Determine your Right Strategy with Strategic Position and Action Evaluation (SPACE) Matrix

Introduction

The Strategic Position and Action Evaluation (SPACE) Matrix is a strategic management tool that focuses on strategy formulation especially as it relates to competitive position of an organization. The SPACE Matrix analysis functions upon two internal and two external strategic dimensions. On the horizontal axis, we have the Financial Strength (FS) and Competitive Advantage (CA); whereas on the vertical axis, we have the (Environmental Stability (ES) and Industrial Strength (IS).  You can assign a value to each of the identified FS and IS variables where a +6 indicates a very strong position and a +1 a very weak position of your enterprise performance respectively. Likewise, you can assign a value to each of the identified CA and ES variables where a -1 indicates a very strong position and a -6 a very weak position respectively. Essentially, you can use the information from the internal and external analysis to set the strategic direction for your organization. Specifically, you can create four strategic positions out of the model and they include aggressive strategy, conservative strategy, defensive strategy, and conservative strategy. The analysis conducted would enable you to determine the best strategic position your organization needs to occupy among the four possible strategic positions.  Essentially, the framework is for business leaders who want to set strategic direction for their organizations given their operational and environmental conditions. Also, for strategist who help organizations and business leaders in making informed strategic decisions

 

Let’s now dive into the components of the matrix

 

The 7 steps approach to developing a SPACE Matrix:

  • Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry attractiveness (IA).
  • Assign a numerical value ranging from 1 (worst) to 6 (best) for the variables that make up the FS and IA dimensions.
  • Assign a number between –1 (best) to –6 (worst) for variables that make up the ES and CA dimensions.
  • Compute an average score for FS, CA, IA, and ES by summing the values given to the variables and dividing by the number of variables included in each dimension.
  • Plot the average scores for FS, IA, ES, and CA on the appropriate axis in the SPACE Matrix.
  • Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new XY point.
  • 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.

Case Study

Okoroh Energy Services

Okoroh Energy Services is an energy services company that provide solutions to oil & gas companies, power plants and petrochemical companies in Nigeria. The company is into maintenance, fabrication, and installation services. At this time, Okoroh Energy Services is facing major challenges, and unless an action is taken, it might go down.   The competitive environment is heating up and that resulted to slow growth, and therefore it need to re-strategizes, in order to maintain its competitive position, or stay ahead of competition

The company want to conduct analysis of its operations and environment to determine where improvement is required. On the internal dimensions, it wants to look at both financial and competitive positions. Whereas on the external dimensions, the focus is on stability position and industry attractiveness. Analysis of the information from those four dimensions would determine the strategic focus. Essentially, it can fall among the following strategic options: conservative strategy, aggressive strategy, defensive strategy, or competitive strategy. However, it cannot determine the type of strategy to pursue unless it has insights from both the internal and external dimensions of the company. To overcome the challenges, we have decided to use the Strategic Position and Action Evaluation (SPACE) Matrix to determine the best strategy for the company. We want to make an informed decision, not relying on intuition to make this important strategic direction for our company. Therefore, the analysis conducted will determine the actions to be taken

Analysis

Let’s now construct the framework. We have chosen five factors each for the FS, CA, ES, and IA. However, the model is not restricted to five factors (you can analyze more than five factors), but we have taken these as the most important competitive factors of the Energy Services industry

Internal Analysis

Financial Strength (FS)

Return on investment

Leverage

Liquidity

Working capital

Cash flow

 

External Analysis

Environmental Stability (ES)

Technological changes

Inflation rate

Exchange rate volatility

Price elasticity

Substitutability

 

Internal Analysis

Competitive Advantage (CA)

Market share

Product quality

Customer loyalty

Technological know-how

Control over suppliers and distributors

External Analysis

Industry Attractiveness (IA)

Growth potential

Profit potential

Financial stability

Ease of entry into market

Resource utilization

Financial Strength (FS)

The top of the SPACE Analysis matrix’s Y-axis shows the financial strength of the organization. The stronger an organization is financially, the higher its position on the Y-axis. Here are the number of factors that influence this:

  • Returns on investment: If companies make a lot of money from their investments, that will make them financially stronger
  • Leverage: The lower the debt level, the more financially stronger the business. Lots of loans and outstanding bills creates a higher debt level, that negatively affects the financial strength
  • Liquidity: In addition to returns, it’s also important that there is enough available money, for instance to pay suppliers without delay
  • Assets: These are listed in order of liquidity, from cash (the most liquid) to land (least liquid). Assets can include Cash, Prepaid Expenses, Accounts Receivable, Notes Receivable, Inventory, Investments etc.
  • Cash flow: A cash flow statement reflects the short-term viability of a company by indicating whether the operation has enough working capital on hand to pay its employees and debts

Industry Attractiveness (IA)

On the right of SPACE matrix, we have Industry Attractiveness. It indicates how attractive it is for businesses to operate in a certain industry. The higher the IA, the farther to the right it is on the X-axis. The following are external factor that could determine the attractiveness of an industry:

  • Growth potential: If there is a potential for growth by operating in a certain industry, companies would take advantage of the growth potential to enter such industry
  • Profit potential: This is directly related to the growth potential. Profit potential makes it a wise decision to focus on a certain sector
  • Financial stability: If entering a new market result in financial insecurity, it’s better for businesses to stay away
  • Ease of entry into the market: how easy or difficult it is for new entrants to enter into the industry? This can involve for example capital requirement, government policies, access to production inputs and financing, cost advantages, etc.
  • Resource utilization: The more the ability for a company to utilize it resources efficiently in a given industry, the more competitive it becomes

Competitive Advantage (CA)

The competitive advantage can be found on the left side of the X-axis of the SPACE Analysis. The bigger this advantage is, the farther left it moves. The following are the factors that could influence the competitive advantage of your organization:

  • Market share: The larger the market share, the more that need be produced, and that results to lower cost per unit of production
  • Product quality: If the quality of the products goes down, it will affect sales. That’s why it’s a good idea for businesses to always monitor their internal quality control process
  • Customer loyalty: To make customers loyal, businesses will have to make concessions to those customers. They have to apply that to what customers find important to their products
  • Technological know-how: This has to do with innovative ability by continually staying on top of the game. Companies that don’t innovate and don’t apply new technologies in their manufacturing will fall behind
  • Control over suppliers and distributors: The ability to have full control over the supply chain and distribution gives a company a competitive advantage

Environmental Stability (ES)

T the environment’s stability that can be found on the lower end of the Y-axis on the matrix. The stable environmental factors are influenced by a number of sub-factors. The bigger the impact, the higher on the Y-axis. Think of factors such as:

  • Technological change: Technology changes rapidly and has a significant impact on organizations. In order to survive, businesses will have to adapt to new technologies.
  • Inflation rate: Inflation rate refers to rising prices, and that results to money losing its value
  • Exchange rate volatility: If there is volatility in exchange rate, it will affect productivity in the economy
  • Price elasticity: The stronger product demand responds to a price change, the harder it is for businesses to calculate a stable price
  • Substitutability: If a product can be easily substituted in a given economy, then it is a threat because companies can only compete on prices.

Computing the X and Y axis

To compute the x-axis, you need to assign value to all the factors computed. The numerical value assigned should range from +1 (worst) to +6 (best), depending on the effect such factor has. After which you add the two scores on the x-axis and plot the resultant point on X. Similar approach is used to plot the y-axis, but the numerical value assigned is negative. So, assign a range of -1 (best) and -6(worst). As the x-axis, you add the two scores on the y-axis and plot the resultant point on Y. After which you plot the intersection of the new (x, y) coordinate.

 

Let’s now calculate the average scores of the x and y axis of Okoroh Energy Services. We arrive at the x-axis score by summing the average of Financial Position (FP) and Environmental Stability (ES). While on the y-axis, we sum the average scores of Competitive Advantage (CA) and Industry Attractiveness (IA).  For us to arrive at the average scores of each dimension, we need to have the rating figures of all the factors in each dimension.

 y-axis: 4.6-3 =1.6

x-axis: -2.6+4.4 =1.8

                                              Setting the strategy

 

Four Positions within the SPACE Analysis matrix

In order to determine a strategy, you first have to find out the position of the organization. Only then can you take actions that can be evaluated later. There are four positions on the SPACE matrix. Let us now design each of the strategic positions Okoroh Energy Services could possibly pursue given the figures of the X and Y axis average scores

 

CONSERVATIVE

• Market penetration

• Market development

• Product development

• Related diversification

AGGRESSIVE

• Backward, forward, horizontal integration

• Market penetration

• Market development

• Product development

• Diversification (related or unrelated)

DEFENSIVE

• Retrenchment

• Divestiture

• Liquidation

COMPETITIVE

• Backward, forward, horizontal integration

 • Market penetration

 • Market development

 • Product development

Conservative strategy

The conservative strategy is located between the company’s financial strength and the competitive advantage. This is usually a stable organization, with low growth.
The following actions would be potential options for a company in this position:

  • Focus on existing successful products and cherish them
  • Leave room to develop new products
  • Potential product penetration through expansion

Aggressive strategy

The aggressive strategy is located between financial strength and industry attractiveness. This is a stable organization that actively chooses to compete with similar businesses. The following actions would be potential options for a company in this position:

  • Focus on products that can really compete with other businesses
  • A focused marketing campaign to gain a larger market share
  • Focus on offering the lowest price compared to competitors
  • Look for potential companies to take over and increase the market share

Defensive strategy

The Defensive strategy of the SPACE Analysis is located between environmental stability and competitive advantage. These are businesses that are being pushed out by competition. If they don’t take action, chances are they won’t make it. The following actions would be the potential options for a company in this position:

  • Reduce costs to realize a stronger competitive position
  • Reduce investments and manufacture at low cost
  • Focus on core business and sell off ancillary activities

Competitive strategy

The competitive strategy of the SPACE Analysis is located between industry attractiveness and environmental stability. These are companies that are competitive but not stable. The following actions would be potential options for a company in this position:

  • Look for partnership opportunities with stable companies
  • Increase productivity to make supply more reliable
  • In addition to the core business, seek other products to boost sales

                                  The Strategic Position of Okoroh Energy Services                 

Remember, our y-axis was 1.6, and 1.8 on the x-axis. Since they’re both positive, it means it falls on the Aggressive Strategy quadrant. Therefore, the possible strategic options are backward integration, forward integration, horizontal integration, market penetration, market development, product development and diversification. To determine the particular strategy to settle for depends on the company’s mission, values, and goal. Although Okoroh Energy Services is on he aggressive strategy position, it must be noted that 1.6/1.8 is not strong on the aggrssiveness. Therefore, several factors need to be put into consideration in determining the right strategy to pausue at the end of the day. However, the SPACE matrix has enable us to know where we sit on the quadrant. We know, given the internal and external factors, we have a competitive advantage by pusuing aggressive strategy. Although the SPACE matrix is a static model, it has been able to point out where improvement is required. It’s now left to Okoroh Energy Services to work on the internal factors where it has full control over, while on the other hand try as much as possible to mitigate the external factors where it doesn’t have so much control.

Analysis of the competitive industry

Essentially, developing a competitive strategy is designing a broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals.  Competitive strategy involves positioning a business to maximize the value of the capabilities that distinguish it from its competitors. The objective of a competitor analysis is to develop a profile of the nature and success of the likely strategy changes each competitor might make. Therefore, you need not only be mindful of what you’re doing, but also the strategic position of your competitors.

 

For us to conduct competitive analysis of Okoroh Energy Services, we have picked two strong competitors in the energy services industry in Nigeria. However, the analysis is not restrictive to two competitors, therefore, it depends on your industry and the competitive environment you’re in. What is important is investing the time and resources in data gathering, and developing the right strategic insights of the position of your competitors

 

Let’s us now compute the FS, IA, CA and ES of each of the competitors. The figures derived would enable us to determine their strategic positioning on the SPACE matrix. As a result, by knowing where the competitors stand, we would be able to re-strategize to in order to create a competitive edge

Competitor 1: Project Masters Services

Estimated FS

 

1

Estimated IA

 

4.4

Estimated CA

 

-5

Estimated ES

 

-3

   

Competitor 1: X-axis

 

-0.6

Competitor 1: Y-axis

 

-2

   

 

Competitor 2: Ada Energy Enterprises

   

Estimated FS

 

2

Estimated IA

 

4.4

Estimated CA

 

1

Estimated ES

 

-3

   

Competitor 2: X-axis

 

5.4

Competitor 2: Y-axis

 

-1

                                  Project Masters Services Strategic Position

For Project Master, both the y-axis and the x-axis are on the negative, and that means it falls on the defensive strategy quadrant. This strategy indicates that not only the industry potency and competitive advantage are weak, but also financial strength and environmental stability are not favorable. In the defensive position, the organization must eliminate its weaknesses and also mitigate the environmental threats. The defensive strategies include several items such as decreasing or eliminating some activities, selling the deleterious departments of the organization, diversification, liquidation, etc.

          Ada Energy Enterprises Strategic Position

On the Ada Energy Enterprises, the y-axis is negative, whereas the x-axis is strongly positive. That means its located on the Competitive quadrant on the SPACE matrix. This is a company with major competitive advantages in a high-growth industry. Being in such position indicate that the organization has powerful advantages, but its financial potency is not sufficient to compensate for the environmental instability. The best strategy in this position is improving financial potency and maintaining competitive position. In this competitive position, the organization must implement the competitive strategies such as down-to-up vertical integration, up-to-down vertical integration, horizontal integration, market penetration, market development, product development, partnership etc.

 

Limitations of the SPACE Matrix

Although the SPACE matrix is a very powerful tool for strategic analysis and formulation, it’s not a perfect model, it has some limitations.

  1. It is a snapshot in time.
  2. There are more than four dimensions that firms could/should be rated on.
  3. The directional vector could fall directly on an axis, or could even go nowhere if the coordinate is (0,0).
  4. Implications of the exact angle of the vector within a quadrant are unclear.
  5. The relative attractiveness of alternative strategies generated is unclear.
  6. Key underlying internal and external factors are not explicitly considered.

                             Conclusion

The Strategic Position and Action Evaluation (SPACE) Matrix is a strategic management tool that focuses on strategy formulation especially as it relates to competitive position of an organization. The axes of the matrix represent two internal dimensions ―Financial Stability (FS) and Competitive Advantage (CA), and two external dimensions―Environmental Stability (ES) and Industry Attractiveness (IA). Essentially, the four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies is the most appropriate for a given organization. Remember, the SPACE Matrix as a strategy framework is only as good as the amount of data you can collect, and your ability to generate the right insights from the data. You need not only focus on the right data of your organization, but also of your industry, competitors, as well as exogenous variables you might not have control over, but could impact your business significantly. You need to invest you time and resources for data gathering and analysis in an ongoing basics, as that would give you the right insight of where your business or industry is headed

 

Omodiaogbe Samuel, MSc. CMC, ChMC, FIMC

Omodiaogbe is a Strategic Management Consultant, and he the Principal Consultant/CEO at Vast Thinking Consults Ltd where he help organizations and business leaders to create superior value. Omodiaogbe holds BSc. and MSc. in Economics. Also, he is a Certified Management Consultant (CMC) and a Fellow, Institute of Management Consultants, Nigeria. He is an Instructor on Coursera, where he teaches 25 courses in Strategic Management. Omodiaogbe is one of the world’s leading MOOCs learners on Coursera and Edx with over 500 Certificates from top-ranked Universities and Business Schools. His areas of expertise centers on Strategic Management

Contact him:
Email; somodiaogbe@vastthinking.com.ng
Visit: www.vastthinking.com.ng

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top
×