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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 (IE matrix).

What is the SPACE matrix strategic management method?

To explain how the SPACE matrix works, it is best to reverse-engineer it. First, let's take a look

at what the outcome of a SPACE matrix analysis can be, take a look at the picture below. The

SPACE matrix is broken down to four quadrants where each quadrant suggests a different type

or a nature of a strategy:

• Aggressive

• Conservative

• Defensive

• Competitive

This is what a completed SPACE matrix looks like:

This particular SPACE matrix tells us that our company should pursue an aggressive strategy.

Our 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, acquisition of competitors, and

so on.

Now, how do we get to the possible outcomes shown in the SPACE matrix? The SPACE Matrix

analysis functions upon two internal and two external strategic dimensions in order to determine

the organization's strategic posture in the industry. The SPACE matrix 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 SPACE matrix factors under the internal strategic dimension. These factors

analyze a business internal strategic position. The financial strength factors often come from

company accounting. These SPACE matrix factors can include for example return on

investment, leverage, turnover, liquidity, working capital, cash flow, and others. Competitive

advantage factors include for example the speed of innovation by the company, market niche

position, customer loyalty, product quality, market share, product life cycle, and others.

Every business is also affected by the environment in which it operates. SPACE matrix factors

related to business external strategic dimension are for example overall economic condition,

GDP 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 Five Forces model.

The SPACE matrix calculates the importance of each of these dimensions and places them on a

Cartesian graph with X and Y coordinates.

The following are a few model technical assumptions:

- By definition, the CA and IS values in the SPACE matrix are plotted on the X axis.

- CA values can range from -1 to -6.

- IS values can take +1 to +6.

- The FS and ES dimensions of the model are plotted on the Y axis.

- ES values can be between -1 and -6.

- FS values range from +1 to +6.

How do I construct a SPACE matrix?

The SPACE matrix is constructed by plotting calculated values for the competitive advantage

(CA) and industry strength (IS) dimensions on the X axis. The Y axis is based on the

environmental stability (ES) and financial strength (FS) dimensions. The SPACE matrix can be

created using the following seven steps:

Step 1: Choose a set of variables to be used to gauge the competitive advantage (CA),

industry strength (IS), environmental stability (ES), and financial strength (FS).

Step 2: Rate individual factors using rating system specific to each dimension. Rate

competitive advantage (CA) and environmental stability (ES) using rating scale from -6 (worst)

to -1 (best). Rate industry strength (IS) and financial strength (FS) using rating scale from +1

(worst) to +6 (best).

Step 3: Find the average scores for competitive advantage (CA), industry strength (IS),

environmental stability (ES), and financial strength (FS).

Step 4: Plot values from step 3 for each dimension on the SPACE matrix on the appropriate

axis.

Step 5: Add the average score for the competitive advantage (CA) and industry strength (IS)

dimensions. This will be your final point on axis X on the SPACE matrix.

Step 6: Add the average score for the SPACE matrix environmental stability (ES) and financial

strength (FS) dimensions to find your final point on the axis Y.

Step 7: Find intersection of your X and Y points. Draw a line from the center of the SPACE

matrix to your point. This line reveals the type of strategy the company should pursue.

SPACE matrix example

The following table shows what values were used to create the SPACE matrix displayed above.

Each factor within each strategic dimension is rated using appropriate rating scale. Then

averages are calculated. Adding individual strategic dimension averages provides values that are

plotted on the axis X and Y.

Where do I go next?

The SPACE matrix can help to find a strategy. But, what if we have 2-3 strategies and need to

decide which one is the best one? The Quantitative Strategic Planning Matrix (QSPM) model can

help to answer this question.

Should you have any questions about the SPACE matrix, you might want to submit them at our

management discussion forum.

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Use & Disclaimers

The BCG Growth-Share Matrix

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of

the Boston Consulting Group in the early 1970's. It is based on the observation that a company's

business units can be classified into four categories based on combinations of market growth and

market share relative to the largest competitor, hence the name "growth-share". Market growth

serves as a proxy for industry attractiveness, and relative market share serves as a proxy for

competitive advantage. The growth-share matrix thus maps the business unit positions within

these two important determinants of profitability.

BCG Growth-Share Matrix

This framework assumes that an increase in relative market share will result in an increase in the

generation of cash. This assumption often is true because of the experience curve; increased

relative market share implies that the firm is moving forward on the experience curve relative to

its competitors, thus developing a cost advantage. A second assumption is that a growing market

requires investment in assets to increase capacity and therefore results in the consumption of

cash. Thus the position of a business on the growth-share matrix provides an indication of its

cash generation and its cash consumption.

Henderson reasoned that the cash required by rapidly growing business units could be obtained

from the firm's other business units that were at a more mature stage and generating significant

cash. By investing to become the market share leader in a rapidly growing market, the business

unit could move along the experience curve and develop a cost advantage. From this reasoning,

the BCG Growth-Share Matrix was born.

The four categories are:

• Dogs - Dogs have low market share and a low growth rate and thus neither generate nor

consume a large amount of cash. However, dogs are cash traps because of the money tied

up in a business that has little potential. Such businesses are candidates for divestiture.

• Question marks - Question marks are growing rapidly and thus consume large amounts

of cash, but because they have low market shares they do not generate much cash. The

result is a large net cash comsumption. A question mark (also known as a "problem

child") has the potential to gain market share and become a star, and eventually a cash

cow when the market growth slows. If the question mark does not succeed in becoming

the market leader, then after perhaps years of cash consumption it will degenerate into a

dog when the market growth declines. Question marks must be analyzed carefully in

order to determine whether they are worth the investment required to grow market share.

• Stars - Stars generate large amounts of cash because of their strong relative market share,

but also consume large amounts of cash because of their high growth rate; therefore the

cash in each direction approximately nets out. If a star can maintain its large market

share, it will become a cash cow when the market growth rate declines. The portfolio of a

diversified company always should have stars that will become the next cash cows and

ensure future cash generation.

• Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is

greater than the market growth rate, and thus generate more cash than they consume.

Such business units should be "milked", extracting the profits and investing as little cash

as possible. Cash cows provide the cash required to turn question marks into market

leaders, to cover the administrative costs of the company, to fund research and

development, to service the corporate debt, and to pay dividends to shareholders. Because

the cash cow generates a relatively stable cash flow, its value can be determined with

reasonable accuracy by calculating the present value of its cash stream using a discounted

cash flow analysis.

Under the growth-share matrix model, as an industry matures and its growth rate declines, a

business unit will become either a cash cow or a dog, determined soley by whether it had become

the market leader during the period of high growth.

While originally developed as a model for resource allocation among the various business units

in a corporation, the growth-share matrix also can be used for resource allocation among

products within a single business unit. Its simplicity is its strength - the relative positions of the

firm's entire business portfolio can be displayed in a single diagram.

Limitations

The growth-share matrix once was used widely, but has since faded from popularity as more

comprehensive models have been developed. Some of its weaknesses are:

• Market growth rate is only one factor in industry attractiveness, and relative market share

is only one factor in competitive advantage. The growth-share matrix overlooks many

other factors in these two important determinants of profitability.

• The framework assumes that each business unit is independent of the others. In some

cases, a business unit that is a "dog" may be helping other business units gain a

competitive advantage.

• The matrix depends heavily upon the breadth of the definition of the market. A business

unit may dominate its small niche, but have very low market share in the overall industry.

In such a case, the definition of the market can make the difference between a dog and a

cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing

a corporation's business portfolio at a glance, and may serve as a starting point for discussing

resource allocation among strategic business units.

GRAND

Lesson#30 STRATEGY

MATRIX-2

Learning objective

Grand strategy matrix is a last matrix of matching strategy formulation framework. It same as

important

as BCG, IE and other matrices. This chapter enables you to understand the preparation of GS

matrix.

The last stage of strategy formulation is decision stage. In this stage it is decided that which way

is most

appropriate or which alternative strategy should be select. This stage contains QSPM that is only

tool

for objective evaluation of alternative strategies. A quantitative method used to collect data and

prepare

a matrix for strategic planning. It is based on identified internal and external crucial success

factors.

That is only technique designed to determine the relative attractiveness of feasible alternative

action.

This technique objectively indicates which alternative strategies are best.

The QSPM uses input from

Stage 1 analyses and matching results from Stage 2 analyses to decide objectively among

alternative

strategies. That is, the EFE Matrix, IFE Matrix, and Competitive Profile Matrix that make up

Stage 1,

coupled with the TOWS Matrix, SPACE Analysis, BCG Matrix, IE Matrix, and Grand Strategy

Matrix

that make up Stage 2, provide the needed information for setting up the QSPM (Stage 3).

Preparation of matrix

Now the question is that how to prepare QSPM matrix. First it contains key internal and external

factors. An internal factor contains (strength and weakness) and external factor include

(opportunities

and threats). It relates to previously IFE and EFE in which weight to all factors. Weight means

importance to internal and external factor. The sum of weight must be equal to one. After

assigning the

weights examine stage-2 matrices and identify alternatives strategies that the organization should

consider implementing. The top row of a QSPM consists of alternative strategies derived from

the

TOWS Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix. These

matching

tools usually generate similar feasible alternatives. However, not every strategy suggested by the

matching techniques has to be evaluated in a QSPM. Strategists should use good intuitive

judgment in

selecting strategies to include in a QSPM. After assigning the weight to strategy, determine the

attractiveness score of each and afterwards total attractiveness score. The highest total

attractiveness

score strategy is most feasible.

1. List of the firm's key external opportunities/threats and internal strengths/weaknesses in the

left

column of the QSPM.

2. Assign weights to each key external and internal factor

3. Examine the Stage 2 (matching) matrices and identify alternative strategies that the

organization

should consider implementing

4. Determine the Attractiveness Scores (AS)

5. Compute the Total Attractiveness Scores

6. Compute the Sum Total Attractiveness Score

111

Limitations

1. Requires intuitive judgments and educated assumptions

2. Only as good as the prerequisite inputs

3. Only strategies within a given set are evaluated relative to each other

Advantages

1. Sets of strategies considered simultaneously or sequentially

2. Integration of pertinent external and internal factors in the decision making process

Key Internal Factors

Research and Development

Computer Information

Finance/Accounting

Production/Operations

Management

Marketing

Systems

Economy conditions

Social/Cultural/Demographic

/Environmental

Political/Legal/Governmental

Competitive

Technological

Consumer attitude

Strategy 1

AS TAS

Strategy 2

AS TAS

Strategy 3

Weight AS TAS

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