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 (E matrix).
What is the !"#$ matri% strategic management method&
To e%plain how the !"#$ matri% works, it is best to reverse'engineer it. (irst, let)s take a look at what
the outcome of a !"#$ matri% analysis can be, take a look at the picture below. The !"#$ matri% is
broken down to four *uadrants where each *uadrant suggests a different type or a nature of a strategy+
"ggressive
#onservative
,efensive
#ompetitive
This is what a completed !"#$ matri% looks like+
This particular !"#$ matri% tells us that our company should pursue an aggressive strategy. -ur
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, ac*uisition of competitors, and so on.
.ow, how do we get to the possible outcomes shown in the !"#$ matri%& The !"#$ /atri% analysis
functions upon two internal and two e%ternal strategic dimensions in order to determine the
organization)s strategic posture in the industry. The !"#$ matri% 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 !"#$ matri% factors under the internal strategic dimension. These factors analyze
a business internal strategic position. The financial strength factors often come from company
accounting. These !"#$ matri% factors can include for e%ample return on investment, leverage,
turnover, li*uidity, working capital, cash flow, and others. #ompetitive advantage factors include for
e%ample the speed of innovation by the company, market niche position, customer loyalty, product
*uality, market share, !roduct li"e cycle, and others.
$very business is also affected by the environment in which it operates. !"#$ matri% factors related to
business external strategic dimension are for e%ample overall economic condition, 0,! 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 $ive $orces model.
The !"#$ matri% calculates the importance of each of these dimensions and places them on a
#artesian graph with 1 and 2 coordinates.
The following are a few model technical assumptions+
' 3y definition, the #" and I values in the !"#$ matri% are plotted on the X axis.
' #" values can range from '4 to '5.
' I values can take 64 to 65.
' The ( and $ dimensions of the model are plotted on the axis.
' $ values can be between '4 and '5.
' ( values range from 64 to 65.
7ow do I construct a !"#$ matri%&
The !"#$ matri% is constructed by plotting calculated values for the competitive advantage (#") and
industry strength (I) dimensions on the X axis. The axis is based on the environmental stability
($) and financial strength (() dimensions. The !"#$ matri% can be created using the following seven
steps+
Step !: #hoose a set of variables to be used to gauge the competitive advantage (#"), industry
strength (I), environmental stability ($), and financial strength (().
Step ": 8ate individual factors using rating system specific to each dimension. 8ate competitive
advantage (#") and environmental stability ($) using rating scale from '5 (worst) to '4 (best). 8ate
industry strength (I) and financial strength (() using rating scale from 64 (worst) to 65 (best).
Step #: (ind the average scores for competitive advantage (#"), industry strength (I), environmental
stability ($), and financial strength (().
Step $: !lot values from step 9 for each dimension on the !"#$ matri% on the appropriate a%is.
Step %: "dd the average score for the competitive advantage (#") and industry strength (I)
dimensions. This will be your final point on axis X on the !"#$ matri%.
tep 5+ "dd the average score for the !"#$ matri% environmental stability ($) and financial strength
(() dimensions to find your final point on the axis .
Step &: (ind intersection of your X and points. ,raw a line from the center of the !"#$ matri% to
your point. This line reveals the type of strategy the company should pursue.
!"#$ matri% e%ample
The following table shows what values were used to create the !"#$ matri% displayed above.
$ach factor within each strategic dimension is rated using appropriate rating scale. Then averages are
calculated. "dding individual strategic dimension averages provides values that are plotted on the a%is 1
and 2.
Where do I go ne%t&
The !"#$ matri% can help to find a strategy. 3ut, what if we have :'9 strategies and need to decide
which one is the best one& The %uantitative Strategic Planning Matrix &%SPM' model can help to
answer this *uestion.
hould you have any *uestions about the SPACE matrix, you might want to submit them at our
management discussion "orum.
%uantitative Strategic Planning Matrix &%SPM'
%uantitative Strategic Planning Matrix (%SPM) is a high'level strategic management approach for
evaluating possible strategies. ;uantitative trategic !lanning /atri% or a ;!/ provides an
analytical method for comparing feasible alternative actions. The ;!/ method falls within so'called
stage 9 of the strategy formulation analytical framework.
When company e%ecutives think about what to do, and which way to go, they usually have a prioritized
list of strategies. If they like one strategy over another one, they move it up on the list. This process is
very much intuitive and sub<ective. The %SPM method introduces some numbers into this approach
making it a little more =expert= techni*ue.
What is a ;uantitative trategic !lanning /atri% or a ;!/&
The Quantitative Strategic Planning Matrix or a QSPM approach attempts to ob<ectively select the
best strategy using input from other management techni*ues and some easy computations. In other
words, the ;!/ method uses inputs from stage 4 analyses, matches them with results from stage :
analyses, and then decides ob<ectively among alternative strategies.
Stage ! strategic management tools'''
The first step in the overall strategic management analysis is used to identify key strategic factors. This
can be done using, for e%ample, the E$E matrix and $E matrix.
Stage " strategic management tools'''
"fter we identify and analyze key strategic factors as inputs for ;!/, we can formulate the ty!e of the
strategy we would like to pursue. This can be done using the stage : strategic management tools, for
e%ample the SWOT analysis (or T-W), SPACE matrix analysis, BCG matrix model, or the
E matrix model.
Stage # strategic management tools'''
The stage 4 strategic management methods provided us with key strategic factors. 3ased on their
analysis, we formulated possible strategies in stage :. .ow, the task is to compare in ;!/ alternative
strategies and decide which one is the most suitable for our goals.
The stage : strategic tools provide the needed information for setting up the ;uantitative trategic
!lanning /atri% ' ;!/. The ;!/ method allows us to evaluate alternative strategies ob<ectively.
#onceptually, the ;!/ in stage 9 determines the relative attractiveness of various strategies based on
the e%tent to which key e%ternal and internal critical success factors are capitalized upon or improved.
The relative attractiveness of each strategy is computed by determining the cumulative impact of each
e%ternal and internal critical success factor.
What does a ;!/ look like and what does it tell me&
(irst, let us take a look at a sample ;uantitative trategic !lanning /atri% ;!/, see the picture below.
This ;!/ compares two alternatives. 3ased on strategies in the stage 4 (I($, $($) and stage : (3#0,
!"#$, I$), company e%ecutives determined that this company 12> needs to pursue an aggressive
strategy aimed at development of new products and further penetration of the market.
They also identified that this strategy can be e%ecuted in two ways. -ne strategy is acquiring a
competing company. The other strategy is to expand internally. They are now asking which option is the
better one.
("ttractiveness core+ 4 ? not acceptable@ : ? possibly acceptable@ 9 ? probably acceptable@ A ? most
acceptable@ B ? not relevant)
,oing some easy calculations in the ;uantitative trategic !lanning /atri% ;!/, we came to a
conclusion that ac*uiring a competing company is a better option. This is given by the Sum otal
Attractiveness Score figure. The ac*uisition strategy yields higher score than the internal e%pansion
strategy. The ac*uisition strategy has a score of A.BA in the ;!/ shown above whereas the internal
e%pansion strategy has a smaller score of :.CB.
7ow do I construct a ;!/&
2ou can see a sample ;uantitative trategic !lanning /atri% ;!/ above. The left column of a ;!/
consists of key e%ternal and internal factors (identified in stage 4). The left column of a
;!/ lists factors obtained directly from the $($ matri% and I($ matri%. The top row consists of feasible
alternative strategies (provided in stage :) derived from the W-T analysis, !"#$ matri%, 3#0 matri%,
and I$ matri%. The first column with numbers includes weights assigned to factors. .ow let us take a
look at detailed steps needed to construct a ;!/.
S(E) !'''
!rovide a list of internal factors '' strengths and !eaknesses. Then generate a list of the firm)s key
e%ternal "actors '' opportunities and threats. These will be included in the left column of the ;!/. 2ou
can take these factors from the $($ matri% and the I($ matri%.
Step "'''
7aving the factors ready, identify strategy alternatives that will be further evaluated. These strategies
are displayed at the top of the table. trategies evaluated in the ;!/ should be mutually e%clusive if
possible.
Step #'''
$ach key e%ternal and internal factor should have some (eight in the overall scheme. 2ou can take
these weights from the I($ and $($ matrices again. 2ou can find these numbers in our e%ample in the
column following the column with factors.
Step $'''
Attractiveness Scores (") in the ;!/ indicate how each factor is important or attractive to each
alternative strategy. "ttractiveness cores are determined by e%amining each key e%ternal and internal
factor separately, one at a time, and asking the following *uestion+
"oes this factor make a difference in our decision a#out !hich strategy to pursue$
If the answer to this *uestion is yes, then the strategies should be compared relative to that key factor.
The range for "ttractiveness cores is % & not attractive' ( & some!hat attractive' ) & reasona#ly
attractive' and * & highly attractive. If the answer to the above *uestion is no, then the respective key
factor has no effect on our decision. If the key factor does not affect the choice being made at all, then
the "ttractiveness core would be B.
Step %'''
#alculate the Total Attractiveness Scores (T") in the ;!/. Total "ttractiveness cores are defined
as the product of multiplying the weights (step 9) by the "ttractiveness cores (step A) in each row.
The Total "ttractiveness cores indicate the relative attractiveness of each key factor and related
individual strategy. The higher the Total "ttractiveness core, the more attractive the strategic
alternative or critical factor.
Step *'''
#alculate the Sum Total Attractiveness Score by adding all Total "ttractiveness cores in each
strategy column of the ;!/.
The ;!/ um Total "ttractiveness cores reveal which strategy is most attractive. 7igher scores point
at a more attractive strategy, considering all the relevant e%ternal and internal critical factors that could
affect the strategic decision.
#an I compare more than two strategies using a ;!/&
2es, in general, any number of alternative strategies can be included in the ;!/ analysis. We included
only two alternatives in our e%ample <ust to keep it simple. It is important to note that strategies sub<ect
to comparison should be mutually e%clusive if possible.
BCG Matrix Model
The BCG matrix or also called BCG model relates to marketing. The 3#0 model is a well'known
portfolio management tool used in product life cycle theory. 3#0 matri% is often used to prioritize which
products within company product mi% get more funding and attention.
The +C, matrix model is a portfolio planning model developed by 3ruce 7enderson of the 3oston
#onsulting 0roup in the early 4DCB)s.
The 3#0 model is based on classification of products (and implicitly also company business units) into
four categories based on combinations of market gro!th and market share relative to the largest
competitor.
When should I use the 3#0 matri% model&
$ach product has its !roduct li"e cycle, and each stage in product)s life'cycle represents a different
profile of risk and return. In general, a company should maintain a #alanced portfolio of products.
7aving a balanced product portfolio includes both high-gro!th products as well as lo!-gro!th products.
" high+gro,th product is for e%ample a new one that we are trying to get to some market. It takes
some effort and resources to market it, to build distribution channels, and to build sales infrastructure,
but it is a product that is e%pected to bring the gold in the future. "n e%ample of this product would
be an i!od.
" lo,+gro,th product is for e%ample an established product known by the market. #haracteristics of
this product do not change much, customers know what they are getting, and the price does not change
much either. This product has only limited budget for marketing. The is the milking cow that brings in
the constant flow of cash. "n e%ample of this product would be a regular #olgate toothpaste.
3ut the *uestion is, how do we e%actly find out what phase our product is in, and how do we classify
what we sell& (urthermore, we also ask, where does each of our products fit into our product mi%&
hould we promote one product more than the other one& The +C, matrix can help with this.
The BCG matrix reaches further behind product mi%. Enowing what we are selling helps managers to
make decisions about what priorities to assign to not only products but also company departments and
business units.
What is the 3#0 matri% and how does the 3#0 model work&
!lacing products in the 3#0 matri% results in A categories in a portfolio of a company+
BCG STA)S (high growth, high market share)
' tars are defined by having high market share in a growing market.
' tars are the leaders in the business but still need a lot of support for promotion a placement.
' If market share is kept, tars are likely to grow into cash cows.
BCG %*ESTO+ MA),S (high growth, low market share)
' These products are in growing markets but have low market share.
' ;uestion marks are essentially new products where buyers have yet to discover them.
' The marketing strategy is to get markets to adopt these products.
' ;uestion marks have high demands and low returns due to low market share.
' These products need to increase their market share *uickly or they become dogs.
' The best way to handle ;uestion marks is to either invest heavily in them to gain market share or to
sell them.
BCG CAS- COWS (low growth, high market share)
' #ash cows are in a position of high market share in a mature market.
' If competitive advantage has been achieved, cash cows have high profit margins and generate a lot of
cash flow.
' 3ecause of the low growth, promotion and placement investments are low.
' Investments into supporting infrastructure can improve efficiency and increase cash flow more.
' #ash cows are the products that businesses strive for.
BCG .OGS (low growth, low market share)
' ,ogs are in low growth markets and have low market share.
' ,ogs should be avoided and minimized.
' $%pensive turn'around plans usually do not help.
"nd now, let)s put all this into a picture+
"re there any problems with the 3#0 matri% model&
ome limitations of the 3#0 matri% model include+
The first problem can be how we define market and how we get data about market share
" high market share does not necessarily lead to profitability at all times
The model employs only two dimensions F market share and product or service growth rate
Gow share or niche businesses can be profitable too (some ,ogs can be more profitable than cash #ows)
The model does not reflect growth rates of the overall market
The model neglects the effects of synergy between business units
/arket growth is not the only indicator for attractiveness of a market
There are probably even more aspects that need to be considered in a particular use of the 3#0 model.
Internal-External (IE) Matrix
The nternal/External &E' matrix is another strategic management tool used to analyze working
conditions and strategic position of a business. The .nternal External Matrix or short I$ matri% is based
on an analysis of internal and e%ternal business factors which are combined into one suggestive model.
The I$ matri% is a continuation of the E$E matrix and $E matrix models.
7ow does the Internal'$%ternal I$ matri% work&
The I$ matri% belongs to the group of strategic portfolio management tools. In a similar manner like the
BCG matrix, the I$ matri% positions an organization into a nine cell matri%.
The I$ matri% is based on the following two criteria+
core from the E$E matrix '' this score is plotted on the y+axis
core from the $E matrix '' plotted on the x+axis
The I$ matri% works in a way that you plot the total (eighted score from the $($ matri% on the y a%is
and draw a horizontal line across the plane. Then you take the score calculated in the I($ matri%, plot it
on the x a%is, 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.
-n the % a%is of the I$ /atri%, an I($ total weighted score of 4.B to 4.DD represents a weak internal
position. " score of :.B to :.DD is considered average. " score of 9.B to A.B is strong.
-n the y a%is, an $($ total weighted score of 4.B to 4.DD is considered low. " score of :.B to :.DD is
medium. " score of 9.B to A.B is high.
I$ matri% e%ample...
Get us take a look at an e%ample. We calculated I($ matri% for an anonymous company on the $E
matrix page. The total weighted score calculated on this page is :.CD which points at a company with
an above'average internal strength.
We also calculated the $($ matri% for the same company on the E$E matrix page. The total weighted
score calculated for the $($ matri% is :.A5 which suggests a slightly less than average ability to respond
to e%ternal factors.
.ow we plot these values on a%es in the I$ matri%.
This I$ matri% 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 I$ matri% tell me&
2our horizontal and vertical lines meet in one of the nine cells in the I$ matri%. 2ou should follow a
strategy depending on in which cell those lines intersect.
The I$ matri% can be divided into three ma<or regions that have different strategy implications.
#ells I, II, and III suggest the gro( and 0uild strategy. This means intensive and aggressive tactical
strategies. 2our strategies should focus on market penetration, market development, and product
development. (rom the operational perspective, a backward integration, forward integration, and
horizontal integration should also be considered.
#ells IH, H, and HI suggest the hold and maintain strategy. In this case, your tactical strategies
should focus on market penetration and product development.
#ells HII, HIII, and I1 are characterized with the harvest or exit strategy. If costs for re<uvenating 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 I$ matri% and 3#0 matri%&
(irst, the I$ matri% measures different values on its a%es. The BCG matrix measures market growth
and market share. The I$ matri% measures a calculated value that captures a group of e%ternal and
internal factors. This means that the I$ matri% re*uires more information about the business than the
3#0 matri%.
While values for each a%is in the 3#0 matri% are single'factor, values for each a%is in the I$ matri% are
multi'factor figures.
3ecause the I$ matri% is broader in its definition, strategists often develop both the 3#0 /atri% and the
I$ /atri% when assessing their conditions and formulating strategies.
Is the I$ matri% forward'looking&
3y default, both the 3#0 matri% and the I$ matri% are constructed using factors related to current
conditions. 7owever, strategists often develop two sets of matrices '' a 3#0 /atri% and an I$ /atri% for
the current state and another set to reflect e%pectations of the future.
IFE Matrix (Internal Factor Evaluation)
nternal $actor Evaluation &$E' matrix is a strategic management tool for auditing or evaluating
ma<or strengths and weaknesses in functional areas of a business. I($ matri% also provides a basis for
identifying and evaluating relationships among those areas. The .nternal /actor Evaluation matrix or
short $E matrix is used in strategy formulation.
The $E Matrix together with the E$E matrix is a strategy'formulation tool that can be utilized to
evaluate ho! a company is performing in regards to identified internal strengths and !eaknesses of a
company. The I($ matri% method conceptually relates to the Balanced Scorecard method in some
aspects.
7ow can I create the I($ matri%&
The I($ matri% can be created using the following five steps+
-ey internal .actors'''
#onduct internal audit and identify both strengths and weaknesses in all your business areas. It is
suggested you identify 4B to :B internal factors, but the more you can provide for the I($ matri%, the
better. The number of factors has no effect on the range of total weighted scores (discussed
below) because the weights always sum to 4.B, but it helps to diminish estimate errors resulting from
sub<ective ratings. (irst, list strengths and then weaknesses. It is wise to be as specific and ob<ective as
possible. 2ou can for e%ample use percentages, ratios, and comparative numbers.
/eights'''
7aving identified strengths and weaknesses, the core of the I($ matri%, assign a weight that ranges
from B.BB to 4.BB to each factor. The weight assigned to a given factor indicates the relative importance
of the factor. >ero means not important. -ne indicates very important. If you work with more than 4B
factors in your I($ matri%, it can be easier to assign weights using the B to 4BB scale instead of B.BB to
4.BB. 8egardless 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. A.ter you
assign ,eight to individual .actors0 ma1e sure the sum o. all ,eights e2uals !'33 (or 4BB
if using the B to 4BB 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.
4ating'''
"ssign a ! to X rating to each factor. 2our rating scale can be per your preference. !ractitioners usually
use rating on the scale from 4 to A. 8ating captures whether the factor represents a ma<or weakness
(rating ? 4), a minor weakness (rating ? :), a minor strength (rating ? 9), or a ma<or strength (rating
? A). If you use the rating scale 4 to A, then strengths must receive a A or 9 rating and weaknesses
must receive a 4 or : rating.
.ote, the weights determined in the previous step are industry based. 8atings are company based.
5ultiply'''
.ow we can get to the I($ matri% math. /ultiply each factor)s weight by its rating. This will give you a
(eighted score for each factor.
Sum'''
The last step in constructing the I($ matri% is to sum the weighted scores for each factor. This provides
the total (eighted score for your business.
$%ample of I($ matri%
The following table provides an e%ample of an $E matrix.
/eights times ratings e*ual ,eighted score.
What values does the I($ matri% take&
8egardless of how many factors are included in an I($ /atri%, the total weighted score can range from a
low of 4.B to a high of A.B (assuming you used the 4 to A rating scale). The average score you can
possibly get is :.I.
Side note'''
Why is the average :.I and not :.B& Get)s e%plain using an e%ample. 2ou have A factors, each has
weight B.:I. (actors have the following rating+ 4, A, 4, A. This will result in individual weighted scores
B.:I, 4, B.:I, and 4 for factors 4 through A. If you add them up, you will get total I($ matri% weighted
score :.I which is also the average in this case.
Total weighted scores well 0elo( 123 point to internally (ea4 business. cores significantly a0ove
123 indicate a strong internal position.
What if a key internal factor is both a strength and a weakness in I($
matri%&
When a key internal factor is both a strength and a weakness, then include the factor twice in the I($
/atri%. The same factor is treated as two independent factors in this case. "ssign weight and also rating
to both factors.
What are the benefits of the I($ matri%&
To e%plain the benefits, we have to start with talking about one disadvantage. I($ matri% or method is
very much sub6ective@ after all other methods such as the T-W or SWOT matrix are sub<ective as
well. I($ is trying to ease some of the sub<ectivity by introducing numbers into the concept.
Intuitive <udgments are re*uired in populating the I($ matri% with factors. 3ut, having to assign weights
and ratings to individual factors brings a bit of empirical nature into the model.
7ow does the I($ matri% differ from the W-T matri% method&
5ore is better'''
-ne difference is already obvious. It is the weights and ratings. This difference leads to another one.
While it is suggested that the W-T matri% is populated with only a handful of factors, the opposite is
the case with the I($ matri%.
!opulating each *uadrant of the W-T matri% with a large number of factors can lead to the point where
we are over-analyzing the ob<ect of our analysis. This does not happen with I($ matri%. Including many
factors into the I($ matri% leads to each factor having only a small weight. Therefore, if we are
sub<ective 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 matri%.
It is important to note that a thorough understanding of individual factors included in the I($ matri% is
still more important than the actual numbers.
EFE Matrix (External Factor Evaluation)
External $actor Evaluation &E$E' matrix method is a strategic'management tool often used for
assessment of current business conditions. The $($ matri% is a good tool to visualize and prioritize the
opportunities and threats that a business is facing.
The E/E matrix is very similar to the $E matrix. The ma<or difference between the $($ matri% and the
I($ matri% is the type of factors that are included in the model. While the I($ matri% deals with internal
factors, the $($ matri% is concerned solely with external factors.
$%ternal factors assessed in the $($ matri% are the ones that are sub<ected to the will of social,
economic, political, legal, and other e%ternal forces.
7ow do I create the $($ matri%&
,eveloping an $($ matri% is an intuitive process which works conceptually very much the same way like
creating the I($ matri%. The $($ matri% process uses the same five steps as the I($ matri%.
5ist "actors6 The first step is to gather a list of e%ternal factors. ,ivide factors into two groups+
opportunities and threats.
Assign (eights6 "ssign a weight to each factor. The value of each weight should be between B and 4
(or alternatively between 4B and 4BB if you use the 4B to 4BB scale). >ero means the factor is not
important. -ne or hundred means that the factor is the most influential and critical one. The total value
of all weights together should e*ual 4 or 4BB.
)ate "actors6 "ssign a rating to each factor. 8ating should be between 4 and A. 8ating indicates how
effective the firmJs current strategies respond to the factor. 4 ? the response is poor. : ? the response is
below average. 9 ? above average. A ? superior. Weights are industry'specific. 8atings are company'
specific.
Multi!ly (eights 0y ratings6 /ultiply each factor weight with its rating. This will calculate the
,eighted score for each factor.
Total all (eighted scores6 "dd all weighted scores for each factor. This will calculate the total
weighted score for the company.
2ou can find more details about this approach as well as about possible values that the $($ matri% can
take on the $E matrix page.
$($ matri% e%ample
Total weighted score of :.A5 indicates that the business has slightly less than average ability to respond
to e%ternal factors. (ee the page on I($ matri% for an e%planation of what category the :.A5 figure falls
to.)
What should I include in the $($ matri%&
.ow that we know how to construct or create the $($ matri%, let)s focus on factors. $%ternal factors can
be grouped into the following groups+
ocial, cultural, demographic, and environmental variables+
$conomic variables
!olitical, government, business trends, and legal variables
3elow you can find e%amples of some factors that capture aspects e%ternal to your business. These
factors may not all apply to your business, but you can use this listing as a starting point.
Social0 cultural0 demographic0 and environmental .actors'''
' "ging population
' !ercentage or one race to other races
' !er'capita income
' .umber and type of special interest groups
' Widening gap between rich K poor
' .umber of marriages andLor divorces
' $thnic or racial minorities
' $ducation
' Trends in housing, shopping, careers, business
' .umber of births andLor deaths
' Immigration K emigration rates
Economic .actors'''
' 0rowth of the economy
' Gevel of savings, investments, and capital spending
' Inflation
' (oreign e%change rates
' tock market trends
' Gevel of disposable income
' Import and e%port factors and barriers
' !roduct life cycle (see the Product li"e cycle page)
' 0overnment spending
' Industry properties
' $conomies of scale
' 3arriers to market entry
' !roduct differentiation
' Gevel of competitiveness (see the Michael Porter#s $ive $orces model)
)olitical0 government0 business trends 7 legal .actors'''
' 0lobalization trends
' 0overnment regulations and policies
' Worldwide trend toward similar consumption patterns
' Internet and communication technologies (e'commerce)
' !rotection of rights (patents, trade marks, antitrust legislation)
' Gevel of government subsidies
' International trade regulations
' Ta%ation
' Terrorism
' $lections and political situation home and abroad
Product Life Cycle
!roduct Gife #ycle (!G#) is a term used to describe individual stages in the life of a product. !roduct life
cycle is an important aspect of conducting business which affects strategic planning. !roduct life cycle
can be divided into several stages characterized by the revenue generated by the product.
What is the fundamental idea behind product life cycle &
!roduct life cycle is very similar to a life. " living being is first born (introduction). Then it grows through
its youth (growth) to become an adult (maturity). When it gets old, it declines both mentally and
physically (decline), after which it eventually dies.
"n analogy to this process can be observed in production as well. (irst, a product is being developed.
"fter we know what it is that we are selling and what the customer wants, we introduce it to the market.
"s our product becomes known by consumers, it grows until it establishes a solid position in the market.
"t this point, our product is mature. "fter a period of time, the product is overtaken by development and
the introduction of superior competitors. Then it goes into decline and is eventually withdrawn. "ll these
phases together are called product life cycle.
What is the official definition of a product life cycle&
3usiness strategy and performance is affected to a great degree by life cycle stages of a product or
service. 3usiness priorities, budgeting, funding, production, distribution, marketing '' all these
production aspects change depending on how long a product or a service has been in the market.
The !roduct li"e cycle method identifies the four (five) distinct stages affecting sales of a product, from
the product)s inception until its retirement.
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In the Introduction stage of the product life cycle, a product or a service is introduced to the market.
This stage involves focused and intense marketing effort designed to establish a clear identity and
promote ma%imum awareness. #onsumers are testing the product in this phase.
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"fter a product is introduced in the market, consumers become more interested in it. This is called the
0rowth stage of the product life cycle. ales are increasing and competitors are emerging as well.
!roducts become more profitable and companies form alliances, <oint ventures, and
takeovers. #ustomers are accustomed to the product and are starting to purchase it repetitively.
/arketing efforts and costs are still significant. "dvertising costs are high. /arket share tends to
stabilize.
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The market has reached saturation. ome producers at a later stage of the /aturity stage of the product
life cycle begin to leave the market due to poor profit margins. ales dynamics is beginning to decrease.
ales volume reaches a steady state supported by loyal customers. !roducers attempt to differentiate
their products. 3rands, trademarks, and image are key tools in this production life cycle stage. !rice
wars and intense competition are common.
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#ontinuous decline in sales signals entry into the ,ecline stage of the production life cycle. #ompetition
is taking over your market share at this point. $conomic and production conditions are becoming
unfavorable. Introduction of innovative products or a change in consumer tastes is common reason for a
decline. There is intense price'cutting and many more products are withdrawn from the market. !rofits
can be improved by reducing marketing and cutting other costs.
Why is it important to know the product life cycle&
"ny for'profit business is constantly seeking ways to grow future cash flows by ma%imizing revenue
from the sale of products and services. !ositive cash "lo( allows a company to invest in development of
new products and services, to e%pand production capabilities, to improve its workforce, and so on. It is
most companies) goal to ac*uire key market share and become a leader in its respective industry.
" consistent and sustainable cash flow from product that is well established and stabilized is the key to
any long'term investment. "nd knowing the !roduct li"e cycle can help with this.
,oes every product follow the same product life cycle curve&
.o. It would be very easy if every product went through the same fate or product life cycle. /ost
products in developed markets fail in the introduction phase. Their product life cycle is very short, and
they do not even make it to the maturity stage.
We can also find products with cyclical maturity phases. " product enters the decline phase of the
product life cycle where it is promoted to regain customers again. If costs of getting the product back to
the top of the market are small, and the product is well positioned or even protected from ma<or
competitors, then we talk about a cash co(. This concept is further e%plained in the BCG matrix
model.
What are the trends in product life cycle&
Short'''
-ne most observable trend is that product life cycles are becoming shorter and shorter. This is given
mostly by ever'increasing competition (see Michael Porter#s $ive $orces model for more on
competition). While a manufacturer of pots and utensils faced competition only from another
manufacturer in the same city hundreds of years ago, a pot manufacturer these days faces competition
from many companies on the other side of the globe in addition to other local manufacturers. $veryone
is trying to come to the market with innovations.
4evitali?ation'''
/any products in mature industries are revitalized by product differentiation and market segmentation.
It is not uncommon that companies try to find new niches and market segments when they see their
product is about to enter the ,ecline phase. #ompanies are becoming very fle%ible in their ability to
reassess product life cycle costs and revenues.
>onger operating li.e'''
$ven though product life cycles shrink, the operating li.e of many products is becoming longer. While
a 4B years old car would be considered a wreck in 5B)s, today)s cars are relatively very durable and their
life time is e%tending. #ompanies have to take product operating life into account and ad<ust their
planning accordingly. #ompanies are attempting to optimize product life cycle revenue and profits
through warranties and upgrades to e%isting products.
Five Forces Model by Michael Porter
$ive $orces model of Michael Porter is a very elaborate concept for evaluating company)s
competitive position. /ichael !orter provided a framework that models an industry and therefore
implicitly also businesses as being influenced by "ive "orces. /ichael Porter0s /ive /orces model is often
used in strategic planning.
!orter)s competitive five forces model is probably one of the most commonly used business strategy
tools and has proven its usefulness in numerous situations. When e%ploring strategic management
models, you also might want to check out the BCG matrix, SWOT analysis, $E matrix, and SPACE
matrix models.
Why would I need to use !orter)s (ive (orces model&
In general, any #$- or a strategic business manager is trying to steer his or her business in a direction
where the business will develop an edge over rival firms. Michael Porter0s model of /ive /orces can be
used to better understand the industry conte%t in which the firm operates. Porter's Five Forces model
is a strategy tool that is used to analyze attractiveness of an industry structure.
What is good about !orter)s (ive (orces model&
!orter has the ability to represent comple% concepts in relatively easily accessible formats. 7is book
about the (ive (orces model is written in a very easy and understandable language. $ven though his
model is backed up by some comple% model, the model itself is simple and easily comprehensible at
all levels.
Porter#s $ive $orces model provides suggested points under each main heading, by which you can
develop a broad and sophisticated analysis o" com!etitive !osition. This can be then used when
creating strategy, plans, or making investment decisions about your business or organization.
,oes !orter)s (ive (orces model really work&
Theoreticians have different view on this. While some agree that !orter)s (ive (orces model is the
ultimate e%planation of how world works, others disagree. It depends in what time frame we <udge the
state of the facts. $ven /ichael !orter himself acknowledges that time is of essence when it comes
to how his forces interact with each other.
.umerous economic studies have shown that different industries can sustain different levels of
profitability. This can be attributed to differences in industry structures.
What is the basic idea behind !orter)s (ive (orces model&
!orter)s (ive (orces model is made up by identification of I fundamental competitive forces+
3arriers to entry
Threat of substitutes
3argaining power of buyers
3argaining power of suppliers
8ivalry among the e%isting players
ome later economists also consider government as the si%th force in this model.
When putting all these points together in a graphical representation, we get !orter)s (ive (orces model
which looks like this+
(orce 4+ 3arriers to entry
3arriers to entry measure how easy or difficult it is for new entrants to enter into the industry. This can
involve for e%ample+
#ost advantages (economies of scale, economies of scope)
"ccess to production inputs and financing,
0overnment policies and ta%ation
!roduction cycle and learning curve
#apital re*uirements
"ccess to distribution channels
!atents, branding, and image also fall into this category.
(orce :+ Threat of substitutes
$very top decision makes has to ask+ 1o! easy can our product or service #e su#stituted$ The following
needs to be analyzed+
7ow much does it cost the customer to switch to competing products or services&
7ow likely are customers to switch&
What is the price'performance trade'off of substitutes&
If a product can be easily substituted, then it is a threat to the company because it can compete with
price only.
.ow the *uestion is how strong the position of buyers is. (or e%ample, can your customers work
together to order large volumes to s*ueeze your profit margins& The following is a list of other
e%amples+
3uyer volume and concentration
What information buyers have
#an buyers corner you in negotiations about price
7ow loyal are customers to your brand
!rice sensitivity
Threat of backward integration
7ow well differentiated your product is
"vailability of substitutes
7aving a customer that has the leverage to dictate your prices is not a good position.
(orce A+ 3argaining power of suppliers
This relates to what your suppliers can do in relationship with you.
7ow strong is the position of sellers&
"re there many or only few potential suppliers&
Is there a monopoly&
,o you take inputs from a single supplier or from a group& (concentration)
7ow much do you take from each of your suppliers&
#an you easily switch from one supplier to another one& (switching costs)
If you switch to another supplier, will it affect the cost and differentiation of your product&
"re there other suppliers with the same inputs available& (substitute inputs)
The threat of forward integration is also an important factor here.
(orce I+ 8ivalry among the e%isting players
(inally, we have to analyze the level of competition between e%isting players in the industry.
Is one player very dominant or all e*ual in strengthLsize&
"re there e%it barriers&
7ow fast does the industry grow&
,oes the industry operate at surplus or shortage&
7ow is the industry concentrated&
7ow do customers identify themselves with your brand&
Is the product differentiated&
7ow well are rivals diversified&
8ivalry is the fifth factor in the (ive (orces model but probably the one with the most attention.
What are the assumptions behind the (ive (orces model&
(rom the risk'return perspective, (ive (orces model indirectly implies that risk'ad<usted rates of return
should be constant across firms and industries.
7ow can I analyze my business from inside&
!orter)s (ive (orces model views the business from outside. It focuses on assessing competitive position
within industry. If you wanted to analyze your firm from within, you might want to consider the SWOT
model. The W-T model has some aspects of e%ternal view as well but complements !orter)s (ive
(orces model in the internal view. "nother model that you might want to consider is the Balanced
Scorecard and $E7E$E matrix.
Balanced corecard
Balanced Scorecard is a performance management framework used by strategic decision makers to
make the right decisions about their business. 3alanced scorecard not only a set of strategic goals@ it is
also a method for monitoring progress toward organization)s strategic goals.
The #alanced scorecard method is a management techni*ue designed to provide a view of an
organization from both internal and e%ternal perspective. 3efore we get to the details, let us draw your
attention to some other strategic management models, such as SWOT analysis, $E matrix, E$E
matrix, BCG matrix, and SPACE matrix.
trategic management professionals often work also with the *uite analytical model called %SPM
model. Mnderstanding the Product 5i"e Cycle and Porter#s $ive/$orces model is also very
important.
What is balanced scorecard and how does it work&
3alanced scorecard views organization from four perspectives+
#ustomer perspective,
Internal'business processes,
Gearning and growth,
(inancials.
The first step in the balance scorecard framework is to analyze these four perspectives. 7owever,
balanced scorecard does not end there, it goes further. 3alanced scorecard also develops metrics and
methods for collecting data to calculate them. "fter data is collected and metrics calculated, each of the
four perspectives can be analyzed relative to each other.
3alanced scorecard provides feedback around both the internal #usiness processes and external
outcomes in order to continuously improve strategic performance and results.
!erspective 4+ #ustomer
#ustomers are the ones who pay the bills@ therefore, it is important to keep them satisfied so that they
not only come back but also spread the word and bring new customers too. $very business should be
constantly asking the *uestion+
=1o! !ell are !e meeting the needs of our customers' and ho! can !e make them more satisfied$=
3alanced scorecard brings this *uestion into action items. 3alanced scorecard includes the *uestion,
methods for how we measure results, and an analysis of how our results meet our goals. This is an
e%ample of how the #ustomer perspective can be handled in the balance scorecard framework+
5etric: 9verall satis.action ratings measured via surveys and polls'
(arget: At least $'33 out o. %'3 .rom each o. the ma6or customer groups: youth0 adult0
elderly'
5ethod: 9ur business regularly conducts customer surveys' A .inal 2uestion in each
survey as1s the respondent to rate his or her overall satis.action' :ata .or this
metric is compiled monthly'
!erspective :+ Internal'business process
"fter defining our customer and knowing how to make him happy, we also need to focus on our
processes that get us to the customer. We ask the *uestion+
21o! do our internal processes function to efficiently deliver products and services' and ho! can !e
improve our efficiency$2
3alanced scorecard can translate this into concrete targets, metrics, and methods. 3elow you can find
an e%ample of how balance scorecard addresses the Internal'business process perspective+
5etric: Servicing customer calls in our call center'
(arget !: Ans,er each incoming phone call .rom a customer ,ithin one minute'
(arget ": :ecrease the number o. dropped calls to less than "@'
5ethod: (his metric ,ill measure the elapsed time .rom the moment ,hen incoming phone
call reaches our net,or1 to the time it is pic1ed up by an operator' An automated phone
auditing I( system ,ill be implemented to trac1 phone statistics'
!erspective 9+ Gearning and growth
Innovation and learning is the key ingredient needed for being ahead of the competition. $mployees
need to keep educating themselves and the company needs to provide them the right tools and
motivation. trategic planners need to ask the *uestion+
21o! !ell are !e positioned to ensure that goals are met in the future$2
"nd again, balance scorecard can help translating this *uestion into action steps. 3elow is an e%ample of
how balanced scorecard can handle the Gearning and growth perspective.
5etric: Sta.. development'
(arget: Each employee has to ta1e training AAC by the end o. 5arch next year and succeed
at least B3@ score on a test'
5ethod: (he company ,ill o..er training AAC that ,ill be .ollo,ed by a test'
!erspective A+ (inance
$verything is about the bottom line. " business needs to align its priorities with activities that bring in
revenue, and it has to be done in an efficient way. ,ecision makers need to ask the *uestion+
21o! !ell are our finances managed to achieve our mission$2
"nd this can be translated into detailed action steps, measures, and goals in the balanced scorecard
framework as well. 7ere is an e%ample+
5etric: (he Sales department expenditures as a proportion o. company expenditures'
(arget !: (he Sales department expenditures ,ill be less than "3@ o. the total company
expenditures'
(arget ": (he Sales department expenditures ,ill gro, at the same or lo,er rate than
revenues .rom sales'
5ethod: (otal expenditures o. company and revenues .rom sales .igures ,ill be obtained
.rom the corporate accounting system' Expenditures .or the Sales department ,ill be
obtained .rom intradepartmental boo1+1eeping system' (hese t,o .igures ,ill be used to
calculate the percent'
Why is the balanced scorecard method good&
The good aspect of the balanced scorecard method is that it is tactical and concrete. While strategic
planning documents often tend to be passive, they only say what should be accomplished but do not say
how and do not say how it will be measured, balanced scorecard attempts to be active.
The balanced scorecard method transforms an organizationJs strategic plans and goals from mere
statements into e%ecution plans and =orders=. This can be done at a very granular level if needed.
3alanced scorecard provides a framework that not only provides performance measurements, but it also
helps planners identify what should be done and how it should be measured. 3alanced scorecard
enables e%ecutives to truly execute their strategies.
7ow is balanced scorecard implemented in real business&
/a<or units throughout organizations often establish their own scorecard which is then integrated with
the scorecards of other units to achieve the scorecard of the overall organization.
The balanced scorecard method today is often implemented as a full strategic planning and management
system where data is fed directly from accounting and company IT systems into the model to calculate
metrics and compare them with strategic goals and plans.
What is the history of the 3alanced corecard method&
The balanced scorecard method was first published by ,r. 8obert Eaplan and ,avid .orton. They
introduced the balance scorecard framework as a performance measurement framework that added
strategic non'financial performance measures to traditional financial metrics to give managers and
e%ecutives a more #alanced view of organizational performance.