Business Strategy

The SPACE matrix assesses a business along four dimensions to find an appropriate strategic thrust and in this article, we’ll look at the SPACE factors for competitive advantage.

Competitive Advantage In The SPACE Matrix

According to the creators of the Strategic Position and Action Evaluation Matrix, (Strategic Management – A Methodical Approach”, Rowe, Mason, Dickel, Mann and Mockler. Published by Addison Wesley) the following items should be considered when assessing Competitive Advantage:

• Market share (small to large)
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• Product quality (inferior to superior)
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• Product life cycle (late to early)
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• Product replacement cycle (variable to fixed)
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• Customer loyalty (low to high)
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• Competition’s capacity utilisation (low to high)
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• Technological know-how (low to high)
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• Vertical integration (low to high)
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• Speed of new product introductions (slow to fast)

Each variable within the competitive advantage dimension of SPACE is assessed from 1 to 6 with high scores good, low scores bad.

Interpreting Competitive Advantage In The SPACE Matrix To Your Situation

While the list of potential sources of competitive advantage is interesting, this dimension more than any other in the SPACE matrix needs to be adapted to your business sector.

The competitive advantage matrix shows that even market share isn’t necessarily a strong cause of advantage in some situations.

For more general sources of competitive advantage (or disadvantage) I’d look to the PIMS database and Porter’s generic strategies.

However to best assess competitive advantage to use in the SPACE matrix, you need to look in detail at your business, your customers and competitors to see who is providing the best customer value.

The following strategy techniques will help:

Value chain analysis

Customer value attribute maps

Key Success Factors

This may mean that using SPACE analysis at different stages of your strategic planning work will generate different conclusions as you better get to understand the sources of competitive advantage.

The Impact On Strategic Direction For Different Levels Of Competitive Advantage

The competitive advantage rating will either reinforce or counteract the rating for industry attractiveness as they are on the same axis in the SPACE matrix. The other axis compares financial strength and environmental stability.

A strong rating on the Industry Attractiveness / Competitive Advantage axis (i.e. the business has a strong competitive advantage in an attractive industry) points to an aggressive strategy or a competitive strategy.

A weak rating (an unattractive industry and/or a competitive disadvantage) indicates that a Conservative strategy or defensive strategy is appropriate.

The SPACE matrix assesses a business along four dimensions to find an appropriate strategic thrust and in this article, we’ll look at the SPACE factors for environmental stability.

Environmental Stability In SPACE

According to the creators of the Strategic Position and Action Evaluation Matrix, (Strategic Management – A Methodical Approach”, Rowe, Mason, Dickel, Mann and Mockler. Published by Addison Wesley) the following items should be considered when assessing Environmental Stability:

• Technological changes
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• Rate of inflation
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• Demand variability
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• Price range of competing products
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• Barriers to entry into market
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• Competitive pressure/rivalry
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• Price elasticity of demand
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• Pressure from substitutes

Assessment of Environment Stability

Environmental stability is offset by Financial Strength on the y-axis of the traditional SPACE matrix. The other axis offsets the competitive advantage of the business and the attractiveness of its industry.

It is usually assessed as a negative, ranging from -1 (excellent, very stable) to -6 (very poor, very unstable).

The creators of SPACE recommend that each item is assessed individually before aggregating the score to form a composite measure. Special attention should be given to any extreme scores to make sure that there is substance behind the assessment.

My Thoughts On Using The SPACE Matrix In Practice

There is a danger of using the SPACE analysis system too literally.

What matters is tailoring the idea of SPACE to fit your own industry sector.

Looking at the list, you’ll see that the factors the authors picked are a combination of PEST Analysis factors and Michael Porter’s Five Forces. These two, well established models are an excellent starting point but for many businesses I’d want to factor in political issues like the uncertainty surrounding the Euro and the weak political response to the problems and economic issues like exchange rates.

As a general guide, if you feel the environmental instability is strong enough to require scenario planning because of some kind of fundamental uncertainty, then I think a poor score is appropriate.

What Does The Score On Environmental Stability Imply?

A strong score backed up with reasonable financial strength suggests that either an aggressive strategy or conservative strategy is appropriate.

A poor score without remarkable financial strength indicates that either a competitive strategy or defensive strategy is required.

The SPACE matrix assesses a business along four dimensions to find an appropriate strategic thrust and in this article, we’ll look at the SPACE factors for industry attractiveness.

Industry Attractiveness In The SPACE Matrix

According to the creators of the Strategic Position and Action Evaluation Matrix, (Strategic Management – A Methodical Approach”, Rowe, Mason, Dickel, Mann and Mockler. Published by Addison Wesley) the following items should be considered when assessing Industry Attractiveness or Industry Strength:

• Growth potential (low to high)
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• Profit potential (low to high)
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• Financial stability (low to high)
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• Technological know-how (simple to complex)
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• Resource utilisation (inefficient to efficient)
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• Capital intensity (low to high)
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• Ease of entry into the market (easy to difficult)
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• Productivity; capacity utilisation (low to high)
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• Manufacturer’s bargaining power (low to high)

Industry attractiveness is on the same axis as competitive advantage and a good score is a high score.

Interpreting Industry Attractiveness In The SPACE Matrix To Your Situation

The Five Forces model created by Michael Porter should be considered to see if there are additional attributes which need to be considered for your particular situation.

I’d be looking to include some measure for competitive rivalry – although the authors may argue that it is implied in the profit potential – but I’ve seen good industries destroyed by kamikaze competition based on price wars. I’d also want to look at the ability of customers to exercise their bargaining power to squeeze the profits.

The level of industry attractiveness is compared with an assessment of the competitive advantage of the business on the x-axis. The other axis contrasts financial strength and environmental stability.

A strong rating on the Industry Attractiveness / Competitive Advantage axis points to an aggressive strategy or a competitive strategy.

A weak rating indicates that a Conservative strategy or defensive strategy is appropriate.

My thinking on strategy is heavily influenced by Michael Porter and his classic book Competitive Advantage introduced the concept of the value chain analysis.

The value chain is an original Porter concept although he built on the idea of the business system from strategy consultants McKinsey and its main purpose is to help you to find, create or develop competitive advantages.

Image rights for value chain

Types of Competitive Advantage

Michael Porter argues that there are only two types of competitive advantage:

• competitive advantage that comes from differentiation – providing some kind of unique value to particular customers
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• competitive advantage that comes from having the cost leadership position

While it would be nice to have both, under normal conditions, the two forms of competitive advantage are mutually exclusive and, if businesses fail to choose, they get stuck in the middle.

Michael Porter believes that these competitive advantages derive from the activities the business does which are:

• done better than competitors;
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• done differently than competitors;
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• that create unique benefits; or
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• done at a lower cost than competitors.

To understand the source of competitive advantage then you need to perform a value chain analysis which identifies the separate value activities.

The Formal Elements of Value Chain Analysis

Porter built his value chain analysis model on a manufacturing business – back in 1985 there were many more around in the United States.

He split the value chain into two parts:

• Primary value activities
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• Support value activities

Primary value activities included:

• Inbound logistics
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• Operations
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• Outbound logistics
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• Marketing & sales
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• Customer service

Support value activities include:

• Procurement
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• Technology
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• Human resources
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• Firm infrastructure

This is a very general, helicopter view of a business and when you’re carrying out your value chain analysis you are supposed to go much more specific and detailed for your business.

You keep analysing activities which give a differentiation advantage (or have the potential to do so)  or disadvantage and which have a cost advantage or disadvantage.

The idea of value chain analysis is that you understand how your business compares with competitors at a detailed level. You can go into a lot of detail for your own business but you’ll be surprised at what you can learn about your competitors by talking to ex-employees (who may already work for you), suppliers, customers and being the customer yourself.

The value chain has been criticised as too prescriptive because the value chain elements don’t fit all types of businesses. This is missing the point entirely.

You don’t have to follow Michael Porter’s categorisation – and I suspect that he’d be astonished if you did – but if you want to understand the sources of your competitive advantages in terms of differentiation and cost, you do need to perform a value chain analysis which fits your business/industry.

It does take some thought and effort but that can be more of a reason to do it. Your lazy, superficial competitors either won’t understand the value chain or will look at what’s involved and think “That’s too difficult”.

Adapting Value Chain Analysis For Differentiation Or Cost Leadership

In his book Competitive Advantage (a must-read for any strategy professional), there are long chapters for how you can use value chain analysis to create cost or differentiation competitive advantages.

You’ll have guessed from the title of my blog, I’m not a huge fan of the cost leadership. That’s because I think there’s always someone who can come along and product whatever [product or service you sell a bit cheaper. For a cost leadership strategy to work, you have to have a significant cost differential which competitors recognise. Otherwise, you’re caught in a commodity trap selling an undifferentiated product at lower and lower prices.

But you can’t ignore costs if you follow the differentiation advantage path.

If your main differentiators are in marketing and customer service then you must keep a focus on costs in the logistics and operations activities and all the support activities. Your differentiation advantage only excuses you incurring extra costs in the activities which create a competitive advantage and only then if the advantage outweighs the extra costs.

How To Do Value Chain Analysis: Identify Your Value Activities

Use Michael Porter’s model if you find it helpful but otherwise create your own high level process map for your business which can also be used for your competitors.

Then drill down to identify the individual activities which create a differentiation advantage or which incur significant costs. Group minor activities together in categories like “other marketing activities”.

It helps if there are several people working on the value chain analysis. Functional specialists who know what’s happening and others who can provide an outsider’s perspective and ask the “dumb questions” which can challenge conventional wisdom and provide significant insight.

How To Do Value Chain Analysis: Allocate Costs To The Value Chain Activities

You can spend a lot of time trying to allocate costs precisely but it’s a false exercise.

It’s much better to be approximately right than precisely wrong.

Activities will incur some costs directly while other costs need to be apportioned based on various assumptions. Don’t confuse the two since you can draw very different conclusions if you change the underlying assumptions.

How To Do Value Chain Analysis: Identify Sources Of Differentiation Advantage

Differentiation comes from:

• the way individual activities are performed
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• the way related activities link together
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• the way the entire value chain is structured

I recommend you work both ways:

From your current or desired key success factors and differentiation factors through to your value activities in a deliberate challenge to see what you can do to support your differentiation advantages.

Then from your individual activities back out to your customers by asking “is there anything in the way we do this activity (or could do the activity) which creates special value for the customer?”

Differentiation & Your Customer’s Value Chain

You can learn a lot from applying value chain analysis to your own business and thinking through how all the parts fit together to support your customer value proposition.

You may get even more insights by looking at the value chain of your typical customer (or different groups of customers) and identifying ways that you can add value or reduce costs to their business by better understanding:

• What your customers are trying to do.
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• How they operate.
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• Their problems and frustrations.

Having a better understanding of your market and the customers who make it up is potentially a big competitive advantage since it lets you develop better products and to respond to changing needs faster than your competitors.

Is The Value Chain Analysis Only For Big Businesses?

No I don’t think so.

Small businesses are often simpler to understand so it means a value chain analysis can be put together quicker.

There’s no getting away from the idea that competitive advantages and disadvantages flow from the activities you do in your business but you can only understand them and how they link together by doing value chain analysis.

The Value Chain And The Six Step Profit Formula

I use a Six Step Profit Formula to help keep strategic management grounded in what can help you to increase profits in the short and long term.

The value chain is useful in a number of steps. In particular, it has a role to play in helping you to develop your irresistible promise and making sure that you deliver it consistently. It also helps you to think through how you continue to get revenue and profit from the relationship.

The Value Chain Is A Strategic Planning Model

The Value Chain is one of the frameworks included in my Strategic Planning Models guide.

Click the link to fined out what other models could help you to develop a winning business strategy.

What Do You Think About Value Chain Analysis?

Do you find Michael Porter’s ideas for value chain analysis a useful technique for creating competitive advantage, analysing the advantages of competitors and spotting opportunities for advantage?

I’d like to know what you think so please leave a comment.

In particular, do you believe that value chain analysis is a suitable technique for SMEs and businesses that don’t have strategic planning specialists.

One of the most popular tools in business planning and strategic planning is SWOT Analysis.

What is SWOT Analysis?

SWOT stands for:

• Strengths – factors that are good in the business now
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• Weaknesses – factors that are bad in the business now
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• Opportunities – factors that could be good in the future
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• Threats – factors that could be bad in the future

Image from Jean-Louis Zimmermann

The SWOT Analysis lets you summarise a business strategy and the major issues so that it can be understood quickly and simply. A SWOT matrix – it is usually presented in four sections – is therefore a common element in business plans prepared for bank managers and other financial providers.

According to Wikipedia the SWOT analysis was developed by Albert Humphrey at Stanford University in the 1960s.

SWOT Analysis is a relative tool:

• There must be an overall goal or objective to base the SWOT assessments. Opportunities are things that help you to reach the goal, threats are things that may stop you reaching the goal. As the goal changes, the assessment of the SWOT elements changes.
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• Strengths and weaknesses are relative to competitors. Let’s jump from business to athletics for a moment. Anyone running in the 100 metres sprint in the Olympics is going to be very fast by normal standards but some runners will have explosive starts and others will finish very quickly. It’s the same in business so don’t confuse qualifying criteria which are necessary to play the game with winning criteria.

What Is TOWS Analysis?

Sometimes the SWOT acronym is changed around to be TOWS – Threats, Opportunities, Weaknesses and Strengths.

Inevitably these are very similar but the emphasis is different.

Strengths and weaknesses focus on the internal aspects of the business while opportunities and threats refer to the external environment.

SWOT Analysis therefore leads with the emphasis on the internal aspects of the business and how they can relate to the external.

TOWS Analysis leads with consideration of the external issues and how they can be influenced or mitigated by the internal issues.

When To Use SWOT Analysis Instead Of TOWS Analysis

Different strategy consultants will prefer one approach rather than the other while others may be flexible and say the use of SWOT or TOWS analysis depends on issues facing the business.

If the external environment is considered fairly certain, then it makes sense to lead with the internal analysis of strengths and weaknesses.

If the external environment is rocky and with high government debts, austerity measures, the potential collapse of the Euro and the knock-on effect of a banking crisis, then it may make more sense in 2011 to lead with the big external issues and identify the major threats and opportunities.

The Importance Of SWOT Analysis

A SWOT Analysis is important for both the person doing the strategic business planning and for anyone reading the business plan and thinking about investing money or time in the business.

For the business manager who is preparing the strategy or the business plan, SWOT analysis helps to avoid a positive bias. An entrepreneur can get excited about an idea and fall into the trap of focusing on the opportunity and the available strengths.

There are important and it is important to play to your strengths but people often fail to implement their business plans because they don’t stop to consider what could go wrong. How weaknesses can prove to be critical and if the gap is closed, then the plan hits a brick wall. Or how external threats can come along and change expectations of the future.

For the reader of the business plan, the SWOT analysis has two important features:

1. It provides evidence that the business owner has considered the upsides and downsides and may identify a few issues that the investor wasn’t aware of.
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2. Inevitably the reader of the business plan will be having ideas and may be preparing a SWOT analysis as he or she reads through the plan. Comparing the two versions of the SWOT analysis and finding a lot of common ground can give confidence in other aspects of the plan. Divergence may reveal that the business owner hasn’t given the plan as much attention as it deserves.

Every SWOT analysis is different.

Two businesses in the same industry may have similar goals but very different strengths and weaknesses which could impact on the assessment of the external opportunities or threats.

The same business may consider two different big strategic goals and do a SWOT analysis for each. There are likely to be some common factors to each but there will also be significant differences because particular SWOT elements are relevant or irrelevant to different goals.

Advantages Of SWOT Analysis

The advantages of doing a SWOT Analysis are:

• It is relatively simple to start although it often needs challenging and refining to produce something of value.
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• Preparing a SWOT analysis is a collaborative exercise and helps to get other management team members involved because it looks across the entire business. Operations people can feel left out when talking about customers and marketing needs but SWOT brings the issues together.
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• It’s a strategic planning tool that is relevant to small businesses and huge organisations and they can both get something out of thinking about strengths, weaknesses, opportunities and threats.
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• SWOT is very flexible and can be done for a business or even an individual thinking about changing jobs.
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• It is a great way to combine and present insights from the various other strategy tools and models available like the Five Forces, versions of PEST analysis and the Competitive Advantage Matrix.

Disadvantages Of SWOT Analysis

The disadvantages of doing a SWOT Analysis are:

•  Doing a SWOT Analysis is not the beginning and end of the strategic planning work. Some people place too much emphasis on it but it is only one tool or common framework.
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• SWOT Analysis has almost become too familiar and therefore isn’t given the rigorous thought it deserves.
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• It can become a box filling exercise. The SWOT template has spaces for 6 of each so you get 6 of each meaning some categories are forced and others ignore potentially important issues.
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• Strengths and weaknesses are often listed as absolutes rather than relative to the competition. I remember one business wanted to export more and listed as a strength that the sales team were learning German which was seen as a potentially big market – but the business would have been competing against German suppliers.
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• The SWOT analysis is subjective – it is based on opinions and not facts.
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• Complicated situations have to be simplified to be included with the SWOT analysis and interrelationships may be lost.
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• Prioritisations of opportunities and threats are often unclear. Expectations are a combination of probability and pay-off/potential cost.

How Not To Do A SWOT Analysis

I have seen some lists of strengths, weaknesses, opportunities and threats where it appears that you go through and cross out the ones that don’t apply and the one’s that you’re left with is your SWOT analysis.

Do not do it like this. Remember GIGO – garbage in, garbage out.

If you’re going to do a SWOT analysis, take the time and effort to think through your business and what’s really happening now and what may happen in the future. It’s the only way you’ll find insight which will help you to make better decisions in your business.

How To Do A SWOT Analysis

A SWOT analysis can be a very simple starting point for strategic planning or it can be part of the end results of a much more elaborate strategic planning process.

It can also be done by one person as a briefing for a management meeting to kick-start discussions or it can be prepared as a group brainstorming session to get the management team involved.

1. Start your SWOT analysis by getting clear on your goal and time-scale – for example you could start your SWOT analysis with the challenging objective of “doubling profits within the next year” or “selling $ 1million of exports to the United States in the next six months”.
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   The issues involved with those two different goals are very different and will colour your thinking. The longer the time-scale, the greater the uncertainties that come from the external environment. It’s relatively easy to think 6 to 12 months ahead but much more difficult to think 5 to 10 years into the future.
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2. Decide if you are going to do a SWOT analysis or TOWS analysis depending on whether you think the bigger issues are inside or outside your business. I’m going to assume you stick with SWOT and follow the traditional sequence of strengths, weaknesses, opportunities and threats.
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3. Identify your strengths. I recommend you start off by listing general strengths about the business including special skills and capabilities, resources including people, brands, machinery, money, contacts and relationships.
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   Do a reality check when you’ve got a provisional list of strengths.Are they relevant to the goal you’ve set? If not take them off the list because they are clutter. Yes it’s nice to have a long list of strengths and it may make you feel good if you list more strengths than weaknesses but if any don’t apply, cross them off.
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   Are they a relative strength compared with competitors who may be trying to achieve the same goal. Sometimes strengths fight strengths e.g. relative buying power of two businesses may give one a cost advantage, other times strengths fight against weaknesses.
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4. Identify your weaknesses relative to the goal. What could stop you from achieving it that’s a factor inside your business. This time it might be a lack of skills and capabilities, resources including people, brands, equipment, money, contacts and relationships.
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   Threats may include an over-reliance on one or two key people. If anything were to happen to them (and it may include you) then your plans may be in disarray.
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5. Switch from looking inside the firm and look outside. It can be useful to run through Michael Porter Five Forces model of industry analysis and wider environmental scanning like PEST (Political, Economic, Social, Technological) which are combined in the SKEPTIC environmental scanning model.
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   Some external forces nag away at managers as a constant source of concern and they don’t need any help to identify them but others, potential just as big but not as tangible today need some coaxing out of minds onto paper.
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6. Identify the positive forces and opportunities which may help you to reach your goal. These may include a rapidly growing market, changing customer tastes in favour of your product, general economic prosperity, favourable exchange rate movements which are particularly important if you are exporting/importing while your competitors are domestically based.
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7. Identify the negative forces and threats in the external environment which may stop you from reaching your goal. Threats and opportunities can be prioritised by assessing the probability of them happening and their likely impact. The tsunami and nuclear power problems happened in Japan earlier in 2011 and were devastating but the threat had existed for many years. Then consider grading from 1 to 5 or high, medium and low to help you to prioritise and keep the SWOT matrix focused on the big issues.

Practical Tips When Preparing Your SWOT Analysis

Sometimes you’ll look at a particular issue and think it could be a strength or a weakness, or an opportunity or a threat. If it’s minor, ignore but if it could be a big issue, split it into two aspects and list as both

e.g. strategic issue – technology is very close to allowing the super widget to be created.

Opportunity – being first to market with a reliable super widget will create a huge buzz inside and outside the company.

Threat – competitor A is working on a super widget prototype and, if it works, prices are normal widgets could fall sharply.

When looking at your products or services for strengths and weaknesses, try to see through the eyes of customer. We all have a tendency to fall in love with our own products so use customer feedback from surveys,  complaints and informal discussions.

Try not to be overly critical or positive. I’ve seen SWOT matrices where it is clear there is positive or negative bias.

Don’t try to create equal numbers just for the sake of making the chart look sensible but if it looks unbalanced, have a think about the other squares. How is your business performing? If it is doing well, especially when compared with competitors, then it’s likely you have more strengths. If is is struggling while competitors are prospering, then you have weaknesses.

Using A SWOT Analysis

There are two elements to SWOT analysis:

1. Putting the matrix together
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2. Drawing conclusions that influence decisions and actions

Get a view on your strategic position compared to competitors. Is it strong, average or poor? Does the future look full of promise or can you expect things to be difficult over the next few years?

The SWOT Analysis gains much more power when you use the internal logic to help you to think about strategic options rather than just using the SWOT matrix to summarise what you intend to do. That is, you can start looking at the dependencies between strengths, weaknesses, opportunities and threats.

There are four options within the SWOT analysis matrix:

• Strengths & Opportunities – how you can use the strengths within your business to take advantage of opportunities in the external environment – this is an offensive strategy where you are taking the imitative and making good things happen.
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• Strengths & Threats – how you can use your internal strengths to make sure that external threats don’t cause severe impacts on your business. Like much of SWOT thinking, this is relative to competitors and “forewarned is forearmed” is an effective way to think about these issues.
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• Weaknesses & Opportunities – what you can do to stop existing internal weaknesses affecting your ability to take advantage of opportunities.
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• Weaknesses & Threats – what you can do to stop internal weaknesses compounding with external threats – for example you may believe that you have a higher break even level than competitors and if you sense difficult times ahead, you can take action now to reduce your fixed costs or improve contribution margins.

SWOT Analysis Template

You can search on the internet for a SWOT analysis template but really there is nothing to it.

If you go into Word and create a 2 x 2 table and head up the top two columns Strengths and Weaknesses and the bottom two columns Opportunities and Threats and then click on the order list or bullet points for each table cell, you have built your own SWOT template. These have the advantage that provided you are brief, you can get the entire SWOT matrix on one page.

For TOWS analysis you just reverse.

You don’t have to follow the 2 x 2 matrix format so you can create a 1 column 4 row table instead and give more details. This allows you to capture more fully your thoughts and issues on the individual strengths, weaknesses, opportunities and threats but you lose the advantage of seeing the entire SWOT analysis on one page.

Some business planning software has a SWOT analysis template included.

SWOT Analysis & Differentiation

If your business has been following a differentiation strategy and you have established a clear gap between you and your competitors, then strengths may include:

• Customer loyalty & high levels of satisfaction
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• Strong brand and reputation – the business name means something
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• Ability to charge a price premium and make higher profit margins
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• Patents that stop competitors imitator key parts of the product

Weaknesses may include:

• Higher costs
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• Lost competitiveness on one customer value criteria you believe is important because a competitor has innovated in a way that you didn’t expect.

Opportunities may include:

• Strengthening the differentiation advantage
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• Taking those advantages and expanding into new markets.

Threats may include:

• Changes in customers needs, wants and tastes -these will change the appeal of customer value attributes and their relative importance.
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• Losing focus on the key differentiators by trying to broaden customer appeal too much.

SWOT Analysis Examples

I believe very strong that your SWOT analysis should be different from in some respects to your closest competitors and I’m wary of using SWOT proforma checklists and ticking off those that apply.

However if you search the Internet, you will find plenty of SWOT examples all the way down to individual businesses (for business student questions like “What are the important factors a SWOT analysis for Google will show?”) and for trade and industry sectors like restaurants, hotels and retailers.

You can use these SWOT examples in two ways:

1. To get you started – sometimes it is tough starting with a blank piece of paper or your SWOT template although some SWOT issues are usually very clear.
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2. To help you to review what you’ve included in your SWOT analysis. This is particularly true if you are preparing your SWOT matrix without doing the strategic analysis from the Five Forces, PEST and customer value analysis.

Feedback On My SWOT Analysis page

Have you found my summary of SWOT analysis helpful?

What points would you emphasise about doing a SWOT matrix?

Let me know please by leaving a comment.

The Strategic Position and Action Evaluation Matrix or SPACE analysis matrix is a super technique for evaluating the sense and wisdom in a particular strategic plan. It was developed by strategy academics Alan Rowe, Richard Mason, Karl Dickel, Richard Mann and Robert Mockler and I don’t understand why it isn’t hugely popular.

Introduction To The Strategic Position and Action Evaluation Matrix aka SPACE Analysis

The Strategic Position and ACtion Evaluation (SPACE) analysis framework is a very useful but not well known tool to develop and review a company’s strategy.

It can be used at

• The beginning of the exercise to predict the overall key themes
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• As a check at the end of the process.
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• It can also be used to evaluate individual strategic options generated by using a tool like the Ansoff Growth Matrix.

SPACE Analysis is a systematic appraisal of four key issues that balance the external and internal factors that should determine the general theme of the strategy:

External

• Industry Attractiveness

• Environmental Stability

Internal

• Competitive Advantage

• Financial Strength

By combining ratings on each dimension on one SPACE matrix diagram, the framework guides the strategic agenda.

The dimensions are combined in a way that seems strange at first but makes sense because two sets of factors are assessed as strengths (financial strength and industry strength) and rated positive while the other two (competitive advantage and environmental stability) are assessed as potential weaknesses and rated negatively.

The logic is that financial strength is needed to compensate for environmental instability. The more difficult the future environment is thought to be, the more important it is to have strong financials.

Industry attractiveness and competitive advantage are seen as potentially alternative sources of superior profit and indeed there are treated as such in my five pathways to profit in my Profit Tipping Point report. If both favour the business, then results should be very good, if both are unfavourable, then the business is in trouble.

The SPACE Analysis Matrix Diagram

A very strong position in the SPACE matrix

This diagram shows that the firm is in a very favourable position and is able to take an aggressive growth strategy. It is operating in an attractive and stable industry and has major competitive advantages backed up by significant financial strength.

Assessing the SPACE Analysis Scores

Each factor in the Strategic Position and Action Evaluation matrix can be quickly judged but there are benefits for exploring each in detail.

There are many factors that can be considered and each industry will have its own key features which should be included in the detailed SPACE evaluation.

A few factors to be considered to give you a flavour of what to include in your SPACE analysis are listed below.

SPACE Analysis Factors For Financial Strength

• Return on Sales

• Return on Assets

• Cash Flow

• Gearing

• Working Capital Intensity

Financial Strength is scored 6 great to 1 poor in the SPACE Analysis Matrix – for more details see Financial Strength In The SPACE Matrix

SPACE Analysis Factors For Competitive Advantage

• Market Share

• Quality

• Customer Loyalty

• Cost Levels

• Product Range

Competitive advantage is scored -1 (minus 1) great to –6 (minus 6) poor – for more details see Competitive Advantage In The SPACE Matrix

SPACE Analysis Factors For Industry Attractiveness

• Growth Potential

• Life Cycle Stage

• Entry Barriers

• Customer Power

• Substitutes

Industry attractiveness is scored 6 great and 1 poor in the SPACE analysis matrix – for more details see Industry Attractiveness In The SPACE Matrix

SPACE Analysis Factors For Environmental Stability

• Political Uncertainty

• Interest Rates

• Technology

• Cyclical

• Environmental Issues

Environmental stability is scored –1 (minus 1) great to –6 (minus 6) poor – for more details see Environmental Stability In The SPACE Matrix

Scores switch between positive and negative so that the combined position can be assessed.

A firm operating with major competitive advantages in an unattractive industry will have a similar net score (and profitability potential) to another firm with little competitive advantage in an attractive industry.

e.g.

Attractiveness of industry 5 (very strong)

Competitive advantage -4 (weak – the business has more disadvantages than advantages)

Net SPACE score on this dimension  = 1

or

Attractiveness of industry 2 (weak – things look difficult)

Competitive advantage -1 (the company has powerful competitive advantages over all the competitors)

Net SPACE score on this dimension  = 1

The financial strength and environmental stability combination works the same way.

Interpreting the SPACE Analysis Matrix Diagram

The arrow indicating the strategic thrust can be drawn from the origin by calculating the net result on each axis and plotting this net position.

The alternative strategic thrusts in the SPACE matrix

The Aggressive posture in the SPACE Analysis Matrix occurs when all the dimensions are positive. The implicit strategy is to aggressively grow the business raising the stakes for all competitors. The main danger is complacency. For more details see Aggressive Strategy In SPACE.

The Competitive posture arises when a firm has strong advantages in an attractive industry but its financial strength is insufficient to compensate for environmental instability. The immediate strategy is to improve its financial strength (raising capital, improving profitability, merging with a cash rich parent) whilst maintaining its competitive position. For more details see Competitive Strategy In SPACE.

The Conservative posture arises when the firm is financially strong but is unlikely to make significant returns from the business. The strategy is to look for diversification opportunities in more attractive competitive situations. For more details see Conservative Strategy In SPACE.

The Defensive posture in the SPACE matrix occurs when all the dimensions are scored poorly. Firms in this position are very weak and heading for failure unless the external environment becomes more favourable. The firm will need to retreat from all but its strongest segments so that it can concentrate its limited resources on a turnaround. Fore more information see Defensive Strategies

Uncertain situations in SPACE Analysis

Sometimes the axis scores cancel each other out and the overall position falls between segments. However, by examining the four dimensions the strategic imperatives can be established – the internal dimensions are easier to change but the external dimensions indicate whether it is likely to be worthwhile.

For example if the Financial Strength is weak but the Environment Stability high then raising capital is appropriate but if the scores were the other way around then the business should be seeking to use its financial strength elsewhere.

Why Isn’t SPACE Analysis More Popular?

The first time I came across the SPACE analysis matrix when I was doing my MBA strategy course at the Manchester Business School and by then I’d read quite a few strategy textbooks and since then, many more books on strategy but SPACE analysis is hardly ever mentioned.

While the Strategic Position and Action Evaluation Matrix is a bit of a mouthful, it does describe the tool perfectly and SPACE is a great acronym.

I like SPACE analysis because it can be applied at many levels.

You can do the detailed analysis for each of the four SPACE dimensions and come up with a subjectively objective rating and crank out the numbers to find which posture is most suitable.

Or you can do a quick and dirty SPACE analysis based on a feel for the factors and quickly know the big issues the business g=faces and which direction its strategy should be taking.

The SPACE Matrix And The Six Step Profit Formula

It can be difficult to understand how various strategic planning models can help you to increase profit in your business which is why I use the Six Step Profit Formula as my model for profit improvement.

As well as helping you to think through the development of your starving crowd with the environmental stability and industry attractiveness dimensions in the SPACE Matrix, the competitive advantage dimension looks at your irresistible promise and whether you can reliably deliver it.

While the Six Step Profit Formula provides a roadmap for improving any business, the SPACE analysis assessment indicates whether the pay-off is likely to be enough reward for the time, energy and money invested.

The SPACE Matrix & Other Strategic Planning Models

The SPACE analysis matrix is one of my favourite strategic planning models which can help you to organise your thoughts and conclusions from the other strategy models.

Environmental stability and industry attractiveness draw on PEST Analysis and Porter’s Five Forces model. Your thinking on competitive advantage can be guided by the generic strategies, value disciplines, the value chain and customer value management.

Have You Used SPACE Analysis -The Strategic Position and Action Evaluation Matrix?

If you’ve used SPACE, either in your academic studies of business strategy or in practice, I’d like to hear about your thoughts and experience so please leave a comment.

Finding Out More About SPACE Analysis

I had to go back to the original book “Strategic Management – A Methodical Approach”, Rowe, Mason, Dickel, Mann and Mockler. Published by Addison Wesley.

The book is hard to find and expensive when new. In my copy of the fourth edition, the Strategic Position and Analysis Evaluation matrix is only covered on pages 255 through to 265.

The good news is that there are a few second hand copies available from Amazon when I checked.

The bargaining power of suppliers and vendors is one of the Five Forces that Michael Porter identified that determine industry structure and attractiveness.

In many ways the bargaining power of suppliers is the same as the bargaining power of customers but seen from the other party’s perspective.

Powerful suppliers in the industry value chain can squeeze profits out of customers and the customers’ customers by establishing a dominant position which gives major strategic control over the entire industry. Good examples are Microsoft and Intel in the PC industry who make very high profits when other parts in the value chain struggle to make profit.

Rather than repeat what I wrote on customer buying power I thought I’d look at uses and abuses of the bargaining power of suppliers.

Uses And Abuses Of The Bargaining Power Of Suppliers

I take a very pragmatic view of what is a use of abuse of bargaining power:

• Use is when you are able to use bargaining power to increase your profitability.
  .
• Abuse is when bargaining power of suppliers is used against you to “steal” your profit.

I therefore see using bargaining power as an offensive strategy as you establish advantage while you need a defensive strategy to protect your business against abuses of the bargaining power.

It’s interesting to look at both sides of the situation like this because there is a tendency in negotiations to assume that the other person has a stronger position than they actually do. This feeling of weakness can make you concede too much too early because you fear the other side will walk away.

Using The Bargaining Power Of Suppliers To Increase Your Profitability

In this situation, you are intending to use the bargaining power that comes from your position as preferred supplier to increase your prices and capture more margin from customers without losing sales to lower priced competitors; or

Low competitive rivalry is a key issue to stop the competitive process forcing down prices.

Collusion and cartels are illegal and severely punished but some industries (which score well on the other Five Forces) settle into a comfortable existence with either businesses operating from their own differentiated positions in niche markets or, if differentiation hasn’t been established, the market share leader can set prices and enforce disciplined pricing by targeted responses.

Cyclical industries which exaggerate the effects of the economic cycle, like the steel industry, are constantly trying to balance demand and supply by increasing or reducing capacity. What is normally a buyer’s market can shift suddenly when suppliers have cut back capacity and demand starts increasing. I’ve seen prices increase very rapidly as suppliers ration out what’s available to desperate manufacturers eager to fill their own increased demand. As capacity gets added back, prices level off and then start reducing but high profits can be made in the early upswing of the economy.

Switching costs are an important issue which lets suppliers exert their bargaining power. These may be high business specific investments in equipment, technical issues that create compatibility problems with using goods from other suppliers or favourable terms of trade (e.g. extended credit subject to certain volumes, loans of equipment e.g. the freezer for ice cream).

Some switching costs create a hurdle at the beginning of the relationship as well as a barrier at the end.

Other switching costs that enhance the bargaining power of the supplier come from being excellent at what they do. The quality or service provided might become an integral part of the buyer’s own value proposition to its customers. The thought of switching to another supplier can create high levels of business risk and personal stress to the decision maker. IBM did very nicely out of the idea that “no one gets fired for buying IBM.”

Some firms will look along the industry value chain and believe there are opportunities for profit by vertically integrating forward into their buyers’ markets. There may be distinct advantages through better coordination which would give the business a competitive advantage over its customers in their markets. Suppliers can use the threat of vertical integration to exercise their bargaining power (if we don’t meet our profit targets doing what we do, we’ll have to look at competing with you.)

Defending Against the Bargaining Power Of Suppliers To Protect Your Profitability

In this situation, you are defending against the abuse of bargaining power by a powerful supplier.

An interesting example of excessive bargaining power is Premiership football in England where the clubs manage to get very high payments for TV rights but then, instead of keeping a share of this as profit for the shareholders, the money is paid out to the pampered footballers.

While businesses can’t form cartels to fix prices, employees can join trade unions and use the power of collective bargaining backed up with the threats of works-to-rule and even strikes. Businesses can form buying groups to increase their bargaining power. I’ve worked in several industries where these groups were able to establish 10% to 15% discounts compared with independents.

Buyers can look across supplier markets for alternative supplies. For example, I used to work for an electrical fittings company with an iron foundry and steel press-work. While we operated in a niche market selling to electrical wholesalers, the larger wholesalers could have gone out to the general foundries and steel fabricators and bought the tooling required to make the high volume items.

Buyers also have the option of vertically integrating backwards if they look at the make or buy decision and decide that the potential savings justify the trouble of manufacturing their own supplies.

Labour & Unionisation To Increase Bargaining Power

Don’t get trapped into thinking that suppliers / vendors only supply materials and components.

It includes all costs and one of the biggest is labour which may be unionised. This can be a significant source of competitive advantage or disadvantage depending on the position of one business compared to its peers.

Unionisation may have a double negative impact on the ability of the business to compete (and to continue to provide employment):

• Wages and salary rates may be higher through collective bargaining and pressure to maintain pay differentials whilst moving up the pay of the lowest paid.
• Restrictive practices may cause low productivity and unnecessary delays in the operational processes.

Do You Have Other Examples Of The Bargaining Power Of Suppliers?

If you have experienced other examples of using the bargaining power as a supplier, or defending against the abuse of bargaining power, then please leave a comment.

More On Michael Porter’s Five Forces

If you found this article on the bargaining power of suppliers helpful, then take a look at my other articles on Michael Porter’s Five Forces:

Five Forces Analysis

Threat Of New Entrants

Bargaining Power of Customers

Threat Of Substitutes

Competitive Rivalry

Michael Porter’s book Competitive Strategy is difficult to beat if you want to look at the Five Forces in detail and their impact on strategy. Although it is over 30 years since it was published, it is still essential reading for any strategy specialist.

Effective strategy is a mixture of defensive strategy and aggressive strategy / offensive strategy to help a business to protect what it’s got and then to make gains in a competitive market.

Use The SPACE Matrix To Check If An Aggressive Strategy is Appropriate

The Strategic Position and Action Evaluation Matrix (SPACE Matrix) is a very useful guide to help you to decide which strategy is most appropriate in which situation.

The SPACE Matrix assesses the business across four dimensions

• Industry Attractiveness (IA)

• Environmental Stability (ES)

• Competitive Advantage (CA)

• Financial Strength (FS)

to come to a recommended strategic thrust which can be:

• An Aggressive strategy
  .
• A Defensive strategy
  .
• A Conservative strategy
  .
• A Competitive strategy

The diagram above shows favourable positions in all four dimensions and therefore the business can follow an aggressive strategy as it leverages its strengths into the opportunities available – see SWOT Analysis for how strengths, weaknesses, opportunities and threats fit together in business strategy.

The strong position in environmental stability means that the business does not have to hold back a good proportion of its financial strength to protect the business in difficult times but can be used to finance growth strategies – see the Ansoff Growth Matrix.

The business is also blessed because it has a good competitive advantage in an industry which is considered to be attractive.

Aggressive Growth Strategies Recommended By The SPACE Analysis

SPACE Analysis recommends that businesses in such a strong position take the following actions:

1. Continue to invest in innovation to sustain and build the competitive advantage which exists.
   .
2. Cover any moves made by competitors to develop alternative competitive advantages. Close off the opportunities to build a differentiated value proposition that may prove attractive to segments of the market.
   .
3. Aggressively build market share by moving above the fair value line in the customer value map.
   .
4. Raise the stakes for other competitors to play the game. This may be through rapid product innovations, marketing campaigns or reducing prices to levels that competitors find difficult to match.
   .
5. Grow within the market through acquisitions.
   .
6. Follow up on possible opportunities in the market including backward or forward vertical integration.
   .
7. Move into related markets which complement the existing position.

This aggressive, offensive strategy will make it tough for competitors to trade and certainly difficult to build up the resources to challenge for market leadership unless they have very deep pockets.

The two big concerns in this very favourable position are:

1. Avoid complacency – business can seem also too easy but new threats may come from substitute markets or as technology makes different sectors converge.
   .
2. Avoid running foul of anti-competition policies. Sometimes a business that is too strong can attract the attention of regulators and especially if it uses predatory pricing aimed at driving competitors out of business.

Offensive Strategy For Marketing & Business Warfare

Business strategy and marketing are often compared to military strategy with its focus on defensive and offensive strategies.

The analogy can be pushed too far in my opinion but it is useful to see how offensive strategies in warfare can be adapted to the business world.

Offensive Strategy As A Frontal Attack

In a frontal attack you would target a competitor in the area of its strengths. In the customer matrix you target the same basic value proposition using either a lower price or a large-scale marketing campaign.

If you win it’s through brute force, not subtly. The competitor immediately knows that it is under attack and is likely to respond vigorously. This makes frontal attacks very risky and often expensive.

The targeted competitor may well have the advantages of a low cost position and strong, committed relationships with customers.

A frontal attack is only a viable offensive strategy if:

• The market is commoditised with few little differentiation and standard customer needs.
  .
• The brand equity and customer loyalty for the targeted competitor is low.
  .
• The targeted competitor has few financial resources (or strong allies) relative to the financial strength of the attacker.

Porsche have done very well by creating a new product category with the Porsche Cayenne, a luxury, extreme sports utility vehicle. With the introduction of the Kubang, Maserati have launched a frontal attack on Porsche (see Maserati Kubang.)

Offensive Strategy As A Flanking Attack

Instead of attacking a competitor where it is strong in a frontal attack, a flanking attack looks for weaknesses in the competitors product range and attacks there instead.

In the customer value map, the competitor may be attracting business it is the best option without being a close fit with the needs of the market segment. This makes it vulnerable to a flanking attack from a competitor who produces a differentiated product targeted at a specific niche. While the competitor will be aware of the aggressive competitive move, it may not be particularly concerned if little volume is looked threatened. It may decide that the size of the market is not worth the fight providing its core market position is not threatened.

The competitor may not even compete in the segment that has been attacked in the offensive marketing strategy but the aggressor may see it as a very important beachhead to move from.

Japanese cars entered both the UK and the US markets at the low price low value end of the customer value curve. Particularly in America where the incumbent cars were huge, this was a flanking attack which was ignored because “Americans don’t buy small cars.” Well Detroit got that wrong!

The same thing happened with motorcycles in Britain. The traditional bike manufacturers were happy to pull out of the low profit small bikes to concentrate on the profitable super-bikes. The Japanese bike manufacturers gradually introduced bigger bikes until the British motorcycle industry couldn’t sustain itself.

Offensive Strategy As Encirclement

In the encirclement offensive strategy, the targeted competitor is attacked from two or more directions at once to confuse the response.

For example on the customer value map, the aggressive competitor could launch three new products:

1. At the same value point as the incumbent but without the aggression involved in the frontal attack.
   .
2. Below the value point to attract price switchers who don’t appreciate everything that the incumbent offers.
   .
3. Above the value point to attract customer segments who feel under-served by the incumbent and who are willing to pay a premium price.

The company that is attacked has to deal with three threats at once and if it cuts price to fight off the low priced offering, it risks the price reduction spilling over into the other customer segments.

While the encirclement offensive strategy is difficult to defend against, it is also difficult for the aggressive competitor to do since it has to be able to launch three products either at once or in rapid sequence while the competitor is still off balance.

Offensive Strategy As A Bypass Attack

In this version of offensive strategy, the aggressive competitor does not go head-to-head against the incumbent competitor but instead targets areas where it isn’t. While this isn’t a direct attack, it can be thought of as a pre-emptive strike into new markets and new complementary products (see the Ansoff Growth matrix) and is likely to be targeting the incumbent’s own offensive strategies.

More Details About Offensive Strategies

I’ve read several strategy books that look at strategy as warfare which I will be reviewing over the next few months.

I have a general criticism of strategic planning that insufficient consideration is given to competitive moves and counter-moves so these ideas on defensive strategies and aggressive strategies are important.

If you are not keen on the military analogy but want a more general perspective, then Michael Porter looks at attack and defence in his book Competitive Advantage.

I’ve written before about the importance of the experience curve for cost management and the importance to manage it actively rather than hoping that more experience automatically leads to lower costs.

The Impact Of The Experience Curve On Innovation & Differentiation

I’ve never discussed its impact on differentiation and how focusing on getting the most benefits from the experience curve can undermine customer facing innovation.

Process innovation lies at the heart of the experience curve. As you or your team do something repeatedly, then you find better or quicker ways to do it and especially if it is a task that you know will be repeated many times.

The first task is to standardise processes so that as much variation in outputs from the system are eliminated as possible and then, once the process is in control, you improve it.

The logic is impeccable and your costs should reduce.

Standardising Outputs Kills Customer Facing Innovation

But standardising outputs (either products or services) so that you can standardise processes kills customer facing innovation.

If you’re following a low cost reduction strategy using the experience curve, you don’t want to hear

“John I’ve got an idea. I think our customers would love it if we just…”

This is a conflict between getting costs lower and pleasing the customer and shows why Michael Porter was right when he warned of the dangers of getting stuck in the middle – caught between a low cost strategy and a differentiation strategy.

What Should You Do About The Experience Curve?

I certainly don’t think you should ignore it. The cost benefits are much too important to leave to chance.

The Experience Curve And A Low Cost Strategy

A business following a low cost strategy must use the experience curve rigorously and set clear targets for efficiency improvements and cost reduction. The aim remains to produce a good enough product and sell it for a low price. Differentiated niche players will bring out improved products and services will either move along the value curve or even shift it. The competitive response of a low cost competitor who has exploited the experience curve effects is to reduce prices. Yes you have to give up some of your hard fought margins but this is the nature of competition.

The Experience Curve And Differentiation Strategy

I also believe that a business following a differentiation strategy needs to pay attention to managing for  the experience curve cost savings and in particular standardising systems and processes so that important customer benefits are delivered consistently and reliably.

But the differentiator needs to actively manage the trade-off between keeping an eye on costs and either losing a differentiation advantage it already has or letting a competitor create a new key success factor which has the potential to transform the market.

Sometimes it will be better to make small, frequent, incremental changes which put the experience curve back to stage 1. Other times it will better to harvest cost savings for a while and then take a bigger, step change in product or service functionality.

It’s hard to generalise for differentiators because it depends on what competitors are doing, how customer needs are changing, the change in the product or service and the ability of the business to manage change and speed down the early stages of the experience curve.

Using The Value Disciplines As A Guide To Innovation

Michael Treacy and Fred Wiersema’s ideas on value disciplines are useful to fall back on when thinking about balancing innovation and the experience curve.

If you’re following an Operation Excellence strategy, the idea is to provide reliable products at a competitive price. You’re going to want to concentrate on extracting a lot of benefits from the experience curve and when you do change products, you’ll hope that your process excellence will give you a cost advantage provided you’re drawing on well established capabilities.

If you’re following a Customer Intimacy strategy, then your focus is very much on how much of an impact any innovation in product or service can have on customers. You’ll already have developed skills at customising products and services to meet the specific needs of particular customers. If customer benefits are high, then you’re likely to change quickly.

If you’re following a Product Leadership strategy, then the temptation to keep changing will be high because the reputation of the business relies on having products that are hot, preferably red hot. However there is a trade-off since you may be prepared to put off small incremental changes to make bigger “next generation” leaps that create so much publicity. Apple is a very good example of a Product leader business.

The Experience Curve & Innovation

Strategy is about making the right call on the big decisions. Sometimes it’s not easy which is why the rewards of getting the decision right are so big and why many companies find themselves stuck in the middle.

My purpose is to help you make the conscious decision.

Although my main interest is on differentiation to create unique customer value, you can’t shy away from managing costs professionally. The experience curve must not be ignored.