Situation Analysis and Strategic

Choice
 SWOT Analysis
• Strategy formulation, often referred to as
strategic planning or long-range planning, is
concerned with developing a corporation’s
mission, objectives, strategies, and policies.
• It begins with situation analysis: the process
of finding a strategic fit between external
opportunities and internal strengths while
working around external threats and internal
weaknesses.
 SWOT Analysis (cont…..)
• A 2005 survey of competitive intelligence
professionals found that SWOT analysis was
used by 82.7% of the respondents, the second
most frequently used technique, trailing only
competitor analysis.
 SWOT Analysis (cont…..)
• Some of the primary criticisms of SWOT
analysis are: It generates lengthy lists.
– It uses no weights to reflect priorities.
– It uses ambiguous words and phrases.
– The same factor can be placed in two categories
(e.g., a strength may also be a weakness).
– There is no obligation to verify opinions with data
or analysis.
– It requires only a single level of analysis.
GENERATING A STRATEGIC FACTORS ANALYSIS
SUMMARY (SFAS) MATRIX
• The EFAS and IFAS Tables plus the SFAS Matrix have
been developed to deal with the criticisms of SWOT
analysis.
• When used together, they are a powerful analytical
set of tools for strategic analysis.
• The SFAS (Strategic Factors Analysis Summary)
Matrix summarizes an organization’s strategic
factors by combining the external factors from the
EFAS Table with the internal factors from the IFAS
Table.
• The SFAS Matrix includes only the most important factors
gathered from environmental scanning and thus provides
information that is essential for strategy formulation.
• The use of EFAS and IFAS Tables together with the SFAS
Matrix deals with some of the criticisms of SWOT
analysis.
• For example, the use of the SFAS Matrix reduces the list
of factors to a manageable number, puts weights on each
factor, and allows one factor to be listed as both a
strength and a weakness (or as an opportunity and a
threat).
FINDING A PROPITIOUS NICHE (27.6.2022)

• One desired outcome of analyzing strategic factors is

identifying a niche where an organization can use its
core competencies to take advantage of a particular
market opportunity.
• A niche is a need in the marketplace that is currently
unsatisfied.
• The goal is to find a propitious niche—an extremely
favorable niche—that is so well suited to the firm’s
internal and external environment that other
corporations are not likely to challenge or dislodge it.
 CASELET
• Page 181/ 231
• SAB Defends its Propitious Niche
 Review of Mission and Objectives
• A reexamination of an organization’s current
mission and objectives must be made before
alternative strategies can be generated and
evaluated.
• Even when formulating strategy, decision
makers tend to concentrate on the
alternatives—the action possibilities—rather
than on a mission to be fulfilled and objectives
to be achieved.
Review of Mission and Objectives (cont….)

• Problems in performance can derive from an

inappropriate statement of mission, which may
be too narrow or too broad.
• If the mission does not provide a common
thread (a unifying theme) for a corporation’s
businesses, managers may be unclear about
where the company is heading.
• Objectives and strategies might be in conflict
with each other
• A company’s objectives can also be inappropriately
stated.
• They can either focus too much on short-term
operational goals or be so general that they provide
little real guidance.
• There may be a gap between planned and achieved
objectives.
• When such a gap occurs, either the strategies have to
be changed to improve performance or the objectives
need to be adjusted downward to be more realistic.
 TOWS Matrix
• The TOWS Matrix (TOWS is just another way
of saying SWOT) illustrates how the external
opportunities and threats facing a particular
corporation can be matched with that
company’s internal strengths and weaknesses
to result in four sets of possible strategic
alternatives.
 BCG Matrix
• The Boston Consulting Group (BCG), a
management consulting group developed and
popularized the growth-share matrix.
• The BCG approach is based on the philosophy that
a. product's market growth rate and its relative
market-share are the two most important factors
• BCG model integrates all the SBUs and their
relative sizes and products into a single matrix.
• BCG matrix is constructed by putting the market growth rate on the
vertical axis.
• The market growth rate is the annual growth rate of the market in
which the business operates.
• The market growth rates are plotted from 0 to 20 percent.
• A market growth rate of more than 10 percent may be considered as
high.
• The relative market share of the SBUs is shown on the horizontal axis.
• The relative market share of the SBUs is computed in relation to the
market-share of the largest competitor.
• A relative market share of 0.1 means the unit's sales volume is only 10
percent of the sales of the largest competitor.
• The firm's growth share matrix is divided into four
cells.
• Each cell indicates a different type of business
situation.
• In the cells, each of the firm's SBUs are plotted in
circles.
• The size of the circles indicates their relative size of
operation.
• BCG model names the four cells as star, cash cow, dog,
and question mark or problem child.
• Stars
– Market Leader in a high growth market
– Dominates the market
– business firm must invest heavily to maintain the
leading position.
– Stars are frequently attacked by competitors and
the firm spends heavily in defending against the
attacks.
– Arghakhachi Cements, Ambe TMT, Wai Wai
• Cash Cows
– Operate in slow growth market, but have dominant market share
– Cash cows generate more cash than what is required to maintain
their market share.
– Cash cows generally show low prospects for growth.
– The basic strategy of the firm for cash cows is to maintain the
current market share.
– The excess cash flow generated by cash cows may be transferred
to stars where the growth prospects are high,
– A multi-unit firm would like to have more than one firm in the
cash cow position.
– Road Show Real Estate, Civil Homes
• Dogs
– These business units have small market shares in a low
growth market
– Since they operate in the low growth market, they
normally offer low potential for expansion.
– Dog units generally operate with matured products in
a saturated market.
– They generate negative cash flow and profit.
– The basic strategy for dogs is to divest the business.
– Jai Nepal hall at one time
• Question Marks
– These business units operate in high growth market relatively
low market-share.
– Question marks have uncertain future.
– They are generally new units producing new products.
– They need a relatively large investment and cash flow in order to
build a larger market share and become stars.
– If a firm has many question marks, its investment portfolio is not
sound.
– When a question mark does not receive adequate resource
support it can easily turn into a dog.
– Bishal Cement other small cement plants
• The SBUs have a life cycle in the growth share
matrix.
• Most products start as question marks, become
stars with sustained investments, turn into
cash cows as the market growth slows down,
and eventually turn into dogs towards the end
of the life cycle.
• A firm has four alternative strategies for its
SBUs: build, hold, harvest, and divest.
 Internal-External (IE) Matrix
• The Internal-External (IE) matrix is another strategic
management tool used to analyze working
conditions and strategic position of a business.
• The Internal External Matrix or short IE matrix is
based on an analysis of internal and external
business factors which are combined into one
suggestive model.
• The IE matrix is a continuation of the EFE
matrix and IFE matrix models.
 How does the Internal-External IE matrix
work?
• The IE matrix belongs to the group of strategic
portfolio management tools.
• In a similar manner like the BCG matrix, the IE
matrix positions an organization into a nine cell
matrix.
• The IE matrix is based on the following two criteria:
– Score from the EFE matrix -- this score is plotted on
the y-axis
– Score from the IFE matrix -- plotted on the x-axis
• The IE matrix works in a way that you plot the total weighted score from
the EFE matrix on the y axis and draw a horizontal line across the plane.
• Then you take the score calculated in the IFE matrix, plot it on the x axis,
and draw a vertical line across the plane.
• The point where your horizontal line meets your vertical line is the
determinant of your strategy.
• This point shows the strategy that your company should follow.
– On the x axis of the IE Matrix, an IFE total weighted score of
• 1.0 to 1.99 represents a weak internal position. 
• 2.0 to 2.99 is considered average. 
• 3.0 to 4.0 is strong.
– On the y axis, an EFE total weighted score of 1.0 to 1.99 is considered low. A
score of 2.0 to 2.99 is medium. A score of 3.0 to 4.0 is high.
 SPACE Matrix
• The SPACE matrix is a management tool used to analyze a
company.
• It is used to determine what type of a strategy a company
should undertake
• The Strategic Position & ACtion Evaluation matrix or short
a SPACE matrix is a strategic management tool that focuses
on strategy formulation especially as related to the
competitive position of an organization.
• The SPACE matrix can be used as a basis for other analyses,
– such as the SWOT analysis, BCG matrix model, industry analysis,
or assessing strategic alternatives (IE matrix).
 What is the SPACE matrix strategic
management method?
•  The SPACE matrix is broken down to four
quadrants where each quadrant suggests a
different type or a nature of a strategy:
– Aggressive
– Conservative
– Defensive
– Competitive
 SPACE Matrix (cont….)
•  The SPACE Matrix analysis functions upon two internal
and two external strategic dimensions in order to
determine the organization's strategic posture in the
industry. 
• The SPACE matrix is based on four areas of analysis.
– Internal strategic dimensions:
•  Financial strength (FS)
• Competitive advantage (CA)
– External strategic dimensions:
• Environmental stability (ES)
• Industry strength (IS)
 SPACE Matrix (cont….)
• There are many SPACE matrix factors under the internal
strategic dimension.
• These factors analyze a business internal strategic position.
• The financial strength factors often come from company
accounting.
• These SPACE matrix factors can include for example return on
investment, leverage, turnover, liquidity, working capital, cash
flow, and others.
• Competitive advantage factors include for example the speed of
innovation by the company, market niche position, customer
loyalty, product quality, market share, product life cycle, and
others.
 SPACE Matrix (cont….)
• Every business is also affected by the environment
in which it operates.
• SPACE matrix factors related to business external
strategic dimension are for example overall
economic condition, GDP growth, inflation, price
elasticity, technology, barriers to entry, competitive
pressures, industry growth potential, and others.
• These factors can be well analyzed using
the Michael Porter's Five Forces model.
 SPACE Matrix (cont….)
• The following are a few model technical
assumptions:
– By definition, the CA and IS values in the SPACE
matrix are plotted on the X axis.
• CA values can range from -1 to -6.
• IS values can take +1 to +6.
– The FS and ES dimensions of the model are plotted
on the Y axis.
• ES values can be between -1 and -6.
• FS values range from +1 to +6.
• The SPACE matrix can be created using the following seven steps:
• Step 1: Choose a set of variables to be used to gauge the
competitive advantage (CA), industry strength (IS), environmental
stability (ES), and financial strength (FS).
• Step 2: Rate individual factors using rating system specific to each
dimension. Rate competitive advantage (CA) and environmental
stability (ES) using rating scale from -6 (worst) to -1 (best). Rate
industry strength (IS) and financial strength (FS) using rating scale
from +1 (worst) to +6 (best).
• Step 3: Find the average scores for competitive advantage (CA),
industry strength (IS), environmental stability (ES), and financial
strength (FS).
• Step 4: Plot values from step 3 for each dimension on the
SPACE matrix on the appropriate axis.
• Step 5: Add the average score for the competitive advantage
(CA) and industry strength (IS) dimensions. This will be your
final point on axis X on the SPACE matrix.
• Step 6: Add the average score for the SPACE matrix
environmental stability (ES) and financial strength (FS)
dimensions to find your final point on the axis Y.
• Step 7: Find intersection of your X and Y points. Draw a line
from the center of the SPACE matrix to your point. This line
reveals the type of strategy the company should pursue.
 The Grand Strategy Matrix
• The Grand Strategy Matrix has become a popular tool for formulating
feasible strategies, along with the SWOT Analysis, SPACE Matrix, BCG
Matrix, and IE Matrix.
• Grand strategy matrix is the instrument for creating alternative and
different strategies for the  organization.  
• All companies and divisions can be positioned in one of the Grand
Strategy Matrix’s four strategy quadrants.
• The Grand Strategy Matrix is based on two dimensions:
– competitive position and market growth.
• Data needed for positioning SBUs in the matrix is derived from the
portfolio analysis.
• This matrix offers feasible strategies for a company to consider which are
listed in sequential order of attractiveness in each quadrant of the matrix.
Quadrant I (Strong Competitive  Position
 and Rapid Market Growth)
• Firms located in here are in an excellent strategic position.
•  The first quadrant refers to the firms or divisions with
– strong competitive base and
– operating in fast moving growth markets.
• Such firms or divisions are better to adopt and pursue strategies
such as
– market development, market penetration, product development etc.
• The idea behind is to focus and make the current competitive
base stronger.
• In case such firms possess readily available resources they can
move on to integration strategies but should never be at the
cost of diverting attention from current strong competitive base.
Quadrant II (Weak Competitive Position  and
Rapid Market Growth)
• 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,  
• The suitable strategies for such firms are to develop the products,
markets, and to penetrate into the markets.
• 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.
• To achieve the competitive advantage or becoming market leader
Quadrant II firms can go into horizontal integration subject to
availability of resources.
• However if these firms foresee a tough competitive environment the
better option is to go into divestiture of some divisions or liquidation
altogether and change the business.
Quadrant III (Weak Competitive Position  and
Slow Market Growth)
• The firms fall in this quadrant compete in slow-growth
industries and have weak competitive positions.
• These firms must make some drastic changes quickly
to avoid further demise 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.
• If all else fails, the final options for Quadrant III
businesses are divestiture or liquidation.
 Quadrant IV (Strong Competitive Position
 and Slow Market Growth)
• Finally, Quadrant IV businesses have a strong competitive
position but are in a slow-growth industry.  
• Such firms are better to go into related or unrelated integration
in order to create a vast market for products and services.  
• These firms also 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
concentric, horizontal, or conglomerate diversification
successfully.
• Quadrant IV firms also may pursue joint ventures
• Generally, strategies listed in the first quadrant
of Grand Strategy Matrix  are intended to
maintain a firm’s competitive edge and boost
rapid growth,
– while the other three quadrants represent appropriate
actions to take to reach the best position, which is the
first quadrant.
• Increasing market share, expanding to new
markets and creating new products are common
strategies.
Strategic Choice

4.7.2022
 Corporate Scenario
• Corporate scenarios are pro forma (estimated
future) balance sheets and income statements that
forecast the effect each alternative strategy and its
various programs will likely have on division and
corporate return on investment.
• In a survey of Fortune 500 firms, 84% reported using
computer simulation models in strategic planning.
• Most of these were simply spreadsheet-based
simulation models dealing with what-if questions.
 Management’s Attitude Toward Risk
• The attractiveness of a particular strategic
alternative is partially a function of the amount
of risk it entails
• Risk is composed not only of the probability
that the strategy will be effective but also of the
– amount of assets the corporation must allocate to
that strategy and
– the length of time the assets will be unavailable for
other uses.
Management’s Attitude Toward Risk (cont….)

• A high level of risk was why Intel’s board of directors

found it difficult to vote for a proposal in the early
1990s to commit $5 billion to making the Pentium
microprocessor chip—
– five times the amount of money needed for its previous chip.
• Based on Grove’s presentation, the board decided to
take the gamble.
• Intel’s resulting manufacturing expansion eventually
cost $10 billion but resulted in Intel’s obtaining 75% of
the microprocessor business and huge cash profits.
 Pressures from Stakeholders
• The attractiveness of a strategic alternative is affected
by its perceived compatibility with the key stakeholders
in a corporation’s task environment.
– Creditors want to be paid on time.
– Unions exert pressure for comparable wage and employment
security.
– Governments and interest groups demand social
responsibility.
– Shareholders want dividends.
• All these pressures must be given some consideration in
the selection of the best alternative.
 Pressures from Stakeholders (cont….)

• Stakeholders can be categorized in terms of

their
– Interest in the corporation’s activities and
– Relative power to influence the corporation’s
activities.
 Pressures from Stakeholders (cont….)
• Strategic managers should ask four questions to
assess the importance of stakeholder concerns in
a particular decision:
– How will this decision affect each stakeholder,
especially those given high and medium priority?
– How much of what each stakeholder wants is he or
she likely to get under this alternative?
– What are the stakeholders likely to do if they don’t
get what they want?
– What is the probability that they will do it?
 Pressures from the Corporate Culture

• If a strategy is incompatible with a company’s

corporate culture, the likelihood of its
success is very low.
• The “aura” of the founders of a corporation
can linger long past their lifetimes because
their values are imprinted on a corporation’s
members
 Pressures from the Corporate Culture
(cont….)
• In evaluating a strategic alternative, strategy makers
must consider pressures from the corporate culture
and assess a strategy’s compatibility with that culture.
• If there is little fit, management must decide if it
should:
– Take a chance on ignoring the culture
– Manage around the culture and change the implementation
plan
– Try to change the culture to fit the strategy
– Change the strategy to fit the culture
 Needs and Desires of Key Managers
• Personal characteristics and experience affect a person’s
assessment of an alternative’s attractiveness.
• For example, one study found that narcissistic (self-absorbed
and arrogant) CEOs favor bold actions that attract attention,
like many large acquisitions—resulting in either big wins or
big losses.
• A person’s ego may be tied to a particular proposal to the
extent that all other alternatives are strongly lobbied against.
• As a result, the person may have unfavorable forecasts
altered so that they are more in agreement with the desired
alternative.
Needs and Desires of Key Managers (cont….)

• In a study by McKinsey & Company of 2,507 executives

from around the world, 36% responded that managers
hide, restrict, or misrepresent information at least
“somewhat” frequently when submitting capital-
investment proposals
• In the same McKinsey study of global executives, more
than 60% of the managers reported that business unit
and divisional heads form alliances with peers or lobby
someone more senior in the organization at least
“somewhat” frequently when resource allocation
decisions are being made.
Needs and Desires of Key Managers (cont….)

• Research reveals that executives from Korea, the

U.S., Japan, and Germany tend to make different
strategic choices in similar situations because
they use different decision criteria and weights.
• For example, Korean executives emphasize
industry attractiveness, sales, and market share
in their decisions; whereas, U.S. executives
emphasize projected demand, discounted cash
flow, and ROI.