UNIT III

C. Matching Stage

Strategy is sometimes defined as the match an organization makes between its internal
resources and skills and the opportunities and threats created by external factors. The
matching stage of the strategy formulation framework consists of five techniques that can be
used in any sequence: the SWOT (TOWS) matrix, the SPACE matrix, the BCG matrix, the
IE matrix, and the Grand Strategy Matrix. The tools rely upon the information derived from
the input stage to match external opportunities and threats with internal strengths and
weaknesses. Matching external and internal critical success factors is the key to effectively
generate feasible alternative strategies.

For example, a firm with excess working capital (an internal strength) could take advantage
of the cell phone industry’s 20 percent annual growth rate (an external opportunity) by
acquiring Cellfone, Inc. This example portrays simple one-to-one matching. In most
situations, external and internal relationships are more complex, and the matching requires
multiple alignments for each strategy generated.

Successful matching of key external and internal factors depends on those underlying key
factors being specific, actionable, and divisional to the extent possible. Any organization,
whether military, product-oriented, service-oriented, governmental, or even athletic, must
develop and execute good strategies to win. A good offense without a good defense, or vice
versa, usually leads to defeat. Developing strategies that use strengths to capitalize on
opportunities could be considered an offense, whereas strategies designed to improve upon
weaknesses while avoiding threats could be termed defensive. Every organization has some
external opportunities and threats and internal strengths and weaknesses that can be aligned
to formulate feasible alternative strategies.

The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix

The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an important matching
tool that helps managers develop four types of strategies: SO (strengths-opportunities)
Strategies, WO (weaknesses-opportunities) Strategies, ST (strengths-threats) Strategies, and
WT (weaknesses-threats) Strategies.3 Matching key external and internal factors is the most
difficult part of developing a SWOT Matrix and requires good judgment—and there is no one
best set of matches.

Strengths are attributes of the organization that are helpful to the achievement of the
objective.
Weaknesses are attributes of the organization that are harmful to the achievement of the
objective.
Opportunities are external conditions that are helpful to the achievement of the objective.
Threats are external conditions that are harmful to the achievement of the objective.
Strengths and weaknesses are internal factors. For example, strength could be your
specialist marketing expertise. A weakness could be the lack of a new product.
Opportunities and threats are external factors. For example, an opportunity could be a
developing distribution channel such as the Internet, or changing consumer lifestyles that
potentially increase demand for a company's products. A threat could be a new competitor in
an important existing market or a technological change that makes existing products
potentially obsolete.

It is worth pointing out that SWOT analysis can be very subjective - two people rarely come-
up with the same version of a SWOT analysis even when given the same information about
the same business and its environment. Accordingly, SWOT analysis is best used as a guide
and not a prescription. Adding and weighting criteria to each factor increases the validity of
the analysis.
a) SO Strategies use a firm’s internal strengths to take advantage of external
opportunities. All managers would like their organizations to be in a position in which
internal strengths can be used to take advantage of external trends and events. Every
firm desires to obtain benefit from its resources such benefit can only be obtained if
utilize its strength to take external opportunity. Resources (Assets) an important
firm’s strength to get opportunity for external resources. For example, the firm
enjoying a good financial position which is strength for a firm and externally
opportunity to expand business. The strong financial position provides an opportunity
to expand the business. The matched strategy is known as SO strategy. Organizations
generally will pursue WO, ST, or WT strategies to get into a situation in which they
can apply SO Strategies. When a firm has major weaknesses, it will strive to
overcome them and make them strengths. When an organization faces major threats, it
will seek to avoid them to concentrate on opportunities.
b) WO Strategies aim at improving internal weaknesses by taking advantage of external
opportunities. Sometimes key external opportunities exist, but a firm has internal
weaknesses that prevent it from exploiting those opportunities. WO strategy is very
useful if the firm take advantage to external resources in order to overcome the
weakness. For example, the firm is in the critical financial problems that is
weakness and firm is availing merger with Multinational Corporation. Another
example, there may be a high demand for electronic devices to control the amount and
timing of fuel injection in automobile engines (opportunity), but a certain auto parts
manufacturer may lack the technology required for producing these devices
(weakness). One possible WO Strategy would be to acquire this technology by
forming a joint venture with a firm having competency in this area. An alternative
WO Strategy would be to hire and train people with the required technical
capabilities.
c) ST Strategies use a firm’s strengths to avoid or reduce the impact of external threats.
This does not mean that a strong organization should always meet threats in the
external environment head-on. This strategy is adopted by various colleges by
opening new branches in order to overcome competitive threat. An example of ST
Strategy occurred when Texas Instruments used an excellent legal department (a
strength) to collect nearly $700 million in damages and royalties from nine Japanese
and Korean firms that infringed on patents for semiconductor memory chips (threat).
 Rival firms that copy ideas, innovations, and patented products are a major threat in
many industries. This is still a major problem for U.S. firms selling products in China.
d) WT Strategies are defensive tactics directed at reducing internal weakness and
avoiding external threats. An organization faced with numerous external threats and
internal weaknesses may indeed be in a precarious position. In fact, such a firm may
have to fight for its survival, merge, retrench, declare bankruptcy, or choose
liquidation. This type of strategy is helpful when weaknesses are removed to
overcome external threats. It is difficult to target WT strategy. For example weak
distribution network creating many problems for the firm. if it strong many external
threats can be removed.

A schematic representation of the SWOT Matrix is provided in Figure. Note that a SWOT
Matrix is composed of nine cells. As shown, there are four key factor cells, four strategy
cells, and one cell that is always left blank (the upper-left cell). The four strategy cells,
labeled SO, WO, ST, and WT, are developed after completing four key factor cells, labeled S,
W, O, and T.

There are eight steps involved in constructing a SWOT Matrix:

1. List the firm’s key external opportunities.
2. List the firm’s key external threats.
3. List the firm’s key internal strengths.
4. List the firm’s key internal weaknesses.
5. Match internal strengths with external opportunities & record resultant SO Strategies in appropriate
cell.
6. Match internal weaknesses with external opportunities, and record the resultant WO Strategies.
7. Match internal strengths with external threats, and record the resultant ST Strategies.
8. Match internal weaknesses with external threats, and record the resultant WT Strategies.

Both the internal/external factors and the SO/ST/WO/WT Strategies are stated in quantitative terms to
the extent possible. Always be specific to the extent possible in stating factors and strategies. Not all
of the strategies developed in the SWOT Matrix, therefore, will be selected for implementation. For
example, when an organization has both the capital and human resources needed to distribute its own
products (internal strength) and distributors are unreliable, costly, or incapable of meeting the firm’s
needs (external threat), forward integration can be an attractive ST Strategy.

Limitations:
1. First, SWOT does not show how to achieve a competitive advantage, so it must not be an
end in itself. The matrix should be the starting point for a discussion on how proposed
strategies could be implemented as well as cost-benefit considerations that ultimately could
lead to competitive advantage.
2. Second, SWOT is a static assessment (or snapshot) in time. A SWOT matrix can be like
studying a single frame of a motion picture where you see the lead characters and the setting
but have no clue as to the plot. As circumstances, capabilities, threats, and strategies change,
the dynamics of a competitive environment may not be revealed in a single matrix.
 3. Third, SWOT analysis may lead the firm to overemphasize a single internal or external
factor in formulating strategies. There are interrelationships among the key internal and
external factors that SWOT does not reveal that may be important in devising strategies.

BOSTON CONSULTING GROUP (BCG) MATRIX

BCG Matrix (also known as the Boston Consulting Group analysis, the Growth-Share matrix,
the Boston Box or Product Portfolio matrix) is a tool used in corporate strategy to analyse
business units or product lines based on two variables: relative market share and the market
growth rate. By combining these two variables into a matrix, a corporation can plot their
business units accordingly and determine where to allocate extra (financial) resources, where
to cash out and where to divest. The main purpose of the BCG Matrix is therefore to
make investment decisions on a corporate level.

It provides a graphic representation for an organization to examine different businesses in its

portfolio on the basis of their related market share and industry growth rates. It is a
comparative analysis of business potential and the evaluation of environment. According to
this matrix, business could be classified as high or low according to their industry growth rate
and relative market share. The BCG Matrix 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. 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 (or revenues)
held by the largest rival firm in that industry.

Relative Market Share - Relative Market Share is the focal company’s share relative to its
largest competitor. So if Samsung has a 20 percent market share in the mobile phone industry
and Apple (its largest competitor) has 60 percent so to speak, the ratio would be 1:3 (0.33)
implying that Samsung has a relatively weak position. If Apple only had a share of 10
percent, the ratio would be 2:1 (2.0), implying that Samsung is in a relatively strong position,
which might be reflected in above average profits and cash flows. The cut-off point here is
1.0, meaning that the focal company should at least have a similar market share as its largest
competitor in order to have a high relative market share. The assumption in this framework
is that an increase in relative market share will result in an increase in the generation of
cash, since the focal company benefits from economies of scales and thus gains a cost
advantage relative to its competitors.

Market Growth Rate - The second

variable is the Market Growth Rate,
which is used to measure the market
attractiveness. Rapidly growing
markets are what organizations usually
strive for, since they are promising for
interesting returns on investments in the
long term. The drawback however is
that companies in growing markets are
likely to be in need for investments in
order to make growth possible. The
investments are for example needed to
fund marketing campaigns or to increase capacity. High or low growth rates can vary from
industry to industry.

1. Question Marks - Divisions in Quadrant I (Question Marks) 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 businesses 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. There is no specific strategy that can be adopted. If the
firm thinks it has dominant market share, then it can adopt expansion strategy, else
retrenchment strategy can be adopted. Ventures or start-ups usually start off as
Question Marks. Question Marks (or Problem Children) are businesses operating with a
low market share in a high growth market. They have the potential to gain market share
and become Stars (market leaders) eventually. If managed well, Question Marks will
grow rapidly and thus consume a large amount of cash investments. If Question
Marks do not succeed in becoming a market leader, they might degenerate into
Dogs when market growth declines after years of cash consumption. Question marks
must therefore be analyzed carefully in order to determine whether they are worth the
investment required to grow market share.
2. Stars - Stars are business units with a high market share (potentially market leaders) in
a fast-growing industry. Stars generate large amounts of cash due to their high relative
market share but also require large investments to fight competitors and maintain their
growth rate. Quadrant II businesses (Stars) represent the organization’s 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. Successfully diversified
companies should always have some Stars in their portfolio in order to ensure future
cash flows in the long term. Apart from the assurance that Stars give for the future, they
are also very good to have for your corporate’s image.
3. Cash Cows – Divisions positioned in Quadrant III (Cash Cows) have a high relative
market share position but compete in a low-growth industry. Called Cash Cows because
they generate cash in excess of their needs, they are often milked. Many of today’s
Cash Cows were yesterday’s 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.
Eventually after years of operating in the industry, market growth might decline and
revenues stagnate. At this stage, your Stars are likely to transform into Cash Cows.
Because they still have a large relative market share in a stagnating (mature) market,
profits and cash flows are expected to be high. Because of the lower growth rate,
investments needed should also be low. Cash cows therefore typically generate cash in
 excess of the amount of cash needed to maintain the business. This ‘excess cash’ is
supposed to be ‘milked’ from the Cash Cow for investments in other business units
(Stars and Question Marks). Cash Cows ultimately bring balance and stability to a
portfolio.
4. Dogs – Business units in a slow-growth or declining market with a small relative
market share are considered Dogs. Quadrant IV divisions (Dogs) 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. These units typically break even (they neither create nor
consume a large amount of cash) and generate barely enough cash to maintain the
business’s market share. These businesses are therefore not so interesting for investors.
Since there is still money involved in these business units that could be used in units
with more potential, Dogs are likely to be divested or liquidated. 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

BCG MATRIX AND THE PRODUCT LIFE CYCLE

The BCG matrix has a strong
connection with the Product Life Cycle.
The Question Marks represent products
or SBU’s that are in the introduction
phase. This is when new products are
being launched in the market. Stars are
SBU’s or products in their growth
phase. This is when sales are increasing
at their fastest rate. Cash Cows are in the
maturity phase: when sales are near their
highest, but the rate of growth is
slowing down due to saturation in the
market. And Dogs are in the decline phase: the final stage of the cycle, when sales begin to
fall.

Figure 3: BCG Matrix and Product Life Cycle

Using the BCG Box to determine strategy
Once a company has classified its SBU's, it must decide what to do with them.
(1) Build Share here the company can invest to increase market share (for example turning
a “question mark" into a star)
(2) Hold here the company invests just enough to keep the SBU in its present position
(3) Harvest here the company reduces the amount of investment in order to maximize the
short term cash flows and profits from the SBU. This may have the effect of turning
Stars into Cash Cows
(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use
the resources elsewhere (e.g. investing in the more promising "question marks").