HOFER’S MATRICES

AND DIRECTIONAL
POLICIES
BUSINESS PORTFOLIO
ANALYSIS
• The analysis methods of the business
portfolio analysis are used in order to
identify and examine the various
strategic alternatives that must be
approached at corporate level.
 POTENTIAL BENEFITS
• It encourages the promotion of competitive
analysis at the level of strategic business units.
• Selective earmarking of financial resources by
means of identification of strategic issues and
by means of adoption of a standardized and
objective negotiation process.
• It helps to reduce risks, increases
concentration and involvement
 (COMPETITIVE POSITION)
(STAGE OF
EVOLUTIO
N) STRONG AVERAGE WEAK
DEVELO
P

GROWT
H
SUPER
GROWT
H
MATURIT
Y
DECLIN
E

HOFER’S MATRICES
Contd…..
• Strategic business unit ”A” seems to be a potential ”Star”. It
holds a large market share, it is in the stage of life cycle
development and has a strong competitive position on the
market. As such, unit ”A” represents a potential candidate in
the competition for corporate resource competition.
• Investments in unit ”B” must take into account the fact that
although it has a strong market position, its market share is
quite small. strategy that may contribute to the increase of
market share must be developed, thus accounting for the
future necessary investment.
Contd……
• Unit ”C” has a small market share, and it holds a
competitively weak position and it entered a small
market whose development is underway. For the unit
”C” a strategy residing in the elimination from the
market must be applied, so that the investment for the
first two units may be favored.
• Unit ”D” is characterized by a strong competitive
position on the market and it holds a large market
share. In this case, it is recommended that investments
be made with a view to maintaining the current position
on the market. On the lung run, it will become a “Cash
Cow”.
Contd……
• Unit ”E” together with unit ”F” are included into
the “Cash Cow” category and they should be
capitalized on because of great cash flows that
they generate.
• Unit ”G” is included into the “Dogs” category and
the management thereof is recommended, with a
view to generating short-term cash flows in as
much as it is possible. Nevertheless, on the long
term, the strategy of limitation or liquidation on
the market must be selected.
Advantages of Hofer’s Matrices

• It provides an image regarding the manner of

distribution of the businesses undertaken by a
company during specific stages of a life cycle.
• The company may predict how the present
portfolio will develop in the future.
• It manages to divert the management’s attention
from the corporate level and focus on potential
strategies specific to the strategic business unit.
Disadvantages

• Identification of Key Success Factors.

• Weight assignment to different Key
Success Factors can be difficult.
• Managers tend to underestimate their
weaknesses and overestimate their
strengths.
Directional Policy Matrix
 Characterize Your Enterprise
The expert system will position your enterprise on the
chart based upon your description of:
– Supplier Bargaining Power
– Threat of Substitutes
– Threat of New Entrants
– Competitive Rivalry
– Buyer Bargaining Power
– Product Quality
– Product Value
– Relative Market Share
– Reputation
– Customer Loyalty
– Staying Power
– Experience

• You can trace through the supporting analysis and its

conclusions, adjusting your input until you are
satisfied your description accurately characterizes
your enterprise.
 Analysis of Your Enterprise Position
Invest Grow
• High Market • High Market
Attractiveness Attractiveness
• High Business • Low Business
Strengths Strengths
• This is the • You ar e in an
ideal quadrant. uncomfortable
• Your strengths quadrant.
are directed at a • The market potential
highly is attractive but yo u
attractive do not have the
market. business strengths
• Invest your necessa ry for being
best resources really successful.
in those parts • The options facing
of your you are either to take
business which what you can while it
are in this is still possible or to
quadrant. invest in building a
better competitive
position.
• You must be selective
in your efforts here ,
as this segment will
cost you to invest in
every aspect of the
business.
Harvest Divest
• Low Market • Low Market
Attractiveness Attractiveness
• High Business • Low Business
Strengths Strength s
• In this quadrant • Think carefully about
you have high what you ar e doing to
strengths in a be in this quadrant.
market that has • The market is not
lost its particularly attractive
attractiveness in and your business
terms of future strengths are below
potential. average here.
• It is still good for • Keep in this segment
near term profits, only if it supports a
so maintain the more profitable part
position for as of your business (for
long as possible. instance, if this
segment completes a
product line range) or
if it absorbs some of
the overhead costs of
a more profitable
segment.
Shell Directional Policy Matrix

• Another refinement upon the Boston Matrix

• Along the horizontal axis are prospects for sector
profitability, and along the vertical axis is a
company's competitive capability
• The location of a Strategic Business Unit (SBU) in
any cell of the matrix implies different strategic
decisions
• However decisions often span options and in
practice the zones are an irregular shape and do
not tend to be accommodated by box shapes.
Instead they blend into each other.
Each of the zones is described as follows:

o Leader - Major resources are focused upon the SBU

o Try Harder - Could be vulnerable over a longer period of time, but
fine for now
o Double or Quit - Gamble on potential major SBU's for the future
o Growth - Grow the market by focusing just enough resources here
o Custodial - Just like a cash cow, milk it and do not commit any
more resources
o Cash Generator - Even more like a cash cow, milk here for
expansion elsewhere
o Phased Withdrawal - Move cash to SBU's with greater potential
o Divest - Liquidate or move these assets on a fast as you can
Best Use
The DPM shows
• Markets categorised based on a scale of
attractiveness to the organisation
• The organisation’s relative strengths in each of
these markets
• The relative importance of each market
Brief History
• This Directional Policy Matrix uses the GE multi-
factor approach using the same fundamental
ideas as the Boston Consulting Group Matrix.
• It provides for Market attractiveness on the y-axis
and Relative Strength on the x-axis. The matrix is
traditionally a four-box matrix but can also be a
nine-box matrix.
Model Use and Applicability
Model Weaknesses

• Quadrant names
McDonald initially labeled the different quadrants
as those in the Boston Consulting Group matrix
and received a lot of criticism from this. These
labels created confusion. More recently he merely
refers to these positions but does not label the
quadrants as they were in the past.
• Products-for-markets
This concept is confusing to many people and
limits the analysis.
Strategic Emphasis
• The McDonald DPM like other models of portfolio analysis
attempts to define a firm’s strategic position and strategy
alternatives. The accepted level at which a firm can be
analysed using the DPM is that of strategic business unit.
• Professor Malcolm McDonald of the Cranfield School of
Management developed the matrix to define Business
Strengths in terms of Critical Success Factors (CSF’s). A
critical success factor represents something that a company
must do right in the eyes of the customer.
• For the first time the business strengths are looked at from
the customer’s point of view and are therefore more
objective. In the past defining the factors was a very
subjective exercise from the company’s point of view. The
Business Strengths in this matrix are relative strengths
(relative to the best in the market)
• The DPM can be used at any level in the organisation and for
any kind of SBU.
Summary
• Was developed to overcome the limitations seen in the BCG matrix
and to simplify the Shell directional policy and GE matrices, which
both illustrated a nine box matrix.
• This matrix provides for Market attractiveness on the y-axis and
Relative Business Strength on the x-axis and is made up of four
quadrants (but nine quadrants can also be used).
• Business Strengths are defined in terms of Critical Success Factors
(CSF’s).
• Factors on both matrices are weighted and scored. Relative strength
on the x-axis is included in the mathematical calculation of the co-
ordinates.
• The circles are placed in any one of five positions on the matrix each
with a specific generic strategy or guideline for management. These
are
– Invest for growth
– Maintain market position, manage for earnings
– Selective
– Manage for cash
– Opportunistic development
• This matrix is a good one to use if the organisation wishes to assess
the competitors relative to themselves as it allows for a good
analysis of the strengths and weaknesses of the competitors from
the customers point of view.
Conclusion

There is always a better strategy

than the one you have; you just
haven't thought of it yet
– Sir Brian Pitman, former CEO of Lloyds
TSB, Harvard Business Review, April 2003
References
• Strategic Management-from Theory to
Implementation, 4th edition
David Hussey

• Business Portfolio Analysis by Hofer’s Method

– Ionescu Florin Tudor The Academy of Economic Studies,
Bucureti
– Cescu tefan Claudiu The Academy of Economic Studies,
Bucureti
– Cruceru Anca Francisca The Academy of Economic
Studies, Bucureti
• http://www.cipher-sys.com/hofhelp/