Strategy Toolkit 1718643194

Strategy Toolkit
Strategy Toolkit | MindTools.com
Strategy Toolkit
This e-book is published by Mind Tools Limited, of

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Copyright © Mind Tools 2009-2011. All rights reserved.
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© Mind Tools Ltd, 2009-2011. 2

Contents
Introduction ................................................................................................................................ 4
SWOT Analysis ......................................................................................................................... 5
PEST Analysis ........................................................................................................................... 7
The Ansoff Matrix .....................................................................................................................10
The Boston Matrix ....................................................................................................................13
The GE-McKinsey Matrix ..........................................................................................................15
Porter's Five Forces..................................................................................................................19
Porter's Generic Strategies .......................................................................................................23
Have you found this e-book useful? .........................................................................................27

Strategy Toolkit
Introduced by Mind Tools CEO, James Manktelow
Welcome to our This e-book contains many of the classic
Strategy Toolkit! strategy tools taught on MBA courses in top
business schools – all in one convenient PDF.
Strategy is the art
of working out how Enjoy finding out about them – and putting them
to win in business into practice!
and life.
It involves
understanding your
environment,
crafting a unique
and valuable
competitive position, and using your resources
in such a way that you make best use of the
opportunities open to you. James Manktelow, CEO,
MindTools.com

SWOT Analysis
Discover new opportunities. Manage and eliminate threats.
SWOT Analysis is a powerful technique for people in your market. Be realistic: It's far too
understanding your Strengths and easy to fall prey to ‘not invented here
Weaknesses, and for looking at the syndrome’. (If you are having any difficulty with
Opportunities and Threats you face. this, try writing down a list of your
characteristics. Some of these will hopefully be
Used in a business context, it helps you carve a strengths!)
sustainable niche in your market. Used in a
personal context, it helps you develop your In looking at your strengths, think about them in
career in a way that takes best advantage of relation to your competitors – for example, if all
your talents, abilities and opportunities. your competitors provide high quality products,
then a high quality production process is not a
Business SWOT Analysis strength in the market, it is a necessity.
What makes SWOT particularly powerful is that,
with a little thought, it can help you uncover Weaknesses:
opportunities that you are well placed to exploit.  What could you improve?
And by understanding the weaknesses of your  What should you avoid?
business, you can manage and eliminate  What are people in your market likely to
threats that would otherwise catch you see as weaknesses?
unawares.  What factors lose you sales?
More than this, by looking at yourself and your Again, consider this from an internal and
competitors using the SWOT framework, you external basis: Do other people seem to
can start to craft a strategy that helps you perceive weaknesses that you do not see? Are
distinguish yourself from your competitors, so your competitors doing any better than you? It
that you can compete successfully in your is best to be realistic now, and face any
market. unpleasant truths as soon as possible.
How to Use the Tool Opportunities:

Start by downloading a copy of our free SWOT  Where are the good opportunities facing
Analysis Template. you?
 What are the interesting trends you are
To carry out a SWOT Analysis, answer the aware of?
following questions:
Useful opportunities can come from such things
Strengths: as:
 What advantages does your company  Changes in technology and markets on
have? both a broad and narrow scale.
 What do you do better than anyone else?  Changes in government policy related to
 What unique or lowest-cost resources do your field.
you have access to?  Changes in social patterns, population
 What do people in your market see as profiles, lifestyle changes, etc.
your strengths?  Local events.
 What factors mean that you ‘get the sale’?
A useful approach for looking at opportunities is
Consider this from an internal perspective, and to look at your strengths and ask yourself
from the point of view of your customers and whether these open up any opportunities.

Alternatively, look at your weaknesses and ask Strengths and weaknesses are often internal
yourself whether you could create opportunities to your organization. Opportunities and
by eliminating them. threats often relate to external factors. For this
reason the SWOT Analysis is sometimes called
Threats: Internal-External Analysis and the SWOT Matrix
 What obstacles do you face? is sometimes called an IE Matrix Analysis Tool.
 What is your competition doing that you
should be worried about? You can also apply SWOT Analysis to your
 Are the required specifications for your competitors. As you do this, you'll start to see
job, products or services changing? how and where you should compete against
 Is changing technology threatening your them.
position?
 Do you have bad debt or cash-flow Example
problems? A start-up small consultancy business might
 Could any of your weaknesses seriously draw up the following SWOT matrix:
threaten your business?
Strengths:
Carrying out this analysis will often be  We can respond very quickly as we have
illuminating – both in terms of pointing out what no red tape, no need for higher
needs to be done, and in putting problems into management approval, etc.
perspective.  We can give really good customer care,
as the current small amount of work
Tip: means we have plenty of time to devote
SWOT can be used in two ways – as a to customers.
simple icebreaker helping people get  Our lead consultant has strong reputation
together and ‘kick off’ strategy formulation, or within the market.
in a more sophisticated way as a serious  We can change direction quickly if our
strategy tool. If you're using it as a serious approach isn't working.
tool, make sure you're rigorous in the way  We have little overhead, so can offer
you apply it: good value to customers.
 Only accept precise, verifiable Weaknesses:

statements (‘Cost advantage of  Our company has no market presence or
US$10/ton in sourcing raw material x’, reputation.
rather than ‘Good value for money’).  We have a small staff with a shallow skills
 Ruthlessly prune long lists of factors, base in many areas.
and prioritize factors so that you spend  We are vulnerable to vital staff being sick,
your time thinking about the most leaving, etc.
significant factors.  Our cash flow will be unreliable in the
 Make sure that options generated are early stages.
carried through to later stages in the
strategy formation process. Opportunities:
 Apply it at the right level – for example,  Our business sector is expanding, with
at product or product line level, rather many future opportunities for success.
than at the much vaguer whole  Our local council wants to encourage
company level. local businesses with work where
 Supplement it with other option- possible.
generation tools – none is likely to be  Our competitors may be slow to adopt
completely comprehensive. new technologies.

Threats: services to local businesses. Marketing would

 Will developments in technology change be in selected local publications, to get the
this market beyond our ability to adapt? greatest possible market presence for a set
 A small change in focus of a large advertising budget. The consultancy should
competitor might wipe out any market keep up-to-date with changes in technology
position we achieve. where possible.
The consultancy may therefore decide to You can see this analysis in diagram format in
specialize in rapid response, good value figure 1 below.
Key Points Opportunities and Threats you face. This helps

SWOT Analysis is a simple but powerful you to focus on your strengths, minimize
framework for analyzing your company's threats, and take the greatest possible
Strengths and Weaknesses, and the advantage of opportunities available to you.
PEST Analysis
Understanding ‘big picture’ forces of change
Related variants: PESTLE, PESTEL, PESTLIED, STEEPLE and SLEPT Analysis
PEST Analysis is a simple, useful and widely- such, it is used by business leaders worldwide
used tool that helps you understand the ‘big to build their vision of the future.
picture’ of your Political, Economic, Socio-
Cultural and Technological environment. As It is important for these reasons:

 By making effective use of PEST Political:

Analysis, you ensure that what you are  Government type and stability.
doing is aligned positively with the  Freedom of press, rule of law and levels
powerful forces of change that are of bureaucracy and corruption.
affecting our world. By taking advantage  Regulation and de-regulation trends.
of change, you are much more likely to be  Social and employment legislation.
successful than if your activities oppose it.  Tax policy, and trade and tariff controls.
 Good use of PEST Analysis helps you  Environmental and consumer-protection
avoid taking action that is doomed to legislation.
failure from the outset, for reasons  Likely changes in the political
beyond your control. environment.
 PEST is useful when you start operating
in a new country or region. Use of PEST Economic:
helps you break free of unconscious  Stage of business cycle.
assumptions, and helps you quickly adapt  Current and project economic growth,
to the realities of the new environment. inflation and interest rates.
 Unemployment and labor supply.
How to Use the Tool  Labor costs.
PEST is a simple mnemonic standing for  Levels of disposable income and income
Political, Economic, Socio-Cultural and distribution.
Technological.  Impact of globalization.
 Likely impact of technological or other
To use this tool, follow this three stage process: change on the economy.
1. Brainstorm the relevant factors that  Likely changes in the economic
apply to you. environment.
2. Identify the information that applies to
these factors. Socio-Cultural:
3. Draw conclusions from this information.  Population growth rate and age profile.
 Population health, education and social
Download our free worksheet here, to record mobility, and attitudes to these.
your analysis.  Population employment patterns, job
market freedom and attitudes to work.
Tip:  Press attitudes, public opinion, social
The important point is to move from the attitudes and social taboos
second step to the third step: it is sterile just  Lifestyle choices and attitudes to these.
to describe factors without thinking through  Socio-Cultural changes.
what they mean. However, be careful not to
assume that your analysis is perfect: use it Technological Environment:
as a starting point, and test your conclusions  Impact of emerging technologies.
against the reality you experience.  Impact of Internet, reduction in
communications costs and increased
The following factors may help as a starting remote working.
point for brainstorming (but make sure you  Research and Development activity.
include other factors that may be appropriate to  Impact of technology transfer.
your situation):
These are shown in Figure 1 on the next page:

Figure 1: PEST Analysis
Other forms of PEST – PESTLE, Example

PESTLIED, STEEPLE and SLEPT: We’re going to avoid giving an example here,
Some people prefer to use different flavors because of the huge potential for causing
of PEST Analysis, using other factors for offense: few societies seem perfect to
different situations. The variants are: outsiders, and there are few things as irritating
as having an outsider criticize one's own
PESTLE/PESTEL: Political, Economic, country...
Sociological, Technological, Legal,
Environmental; However, a broad principle is that things that
PESTLIED: Political, Economic, Social, make activity more difficult for people or
Technological, Legal, International, organizations raise the cost of doing business:
Environmental, Demographic; business is either stopped altogether, or costs
STEEPLE: Social/Demographic, more as people spend time and money
Technological, Economic, Environmental, circumventing difficulties. The higher the cost of
Political, Legal, Ethical; and doing business in a region, the more project
SLEPT: Social, Legal, Economic, Political, profitability is squeezed or eliminated. And
Technological given that businesspeople normally have at
least some level of intelligence, businesses and
Choose the flavor that most suits you! projects that could otherwise operate are never

launched – meaning that less economic activity environment in which you are operating, and
takes place. (The lower the amount of the opportunities and threats that lie within it. By
economic activity, the poorer and less capable understanding your environment, you can take
societies tend to be.) advantage of the opportunities and minimize
the threats.
Another broad principle is wherever there is
rapid or major change in an area, there are PEST is a mnemonic standing for Political,
likely to be new opportunities and threats that Economic, Social and Technological. These
arise. Smart people and companies will take headings are used firstly to brainstorm the
advantage of the opportunities and manage the characteristics of a country or region and, from
threats. this, draw conclusions as to the significant
forces of change operating within it.
And do remember that few situations are
perfect: it is up to us to make the most of the This provides the context within which more
situation in which we find ourselves. detailed planning can take place to take full
advantage of the opportunities that present
Key Points themselves.
PEST Analysis is a useful tool for
understanding the ‘big picture’ of the
The Ansoff Matrix

Understanding the risks of different options
Also known as the Product/Market Expansion Grid
For a whole variety of reasons, there are times the potentially considerable investment that
when as an individual or in business you want you’ll need to make.
or need to expand or change your field or
market. In business, you might need to achieve Understanding the Tool
economies of scale, make more money for The Ansoff Matrix was first published in the
investors, or gain national or even global Harvard Business Review in 1957, and has
recognition of their brand. As an individual, you given generations of marketers and small
may want to change company, or even career. business leaders a quick and simple way to
develop a strategic approach to growth.
Having decided that you want to grow your
business or career, you’ll have hundreds of Sometimes called the Product/Market
ideas about things you could do. For your Expansion Grid, it shows four growth options for
business, this means new products, new business formed by matching up existing and
markets, new channels, or new marketing new products and services with existing and
campaigns. For your career, it means new new markets, as shown in Figure 1 on the next
skills, new roles, and even new industries. page.
That’s great! But which ones should you The Matrix essentially shows the risk that a
choose? And why? particular strategy will expose you to, the idea
being that each time you move into a new
Using a strategic approach, such as the Ansoff quadrant (horizontally or vertically) you increase
Model or Matrix, helps you evaluate your risk.
options and choose the one that suits your
situation best, and gives you the best return on
© Mind Tools Ltd, 2009-2011. 10

Figure 1: The Ansoff Matrix - Business Figure 2: The Ansoff Matrix - Career
Market Diversification Industry Retraining

New Development New Transfer
Industries
Markets
Existing Market Product Existing Expert Functional Skills

Penetration Development Development Development
Existing Products & New Existing Functional New

Services Skills
The Corporate Ansoff Matrix Tip 1:

Looking at it from a business perspective, Interpret this according to your
staying with your existing product in your circumstances. For example, an accountant
existing market is a low risk option: You know may find it easy to switch from one industry
the product works, and the market holds few to another. But a salesman doing this might
surprises for you. lose contacts that would take a while to
rebuild.
However, you expose yourself to a whole new
level of risk either moving into a new market Tip 2:
with an existing product, or developing a new Don't be too scared by risk – if you manage
product for an existing market. The market may risk correctly (for example, by researching
turn out to have radically different needs and carefully, making contingency plans,
dynamics than you thought, or the new product arranging insurance, and suchlike) and
may just not work or sell. ‘calculate’ it well, then it can be well worth
taking quite large risks.
And by moving two quadrants and targeting a
new market with a new product, you increase
your risk to yet another level! How to Use the Tool
Use of the tool is straightforward:
Personal Ansoff
Looking at it from a personal perspective, just 1. Start by downloading either our free
staying where you are is (usually!) a low risk Corporate Ansoff or Personal Ansoff
option. worksheet. Then plot the approaches
you're considering on the matrix. The
Switching to a new role in the same company, table on the next page shows how you
or changing to a similar job with a company in might classify different approaches.
the same industry is a higher risk option. And
switching to a new role in a new industry has an
even higher level of risk.
This is shown in figure 2.
© Mind Tools Ltd, 2009-2011. 11

Market Development Diversification

Here, you’re targeting new markets, or new areas This strategy is risky: There’s often little scope for
of the market. You’re trying to sell more of the using existing expertise or achieving economies of
same things to different people. Here you might: scale, because you are trying to sell completely
different products or services to different
 Target different geographical markets at customers.
home or abroad.
 Use different sales channels, such as online Its main advantage is that, should one business
or direct sales if you are currently selling suffer from adverse circumstances, the other is
through the trade. unlikely to be affected.
 Target different groups of people, perhaps
different age groups, genders or
demographic profiles from your normal
customers.
Market Penetration Product Development
With this approach, you’re trying to sell more of Here, you’re selling more things to the same
the same things to the same people. Here you people. Here you might:
might:
 Extend your product by producing different
 Advertise, to encourage more people within variants, or packaging existing products it in
your existing market to choose your product, new ways.
or to use more of it.  Develop related products or services (for
 Introduce a loyalty scheme. example, a domestic plumbing company
 Launch price or other special offer might add a tiling service – after all, if they’re
promotions. plumbing in a new kitchen, most likely tiling
 Increase your sales force activities. will be needed!).
 Buy a competitor company (particularly in  In a service industry, increase your time to
mature markets). market, customer service levels, or quality.
2. Manage risk appropriately. For example, Taking Ansoff Further

if you're switching from one quadrant to Some marketers use a nine-box grid for a more
another, make sure that: sophisticated analysis. This adds ‘modified’
products between existing and new ones (for
 You research the move carefully. example, a different flavor of your existing pasta
 You build the capabilities needed to sauce rather than launching a soup), and
succeed in the new quadrant. ‘expanded’ markets between existing and new
 You've got plenty of resources to ones (for example, opening another store in a
cover a possible thin period while nearby town, rather than going into online
you're developing and learning how sales).
to sell the new product, or are
learning what makes the new market This is useful as it shows the difference
tick. between product extension and true product
 You have firstly thought through development, and also between market
what you have to do if things don't expansion and venturing into genuinely new
work out, and that failure won't markets (see Figure 3). However, be careful of
‘break’ you. the three ‘options’ in blue, as they involve trying
to do two things at once without the one benefit
© Mind Tools Ltd, 2009-2011. 12

Figure 3: The 9-Box Grid

of a true diversification strategy (escaping a
downturn in one product market).
New Market Partial Diversification
Development Diversification
Market s
Expanded Market Limited Partial
Expansion Diversification Diversification
Existing Market Product Product

Penetration Extension Development
Existing Modified New

Products
& Services
The Boston Matrix

Focusing effort to give the greatest returns
Also called the BCG Matrix, the Growth-Share Matrix and Portfolio Analysis
If you enjoy visual representations and vivid money (this assumption is based on the idea
descriptions of your business then you'll love that you will have been in the market long
the Boston Matrix! enough to have learned how to be profitable,
and will be enjoying scale economies that give
Also called the BCG Matrix, it provides a useful you an advantage).
way of looking at the opportunities open to you,
and helps you analyze which segments of your The question it asks is, "Should you be
business are performing well – and which ones investing your resources into that product line
aren't. That way, you can decide on the most just because it is making you money?" The
appropriate investment strategy for your answer is, "not necessarily."
business in the future, and where best to
allocate your resources. This is where market growth comes into play.
Market growth is used as a measure of a
Understanding the Model market's attractiveness. Markets experiencing
Market Share and Market Growth high growth are ones where the total market is
To understand the Boston Matrix you need to expanding, which should provide the
understand how market share and market opportunity for businesses to make more
growth interrelate. money, even if their market share remains
stable.
Market share is the percentage of the total
market that is being serviced by your company, By contrast, competition in low growth markets
measured either in revenue terms or unit is often bitter, and while you might have high
volume terms. The higher your market share, market share now, what will the situation look
the higher proportion of the market you control. like in a few months or a few years? This
makes low growth markets less attractive.
The Boston Matrix assumes that if you enjoy a
high market share you will normally be making
© Mind Tools Ltd, 2009-2011. 13

Note: get attention and exploit new opportunities.

The origin of the Boston Matrix lies with the However it’s only worth expending a certain
Boston Consulting Group in the early 1970s. amount of effort, because the market isn’t
It was devised as a clear and simple method growing and your opportunities are limited.
for helping corporations decide which parts
of their business they should allocate their Stars: High Market Share / High Market
available cash to. Today, this is as important Growth
as ever because of the limited availability of Here you're well established, and growth is
credit. exciting! There should be some strong
opportunities here, and you should work hard to
However, the Boston Matrix is also a good realize them.
tool for thinking about where to apply other
finite resources: people, time and equipment. Question Marks (Problem Child): Low
Market Share / High Market Growth
These are the opportunities no one knows what
The Matrix Itself to do with. They aren’t generating much
The Boston Matrix categorizes opportunities revenue right now because you don’t have a
into four groups, shown on axes of Market large market share. But, they are in high growth
Growth and Market Share: markets so the potential to make money is
there.
Figure 1: The Boston Matrix
Question Marks might become Stars and

eventual Cash Cows, but they could just as
High
easily absorb effort with little return. These
Question Stars opportunities need serious thought as to
Marks whether increased investment is warranted.
Market Growth
How to Use the Tool

To use the Boston Matrix to look at your
opportunities, first download our free
worksheet, and then use the following steps:
Dogs Cash Cows
Step One: Plot your opportunities in terms of
their relative market presence, and market
Low growth on the blank matrix provided on the
worksheet.
Low Market Share High
Step Two: Classify them into one of the four
These groups are explained below: categories. If a product seems to fall right on
one of the lines, take a real hard look at the
Dogs: Low Market Share / Low Market
Growth Tip:
In these areas, your market presence is weak, Be careful about these lines – there’s
so it’s going to take a lot of hard work to get nothing magical about them or their position.
noticed. Also, you won’t enjoy the scale There may be very little real difference
economies of the larger players, so it’s going to between a Problem Child with a market
be difficult to make a profit. share of 49%, and a Star with a market
share of 51%. It’s also not necessarily true
Cash Cows: High Market Share / Low Market that the line should run through the 50%
Growth position. As ever, use your common sense.
Here, you’re well-established, so it’s easier to
© Mind Tools Ltd, 2009-2011. 14

situation and rely on past performance to help Tip 2:

you decide which side you will place it. A similar (and equally powerful) tool is the
Action Priority Matrix, which helps you pick
Step Three: Determine what you will do with projects which legitimately give you the
each product/product line. There are typically quickest and highest value returns. By using
four different strategies to apply: the BCG Matrix and Action Priority Matrix
together, you get the best of both worlds!
 Build Market Share: Make further
investments (for example, to maintain
Star status, or turn a Question Mark into a Key Points
Star) The Boston Matrix is an effective tool for quickly
 Hold: Maintain the status quo (do nothing) assessing the options open to you, both on a
 Harvest: Reduce the investment (enjoy corporate and personal basis.
positive cash flow and maximize profits
from a Star or Cash Cow) With its easily understood classification into
 Divest: For example, get rid of the Dogs, Dogs, Cash Cows, Question Marks, and Stars,
and use the capital to invest in Stars and it helps you quickly and simply screen the
some Question Marks. opportunities open to you – and identify where
best to invest the money, time, and effort you
have available.
Tip 1:
From a personal perspective, you can
evaluate the opportunities open to you by
substituting the dimension of Market Share
with one of Professional Skills. Plot the
options open to you on the personal version
of the BCG Matrix, and take action
appropriately.
The GE-McKinsey Matrix

Determining investment priorities
If you had endless amounts of money and time, a way of looking at the opportunities open to
there would probably be no need to figure out you, so that you can choose the ones that will
how best to allocate your resources. But, in give you the best results. In the BCG 2 x 2
reality, we all have to prioritize our investments matrix, the more of each dimension your
– particularly in difficult economic conditions. product line has, the more attractive it is – and,
therefore, the more you should invest in it.
When faced with this challenge in your
organization, how do you decide which product General Electric (GE) liked the visual part of
groups to continue, which market segments to BCG's matrix, but not the dimensions. GE
focus on, or which business units to sell? To therefore asked its consulting firm, McKinsey &
make that decision, you must first understand Company, to create a model that better suited
your business portfolio – and you start by GE's needs. The result was the 3 x 3 GE Matrix
determining the benchmarks to define your (also called the McKinsey Matrix, the Business
portfolio. Strength Matrix, or the Nine-Box Matrix).
In the 1970s, the Boston Consulting Group

(BCG) developed the growth-share matrix,
which uses market growth and market share as
© Mind Tools Ltd, 2009-2011. 15

Figure 1: A Blank GE/McKinsey Matrix some examples of attractiveness factors that

may or may not be appropriate for your
High business:
 Market growth (from BCG's matrix).

Industry Attractiveness
 Market size.
 PEST factors – political, economic,
Med sociocultural, and technological elements.
 Porter's Five Forces factors – supplier
power, buyer power, strength of
competition, threat of substitution, and
barriers to entry.
 Workforce availability.
 Fluctuations/changes in demand.
Low  Profit margins.
 Legal and/or regulatory pressures.
High Medium Low
Business Unit Strength Follow these steps to determine industry

attractiveness:
The original GE Matrix showed industry  Brainstorm the factors you'll use to
attractiveness on the x-axis, and business determine how attractive your various
unit strength on the y-axis. Over time, it has markets are. This is a subjective process,
become more common to do the opposite, and different organizations will come up
which is what you see above. with different results. Just be aware that
you'll need to apply all of these factors to
The GE matrix uses the dimensions of industry all of the business units or product lines
attractiveness and business unit strength. Both that you're evaluating. This helps you
of these include a wide variety of factors that compare the overall attractiveness of
the organization itself chooses. The GE matrix each unit or product that you're
is considered more sophisticated than the BCG considering.
matrix because it has more flexibility and a
wider scope.  Assign a weight to each factor. Your
weights must add up to 1.0 when you're
By plotting the positions of various business finished.
units, product lines, or products, a company can
‘see' how best to allocate its resources. You Then, rate each business unit on each
may find this quick summary approach industry attractiveness factor. Use this
particularly effective for developing, evaluating, scale of 1–9:
and communicating strategic decisions.
1 = Extremely unattractive.
Using the GE Matrix 5 = Industry average.
9 = Extremely attractive.
Step 1: Determine Industry Attractiveness
(vertical axis) Multiply the rating by the weight to
There are several factors that define an calculate a score for each factor for each
industry, and they're often used to help you business unit. Add these scores together,
determine whether or not you want to enter a and use them to plot the matrix.
particular market in the first place. Here are
© Mind Tools Ltd, 2009-2011. 16

Attractiveness Business Business Business

Weight
Factor Unit 1 Unit 2 Unit 3
Weighted Weighted Weighted
Rating Rating Rating
Market size 0.10 3 0.30 7 0.70 8 0.80
Market growth 0.30 4 1.20 7 2.10 5 1.50
Profit margins 0.25 2 0.50 8 2.00 4 1.00
Volatility 0.15 5 0.75 6 0.90 7 1.05
Strength of
0.20 3 0.60 7 1.40 5 1.00
competition
TOTALS 1.00 3.35 7.10 5.35
Step 2: Determine Business Strength

(horizontal axis) The steps for determining business strength are
'Business strength' brings together a the same as for industry attractiveness:
combination of factors that determine how
strong a particular business unit or product is,  Brainstorm the factors you'll use to
compared with others in its industry. Again, you determine how strong your business unit
can use a variety of factors to gauge your or product market is. Remember, you'll
business strength, including the following: apply all of these factors to all business
units or product lines.
 Market share (from BCG's matrix).
 Production capacity.  Assign a weight to each factor. Your
 Production flexibility. weights must add up to 1.0 when you're
 Product differentiation. finished.
 Company reputation.
 Managerial competence.  Rate each business unit on each
 Customer loyalty. business strength factor. Use this scale of
1–9:
(A SWOT analysis is a useful framework for
determining and evaluating business strengths.) 1 = Extremely weak.
5 = Industry average.
The business strength dimension of the matrix 9 = Extremely strong/represents best
focuses on elements that an individual practice.
company controls. However, bear in mind that
operating in an attractive market may not be Multiply the rating by the weight to
profitable, if your organization lacks the ability calculate a score for each factor for each
to supply customers effectively with what they business unit. Add these scores together,
want. and use them to plot the matrix.
© Mind Tools Ltd, 2009-2011. 17

Strength
Weight Business Unit 1 Business Unit 2 Business Unit 3
Factor
Weighted Weighted Weighted
6 4 3
Market share 0.30 1.70 1.20 0.90
(45%) (20%) (10%)
Manufacturing
0.15 5 0.75 3 0.45 4 0.60
capacity
Quality 0.25 7 1.75 7 1.75 5 1.25
Workforce
0.10 7 0.70 8 0.80 4 0.40
skill
Marketing
0.20 8 1.60 3 0.60 8 1.60
ability
TOTALS 6.60 4.80 4.75
Step 3: Plot the Information

Plot your business units, or product groups, Sometimes a matrix includes an arrow
onto the matrix (see the example in Figure 2). leading from the circle. This indicates the
Use a circle for each business unit, following direction in which the business unit is
these guidelines: expected to move, relative to competitors
and the industry as a whole.
 Business unit strength and industry
attractiveness are shown by the circle's The resulting matrix is easy to read, and it
position on the matrix. identifies which parts of your company are
 Market size is represented by the size of doing well, and which ones are doing poorly.
the circle.
 Market share is represented by a pie
Interpreting the Matrix
chart within the circle.
Finally, the GE matrix describes a set of
Figure 2: Example GE/McKinsey Matrix strategies related to the positions of the
business units. There are three general
strategies:
9
1. Grow – Strategic Business Units (SBUs)

20%
in the top left corner (dark gray squares)
Industry Attractiveness
BU2
have a relatively strong position in an
6 attractive industry. This indicates that it's
10%
a good idea to invest in these. Look for
BU3 growth opportunities, and build on
45%
current strengths to improve your
3
BU1 position in the market.
2. Hold – SBUs in the middle (light gray

squares) are average. Some might have
a good position in a slower industry, or
1
9 6 3 1 they might have a weak position in a
Business Unit Strength
good market. There's something positive
© Mind Tools Ltd, 2009-2011. 18

that you can develop within these Key Points

business units. Reasonable strategies Use the GE-McKinsey matrix to assign
that you can consider here are to invest investment priorities in various parts of your
more resources, defend your current organization. By analyzing a business unit
position, or attempt to find a niche. based on its market strength and the
attractiveness of its industry, you can quickly
3. Harvest/Exit – SBUs in the bottom right see how well positioned it is for growth and
corner (white squares) are in an potential. If business units have a favorable
unattractive industry, a weak position, or position in both or one of these dimensions, it's
both. There are no promising scenarios, probably worth continuing to invest in them.
so it's probably best to look at exit Business units in the lower part of the matrix
strategies. It's not a good idea to invest are likely to contribute little benefit to your
any further in these business units. organization.
Instead, use your resources for units in
other parts of the matrix. The GE matrix gives you an excellent overview
of your strategic business units, or other
Remember that many more criteria are relevant segments of your company. From there, you
to a complete analysis of a business unit, not can start a detailed investigation of the exact
just the ones in the GE matrix. The matrix strategy to pursue – so that you can maximize
provides a great visual summary of relative your market position, and best allocate your
positions, and it's a good starting point to resources.
investigate the strategic direction that best fits
each business unit or product line.
Porter's Five Forces

Assessing the balance of power in a business situation
The Porter's 5 Forces tool is a simple but How to Use the Tool
powerful tool for understanding where power Five Forces Analysis assumes that there are
lies in a business situation. This is useful, five important forces that determine competitive
because it helps you understand both the power in a situation. These are:
strength of your current competitive position,
and the strength of a position you're looking to 1. Supplier Power: Here you assess how
move into. easy it is for suppliers to drive up prices.
This is driven by the number of suppliers
With a clear understanding of where power lies, of each key input, the uniqueness of
you can take fair advantage of a situation of their product or service, their strength
strength, improve a situation of weakness, and and control over you, the cost of
avoid taking wrong steps. This makes it an switching from one to another, and so
important part of your planning toolkit. on. The fewer the supplier choices you
have, and the more you need suppliers’
Conventionally, the tool is used to identify help, the more powerful your suppliers
whether new products, services or businesses are.
have the potential to be profitable. However it
can be very illuminating when used to 2. Buyer Power: Here you ask yourself
understand the balance of power in other how easy it is for buyers to drive prices
situations too. down. Again, this is driven by the
number of buyers, the importance of
each individual buyer to your business,
© Mind Tools Ltd, 2009-2011. 19

the cost to them of switching from your manually or by outsourcing it. If

products and services to those of substitution is easy and substitution is
someone else, and so on. If you deal viable, then this weakens your power.
with few, powerful buyers, they are often
able to dictate terms to you. 5. Threat of New Entry: Power is also
affected by the ability of people to enter
3. Competitive Rivalry: What is important your market. If it costs little in time or
here is the number and capability of money to enter your market and
your competitors – if you have many compete effectively, if there are few
competitors, and they offer equally economies of scale in place, or if you
attractive products and services, then have little protection for your key
you’ll most likely have little power in the technologies, then new competitors can
situation. If suppliers and buyers don’t quickly enter your market and weaken
get a good deal from you, they’ll go your position. If you have strong and
elsewhere. On the other hand, if no-one durable barriers to entry, then you can
else can do what you do, then you can preserve a favorable position and take
often have tremendous strength. fair advantage of it.
4. Threat of Substitution: This is affected These forces can be neatly brought together in
by the ability of your customers to find a a diagram like the one below:
different way of doing what you do – for To use the tool to understand your situation,
example, if you supply a unique look at each of these forces one-by-one and
software product that automates an write your observations on our free worksheet
important process, people may which you can download here.
substitute by doing the process
© Mind Tools Ltd, 2009-2011. 20

Porter’s Five Forces
Threat of New Entry: Competitive Rivalry:

- Time and cost of entry Threat of - Number of competitors
- Specialist knowledge - Quality differences
- Economies of scale New - Other differences
- Cost advantages Entry - Switching costs
- Technology protection - Customer loyalty
- Barriers to entry - Costs of leaving market
- etc.
Supplier Competitive Buyer

Power Rivalry Power
Supplier Power:
- Number of suppliers
- Size of suppliers Buyer Power:
- Number of customers
- Uniqueness of service
- Size of each order
- Your ability to substitute
- Differences between
- Cost of changing
competitors
- Price sensitivity
Threat of Substitution: Threat of - Ability to substitute
- Substitute performance - Cost of changing
- Cost of change Substitution
Brainstorm the relevant factors for your market

or situation, and then check against the factors This tool was created by Harvard Business
listed for the force in the diagram above. School professor, Michael Porter, to analyze
the attractiveness and likely-profitability of an
Then download our free worksheet, mark the industry. Since publication, it has become
key factors on the diagram, and summarize the one of the most important business strategy
size and scale of the force on the diagram. An tools. The classic article which introduces it
easy way of doing this is to use, for example, a is ‘How Competitive Forces Shape Strategy’
single ‘+’ sign for a force moderately in your in Harvard Business Review 57, March –
favor, or ‘--’ for a force strongly against you (you April 1979, pages 86-93.
can see this in the example below).
Example
Then look at the situation you find using this Martin Johnson is deciding whether to switch
analysis and think through how it affects you. career and become a farmer – he's always
Bear in mind that few situations are perfect; loved the countryside, and wants to switch to a
however use environmental scanning as a career where he's his own boss. He creates the
framework for thinking through what you could following Five Forces Analysis as he thinks the
change to increase your power with respect to situation through:
each force.
© Mind Tools Ltd, 2009-2011. 21

Porter’s Five Forces - Buying a Farm
Threat of New Entry:

- Not too expensive to enter Competitive Rivalry:
the industry. Threat of - Very many competitors
- Experience needed, but - Commodity products
training easily available
New - Low switching costs
- Some economies of scale Entry - Low customer loyalty
- Some cost benefits if in - High costs of
leaving market
-
Business for some time
- No technology protection - Overall: --
- Low barriers to entry
- New entry quite easy: -
Supplier
Power o
Competitive
Rivalry -- Buyer
Power
--
Supplier Power:
- Moderate no. of suppliers
- Suppliers large
- Similar products
- Able to substitute
- Buyer Power:
- Few, large supermarkets
- Able to change - May be co-operatives?
- Neutral supplier power - Very large orders
- Homogeneous product
Threat of Substitution: Threat of - Extreme price sensitivity
- Some cross-product subst. Substitution - Ability to substitute
- Ability to import food - High buyer power: --
- Some substitution: -
This worries him: Key Points

Porter's Five Forces Analysis is an important
 The threat of new entry is quite high: if tool for assessing the potential for profitability in
anyone looks as if they’re making a an industry. With a little adaptation, it is also
sustained profit, new competitors can useful as a way of assessing the balance of
come into the industry easily, reducing power in more general situations.
profits.
 Competitive rivalry is extremely high: if It works by looking at the strength of five
someone raises prices, they’ll be quickly important forces that affect competition:
undercut. Intense competition puts strong
downward pressure on prices.  Supplier Power: The power of suppliers
 Buyer Power is strong, again implying to drive up the prices of your inputs;
strong downward pressure on prices.  Buyer Power: The power of your
 There is some threat of substitution. customers to drive down your prices;
 Competitive Rivalry: The strength of
Unless he is able to find some way of changing competition in the industry;
this situation, this looks like a very tough  The Threat of Substitution: The extent
industry to survive in. Maybe he'll need to to which different products and services
specialize in a sector of the market that's can be used in place of your own; and
protected from some of these forces, or find a  The Threat of New Entry: The ease with
related business that's in a stronger position. which new competitors can enter the
© Mind Tools Ltd, 2009-2011. 22

market if they see that you are making of the position and your ability to make a
good profits (and then drive your prices sustained profit in the industry.
down).
You can then look at how you can affect each
By thinking through how each force affects you, of the forces to move the balance of power
and by identifying the strength and direction of more in your favor.
each force, you can quickly assess the strength
Porter's Generic Strategies

Choosing your route to competitive advantage
Which do you prefer when you fly: a cheap, no- the generic strategies "Cost Leadership" (no
frills airline, or a more expensive operator with frills), "Differentiation" (creating uniquely
fantastic service levels and maximum comfort? desirable products and services) and "Focus"
And would you ever consider going with a small (offering a specialized service in a niche
company which focuses on just a few routes? market). He then subdivided the Focus strategy
into two parts: "Cost Focus" and "Differentiation
The choice is up to you, of course. But the point Focus". These are shown in Figure 1 below.
we're making here is that when you come to
book a flight, there are some very different Figure 1: Porter’s Generic Strategies
options available.
Why is this so? The answer is that each of

these airlines has chosen a different way of Cost
Broad
achieving competitive advantage in a crowded Differentiation

Leadership
marketplace.
Scope
The no-frills operators have opted to cut costs

to a minimum and pass their savings on to
Narrow
customers in lower prices. This helps them grab Cost Differentiation

market share and ensure their planes are as full Focus Focus
as possible, further driving down cost. The
luxury airlines, on the other hand, focus their
efforts on making their service as wonderful as Cost Differentiation
possible, and the higher prices they can
Source of Competitive Advantage
command as a result more than make up for
their higher costs.
The terms "Cost Focus" and "Differentiation
Meanwhile, smaller airlines try to make the Focus" can be a little confusing, as they
most of their detailed knowledge of just a few could be interpreted as meaning "A focus on
routes to provide better or cheaper services cost" or "A focus on differentiation".
than their larger, international rivals. Remember that Cost Focus means
emphasizing cost-minimization within a
These three approaches are examples of focused market, and Differentiation Focus
"generic strategies", because they can be means pursuing strategic differentiation
applied to products or services in all industries, within a focused market.
and to organizations of all sizes. They were first
set out by Michael Porter in 1985 in his book
Competitive Advantage: Creating and
Sustaining Superior Performance. Porter called
© Mind Tools Ltd, 2009-2011. 23

The Cost Leadership Strategy Kaizen philosophy of "continuous

Porter's generic strategies are ways of gaining improvement".
competitive advantage - in other words,
developing the "edge" that gets you the sale The Differentiation Strategy
and takes it away from your competitors. There Differentiation involves making your products or
are two main ways of achieving this within a services different from and more attractive
Cost Leadership strategy: those of your competitors. How you do this
depends on the exact nature of your industry
 Increasing profits by reducing costs, while and of the products and services themselves,
charging industry-average prices. but will typically involve features, functionality,
durability, support and also brand image that
Remember that Cost Leadership is about your customers value.
minimizing the cost to the organization of
delivering products and services. The cost or To make a success of a generic Differentiation
price paid by the customer is a separate strategy, organizations need:
issue!
 Increasing market share through charging  Good research, development and
lower prices, while still making a innovation.
reasonable profit on each sale because  The ability to deliver high-quality products
you've reduced costs. or services.
 Effective sales and marketing, so that the
The Cost Leadership strategy is exactly that - it market understands the benefits offered
involves being the leader in terms of cost in by the differentiated offerings.
your industry or market. Simply being amongst
the lowest-cost producers is not good enough, Large organizations pursuing a differentiation
as you leave yourself wide open to attack by strategy need to stay agile with their new
other low cost producers who may undercut product development processes. Otherwise,
your prices and therefore block your attempts to they risk attack on several fronts by competitors
increase market share. pursuing Focus Differentiation strategies in
different market segments.
You therefore need to be confident that you can
achieve and maintain the number one position The Focus Strategy
before choosing the Cost Leadership route. Companies that use Focus strategies well
Companies that are successful in achieving concentrate on particular niche markets and, by
Cost Leadership usually have: understanding the dynamics of that market and
the unique needs of customers in it, develop
 Access to the capital needed to invest in uniquely low cost or well-specified products for
technology that will bring costs down. the market. Because they serve customers in
 Very efficient logistics. their market uniquely well, they tend to build
 A low cost base (labor, materials, strong brand loyalty amongst their customers.
facilities), and a way of sustainably cutting This makes their particular market segment less
costs below those of other competitors. attractive to competitors.
As with broad market strategies, it is still
The greatest risk in pursuing a Cost Leadership essential to decide whether you will pursue
strategy is that these sources of cost reduction Cost Leadership or Differentiation once you
are not unique to you, and that other have selected a Focus strategy as your main
competitors copy your cost reduction strategies. approach: Focus is not normally enough on its
This is why it's important to continuously find own.
ways of reducing every cost. One successful
way of doing this is by adopting the Japanese But whether you use Cost Focus or
Differentiation Focus, the key to making a
© Mind Tools Ltd, 2009-2011. 24

success of a generic Focus strategy is to

ensure that you are adding something extra as Step 1: For each generic strategy, carry out a
a result of serving only that market niche. It's SWOT analysis of your strengths and
simply not enough to focus on only one market weaknesses, and the opportunities and threats
segment because your organization is too small you would face, if you adopted that strategy.
to serve a broader market (if you do, you risk
competing against better-resourced broad Having done this, it may be clear that your
market companies' offerings.) organization is unlikely to be able to make a
success of some of the generic strategies.
The "something extra" that you add can
contribute to reducing costs (perhaps through Step 2: Use Five Forces Analysis to
your knowledge of specialist suppliers) or to understand the nature of the industry you are
increasing differentiation (though your deep in.
understanding of customers' needs).
Step 3: Compare the SWOT analyses of the
viable strategic options with the results of your
Generic strategies apply to not-for-profit Five Forces analysis. For each strategic option,
organizations too. A not-for-profit can use a ask yourself how you could use that strategy to:
Cost Leadership strategy to minimize the
cost of getting donations and achieving more  Reduce or manage supplier power.
for their income, while one with pursing a  Reduce or manage buyer/customer
Differentiation strategy will be committed to power.
the very best outcomes, even if the volume  Come out on top of the competitive
of work they do as a result is lower. Local rivalry.
charities are great examples of organizations  Reduce or eliminate the threat of
using Focus strategies to get donations and substitution.
contribute to their communities.  Reduce or eliminate the threat of new
entry.
Choosing the Right Generic Strategy
Your choice of which generic strategy to pursue Select the generic strategy that gives you the
underpins every other strategic decision you strongest set of options.
make, so it's worth spending time to get it right.
But you do need to make a decision: Porter Porter's Generic Strategies offer a great
specifically warns against trying to "hedge your starting point for strategic decision making.
bets" by following more than one strategy. One Once you've made your basic choice,
of the most important reasons why this is wise though, there are still many strategic options
advice is that the things you need to do to make available. Bowman's Strategy Clock helps
each type of strategy work appeal to different you think at the next level of details, in that it
types of people. Cost Leadership requires a splits Porter's options into eight sub-
very detailed internal focus on processes. strategies.
Differentiation, on the other hand, demands an
outward-facing, highly creative approach. Key Points
According to Porter's Generic Strategies model,
So, when you come to choose which of the there are three basic strategic options available
three generic strategies is for you, it's vital that to organizations for gaining competitive
you take your organization's competencies and advantage. These are: Cost Leadership,
strengths into account. Differentiation and Focus.
Use the following steps to help you choose.
© Mind Tools Ltd, 2009-2011. 25

Organizations that achieve Cost Leadership If you're in an organization comitted to

can benefit either by gaining market share achieving Cost Leadership, can you reduce
through lowering prices (whilst maintaining costs by hiring less expensive staff and training
profitability,) or by maintaining average prices them up, or reducing turnover? Can you reduce
and therefore increasing profits. All of this is training costs by devising in-house schemes for
achieved by reducing costs to a level below sharing skills and knowledge amongst team
those of the organization's competitors. members? Can you reduce expenses by using
technology such as video conferencing over the
Companies that pursue a Differentiation Internet?
strategy win market share by offering unique
features that are valued by their customers. If your organization is pursuing to
Focus strategies involve achieving Cost Differentiation, can you improve customer
Leadership or Differentiation within niche service? Customer Experience Mapping may
markets in ways that are not available to more help here. Can you help to foster a culture of
broadly-focused players. continuous improvement and innovation in your
team?
Apply This to Your Life
Ask yourself what your organization's generic And if you're working for a company that has a
strategy is. How does this affect the choices chosen a Focus strategy, what knowledge or
your make in your job? expertise can you use or develop to add value
for your customers that isn't available to broad
market competitors?
© Mind Tools Ltd, 2009-2011. 26

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Strategy Toolkit

Strategy Toolkit | MindTools.com

This e-book is published by Mind Tools Limited, of

Copyright © Mind Tools 2009-2011. All rights reserved.

This e-book is protected by international copyright law.

Cover image © iStockphoto/stockcam

© Mind Tools Ltd, 2009-2011. 2

© Mind Tools Ltd, 2009-2011. 3

© Mind Tools Ltd, 2009-2011. 4

How to Use the Tool Opportunities:

© Mind Tools Ltd, 2009-2011. 5

 Only accept precise, verifiable Weaknesses:

© Mind Tools Ltd, 2009-2011. 6

Threats: services to local businesses. Marketing would

Key Points Opportunities and Threats you face. This helps

© Mind Tools Ltd, 2009-2011. 7

 By making effective use of PEST Political:

© Mind Tools Ltd, 2009-2011. 8

Figure 1: PEST Analysis

Other forms of PEST – PESTLE, Example

© Mind Tools Ltd, 2009-2011. 9

The Ansoff Matrix

© Mind Tools Ltd, 2009-2011. 10

Market Diversification Industry Retraining

Existing Market Product Existing Expert Functional Skills

Existing Products & New Existing Functional New

The Corporate Ansoff Matrix Tip 1:

This is shown in figure 2.

© Mind Tools Ltd, 2009-2011. 11

Market Development Diversification

2. Manage risk appropriately. For example, Taking Ansoff Further

© Mind Tools Ltd, 2009-2011. 12

Figure 3: The 9-Box Grid

Existing Market Product Product

Existing Modified New

The Boston Matrix

© Mind Tools Ltd, 2009-2011. 13

Note: get attention and exploit new opportunities.

Question Marks might become Stars and

How to Use the Tool

© Mind Tools Ltd, 2009-2011. 14

situation and rely on past performance to help Tip 2:

The GE-McKinsey Matrix

In the 1970s, the Boston Consulting Group

© Mind Tools Ltd, 2009-2011. 15

Figure 1: A Blank GE/McKinsey Matrix some examples of attractiveness factors that

 Market growth (from BCG's matrix).

Business Unit Strength Follow these steps to determine industry

© Mind Tools Ltd, 2009-2011. 16

Attractiveness Business Business Business

Step 2: Determine Business Strength

© Mind Tools Ltd, 2009-2011. 17

Step 3: Plot the Information

1. Grow – Strategic Business Units (SBUs)

2. Hold – SBUs in the middle (light gray

© Mind Tools Ltd, 2009-2011. 18

that you can develop within these Key Points

Porter's Five Forces

© Mind Tools Ltd, 2009-2011. 19