The SPACE Matrix or more formally, the Strategic Position and Action Evaluation Matrix recommends one of four basic strategic approaches for a business and today I’m going to focus on the Competitive Strategy dimension.
This is when the business is in a good position in its marketplace but its financial strength is insufficient to compensate for environmental instability.
What Is The SPACE Matrix
The SPACE matrix assesses the strategic position of a business along four dimensions:
Combining these four dimensions provides four broad strategic directions:
- Aggressive strategy
. - Defensive strategy
. - Conservative strategy
. - Competitive strategy
Competitive Strategy In The SPACE Matrix
When Does The SPACE Matrix Recommend Following A Competitive Strategy?
The competitive strategy approach is recommended when:
The business scores well on the Industry Attractiveness / Competitive Advantage (IA/CA) axis of the SPACE matrix but unfavourably on the Financial Strength / Environmental Stability (FS/ES) axis.
The high IA/CA score can be when:
- The industry is considered attractive and the company has competitive advantages over its rivals, a very strong position.
. - The industry is considered attractive and the business is neutral on competitive advantage.
. - The industry is reasonable but the business has a strong competitive advantage.
The low FS/ES score can be when:
- The environment is unstable and the company is weak financially.
. - The environment is considered to be unstable and the business has modest financial resources.
. - The business is weak financially but environmental stability is reasonable.
What Does A Competitive Strategy In The SPACE Matrix Involve?
The key strategic imperative is to acquire financial strength to compensate for the environmental instability so that the business can then follow an aggressive strategy.
The business needs to split its attention between strengthening the balance sheet and improving the underlying profitability of its sales.
To strengthen the balance and to provide the funds for expansion, it can:
- Raise extra share capital or even long term loans. A private business can turn to private equity in terms of business angels or venture capital firms to provide cash although this will dilute the interest of the current shareholders.
. - Merge with a cash rich company who is looking for opportunities to expand.
. - Form alliances to gain access to tangible and intangible assets without having to incur high investment costs.
. - Improving profitability will also lead to strengthening the balance sheet provided the gains aren’t withdrawn by the owners. This will take time to build up cash and equity.
To improve profitability of the business and take advantage of its strong combined position on the industry attractiveness / competitive advantage axis, the business should:
- Reduce its fixed and variable costs provided it doesn’t damage the competitive advantage. Innovate to improve productivity.
. - Emphasise the differentiation competitive advantages, make sure they are communicated well to the market and increase prices to improve margins. This action will depend on where the business is on the customer value map.
. - Expand into new markets and products where the business is confident it will be profitable – see the Ansoff Growth matrix.
What To Look Out For Following A Competitive Strategy
The intention of the competitive strategy is to boost profitability and balance sheet strength so that it can move into an aggressive strategy.
The business must make sure that its hard-nosed emphasis on profitability does not undermine its competitive advantage. Businesses are often poor at cutting costs strategically since it involves hard decisions to save some areas – perhaps even increasing investment – while cutting back in others. The 10% off all costs is easier to manage and looks fairer to employees in particular but it risks undermining key capabilities and driving away essential staff who want to move to more secure employment.
