STRATEGY

FORMULATION
BY GROUP 2

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 PORTERS FIVE By: Arah Abigail
Balgos

FORCES MODEL
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 INDUSTRY ANALYSIS
Porters Model of Industry Competition,
commonly known as Porters Five Forces

Porters Model provides a framework for

analyzing the influence of the forces on
the industry to determine the industrys
profitability and competitiveness.

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PORTERS FIVE FORCES
MODEL
Porter's Five Forces model is made up by
identification of 5 fundamental competitive
forces:
1.Barriers of New Entrants.
2.Threat of substitutes.
3.Bargaining power of buyers.
4.Bargaining power of suppliers.
5.Rivalry among existing firms.

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PORTERS FIVE-FORCES MODEL OF
COMPETITION

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1. THREAT OF NEW
ENTRANTS
Fundamental question: how easy is it
for another company to enter the
industry?
Factors making easy entry to
industry:
Low economies of scale.
Low product differentiation.
Low capital requirements.
No switching costs for buyer.
Easy access to distribution channels.
Little government regulation.
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1. THREAT OF NEW
ENTRANTS
Factors making difficult entry to
industry (Barriers to entry)
Need to gain economies of scale quickly.
Lack of experience.
Strong customer loyalty.
Strong brand preferences.
Large capital requirements.
Lack of access to raw materials.
Government policies and taxation.
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2. SUPPLIER POWER
Fundamental question: how badly
does a supplier need your business?
Factors giving power to supplier:
Supplier industry dominated by few firms.
Buyer is not important to customer.
Suppliers product is important input to
buyers product.
Suppliers products have high switching
costs.
Supplier can integrate forward and
become competitor of buyer.
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 3. THREAT OF
SUBSTITUTES
Fundamental question: what other
products or services could perform the
same function as your products or
services?
Factors indicating high threat of
substitutes:
Few switching costs for buyer.
Price of substitute lower or quality higher
than for your products.
Firms offering substitutes have high
profitability.
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4. BUYER POWER
Fundamental questions: How badly does
a buyer need your products or services?
Factors contributing to high buyer
power:
Few buyers compared to the number of
sellers.
Buyers purchases high relative to sellers
sales.
Products are undifferentiated.
Buyer has low switching costs.
Buyer has low profits.
Buyer can integrate backward and supply
the product to itself.
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5. COMPETITIVE
RIVALRY
Fundamental question: how intense is
competition in the industry?
Factors leading to high competitive
rivalry:
Numerous or equally balanced competitors.
High fixed costs.
Slow industry growth.
Lack of differentiation or switching costs.
High strategic stakes.
High exit barriers.

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MATRIX
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 Comprehensive Strategy-
Formulation Framework
Stage 1:
The Input Stage

Stage 2: Stage 3:
The Matching Stage The Decision Stage

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Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)

Stage 1: Competitive Profile Matrix

The Input Stage (CPM)

External Factor Evaluation

Matrix (EFE)

Note: EFE and CPM form external and IFE from

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internal (assessment)
A COMPREHENSIVE STRATEGY-
FORMULATION FRAMEWORK

Stage 1 - Input Stage:

Summarizes the basic input
information needed to formulate
strategies.
Consists of the EFE Matrix, the IFE
Matrix, and the Competitive Profile
Matrix (CPM).
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 INTERNAL
FACTOR
EVALUATION (IFE) 16
INTERNAL FACTOR
EVALUATION MATRIX

Summaries internal strength and

weaknesses within the functional
areas of the business.
Identifies and evaluates cross-
functional relationships; e.g.
marketing and finance.

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 INTERNAL FACTOR
EVALUATION (IFE)
List key internal factors as identified in
the internal-audit process. Use a total
from ten to twenty internal factors
including both strengths and weaknesses.
Assign a weight ranging from 0 (not
important) to 1.0 (very important). The
weight indicates the relative importance
of the factor to being successful in the
firms industry. The sum of all the
weights must equal 1.0.
Assign a 1-4 rating to each factor to
indicate whether that factor represents a
major weakness (1), minor weakness (2),
minor strength (3), or major strength (4).
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 INTERNAL FACTOR
EVALUATION (IFE)
Multiply each factors weight by its
rating to determine a weighted score
for each variable.
Sum the weighted scores for each
variable to determine the total
weighted score for the organization.
Total weighted scores of below 2.5
indicate an internally weak
organization.

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SAMPLE INTERNAL
EVALUATION MATRIX

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SAMPLE INTERNAL
EVALUATION MATRIX

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 EXTERNAL
FACTOR
EVALUATION 22
INDUSTRY ANALYSIS:
THE EXTERNAL FACTOR
EVALUATION (EFE)
MATRIX
Economic Political
Social Governmental
Cultural Technological
Demographic Competitive
Environmental Legal

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EFE MATRIX STEPS

1. List key external factors

2. Weight from 0 to 1
3. Rate effectiveness of current
strategies
4. Multiply weight * rating
5. Sum weighted scores

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EFE MATRIX SAMPLE

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 Competitive Profile Matrix
(CPM)
Competitive Profile Matrix
(CPM):
Identifies firms major

competitors and their strengths

and weaknesses in relation to a
design firms strategic
positions. 6 -26
Sample CPM

Gateway Apple Dell

CSFs Wt Rating Wtd
Score
Ratin
g
Wtd
Score
Rating Wtd
Score

Market share 0.15 3 0.45 2 0.30 4 0.60

Inventory sys 0.08 2 0.16 2 0.16 4 0.32
Fin position 0.10 2 0.20 3 0.30 3 0.30
Prod. Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distr 0.10 3 0.30 2 0.20 3 0.30
Global Exp. 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
Sample CPM

Gateway Apple Dell

CSFs (contd) Wt Rating Wtd
Score
Ratin
g
Wtd
Score
Rating Wtd
Score
Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12
E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Serv 0.10 3 0.30 2 0.20 4 0.40
Price
0.02 4 0.08 1 0.02 3 0.06
competitive
Mgt. 0.01 2 0.02 4 0.04 2 0.02
experience

Total 1.00 2.83 2.47 3.49

 A COMPREHENSIVE
STRATEGY-
FORMULATION
FRAMEWORK
Stage 2 - Matching Stage:
Focuses on generating possible alternative
strategies by Matching key external and
internal factors.
Techniques include :
TOWS Matrix, the Strategic Position and
Action Evaluation (SPACE) Matrix, the
Boston Consulting Group (BCG) Matrix, the
Internal-External (IE) Matrix, and the
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Stage 2 :The Matching Stage

TOWS Matrix

SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix

IE Matrix

Grand Strategy
30 Matrix
 STAGE 2 :THE
MATCHING STAGE
1. TOWS Matrix: Threats Opportunities
Weakness and Strengths.
helps managers to develop four
types of strategies:
SO (strengths-opportunities) Strategies.
WO (weaknesses-opportunities) Strategies.
ST (strengths-threats) Strategies.
WT (weaknesses-threats) Strategies.

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 TOWS MATRIX
SO Strategies WO Strategies
use a firms aim at improving
internal strengths internal weaknesses
to take advantage by taking advantage
of external of external
opportunities. opportunities.

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TOWS MATRIX
ST WT
Strategies Strategies
use a firms defensive tactics
strengths to directed at
avoid or reduce reducing internal
the impact of weakness and
external threats. avoiding external
threats.

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TOWS MATRIX
Weaknesses W Strengths S
TOWS List Weaknesses List Strengths

Opportunities WO Strategies
SO Strategies
O Match and
Match and determine
determine strategy
List Opportunities strategy

Threats T WT Strategies ST Strategies

Match and Match and
List Threats determine determine
strategy strategy
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 TOWS MATRIX
Weaknesses W Strengths S
TOWS List Strengths
List Weaknesses

Opportunities O WO Strategies SO Strategies

Overcoming Use strengths to

List Opportunities weaknesses by take advantage of
taking advantage of opportunities
opportunities

Threats T WT Strategies ST Strategies

Minimize Use strengths to

List Threats weaknesses and avoid threats
avoid threats 35
TOWS Matrix
Key Internal Key External Result
Factor Factor
20% annual Strategy
Great working
growth in the Acquire Cellphone,
capacity + =
cell phone Inc.
(strength) industry
(opportunity)
Exit of two major Pursue horizontal
Insufficient
foreign integration by
capacity + =
competitors buying competitor's
(weakness) from the facilities
industry
Decreasing Develop new
Strong R&D (opportunity)
+ numbers of = products for older
(strength) young adults adults
Poor employee (threat) Develop a new
+ Strong union = employee benefits
morale activity (threat)
(weakness) package
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A SWOT MATRIX FOR A RETAIL
COMPUTER STORE

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THE SPACE MATRIX

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THE STRATEGIC
POSITION AND ACTION
EVALUATION (SPACE)
MATRIX
Strategic Position and
Action Evaluation (SPACE)
Matrix
four-quadrant framework indicates
whether aggressive, conservative,
defensive, or competitive strategies
are most appropriate for a given
organization

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THE STRATEGIC
POSITION AND ACTION
EVALUATION (SPACE)
MATRIX
Two internal dimensions
(financial position [FP] and
competitive position [CP])
Two external dimensions
(stability position [SP] and
industry position [IP])
Most important determinants of an
organizations overall strategic
position
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FACTORS THAT MAKE UP
THE SPACE MATRIX AXES

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STEPS TO DEVELOP A
SPACE MATRIX

1. Select a set of variables to

define financial position (FP),
competitive position (CP),
stability position (SP), and
industry position (IP)

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STEPS TO DEVELOP A
SPACE MATRIX

2. Assign a numerical value

ranging from +1 (worst) to +7
(best) to each of the variables
that make up the FP and IP
dimensions. Assign a numerical
value ranging from 1 (best) to
7 (worst) to each of the
variables that make up the SP
and CP dimensions

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STEPS TO DEVELOP A
SPACE MATRIX

3. Compute an average score for FP, CP,

IP, and SP
4. Plot the average scores for FP, IP,
SP, and CP on the appropriate axis
in the SPACE Matrix
5. Add the two scores on the x-axis and
plot the resultant point on X. Add
the two scores on the y-axis and
plot the resultant point on Y. Plot
the intersection of the new xy point

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STEPS TO DEVELOP A
SPACE MATRIX

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

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EXAMPLE STRATEGY
PROFILES

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EXAMPLE STRATEGY
PROFILES

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THE BOSTON CONSULTING
GROUP (BCG) MATRIX
2.BCG Matrix :
Graphically shows differences among
divisions in terms of relative market share
position and industry growth rate.
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.

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THE BCG MATRIX

In the BCG approach, each of the

firms strategic business units (SBUs)
is plotted on a two-dimensional grid
in which the axes are relative market
share and industry growth rate.
Relative market share is measured by
the ratio of the business units size
to that of its largest competitor.
Growth rate is estimated from market
data.

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THE BCG MATRIX
Each circle
represents one
of the firms
business units.
The size of the
circle
represents the
relative size of
the business
unit in terms of
revenue.

The Boston Consulting Group (BCG) Portfolio Matrix

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BCG MATRIX

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THE BCG MATRIX

The four quadrants of the grid include :

stars: firms with long-term growth
potential that should continue to
receive substantial investment funding.
High Market shares in high-growth
industries;
question marks: SBUs operating in high-
growth industries with relatively weak
or low market shares where resources
should be invested in them to enhance
their competitive positions;
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THE BCG MATRIX

cash cows: SBUs with high market

shares in low-growth industries that
have limited long-run potential but
represent a source of current cash
flows to fund investments in stars
and question marks;
dogs: SBUs with weak positions and
limited potential - most analysts
recommend that they be divested; low
market share in weak or low-growth
industries.
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SAMPLE OF BCG MATRIX
FOR GOOGLE
 BCG MATRIX
High Market Share Position Low

High Stars II
Question Marks I
Industry Growth

High market
share Low market share
High growth high-growth
Industry industry
Cash Cows III
High market Dogs IV
share Low market share
low-growth low-growth
Low industry industry
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 BCG Matrix

1. Stars:
High relative market share and high
growth rate.
Best long-run opportunities for growth &
profitability.
Large investment to maintain or
strengthen leading position.
Integration strategies, intensive
strategies, joint ventures. 56
 BCG Matrix recap

2. Question Marks:
Low relative market share compete
in high-growth industry.
Cash needs are high.
Cash generation is low.
Decision to strengthen (intensive
strategies) or divest.

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 BCG Matrix

3. Cash Cows:
High relative market share, competes
in low-growth industry.
Generate cash in excess of their needs.
Milked for other purposes.
Maintain strong position as long as
possible.
Product development, concentric
diversification. 58
 BCG Matrix

4. Dogs:
Low relative market share
compete in slow or no growth
industry.
Weak internal and external
position.
Liquidation, divestiture,
retrenchment. 59
THE BCG MATRIX

The major benefit of the BCG

Matrix is that it draws attention
to the cash flow, investment
characteristics, and needs of an
organizations various divisions.

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THE INTERNAL-
EXTERNAL (IE) MATRIX

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THE INTERNAL-
EXTERNAL (IE) MATRIX

The IE Matrix is based on two key

dimensions: the IFE total
weighted scores on the x-axis and
the EFE total weighted scores on
the y-axis
Three major regions
Grow and build
Hold and maintain
Harvest or divest

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THE IE MATRIX

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 Grand Strategy Matrix

Tool for formulating alternative

strategies
Based on two dimensions
1. Competitive position
2. Market growth

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 Rapid Market Growth
Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product 3. Product development
development 4. Forward integration
4. Horizontal 5. Backward integration
Weak integration 6. Horizontal Strong
ompetitive
5. Divestiture integration Competitive
Position6. Quadrant III
Liquidation Position
1. Retrenchment
Quadrant IV
2. Concentric 1. Concentric
diversification diversification
3. Horizontal 2. Horizontal
diversification diversification
4. Conglomerate 3. Conglomerate
diversification diversification
Slow Market Growth 65
5. Liquidation 4. Joint ventures
 Grand Strategy Matrix

Quadrant I
Excellent strategic position
Concentration on current
markets/products
Take risks aggressively when
necessary
Which type of strategy would
you suggest? 66
 Grand Strategy Matrix

Quadrant II
Evaluate present approach
How to improve competitiveness
Rapid market growth requires
intensive strategy

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 Grand Strategy Matrix

Quadrant III
Compete in slow-growth industries
Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)

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 Grand Strategy Matrix

Quadrant IV
Strong competitive position
Slow-growth industry
Diversification to more promising
growth areas

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Strategy-Formulation Analytical
Framework

Quantitative Strategic
Stage 3: Planning Matrix
The Decision Stage (QSPM)

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 A COMPREHENSIVE STRATEGY-
FORMULATION FRAMEWORK

Stage 3 - Decision Stage:

Involves the Quantitative Strategic Planning
Matrix (QSPM).
Discloses the relative attractiveness of alternative
strategies and thus provides objective basis for
selecting specific strategies.

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THE QUANTITATIVE
STRATEGIC PLANNING
MATRIX (QSPM)

Quantitative Strategic Planning Matrix (QSPM):

Objectively indicates which alternative strategies are best.

Uses input from Stage 1 analyses and matching results

from Stage 2 analyses to decide objectively among
alternative strategies.

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 STEPS TO DEVELOP A QSPM

1. Make a list of the firms key external

opportunities/threats and internal
strengths/weaknesses in the left column.
2. Assign weights to each key external and
internal factor.
3. Examine the Stage 2 (matching) matrices,
and identify alternative strategies that
the organization should consider
implementing.
4. Determine the Attractiveness Scores (A.S)
5. Compare the Total Attractiveness Scores.
6. Compute the Sum Total Attractiveness Score.
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 POSITIVE FEATURES OF
THE QSPM
Sets of strategies can be examined
sequentially or simultaneously.
Requires strategists to integrate
pertinent external and internal
factors into the decision process.
Can be adapted for use by small and
large for-profit and nonprofit
organizations.

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THANK YOU FOR
LISTENING!
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