Amity Business School

MBA
Strategic Management
Strategic Choice

Comprehensive Strategy-Formulation
Framework

Stage 1:
The Input Stage

Stage 2:
The Matching Stage

Stage 3:
The Decision Stage

Strategy-Formulation Analytical Framework

Internal Factor Evaluation
Matrix (IFE)

Stage 1:
The Input Stage

External Factor Evaluation

Matrix (EFE)

Competitive Profile Matrix

(CPM)

Strategy-Formulation Analytical Framework

SWOT Matrix

SPACE Matrix

Stage 2:
The Matching Stage

BCG Matrix

IE Matrix

Grand Strategy Matrix

Matching Key Factors to Formulate Alternative Strategies

Key External Factor

Key Internal Factor

Resultant Strategy

20% annual growth in the

cell phone industry
(opportunity)

Acquire Cellfone, Inc.

Insufficient capacity
(weakness)

Exit of two major foreign

competitors from 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)

Excess working capacity

(strength)

Strong union activity

(threat)

Develop a new employee

benefits package

SPACE Matrix
Strategic Position & Action Evaluation Matrix

Aggressive
Conservative

Defensive
Competitive

SPACE Matrix

Two Internal Dimensions

Financial Strength (FS)
Competitive Advantage (CA)

SPACE Matrix
Two External Dimensions
Environmental Stability (ES)
Industry Strength (IS)

SPACE Factors
Internal Strategic Position

Financial Strength (FS)

Return on investment
Leverage
Liquidity
Working capital
Cash flow

External Strategic Position

Environmental Stability (ES)

Technological changes
Rate of inflation
Demand variability
Price range of competing products
Barriers to entry
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business

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
Ease of entry into market
Productivity, capacity utilization

Steps to Developing a SPACE Matrix

1. Select a set of variables to define FS, CA, ES,
& IS
2. Assign a numerical value:
1. From +1 to +6 to each FS & IS dimension
2. From -1 to -6 to each ES & CA dimension

3. Compute an average score for each FS, CA,

ES, & IS

Steps to Developing a SPACE Matrix

1. Plot the average score on the appropriate
axis
2. Add the two scores on the x-axis and plot the
point. Add the two scores on the y-axis and
plot the point. Plot the intersection of the
new xy point
3. Draw a directional vector from the origin
through the new intersection point.

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

Defensive

-5

Competitive

-6

ES

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18

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Portfolio Analysis
BCG Tool for Analyzing Opportunities
& Ability to Compete

Types of Portfolio Analysis

Growth Share Matrix (Boston Consulting
Group)
Industry Attractiveness/Business Position
Matrix (General Electric)

Growth Share Matrix (Boston

Consulting Group)
Classification of SBUs/products into four cell
matrix based on
Market Attractiveness
Indicator Industrys annual growth rate
10% traditional cutoff

Business Strength
Indicator Companys Market Share Relative to Largest
Competitor

The Boston Consulting Groups Growth-Share Matrix

24

Star Strategies
Leader expanding industry
Generates large profits
Requires substantial
investments to sustain
growth
Farthest down on
experience curve relative to
competition
Increase sales e.g. new
markets, new channels of
distribution
Increase market share

Problem Child or ?
Low market share in
expanding industry
Needs substantial cash to
improve its position
Slow progress on
experience curve
Increase sales (limit to niche
or increase market share
(limit to niche)
Leave market

Cash Cow
Leader in mature or declining
industry
Can generate funds for other
SBUs
Maintain market share e.g.
ensure quality, build customer
loyalty, develop substitute brands
Maximize Cash Flow e.g. increase
usage rate, rate of replacement,
modify expense structure, raise
prices

Dogs
Low market share in a
mature or declining industry
Slow progress on
experience curve
Cost disadvantages and few
growth opportunities
Harvest or Divest
Concentrate on niches
requiring limited effort

Strategy Implications BCG

Star Leader in Expanding Industry
BUILD - Continue to increase market share if necessary at
expense of short-term earnings

Problem Child Low market share in Expanding

Industry
HARVEST if weak, BUILD if strong.
Assess chances of dominating segment. If good, go after
share. If bad, redefine business or withdraw.

Strategy Implications BCG

Cash Cow Leader in mature or declining industry
HOLD - Maintain share and cost leadership until further
investment becomes marginal
Maximize cash flow

Dogs Low market share in a mature or declining

industry
DIVEST Plan an orderly withdrawal so as to maximize cash
flow or concentrate on niches that require limited effort

Assumptions of Growth /Share Matrix

High market share generates cash revenues ?
High Market growth uses more cash resources
?

Issues with Growth/Share Matrix

Market growth is not the only factor related to
cash usage.
Market growth is not necessarily related to cash
usage.
Market share is not necessarily related cash
generation.
Multiple factors lead to profitability.
Cash is not the only factor in evaluating a
portfolio.

Issues With Growth/Share Matrix

( contd..)

Limited to industries where experience curve

is relevant
Appropriate for volume industries
Overlooks perils of growth
Measurement problems
Product-market definition problems
Difficult to implement strategies

Portfolio Analysis
GE Tool for Analyzing Opportunities
& Ability to Compete

GE Portfolio Analysis
Classification of SBUs/products into nine cell
matrix based on
Market Attractiveness
Multiple Indicators

Business Strength
Multiple Indicators

Steps In Developing GE Matrix

1. Select Factors & Indicators.
2. Assign each indicator a weight (total = 1)
based on its importance.
3. Rate the industry on industry indicators and
company on business indicators on scale of
1(weak) 5 (strong).
4. Multiply weight times rating and total for
summary measures.

GE Portfolio Analysis Sample Industry/Market Indicators

Market Factors

Size
Growth Rate
Cyclicality
Seasonality

Competition
Type of competitors
Degree of Concentration

Financial & Economic

Contribution Margins
Barriers to Entry or Exit

GE Portfolio Analysis Industry/Market Indicators

Technological
Patents & copyrights
Will it become obsolete

Sociopolitical
Social attitudes & trends
Laws & government regulations

GE Portfolio Analysis
Business Strength Indicators
Market
Companys Market Share
Companys Sales or Share Growth Rate

Competition
Strength of product, promotion, price, distribution,
financial resources, management relative to
competition

Financial & Economic

Companys Margins
Economies of scale

GE Portfolio Analysis
Business Strength Indicators

Technological
Companys ability to cope with change
Technological skills
Patent Protection

Sociopolitical
Companys responsiveness & flexibility

Industry
Attractiveness

GE Nine-Cell Matrix
Relative Costs
Profit Margins
Fit with KSFs

Market Size
Growth Rate
Profit Margin
10.0
Intensity of Competition
Seasonality
High
Cyclicality
Resource Requirements
6.7
Social Impact
Regulation
Medium
Environment
Opportunities & Threats
3.3
Relative Market Share
Low
Reputation/ Image
Bargaining Leverage
Ability to Match Quality/Service 1.0

Strong

Rating Scale: 1 = Weak ; 10 = Strong

6.7

Average

3.3

Weak

1.0

Market

Competitive

Position

Strong

Medium

Maintain Leadership
Invest to Grow

Challenge Leader

Concentrate on Maintaining
Strength

Reinforce Strengths

Challenge Leader/Build
Selectively

Manage for Earnings

Weak

Attractiveness

High
Medium

In most attractive markets

Or counter competition
Emphasize profitability by
raising productivity

Low

Overcome Weakness,
Invest to Build Selectively Find Niche or Quit
Build Selectively

Harvest (Gradual
Protect existing programs Withdrawal) or Limited
Expansion
Concentrate on
profitable, less risky
segments

Look ways to expand

without high risk
Or Minimize investment

Generate Cash

Harvest

Divest

Manage for current earnings

Concentrate on attractive
Segments
Defend Strengths

Minimize Investment
Protect positions in most
profitable segments

Sell at time that will

maximize cash value
Cut fixed costs and avoid
investment

Strategy Implications of
Attractiveness/Strength Matrix

Businesses in upper left corner

Accorded top investment priority

Strategic prescription is grow and build

Businesses in three diagonal cells
Given medium investment priority

Invest to maintain position

Businesses in lower right corner
Candidates for harvesting or divestiture

May be candidates for an overhaul and reposition strategy

The Attractiveness/Strength Matrix

Allows for intermediate rankings between high and low and between
strong and weak

Incorporates a wide variety of strategically relevant variables

Stresses allocating corporate resources to businesses with greatest

potential for

Competitive advantage and

Superior performance

Strickland Grand Strategy

Selection Model

Corporate Strategies
(Grand Strategies)
I. Directional Strategies
A.
Growth Strategies
1. Concentration
a. Vertical Growth
b. Horizontal Growth
2. New Product
3. New Market
4. Diversification
a. Concentric
b. Conglomerate
B.
Stability Strategies
1. Pause
2. No Change
3. Profit
C.
Retrenchment Strategies
1. Turnaround
2. Captive Company
3. Sell out or Divestment
4. Bankruptcy or Liquidation
II. Portfolio Strategy
III. Parenting Strategy

i.

Forward Integration

ii. Backward Integration

i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.

Exporting
Licensing
Franchising
Joint Ventures
Acquisitions
Green Field Development
Production Sharing
Turnkey operations
Management contracts
Build, Operate, Transfer (BOT)

Strategy Analysis & Choice

Grand Strategy Matrix

Popular tool for formulating alternative strategies

Based on two evaluative dimensions

Competitive position
Market growth

Grand Strategy Matrix

RAPID MARKET GROWTH
Quadrant II

WEAK
COMPETITIVE
POSITION

Market development
Market penetration
Product development
Horizontal integration
Divestiture
Liquidation

Quadrant I

Quadrant III
Retrenchment
Concentric diversification
Horizontal diversification
Conglomerate
diversification
Liquidation

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

Quadrant IV

Concentric diversification
Horizontal diversification
Conglomerate
diversification
Joint ventures

SLOW MARKET GROWTH

STRONG
COMPETITIVE
POSITION

Strategy Analysis & Choice

Grand Strategy Matrix

Quadrant I

Excellent strategic position

Concentration on current markets and products
Take risks aggressively when necessary

Strategy Analysis & Choice

Grand Strategy Matrix

Quadrant II

Evaluate present approach seriously

How to change to improve competitiveness
Rapid market growth requires intensive strategy

Strategy Analysis & Choice

Grand Strategy Matrix

Quadrant III

Compete in slow-growth industries

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

Strategy Analysis & Choice

Grand Strategy Matrix

Quadrant IV

Strong competitive position

Slow-growth industry
Diversification indicated to more promising growth areas

Ansoffs matrix

Ansoffs Matrix
This matrix was developed by Igor Ansoff
It is a framework for identifying corporate growth
opportunities
Two dimensions determine the scope of options,
namely
products and markets

Ansoffs Matrix
Existing product

New product

Existing
market

Market penetration
Increase sales to the
existing market
Penetrate more deeply
into the existing market

Product development
New product developed for
existing markets

New market

Market development
Existing products sold to
new markets

Diversification
New products sold in new
markets

Ansoffs matrix and risk

The greater the degree of newness the greater
the risk

Market penetration - little risk involved

Market development - moderate risk
Product development - moderate risk
Diversification - high risk because both
product and market are new and unknown

Market Penetration
Aim of the strategy:
To maintain or increase share of the current market with current
products
To secure dominance of a growth market or restructure a mature
market by driving out competition

But it is difficult to achieve growth through increased market

penetration if the market is saturated
In a stagnating market increase in sales is only possible by
grabbing market share from rivals. Hence competition will be
intense in such markets
Risks are low but the prospects of success are low unless
there is strong growth in the market

Market penetration strategies

How is increased market penetration
achieved?
Increase usage by existing customers
Attract customers away from rivals
Gain market. share at the expense of rivals
Encourage increase in frequency of use
Devise and encourage new applications
Encourage non buyers to buy

Market penetration requires realignment of

the marketing mix

Market development
This involves

Selling the same product to different people

Entering new markets or segments with existing products
Gaining new customers,new segments,new markets
Entering overseas markets

Market development will require changes to

marketing strategy e.g. new distribution channels,
different pricing policy, now promotional strategy to
attract different types of customers

Market development
Market development is used when
Untapped markets are beckoning
The firm has excess capacity
There are attractive channels to access new
market

Market development involves moderate risk there is a lack of familiarity with customers
but at least the product is familiar

Product development
This is the development of new products for
the existing market
New products come in the form of:
New products to replace current products
New innovative products
Product improvements
Product line extensions
New products to complement existing products
Products at a different quality level to existing
products

Product development
Product development is used when:
The Firm has strong R&D capabilities
The market is growing
There is rapid change
The firm can build on existing brands
Competitors have better products

But new product development is costly and

there are moderate risks associated with this
strategy

Diversification
Diversification in the Ansoff Matrix means:
New products sold to new markets
New products for new customers

It is a risky strategy because it involves two unknowns

Therefore new products and new markets should be selected
which offer the prospect for growth which the exiting product
market mix does not
Diversification can be sub-divided into related and unrelated

Related diversification
This is development beyond present product market but still
within the broad confines of the industry
Markets and products share some commonality with existing
products
Therefore it builds on assets or activities which the firm has
developed
Related diversification can also be seen as synergistic
diversification since it involves harnessing exiting product
market knowledge
This closeness can reduce the risks associated with
diversification
Example: banks developing insurance products

Related diversification
Horizontal diversification: when new products are
introduced to current markets
Vertical diversification: when an organisation
decides to move into its suppliers or customers
business to secure supply or to firm up the use of
products in end products
Concentric diversification: when new products
closely related to current products are introduced
into new markets
The product might be new but is it genuinely
diversification into new markets?

Unrelated diversification
Features of unrelated diversification
Growth in products and markets that are completely new
Development beyond the present industry into products and
markets which bear little relation to the present product
market mix
No commonality with existing products and markets

It is also known as conglomerate diversification:

When completely new, technologically unrelated
products are introduced into new markets
As it represents a departure from existing products
and markets it does represent considerable risk

Uses of the Ansoff Matrix

The matrix is a framework to explore directions for
strategic growth
It is the most commonly used model for analysing the
possible strategic direction that a business should take
It not only identifies and analyses different growth
opportunities it also encourages planners to consider
both expected returns and risks