Strategic Evaluation and Choice

STRATEGIC CHOICE
“The decision to select from among the grand strategies
considered, the strategy which will best meet the
enterprise’s objective. The decision involves focusing
on a few alternatives considering the selection factors,
evaluating the alternatives against these criteria and
making the actual choice.”
-Azhar Kazmi
 Criteria for evaluating strategic
alternatives

• Criteria of suitability

• Criteria of feasibility

• Criteria of acceptability

2–3
Framework for evaluating strategic
alternatives
 Focusing on strategic alternatives

Focusing on alternative could be done by

visualizing the future state and working
backwards. This could be done through gap
analysis.
 GAP Analysis

GAP ANALYSIS = Projected Performance – Desired

Performance
Gap Analysis For Focusing on Strategic
Alternatives

Desired
Performance performance

Present Performance
gap
performance

T1 T2
TIME
 Strategic Alternative
At the corporate level:
• Expansion Strategy
• Stability Strategy
• Retrenchment Strategy
• Combination Strategy
 Expansion Strategy
If the performance GAP is large due to
expected environmental opportunity,
Expansion Strategy would be seem to be a
feasible alternative.
 Stability Strategy
If the “Performance Gap” is narrow then
Stability Strategy would seem to be a
feasible alternative.
 Retrenchment Strategy
If the performance GAP is large due to Past
and expected bad performance then
Retrenchment Strategy would seem to be
a feasible alternative.
 Combination Strategy

• In the complex scenario, where the multiple

reason for the performance GAP then
Combination Strategy would seem to be a
feasible alternative.
 A strategic analysis framework
• According to Freed D. David significant
strategy analysis techniques can be integrated
into three stage decision making framework.

Stage 1: Input Stage:

– EFE Matrix,
– IFE (Internal Factor Evaluation) Matrix, and
– CP (Competitive Profile) Matrix

2–13
A Comprehensive Strategy-Formulation Analytical
Framework (SFAF)
Stage 2: Matching Stage
– SWOT ( Strength-Weakness-Opportunities-Threat) Matrix,
– SPACE (Strategic Position and Action Evaluation) Matrix,
– IE (Internal-External) Matrix,
– GS (Grand Strategy) Matrix

Stage 3: Decision making stage

– QSP (Quantitative Strategic Planning) Matrix

14
 EFE Matrix
An EFE (external factor evaluation) Matrix summarizes and
evaluate all the external forces that affect an organization.
It is developed in five stages:

15
 Five Steps
1. List key external factors identified in external audit;

2. Assign to each factor weight ranging from 0.0 (not

important) to 1.0 (very important).
3. Assign rating between 1 (poor response) and 4 (superior
response).
4. Multiply weight by its rating to get weighted score
5. Sum up to get total weighted score for the organization

2–16
 Example of EFE Matrix
Key External Factors Weight Rating Weighted
score
Opportunities

1. Domestic demand increasing 10% annually

2. Export demand increasing 15% annually

3. Input price decreasing 5% annually

Threats

1. Rival organizations increasing ad by 20% annually

2. Govt. Tightening its regulation

3. Interest rates are increasing 3% annually

Total
17
 IFE (Internal Factor Evolution) Matrix

• IFE Matrix is a management strategy formulation tool that

summarizes and evaluates major strengths and weaknesses in
functional areas of the organization.

18
 Five steps to construct IFE Matrix:

– List key strengths and weaknesses

– Assign weight ranging from 0.0 (not important) to 1.0 (all

important)
– Assign rating from 1 (major weakness) to 4 (major
strength)
– Multiply weights and rating to get weighted score
– Sum the weighted score to get total weighted score for
the organization.

2–19
 An example of IFE Matrix
Key Internal Factors Weight Rating Weighted
Score
Strengths

Weaknesses

Total Weighted Score

20
 CP (Competitive Profile) Matrix

• CP Matrix identifies a organization’s strategic

competitors and its particular strengths and weakness
in relation to the organization’s strategic position.

• CP Matrix is broader as it includes both internal and

external issues.

• CP Matrix rating refers to strengths and weakness

between I (major weakness) and 4 (major strength).

21
 Example of CP Matrix
Org. A Org. B Org. C

Critical success factors weight rating score rating score Rating score

Product quality

Price competitiveness

Advertising

Management

Financial position

Market share

Customer loyalty

Global expansion

Total
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Stage two: Matching Stage

2–23
SWOT (Strength-Weakness-Opportunities-
Threat) Analysis

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 TOWS Matrix
Strength - S Weakness – W
1 1
2 2
3 3
4 4

Opportunities –O SO Strategies WO Strategies

1 1 1
2 2 2
3 3 3
4

Threats- T ST Strategies WT Strategies

1 1 1
2 2 2
3 3 3
4

25
 SPACE (Strategic Position and Action
Evaluation) Matrix
• SPACE Matrix in its 4 quadrant framework indicates
whether aggressive, conservative, defensive or
competitive strategies are appropriate for a
organization.
• Axes of the SPACE Matrix represent two internal and
two external dimensions.
• Internal dimensions are:
– FS (Financial strength)
– CA (Competitive Advantage)
 External dimensions are:
 ES (Environmental Stability)
 IS (Industry Strength)

2–27
 Factors of SPACE Matrix (contd.)
Internal Strategic Position External Strategic Position
FS (Financial Strengths) ES (Environmental Stability)
1. Return on Investment 1. Rate of Inflation
2. Leverage Ratios 2. Price Elasticity of Demand
3. Liquidity Ratios 3. Competitive Pressure
4. Working Capital 4. Price range of competing products
5. Cash Flow 5. Technological change
CA (Competitive Advantage) IS (Industry Strength)
1. Market share 1. Growth potential
2. Product quality 2. Profit potential
3. Customer loyalty 3. Financial stability
4. Control over input suppliers 4. Productivity
2–29
2–30
 SPACE Matrix (contd.)
FS +

Conservative Strategies Aggressive Strategies

CA IS
• _ +

Defensive Strategies Competitive Strategies

ES _
 IE (Internal-External) Matrix
• IE Matrix is based on two dimensions:
– IFE total weighted scores on x-axis, and
– EFE total weighted scores on y-axis
 IE Matrix is divided into 3 regions with different
strategic implications:
 I, II &IV : grow and build (intensive or integrative
strategies)
 III, V & VII : hold and maintain (market penetration and
product development strategies)
 VI, VIII &IX : harvest or divest (defensive strategies)
 IE (Internal-External) Matrix (contd.)
IFE TW Score IFE Strong IFE Average IFE Weak
EFE TW Score 3.0 – 4.0 2.0 – 2.99 1.0 – 1.99

EFE High I II III

3.0 – 4.0 Grow and build Grow and build Hold and
maintain

EFE Medium IV V VI
2.0 – 2.99 Grow and build Hold and Harvest or divest
maintain

EFE Low VII VIII IX

1.0 – 1.99 Hold and Harvest or divest Harvest or divest
maintain
2–34
 GS (Grand Strategy) Matrix
GS Matrix is based on two evaluative dimensions:
1. Competitive Position, and
2. Market Growth.
 All organizations can be positioned in one of the four
strategy quadrants:

1. Quadrant I is an excellent strategic position for an

organization due to strong competitive position and
rapid market growth.
2. Quadrant II organizations need to evaluate their
market position as they are facing weak competitive
position.
3. Quadrant III organizations are in slow growth
industries and have weak competitive position.
4. Quadrant IV organizations have strong competitive
position , but are in a slow growth industry.
2–36
 GS (Grand Strategy) Matrix (contd.)
RMG
Quadrant II Quadrant I

Intensive strategies Intensive strategies

Defensive strategies Integration strategies

WCP SCP

Quadrant III Quadrant IV

Defensive strategies Diversification strategies

SMG
Stage Three: The decision Stage

2–38
 QSP (Quantitative Strategic Planning) Matrix

• QSP Matrix is the decision making tool of Stage 3 of

Strategy-Formulation Analytical Framework.
• QSP Matrix determines the relative attractiveness of
various strategies based on the extent to which key
external and internal success factors are capitalized
upon or improved.
• QSP Matrix is prepared using information of stage 1
(input stage) and stage 2 (matching stage) of Strategy
Formulation Analytical Framework.
Six steps are required to prepare QSP Matrix:
• Step 1: listing external opportunities/threats and internal
strengths/weakness from stage 1 (input stage) of SFAF;

• Step 2: assigning weights to each external and internal factors

as from stage 1 (input stage) of SFAF;

• Step 3: Identifying alternative strategies from stage 2

(matching stage) of SFAF;

• Step 4: determining strategy Attractiveness Score (AS);

• Step 5: Computing Total Attractiveness Score (TAS); and

• Step 6: Computing Sum Total Attractiveness Score (STAS).

 QSP Matrix (contd.)
Key Factors Weight Strategy 1 Strategy 2 Strategy 3
AS TAS AS TAS AS TAS
Key External Factors
(Opportunities/Threats)

Economy
Political/legal/governance
Technology trends
Competitive environment
Key Internal Factors
(Strengths/Weakness)
Management
Marketing
Finance/Accounting
Production/Operation
R&D
MIS
 Limitations of the Strategy
Formulation Framework
• Quantitative techniques used in Strategy Formulation
Analytical Framework (SFAF), like any other quantitative
methods are based on simplified assumptions that may
not always realistic;
• SFAF always requires intuitive judgments based on
objective information;
• SFAF can be only as good as the inputs and matching
analysis on which it is based.
 Cultural and Political aspects of
Strategy Choice
• All organization have a culture. If formulated
strategies are in conflict with organizational culture,
implementation will be slow and difficult.
• All organization have internal power politics. Unless
internal power politics is managed well,
implementation of strategies could be sabotaged.