Tool for strategic planning

There are many tools for planning strategy as well as many kinds of planning strategies. This is the process of formulating a comprehensive strategy with popular tools used in almost all sizes and types of enterprises.

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7 Stage 1: INPUT STAGE

External factor

Stage 3: DECISION STAGE

Figure 2.2 Analytic framework of strategy formulation Source: Fred R.David (2006)

Stage 1 summarizes basic information that is necessary for formulating strategy. Stage2 focuses on suggesting feasible strategies that can be chosen by arranging and combining important internal and external factors. Stage 3 is called decisive stage including only one technique, which is Quantitative strategic planning matrix (QSPM). QSPM presents the relative attractiveness of optional strategies and then provides objective foundation for choosing specific strategies.

All nine techniques in process of formulating strategy are required a combination Quantitative

strategic planning matrix (QSPM)

between intuition and analysis process. In this research, the author would like to focus on four main tools: EFE Matrix, IFE Matrix, Competitive Profile Matrix, SWOT Matrix and Quantitative Strategic Planning Matrix (QSPM).

2.2.2.1. EFEMatrix (External Factor Evaluation Matrix)

EFE Matrix permits strategists to summarize and evaluate information on economy, society, culture, population, geography, politics, government, law, technology and competition. There are five steps in developing an EFE Matrix.

Step 1: Building up a list of factors having decisive role in the success, which has been found in the testing process of external factors. Theyconsistof the total from 10 to 20 factors including opportunities and threats affecting enterprises and business lines of such enterprises.

Step 2: Classifying important level from 0.0 (not important) to 1.0 (very important) for each factor. Opportunities often have higher classification level than threats.However, threats also can be received higher classification level if such threats are very serious or threatening.The appropriate classification level can be identified by comparing unsuccessful competitors with successful ones through discussing about this factors and reaching consensusof group. The total classification leveldefined for these factors must be 1.0.

Step 3: Classifying 1 to 4 for each factor deciding an enterprise’s success to know the method that current strategies of enterprises react with such factor. Of which, 4 is the positive response, 3 is above averageresponse, 2 is average response and 1 is negative response. These levels reply on strategic efficiency in enterprises. Hence, this classification replies on enterprises in which the classification level in step 2 replies on sector.

Step 4: Multiplyingthe importance of each variableby its kind to identify the point in terms of importance.

Step 5: Adding total point in terms of importance to each variable to identify the total importance point for each organization.

Regardless of main opportunities and threats included in External Factor Evaluation Matrix, the highest importance point an organization can get is 4.0 and the lowest one is 1.0.

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The total average importance point is 2.5. If the total importance point is 4.0, it means that organization is responding very well to current opportunities and threats in its condition. If the total importance point is 1.0, it means that chosen strategy does not take advantage of opportunities and avoid external factors.

2.2.2.2. IFE Matrix (Internal Factor Evaluation Matrix)

This tool for formulating this strategy summarizes and evaluates important strengths and weaknesses of functional business sectors and it provides foundation to identify and evaluate relationship among these sectors. Anintuitive comment is necessary for developing IFE Matrix; hence, formative aspect of research method must be deductive to show that this is the most effective technique. Like EFE Matrix, IFE Matrix can be developed in 5 steps.

Regardless of the number of factors of IFE Matrix, the total importance point can be classified from 1.0 - the lowest point, 4.0- the highest point and 2.5 -the average point. If the total importance point is less than 2.5, it means that an enterprise is weak at internal operation.If the total importance point is greater than 2.5; it means that an enterprise is strong in internal operation. Like EFE Matrix, an IFE Matrix should have from 10 to 20 core factors.

The number of factors does not affect the total importance group because the total importance level always is 1.0.

2.2.2.3. Competitive profile matrix

Competitive profile matrix identifies major competitors with their special strengths and weaknesses. Competitive profile matrix is the expansion of external factor evaluation matrix in case importance level, classification and total importance point have same significance.

However, competitive profile matrix is different from external factor evaluation. That is internal factors have decisive importance for success, especially financial factors, advertising efficiency, research and development activities. Moreover, the difference of two matrixes is the classification level of competitors included in competitive profile matrix and total importance point of this enterprise isalso calculated. The total point evaluated of competitors is compared with sample enterprise. Special classification levels of rival enterprises can be comparedwith classification level of sample enterprise. The analytic comparison provides important strategic information.

Classification levels are also from 1 to 4 as two above matrixes.

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2.2.2.4. SWOT Matrix

Strengths – Weaknesses – Opportunities- Threats Matrix is an important combination tool that can help administrators develop four kinds of strategy: strengths-opportunities strategy (SO), weaknesses-opportunities strategy (WO), strengths-threats strategy (ST) and weaknesses-threats strategy (WT). The combination of internal and external factors is the most difficult task for developing a SWOT Matrix. It requires a good judgment and it will not have the best combination.

Process of building SWOT Matrix includes 8 steps:

1/ Making a list of big opportunities

2/ Making a list of main threats

3/ Making a list of main strengths of enterprise

4/ Making a list of vital weaknesses of enterprise

5/ Combining strengths with opportunities to find out SO Strategy

6/ Combining weaknesseswith opportunities to find out WO Strategy

7/ Combining strengths with threatsto find out ST Strategy

8/ Combining weaknesses withthreatsto find out WT Strategy

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STRENGTHS - S WEAKNESSES - W

OPPORTUNITIES - O S-O STRATEGIES W-O STRATEGIES

Using strengths to take advantage of opportunities

Overcoming weaknesses by taking advantage of opportunities

THREATS - T S-T STRATEGIES W-T STRATEGIES

Using strength to avoid threats

Improving weaknesses and avoiding threats

Figure 2.3 SWOT Matrix Source: Fred R.David (2006)

2.2.2.5. Quantitative Strategic Planning Matrix (QSPM)

This matrix is analytic technique to decide attractiveness of replaceable feasible strategies. It is the third stage of analytic framework of formulating strategy. This technique will provide anobjective view of which replaceable strategy is the best one. QSPM Matrix uses input factors thanks to analysis in stage 1 and combination result of analysis in stage 2 to decide replaceable strategies objectively. QSPM Matrix is a tool that allowsassessing replaceable strategies objectively on the ground of internal and external major successful factors.QSPM Matrix requires a good judgment by intuition.

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Optional strategy

Main factors

Classification Strategy 1 Strategy 2 Strategy 3

Internal factors

Administration

Marketing

Finance/Accounting

Production/Implementation

Research and development

Information systems

External factors

Economy

Politics/Law/Government

Society/Culture/Population

Technique

Competition

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Source: Fred R.David (2006) Classification of internal factors according to these

following levels: 1,2,3,4  weakest;

slightly weak; moderately strong, strongest

Classification of external factors in these following

levels: 1,2,3,4

 reaction of enterprise:

poor, average, good, excellent

Figure 2.4 QSPM Matrix Source: Fred R.David (2006)

Above is the basic model of QSPM Matrix. The left column of QSPM Matrix includes internal, external factors (stage 1), and the top row includes replaceable feasible strategies (stage 2).The left column of QSPM includes information that is found directly from EFE Matrix and IFE Matrix. Next to the column of successful factors is column that is classified accordinglyfor each factor in EFE Matrix and IFE Matrix. The top row of QSPM Matrix includes replaceable strategies obtained from SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix and Grand strategy matrix. These strategies often provide feasible similar strategies to replace. However, not every strategy of combination strategy can be evaluated in QSPM Matrix. Strategists should use good judgment by intuition to choose strategies of QSPM Matrix.

Based on concepts, QSPM Matrix identifies attractiveness of different strategies by employing or improving external and internal successful core factors. Attractiveness of each strategy in replaceable strategies’ group can be calculated by identifying cumulative impact of each external and internal successful main factor.