Machine strength grading of sawn timber is a sawmill process in which density, modulus of elasticity (MOE) and bending or tensile strength are predicted such that the timber can be assigned to strength classes. The predictions of these properties are performed using one or several so-called indicating properties (IPs), which represent a board property, or combination of board properties, measured non-destructively. A limitation of today’s strength grading is that the IPs applied in the industry for prediction of strength, in general, are based on rather weak statistical relationships between IPs and strength properties, which in turn results in poor material utilisation. It is well known that the strength of sawn timber is associated with the presence of knots and their surrounding fibre disorientations. Local fibre direction at surfaces of softwood can be determined by means of the light scattering that occur when a wood surface is illuminated by a dot-laser, i.e. by application of the so-called tracheid effect. Lately, IPs based on such measurements have been developed, and some of the suggested IPs have a strong statistical relationship to bending strength. The purposes of the research presented in this thesis are to contribute with knowledge of possibilities and limitations of the tracheid effect and of data of fibre directions in the vicinity of knots, to evaluate if information of fibre directions at surfaces of Norway spruce sawn timber can be used to achieve a better material utilisation of glulam lamellae and finger-jointed timber, and to provide insight regarding the grading regulations in Europe. Results presented herein show that knots and fibre direction within the interior of boards can be modelled on the basis of data obtained by means of the tracheid effect, but also that a previously proposed method to determine out-of-plane fibre angles gives poor accuracy. As regards grading of glulam lamellae, an IP based on fibre directions and dynamic MOE is proposed for prediction of tensile strength. The latter is used when grading glulam lamellae. Application of the proposed IP resulted in substantially increased yield in strength classes. It is also shown that this IP is applicable for boards with sawn as well as with planed surface finish. Regarding current regulations for machine strength grading in Europe, results indicate that grading based on global board properties give higher yield than what is appropriate.