The Matching Stage and Decision Stage
STAGE 2: The Matching Stage
The matching stage of the strategy-formulation framework consists of five techniques that
can be used in any sequence: the SWOT Matrix, the SPACE Matrix, the BCG Matrix, the
IE Matrix, Grand Strategy Matrix, and the Balance Scoreboard.
These tools rely on information derived from the input stage to match external
opportunities and threats with internal strengths and weaknesses.
1. SWOT MATRIX – is an important matching tool that helps managers develop four
types of strategies: SO strategies, WO strategies, ST strategies, and WT
strategies.
● Strengths–Opportunities (SO)
- Use of internal strengths to take advantage of opportunities.
● Strengths–Threats (ST)
- Use of internal strengths to avoid or minimize the impact of threats.
● Weaknesses–Opportunities (WO)
- Overcoming internal weaknesses by taking advantage of external
opportunities.
● Weaknesses–Threats (WT)
- Overcoming internal weaknesses and avoiding/minimizing external
threats.
2. Internal - External Factor Evaluation 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.
● Three Strategies under Internal - External Evaluation Matrix
The IE matrix can be divided into three major regions that have different strategy
implications.
Cells I, II, and III suggest the grow and build strategy. This means intensive and
aggressive tactical strategies. Your strategies should focus on market penetration,
market development, and product development. From the operational perspective,
a backward integration, forward integration, and horizontal integration should also
be considered.
Cells IV, V, and VI suggest the hold and maintain strategy. In this case, your
tactical strategies should focus on market penetration and product development.
Cells VII, VIII, and IX are characterized with the harvest or exit strategy. If costs
for rejuvenating the business are low, then it should be attempted to revitalize the
business. In other cases, aggressive cost management is a way to play the end
game.
● Construction of the I-E Matrix
The IE matrix is based on the following two criteria:
1. Score from the EFE matrix -- this score is plotted on the y-axis
2. 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. A score of 2.0 to 2.99 is considered average. A score of 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.
There are certain steps that should be followed to prepare an internal external
matrix. These steps are described below:
01: There are two key dimensions which provide the basis of the IE matrix. These
dimensions are the EFE matrix & IFE matrix because all the input data is obtained
from these two matrices to proceed to the IE matrix.
02: The total weighted score of the IFE matrix is plotted on the x-axis while on the
y-axis the total weighted score of the EFE matrix is plotted.
03: The x-axis portion of the IE matrix includes the total weighted score of the IFE
matrix. The total weighted score from 1.0 to 1.99 indicates that the internal position
of the organization is weaker. The total weighted score of 2.0 to 2.99 represents
that the internal position of the organization is average. While the total weighted
score of 3.0 to 4.0 indicates that the internal position of the organization is stronger
enough.
04: The y-axis portion of the IE matrix includes the total weighted score of the EFE
matrix. The total weighted score of 1.0 to 1.99 represents the low level. The
medium range is represented by the score 2.0 to 2.99. While the total weighted
score of 3.0 to 4.0 is regarded as high.
05: There are three main regions of the IE matrix, and each region indicates
different actions to be taken. These three regions are as follows.
1. Grow & Build Region, which is specified through I, II & IV cells of the IE
matrix
2. Hold & Maintain Region, which is covered by the III, V or VII cells of the IF
matrix
3. Harvest or divest region, which is covered through the VI, VIII or IX cells of
the IE matrix
3. SPACE Matrix (Strategic Position & ACtion Evaluation) – a strategic management
tool that focuses on strategy formulation especially as related to the competitive
position of an organization.
● Four (4) clusters of Space Matrix
1. Aggressive strategy
The aggressive strategy is located between financial strength
and industry attractiveness. This is a stable organization that actively
chooses to compete with similar businesses.
The following actions would be potential options for a
company in this position:
❖ Focus on products that can really compete with other
businesses
❖ A focused marketing campaign to gain a larger market share
❖ Focus on offering the lowest price compared to competitors
❖ Look for potential companies to take over and increase the
market share
2. Conservative strategy
The conservative strategy is located between the company’s
financial strength and the competitive advantage. This is usually a
stable organization, with low growth.
The following actions would be potential options for a
company in this position:
❖ Focus on existing successful products and cherish these
❖ Also leave room to develop new products
❖ Potential product penetration through expansion
3. Defensive strategy
The Defensive strategy of the SPACE Analysis is located
between environmental stability and competitive advantage. These
are businesses that are being pushed out by the competition. If they
don’t take action, chances are they won’t make it.
The following actions would be potential options for a
company in this position:
❖ Reduce costs to realize a stronger competitive position
❖ Reduce investments and manufacture at low cost
❖ Focus on core business and sell off ancillary activities
4. Competitive strategy
The competitive strategy of the SPACE Analysis is located
between industry attractiveness and environmental stability. These
are companies that are competitive but not stable.
The following actions would be potential options for a
company in this position:
❖ Look for partnership opportunities with stable companies
❖ Increase productivity to make supply more reliable
❖ In addition to the core business, seek other products to boost
sale
● Construction of the Space Matrix
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 a 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 the 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.
4. BCG Matrix (Boston Consulting Group) – Is a business tool, which uses relative
market share and industry growth rate factors to evaluate the potential of a
business brand portfolio and suggest further investment strategies.
● BCG Matrix Template
There are four quadrants into which firms’ brands are classified:
Stars. Stars operate in high growth industries and maintain high market share.
Stars are both cash generators and cash users. They are the primary units in which
the company should invest its money because stars are expected to become cash
cows and generate positive cash flows. Yet not all stars become cash flows. This
is especially true in rapidly changing industries, where new innovative products
can soon be outcompeted by new technological advancements, so a star instead
of becoming a cash cow, becomes a dog.
Strategic choices: Vertical integration, horizontal integration, market penetration,
market development, product development
Cash cows are the most profitable brands and should be “milked” to provide as
much cash as possible. The cash gained from “cows” should be invested into stars
to support their further growth. According to the growth-share matrix, corporates
should not invest into cash cows to induce growth but only to support them so they
can maintain their current market share. Again, this is not always the truth. Cash
cows are usually large corporations or SBUs that can innovate new products or
processes, which may become new stars. If there would be no support for cash
cows, they would not be capable of such innovations.
Strategic choices: Product development, diversification, divestiture, retrenchment
Question marks. Question marks are the brands that require much closer
consideration. They hold low market share in fast growing markets consuming
large amounts of cash and incurring losses. It has potential to gain market share
and become a star, which would later become a cash cow. Question marks do not
always succeed and even after large amounts of investments they struggle to gain
market share and eventually become dogs. Therefore, they require very close
consideration to decide if they are worth investing in or not.
Strategic choices: Market penetration, market development, product development,
divestiture
Dogs. Dogs hold low market share compared to competitors and operate in a
slowly growing market. In general, they are not worth investing in because they
generate low or negative cash returns. But this is not always the truth. Some dogs
may be profitable for a long period of time, they may provide synergies for other
brands or SBUs or simply act as a defense to counter competitors' moves.
Therefore, it is always important to perform deeper analysis of each brand or SBU
to make sure they are not worth investing in or must be divested.
Strategic choices: Retrenchment, divestiture, liquidation
● Construction of the BCG Matrix
BCG analysis can be a useful tool if performed by following these steps:
Step 1. Choose the unit.
BCG matrix can be used to analyze SBUs, separate brands, products, or a firm as
a unit itself. Which unit will be chosen will have an impact on the whole analysis.
Therefore, it is essential to define the unit for which you’ll do the analysis.
Step 2. Define the market.
Defining the market is one of the most important things to do in this analysis. This
is because an incorrectly defined market may lead to poor classification. For
example, if we would do the analysis for the Daimler’s Mercedes-Benz car brand
in the passenger vehicle market it would end up as a dog (it holds less than 20%
relative market share), but it would be a cash cow in the luxury car market. It is
important to clearly define the market to better understand a firm's portfolio
position.
Step 3. Calculate relative market share.
Relative market share can be calculated in terms of revenues or market share. It
is calculated by dividing your own brand’s market share (revenues) by the market
share (or revenues) of your largest competitor in that industry.
Step 4. Find out market growth rate.
The industry growth rate can be found in industry reports, which are usually
available online for free. It can also be calculated by looking at average revenue
growth of the leading industry firms. Market growth rate is measured in percentage
terms. The midpoint of the y-axis is usually set at 10% growth rate, but this can
vary. Some industries grow for years but at an average rate of 1 or 2% per year.
Therefore, when doing the analysis, you should find out what growth rate is seen
as significant (midpoint) to separate cash cows from stars and question marks from
dogs.
Step 5. Draw the circles on a matrix.
After calculating all the measures, you should be able to plot your brands on the
matrix. You should do this by drawing a circle for each brand. The size of the circle
should correspond to the proportion of business revenue generated by that brand.
5. 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.
● Four (4) Essential elements of Grand Strategy Matrix
The Grand Strategy Matrix is based on two dimensions: competitive position and market
growth.
Quadrant I (Strong Competitive Position and Rapid Market Growth) – Firms
located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic
position. The first quadrant refers to the firms or divisions with a 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 the 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, and they need to determine why the firm’s current approach
is ineffectual and how the company can best change to improve its
competitiveness. The suitable strategies for such firms are to develop the
products, markets, and to penetrate the markets. Because Quadrant II firms are in
a rapid-market-growth industry, an intensive strategy (as opposed to integration 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.
Quadrant III (Weak Competitive Position and Slow Market Growth) – The firms
that 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
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.
6. Balance Scoreboard – derives its name from the perceived need of firms to
“balance” financial measures that are oftentimes used exclusively in strategy
evaluation and control with nonfinancial measures such as product quality and
customer service.
● Four (4) measures of Balance Scorecard
1. Learning and growth Perspective
The business environment is incredibly dynamic, and in order
to survive, you’ll need to grow and improve, and the organization
must continually evolve. Management must focus on ways to grow
the organization in order to achieve strategic goals such as
increasing market share. The learning and growth measurements
are a way to evaluate how employees and management collaborate
to build the firm and assist employees grow within it. The amount of
employee recommendations that are adopted, turnover rates, hours
of employee training, scope of process improvements, and quantity
of new products are all examples of measures in this category.
Learning and growth perspective evaluate how well a company
grows by innovating and creating value.
2. Internal Business Perspective
This requires that the organization monitor its internal
operations and evaluate them to ensure they are meeting the
strategic goals of the organization. Organization will be by
investigating how well products are manufactured. Operational
management is analyzed to track any gaps, delays, bottlenecks,
shortages, or waste. There are many variables that could be used as
internal business measures, including number of defects produced,
machine downtime, transaction efficiency, and number of products
completed per day per employee, or more refined measures. Internal
business perspective measures how the organization assesses
management's operational objectives, such as quality control or on-
time production.
3. Customer Perspective
Customers or clients are essential to every organization;
without them, it would cease to exist. As a result, it is critical for an
organization to assess how well it is performing in terms of
customers. Customer satisfaction, number of repeat customers,
number of new customers, number of new customers via customer
referrals, and market share are examples of common factors that
could be measured. It evaluates how the customer perceives the
business and how the business interacts with customers.
4. Financial Perspective
The financial perspective part of a balanced scorecard retains
the types of metrics that have been set by companies to evaluate
performance. The particular metric used in the scorecard will vary
depending on the type of company involved, who is being evaluated,
and what is being measured. The type of financial measures used
should capture the components of the decision-making tasks of the
person being evaluated. Financial perspective measures are usually
traditional measures, based on financial statement information such
as Return on Investment and Earnings per share.
STAGE 3: Decision Stage
Stage three, called the decision stage, involves a single technique, the Quantitative
Strategic Planning Matrix (QSPM). A QSPM uses input information from stage one to
objectively evaluate feasible strategies identified in stage two.
Quantitative Strategic Planning Matrix (QSPM) – is a high-level strategic management
approach for evaluating possible strategies. Quantitative Strategic Planning Matrix or a
QSPM provides an analytical method for comparing feasible alternative actions. The
QSPM method falls within so-called stage 3 of the strategy formulation analytical
framework.
● Construction of the QSPM
Step 1: To begin the process of constructing a QSPM, you will first develop a list
of your organization's key internal strengths/weaknesses and external
opportunities/threats on the left side. The EFE Matrix and IFE Matrix should be
used to get this information. (Left Column)
Step 2: Second step will be the assigning of Weights to each key internal and
external factors. These weights are the same as those in the EFE and IFE
Matrixes. You must assign a weight to each of the factors you include in your
matrix. The relevance of each factor will be determined by its weight. (Right Side
of Key Factors)
Step 3: Third step will be the outlining of Strategy Alternatives that you considered
that will be implemented. All the strategies you've considered should be listed at
the top of the QSPM.
Step 4: Fourth step is Determining the Attractiveness Scores. These are numerical
values that indicate the relative attractiveness of each strategy in each set of
alternatives. Attractiveness Scores are determined by examining each key
external or internal factor, one at a time. Attractiveness Scores should be assigned
to each strategy to indicate the relative attractiveness of one strategy over others,
considering the particular factor. These scores will be on a scale from 1 to 4, where
1 is not attractive and 4 is most attractive.
Step 5: Fifth step is the computation of the Total Attractiveness Scores. The
product of multiplying the weights (Step 2) by the Attractiveness Scores (Step 4)
in each row gives the total Attractiveness Scores. 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).
Step 6: The Final step is the Computation of all the Sum Total Attractiveness
Score. In this step you will add all the Total Attractiveness Scores in each strategy
column of the QSPM. The Sum Total Attractiveness Scores reveal which strategy
is most attractive in each set of alternatives. Higher scores implies that the
strategies are more attractive, considering all the relevant external and internal
factors that could affect the strategic decisions. The magnitude of the difference
between the Sum Total Attractiveness Scores in each set of strategic alternatives
indicates the relative desirability of one strategy over another.
Example of a QSPM
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