A Tool for Calibrating Competition using SPACE Matrix and GE McKinsey
Abstract: For any organization, it is very important to analysis its competitive strategy before its formulates the strategic objective. The process of calibrating competitive is very important for all organization in this economic suitation. This articles describe about two tool which are used to measure or calibrate competition. First we discuss about the one of the important management tool called SPACE Matrix which helps to evaluate its competitve strategy abd thereby formulate its strategic planning. Here the SPACE Matrix is used four dimensionals,to analyze its competitiveness, where as the others conventional tools used only two or three dimensionals. Secondly the GE / Mickinsy Matrix which is used to identiyfy the industry attractiveness and business unit strength.
Keywords: SPACE Matrix, GE/ Mckinsey Matrix, Industry attractiveness, Strategic business unit strength.
1. Introduction
In this Modern era, for any organisation the sucess or failure many depends on its core Competition.Competitive Startegy like any other stargey play a important role for organisation to acheive is Startegic Objective. Competivite strategy function is to establising a profitable and sustainable position an any industry against all forces in the environment like competitors.For any strategy that should become sucessful, it should understand all factors like internal environment, external environment, macro environment etc. Having the knowledge about these parameters , which helps the organisation to where and how to compete, where to position its product and services and whom to target etc with the available resources in the organisation
Various Conventional Tools
They are various method used to analyze and determine the competiviteness of an organization like,
General Electrical Stoplight Strategy
BCG Matrix
Mckinsey’s Industry Attractiveness / company Strength Matrix
Profit Impact of Market Strategy (PIMS)
Scenario Planning
2. SPACE Matrix
On the above conventionally methods we have some limitations which are indicated in the literature. Now we are going to analyze a technique which is used to overcome the limitations of the above methods, called SPACE Matrix (Strategic Position and Action Evaluation).
When we compare the SPACE matrix with the others like General Electric portfolio and Mckinsey approaches, we found that in that above two methods, one axis in the matrix represent the overall attractiveness of the industry and other represents the organisation ability to compete in the completive market space (Loun 1998).
SPACE Matrix or Strategic Position and Action Evaluation matrix is a tool used to formulate the organisation strategy and also used to find its competitive position in the Environment.
SPACE matrix technique uses another two dimensions apart from the one which we discuss above, like industry’s stability and financial strength. All these four dimensions are assessed and evaluated by several factors. Thus a number of factors help the manger to identify the correct alternative strategic from the options available, for betterment of the organisation.
On analysing, we found that this SPACE matrix is not well known by organisation in many countries. Though Space matrix is having some literature review in the history, many of them didn’t find the actual advantage of this matrix. In this article we discuss about the importance of the SPACE matrix and a hypothetical case study for our understanding.
2.1. Four Dimensions
Using the SPACE matrix method we find the strategic position/posture of an organisation. We have analyzed four dimensions in this method; two contribute to the internal dimensions and the other two to external dimensions. The internal dimension includes competitive advantage and the financial strength which are the major factors to determine the strategic position of any organization. The external dimension includes the industry strength and the environmental stability which is used to identify the strategic position in the industry. By evaluating these four dimensions, we result in four different strategic postures namely,
Aggressive Strategic Posture
Competitive Strategic Posture
Conservative Strategic Posture
Defensive Strategic Posture
After identifying the appropriate posture of an organisation, which in turn helps to identify the organisation generic competitive strategies. This leads to define the strategic thrust for the business. Afterwards the mangers or the top level management of the organisation can choose the appropriate strategy in which their organisation needs to focus to achieve the strategic objective and goal. The four strategic includes,
Overall cost leadership strategy
Differentiation strategy
Focus strategy
Defensiveness strategy
Now we will understand the key factors which afters these four dimensions i.e. aggressive strategic posture, competitive strategic posture, conservative strategic posture and defensive strategic posture.
The factor which affects the environmental stability of an organisation are technological change, demand variability, rate of inflation, price range of the competitive company products, competitive pressure ,price elasticity and entry barrier. The factors which influence the Industry strength includes growth and profit potential, technology know how, capital intensity, resource utilization, easy to enter in to any new market, productivity or capacity utilization and financial stability. Next the very keen factors which affects the competitive advantage includes Product quality, market share , product replacement cycles ,product life cycle , vertical integration, technological knowhow ,competitive capacity utilization etc. The factors which influence the Financial strength dimensions are ROI ( return on investment) liquidity, leverage, capital required or capital available, share holder wealth, operating profit risk involved and exit from the market.
Table 1: Factors affecting the four dimensions
FACTORS
1
Environmental Stability
Rate of inflation
Technological changes
Demand variability
Price range of products
Entry barrier in to the new market
Price elasticity of demand
Others
2
Industry Strength
Growth potential
Financial stability
Profit potential
Technology know how
Capital intensity
Ease of entry
Productivity utilization
Capacity utilization
Adaptability
Flexibility
Others
3
Competitive Advantage
Market share
Product life cycle
Product quality
Customer loyalty
Replacement cycle
Competitors capacity
Vertical integration
Technology know how
4
Financial Strength
ROI – return on investment
Liquidity
Leverage
Cash flow
Capital required
Capital available
Risk involved ( business)
Exit from market
Others
2.2. Four Strategic Postures
The four postures i.e. aggressive strategic posture, competitive strategic posture, conservative strategic posture and defensive strategic posture are show below in the SPACE matrix chart.
2.2.1.Aggressive Strategic Posture:
This is typical in an attractive industry where the economy is under very stable conditions. The industry or organization take full advantage of opportunities in own or related industry, for new mergers and acquisition, increase the company market share. In this posture it is difficult for any new entrants.
2.2.2.Competitive Strategic Posture:
This is typical in an attractive industry where the economy is under unstable conditions. The company will acquire competitive financial resource; increase its market share and thrust. Increase its sales force and also improve or extends the product line.
2.2.3.Conservative Strategic Posture:
This is in distinctive low growth and stable market. They focus on financial stability. Cut cost, prune the product lines, reduce the work force, cash flow improvement, NPD ( new product development and entry in to new and attractive markets.
2.2.4.Defensive Strategic Posture:
The characteristic of this posture is in an unattractive industry. Here the critical factor is the competitors. They lack in financial strength and competitive product. The organization plan for the cost reduction technique reduces its new investment etc.
Figure 1 a : SPACE Matrix
Figure 1 b : SPACE Matrix
Thus we can say the SPACE matrix will help the organisation to formulate its strategic goal and help to identify its competitive position in the market space. If we need to make decision based on two or more strategic, then we need to go for the other tool called Quantitative Strategic Planning Matrix (QSPM).
3. The McKinsey / General Electric Matrix
Now we discuss about the McKinsey GE Matrix. When the General Electric Company has found that the BCG matrix has not cope up with what the GE expects, the GE consult the Mckinsey for the solution. The Mckinsey Company formulated the matrix called McKinsey GE matrix or 9 box matrix or business strength matrix (James R 1997). The basic changes that are made to BCG Matrix are , first the market growth is replaced by the Market attractiveness. Then the market share is replaced by the competitive strength. Thus the McKinsey General Electric matrix is used to find the competitive position of any organisation.
The GE /McKinsey Matrix is used to analyze the business portfolio of an organisation as part of strategic planning.
3.1.Factors – Market Attractiveness
There are various factors that affect the market attractiveness of any organisation. They are listed as follows,
Market Size
Market Profitability
Market Growth
Pricing trends
Competitive rivalry / intensity
Risk involved
Opportunity
Market Segmentation
SCM – Distribution part
3.2.Factors – Competitive strength
There are various factors that affect the Competitive strength of any organisation. They are listed as follows,
Strength of competencies
Strength of assets
Market Share
Cust loyalty
Cost structure vs competitors
SCM ( strength of the distribution chain)
Technology know how
Financial resources
In GE Mckinsey matrix, each variable has some given some weight age, so that the overall attractiveness of any industry can be calculated.
The Formula is given below,
Industry Attractiveness = AF11 + AF22
Where AF11 = Attractiveness Factor 1 Value by Factor 1 weighting
AF22 = Attractiveness Factor 2 Value by Factor 2 weighting,
Similarly, the business unit strength can be calculated as
Business Unit Strength = SF11 + SF22
Where SF11 = Strength Factor 1 Value by Factor 1 weighting
SF22 = Strength Factor 2 Value by Factor 2 weighting,
The nine block matrix which is formed by two dimensions, one is business units strength and the other is the industry attractiveness, the matrix is shown below,
From the above matrix we can conclude that, if the Industry attractiveness and the Business unit strength are high, then we can invest in new projects and can see the growth. Where as if the Business unit strength likes high and the industry attractiveness is medium then we can see there is a selective growth in that particular industry. But if both the Industry attractiveness and the business unit strength are low or medium, then the industry should be very selective in choosing any strategy or investing. The last stage discuss that if both the dimensions, industry attractiveness and Business unit strength are low, the industry must be very careful in the strategy planning. That is it should follow the Harvest and Divest method, thereby it can sustain in the competitive environment.
Industry attractiveness
High Medium Low
Investment and
Growth
Selective Growth
Selectivity
Selective Growth
Selectivity
Harvest/Divest
Selectivity
Harvest/Divest
Harvest/Divest
High
Medium
Low
Figure 2 : GE/ Mckinsey Matrix
4. Conclusion
Since the calibrating the competitiveness is very important for every organisation in this macro environmental condition, first we studied about how the SPACE matrix helped to formulate the organisation strategy and also used to find its competitive position in the Environment. Secondly we discuss about the GE / Mckinsey matrix how to evaluate the industry attractiveness and the business unit strength. GE / Mckinsey matrix is the one step advance tool of BCG matrix, which focuses on market attractiveness and competitive strength rather than market growth and market share.
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