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.

SWOT Analysis

SWOT analysis is a simple framework for generating strategic alternatives from a

situation analysis. It is applicable to either the corporate level or the business unit level
and frequently appears in marketing plans. SWOT (sometimes referred to as TOWS)
stands for Strengths, Weaknesses, Opportunities, and Threats. The SWOT framework
was described in the late 1960's by Edmund P. Learned, C. Roland Christiansen, Kenneth
Andrews, and William D. Guth in Business Policy, Text and Cases (Homewood, IL:
Irwin, 1969). The General Electric Growth Council used this form of analysis in the
1980's. Because it concentrates on the issues that potentially have the most impact, the
SWOT analysis is useful when a very limited amount of time is available to address a
complex strategic situation.

The following diagram shows how a SWOT analysis fits into a strategic situation
analysis.
 Situation Analysis
/ \
Internal Analysis External Analysis
/\ /\
Strengths Weaknesses Opportunities Threats
|
SWOT Profile

The internal and external situation analysis can produce a large amount of information,
much of which may not be highly relevant. The SWOT analysis can serve as an
interpretative filter to reduce the information to a manageable quantity of key issues. The
SWOT analysis classifies the internal aspects of the company as strengths or weaknesses
and the external situational factors as opportunities or threats. Strengths can serve as a
foundation for building a competitive advantage, and weaknesses may hinder it. By
understanding these four aspects of its situation, a firm can better leverage its strengths,
correct its weaknesses, capitalize on golden opportunities, and deter potentially
devastating threats.

Internal Analysis

The internal analysis is a comprehensive evaluation of the internal environment's

potential strengths and weaknesses. Factors should be evaluated across the organization
in areas such as:

• Company culture
• Company image
• Organizational structure
• Key staff
• Access to natural resources
• Position on the experience curve
• Operational efficiency
• Operational capacity
• Brand awareness
• Market share
• Financial resources
• Exclusive contracts
• Patents and trade secrets

The SWOT analysis summarizes the internal factors of the firm as a list of strengths and
weaknesses.

External Analysis
An opportunity is the chance to introduce a new product or service that can generate
superior returns. Opportunities can arise when changes occur in the external environment.
Many of these changes can be perceived as threats to the market position of existing
products and may necessitate a change in product specifications or the development of
new products in order for the firm to remain competitive. Changes in the external
environment may be related to:

• Customers
• Competitors
• Market trends
• Suppliers
• Partners
• Social changes
• New technology
• Economic environment
• Political and regulatory environment

The last four items in the above list are macro-environmental variables, and are addressed
in a PEST analysis.

The SWOT analysis summarizes the external environmental factors as a list of

opportunities and threats.

SWOT Profile

When the analysis has been completed, a SWOT profile can be generated and used as the
basis of goal setting, strategy formulation, and implementation. The completed SWOT
profile sometimes is arranged as follows:

Strengths Weaknesses
1. 1.
2. 2.
3. 3.
. .
. .
. .

Opportunities Threats
1. 1.
2. 2.
3. 3.
. .
. .
. .
When formulating strategy, the interaction of the quadrants in the SWOT profile becomes
important. For example, the strengths can be leveraged to pursue opportunities and to
avoid threats, and managers can be alerted to weaknesses that might need to be overcome
in order to successfully pursue opportunities.

Multiple Perspectives Needed

The method used to acquire the inputs to the SWOT matrix will affect the quality of the
analysis. If the information is obtained hastily during a quick interview with the CEO,
even though this one person may have a broad view of the company and industry, the
information would represent a single viewpoint. The quality of the analysis will be
improved greatly if interviews are held with a spectrum of stakeholders such as
employees, suppliers, customers, strategic partners, etc.

SWOT Analysis Limitations

While useful for reducing a large quantity of situational factors into a more manageable
profile, the SWOT framework has a tendency to oversimplify the situation by classifying
the firm's environmental factors into categories in which they may not always fit. The
classification of some factors as strengths or weaknesses, or as opportunities or threats is
somewhat arbitrary. For example, a particular company culture can be either a strength or
a weakness. A technological change can be a either a threat or an opportunity. Perhaps
what is more important than the superficial classification of these factors is the firm's
awareness of them and its development of a strategic plan to use them to its advantage.

GE / McKinsey Matrix

In consulting engagements with General Electric in the 1970's, McKinsey &

Company developed a nine-cell portfolio matrix as a tool for screening GE's large
portfolio of strategic business units (SBU). This business screen became known
as the GE/McKinsey Matrix and is shown below:

GE / McKinsey Matrix

Business Unit Strength

High Medium Low

High
 Medium

Low

The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it

maps strategic business units on a grid of the industry and the SBU's position in
the industry. The GE matrix however, attempts to improve upon the BCG matrix
in the following two ways:

• The GE matrix generalizes the axes as "Industry Attractiveness" and

"Business Unit Strength" whereas the BCG matrix uses the market growth
rate as a proxy for industry attractiveness and relative market share as a
proxy for the strength of the business unit.
• The GE matrix has nine cells vs. four cells in the BCG matrix.

Industry attractiveness and business unit strength are calculated by first

identifying criteria for each, determining the value of each parameter in the
criteria, and multiplying that value by a weighting factor. The result is a
quantitative measure of industry attractiveness and the business unit's relative
performance in that industry.

Industry Attractiveness

The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is

determined by factors such as the following:

• Market growth rate

• Market size
• Demand variability
• Industry profitability
• Industry rivalry
• Global opportunities
• Macroenvironmental factors (PEST)

Each factor is assigned a weighting that is appropriate for the industry. The
industry attractiveness then is calculated as follows:
 Industry attractiveness = factor value1 x factor weighting1
+ factor value2 x factor weighting2
.
.
.

+ factor valueN x factor weightingN

Business Unit Strength

The horizontal axis of the GE / McKinsey matrix is the strength of the business
unit. Some factors that can be used to determine business unit strength include:

• Market share
• Growth in market share
• Brand equity
• Distribution channel access
• Production capacity
• Profit margins relative to competitors

The business unit strength index can be calculated by multiplying the estimated
value of each factor by the factor's weighting, as done for industry attractiveness.

Plotting the Information

Each business unit can be portrayed as a circle plotted on the matrix, with the
information conveyed as follows:

• Market size is represented by the size of the circle.

• Market share is shown by using the circle as a pie chart.
• The expected future position of the circle is portrayed by means of an
arrow.

The following is an example of such a representation:

The shading of the above circle indicates a 38% market share for the strategic
business unit. The arrow in the upward left direction indicates that the business
unit is projected to gain strength relative to competitors, and that the business
unit is in an industry that is projected to become more attractive. The tip of the
arrow indicates the future position of the center point of the circle.

Strategic Implications

Resource allocation recommendations can be made to grow, hold, or harvest a

strategic business unit based on its position on the matrix as follows:

• Grow strong business units in attractive industries, average business units

in attractive industries, and strong business units in average industries.
• Hold average businesses in average industries, strong businesses in
weak industries, and weak business in attractive industies.
• Harvest weak business units in unattractive industries, average business
units in unattractive industries, and weak business units in average
industries.

There are strategy variations within these three groups. For example, within the
harvest group the firm would be inclined to quickly divest itself of a weak
business in an unattractive industry, whereas it might perform a phased harvest
of an average business unit in the same industry.

While the GE business screen represents an improvement over the more simple
BCG growth-share matrix, it still presents a somewhat limited view by not
considering interactions among the business units and by neglecting to address
the core competencies leading to value creation. Rather than serving as the
primary tool for resource allocation, portfolio matrices are better suited to
displaying a quick synopsis of the strategic business units.

BCG Matrix Model

The BCG matrix or also called BCG model relates to marketing. The BCG model is a
well-known portfolio management tool used in product life cycle theory. BCG matrix is
often used to prioritize which products within company product mix get more funding
and attention.

The BCG matrix model is a portfolio planning model developed by Bruce Henderson of
the Boston Consulting Group in the early 1970's.

The BCG model is based on classification of products (and implicitly also company
business units) into four categories based on combinations of market growth and market
share relative to the largest competitor.
When should I use the BCG matrix model?

Each product has its product life cycle, and each stage in product's life-cycle represents a
different profile of risk and return. In general, a company should maintain a balanced
portfolio of products. Having a balanced product portfolio includes both high-growth
products as well as low-growth products.

A high-growth product is for example 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 expected to bring the gold in the
future. An example of this product would be an iPod.

A low-growth product is for example an established product known by the market.

Characteristics 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. An
example of this product would be a regular Colgate toothpaste.

But the question is, how do we exactly find out what phase our product is in, and how do
we classify what we sell? Furthermore, we also ask, where does each of our products fit
into our product mix? Should we promote one product more than the other one? The
BCG matrix can help with this.

The BCG matrix reaches further behind product mix. Knowing 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 BCG matrix and how does the BCG model work?

Placing products in the BCG matrix results in 4 categories in a portfolio of a company:

BCG STARS (high growth, high market share)

- Stars are defined by having high market share in a growing market.

- Stars are the leaders in the business but still need a lot of support for promotion a
placement.
- If market share is kept, Stars are likely to grow into cash cows.

BCG QUESTION MARKS (high growth, low market share)

- These products are in growing markets but have low market share.
- Question marks are essentially new products where buyers have yet to discover them.
- The marketing strategy is to get markets to adopt these products.
- Question marks have high demands and low returns due to low market share.
- These products need to increase their market share quickly or they become dogs.
- The best way to handle Question marks is to either invest heavily in them to gain
market share or to sell them.

BCG CASH COWS (low growth, high market share)

- Cash 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.
- Because of the low growth, promotion and placement investments are low.
- Investments into supporting infrastructure can improve efficiency and increase cash
flow more.
- Cash cows are the products that businesses strive for.

BCG DOGS (low growth, low market share)

- Dogs are in low growth markets and have low market share.
- Dogs should be avoided and minimized.
- Expensive turn-around plans usually do not help.

And now, let's put all this into a picture:

Are there any problems with the BCG matrix model?

Some limitations of the BCG matrix model include:

• The first problem can be how we define market and how we get data about market
share
• A high market share does not necessarily lead to profitability at all times
• The model employs only two dimensions – market share and product or service
growth rate
 • Low share or niche businesses can be profitable too (some Dogs can be more
profitable than cash Cows)
• The model does not reflect growth rates of the overall market
• The model neglects the effects of synergy between business units
• Market growth is not the only indicator for attractiveness of a market

Portfolio Management based on Market Share and Market

Growth. Explanation of BCG Matrix. ('70)

The BCG Matrix method is the most well-known portfolio management tool. It is
based on product life cycle theory. It was developed in the early 70s by the Boston
Consulting Group. The BCG Matrix can be used to determine what priorities should be
given in the product portfolio of a business unit. To ensure long-term value creation, a
company should have a portfolio of products that contains both high-growth products in
need of cash inputs and low-growth products that generate a lot of cash. The Boston
Consulting Group Matrix has 2 dimensions: market share and market growth. The
basic idea behind it is: if a product has a bigger market share, or if the product's market
grows faster, it is better for the company.

The four segments of the BCG Matrix

Placing products in the BCG matrix provides 4 categories in a portfolio of a company:

• Stars (high growth, high market share)
o Stars are using large amounts of cash. Stars are leaders in the business.
Therefore they should also generate large amounts of cash.
o Stars are frequently roughly in balance on net cash flow. However if
needed any attempt should be made to hold your market share in Stars,
because the rewards will be Cash Cows if market share is kept.

• Cash Cows (low growth, high market share)

o Profits and cash generation should be high. Because of the low growth,
investments which are needed should be low.
o Cash Cows are often the stars of yesterday and they are the foundation of a
company.
• Dogs (low growth, low market share)
o Avoid and minimize the number of Dogs in a company.
o Watch out for expensive ‘rescue plans’.
o Dogs must deliver cash, otherwise they must be liquidated.
• Question Marks (high growth, low market share)
 o Question Marks have the worst cash characteristics of all, because they
have high cash demands and generate low returns, because of their low
market share.
o If the market share remains unchanged, Question Marks will simply
absorb great amounts of cash.
o Either invest heavily, or sell off, or invest nothing and generate any cash
that you can. Increase market share or deliver cash.

the BCG Matrix and one size fits all strategies

The BCG Matrix method can help to understand a frequently made strategy mistake:
having a one size fits all strategy approach, such as a generic growth target (9 percent per
year) or a generic return on capital of say 9,5% for an entire corporation.

In such a scenario:

• Cash Cows Business Units will reach their profit target easily. Their management
have an easy job. The executives are often praised anyhow. Even worse, they are
often allowed to reinvest substantial cash amounts in their mature businesses.
• Dogs Business Units are fighting an impossible battle and, even worse, now and
then investments are made. These are hopeless attempts to "turn the business
around".
• As a result all Question Marks and Stars receive only mediocre investment funds.
In this way they can never become Cash Cows. These inadequate invested sums
of money are a waste of money. Either these SBUs should receive enough
investment funds to enable them to achieve a real market dominance and become
Cash Cows (or Stars), or otherwise companies are advised to disinvest. They can
then try to get any possible cash from the Question Marks that were not selected.

Other uses and benefits of the BCG Matrix

• If a company is able to use the experience curve to its advantage, it should be able
to manufacture and sell new products at a price that is low enough to get early
market share leadership. Once it becomes a star, it is destined to be profitable.
• BCG model is helpful for managers to evaluate balance in the firm’s current
portfolio of Stars, Cash Cows, Question Marks and Dogs.
• BCG method is applicable to large companies that seek volume and experience
effects.
• The model is simple and easy to understand.
• It provides a base for management to decide and prepare for future actions.

Limitations of the BCG Matrix

Some limitations of the Boston Consulting Group Matrix include:

• It neglects the effects of synergy between business units.

 • High market share is not the only success factor.
• Market growth is not the only indicator for attractiveness of a market.
• Sometimes Dogs can earn even more cash as Cash Cows.
• The problems of getting data on the market share and market growth.
• There is no clear definition of what constitutes a "market".
• A high market share does not necessarily lead to profitability all the time.
• The model uses only two dimensions – market share and growth rate. This may
tempt management to emphasize a particular product, or to divest prematurely.
• A business with a low market share can be profitable too.
• The model neglects small competitors that have fast growing market shares.

Book: Carl W. Stern, George Stalk - Perspectives on Strategy from The Boston
Consulting Group -

BCG Matrix Forum

Recent User Comments
"Hello everyone, I'm a little bit confused
about how to plot products on to the BCG
matrix? Should I:
[1] Look at the definitions of the animals and
place products on to the graph depending
upon what animal they most feel like
[2] Look at the X and Y axis and place
products on the graph and plot depending
upon market share and growth and completely
J How to do
ignore the animals during the plotting process.
Winstanley - BCG 1
I assume that [2] is the right approach.
UK Plotting?
If [2] is the right approach then how do I
determine market share and growth?
Lets say there are 100 people who want a TV.
10 of them have my TV at the end of one
year. And 50 of them have someone elses'
TV.
What is my market share and what is my
growth? Do I have high growth and low
share? Thanks..."
Juliet - Gha Funding "I think the cash cows should fund stars if they
2
na Stars are cash hungry."
Yuri BCG in Emerging "The tool is really great, but how to use it 1
Lengue - A or Fragmented in fragmented industries where there is a
ngola Markets lack of information making almost
impossible to make intelligent decisions.
For instance how would market growth
rate or market share be calculated under
 such conditions?"
"The matrix does not consider the place of
traditional/generic products that companies
maintain in their product lines that may have had
high market share and market growth in time past,
but currently do not. Sometimes, companies just
can keep the dogs (low growth, low market share)
BCG
Dr Isaac due to some intangible factors.
Matrix:
Ogbuka - What needs to be done may not necessarily be to let 0
not in All
Nigeria go but to invest more in such products in
Cases
repackaging (innovation). This is because market
expansion is a dynamic process that responds to
identified opportunities and there are other basic
factors that influence investment decisions and
market expansion. The cost element is for instance
an essential determinant."
"What are the pros and cons of
Frank Advantages and
portfolio planning tools like the
Bacchus - U Disadvantages of 1
BCG Matrix or the GE/McKinsey
SA Portfolio Planning Tools
matrix?"
Best User Comments
"Generally in the BCG Matrix, when the
10% limit market growth is more than 10%, it would be
Rob - Netherl
in BCG considered a star. Can anyone explain why 43
ands
Matrix they have chosen the (fairly high) limit of
10%??"
"This explanation of BCG matrix is superb,
Superb
Manish in terms of penetrating the market as start
explanation of
Sijaria - In ups. Clearly layouts the structure of SBU's 31
PLC and BCG
dia and their expectations in the business
Matrix
product life cycle. "Very Good"!"
Nyle - U Lack of Question "If a business has no Question Marks (or
27
SA Marks? just one), what should it do?"
"The matrix is misrepresenting in some cases.
Example: Coca cola and Pepsi. Coca cola is market
LEADER, as a result of which the relative market
Cola share of Pepsi is always smaller than 1. When the
Thijs - Nethe
& relative market share is smaller than 1, you will be 25
rlands
Pepsi at the right-hand side of the matrix. In that case,
Pepsi will automatically be a Question mark or a
dog. Everyone understands that Pepsi is a cash cow
or star!"
Wallace The BCG "(How) could the the BCG Matrix be
G. - USA - Matrix: adapted to include synergy effects 19
NY Reloaded between business units?"
John BCG Matrix is "Totally useless (as a contemporary 16
T. - Greece useless! business tool)."
"Use it for a basic analysis.But other metrics are
Manoj BCG
required if a deeper insight in business is 16
Sinha - India Matrix
needed."
Shreya - In BCG Matrix in "Which industries or Firms in India are
10
dia India using the BCG Matrix?"
"i am not sure if this matrix works to create a
competition map, it does not work like swot
chart. It's merely plotting the products you
Not useful for
arya - Indo have within your company for evaluation
Competitive 10
nesia purpose... It will depend on your analysis
Analysis
though where you'll take it forward but for
most cases it's totally junk for competition
mapping."
"One important thing in business would be how to
allocate and manage limited resource to achieve
maximum results. In that sense, the matrix is a good
tool to see where is the business that a company should
focus on to grow. But one thing that we need to
Marty - Real
consider using the matrix is that real business is not 7
Korea business
simple to be explained by a 2x2 matrix. For example, a
business can make more money and be more profitable
than other businessses in a company's portfolio even if
the market growth and the relative market share of the
business is low."
"This model is extremely useful if adapted suitably, to address a
particular situation. For example, for a portfolio of products in a
firm, one can locate them in a 2 by 2 matrix on the Market Share vs
Growth rate variables. The variables can then be changed to
margins vs growth rate and the products relocated. If we notice a
shift in the location of a product from say,'?' to star(between the
Srinivasan Use of two matrices), we may like to explore the possibilities of investing
Kannan - UA the in it's growth. Similarly, if a low share/low growth product, has
E Model high margins and consequently shifts between matrices, the
strategy should be appropriate. Likewise, if a cash cow in the
market share matrix shifts to dog in the margin matrix, we may
decide to closely observe the product and restrict support for the
same. This model is a useful tool if used appropriately. It does not
replace our thought process but certainly structures the process of
decision making."

Grand Strategy Steps

Summary
 • Step One. Answer "what's your Theory of Business?"

• Step Two. Identify your Values, Beliefs, Attitudes and Capabilities.

• Step Three. Write your Mission Statement.

• Step Four. Perform an Environmental Scan.

• Step Five. Perform a SWOT Analysis.

• Step Six. Determine your Strategic Focus.

• Step Seven. Seek Performance Breakthroughs.

• Step Eight. Understand and Apply Cause and Effect Relationships.

• Step Nine. Develop a Strategy Map.

• Step Ten. Translate goals into KPMs and Perform Gap Analysis.

• Step Eleven. Prepare a Scorecard to track and drive Your Grand Strategy.

• Step Twelve. Execute, Adjust, Execute.

Grand Strategy: building your foundation

for performance breakthroughs
by Daniel J. Knight

Imagine you were able to maximize your opportunities, minimize your risks and achieve
performance breakthroughs. You're probably thinking – "that would be great, how do I do
it?" Well it's simple but this simplicity demands critical thinking and diligent effort. So
if you're interested, let's find out how. Achieving this level of performance requires a
deliberate strategy with a performance management and measurement system that
enables you to scan the business horizon, focus your time, energy, knowledge,
relationships and resources and execute courses of action that possess the highest pay-off,
lowest costs and easiest implementation trajectory. You may wonder whether such a
strategy formulation is worth your time and effort, especially if you're in a quickly
changing business environment. This issue came up in a discussion with leading business
writer and consultant Seth Godin. We concluded that business strategy drives growth and
prosperity for businesses, both large and small. Godin said that for example Howard
Shultz, founder and head of Starbucks Coffee, could have decided to open and run only a
few stores, but you better believe that to grow Starbucks like he has he had to have a
business strategy.
So with that as introduction let's go through a step-by-step process for developing a
business strategy with a performance management and measurement system for your
business. Let's call it a "Grand Strategy" because it equates to a necessary precursor for
all subordinate strategies and systems whether they be marketing, innovation or
otherwise. There are 12 steps to this Grand Strategy process. The first 11 steps of this
process are best developed as a living document with your top management team and a
facilitator at an off-site meeting to avoid distractions. And step twelve, "Execute, Adjust,
Execute" requires strong top management commitment, support and involvement.

Step One. Ask "what's your 'Theory of Business'?" As philosophers tell us, there is
nothing as practical as good theory. Briefly answer these four questions to uncover yours.

What business are you in and where are you now?

• Where are you going?

• How will you get there?
• How will you know you've arrived?

Step Two. Create a clear expression of your intangible business resources. These
intangibles form an intellectual and emotional grounding for your Grand Strategy. They
drive your business and business relationships. Without them, you won't be able to
commit the time, energy and tangible resources that move your business forward. These
intangibles are:

• Values – high level concepts that you pour your life into regardless of financial
return because they define you and your business. Some examples are family well
being, charity and goodwill toward others, honesty and integrity, and making a
difference in the world.

• Beliefs - key principles that state your assumptions about the cause and effect
relationships that drive you and your business. For example, if we provide
excellent products and services that please our customers at a competitive price,
we will be a profitable business.

• Attitudes – emotional orientations exhibited by you and your business toward

others that affects how you view them and treat them, and in turn how they react
to you and your business. Attitudes result in either positive or negative
expressions such as "most people tend to be fair if treated fairly" or "most people
will take advantage of you if you let them."

• Capabilities – inherent knowledge and relationships that support getting work

done for you and your business. For example, such things as patents, suppliers
and customer data bases, production processes, sales force knowledge, knowledge
about competitors, technological expertise and customer relationships fit here.

What are your Values, Beliefs, Attitudes and Capabilities? List them.
Step Three. Write a "Mission Statement." This statement provides you with the
articulation of your business purpose or reason for being. Answering the following four
questions in a satisfying amount of detail provides compelling background information
from which you can extract a hard hitting mission statement to move your business and
Grand Strategy forward.

• Why are you in business?

• What does your business do and how does it do it?
• Who does your business, who supports it, who benefits from it and who, if
anyone, suffers from it?
• How many different kinds of resources are involved in your business, how much
do they costs and how much profit do you expect to make from them?

Answer these questions and notice the power of their focusing affect on your business.
From your answers, develop a condensed and hard hitting Mission Statement.

Step Four. Perform an "Environmental Scan" by asking and answering the following
questions:

• What industry are you in (retail, wholesale, finance, manufacturing, durable or

non-durable goods and so on) and what are its trends?

• What is the economic situation (interest rates, costs of labor and materials,
unemployment levels, consumer demand, inflation and prices) and how will it
affect your business?

• Who are your competitors and potential competitors? What relevant advantages
and disadvantages do they possess?

• Who are your suppliers and potential suppliers? What mutual interests do you
share with them? What natural conflicts exist?

• Who are your customers and potential customers and who are their customers?
What segments do they fall in?

• What are the demographics that impact your business – age groups, ethnics,
economic status? What are their differences in terms of needs and preferences?

• What is the regulatory environment and how does it affect your business?

• What are the emerging technologies and how might they affect your business?

• Who are your stakeholders (employees, suppliers, customers, investors and

community) and what are their expectations?
Answer these Environmental Scan questions in order to possess the necessary business
intelligence and insight to proceed to the next step.

Step Five. After you complete your scan, then perform a SWOT Analysis. SWOT stands
for "Strengths," "Weaknesses," "Opportunities" and "Threats." Your Strengths and
Weaknesses are internal. Your Opportunities and Threats are external.

The areas for you to explore under each SWOT Analysis category are:

Strengths or Weaknesses

 Customer Service
 Products
 Systems and Processes
 R&D
 Cash Flow
 Employee Training
 Employee Loyalty
 Others?

Opportunities or Threats

 Emerging Products and Services

 Technological Change
 New Markets
 Competitive Pressures
 Supplier Relationships
 Economic Conditions
 Others?

Now, brainstorm to generate ideas under each category/area. Generate as many as ideas
as possible. Using your best judgment, select the top six ideas in terms of relevance and
importance for improving the performance and competitiveness of your business. Next,
translate the top six selected ideas into goal statements. For this translation process, use
the following format: action verb + (restated idea) in order to (object). For example, a
goal statement would look like this: "Increase customer satisfaction in order to reduce
customer losses and defections."

Step Six. Determine your "Strategic Focus." Business is becoming more and more
competitive. Let's call this phenomenon "Hyper-Competition." From it we see the time
lapse between finding a competitive edge and having it copied shrinking. Hyper-
Competition demands that you differentiate. This differentiation starts with you selecting
a Strategic Focus for your business. Otherwise your products and services become
commoditized.

Strategic Focus breaks down into the following three disciplines:

 • Customer Intimacy - emphasizes paying close attention to customers desires and
providing them with total, not to be beaten service and solutions. Ritz Carlton
Hotels and Nordstroms lead with this discipline.

• Product Leadership – emphasizes R&D and providing the best technology and
quality available in products. Intel and Starbucks lead with this discipline.

• Operational Excellence – emphasizes efficient operations and costs controls to

provide the lowest costs. Wal-Mart and Southwest Airlines lead with this
discipline.

Picking one of these as your lead focus represents a smart thing to do. This imperative
does not mean that you don't try to do well in the other two. It means that you don't try to
do all three equally well. Trying to be all things for all customers puts you on a path to
failure because customers will not behave in a way that profits your business. Business is
just too hyper-competitive for you to succeed doing all three better than anyone else.

So now look at your: Theory of Business; Values, Beliefs, Attitudes and Capabilities;
Mission Statement, Environmental Scan and SWOT Analysis, and then make a judgment
call. Pick your Strategic Focus and lead with it.

Step Seven. Seek performance breakthroughs. You begin this process by selecting your
Strategic Focus and limiting your goal statements to the top six. These top six goals
represent your "Strategic Goals" for achieving performance breakthroughs.

If you look at the time you spend on your business, you find it can be broken down into
three categories. These are:

• Administrative and Operations – the time you spend keeping the routine day to
day business running

• Crisis – the time you spend solving unanticipated problems

• Breakthrough – the deliberate time you spend on creative efforts to improve

performance

What happens is that the first two time categories grow to occupy all your time and they
push out your breakthrough time. Maintaining a Strategic Focus combined with
developing Strategic Goals to execute amounts to the only workable solution to this
challenge. Now, incorporate this thinking into the succeeding steps of your Grand
Strategy process.

Step Eight. Understand and apply "Cause and Effect Relationships." Let's discuss the
dynamics of Cause and Effect Relationships among your Strategic Goals. There are four
basic "Perspectives" that provide the framework for linking your goals in to your Grand
Strategy. These Perspectives are:

• Human Capital – the people talent in your organization and the systems and
process that directly enable them to be productive. A good way to look at the
people part is that it's what goes home at night.

• Structural Capital – the systems, structures and strategies that the organization
owns and produces value with. It stays in the organization when you turn off the
lights.

• Customer Capital – the relationship, level of satisfaction, reputation, potential for

referrals and loyalty which your organization enjoys with its customers.

• Financial Performance – the level of economic return provided to you and your
owners relative to investment. Performance under this perspective is also
compared to alternative investments like T-Bills.

So imagine that you possess superior Human Capital by recruiting, training and retaining
top talent and acquiring excellent people support systems. Given this superior Human
Capital, might you not be able to improve and create superior Structural Capital? And
with superior Human and Structural Capital, might you not be able to improve and create
superior Customer Capital which in turn would improve and create superior Financial
Performance? What we have described here equates to a virtuous cycle which enables
you to make more money for you and your owners and at the same time invest more in
your Human Capital. This virtuous cycle in turn starts succeeding rounds of
improvement which should cause an upward spiral to higher and higher levels of
performance. You will learn how to develop these Perspectives and link them in the next
step.

Step Nine. Develop a "Strategy Map." Let's start by looking at an example. A Harvard
Business Review article, The Employee – Customer Profit Chain at Sears, Jan-Feb 1998,
chronicled a transformation of Sears. Based on this article, an extraction of the Strategy
Map for Sears follows:

Mission Statement
"Be a compelling place to Work, Shop and Invest"

Strategy Map
o

Financial Performance Goals – Increase Revenues and Profitability

(What would it take to accomplish these strategic goals? Their answer was to

increase customer satisfaction to cause increased revenues and profitability)

Customer Capital Goal - Increase Customer Satisfaction

 (What would it take to accomplish this Strategic Goal? Their

answer was to create and maintain well stocked and attractive shelves and provide
friendly and helpful service that causes increased customer satisfaction.)

 

 Structural Capital Goals - Create and Maintain Well Stocked and Attractive Shelves
and Provide Friendly and Helpful Service
  (What would it take to accomplish these Strategic Goals? Their answer was to
increase employee training and development in relevant areas. This would increase
employee competence and satisfaction. And this in turn would make employees able and
willing to create and maintain well stocked and attractive shelves and provide friendly and
helpful service)


 Human Capital Goals - Increase Employee Training and Development in the Relevant
Areas in order to cause an Increase in Employee Competence and Satisfaction.
  (What would it take to accomplish these Strategic Goals? The answer was top
management belief in the complete series of Cause and Effect Relationships and top
management commitment of the time and resources for successful accomplishment.)

 Financial (Place Goals here)

Performance Example: Increase Revenue and Profits

Customer (Place Goals here)

Capital Example: Reduce Customer Losses and Defections

by Increasing Customer Satisfaction

Structural (Place Goals here)

Capital

Human (Place Goals here)

Capital

As proof of this Cause and Effect Relationship, Sears developed and validated a
predictive model that showed that for each 5 percent increase in employee satisfaction a
1.3 percent increase in customer satisfaction resulted which in turn resulted in a .5
percent increase in revenue. And Sears realized a 4 percent increase in customer
satisfaction in the 12 month period before the article was published and they were
expecting revenues to increase by $200 million.

So how do you develop a Strategy Map? The answer - you take a clean sheet of paper
and place your Mission Statement at the top. Lay out the four Perspectives underneath to
form a Strategy Map framework. Next, use your best judgment and assign your top
Strategic Goals to one of the four Strategy Map Perspectives (see example below).
Mission Statement: (Briefly state your Mission here)
Start with the Financial Perspective and work your way down in order to validate your
Strategic Goals. You do this by asking for each goal "So what, who cares?" Using this
question, you probably won't get much change on the Financial Performance Strategic
Goals because these drive the train. But take for example the above Strategy Map
Strategic Goal under Customer Capital. It reads in part "Reduce Customer Losses and
Defections." You may find out that you don't care about all these customer losses and
defections. In fact, some of these customers may not be profitable so you indeed want to
loss them. Suddenly, you find yourself restating this part of the goal to the more useful
"Reduce Losses and Defections of Our Most Profitable Customers." Do you see how the
questions "So what, who cares?" helps you validate and refine your goals? It's an
extremely value tool.

Continuing in the Customer Capital Perspective, ask "Are there other goals (enabling
goals) that should be developed and penned in to move the Customer Capital and
Financial Performance Goals in the direction we want them to move?" If there are, then
generate these enabling goals and draw in the cause and effect relationship between them
and the other goals.

Next move to the Structural Capital Perspective and then the Human Capital Perspective
and repeat the process. Often the Human Capital Perspective Goals don't surface in your
SWOT Analysis so they have to be generated as enabling goals to make your Strategy
Map provide a viable basis to support your Grand Strategy.

Step Ten. Translate your Strategy Map goals into "Key Performance Measures" (KPMs)
and perform a "Gap Analysis." First, translate your goals into measurable terms. In some
cases, a goal may already be stated in measurable terms. But you often have to break
goals down and restate them in measurable terms. For example, the Structural Capital
Goal of "Create and Maintain Well Stocked and Attractive Shelves" may be broken down
and restated as the KPM "Mystery Shoppers Rating for Store Product Display and
Appeal."

Financial Performance Goals are usually stated in measurable terms so use these terms
for your Financial Performance KPMs as appropriate. On Customer, Structural and
Human Capital Goals, you usually have to restate them in KPM terms with a number,
percentage or ranking. Some examples of KPMs follow:

Financial Perspective KPMs:

-Revenue - $xxx

-Profit - $xxx

-Cash Flow - $xxx

-Revenue per Employee - $xxx

-Return on Investment – x%

Customer Capital KPMs:

-Customer Retention – x%

-Customer Satisfaction – x%

-Customer Profitability

Segment 1 - $xxx

Segment 2 - $xxx

Structural Capital KPMs:

-Ratio of Sales Persons to General and Administrative - x/y

-Time to Market for New Products – x months

-Inventory Turnover – 100% every x months

• -Mystery Shoppers Rating of Store Product Display and Appeal – Grade

• -Mystery Shoppers Rating of Employee Helpfulness – Grade

Human Capital KPMs:

-Employee Turnover - x% per period

-Average Days missed per Employee – x%

-Employee Satisfaction - x% Highly Satisfied, Satisfied and so on

-Number of Suggestions Submitted - xx

-Number of Suggestions Adopted – xx

-Number of Employees Fully Qualified for Their Position – xx

So translate all of your Strategy Map goals into KPMs.

Now you're ready to perform your Gap Analysis. Start this process by determining where
you are on each KPM. For the status on Financial KPMs, use your available financial
numbers, but for the status on Customer, Structural and Human Capital KPMs, you
usually have to create estimated numbers, percentages or rankings. These initial estimates
are okay because you want to put a stake in the ground. But you'll also want to put in
place a process to collect data and refine these KPMs as you move forward.

Next develop your desired "Targets" for each KPM. Again, this initially amounts to an
estimating process based on your best judgment and level of ambition. You then break
these Targets down into quarterly aiming points to begin to close the gaps. Again you'll
want to put in place a research, analysis and benchmarking process to collect data and
refine these Targets as you move forward.

Step Eleven. Prepare a "Scorecard" to keep track and drive your Grand Strategy. Here's
a format with examples to illustrate how to prepare one.

Grand Strategy Scorecard

Perspective/ Quarterly Data Source/

Goals KPM Target Actual Status* Owner

Financial Performance

Increase

Profitability ROI 12% 13% (+) CFO

Customer Capital

Increase Customer

Satisfaction Sat Rating 95% 94% (-) Customer

Service

Structural Capital

Create and Maintain Grade A- A- (0) Mystery

Well Stocked and Shopper
Attractive Shelves

Human Capital
Increase Employee Sat Rating 90% 90% (0) Human
Satisfaction Resources

* (+) = ahead of target / (0) = on target / (-) = behind target

Once you have this Scorecard you have the centerpiece of your Grand Strategy. Now
move on to implementation.

Step Twelve. Execute, Adjust, Execute. A Fortune Magazine study in June 1999 found
that many CEOs were fired because they failed to execute their strategy. Things really
have not changed much since then. As a friend, Mike Kipp, a consultant from Nashville,
Tennessee, says "All organizations are perfectly designed to achieve the results they are
getting." Don't confuse creating your Grand Strategy with taking action. Now the Grand
Strategy process demands real work and organizational change. Otherwise improvement
won't occur and things might even get worse. Execution and appropriate adjustments are
imperative or you've only done an academic exercise.

Finally, to keep your Grand Strategy and Scorecard up to date and on track, you form a
small team of high performers. This team should be prepared to facilitate and help you
with implementation across and down through the organization. In this way, you'll get
your total organization's brainpower and energy behind your Grand Strategy. People
tend to support what they help build. And with your strong leadership combined with
openness to involvement and feedback, you'll realize strategic goal linkage and alignment
from the top to the bottom of your organization. And with this linkage and alignment,
your Grand Strategy will move forward and achieve the breakthroughs you desire in
marketing, innovation and performance improvement.

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 Quantitative Strategic Planning Matrix (QSPM)

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.

Steps in preparation of QSPM

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

Key External Factors

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