THE INTERNAL FACTOR ;~ EVALUATION (IFE) MATRIX

A summary step in conducting an internal strategic-management audit is to construct an Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among those areas. Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-powerful technique. A thorough understanding of the factors included is more important than the actual numbers. Similar to the EFE Matrix and Competitive Profile Matrix described in Chapter 3, an IFE Matrix can be developed in five steps: 1. List key internal factors as identified in the internal-audit process. Use a total of from ten to twenty internal factors, including both strengths and weaknesses. List strengths first and then weaknesses. Be as specific as possible, using percentages, ratios, and comparative numbers. 2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor. The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm's industry. Regardless of whether a key factor is an internal strength or weakness, factors considered to have the greatest effect on organizational performance should be assigned the highest weights. The sum of all weights must equal 1.0. 3. Assign a I-to-4 rating to each factor to indicate whether that factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). Note that strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating. Ratings are thus company-based, whereas the weights in Step 2 are industry-based. 4. Multiply each factor's weight by its rating to determine a weighted score for each variable. 5. Sum the weighted scores for each variable to determine the total weighted score for the organization. Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below 2.5 characterize organizations that are weak internally, whereas scores significantly above 2.5 indicate a strong internal position. Like the EFE Matrix, an IFE Matrix should include from 10 to 20 key factors. The number of factors has no effect upon the range of total weighted scores because the weights always sum to 1.0. When a key internal factor is both a strength and a weakness, the factor should be included twice in the IFE Matrix, and a weight and rating should be assigned to each statement. For example, the Playboy logo both helps and hurts Playboy Enterprises; the logo attracts customers to the Playboy magazine, but it keeps the Playboy cable channel out of many markets. An example of an IFE Matrix for Circus Circus Enterprises is provided in Table 4-7. Note that the firm's major strengths are its size, occupancy rates, property, and long-range planning as indicated by the rating of 4. The major weaknesses are locations and recent joint venture. The total weighted score of 2.75 indicates that the firm is above average in its overall internal strength.

TABLE 4-7
KEY INTERNAL FACTORS

A Sample Internal Factor Evaluation Matrix for Circus Circus Enterprises

WEIGHT RATING WEIGHTED SCORE

Internal Strengths 1. Largest casino company in the United States 2. Room occupancy rates over 95 % in Las Vegas 3. Increasing free cash flows 4. Owns one mile on Las Vegas Strip 5. Strong management team 6. Buffets at most facilities 7. Minimal comps provided 8. Long-range planning 9. Reputation as family-friendly 10. Financial ratios 1 nternal Weaknesses 1. Most properties are located in Las Vegas 2. Little diversification 3. Family reputation, not high rollers 4. Laughlin properties 5. Recent loss of joint ventures TOTAL

.05 .10 .05 .15 .05 .05 .05 .05 .05 .05 .05 .05 .05 .10 .10 1.00

4 4 3 4 3 3 3 4 3 3 1 2 2 1 1

.20 .40 .15 .60 .15 .15 .15 .20 .15 .15 .05 .10 .10 .10 .10 2.75

In multidivisional firms, each autonomous division or strategic business unit should construct an IFE Matrix. Divisional matrices then can be integrated to develop an overall corporate IFE Matrix.

TYPES OF STRATEGIES Objectives: This lecture brings strategic management to life with many contemporary examples. Sixteen types of strategies are defined and exemplified, including Michael Porter's generic strategies: cost leadership, differentiation, and focus. Guidelines are presented for determining when different types of strategies are most appropriate to pursue. An overview of strategic management in nonprofit organizations, governmental agencies, and small firms is provided. After reading this lecture you will be able to know about: Long term objectives: Types of Strategies Integration strategies Strategies in Action: Even if you're on the right track, you'll get run over if you just sit there. -- Will Rogers Hundreds of companies today embrace strategic planning because: Quest for higher revenues Quest for higher profits Many firms have to use strategic planning in order to earn revenues and more profits. Long term objectives

Long-term objectives

represent the results expected from pursuing certain strategies. Strategies

represent the actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should be consistent, usually from two to five years. The Nature of Long-Term Objectives Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and congruent among organizational units. Each objective should also be associated with a time line. Objectives are commonly stated in terms such as growth in assets, growth in sales, profitability, market share, degree and nature of diversification, degree and nature of vertical integration, earnings per share, and social responsibility. Clearly established objectives offer many benefits. They provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid in both the allocation of resources and the design of jobs. Long-term objectives are needed at the corporate, divisional, and functional levels in an organization. They are an important measure of managerial performance. Clearly stated and communicated objectives are vital to success for many reasons. First, objectives help
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stakeholders understand their role in an organization's future. They also provide a basis for consistent decision making by managers whose values and attitudes differ. By reaching a consensus on objectives during strategy-formulation activities, an organization can minimize potential conflicts later during implementation. Objectives set forth organizational priorities and stimulate exertion and accomplishment. They serve as standards by which individuals, groups, departments, divisions, and entire organizations can be evaluated. Objectives provide the basis for designing jobs and organizing activities to be performed in an organization. They also provide direction and allow for organizational synergy. Without long-term objectives, an organization would drift aimlessly toward some unknown end! It is hard to imagine an organization or individual being successful without clear objectives. Success only rarely occurs by accident; rather, it is the result of hard work directed toward achieving certain objectives. Not Managing by Objectives Strategists should avoid: Managing by Extrapolation Managing by Crisis

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Strategic Management MGT603 VU Managing by Subjective Managing by Hope Strategists should avoid the following alternative ways to "not managing by objectives." keep on doing about the same things in the same ways because things are going well.

Managing by Extrapolation--adheres to the principle "If it ain't broke, don't fix it." The idea is to Managing by Crisis--based on the belief that the true measure of a really good strategist is the Managing by Subjective--built on the idea that there is no general plan for which way to go and Managing by Hope--based on the fact that the future is laden with great uncertainty, and that if we

ability to solve problems. Because there are plenty of crises and problems to go around for every person and every organization, strategists ought to bring their time and creative energy to bear on solving the most pressing problems of the day. Managing by crisis is actually a form of reacting rather than acting and of letting events dictate what's and when's of management decisions.

what to do; just do the best you can to accomplish what you think should be done. In short, "Do your own thing, the best way you know how" (sometimes referred to as the mystery approach to decision making because subordinates are left to figure out what is happening and why). try and do not succeed, then we hope our second (or third) attempt will succeed. Decisions are predicted on the hope that they will work and the good times are just around the corner, especially if luck and good fortune are on our side! Types of Strategies Defined and exemplified in Table, alternative strategies that an enterprise could pursue can be categorized into thirteen actions--forward integration, backward integration, horizontal integration, market penetration, market development, product development, concentric diversification, conglomerate diversification, horizontal diversification, joint venture, retrenchment, divestiture, and liquidation--and a combination strategy. Each alternative strategy has countless variations. For example, market penetration can include adding salespersons, increasing advertising expenditures, coopering, and using similar actions to increase market share in a given geographic area. A Comprehensive Strategic-Management Model

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Strategic Management MGT603 VU Alternative Strategies Defined and Exemplified Strategy Definition Example Forward Gaining ownership or General Motors is acquiring 10 Integration increased control over percent of its dealers. distributors or retailers Backward Seeking ownership or Motel-8 acquired a furniture Integration increased control of a manufacturer. firm's suppliers Horizontal Seeking ownership or Hilton recently acquired Integration increased control over Promos. competitors Market Seeking increased market Ameritrade, the online broker, Penetration share for present products tripled its annual advertising or services in present expenditures to $200 million to markets through greater convince people they can make their own investment decisions. marketing efforts Market Introducing present Britain's leading supplier of Development products or services into buses, Henlys PLC, acquires new geographic area Blue Bird Corp., North America's leading school bus maker. Product Seeking increased sales by Apple developed the G4 chip Development improving present that runs at 500 megahertz. products or services or developing new ones Concentric Adding new, but related, National Westminister Bank Diversification products or services PLC in Britain buys the leading British insurance company, Legal & General Group PLC. Conglomerate Adding new, unrelated H&R Block, the top tax Diversification products or services preparation agency, said it will buy discount stock brokerage Olde Financial for $850 million in cash. Horizontal Adding new, unrelated The New York Yankees baseball Diversification products or services for team is merging with the New present customers Jersey Nets basketball team. Joint Venture Two or more sponsoring Lucent Technologies and Philips firms forming a separate Electronics NV formed Philips organization for Consumer Communications to cooperative purposes make and sell telephones. Retrenchment Regrouping through cost Singer, the sewing machine and asset reduction to maker, declared bankruptcy. reverse declining sales and profit

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Strategic Management MGT603 VU Divestiture Selling a division or part Harcourt General, the large U.S. of an organization publisher, selling its Neiman Marcus division. Liquidation Selling all of a company's Ribol sold all its assets and assets, in parts, for their ceases business. tangible worth Integration Strategies:

Integration Strategies
Forward Integration Vertical Integration Backward Integration Strategies Horizontal Integration
Forward integration, backward integration, and horizontal integration are sometimes collectively referred to as vertical integration strategies. Vertical integration strategies allow a firm to gain control over distributors, suppliers, and/or competitors. Forward integration strategy refers to the transactions between the customers and firm. Similarly, the function for the particular supply which the firm is being intended to involve itself will be called backward integration. When the firm looks that other firm which may be taken over within the area of its own activity is called horizontal integration. Benefits of vertical integration strategy: Allow a firm to gain control over: Distributors (forward integration) Suppliers (backward integration) Competitors (horizontal integration) Forward integration: Gaining ownership or increased control over distributors or retailers Forward integration involves gaining ownership or increased control over distributors or retailers. You can gain ownership or control over the distributors, suppliers and Competitors using forward integration. Guidelines for the use of integration strategies: Six guidelines when forward integration may be an especially effective strategy are:

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Strategic Management MGT603 VU Present distributors are expensive, unreliable, or incapable of meeting firm's needs Availability of quality distributors is limited When firm competes in an industry that is expected to grow markedly Organization has both capital and human resources needed to manage new business of distribution Advantages of stable production are high Present distributors have high profit margins When your present distributors are expensive and you think that without affecting the quality of the goods you have to carry own the operations, forward integration is advisable. Similarly, if distributors are unreliable, they can not deliver with a sustained degree of timeliness or they are not in a proper way to meet the needs of the firm, forward integration is advisable. Availability of quality distributors is limited or it is difficult to get the quality of goods, then this need for a quality distributor, forward integration is best alternative. Suppose you have two industries, computers and mobile telephone which are progressing tremendously, it is advisable to think of forward integration due to the changing environment of the business. Organization has both capital and human resources needed to manage new business of distribution. A firm has all the basic elements to run the business safely in that case forward integration is best alternate. For stable production, stable supply is necessary. If you think that present distributors are charging high mark up, you may do that operation your self in order to avoid the mark up charges. It is advisable that firm itself involve in the operations. By gaining control, stability will be more and profitability will be enhanced. meeting the firm's distribution needs those firms that integrate forward

When an organization's present distributors are especially expensive, or unreliable, or incapable of When the availability of quality distributors is so limited as to offer a competitive advantage to When an organization competes in an industry that is growing and is expected to continue to grow When an organization has both the capital and human resources needed to manage the new When the advantages of stable production are particularly high; this is a consideration because an When present distributors or retailers have high profit margins; this situation suggests that a

markedly; this is a factor because forward integration reduces an organization's ability to diversify if its basic industry falters business of distributing its own products

organization can increase the predictability of the demand for its output through forward integration

company profitably could distribute its own products and price them more competitively by integrating forward Backward Integration Seeking ownership or increased control of a firm's suppliers Both manufacturers and retailers purchase needed materials from suppliers. Backward integration is a strategy of seeking ownership or increased control of a firm's suppliers. This strategy can be especially appropriate when a firm's current suppliers are unreliable, too costly, or cannot meet the firm's needs. Guidelines for Backward Integration: Six guidelines when backward integration may be an especially effective strategy are: When present suppliers are expensive, unreliable, or incapable of meeting needs Number of suppliers is small and number of competitors large High growth in industry sector Firm has both capital and human resources to manage new business Advantages of stable prices are important Present supplies have high profit margins meeting the firm's needs for parts, components, assemblies, or raw materials

When an organization's present suppliers are especially expensive, or unreliable, or incapable of

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Strategic Management MGT603 VU

When the number of suppliers is small and the number of competitors is large When an organization competes in an industry that is growing rapidly; this is a factor because When an organization has both capital and human resources to manage the new business of When the advantages of stable prices are particularly important; this is a factor because an When present supplies have high profit margins, which suggests that the business of supplying When an organization needs to acquire a needed resource quickly

integrative-type strategies (forward, backward, and horizontal) reduce an organization's ability to diversify in a declining industry supplying its own raw materials

organization can stabilize the cost of its raw materials and the associated price of its product through backward integration products or services in the given industry is a worthwhile venture

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Strategic Management MGT603 VU Lesson 19 TYPES OF STRATEGIES Objectives: This lecture brings strategic management to life with many contemporary examples. Sixteen types of strategies are defined and exemplified, including Michael Porter's generic strategies: cost leadership, differentiation, and focus. Guidelines are presented for determining when different types of strategies are most appropriate to pursue. An overview of strategic management in nonprofit organizations, governmental agencies, and small firms is provided. After reading this lecture you will be able to know about: Types of Strategies Integration strategies Horizontal Integration: Seeking ownership or increased control over competitors Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm's competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. Increased control over competitors means that you have to look for new opportunities either by the purchase of the new firm or hostile take over the other firm. One organization gains control of other which functioning within the same industry. It should be done that every firm wants to increase its area of influence, market share and business. Guidelines for Horizontal Integration: Four guidelines when horizontal integration may be an especially effective strategy are: Firm can gain monopolistic characteristics without being challenged by federal government Competes in growing industry Increased economies of scale provide major competitive advantages Faltering due to lack of managerial expertise or need for particular resources When an organization can gain monopolistic characteristics in a particular area or region without being challenged by the federal government for "tending substantially" to reduce competition When an organization competes in a growing industry When increased economies of scale provide major competitive advantages When an organization has both the capital and human talent needed to successfully manage an expanded organization When competitors are faltering due to a lack of managerial expertise or a need for particular resources that an organization possesses; note that horizontal integration would not be appropriate if competitors are doing poorly because overall industry sales are declining

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Table of Contents:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
NATURE OF STRATEGIC MANAGEMENT:Interpretation, Strategy evaluation KEY TERMS IN STRATEGIC MANAGEMENT:Adapting to change, Mission Statements INTERNAL FACTORS & LONG TERM GOALS:Strategies, Annual Objectives BENEFITS OF STRATEGIC MANAGEMENT:Non- financial Benefits, Nature of global competition COMPREHENSIVE STRATEGIC MODEL:Mission statement, Narrow Mission: CHARACTERISTICS OF A MISSION STATEMENT:A Declaration of Attitude EXTERNAL ASSESSMENT:The Nature of an External Audit, Economic Forces KEY EXTERNAL FACTORS:Economic Forces, Trends for the 2000s USA EXTERNAL ASSESSMENT (KEY EXTERNAL FACTORS):Political, Governmental, and Legal Forces TECHNOLOGICAL FORCES:Technology-based issues INDUSTRY ANALYSIS:Global challenge, The Competitive Profile Matrix (CPM) IFE MATRIX:The Internal Factor Evaluation (IFE) Matrix, Internal Audit FUNCTIONS OF MANAGEMENT:Planning, Organizing, Motivating, Staffing FUNCTIONS OF MANAGEMENT:Customer Analysis, Product and Service Planning, Pricing INTERNAL ASSESSMENT (FINANCE/ACCOUNTING):Basic Types of Financial Ratios ANALYTICAL TOOLS:Research and Development, The functional support role THE INTERNAL FACTOR EVALUATION (IFE) MATRIX:Explanation TYPES OF STRATEGIES:The Nature of Long-Term Objectives, Integration Strategies TYPES OF STRATEGIES:Horizontal Integration, Michael Porters Generic Strategies TYPES OF STRATEGIES:Intensive Strategies, Market Development, Product Development

21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.

TYPES OF STRATEGIES:Diversification Strategies, Conglomerate Diversification TYPES OF STRATEGIES:Guidelines for Divestiture, Guidelines for Liquidation STRATEGY-FORMULATION FRAMEWORK:A Comprehensive Strategy-Formulation Framework THREATS-OPPORTUNITIES-WEAKNESSES-STRENGTHS (TOWS) MATRIX:WT Strategies THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX BOSTON CONSULTING GROUP (BCG) MATRIX:Cash cows, Question marks BOSTON CONSULTING GROUP (BCG) MATRIX:Steps for the development of IE matrix GRAND STRATEGY MATRIX:RAPID MARKET GROWTH, SLOW MARKET GROWTH GRAND STRATEGY MATRIX:Preparation of matrix, Key External Factors THE NATURE OF STRATEGY IMPLEMENTATION:Management Perspectives, The SMART criteria RESOURCE ALLOCATION ORGANIZATIONAL STRUCTURE:Divisional Structure, The Matrix Structure RESTRUCTURING:Characteristics, Results, Reengineering PRODUCTION/OPERATIONS CONCERNS WHEN IMPLEMENTING STRATEGIES:Philosophy MARKET SEGMENTATION:Demographic Segmentation, Behavioralistic Segmentation MARKET SEGMENTATION:Product Decisions, Distribution (Place) Decisions, Product Positioning FINANCE/ACCOUNTING ISSUES:DEBIT, USES OF PRO FORMA STATEMENTS RESEARCH AND DEVELOPMENT ISSUES STRATEGY REVIEW, EVALUATION AND CONTROL:Evaluation, The threat of new entrants PORTER SUPPLY CHAIN MODEL:The activities of the Value Chain, Support activities STRATEGY EVALUATION:Consistency, The process of evaluating Strategies REVIEWING BASES OF STRATEGY:Measuring Organizational Performance MEASURING ORGANIZATIONAL PERFORMANCE CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM:Contingency Planning

Internal-External (IE) Matrix

Internal-External (IE) Matrix
The Internal-External (IE) 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.

The IE matrix is a continuation of the EFE matrix and IFE matrix models.

How does the Internal-External IE matrix work?

The IE matrix belongs to the group of strategic portfolio management tools. In a similar manner like the BCG matrix, the IE matrix positions an organization into a nine cell matrix.

The IE matrix is based on the following two criteria: 1. 2. Score from the EFE matrix -- this score is plotted on the y-axis 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.

IE matrix example...
Let us take a look at an example. We calculated IFE matrix for an anonymous company on the IFE matrix page. The total weighted score calculated on this page is 2.79 which points at a company with an above-average internal strength.

We also calculated the EFE matrix for the same company on the EFE matrix page. The total weighted score calculated for the EFE matrix is 2.46 which suggests a slightly less than average ability to respond to external factors.

Now we plot these values on axes in the IE matrix.

This IE matrix tells us that our company should hold and maintain its position. The company should pursue strategies focused on increasing market penetration and product development (more about this below).

What does the IE matrix tell me?

Your horizontal and vertical lines meet in one of the nine cells in the IE matrix. You should follow a strategy depending on in which cell those lines intersect.

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.

What is the difference between the IE matrix and BCG matrix?

First, the IE matrix measures different values on its axes. The BCG matrix measures market growth and market share. The IE matrix measures a calculated value that captures a group of external and internal factors. This means that the IE matrix requires more information about the business than the BCG matrix.

While values for each axis in the BCG matrix are single-factor, values for each axis in the IE matrix are multi-factor figures.

Because the IE matrix is broader in its definition, strategists often develop both the BCG Matrix and the IE Matrix when assessing their conditions and formulating strategies.

Is the IE matrix forward-looking?

By default, both the BCG matrix and the IE matrix are constructed using factors related to current conditions. However, strategists often develop two sets of matrices -- a BCG Matrix and an IE Matrix for the current state and another set to reflect expectations of the future.

Is there any other management model related to IE matrix?

Yes, the IE matrix model can be developed into an even more analytical tool called the SPACE matrix.

Besides the IFE and EFE matrix, you might also be interested in reading about the SWOT matrix.

The Quantitative Strategic Planning Matrix (QSPM) model is the next step in strategic management decision making. This method can help if we need to decide between strategic alternatives.

SPACE Matrix Strategic Management Method

SPACE Matrix Strategic Management Method
The SPACE matrix is a management tool used to analyze a company. It is used to determine what type of a strategy a company should undertake.

The Strategic Position & ACtion Evaluation matrix or short a SPACE matrix is a strategic management tool that focuses on strategy formulation especially as related to the competitive position of an organization.

The SPACE matrix can be used as a basis for other analyses, such as the SWOT analysis, BCG matrix model, industry analysis, or assessing strategic alternatives (IE matrix).

What is the SPACE matrix strategic management method?

To explain how the SPACE matrix works, it is best to reverse-engineer it. First, let's take a look at what the outcome of a SPACE matrix analysis can be, take a look at the picture below. The SPACE matrix is broken down to four quadrants where each quadrant suggests a different type or a nature of a strategy:

Aggressive Conservative Defensive Competitive

This is what a completed SPACE matrix looks like:

This particular SPACE matrix tells us that our company should pursue an aggressive strategy. Our company has a strong competitive position it the market with rapid growth. It needs to use its internal strengths to develop a market penetration and market development strategy. This can include product development, integration with other companies, acquisition of competitors, and so on.

Now, how do we get to the possible outcomes shown in the SPACE matrix? The SPACE Matrix analysis functions upon two internal and two external strategic dimensions in order to determine the organization's strategic posture in the industry. The SPACE matrix is based on four areas of analysis.

Internal strategic dimensions:

Financial strength (FS) Competitive advantage (CA)

External strategic dimensions:

Environmental stability (ES) Industry strength (IS)

There are many SPACE matrix factors under the internal strategic dimension. These factors analyze a business internal strategic position. The financial strength factors often come from company accounting. These SPACE matrix factors can include for example return on investment, leverage, turnover, liquidity, working capital, cash flow, and others. Competitive advantage factors include for example the speed of innovation by the company, market niche position, customer loyalty, product quality, market share, product life cycle, and others.

Every business is also affected by the environment in which it operates. SPACE matrix factors related to business external strategic dimension are for example overall economic condition, GDP growth, inflation, price elasticity, technology, barriers to entry, competitive pressures, industry growth potential, and others. These factors can be well analyzed using the Michael Porter's Five Forces model.

The SPACE matrix calculates the importance of each of these dimensions and places them on a Cartesian graph with X and Y coordinates.

The following are a few model technical assumptions: - By definition, the CA and IS values in the SPACE matrix are plotted on the X axis. - CA values can range from -1 to -6. - IS values can take +1 to +6.

- The FS and ES dimensions of the model are plotted on the Y axis. - ES values can be between -1 and -6. - FS values range from +1 to +6.

How do I construct a SPACE matrix?

The SPACE matrix is constructed by plotting calculated values for the competitive advantage (CA) and industry strength (IS) dimensions on the X axis. The Y axis is based on the environmental stability (ES) and financial strength (FS) dimensions. 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 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 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.

SPACE matrix example

The following table shows what values were used to create the SPACE matrix displayed above.

Each factor within each strategic dimension is rated using appropriate rating scale. Then averages are calculated. Adding individual strategic dimension averages provides values that are plotted on the axis X and Y.

Where do I go next?
The SPACE matrix can help to find a strategy. But, what if we have 2-3 strategies and need to decide which one is the best one? The Quantitative Strategic Planning Matrix (QSPM) model can help to answer this question.

Should you have any questions about the SPACE matrix, you might want to submit them at our management discussion forum.

FE Matrix (Internal Factor Evaluation)

IFE Matrix (Internal Factor Evaluation)
Internal Factor Evaluation (IFE) matrix is a strategic management tool for auditing or evaluating major strengths and weaknesses in functional areas of a business.

IFE matrix also provides a basis for identifying and evaluating relationships among those areas. The Internal Factor Evaluation matrix or short IFE matrix is used in strategy formulation.

The IFE Matrix together with the EFE matrix is a strategy-formulation tool that can be utilized to evaluate how a company is performing in regards to identified internal strengths and weaknesses of a company. The IFE matrix method conceptually relates to the Balanced Scorecard method in some aspects.

How can I create the IFE matrix?

The IFE matrix can be created using the following five steps:

Key internal factors...

Conduct internal audit and identify both strengths and weaknesses in all your business areas. It is suggested you identify 10 to 20 internal factors, but the more you can provide for the IFE matrix, the better. The number of factors has no effect on the range of total weighted scores (discussed below) because the weights always sum to 1.0, but it helps to diminish estimate errors resulting from subjective ratings. First, list strengths and then weaknesses. It is wise to be as specific and objective as possible. You can for example use percentages, ratios, and comparative numbers.

Weights...

Having identified strengths and weaknesses, the core of the IFE matrix, assign a weight that ranges from 0.00 to 1.00 to each factor. The weight assigned to a given factor indicates the relative importance of the factor. Zero means not important. One indicates very important. If you work with more than 10 factors in your IFE matrix, it can be easier to assign weights using the 0 to 100 scale instead of 0.00 to 1.00. Regardless of whether a key factor is an internal strength or weakness, factors with the greatest importance in your organizational performance should be assigned the highest weights. After you assign weight to individual factors, make sure the sum of all weights equals 1.00(or 100 if using the 0 to 100 scale weights).

The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm's industry.Weights are industry based.

Rating...

Assign a 1 to X rating to each factor. Your rating scale can be per your preference. Practitioners usually use rating on the scale from 1 to 4. Rating captures whether the factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). If you use the rating scale 1 to 4, then strengths must receive a 4 or 3 rating and weaknesses must receive a 1 or 2 rating.

Note, the weights determined in the previous step are industry based. Ratings are company based.

Multiply...

Now we can get to the IFE matrix math. Multiply each factor's weight by its rating. This will give you a weighted score for each factor.

Sum...

The last step in constructing the IFE matrix is to sum the weighted scores for each factor. This provides the total weighted score for your business.

Example of IFE matrix

The following table provides an example of an IFE matrix.

Weights times ratings equal weighted score.

What values does the IFE matrix take?

Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0 (assuming you used the 1 to 4 rating scale). The average score you can possibly get is 2.5.

Side note...

Why is the average 2.5 and not 2.0? Let's explain using an example. You have 4 factors, each has weight 0.25. Factors have the following rating: 1, 4, 1, 4. This will result in individual weighted scores 0.25, 1, 0.25, and 1 for factors 1 through 4. If you add them up, you will get total IFE matrix weighted score 2.5 which is also the average in this case.

Total weighted scores well below 2.5 point to internally weak business. Scores significantly above 2.5 indicate a strong internal position.

What if a key internal factor is both a strength and a weakness in IFE matrix?
When a key internal factor is both a strength and a weakness, then include the factor twice in the IFE Matrix. The same factor is treated as two independent factors in this case. Assign weight and also rating to both factors.

What are the benefits of the IFE matrix?

To explain the benefits, we have to start with talking about one disadvantage. IFE matrix or method is very much subjective; after all other methods such as the TOWS or SWOT matrix are subjective as well. IFE is trying to ease some of the subjectivity by introducing numbers into the concept.

Intuitive judgments are required in populating the IFE matrix with factors. But, having to assign weights and ratings to individual factors brings a bit of empirical nature into the model.

How does the IFE matrix differ from the SWOT matrix method?
More is better...

One difference is already obvious. It is the weights and ratings. This difference leads to another one. While it is suggested that the SWOT matrix is populated with only a handful of factors, the opposite is the case with the IFE matrix.

Populating each quadrant of the SWOT matrix with a large number of factors can lead to the point where we are over-analyzing the object of our analysis. This does not happen with IFE matrix. Including many factors into the IFE matrix leads to each factor having only a small weight. Therefore, if we are subjective and assign unrealistic rating to some factor, it will not matter very much because that particular factor has only a small weight (=small importance) in the whole matrix.

It is important to note that a thorough understanding of individual factors included in the IFE matrix is still more important than the actual numbers.

Are there other models I should know about?

The IFE matrix goes side by side with so-called EFE matrix which together lead into the IE matrix.

You might like to read about the SWOT matrix analysis, BCG matrix model, and Product Life Cycle.

EFE Matrix (External Factor Evaluation)

EFE Matrix (External Factor Evaluation)
External Factor Evaluation (EFE) matrix method is a strategic-management tool often used for assessment of current business conditions. The EFE matrix is a good tool to visualize and prioritize the opportunities and threats that a business is facing.

The EFE matrix is very similar to the IFE matrix. The major difference between the EFE matrix and the IFE matrix is the type of factors that are included in the model. While the IFE matrix deals with internal factors, the EFE matrix is concerned solely with external factors.

External factors assessed in the EFE matrix are the ones that are subjected to the will of social, economic, political, legal, and other external forces.

How do I create the EFE matrix?

Developing an EFE matrix is an intuitive process which works conceptually very much the same way like creating the IFE matrix. The EFE matrix process uses the same five steps as the IFE matrix.

List factors: The first step is to gather a list of external factors. Divide factors into two groups: opportunities and threats.

Assign weights: Assign a weight to each factor. The value of each weight should be between 0 and 1 (or alternatively between 10 and 100 if you use the 10 to 100 scale). Zero means the factor is not important. One or hundred means that the factor is the most influential and critical one. The total value of all weights together should equal 1 or 100.

Rate factors: Assign a rating to each factor. Rating should be between 1 and 4. Rating indicates how effective the firms current strategies respond to the factor. 1 = the response is poor. 2 = the response is below average. 3 = above average. 4 = superior. Weights are industryspecific. Ratings are company-specific. Multiply weights by ratings: Multiply each factor weight with its rating. This will calculate the weighted score for each factor. Total all weighted scores: Add all weighted scores for each factor. This will calculate the total weighted score for the company.

You can find more details about this approach as well as about possible values that the EFE matrix can take on the IFE matrixpage.

EFE matrix example

Total weighted score of 2.46 indicates that the business has slightly less than average ability to respond to external factors. (See the page on IFE matrix for an explanation of what category the 2.46 figure falls to.)

What should I include in the EFE matrix?

Now that we know how to construct or create the EFE matrix, let's focus on factors. External factors can be grouped into the following groups:

Social, cultural, demographic, and environmental variables: Economic variables Political, government, business trends, and legal variables

Below you can find examples of some factors that capture aspects external to your business. These factors may not all apply to your business, but you can use this listing as a starting point.

Social, cultural, demographic, and environmental factors...

- Aging population - Percentage or one race to other races - Per-capita income - Number and type of special interest groups - Widening gap between rich & poor - Number of marriages and/or divorces - Ethnic or racial minorities - Education - Trends in housing, shopping, careers, business - Number of births and/or deaths - Immigration & emigration rates

Economic factors...

- Growth of the economy - Level of savings, investments, and capital spending - Inflation - Foreign exchange rates - Stock market trends - Level of disposable income - Import and export factors and barriers - Product life cycle (see the Product life cycle page) - Government spending - Industry properties - Economies of scale - Barriers to market entry - Product differentiation - Level of competitiveness (see the Michael Porter's Five Forces model)

Political, government, business trends & legal factors...

- Globalization trends - Government regulations and policies - Worldwide trend toward similar consumption patterns - Internet and communication technologies (e-commerce) - Protection of rights (patents, trade marks, antitrust legislation) - Level of government subsidies - International trade regulations - Taxation - Terrorism - Elections and political situation home and abroad

Are there other models I should know about?

The EFE matrix goes side by side with so-called IFE matrix. The EFE matrix together with the IFE matrix leads to the IE matrix. And, the IE matrix can be extended into so-called SPACE matrix

Intensive, Integrative and Diversification Strategies

INTRODUCTION Develop proper marketing strategies is crucial to an organization to adopt changing market based on organizations capabilities. It also helps organization to increase market share and revenue by reaching new customer segments and new market. It could be using current product to penetrate market in other countries, or develop unrelated product to increase profit margin when attempt to new market share. There are few strategies highly recommended such as Intensive, integration and diversification strategy which are useful and workable for organization to apply. BODY Intensive strategy is used for organization for improve market share and revenue through market expend and product improvement. It is a strategy of aggregation or expansion under which growth is achieved by expanding the scale of operation. This strategy involves expansion of firms product range and market. Three alternative strategies in this regard are as follows: Market penetration, which means intend to increase market share for present product in present market. It means firms tries to penetrate deeper into the market to increase its market share. So, more funds spent on advertising and sale promotion to increase sale volume. For example, in order to increase market share in Singapore, NTUC FAIRPRICE has opened 24-hour store (FAIRPRICE EXTRA) to provide more conveniences to customer especially working adults as this customer category usually unable to shop during normal operation hour. It helps customer to have alternative choice and improve crowded and long queue problem during weekend.

Market development means introducing present product to new market in order to achieve higher sales and profit margin. It will be achieve successfully when products accepted in new market as total cost and average cost will be reduce. Firms may enjoy economies of scale and spread over risks instead focus in the single market. For example: OLD TOWN CAF as famous caf in Malaysia with serving white coffee and local foods. It opened few branches in Singapore to increase their oversea market share. OLD TOWN CAF able to spread risk of business into two markets which are Malaysia and Singapore. Business able to continue even one of the markets does not do well. Product Development which helps to improves present product to achieve more revenue. Under this strategy, a business seeks to grow by developing improved products for the present markets. The current product may be replaced or the new products may be introduced in addition to the existing products. For example, TOYOTA Company always seeks for new technology to increase its vehicle fuel efficiency. This improvement helps TOYOTA to be more competitive than others. As the result, TOYOTA Company gain more sales by selling hybrid vehicle as it helps to reduce pollution to environment as well. Integration strategies allow a firm to gain control over distributors, suppliers, and/or competitor. There are three types of integration strategies: forward, backward and horizontal. It also used for organization which improve relationship and information flow with distribution and supplier. Forward integration is meaning that firm can grow by taking over functions forward in the value chain previously provided by final manufacturers, distributors, or retailers (forward integration). This strategy provides more control over such things as final products/services and distribution. For example, FAIRPRICE setup own distribution center to receive delivered goods from various suppliers and then distribute to different branches in Singapore. It helps to make opportunity to FAIRPRICE to involve in the logistic industry and increase more power control in the distribution aspect to avoid stock out and affect its current business directly. Backward integration is means firm can grow by taking over functions earlier in the value chain that were previously provided by suppliers or other organizations (backward integration). For example, TOYOTA has agreement with its suppliers those promise to meet its JIT processing. It helps to improve cost of inventory and cash-flow. TOYOTA able to increase control powers these suppliers by investing suppliers business development. This is winwin deal as TOYOTA also involved itself into suppliers businesses also help to increase revenue and profit at time same. Horizontal integration refers to a strategy of seeking ownership of or increased control over a firms competitors. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies.

For example, CHERY bought over VOLVO with over 4 billion US Dollars. CHERY acquired ownership, goodwill, technology and customer share from VOLVO after the deal. It could lead CHERY to own higher technical support and resource for further development. At the same time, CHERY also eliminated a bigger competitor in automobile industry. Diversification strategy is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry which the business is already in. At the corporate level, it is generally and it is also very interesting entering a promising business outside of the scope of the existing business unit. Concentric diversification is one type of strategic thrust. Concentric diversification focuses on creating a portfolio of related businesses. The portfolio is usually developed by acquisition rather than by internal new business creation. Product-market synergies are a major issue in creating the portfolio of related strategic business units (SBUs). For example, NOKIA launched new features mobile phone which allows consumer surfing internet and mailbox. It helps to create competitive advantages to NOKIA. Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its current line of business. Synergy may result through the application of management expertise or financial resources, but the primary purpose of conglomerate diversification is improved profitability of the acquiring firm. Little, if any, concern is given to achieving marketing or production synergy with conglomerate diversification. For example, NOKIA business direction was mainly focusing on electronic product likes cable, television and other consumer products. When NOKIA started entry mobile phone market, it has created more revenue although industry totally different to previous. Horizontal diversification occurs when the company acquires or develops new products that could appeal to its current customer groups even though those new products may be technologically unrelated to the existing product lines. For example, petrol station always provides merchandise stored for conveniences its customers. Conclusion These three strategies provide organization to improve from different perspectives to achieve more market share and compete to its competitors. Intensive strategy helps firm to achieve deeper and new market share with relevant currents business unit. For integrative strategy, it linked to further expansion either vertical or horizontal or even both at the same. This strategy helps firms to own more control power to upstream and downstream (vertical chain) by investing involved. It also could be another solution to reduce competitor in the industry such as the case we mentioned above. However, firm may also apply diversification strategy into different businesses to gain more market share. It is a good way to spread over risks to different industry instead of only focusing into single industry. The requirement of these strategies are difference, firm might need

to tailor with current business direction and resource and facilities. Wrong decision making and divest might lead to higher switching cost from the business. Regards, Mike