The analysis and selection of strategies aims to determine the alternative courses of action that will allow the company to best achieve its mission and objectives. The strategies, objectives and mission that the company has, added to the information from the external and internal audits, lay the foundations to generate and evaluate viable alternative strategies.
A manageable series of more attractive alternative strategies must be developed. Where have you determine the advantages, disadvantages, costs and benefits of these strategies. The process should include representatives from each of the company's departments and divisions. The process All those who participate must have the to generate information from the internal external audits. The strategies proposed by the participating strategies should be analyzed and discussed in a meeting and they should classify the strategies in order of their attractiveness:
1 = Should not be put into practice, 2 = Could be put into practice, 3 = Should be put into practice 4 = Should be put into practice.
- Define the mission and vision of the organization Set objectives Examine the environment Make predictions Implement the strategy Analyze the organization's resources Analyze opportunities and risks Identify and evaluate alternative strategies Select the strategy
Long-Term Goals
Long-term goals represent the expected results of following certain strategies. Strategies are the actions that will be taken to achieve long-term goals. The objectives crystallize as viable strategies are formulated and selected.
The objectives of the different units of the organization must be quantitative, measurable, realistic, understandable, challenging, hierarchical, achievable and consistent. In addition, each objective must be tied to a time limit. Goals are nature vital to success for the reasons:
Basis for designing positions and organizing long-term activity objectives.
Set priorities and stimulate effort and achievement
They help stakeholders understand their role in the future.
They lay the foundation for decision making
Manage by extrapolations: This idea implies continuing to do more or less the same and in the same way, because things are going well.
Manage by crisis: A really good strategist is his ability to solve problems, they must invest their time and creative energy in solving the most pressing problems of the day.
Manage without goals
Manage by subjective ideas: There is no general plan that indicates what to do or which way to go; just do your best to do what you think should be done
Manage by hope: It is based that the future is full of uncertainties and that, if we try to succeed, but we do not succeed, then we cherish the hope that our second attempt will
succeed.
General framework for formulating strategies
Important strategy-making techniques can be integrated into a three-stage decision-making framework
The Input Stage
The information obtained from these three matrices provides basic inputs for the adequacy and decision matrices. Making "minor" decisions in matrices to obtain information regarding the relative importance of internal and external factors allows strategists to generate and evaluate alternative strategies more effectively.
The Adequacy Stage
The SWOT matrix The PEYEA matrix, The BCG matrix The IE matrix
The matrix of grand strategy.
These instruments depend on the information derived from the input stage to match external opportunities and threats with flash-point strengths and weaknesses.
The matrix for formulating strategies for threats-opportunities weaknesses (SWOT).
It is an important tuning instrument that helps managers develop four types of strategies: strengths and weaknesses strategies, weaknesses and opportunities strategies, strengths and threats strategies, and weaknesses and threats strategies.
THE “PEYEA” MATRIX (STRATEGIC POSITION AND EVALUATION OF THE ACTION)
Its objective is to determine which are the most appropriate strategies for an organization once its internal and external strategic positions have been defined. Within each position, two groups were established and in each one they determined indicators, which were evaluated on a scale from one (1) to six (6).
Internal Strategic Position
The objective is to prepare the internal diagnosis of the company to determine its strategic position. The best reflection is to measure your financial strength, as this depends on how you will survive in the face of changes in the environment.
A company wants to increase its competitive advantage, it must increase the efficiency of its processes and add value to its product.
External Strategic Position
The power or influence that the sector has over the interest groups (“stakeholders”) to negotiate as a union among others, tax advantages, lower prices in the acquisition of raw materials, import of new technologies, imposition of barriers to prevent the new entry of competitors, determine the potential for growth and profit generation; These elements constitute the so-called industrial force.
Steps to prepare a PEYEA matrix
- Select a series of variables that include financial strength (FF), competitive advantage (CV), environmental stability (EA), and industry strength (FI). Assign a numerical value from +1 (worst) to + 6 (best) to each of the variables that make up dimensions FF and FI. Assign a numerical value of –1 (best) –6 (worst) to each of the variables that make up the dimensions VC, EA. Calculate the average score of FF, VC, EA, and FI by adding the values given to the variables of each dimension dividing them by the number of variables included in the respective dimension. Enter the average scores of FF, VC, EA, and FI on the corresponding axis of the PEYEA matrix. Add the two scores on the “x” axis and note the resulting point in X. Add the two “y” axis scores and record the resulting point in Y.Record the intersection of the new point “xy”. Draw a directional vector of the origin of the PEYEA matrix through the new point of the intersection. This vector will reveal the type of strategy recommended for the aggressive, competitive, defensive or conservative organization.
Indicators
Indicators for internal strategic position:
Financial strength: ROE, ROA, indebtedness and liquidity are the indices that allow a company to be properly diagnosed.
Net profit
ROE = Return on equity =
Heritage
Net profit
ROA = Return on asset =
Active
Total, passive
Indebtedness =
Total, active
Banks + Temporary Investments
Degree of liquidity =
Current liabilities
Company sales
Market share = 19
Industry Sales
Indicators For External Strategic Position
Industrial strength: Potentials for profit and sales growth were considered, as well as entry barriers to new competitors.
Technological knowledge: It is measured by comparing the development and research expenses carried out by the industry under analysis in the year, with respect to previous periods.
Environmental stability: its measurement is carried out using macroeconomic indicators such as inflation and devaluation rates, variability of product demand and its elasticity.
BCG MATRIX
The BCG matrix graphically shows the differences between the divisions, in terms of the relative part of the market they are occupying and the growth rate of the industry. The BCG matrix allows a multidivisional organization to manage its business portfolio by analyzing the relative part of the market it is occupying and the industry growth rate of each of the divisions in relation to all other divisions of the organization.
THE BCG MATRIX
RELATIVE PARTICIPATION IN THE MARKET
THE QUESTIONS
Divisions in Quadrant 1 occupy a relatively small market position, but compete in a high-growth industry. As a general rule, these companies need a lot of money, but they generate little cash. These businesses are called question marks, because the organization has to decide whether to reinforce them through intensive strategy (market penetration, market development, or product development) or to sell them.
THE STARS
Businesses located in Quadrant 2 (often called stars) represent the best opportunities for long-term growth and profitability for the company. Divisions that have a considerable relative market share and a high growth rate for the industry must attract enough investment to maintain or strengthen their dominant positions.
THE MONEY COWS
Divisions located in Quadrant 3 have a relatively large share of the market, but compete in an industry with little growth. They are called money cows because they make more money than they need and are often “milked”. Many of today's money cows were stars yesterday.
DOGS
The divisions of the organization located in quadrant 4 have relatively little market share and compete in an industry with little or no market growth; They are the dogs in the company's portfolio. Due to their weak position, internal and external, these businesses are often liquidated, discarded or cut through the entrenchment.
Elaboration criteria
The growth-share matrix is based on two main dimensions
Relative market share: This refers to the market share of the Strategic Business Unit in relation to its most important competitor. It is divided into high and low and is expressed on a logarithmic scale.
The industry growth rate: Indicating the annual growth rate of the industry market to which the company belongs.
The internal-external matrix (IE)
The IE matrix is similar to the BCG matrix in that the two instruments require the divisions of the organization to be placed within a schematic diagram; that is why both are called portfolio matrices. The size of each circle represents the% of sales corresponding to each division and the slices reveal the% of profits corresponding to each division, both in the BCG matrix and in the EI.
The IE matrix is based on two key dimensions: the EFI weighted totals on the x-axis and the EFE weighted totals on the y-axis.
Industry analysis: the external factors assessment matrix (EFE)
The External Factors Assessment Matrix (EFE) enables strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information.
Preparation of an EFE matrix consists of five steps:
- Make a list of the critical or determining factors for success identified in the external audit process. Cover a total of between ten and twenty factors, including both opportunities and threats that affect the company and its industry. On this list, list the opportunities first, then the threats. Be as specific as possible, using percentages, ratios, and comparative figures where possible. Assign a relative weight to each factor, from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor in achieving success in the company's industry. Opportunities tend to carry higher weights than threats, but threats, in turn, can carry higher weights if they are especially serious or threatening.Appropriate weights can be determined by comparing competitors who are successful with those who are not, or by looking at the factor as a group and reaching a consensus. The sum of all the weights assigned to the factors must add up to 1.0.
Preparation of an EFE matrix consists of five steps:
- Assign a score of 1 to 4 to each of the determinants of success to indicate whether the company's present strategies are responding effectively to the factor, where 4 = a higher response, 3 = a higher response than the average, 2 = a medium response and 1 = a bad response. Ratings are based on the effectiveness of the company's strategies. Thus, the ratings are company-based, while the weights in Step 2 are industry-based. Multiply the step for each factor by its rating to get a weighted rating. Add the weighted ratings for each of the variables for determine the weighted total of the organization.
The internal factors evaluation matrix
(EFI)
This strategy-making instrument summarizes and assesses the most important strengths and weaknesses within the functional areas of a business and also provides a basis for identifying and evaluating the relationships between these areas. Intuitive judgments are necessary when developing an EFI matrix, so the fact that this technique has the appearance of a scientific approach should not be interpreted as if it were entirely overwhelming. It is far more important to fully understand the factors included than the actual numbers.
Elaboration of the EFI matrix consists of five steps:
- Make a list of the success factors identified through the internal audit process. Use between ten and twenty internal factors in total, including both strengths and weaknesses. Write down the strengths first, then the weaknesses. Be as specific as possible and use comparative figures, ratios and percentages. Assign a weight between 0.0 (not important) to 1.0 (absolutely important) to each of the factors. The weight assigned to a given factor indicates its relative importance to the success of the company. Regardless of whether the key factor represents an internal strength or weakness, the factors that are considered to have the most impact on the performance of the organization should carry the highest weights. The total of all the weights must add up to 1.0.
Elaboration of the EFI matrix consists of five steps:
- Assign a rating between 1 and 4 to each of the factors to indicate whether the factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3) or a strength higher (score = 4). Thus, the ratings refer to the company, while the weights in Step 2 refer to the industry. Multiply the weight of each factor by its corresponding rating to determine a weighted rating for each variable. Add the weighted ratings of each variable for determine the weighted total for the entire organization.
The IE matrix is divided into three large spaces that have different strategic implications.
The divisions that fall into cells I, II or IV would be "Grow and build." Intensive strategies (market penetration, market development, or product development) or integrative strategies (backward integration, forward integration, and horizontal integration) may be the most suitable for these divisions.
Divisions that fall into cells III, V, or VII can best be managed with “hold and hold” strategies; Market penetration and product development are two commonly used strategies for these types of divisions.
The divisions that fall into cells VI, VII or IX is "Harvest or Divest". Successful organizations are able to achieve a portfolio of businesses placed in or around cell I in the IE matrix.
The grand strategy matrix
All organizations can be placed in one of the four strategic quadrants of the grand strategy matrix. company divisions can also be placed in it. The grand strategy matrix is based on two evaluative dimensions:
competitive position and market growth. The strategies that an organization should consider are ranked by the order of attractiveness in each of the quadrants of the matrix.
QUADRANT STUDY
Rapid market growth
QUADRANT II
- Market development Market penetration Product development Horizontal integration Divestment • Liquidation QUADRANT IIIA entrenchment Concentric diversification Horizontal diversification Conglomerate diversification Divestment
QUADRANT I
- Market Development Market Penetration Product Development Forward Integration Backward Integration Horizontal Integration Concentric Diversification QUADRANT IV Concentric Diversification Horizontal Diversification Conglomerate Diversification JV Liquidation Slow Market Growth
The companies that are located in quadrant I are in an excellent strategic position. Convenient strategies would be to continue to focus on current markets and products (product development). When an organization has too many resources, then backward, forward, or horizontal integration strategies might be appropriate. You are too committed to a single product, so concentric diversification could lower the risks associated with a very narrow product line.
They have the luxury of taking advantage of external opportunities in many areas; they can take risks aggressively when necessary.
Companies located in quadrant II
They have to thoroughly evaluate their current approach to the market. Even though their industry is growing, they are unable to compete effectively and must determine why the current approach of the company is ineffective and what is the best way for the company to change in order to improve its competitiveness. Since companies in Quadrant II are in an industry with a rapidly growing market, the first option they should consider is an intensive (and not integrative or diversification) strategy. However, if the company lacks distinctive competence or competitive advantage, horizontal integration is often a desirable alternative.
Organizations in Quadrant III
They compete in slow growing industries and have very weak competitive positions. These companies must apply drastic changes without delay in order to avoid their further downfall and possible liquidation. First, a considerable reduction in costs and assets must be pursued
(entrenchment). An alternative strategy would be to draw resources from current businesses to direct them to other areas. When all else has failed, the last option for businesses in Quadrant III is divestment or liquidation.
Businesses in Quadrant IV
They have a strong competitive position, but they are in a slow growing industry. These companies are strong enough to start diversified programs in areas with the most promising growth. Typically, companies in Quadrant IV have large cash flows and little need for internal growth and can often successfully pursue concentric, horizontal, or conglomerate diversification. Companies located in Quadrant IV can also form joint ventures.
Download the original file
