The SPACE Matrix

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, analysis, BCG matrix model, industry analysis, or assessing strategic alternatives (IE matrix). 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 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 p roduct 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 ex ternal strategic dimensions in order to determine the organization's strategic posture in the industry. The SPACE matrix is based on four areas 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 cap ital, cash flow, and others. Competitive advantage factors include for example the speed of o f innovation by the company, market niche position, customer loyalty, product quality, market share, product share, product life cycle, cycle, and others. Every business is also affected by the environment in w hich 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 b e 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

 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 ex ternal strategic dimensions in order to determine the organization's strategic posture in the industry. The SPACE matrix is based on four areas 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 cap ital, cash flow, and others. Competitive advantage factors include for example the speed of o f innovation by the company, market niche position, customer loyalty, product quality, market share, product share, product life cycle, cycle, and others. Every business is also affected by the environment in w hich 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 b e 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 e nvironmental 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 av erage score for the SPACE matrix environmental env ironmental 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 d isplayed 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 /\ Strengths Weaknesses

\ External Analysis /\ 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 weak nesses 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 o ccur 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 1. 2. 3. . . .

Weaknesses 1. 2. 3. . . .

Opportunities 1. 2. 3. . . .

Threats 1. 2. 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 o f 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 no t always fit. The classification of some factors as strengths or weaknesses, or as opportunities or threats is somewhat arbitrary. For example, a particular company cu lture 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 High

Medium

Low

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 value N x factor weighting N

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: •

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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

o o

Question Marks have the worst cash characteristics of all, becau se they have high cash demands and generate low returns, because of their low market share. If the market share remains unchanged, Question Marks will simply absorb great amounts of cash. 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: •

•

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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 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 na Stars are cash hungry." Yuri BCG in Emerging "The tool is really great, but how to use it 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 

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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 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  BCG Matrix or the GE/McKinsey SA Portfolio Planning Tools matrix?"

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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 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 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  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 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  NY Reloaded  between business units?" John BCG Matrix is "Totally useless (as a contemporary

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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

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

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

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Step Three. Write your Mission Statement .

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Step Four. Perform an Environmental Scan.

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Step Five. Perform a SWOT Analysis.

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Step Six. Determine your Strategic Focus.

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Step Seven. Seek Performance Breakthroughs.

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Step Eight. Understand and Apply Cause and Effect Relationships.

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Step Nine. Develop a Strategy Map.

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

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

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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: •

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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. • • •

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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: •

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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?

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

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

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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  

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

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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.  HyperCompetition 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:

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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: •

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 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 g row 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: •

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 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.) 

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 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) 

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 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.) 

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Financial   Performance

Customer  Capital 

(Place Goals here) Example: Increase Revenue and Profits

(Place Goals here) 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/ Goals

Quarterly

KPM

Target

Data Source/

Actual

Status*

Owner 

Financial Performance

Increase Profitability

ROI

12%

13%

(+)

95%

94%

(-)

A-

A-

CFO

Customer Capital 

Increase Customer  Satisfaction

Sat Rating

Customer 

Service  Structural Capital 

Create and Maintain Well Stocked and Attractive Shelves  Human Capital 

Grade

(0)

Mystery Shopper 

Increase Employee Satisfaction

Sat Rating

90%

90%

(0)

Human 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 quan titative 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