Use the Quantitative Strategic Planning Matrix (QSPM) to set the Right Strategy

Introduction

Quantitative Strategic Planning Matrix (QSPM) is a strategic management tool for formulating strategy. The basic tenet of the QSPM is that firms need to systematically assess their external and internal environments, conduct extensive research, deeply evaluate the advantages and disadvantages of various alternatives, and then decide upon a particular course of action. Conceptually, a QSPM determines the relative attractiveness of various strategies based on the extent to which the alternative strategies will enable the firm to capitalize upon strengths and opportunities, improve upon weaknesses, and avoid or mitigate external threats. QSPM analysis includes determining the relative importance of key external opportunities and threats and internal strengths and weaknesses, and using that information to determine the relative attractiveness of alternative strategies. The strategy with the highest Total Attractiveness Score ends up being the optimal strategy to be pursued by the company. As a strategic-management tool, the process can be described as an objective, logical, systematic approach for making major decisions in an organization. Although developing a QSPM requires a number of some subjective decisions along the way, there is every likelihood that the final strategic decisions will be best for the firm. Therefore, QSPM is a powerful tool used by firms in systematic decision making, as it assists firms to avoid formulating strategies based solely on gut feeling or intuition.

Step-by-Step Approach to Creating the Matrix

Following are the steps of preparation of QSPM matrix:

Step 1: List key internal and external factors: Step 1 in creating a QSPM is to generate a list of the key internal strength/weakness and external opportunity/threat factors determined to be most important for the firm to consider in selecting among feasible alternative strategies. The internal and external factors should be specific, actionable, divisional, and quantitative to the extent possible. Vagueness is not good in strategic decision-making, and a number, percentage, ratio, or comparison should be included in the factors

Step 2: Assign importance weights to internal and external factors: This step requires that weights be assigned to indicate the perceived relative importance of each internal and external factor for being successful in the given industry. The weights are thus industry based, rather than company based. Specifically, a weight is assigned to each factor, depending on how important that factor is for being successful in competing in a particular industry. Importantly, the assigned weights must sum to 1.0 for the internal factors, and also sum to 1.0 for the external factors. Weights are determined based on company and industry research

Step 3: List potential strategies: This step requires you to identify alternative potential strategies to consider and array them across the top row in the QSPM. For example, Strategy 1, Strategy 2, etc. Strategies should be stated in specific terms, such as ‘Add 30 sales representatives in Nigeria,’ rather than stated in vague terms, such as ‘Expand to Nigeria.’

Step 4: Assign attractiveness score to each strategy: This step requires assigning an Attractiveness Score (AS) to each strategy. The scale for AS can range from 1 to 10 depending on the number of strategies considered. If 10 strategies are being examined, usually a 1–10 scale is used, but if 2 strategies, the range should be 1 to 2. The ASs should be placed in a column under each respective strategy. In developing a QSPM, and particularly when assigning AS values, it is important to work row-by-row and never assign duplicate AS values in a row. However, a dash (or zero) should be used to indicate situations in which the key factor does not relate to any of the strategies under consideration.

Step 5: Calculate Total Attractiveness Score: This step requires calculation of Total Attractiveness Scores (TAS), which are determined by multiplying the weight (i.e., the relative importance of each factor) by the AS (i.e., the attractiveness of each strategy).

Step 6: Sum the attractiveness and TAS: Finally, step 6 in developing a QSPM is to sum the AS and TAS columns for each respective strategy. The higher the sum total attractiveness scores (STASs) for a particular strategy, the more attractive that strategy is, compared to the other alternative strategies under consideration. Higher TASs indicate more attractive strategies, considering all the relevant internal and external factors that could affect the alternatives.

Key factors to take note of when developing AS and TAS for the strategy

  • Never work column by column; always prepare a QSPM working row by row
  • AS scores are not mere guesses; they should be rational, defensible, and reasonable
  • If you have more than one strategy in the QSPM, then let the AS scores range from 1 to the number of strategies being evaluated
  • If a particular factor affects one strategy but not the other, it affects the choice being made, so AS should be recorded for both strategies. never rate one strategy and not the other
  • Make sure your strategies are stated in specific terms
  • Strategy Alternatives should have a minimum of two options in play, but you can have much more if you chose

                                                                  SWOT

Strength (S): Strengths are the internal factors, positive characteristics of the organization, which distinguish it in the environment and from the competition. Look within your company and find every strength that secures your position on the market. Strengths can be flexible such as brand attributes or more general like a specific team or branch. It can also be strengths in a particular product or product development which could give a market advantage.

Weakness (W): these are characteristics which give your business a disadvantage over the competitors. Weaknesses can be within the company, like lack of specialized personnel or lack of resources either in form of financials or maybe production requires specific materials which are difficult to attain. Weakness might not be that easy to find, or even to admit to. Basically, it includes all things, no matter how amazing the idea, that holds you back.

Opportunity (O): These external factors that could contribute to your growth. You need to look at every area where there is potential for growth or improvement and finding the factors that can contribute to it. It could be financial advancement or opportunity to hire new experienced workers. The primary purpose of opportunity is to find factors that can be turned into strengths for the company in the future. In short, an opportunity in business can be defined as anything that grows your business

Threats (T): these are external factors that can harm the business or project. This could include new businesses that could become competitors, new laws that might affect your company, up-and-coming competitor, or hash global business environment. In fact, it can be a very broad section of the analysis depending on how detailed you wish to be and how big impact threats you want to include

Case Study

Okoroh Energy Services

Okoroh Energy Services is an energy services company that provide solutions to oil & gas companies, power plants and petrochemical companies in Nigeria. The company is into maintenance, fabrication, and installation services. At this time, the competitive environment is heating up and that resulted to slow growth, and therefore it need to re-strategizes in order to maintain its competitive position, or stay ahead of competition. Okoroh Energy Services want to set an optimal strategy based on the analysis of its internal and external condictiones. On the internal dimensions, it wants to look at both its strengths and weaknesses, while on the external dimensions, the focus is on its opportunities and threats. Analysis of the information from those four dimensions would determine the strategic focus. Essentially, there are four strategic options it could concentrate on―conservative strategy, aggressive strategy, defensive strategy, or competitive strategy, and each has sub-options. However, it cannot determine the type of strategy sub option to pursue without insights from rating on the Total Attractiveness Score of two or more strategic alternatives

To overcome the challenges, we have decided to use the Quantitative Strategic Planning Matrix (QSPM) to determine the best strategy among the alternatives. We want to make an informed decision, not relying on intuition to make this important strategic direction for our company. The QSPM is a strategic management tool designed to assess and determine the extent that alternative strategies enable the firm to effectively take advantage of external opportunities, mitigate external threats, capitalize on internal strengths, and improve upon internal weaknesses. By applying the model, Okoroh Energy Services would be able to be able to analyze, and set the right strategic direction for competitiveness

 

Let’s assess the internal and external environments of Okoroh Energy Services and compute the strategic option. Essentially, there are three strategic options Okorroh Energy Services wants to analyze:

  • Strategy 1: Acquire a competitor
  • Strategy 2: Develop fabrication market in Ghana
  • Strategy 3: Create piping as a new product
                                       Setting the strategy alternative options

Strategic alternatives are the options or choices available to the decision makers. They allow the executives to put together an alternative strategy that can be implemented in the future. You will obviously need to have at least two options in play, but you can have many more than that if you so choose. Based on the analysis conducted, you can generate several alternative plans. Strategic options should be realistic and manageable. After generating the options, you then analyze each alternative plan by performing a detailed quantitative analysis and establish which strategic option is optimal in terms of return on investment

 

For Okoroh Energy Services we have the following strategic options:

  • Strategy 1: Acquire a competitor (2.15)
  • Strategy 2: Develop fabrication market in Ghana (2.93)
  • Strategy 3: Create piping as a new product (2.48)

Given the analysis conducted with the QSPM, the company need to settle for the one that has the highest Sun Total Attractiveness Score. That strategy happens to be Strategy 2: Develop fabrication market in Ghana with a TAS of 2.93. The new market development strategy is an aggressive strategy that will make us to have a huge presence in Ghana with our fabrication business. Essentially, the QSPM enables us to make accurate strategic decision by conducting quantitative analysis of our internal and external factors. Although the company does not have the resources and capabilities to execute the three strategies, that doesn’t mean it need totally discard the other two. It needs to have them as backup strategies, and that means it can always fall back to them. Nevertheless, there are some measures of subjectivity in the weight and AS assigned, but if the research is done appropriately, we’re more likely to arrive at an accurate strategic choice

 

                                                         Pros and Cons of the QSPM

Advantages.

  • There is no limit to the number of strategies that can be evaluated or the number of sets of strategies that can be examined at once using the QSPM.
  • Another positive feature of the QSPM is that it requires strategists to integrate pertinent external and internal factors into the decision process
  • Developing a Quantitative Strategic Planning Matrix makes it less likely that key factors will be overlooked or weighted inappropriately.
  • It draws attention to important relationships that affect strategy decisions
  • A QSPM can be used by small and large, for-profit and nonprofit organizations.
  • developing QSPM minimize the chances that main factors are missed or excessively given weigh,
  • QSPM could be adapted to be used by profit and nonprofit oriented companies so it could be applied to any kinds of organization,
  • the small decisions increase the probability that the end’s strategic decision is the best for the organization.

Disadvantages

 

  • A limitation of the QSPM is that it can be only as good as the prerequisite information and matching analyses upon which it is based.
  • Another limitation is that it requires good judgment in assigning attractiveness scores. Also, the sum total attractiveness scores can be really close such that a final decision is not clear.
  • Like all analytical tools however, the QSPM should not dictate decisions but rather should be developed as input into the owner’s final decision
  • The QSPM has some limitations. First, it always requires intuitive judgments and educated assumptions. The weights, ratings, and ASs require judgmental decisions, even though they should be based on objective company and industry trends, facts, data, and information
  • Constructive discussion during strategy analysis and choice may arise because of genuine differences of interpretation of information and varying opinions

 

                               Summary

Quantitative Strategic Planning Matrix (QSPM) is a high-level strategic management approach for evaluating possible strategies. It provides an analytical method for comparing feasible alternative actions. The QSPM takes into account fundamental business characteristics and industry structure. QSPM allows for a thorough analysis of a firm’s competitive outcome by analyzing the internal strengths and weaknesses, as well as external environment that could impact the company positively or negatively. The relative attractiveness of each strategy is computed by determining the cumulative impact of each external and internal critical success factor. The ultimate goal of the QSPM method is to pick the right strategy to move forward with based on the information available at hand. Obviously, any tool like the QSPM is only going to be as good as the information which is put into the system. If you don’t take the time necessary to develop accurate weights and attractiveness scores, you won’t be able to place much faith in the final outcome of the process. To get the most from QSPM, you have to take each step along the way seriously. Only then will you be able to confidently base important decisions on the outcome of the analysis.

 

Omodiaogbe Samuel, MSc. CMC, ChMC, FIMC

Omodiaogbe is a Strategic Management Consultant, and he the Principal Consultant/CEO at Vast Thinking Consults Ltd where he help organizations and business leaders to create superior value. Omodiaogbe holds BSc. and MSc. in Economics. Also, he is a Certified Management Consultant (CMC), a Chartered Management Consultant (ChMC), and a Fellow, Institute of Management Consultants, Nigeria. He is an Instructor on Coursera, where he teaches 25 courses in Strategic Management. Omodiaogbe is one of the world’s leading learners on Coursera and Edx with over 500 Certificates from top-ranked Universities, Business Schools, and Organizations

Contact him:
Email; somodiaogbe@vastthinking.com.ng
Visit: www.vastthinking.com.ng

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