A COMPREHENSIVE STRATEGY FORMULATION FRAMEWORK- CHAPTER 6 SM

A COMPREHENSIVE STRATEGY FORMULATION FRAMEWORK

1. STAGE 1 : INPUT STAGE
• EFE MATRIX
• IFE MATRIX
• CPM

2. STAGE 2 : MATCHING STAGE
• SWOT
• SPACE MATRIX
• BCG MATRIX
• IE MATRIX
• GSM

3. STAGE 3 : DECISION STAGE
• QSPM


STAGE 1: INPUT STAGE
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 allow strategists to more effectively generate and evaluate alternative strategies. Good intuitive judgment is always needed in determining appropriate weights and ratings. Consist of 3 techniques which is EFE Matrix, IFE Matrix and CPM.

1. EFE Matrix
• Allows strategists to summarize and evaluate economics, social, cultural, demographic, environmental, political, governmental, legal, technological and competitive information.
• Is a strategic management tools which is used to know whether the firm is able to effectively take advantage of existing opportunities along with minimizing the external threats.
• The analysis helps in formulating new strategies and policies on the basis of existing position of the company.
• Some of the important opportunities which can be included in the analysis are new geographic markets, online sales, forward or backward integration, expanding the company’s product line, increasing demand for the industry’s products etc.
• Threats include: slow down in market growth, increasing competition, shift in buyer needs and taste, loss of sales to substitute products, likely entry of potent new competitors etc.

EFE Matrix can be developed in 5 steps:
1.  List key external factors as identified in the external audit process.
• Include a total 15 to 20 factors, including both opportunities and threats that affect the firm and its industry.
• List the opportunities first and then the threats.
• Be as specific as possible, using percentages, ratios and comparative numbers whenever possible.
• Recall that Edward Deming said, “in God we trust, everyone else bring data”.
2.  Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very
      important).
• The weight indicates the relative importance of that factor to being successful in the firm industry.
• Opportunities often receive higher weights than threats, but threats can receive high weights if they are especially severe or threatening.
• Appropriate weights can be determined by comparing successful with unsuccessful competitors or by discussing the factor and reaching a group consensus.
• Then sum of all weights assigned to the factors must equal 1.0.

3. Assign a rating between 1 and 4 to each key external factor to indicate how
    effectively the firm’s current strategies respond to the factor.
• Where 4 = the response is superior, 3 = the response is above average, 2 = the response is average and 1 = the response is poor.
• Ratings are based on effectiveness of the firm’s strategies.
• Ratings are thus company-based, whereas the weights in step 2 are industry-based.
• It is important to note that both threats and opportunities can receive a 1, 2, 3, or 4.
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score for
     the organization.


For example: EFE Matrix for Harrah’s Entertainment (largest gaming company in the world that
                       owns and operate over 50 casinos, hotels and 7 golf courses under several brands).

By adding the weighted score of various opportunities and threats of Harrah’s Entertainment, we get the total weighted score of 3.06. Here it should be noted that the highest possible total weighted score of a firm is 4 whereas the lowest possible total weighted score is 1.
The total weighted score remains in the limit of 1 to 4 regardless of the total number of opportunities and threats. Similarly, the average total weighted score is 2.5. If the total weighted score of a company is 4, it means that the company is effectively taking advantage of existing opportunities and is also able to minimize the risk. On the other hand, the total weighted score of 1 show that firm is not able to take advantage of current opportunities or avoid external threats.
In the case of Harrah’s Entertainment, the total weighted score is above average, which means that the Harrah’s strategies are effective and the company is taking advantage of existing opportunities along with minimizing the potential adverse effects of external threats.


2. IFE Matrix
Summarize and evaluates the major strengths and weaknesses in the functional areas of business and it also provides a basis for identifying and evaluating relationships among those areas. Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-powerful technique. A thorough understanding of the factors included is more important than the actual numbers.

Similar to the EFE Matrix and CPM, An IFE Matrix can be developed in five steps:

1. List key internal factors as identified in the internal-audit process.
• Use a total of from 10 to 20 internal factors, including both strengths and weaknesses.
• List strengths first and then weaknesses.
• Be as specific as possible, using percentages, ratios and comparative numbers.
• Recall Edward Deming said, “In God we trust, everyone bring data”.

2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor.
• The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm’s industry.
• Regardless of whether a key factor is an internal strength or weakness, factors considered to have the greatest effect on organizational performance should be assigned the highest weights.
• The sum of all weights must equal to 1.0.

3. Assign a 1 to 4 rating each factor indicate whether that factor represents a major weaknesses (rating =1), a minor weaknesses (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4).
• Note that strengths must receive a 3 or 4 rating and the weaknesses must receive a 1 or 2 rating.
• Ratings are thus company-based, whereas the weights in step 2 are industry-based.


4. Multiply each factors weight by its rating to determine a weighted score for each variable.

5. Sum the weighted scores for each variable to determine the total weighted score for the organization.


For example: IFE Matrix for Harrah’s Entertainment (largest gaming company in the world that
                       owns and operate over 50 casinos, hotels and 7 golf courses under several brands).



The total weighted score ranges from 1 to 4 (where 1 is low, 4 is high and 2.5 is average) regardless of the total number of internal factors used in the analysis. If the total weighted score is less than 2.5, it indicates that the organization is weak internally. On the other hand, the scores above 2.5 show strong internal position.
An internal factor could be included twice in the IFE Matrix if the factor is both strength and weakness. In case of Harrah’s Entertainment, the total weighted score is above than average, it means that the company is strong internally.


3. CPM
• Is a strategic management tool which is use to Identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s strategic position.
• On the basis of this comparison, the firm can design wise offensive or defensive strategies.
• 2 types of systems can be used for the construction of CPM i.e. weighted rating system (each measure of critical success factor is assigned a weight based on its perceived importance) and unweighted (each critical success factor measured is assumed to be equally important) rating system.
• It is important to note that the meaning of weights and total scores is same in both EFE and CPM.

Differences between EFE and CPM
1. In CPM, critical success factors include both internal and external issues

2. In EFE, critical success factors are grouped into opportunities and threats whereas such grouping does not exist in CPM.

3. In EFE, total weighted scores of a firm cannot be compared to the total weighted score of rival firms such comparison is possible in CPM.


Steps in the construction of CPM:
1. Lists down all the key success factors of industry (usually from 6 to 10)

2. Assign weights to each factor ranging from 0.0 (not important) to 1 (most important).

• Greater weights should be given to those factors which have greater influence on the organizational performance.
• The sum of all weights must equal 1.



3. Rate each factor ranging from 1 to 4 for all the firms in analysis.
• Here, rating 1 represents major weakness, rating 2 shows minor weakness.
• Similarly, rating 3 indicates minor strength whereas rating 4 shows major strength.
• It means that weakness must receive 1 or 2 rating while strength must get 3 or 4 rating.

4. Calculate weighted score by multiplying each factor’s score by its rating

5. Find the total weighted score of all the firms by adding the weighted scores for each variable.

For example: Competitive Profile Matrix for Dell Computer

The overall competitiveness of a firm can be evaluated on the basis of its overall strengths rating. If the difference between a firms’s overall rating and the score of lower-rated rivals is higher than the firm has greater net competitive advantage. On the other hand, if the difference between a firms’s overall rating and the scores of higher rated rivals is bigger than the firm has greater net competitive disadvantage.
In above example, CPM shows that the total weighted score of Dell is higher than Gateway and Apple which means that Dell enjoys the strongest competitive position. On the other hand, Apple has net competitive disadvantage because of its lower total weighted score than Dell and Gateway.

STAGE 2: MATCHING STAGE
Match between organization’s internal resources & skill and the opportunities & risk created by its external factors. It is consisting of 5 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 strength and weaknesses. Matching external and internal critical success factors is the key to effectively generating feasible alternative strategies.

1. THE STRENGTHS-WEAKNESSES-OPPORTUNITIES-THREATS MATRIX (SWOT Matrix)
• Gives sets of strategies by analyzing internal capacity of the company and external environment of the industry.
• Is composed of 9 cells. There are 4 key factor cells, 4 strategy cells and 1 cell that always left blank (the upper left cell).
• 4 key factor cells labeled S, W, O, T.
• It is an important matching tools that helps managers develop and constructing 4 types of strategies which are: SO, WO, ST and WT.
• Matching key external and internal factors is the most difficult part of developing a SWOT Matrix.
• There is no best set of matching external and internal factors due to which analysis becomes difficult to some extent.

• SO strategies

Firms use such strategies to grab the external opportunities by using the internal strengths. For example: a firm has a strong financial position but it is losing its market share; now with the help of strong financial position it can introduce innovative products by investing in research and development sector. Organizations always try to overcome major weaknesses and make them strengths. Similarly, organizations try to avoid threats and concentrate on opportunities.

• WO strategies
These strategies are used for the purpose of improving internal weaknesses by using external opportunities. It is possible that a firm has good external opportunity but can avail it due to internal weakness. For example, a firm may find an opportunity of increasing its production by introducing new technology but the firm may lack the skilled workers required for the production. In such case, possible WO strategies would be to hire and train people with the essential technical skills.

• ST strategies
Such strategies are used by the organization for the purpose of reducing the impact of external threats by using its internal strengths. For example: a firm with strong legal department (strength) can avoid external threats such as copying ideas, innovations and patented products. Similarly, an organization with strong line of quality products may face the threat of low priced products of rivals. In such case, the organization can apply ST strategy of mass production to reduce the unit cost of production.

• WT strategies
WT strategies are mainly used by those firms which are not in a good and stable position. Basically, these strategies are defensive because organizations try to reduce internal weaknesses while avoiding the external threats. For example, if an organization has weak financial position (weakness) and the demand for its products is reducing (threat) then the possible WT strategies would be retrench or merge.

There are 8 Steps involved in constructing SWOT Matrix:
1. Lit the firm key external opportunities
2. List the firm key external threats
3. List the firm key internal strengths
4. List the firm key internal weaknesses
5. Match internal strengths with external opportunities and record the resultant SO strategies in appropriate cell.
6. Match internal weaknesses with external opportunities and record the resultant WO strategies.
7. Match internal strength with external threats and record the resultant ST strategies.
8. Match internal weaknesses with external threats and record the resultant WT strategies.

Limitations of SWOT Matrix
1. SWOT Matrix does not reveal the steps which need to be followed in order to achieve competitive advantage. The matrix does not show how to implement the strategies successfully. (does not show how to achieve a competitive advantage)

2. Organizations always face challenging competitive environment. Due to continuous improvements, it becomes difficult for the organizations to reveal the dynamic of a competitive environment in a single matrix. (provide a static assessment in time)

3. TWOS matrix does not show interrelationships among the key internal and external factors. Organizations may emphasize a single internal or external factor in formulating strategies. Whereas, interrelationship among the factors also impact the strategies. (may lead the firm to overemphasize a single internal and external factor in formulating strategies)

For example:

For example: SWOT Matrix of Whirlpool


SWOT Matrix for Whirlpool is provided in the above figure contains 9 cells in which 4 are key factors cell, 4 strategy cells and 1 blank cell. First of all, the four key factor cells are completed which are labeled as: S, W, O, T then the 4 strategy cells will be constructed which are labeled as: SO, WO, ST and WT.
It is important to note that not all the strategies developed in the SWOT Matrix will be selected for implementation. The matrix only points out the possible strategies which can be implemented. It does not help in determining the best strategies for implementation. While constructing SWOT matrix, one should include S1, O2 type notation after each strategy because notation reveals the rationale for each alternative strategy.


2. STRATEGICC POSITION & ACTION EVALUATION MATRIX (SPACE Matrix)

• Refer to the strategic position and action evaluation matrix.
• Is an important strategic management tool used for the purpose of determining the type of a strategy a company should undertake.
• The top management of an organization could easily identify the most appropriate strategy for a given enterprise. It is 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 2 internal dimensions (financial position-FP and competitive position- CP) and 2 external dimensions (stability position-SP and industry position-IP)
• These 4 factors perhaps the most important determinants of an organization’s overall strategic position.
• Depending on the type of organization, numerous variables could make up each of the dimensions represented on the axes of the SPACE Matrix.
• Factors that were included earlier in the firms EFE and IFE matches should be considered in developing a SPCA Matrix.
• Other variables commonly such as ROI, leverage, liquidity, working capital and cash flows are commonly considered to be determining factors of an organizations financial strength.
• Like SWOT Matrix, the SPACE Matrix should be both tailored to the particular organization being studied and based on actual information as much as possible.

The steps required to develop a SPACE Matrix are as follows:
1. Select a set of variables to define financial position (FP), competitive position (CP), stability position (SP) and industry position (IP).

2. Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables that make up the FP and IP dimension. Assign a numerical value ranging from -1 (best) to -7 (worst) to each of the variables that make up the SP and CP dimensions. On the FP and CP axes, make comparison to competitors. On the IP and SP axes, makes comparison to other industries.


3. Compute an average score for FP, CP, IP and SP by summing the value given to the variables of each dimension and then by dividing by the number of variables included in the respective dimension.

4. Plot the average score for FP, IP, SP and CP on the appropriate axis in the space matrix.

5. Add the 2 scores on the x-axis and plot the resultant point on x. add the 2 scores on the y-axis and plot the resultant point on y. plot the intersection of the new xy point.

6. Draw a directional vector from the origin of the SPACE matrix through the new intersection point. This vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive or conservative.

For example: SPACE Matrix of Coca-Cola Company


Space matrix calculation
ES Average Score = -1.83 + Average FS Score (+5.00) = +3.17
Average CA Score + -1.50 + Average IS Score (+5.00) = +3.50

According to graph above, we noticed that the Coca-Cola Company falls into the aggressive quadrant of the SPACE Matrix. It is located at the quadrant of +3.5 for x-component and a y-component of 3.17. it shows that the company has an admirable position to use its IS in order to take advantage of external opportunities, overcome weaknesses and avoid threats. So, in this position, Coca-Cola Company has set of possible strategies such as market development, product development, market penetration, forward integration, backward integration, horizontal integration, horizontal diversification, concentric diversification and conglomerate diversification depending on detailed conditions that face the company.

3. BOSTON CONSULTING GROUP MATRIX (BCG Matrix)
• Are designed specifically to enhance a multidivisional firm’s effort to formulate strategies.
• 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.
• Autonomous divisions = business portfolio
• Divisions may compete in different industries
• Focus on relative market-share position & industry growth rate
• 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 (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 cow”, and those divisions located in Quadrant IV are called “Dogs”.

• Question Marks – Quadrant I

Products with low market share but in a growth market are classified as Question Marks. Due to the growth, these SBUs need plenty of cash to grasp their market share. If no measures are taken to increase the market share, it will soak up huge sum of cash in the short run and afterward, as growth slowdown, turn into a dog.

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 business 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
Products having high market share of growth market are known as star. These products/markets or SBUs are net consumer of cash because they always need huge investment to sustain market share and sponsorship rapid growth. When the product approaches to maturity phase, then the growth become low and its converted into cash cow.
Quadrant II businesses (stars) represent the organizations 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.

• Cash Cow – Quadrant III

Cash cows have high market share but low growth products or businesses. Their elevated earnings attached with their decline, signify superior cash inflows and they require very small amount of reinvestment. Therefore, they are the good source of cash to support the other products or SBUs. Extra cash inflows are used for R&D for the introduction of innovative and competitive products.

Divisions positioned in Quadrant III have a high relative market share position but compete in a low-growth industry. Called cash cow because they generate cash in excess of their needs, they are often milked. Many of today’s cash cow were yesterdays 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.


• Dogs – Quadrant IV
Dog has low market share and low growth product or SBU. It may produce sufficient cash to preserve themselves, but do not assure to be a big source of cash. Although dog does not require huge amount of cash but it holds considerable amount of cash which could be utilized somewhere else. Every organization must avoid and minimize the number of 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 construction of BCG Matrix requires a lot of information (actual facts and figures) therefore an example of hypothetical company is given blow:
Calculation of RMS and Industry Growth Rate


RMS = Revenue of the Hypothetical Company / Total revenue of the market leader in the industry
RMS = 200000 / 100000 = 2
On the other hand, industry growth rate is measured in terms of total sales. Each SBU has different industry growth rate due to difference in the industries.

Construction of BCG Matrix


4. THE INTERNAL-EXTERNAL MATRIX (IE Matrix)

The similarity between IE matrix & BCG Matrix
• The IE Matrix is similar to BCG Matrix in that both tools involve plotting organization divisions in a schematic diagram; this is way 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.
  The differences between IE matrix & BCG Matrix
• The axis are different.
• IE Matrix requires more information about the divisions than the BCG Matrix
• The strategic implications of each matrix are different.

 For these reasons, strategists in multidivisional firms often develop both the BCG Matrix and 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 strategist decisions on an organization’s portfolio of division’s.

The IE Matrix is based on 2 key dimensions:
1. The IFE total weighted scores on the x-axis
2. The EFE total weighted scores on the y-axis

The IE Matrix can be divided into 3 major regions that have strategy implications.
1. Grow and build – Cells I, II or IV
First, the prescription for divisions that fall into cell I, II or IV can be described as grow and build. Intensive (market penetration, market development and product development) or integrative (backward integration, forward integration and horizontal integration) strategies can be most appropriate for these divisions.


2. Hold and maintain – Cells III, V or VII
Second, divisions that fall into cells III, V or VII can be managed best with hold and maintain strategies: market penetration and product development are two commonly employed strategies for these types of divisions.


3. Harvest and divest – Cells VI, VII or IX
Third, a common prescription for divisions that fall into cells VI, VIII, or IX is harvest or divest. Successful organizations are able to achieve a portfolio of businesses positioned in or around cell I in the IE Matrix.


5. GRAND STRATEGY MATRIX (GSM)
• GSM is famous tools for alternative strategies in addition to SPACE Matrix, BCG Matrix, IE Matrix and SWOT Matrix.
• All the firms can fall in one of the GSM’s four strategy quadrants.
• GSM evaluation is based on 2 dimensions i.e. market growth and competitive position.
• Each quadrant provides the set of possible strategies in which company falls such as quadrant 2 contains market development, market penetration, product development, horizontal integration, divestiture and liquidation strategies.
• Quadrant 3 contains the set of retrenchment, related diversification, divestiture, unrelated diversification and liquidation strategies.
• Quadrant 4 contains the set of diversification, joint venture and unrelated diversification strategies.


 Quadrant I
Companies positioned in this quadrant have very strong strategic management position. These firms focus on their established competitive advantage (CA) and take advantage of it’s as long as it allows them. These companies must concentrate on the existing market by adopting the set of product development, market development and market penetration strategies. Organizations that falls in quadrant I have focus on a single product and can go for related diversification strategy to minimize the risk related to limited product line. If these organizations have higher resources they can go for horizontal, backward and forward set of strategies. These firms can take risks being an aggressive and can afford to obtain advantage of opportunities in numerous ways.

Firms located in quadrant I of the GSM are in an excellent strategic position. For these firms, continued concentration on current markets and product, it is unwise for a quadrant I firm to shift notably from its established competitive advantages. When quadrant I organization has excessive resources, then backward, forward or horizontal integration may be effective strategies. When quadrant I firm is too heavily committed to a single product, then related diversification may reduce the risk 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. (Textbooks)

 Quadrant II

Firms laying in this quadrant have the rapid growing industry but cannot fight competently. They must evaluate their existing approach in the market place, need to know why they are in effective in the market and must come up with a strategy as a first strategic option. If companies do not have competitive advantage, horizontal integration is more advantageous option. Last but not the least option is the liquidation which provides fund needed for other Strategic Business Unit (SBU) or to acquire other businesses.

Firms positioned in quadrant II need to evaluate their present approach to the market place 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 firm 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. (Textbooks)


 Quadrant III

All those firms fall in this quadrant have slow growth market and have relatively weak position. Firms have to make noticeable modifications to sustain their position. Retrenchment strategy has priority in this quadrant followed by diversification to transfer resource to another growing business. Last strategic option available for the firms positioned in this quadrant is liquidation and divestiture of the business.

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 business are divestiture or liquidation. (Textbooks)

 Quadrant IV

Companies competing in this quadrant have slow growth industry but have a strong competitive position. These firms can diversify into different untapped businesses by utilizing their existing resource. These firms face restricted internal growth and have high cash flow intensity which allows them to practice related and unrelated diversifications effectively. Finally, these firms can go for joint ventures to fulfill their internal growth needs.

Finally, quadrant IV businesses have a strong competitive position but are in a slow growth 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.



For example:  Grand Strategy Matrix of Coca-Cola Company

As figure identify that Coca-Cola Company comes in the 1st quadrant. The company management must focus on current market and achieved growth by adopting product development, market development and market penetration strategies.
The company has abundant resources and competitive advantage through which it can achieve growth by adopting the backward and forward integration strategies. Coca-Cola Company can also adopt the related diversification strategy to reduce its risk with broad portfolio or product line. Coca-Cola can afford to take benefit of external opportunities in many areas. It can also take risks being aggressive when necessary.


STAGE 3: DECISION STAGE
Analysis and intuition provide a basis for making strategy formulation decisions. The matching techniques 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. Participant could rate these strategies on a 1 to 4 scale so that a prioritized list of the best strategies could be achieved.

THE QUANTITATIVE STRATEGIC PLANNING MATRIX (QSPM)
• Technique designed to determine the relative attractiveness of feasible alternative actions.
Six steps required to develop a QSPM:
1. Make list of the firm’s key external opportunities/ threats and internal strengths/weaknesses in the left column of the QSPM.
• This information should be taken directly from the EFE Matrix and IFE Matrix. A minimum of 10 external key success factors should be included in QSPM.

2. Assign weights to each key external and internal factor.
• These weights are identical to those in the EFE Matrix and IFE Matrix. The weights are presented in a straight column just to the right of the external and internal critical success factors.

3. Examine the stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing.
• Record these strategies in the top row of the QSPM. Group the strategies into mutually exclusive sets if possible.

4. Determine the Attractiveness Scores (AS)
• Defined as numerical values that indicate the relative attractiveness of each strategy in agiven set of alternative.
• Attractiveness Scores (AS) are determined by examining each key external or internal factor, one at a time, and asking the question “Does this factor affect the choice of strategies being made?”
• If the answer to this question is yes, then the strategies should be compared relative to that key factor. Specifically, Attractiveness Scores should be assigned to each strategy to indicate the relative attractiveness of one strategy over others, considering the particular factor. The range for Attractiveness Score is 1= not attractive, 2=somewhat attractive, 3=reasonably attractive and 4=highly attractive. By attractive, we mean the extent that one strategy, compared to others, enables the firm to either capitalize on the strength, improve on the weakness, exploit the opportunity, or avoid the threat. Work row by row in developing a QSPM.
• If the answer to the previous question is no, indicating that the respective key factor has no effect upon the specific choice beinmade, then do not assign Attractiveness Scores to the strategies in that set. Use a dash to indicate that they key factor does not affect the choice being made. Note: if you assign an AS score to one strategy, then assign AS scores to the other. In the other words, if one strategy receives a dash, then all others must receive a dash in a given row.

5. Compute the Total Attractiveness Scores
• Total Attractiveness Scores (TAS) are defined as the product of multiplying the weights (step 2) by the Attractiveness Scores (step 4) in each row.
• The Total Attractiveness Scores indicate the relative attractiveness of each alternative strategy, considering only the impact of the adjacent external or internal critical success factor.
• The higher the Total Attractiveness Score, the more attractive the strategic alternative (considering only the adjacent critical success factor).

6. Compute the sum Total Attractiveness Score
• Add Total Attractiveness Scores in each strategy column of the QSPM.
• The sums Total Attractiveness Scores (STAS) reveal which strategy is most attractive in each set of alternative.
• Higher scores indicate more attractive strategies, considering all the relevant external and internal factors that could be affect the strategic decisions.
• The magnitude of the difference between the sum Total Attractiveness Scores in the given set of strategic alternative indicates the relative desirability of one strategy over another.


Advantages of QSPM
1. Sets of strategies considered simultaneously or sequentially
• E.g : corporate level strategies could be evaluated first, followed by division level strategies and then functional level strategies. There is no limit to the number of strategies that can be evaluated or number of sets of strategies that can be examined at once using QSPM.

2. Integration of pertinent external & internal factors in the decision making process.
• Developing a QSPM makes it less likely that key factors will be overlooked or weighted inappropriately.
• A QSPM draws attention to important relationship that affects strategy decisions.
• Although developing QSPM requires a number of subjective decisions, making small decisions along the way enhances the profitability that the final strategic decisions will be best for the organization.
• A QSPM can especially enhance strategic choice in multinational firms because many key factors and strategies can be considered at once. It also has been applied successfully by a number of small businesses.

Limitations of QSPM
1. Requires intuitive judgments and educated assumptions
• It always requires intuitive judgments and educated assumptions. The ratings and attractiveness scores require judgmental decisions, even though they should be based on objective information. Discussion among strategists, managers, and employees throughout the strategy formulation process, including development of a QSPM, is constructive and improve strategic decisions. Constructive discussion during strategy analysis and choice may arise because of genuine differences of interpretation of information and varying opinions.

2. Only as good as the prerequisite inputs.
• It can be only as good as the prerequisite information and matching analyses upon which it is based.