comments on a variety of strategic planning tools

8/13/2019 Comments on a Variety of Strategic Planning Tools

1/6

Comments on a Variety of Strategic Planning Tools

One important aspect of this approach is to note that the tools fit into various stages of an

overall process model. The biggest general advantage is that they provide a basis for

systematic organization and evaluation of information relevant to the selection and defense

of a strategic alternative that addresses the organizations needs within its mission. The

models may help us avoid a cursory overview with an intuitive decision that ignores key

aspects or treats all information as equally important.

The Stage 1 (input stage) models are designed to enhance performance of a situational

audit to address the basic question, Where are we? The IFE/EFE and Competitive

Profile Matrix may be used for this purpose.

The CPM is used as a tool in the evaluation of the competitive environment of the firm,particularly in respect to the relevant factors that are keys to success in an industry or

competitive environment. The model requires an evaluation of the strengths and

weaknesses of the company and its key competitors relative to the identified keys.

Normally, five to fifteen factors are included in the evaluation.

Each factor receives a raw score of 1(major weakness) to 4(major strength). Weights are

then assigned to each factor based on its relative importance. The sum of all weights must

equal 1 with the resulting average score being 2.5. More importantly, the weighted scores

give a comparison of the company to each of its competitors from strongest to weakest.

The biggest advantage of CPM is that it keeps us from making decisions in a vacuum by

developing a realistic assessment of competitor power. Since competitive forces are oftenconsidered to have the greatest impact on a firms strategic position, as posited by Michael

Porter and others, this analysis in some form is crucial. The biggest disadvantage is that

the weightings and identified factors are somewhat subjective, but strategists can overcome

this with careful evaluation of their industries rather than reliance on some standard list.

A limitation is the use of whole number raw scores that might result in misdirected

interpretation of results (i.e. An overall score of 3.0 v. 2.5 does not mean one firm is 20%

better than the other). This type of implied precision is an illusion.

The IFE/EFE have the same basic structure for evaluation. The EFE looks at key factors

in the external environment in respect to the opportunities and threats, utilizing a 4-point

scale from 1(major threat) to 4(major opportunity). Normally, 10 to 15 key opportunitiesand threats are included in the analysis. Weightings are assigned in a fashion similar to the

CPM and applied to develop a weighted average score. Since an average score would be

2.5, scores greater than 2.5 would indicate that the firm is above average in its ability to

capitalize on environmental opportunities and avoid threats. Scores below 2.5 would have

the opposite interpretation. The closer a score is to an extreme (1 or 4), the more

pronounced the effect. Note that the CPM results can be utilized in assessing the

competitive environment in the EFE.


2/6

The IFE is evaluated in the same way as the EFE. The scoring is based on the 4-point scale

from 1(major weakness) to 4(major strength). Computation is similar as is the

interpretation of resulting scores. Again, we would normally look at 10 to 15 key factors as

a basis.

Both the EFE and IFE exhibit strength in the area of forcing the strategist to identify a

limited list of key factors within the confines of normal evaluation of the firms

environment and operations. This required systemization reduces the chance of ignoring

some aspect of the external forces (regulation, economics, competition) or of the internal

functions (marketing, production, finance, R&D, management structure, ). A principal

weakness is the potential misidentification of the key factors to include, r esulting in a

weighted score that reflects the influence of inconsequential information. The main

limitation is that we do not get a similar score for competitors in the industry. (This can be

factored into the analysis if we combine results from a CPM, but its influence is still

reduced.)

The tools in Stage 2 (matching stage) include the SWOT, BCG, IE, and Space matrices.

Remember that the purpose of Stage 2 is to identify meaningful alternatives for further

consideration. In effect, we are addressing the question, Where can we/might we go? ;

and most importantly, what alternatives are likely to help us get there.

The SWOT matrix is a matching tool that helps managers develop four types of strategies:

SO, WO, ST, and WT. The identification of key factors in each sector is not unlike the

IFE/EFE approach and may utilize the factors explored at the input stage. The important

and difficult part of developing the SWOT matrix is making the matches. It should be

noted that there is no one best set of matches. Every organization would like to be

positioned to take advantage of SO strategies; however, many must pursue WO, ST, or WT

strategies in order to get into a situation where they can apply SO strategies. A firm with

major weaknesses will strive to overcome them and create strengths; a firm facing major

threats will seek to avoid them in order to concentrate on opportunities.

For example, a firm may see a desirable opportunity, but its lack of technology bars them

from taking advantage of the opportunity. Three possible WO strategies would be to form

a joint venture with a company that possesses the technology, buy rights to the use of the

technology, or hire and train people with the required technical capabilities. A firm with

global operations might use an ST strategy to address the threat of price increases or

quantity reduction from domestic suppliers.

WT strategies are difficult in that the firm is seeking to avoid external threats while faced

with significant internal weaknesses resulting in survival issues. If a firm has excess

capacity coupled with a declining industry, a WT strategy would likely be framed around

concentric diversification.

A strength of the SWOT is that it allows us to visually organize the matching process on a

factor-by-factor basis. By numbering our lists, we can see how strong a match we have in

various cells. We might have an S1, S3, S6, S7/O2 alternative where there are four


3/6

different strengths that can be utilized to take advantage of the same opportunity. This

would likely be a stronger alternative than an S2/O4 where only a single strength is

available related to the opportunity. The greater the number of matches in a given cell, the

more likely that type of strategy will be selected. Remember, we are trying to generate

feasible alternatives here, not determine which is best. A potential weakness is in the

misuse of SWOT as simply a Stage 1 tool without organizing the informationappropriately. Secondary to this is the mechanical approach where conflicts are ignored

while matches are identified. A thorough evaluation of relatedness of the items can help

prevent this error.

The Strategic Position and Action Evaluation (SPACE) matrix is a four-quadrant

framework used to determine whether aggressive, conservative, defensive, or competitive

strategies are most appropriate for an organization. The axes of the SPACE matrix

represent two internal and two external dimensions. The most commonly used internal

dimensions are financial strength (FS) and competitive advantage (CA). Similarly, themost common externals are environmental stability (ES) and industry strength (IS).

Although these are not the only possible dimensions to use, they are applicable in the vast

majority of cases as the most important determinants.

The steps involved in completing the SPACE matrix are:

1. Select sets of variables to comprise each dimension (FS,CA,ES,IS)2. Assign a numerical value ranging from 1 to 6 to each variable included in the FS

and IS dimensions and from1 to6 in the ES and CA dimensions

3. Compute an average score for each dimension4. Plot the average scores for FS,IS,ES,and CA on the appropriate axis in the

SPACE matrix.

5. Add the two scores on the x-axis and plot the resultant point on X. Do the samefor Y and plot the intersection of the new xy point.

6. Draw a directional vector from the origin through the new xy intersection. Thisvector reveals the type of strategies recommended for the organization

(aggressive, conservative.)

Conservative strategies generally indicate staying close to a firms core competencies and

avoiding risks. These may include market penetration, market development, product

development, and concentric diversification.

Defensive strategies generally focus on improving weaknesses and avoiding threats. These

might include retrenchment, divestiture, liquidation, and limited concentric diversification.

Competitive strategies include backward, forward, and horizontal integration, market

development and penetration, and joint ventures.

Aggressive strategies are the most empowered and could include all the conservative and

competitive strategies along with conglomerate diversification and combination strategies.


4/6

The further from the origin the plotted xy point is the more compelling the identification of

strategy type. The various potential strategies within the category form a basis for the

alternatives to pursue.

SPACE matrices have the advantage of magnitude or intensity in evaluating the possiblealternatives. (i.e. A 5,5 is much more compelling than a 1,2 xy intersection in respect to

alternative types.) A weakness is that many firms are not clearly delineated by quadrant or

have weak indicators. This can be overcome to some extent by looking at strategies in

common for neighboring quadrants. A limitation is the scoring and perceived complexity

of developing the model.

While the SWOT and Space matrices are general purpose, the BCG and IE matrices are

better applied to the evaluation of a business portfolio. When a firms divisions or SBUs

compete in different industries, separate strategies may be needed for each business. This

is the original purpose of both the BCG and IE matrices, although the IE matrix may be

used for a single business entity to identify strategic direction.

The classic BCG uses a grid that examines the Relative Market Share and Industry Growth

Rate. The Industry Growth Rate scale is reflective of the range over which various

industries in which the firm competes are distributed, for example 20% to +20%. The

Relative Market Share scale is set from 1 to 0 with .5 being a division that has half the

market share of the industry leader. Divisions are then placed on the grid based on their

position in these dimensions. The BCG matrix places labels on the various combinations.

Stars are high in both dimensions, Dogs are low in both dimensions, while Cash Cows hold

high market share in low growth industries and Question Marks have low market share in

high growth industries.

Additionally, each division is represented by a pie chart that varies in size based on its total

revenues and slices within the pie chart that reflects the percent of overall profits

attributable to each division.

Question Mark divisions force the firm to decide whether to strengthen them through an

intensive strategy (market penetration, market development, product development) or to

sell them.

Stars are similar to SOs providing multiple options for using strengths to take advantage

of opportunities.

Cash Cows generate cash in excess of their needs and are milked for cash by the firm.

Many Cash Cows were former Stars, but their industries are declining. Product

development or concentric diversification may be appropriate for strong Cash Cows; while

divestiture or retrenchment may be appropriate as they weaken.

Dogs are often candidates for liquidation, divestment, or downsizing due to their overall

poor positioning.


5/6

A major advantage of the BCG, when appropriate, is that it draws attention to the cash

flow, investment characteristics, and needs of various divisions. With many firms the

divisions move through cycles from question marks to stars to cash cows and to dogs.

Therefore, proper attention may lead to winning strategies that permit a business to

maintain a portfolio of mostly Stars. A major weakness is that many divisions may not fit

neatly into a specific category resulting in oversimplification of the process. A limitationexists in respect to the snapshot nature of the analysis that may not be an accurate

reflection of industries growth over time or directional movement within market share

data. The model also ignores certain other key variables such as size of market and

competitive advantage requiring further analysis.

The IE matrix uses a 9-cell approach to evaluating firms, divisions or SBUs. The

fundamental requirement for use is that each entity must have an IFE/EFE for its sector.

Each entitys scores are plotted on the IE matrix placing them in one of the nine cells.

Cells I, II and IV are Grow and Build entities calling for intensive strategies as outlined in

the BCG discussion or for integrative strategies involving various forms of integration

(backward, forward). Cells III, V, and VI are best managed with Hold and Maintainstrategies such as market penetration and product development. The remaining cells are

candidates for Harvest and Divest strategies (liquidation or sale). Pie charts similar to

those in the BCG may used to give indication of relative importance.

The QSPM is used in Stage 3 (Decision stage). The QSPM uses input from Stage 1 analyses

and matching results from Stage 2 to decide objectively among alternative strategies.

The QSPM is designed to determine the relative attractiveness of alternatives based on the

extent to which key internal and external factors are capitalized upon or improved. The

mechanics of the tool lead to the development and comparison of Total Attractiveness

Scores.

The steps in the process follow:

1. List the firms key internal strengths/weaknesses and externalopportunities/threats in the left-hand column. This information should be taken

from the IFE/EFE matrices. Normally, there would be a minimum of five

external and five internal factors stated in specific terms.

2. Assign ratings to the key internal and external factors from IFE/EFE.3. Examine the Stage 2 matrices and identify alternative strategies that the

organization should consider implementing. Place these along the top row of the

QSPM.

4. Determine Attractiveness Scores. These are relative values based on thealternatives relationship to each of the key factors. Example would be 1-4 with


6/6

1 being unacceptable for the factor and 4 being very well suited to the factor.

Obviously, other scoring scales could be utilized.

5. Compute the Total Attractiveness Score by multiplying each factor rating by theAttractiveness Score. The higher the Total Attractiveness Score, the more

attractive the alternative in respect to a particular factor.

6.

Calculate the Sum Total Attractiveness Score. This is the sum of the TotalAttractiveness Scores in each alternative column. The higher the score, the more

attractive the alternative.

An advantage of the QSPM is that it allows evaluation of numerous strategies

simultaneously. It can be applied to divisional level strategies as well as corporate level.

Another positive is that it forces strategists to integrate information from the input and

matching stages in an organized fashion making it less likely that key factors will be

overlooked. The approach can also be useful to both small and large firms and can be

adapted to almost any type of organization. A weakness of the tool is that it requires some

subjective assignment of scores, but this can be ameliorated by thoughtful discussion

among participants in the planning process. An obvious limitation is that the results areonly as good and useful as the identification of inputs and alternatives permits. In essence,

it is a derived tool.

The information/comments provided are not designed to restrict or limit your use of other

tools and processes, nor is this intended to be construed as an exhaustive list. Rather, this

is provided as an approach that may be helpful in identifying and organizing information

to aid in both selection of type and comparison of specific alternatives generated for

consideration.

comments on a variety of strategic planning tools

Documents