SPACE Matrix Strategic Management

Method
SPACE Matrix Strategic Management Method

The SPACE matrix is a management tool used to analyze a company. It is

used to determine what type of a strategy a company should undertake.

The Strategic Position & Action Evaluation matrix or short

a SPACE matrix is a strategic management tool that focuses on strategy
formulation especially as related to the competitive position of an
organization.

The SPACE matrix can be used as a basis for other analyses, such as the
SWOT analysis, BCG matrix model, industry analysis, or assessing strategic
alternatives (IE matrix).

What is the SPACE matrix strategic management method?

To explain how the SPACE matrix works, it is best to reverse-engineer it.
First, let's take a look at what the outcome of a SPACE matrix analysis can
be, take a look at the picture below. The SPACE matrix is broken down to
four quadrants where each quadrant suggests a different type or a nature of
a strategy:

• Aggressive
• Conservative
• Defensive
• Competitive

This is what a completed SPACE matrix looks like:

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This particular SPACE matrix tells us that our company should pursue an
aggressive strategy. Our company has a strong competitive position it the
market with rapid growth. It needs to use its internal strengths to develop a
market penetration and market development strategy. This can include
product development, integration with other companies, acquisition of
competitors, and so on.

Now, how do we get to the possible outcomes shown in the SPACE matrix?
The SPACE Matrix analysis functions upon two internal and two external
strategic dimensions in order to determine the organization's strategic
posture in the industry. The SPACE matrix is based on four areas of analysis.

Internal strategic dimensions:

Financial strength (FS)

Competitive advantage (CA)

External strategic dimensions:

Environmental stability (ES)

Industry strength (IS)

There are many SPACE matrix factors under the internal

strategic dimension. These factors analyze a business internal strategic
position. The financial strength factors often come from company
accounting. These SPACE matrix factors can include for example return on
investment, leverage, turnover, liquidity, working capital, cash flow, and
others. Competitive advantage factors include for example the speed of
innovation by the company, market niche position, customer loyalty, product
quality, market share, product life cycle, and others.

Every business is also affected by the environment in which it operates.

SPACE matrix factors related to business external strategic dimension
are for example overall economic condition, GDP growth, inflation, price
elasticity, technology, barriers to entry, competitive pressures, industry
growth potential, and others. These factors can be well analyzed using the
Michael Porter's Five Forces model.

The SPACE matrix calculates the importance of each of these dimensions and
places them on a Cartesian graph with X and Y coordinates.

The following are a few model technical assumptions:

- By definition, the CA and IS values in the SPACE matrix are plotted on the X
axis.

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- CA values can range from -1 to -6.
- IS values can take +1 to +6.

- The FS and ES dimensions of the model are plotted on the Y axis.

- ES values can be between -1 and -6.
- FS values range from +1 to +6.

How do I construct a SPACE matrix?

The SPACE matrix is constructed by plotting calculated values for
the competitive advantage (CA) and industry strength (IS) dimensions on the
X axis. The Y axis is based on the environmental stability (ES) and
financial strength (FS) dimensions. The SPACE matrix can be created using
the following seven steps:

Step 1: Choose a set of variables to be used to gauge the

competitive advantage (CA), industry strength (IS), environmental stability
(ES), and financial strength (FS).
Step 2: Rate individual factors using rating system specific to each
dimension. Rate competitive advantage (CA) and environmental stability (ES)
using rating scale from -6 (worst) to -1 (best). Rate industry strength (IS) and
financial strength (FS) using rating scale from +1 (worst) to +6 (best).

Step 3: Find the average scores for competitive advantage (CA), industry
strength (IS), environmental stability (ES), and financial strength (FS).

Step 4: Plot values from step 3 for each dimension on the SPACE matrix on
the appropriate axis.

Step 5: Add the average score for the competitive advantage (CA) and
industry strength (IS) dimensions. This will be your final point on axis X on
the SPACE matrix.

Step 6: Add the average score for the SPACE matrix environmental stability
(ES) and financial strength (FS) dimensions to find your final point on the
axis Y.

Step 7: Find intersection of your X and Y points. Draw a line from the center
of the SPACE matrix to your point. This line reveals the type of strategy the
company should pursue.

SPACE matrix example

The following table shows what values were used to create the SPACE matrix
displayed above.

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Each factor within each strategic dimension is rated using appropriate rating
scale. Then averages are calculated. Adding individual strategic dimension
averages provides values that are plotted on the axis X and Y.

Where do I go next?
The SPACE matrix can help to find a strategy. But, what if we have 2-3
strategies and need to decide which one is the best one? The Quantitative
Strategic Planning Matrix (QSPM) model can help to answer this question.

Should you have any questions about the SPACE matrix, you might want to
submit them at our management discussion forum.

The SPACE MATRIX Explained

The SPACE MATRIX Explained

The Strategic Position and Action Evaluation or the SPACE Matrix is a four-quadrant
framework which indicates whether aggressive, conservative, defensive, or competitive
strategies are most appropriate for a given enterprise or company. The SPACE Matrix
Analysis is most often employed during professional market analysis of a firm or for
graduate level MBA coursework . The axes of the SPACE Matrix represent the two internal
dimensions of a competitive firm which are its financial strength or FS and its competitive
advantage or CA] and two external dimensions which are environmental stability ES and
industry strength or IS. These four factors are the most important determinants of an
enterprise's overall strategic position in the marketplace.

(for an actual SPACE Matrix in action--follow this link for a graphic explanation with images)

Depending upon the type of firm and its industry, a number of variables could make up each
of the dimensions represented on the axes of the typical SPACE Matrix. Factors that are
typically included are those found in the firm's External Factor Analysis and its Internal
Factor Analysis (EFA & IFA) and these should be considered in developing a SPACE Matrix.
Other important variables that can be included in a SPACE Matrix examination are a firm's
4
financial performance such as return on investment, leverage, liquidity, working capital, and
cash flow commonly are considered determining factors of an organization's financial
strength. Like the TOWS Matrix, the SPACE Matrix should be completely customized to the
particular firm being studied and based on factual information derived from industry and
market data.

The steps required to develop a SPACE Matrix are listed below:

1. Select a set of variables to define financial strength (FS), competitive advantage (CA),
environmental stability (ES), and industry strength (IS)

2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of the variables
that make up the FS and IS dimensions. Assign a numerical value ranging from -1 (best) to
-6 (worst) to each of the variables that make up the ES and CA dimensions.

3. Compute an average score for FS, CA, IS, and ES by summing the values given to the
variables of each dimension and dividing by the number of variables included in the
respective dimension.

4. Plot the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE
Matrix.

5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on
they-axis and plot the resultant point on Y. Plot the intersection of the new xy point.

6. Draw a directional vector from the origin of the SPACE Matrix through the new
intersection point. This vector reveals the type of strategies recommended for the
organization: aggressive, competitive, defensive, or conservative.

The directional vector associated with each given profile suggests the type of strategies to
pursue which are: aggressive, conservative, defensive, or competitive. When an
organization's directional vector is located in the aggressive quadrant (upper-right
quadrant) of the SPACE Matrix, an firm is in an excellent position to use its internal
strengths to (1) take advantage of external opportunities, (2) overcome internal
weaknesses, and (3) avoid external threats. Therefore, market penetration, market
development, product development, backward integration, forward integration, horizontal
integration, conglomerate diversification, concentric diversification, horizontal
diversification, or a combination strategy all can be feasible, depending on the specific
circumstances that the company is facing at the time.

Matrix

The Strategic Position and Action Evaluation or the SPACE Matrix is a four-quadrant framework which indicates
whether aggressive, conservative, defensive, or competitive strategies are most appropriate for a given enterprise
or company. The SPACE Matrix Analysis is most often employed during professional market analysis of a firm or for
graduate level MBA coursework . The axes of the SPACE Matrix represent the two internal dimensions of a
competitive firm which are its financial strength or FS and its competitive advantage or CA] and two external
dimensions which are environmental stability ES and industry strength or IS. These four factors are the most
important determinants of an enterprise's overall strategic position in the marketplace. A generic SPACE Matrix is
detailed below:

5
Depending upon the type of firm and its industry, a number of variables could make up each of the dimensions
represented on the axes of the typical SPACE Matrix. Factors that are typically included are those found in the firm's
External Factor Analysis and its Internal Factor Analysis (EFA & IFA) and these should be considered in developing a
SPACE Matrix. Other important variables that can be included in a SPACE Matrix examination are a firm's financial
performance such as return on investment, leverage, liquidity, working capital, and cash flow commonly are
considered determining factors of an organization's financial strength. Like the TOWS Matrix, the SPACE Matrix
should be completely customized to the particular firm being studied and based on factual information derived from
industry and market data.

The steps required to develop a SPACE Matrix are listed below:

1. Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental
stability (ES), and industry strength (IS)

2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of the variables that make up the
FS and IS dimensions. Assign a numerical value ranging from -1 (best) to -6 (worst) to each of the variables
that make up the ES and CA dimensions.

3. Compute an average score for FS, CA, IS, and ES by summing the values given to the variables of each
dimension and dividing by the number of variables included in the respective dimension.

4. Plot the average scores for FS, IS, ES, and CA on the
appropriate axis in the SPACE Matrix.

5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on they-axis and
plot the resultant point on Y. Plot the intersection of the new xy point.

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 6. Draw a directional vector from the origin of the SPACE Matrix through the new intersection point. This
vector reveals the type of strategies recommended for the organization: aggressive, competitive,
defensive, or conservative.

Some examples of strategy profiles that can emerge from a SPACE analysis are shown below:

The directional vector associated with each given profile suggests the type of strategies to pursue which are:
aggressive, conservative, defensive, or competitive. When an organization's directional vector is located in the
aggressive quadrant (upper-right quadrant) of the SPACE Matrix, an firm is in an excellent position to use its
internal strengths to (1) take advantage of external opportunities, (2) overcome internal weaknesses, and (3) avoid
external threats. Therefore, market penetration, market development, product development, backward integration,
forward integration, horizontal integration, conglomerate diversification, concentric diversification, horizontal
diversification, or a combination strategy all can be feasible, depending on the specific circumstances that the
company is facing at the time.

A sample SPACE Matrix Analysis for a bank or financial institution is included below so that you can see how it
is actually applied in practice:

Financial Institution SPACE Matrix

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FINANCIAL STRENGTH Ratings

• The bank's primary capital ratio is 7.23 percent, which is

1.23 percentage points over the generally required ratio of
6 percent.
1.0
• The bank's return on assets is negative 0.77, compared to 1.0
a bank industry average ratio of positive 0.70. 3.0
• The bank's net income was $183 million, down 9 percent 4.0
from a year earlier. 9.0

• The bank's revenues increased 7 percent to $3.46 billion.

INDUSTRY STRENGTH

• Deregulation provides geographic and product freedom.

• Deregulation increases competition in the banking industry. 4.0

2.0
4.0
• Pennsylvania's interstate banking law allows the bank to 10.0
acquire other banks in New Jersey, Ohio, Kentucky, the
District of Columbia, and West Virginia.

ENVIRONMENTAL STABILITY

• Less-developed countries are experiencing high inflation

and political instability.

• Headquartered in Pittsburgh, the bank historically has been -4.0

heavily dependent on the steel, oil, and gas industries. -5.0
These industries are depressed. -4.0
-13.0

• Banking deregulation has created instability throughout the

industry.

COMPETITIVE ADVANTAGE

• The bank provides data processing services for more than

450 institutions in 38 states.
-2.0
• Superregional banks, international banks, and nonbanks -5.0
are becoming increasingly competitive. -2.0
-9.0

• The bank has a large customer base.

CONCLUSION

• ES Average is -13.0 ÷ 3 = -4.33

• IS Average is + 10.0 ÷ 3 = 3.33

• CA Average is -9.0 ÷ 3 = -3.00

• FS Average is + 9.0 ÷ 4 = 2.25

• Directional Vector Coordinates:

x-axis: -3.00 + (13.33) = +0.33
y-axis: -4.33 + (12.25) = -2.08

• The bank should pursue Competitive Strategies.

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 In the figure above, the actual diagram would go in the blank space in the lower right corner.

The directional vector may appear in the conservative quadrant (upper-left quadrant) of the SPACE Matrix,
which implies that staying close to the company's basic competencies and not taking excessive risks should be the
recommended strategy. Conservative strategies most often include market penetration, market development,
product development, and concentric diversification for example. The directional vector may be located in the
lower-left or defensive quadrant of the SPACE Matrix, which suggests that the company might want to focus on
rectifying internal weaknesses and avoiding external threats. Defensive strategies include retrenchment,
divestiture, liquidation, and concentric diversification. Finally, the directional vector may be located in the lower-
right or competitive quadrant of the SPACE Matrix, indicating competitive strategies would be most appropriate.
Competitive strategies include backward, forward, and horizontal integration; market penetration; market
development; product development; and joint venture, to name but a few. Understanding all of these potential
options can be a complicated and time consuming undertaking. If you need a SPACE Matrix produced for your

organization or for a business research project just contact China Doll Publishing or follow the link for more
explanations regarding custom writing services .