term objectives. The time frame for
objectives and strategies should be consistent, usually from two to five years.
6.2.1 The Nature of Long-Term Objectives
Objectives should be quantitative, measurable, realistic, understandable, challenging,
hierarchical, obtainable, and congruent among organizational units. Each objective should also
be associated with a timeline. Objectives are commonly stated in terms such as growth in assets,
growth in sales, profitability, market share, degree and nature of diversification, degree and
nature of vertical integration, earnings per share, and social responsibility.
Clearly established objectives offer many benefits. They provide direction, allow synergy, aid in
evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and
aid in both the allocation of resources and the design of jobs. Objectives provide a basis for
consistent decision making by managers whose values and attitudes differ. Objectives serve as
standards by which individuals, groups, departments, divisions, and entire organizations can be
evaluated.
Long-term objectives are needed at the corporate, divisional, and functional levels of an
organization. They are an important measure of managerial performance. Many practitioners and
academicians attribute a significant part of U.S. industry’s competitive decline to the short-term,
rather than long-term, strategy orientation of managers in the United States. Arthur D. Little
argues that bonuses or merit pay for managers today must be based to a greater extent on long
term objectives and strategies.
Without long-term objectives, an organization would drift aimlessly toward some unknown end.
It is hard to imagine an organization or individual being successful without clear objectives.
Success only rarely occurs by accident; rather, it is the result of hard work directed toward
achieving certainobjectives.
The Desired Characteristics of Objectives
1. Quantitative
2. Measurable
3. Realistic
4. Understandable
5. Challenging
6. Hierarchical
7. Obtainable
8. Congruent across departments
The Benefits of Having Clear Objectives
1. Provide direction by revealing expectations
2. Allow synergy
3. Aid in evaluation by serving as standards
4. Establish priorities
5. Reduce uncertainty
6. Minimize conflicts
7. Stimulate exertion
8. Aid in allocation of resources
9. Aid in design of jobs
10. Provide basis for consistent decision making
6.3 A Comprehensive Strategy-Formulation Framework
Important strategy-formulation techniques can be integrated into a three-stage decisionmaking
framework, as shown in Figure 6.1. 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, 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.
 Figure 6.1

All nine techniques included in the strategy-formulation framework require the integration of
intuition and analysis. Autonomous divisions in an organization commonly use strategy-
formulation techniques to develop strategies and objectives. Divisional analyses provide a basis
for identifying, evaluating, and selecting among alternative corporate-level strategies. Strategists
themselves, not analytic tools, are always responsible and accountable for strategic decisions.
Lenz emphasized that the shift from a words-oriented to a numbersoriented planning process can
give rise to a false sense of certainty; it can reduce dialogue, discussion, and argument as a
means for exploring understandings, testing assumptions, and fostering organizational learning.
Strategists, therefore, must be wary of this possibility and use analytical tools to facilitate, rather
than to diminish, communication. Without objective information and analysis, personal biases,
politics, emotions, personalities, and halo error (the tendency to put too much weight on a single
factor) unfortunately may play a dominant role in the strategy-formulation process.
6.3.1 The Input Stage
This stage includes the procedures for developing an EFE Matrix, an IFE Matrix, and a CPM
were presented in previous section.The input tools require strategists to quantify subjectivity
during early stages of the strategy-formulation process. Making small decisions in the input
matrices regarding the relative importance of external and internal factors allows strategists to
more effectively generate and evaluate alternative strategies. Good intuitive judgment is always
needed in determining appropriate weights and ratings.
6.3.2 The Matching Stage
Strategy is sometimes defined as the match an organization makes between its internal resources
and skills and the opportunities and risks created by its external factors. 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.
Any organization, whether military, product-oriented, service-oriented, governmental, or even
athletic, must develop and execute good strategies to win. A good offense without a good
defense, or vice versa, usually leads to defeat. Developing strategies that use strengths to
capitalize on opportunities could be considered an offense, whereas strategies designed to
improve upon weaknesses while avoiding threats could be termed defensive. Every organization
has some external opportunities and threats and internal strengths and weaknesses that can be
aligned to formulate feasible alternative strategies.
6.3.2.1 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. For example, there may be a high demand for
electronic devices to control the amount and timing of fuel injection in automobile engines
(opportunity), but a certain auto parts manufacturer may lack the technology required for
producing these devices (weakness). One possible WO Strategy would be to acquire this
technology by forming a joint venture with a firm having competency in this area. An alternative
WO Strategy would be to hire and train people with the required technical capabilities. 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
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.
6.3.2.2 The Strategic Position and Action Evaluation (SPACE) Matrix
The Strategic Position and Action Evaluation (SPACE) Matrix, another important Stage 2
matching tool, is illustrated in Figure 6.2. 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.
Figure 6.2
6.3.2.3The Boston Consulting Group (BCG) Matrix
Autonomous divisions (or profit centers) of an organization make up what is called a business
portfolio. When a firm’s divisions compete in different industries, a separate strategy often must
be developed for each business. The Boston Consulting Group (BCG) Matrix and the Internal-
External (IE) Matrix are designed specifically to enhance a multidivisional firm’s efforts to
formulate strategies.
The BCG Matrix graphically portrays differences among divisions in terms of relative market
share position and industry growth rate. 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. Divisions located in Quadrant I of the BCG Matrix are called “Question Marks,” those
located in Quadrant II are called “Stars,” those located in Quadrant III are called “Cash Cows,”
and those divisions located in Quadrant IV are called “Dogs.”
• Question Marks—Divisions in Quadrant I have a low relative market share position, yet they
compete in a high-growth industry. Generally these firms’ cash needs are high and their cash
generation is low. These businesses are called Question Marks because 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—Quadrant II businesses (Stars) represent the organization’s best long-run opportunities
for growth and profitability. Divisions with a high relative market share and a high industry
growth rate should receive substantial investment to maintain or strengthen their dominant
positions. Forward, backward,and horizontal integration; market penetration; market
development; and product development are appropriate strategies for these divisions to consider,
as indicated in Figure 6.3.
• Cash Cows—Divisions positioned in Quadrant III have a high relative market share position
but compete in a low-growth industry. Called Cash Cows because they generate cash in excess of
their needs, they are often milked. Many of today’s Cash Cows were yesterday’s Stars. Cash
Cow divisions should be managed to maintain their strong position for as long as possible.
Product development or diversification may be attractive strategies for strong Cash Cows.
However, as a Cash Cow division becomes weak, retrenchment or divestiture can become more
appropriate.
Figure 6.3
• Dogs—Quadrant IV divisions of the organization have a low relative market share position and
compete in a slow- or no-market-growth industry; they are Dogs in the firm’s portfolio. Because
of their weak internal and external position, these businesses are often liquidated, divested, or
trimmed down through retrenchment. When a division first becomes a Dog, retrenchment can be
the best strategy to pursue because many Dogs have bounced back, after strenuous asset and cost
reduction, to become viable, profitable divisions.
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. The divisions of many firms
evolve over time: Dogs become Question Marks, Question Marks become Stars, Stars become
Cash Cows, and Cash Cows become Dogs in an ongoing counterclockwise motion. Less
frequently, Stars become Question Marks, Question Marks become Dogs, Dogs become Cash
Cows, and Cash Cows become Stars (in a clockwise motion). In some organizations, no cyclical
motion is apparent. Over time, organizations should strive to achieve a portfolio of divisions that
are Stars. Notice in the diagram that Division 1 is considered a Star, Division 2 is a Question
Mark, Division 3 is also a Question Mark, Division 4 is a Cash Cow, and Division 5 is a Dog.
The BCG Matrix, like all analytical techniques, has some limitations. For example, viewing
every business as either 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.
6.3.3.4 The Internal-External (IE) Matrix
The IE Matrix is similar to the BCG Matrix in that both tools involve plotting organization
divisions in a schematic diagram; this is why they are both called “portfolio matrices.” Also, the
size of each circle represents the percentage sales contribution of each division, and pie slices
reveal the percentage profit contribution of each division in both the BCG and IE Matrix. But
there are some important differences between the BCG Matrix and the IE Matrix. First, the axes
are different. Also, the IE Matrix requires more information about the divisions than the BCG
Matrix. Furthermore, the strategic implications of each matrix are different. For these reasons,
strategists in multidivisional firms often develop both the BCG Matrix and the IE Matrix in
formulating alternative strategies. A common practice is to develop a BCG Matrix and an IE
Matrix for the present and then develop projected matrices to reflect expectations of the future.
This before-and-after analysis forecasts the expected effect of strategic decisions on an
organization’s portfolio of divisions.
6.3.3.5 The Grand Strategy Matrix
All organizations can be positioned in one of the Grand Strategy Matrix’s four strategy
quadrants. A firm’s divisions likewise could be positioned. As illustrated in Figure 1-12, the
Grand Strategy Matrix is based on two evaluative dimensions: competitive position and market
(industry) growth. Any industry whose annual growth in sales exceeds 5 percent could be
considered to have rapid growth. Appropriate strategies for an organization to consider are listed
in sequential order of attractiveness in each quadrant of the matrix. Firms located in Quadrant I
of the Grand Strategy Matrix are in an excellent strategic position. For these firms, continued
concentration on current markets (market penetration and market development) and products
(product development) is an appropriate strategy. It is unwise for a Quadrant I firm to shift
notably from its established competitive advantages. When a Quadrant I organization has
excessive resources, then backward, forward, or horizontal integration may be effective
strategies. When a Quadrant I firm is too heavily committed to a single product, then related
diversification may reduce the risks associated with a narrow product line. Quadrant I firms can
afford to take advantage of external opportunities in several areas. They can take risks
aggressively when necessary.
Figure 6.4
Firms positioned in Quadrant II need to evaluate their present approach to the marketplace
seriously. Although their industry is growing, they are unable to compete effectively, and they
need to determine why the firm’s current approach is ineffective and how the company can best
change to improve its competitiveness. Because Quadrant II firms are in a rapid-market-growth
industry, an intensive strategy (as opposed to integrative or diversification) is usually the first
option that should be considered. However, if the firm is lacking a distinctive competence or
competitive advantage, then horizontal integration is often a desirable alternative. As a last
resort, divestiture or liquidation should be considered. Divestiture can provide funds needed to
acquire other businesses or buy back shares of stock. Quadrant III organizations compete in
slow-growth industries and have weak competitive positions. These firms must make some
drastic changes quickly to avoid further decline and possible liquidation. Extensive cost and asset
reduction (retrenchment) should be pursued first. An alternative strategy is to shift resources
away from the current business into different areas (diversify). If all else fails, the final options
for Quadrant III businesses are divestiture or liquidation. Finally, Quadrant IV businesses have a
strong competitive position but are in a slowgrowth industry. These firms have the strength to
launch diversified programs into more promising growth areas: Quadrant IV firms have
characteristically high cash-flow levels and limited internal growth needs and often can pursue
related or unrelated diversification successfully. Quadrant IV firms also may pursue joint
ventures.
6.4 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. 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).
Table 6-1The Quantitative Strategic Planning Matrix—QSPM
Conceptually, the QSPM determines the relativeattractiveness 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.
This example illustrates all the components of the QSPM: Strategic Alternatives, Key Factors,
Weights, Attractiveness Scores (AS), Total Attractiveness Scores (TAS), and the Sum Total
Attractiveness Score. 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.
Step 2 Assign weights to each key external and internal factor.
Step 3 Examine the Stage 2 (matching) matrices, and identify alternative strategies that the
organization should consider implementing.
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.
Step 5 Compute the Total Attractiveness Scores
Step 6 Compute the Sum Total Attractiveness Score
6.5 The Balanced Scorecard
The Balanced Scorecard is an important strategy-evaluation tool. It is a process that allows firms
to evaluate strategies from four perspectives: financial performance, customer knowledge,
internal business processes, and learning and growth. The Balanced Scorecard analysis requires
that firms seek answers to the following questions and utilize that information, in conjunction
with financial measures, to adequately and more effectively evaluate strategies being
implemented:
1. How well is the firm continually improving and creating value along measures such as
innovation, technological leadership, product quality, operational process efficiencies, and so on?
2. How well is the firm sustaining and even improving upon its core competencies and
competitive advantages?
3. How satisfied are the firm’s customers?
The firm examines six key issues in evaluating its strategies: (1) Customers, (2)
Managers/Employees, (3) Operations/Processes, (4) Community/Social Responsibility, (5)
Business Ethics/Natural Environment, and (6) Financial.
The basic form of a Balanced Scorecard may differ for different organizations. The Balanced
Scorecard approach to strategy evaluation aims to balance long-term with short-term concerns, to
balance financial with nonfinancial concerns, and to balance internal with external concerns.
6.6 The 7-S Model
The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.” The
goal of the model is to depict how effectiveness can be achieved in an organization through the
interactions of seven key elements – Structure, Strategy, Skill, System, Shared Values, Style, and
Staff.

The focus of the McKinsey 7s Model lies in the interconnectedness of the elements that are
categorized by “Soft Ss” and “Hard Ss” – implying that a domino effect exists when changing
one element in order to maintain an effective balance. Placing “Shared Values” as the “center”
reflects the crucial nature of the impact of changes in founder values on all other elements. The
McKinsey 7-S Framework then categorizes these seven elements into two categories: hard
elements and soft elements.
  Hard ‘S’ elements are easily identifiable and influenced by leadership and management.
They include Strategy, Structure, and Systems.
 Soft ‘S’ elements are those that are intangible and culture-driven. They include Shared
Values, Style, Staff, and Skills.

The ‘S’ element of the McKinsey 7-S Model is:

1. Strategy - The strategy element is a detailed plan that organizations create for
successful change implementation and to gain a competitive edge. A well-crafted strategy is
aligned with the other six elements of the 7-S model and is reinforced by a strong vision,
mission, and values.
2. Structure - Structure or organizational structure refers to a clear chain of command to avoid
chaos & confusion. Structure is a simple yet crucial element as it creates a sense of employee
accountability within the organization.
3. Systems - Systems refer to the processes and operational procedures employed to complete a
business’s routine activities. An organization’s SOPs comprise practices and workflows that
directly impact productivity and decision-making.
4. Shared Values - These are the core values governing an organization’s health. While
implementing a change, organizations expect a behavioral modification from their employees,
which is only possible in a strong change culture and organizational values.
5. Style - This element refers to the management style prevalent in a company that decides the
level of employee productivity and satisfaction.
6. Staff - This element represents the talent pool required, the size of the existing workforce, and
their motivations. It also considers how they are trained and rewarded within the organization.
7. Skills - Skills refer to the abilities of employees to complete tasks. A study suggests that 45%
of respondents reported that a skill gap caused a loss in productivity. Skills gaps overburden
experienced employees who have to pick up the slack for their coworkers’ inexperience. It’s
essential to identify the skill gaps and create relevant employee training programs to bridge these
gaps.
6.6.1 Application of the McKinsey 7S Model
The subjectivity surrounding the concept of alignment concerning the seven key elements
contributes to why this model seems to have a complicated application. However, it is suggested
to follow a top-down approach – ranging from broad strategy and shared values to style and
staff.
Step 1: Identify the areas that are not effectively aligned
Is there consistency in the values, strategy, structure, and systems? Look for gaps and
inconsistencies in the relationship of elements. What needs to change?
Step 2: Determine the optimal organization design
It is important to consolidate the opinions of top management and create a generic optimal
organizational design that will allow the company to set realistic goals and achievable objectives.
The step requires a tremendous amount of research and analysis since there are no
“organizational industry templates” to follow.
Step 3: Decide where and what changes should be made
Once the outliers are identified, the plan of action can be created, which will involve making
concrete changes to the chain of hierarchy, the flow of communication, and reporting
relationships. It will allow the company to achieve an efficient organizational design.
Step 4: Make the necessary changes
Implementation of the decision strategy is a make-or-break situation for the company in
realistically achieving what it set out to do. Several hurdles in the process of implementation
arise, which are best dealt with in a well-thought-out implementation plan.
Advantages of the Model
 It enables different parts of a company to act in a coherent and “synced” manner.
 It allows for the effective tracking of the impact of the changes in key elements.
 It is considered a longstanding theory, with numerous organizations adopting the model
over time.
Disadvantages of the Model
 It is considered a long-term model.
 With the changing nature of businesses, it remains to be seen how the model will adapt.
 It seems to rely on internal factors and processes and may be disadvantageous in
situations where external circumstances influence an organization.