SPACE Analysis

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:

• Industry attractiveness
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• Competitive advantage
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• Environmental stability
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• Financial strength

Combining these four dimensions provides four broad strategic directions:

• Aggressive strategy
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• Defensive strategy
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• Conservative strategy
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• 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.
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• The industry is considered attractive and the business is neutral on competitive advantage.
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• 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.
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• The environment is considered to be unstable and the business has modest financial resources.
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• 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.
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• Merge with a cash rich company who is looking for opportunities to expand.
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• Form alliances to gain access to tangible and intangible assets without having to incur high investment costs.
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• 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.
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• 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.
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• 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.

The SPACE or Strategic Positioning 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 financial strength.

Financial Strength 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 Financial Strength:

• Return on investment (low to high)
• Leverage (debt to equity ratio) (inbalanced to balanced)
• Liquidity (access to quick money when needed) (inbalanced to solid)
• Capital required versus capital available) (high to low)
• Cash flow (low to high)
• Ease of exit from market (difficult to easy)
• Risk involved in the business (much to little)
• Inventory turnover (slow to fast)
• Use of economies of scale and experience (low to high)

The factors for Financial Strength are marked from 1 to 6 and a high score is good, a low score indicates financial weakness.

Interpreting Financial Strength In The SPACE Matrix To Your Situation

This is the most generic of the dimensions in the SPACE matrix. High profit margins and access to cash to invest when you want it are valuable in any business.

Several of the financial measures are not black and white:

1. Leverage ranges from imbalanced (bad) to balanced (good) on the basis that equity finance is more expensive than moderate levels of debt so the business should aim for the lowest weighted average cost of capital. Finance theory is beyond the scope of this blog so I won’t go into details. In my accountancy training I was taught that a debt to equity ratio of around 1:1 was good but it is much more dangerous to be highly geared (high debt to equity) than under. Over the last twenty years many private equity deals have been done on the basis of high debt ratios and while the credit crunch has made access to funding difficult, the record low interest rates have prevented many bankruptcies.
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2. Liquidity also ranges from imbalanced (bad) to balanced (good) because high levels of cash will depress returns on investment while liquidity problems will mean the business struggles to pay creditors as they fall due and may mean the business is technically insolvent. Going back to my days as an accountancy trainee, a current ratio of 2:1 (current assets to current liabilities) and a quick ratio of 1:1 (debtors plus cash/creditors) was considered good.

Businesses have different financial needs in terms of:

• asset intensity – some businesses need large investments in capital equipment
• working capital cycles – a supermarket will be paid in cash by customers well before it has to pay its suppliers while a distributor may have to hold high levels of stocks/inventories, finance trade debtors and even pay for imported goods before they are despatched.

The Impact On Strategic Direction For Different Levels Of Financial Strength

Financial strength is used to offset any environmental instability on the y-axis of the SPACE matrix diagram. The other axis offsets industry attractiveness and competitive advantage.

A strong score on financial strength backed up with reasonable environmental stability suggests that either an aggressive strategy or conservative strategy is appropriate depending on the position for competitive advantage and industry attractiveness.

A poor score without remarkable environmental stability 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 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.

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.

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
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• A Defensive strategy
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• A Conservative strategy
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• 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.
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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.
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3. Aggressively build market share by moving above the fair value line in the customer value map.
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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.
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5. Grow within the market through acquisitions.
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6. Follow up on possible opportunities in the market including backward or forward vertical integration.
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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.
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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.
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• The brand equity and customer loyalty for the targeted competitor is low.
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• 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.
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2. Below the value point to attract price switchers who don’t appreciate everything that the incumbent offers.
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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.

It’s important to recognise when a defensive strategy is the sensible approach in marketing and business. You make want to be more proactive but it can get you into trouble and especially if you don’t have the strengths to support an offensive strategy.

I use the SPACE analysis matrix to help ground management’s natural desire for growth and profit improvement and put it into perspective of the realities of the existing situation.

Defensive Strategy In SPACE

A defensive strategy is recommended by SPACE analysis when:

1. The Industry Attractiveness / Competitive Advantage axis is negative; and
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2. The Financial Strength /  Environmental Stability axis is also negative

It’s a bit like a seven stone weakling going into the boxing ring with Mike Tyson at his peak. It’s best not to stand around and try to fight.

Other Reasons To Follow A Defensive Strategy

A defensive strategy doesn’t have to come out of weakness but from strength.

Sometimes maintaining the status quo suits a market leader or someone who is operating under a high price umbrella of a market leader because profits are high and life is easy. This can be dangerous since the industry is inviting an aggressive move by a new entrant to the market but sometimes “a bird in the hand is better than two in the bush.”

Markets are very comfortable when competitors co-exist in their own little spaces and don’t threaten each other beyond localised skirmishes on the borders.

I’ve known plenty of business owners who don’t want to grow their businesses significantly. They don’t have the desire to manage a big business.

Defensive Strategy Options

Different defensive strategy options apply in different parts of the business.

Defensive Marketing Strategy

First be clear on which product-markets you want to defend, which you want to grow and which you will allow to be taken from you without a serious fight.

The growth-share matrix from the Boston Consulting Group may help as it looks across the market growth rates and your market share to create four categories:

• Stars – growing market, high share
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• Cash cows – stable or shrinking market, high share
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• Question marks – growing market, low market share
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• Dogs – stable or shrinking market, low market share

While the framework can be criticised as too simplistic and I want to write more about the strategic options for dog businesses, the basic guidance is:

Stars – to grow aggressively

Cash cows – to defend strongly – these are your main source of profit and cash

Dogs – to harvest i.e. to let your market share drift away as you manage for short term cash and profit.

And question marks live up to their names.

Try to keep rational when things can get emotional. Compare the cost of reaction with the cost of inaction to make sure that what you intend to do makes economic sense.

Defending Your Market

If your important market comes under attack, you need to stand up and fight to protect what you have.

Be aware of the potential threats, what they are and where they may come from. Competitive analysis pays-off by understanding their objectives and their strengths and weaknesses.

If there is a potential weakness in your product or service, as shown by your customer value attribute map and it’s important to your differentiation strategy, close it.

If a competitor attacks you in a core customer account, fight back with equal or greater strength. Match the move with the customer and repeat at a core customer for the competitor.  The aim is to signal that you don’t want an all out price war which will destroy industry profitability but you won’t allow aggressive moves to be rewarded.

Borrowing Defensive Strategy From Warfare To Marketing

Some very interesting books have been written comparing business strategy to warfare.

Typical defences are:

1. The fortified position defence – building barriers to entry to make it difficult to be attacked
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2. Mobile defence – work to identify new market segments and supply tightly focused products s solutions to particular customers wants and needs
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3. Flanking defence – if you fear an attack at the low price end, you can introduce your own fighter brand as a deterrent. Yes it might take some of your sales away from your middle market brand but it may block a new competitor or make things much more difficult.
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4. Counter attack – sometimes it is better to response outside or your own market for fear of sparking a price war that damages all your sales in the core market so to send a signal to the aggressor, you can attack in their core market and cause them as much or more trouble as they are causing you.

Defensive Strategy In Business

Sometimes the focus on a defensive strategy is not to protect a market share position but to protect (or save) the entire business.

Common turnaround measures often include:

• Cost cutting
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• Rationalisation of products – you can’t afford to carry passengers
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• Capacity reduction
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• Cash generation from the sale of unnecessary inventory and equipment

A defensive business strategy may even involve selling or closing large sections of the business which are draining profit or cash.

Returning to the SPACE analysis, focus should be spent improving the internal characteristics – financial strength and competitive advantage – to buy time for the external issues – environmental stability and the attractiveness of the industry to settle down.

More on Defensive Strategy

The books comparing military and business strategy are worth reading to give you a different perspective on business.

Michael Porter has a chapter on defensive strategy in his classic book on Competitive Advantage.