HOFER’S MATRICES HOFER’S MATRICES AND DIRECTIONAL AND DIRECTIONAL

POLICIESPOLICIES

BUSINESS PORTFOLIO BUSINESS PORTFOLIO ANALYSISANALYSIS

• The analysis methods of the business The analysis methods of the business portfolio analysis are used in order to portfolio analysis are used in order to identify and examine the various identify and examine the various strategic alternatives that must be strategic alternatives that must be approached at corporate level.approached at corporate level.

POTENTIAL BENEFITSPOTENTIAL BENEFITS

• It encourages the promotion of competitive It encourages the promotion of competitive analysis at the level of strategic business analysis at the level of strategic business units.units.

• Selective earmarking of financial resources Selective earmarking of financial resources by means of identification of strategic issues by means of identification of strategic issues and by means of adoption of a standardized and by means of adoption of a standardized and objective negotiation process.and objective negotiation process.

• It helps to reduce risks, increases It helps to reduce risks, increases concentration and involvementconcentration and involvement

((COMPETITIVE POSITION)COMPETITIVE POSITION)

STRONG AVERAGE WEAK

DEVELOP

GROWTH

SUPER GROWTH

MATURITY

DECLINE

HOFER’S MATRICES

(STAGE OF EVOLUTION)

Contd…..Contd…..

• Strategic business unit ”A” seems to be a potential Strategic business unit ”A” seems to be a potential ”Star”. It holds a large market share, it is in the stage ”Star”. It holds a large market share, it is in the stage of life cycle development and has a strong of life cycle development and has a strong competitive position on the market. As such, unit ”A” competitive position on the market. As such, unit ”A” represents a potential candidate in the competition for represents a potential candidate in the competition for corporate resource competition.corporate resource competition.

• Investments in unit ”B” must take into account the Investments in unit ”B” must take into account the fact that although it has a strong market position, its fact that although it has a strong market position, its market share is quite small. strategy that may market share is quite small. strategy that may contribute to the increase of market share must be contribute to the increase of market share must be developed, thus accounting for the future necessary developed, thus accounting for the future necessary investment.investment.

Contd……Contd……

• Unit ”C” has a small market share, and it holds a Unit ”C” has a small market share, and it holds a competitively weak position and it entered a small competitively weak position and it entered a small market whose development is underway. For the unit market whose development is underway. For the unit ”C” a strategy residing in the elimination from the ”C” a strategy residing in the elimination from the market must be applied, so that the investment for the market must be applied, so that the investment for the first two units may be favored.first two units may be favored.

• Unit ”D” is characterized by a strong competitive Unit ”D” is characterized by a strong competitive position on the market and it holds a large market position on the market and it holds a large market share. In this case, it is recommended that share. In this case, it is recommended that investments be made with a view to maintaining the investments be made with a view to maintaining the current position on the market. On the lung run, it will current position on the market. On the lung run, it will become a “Cash Cow”.become a “Cash Cow”.

Contd……Contd……

• Unit ”E” together with unit ”F” are included into Unit ”E” together with unit ”F” are included into the “Cash Cow” category and they should be the “Cash Cow” category and they should be capitalized on because of great cash flows that capitalized on because of great cash flows that they generate.they generate.

• Unit ”G” is included into the “Dogs” category and Unit ”G” is included into the “Dogs” category and the management thereof is recommended, with a the management thereof is recommended, with a view to generating short-term cash flows in as view to generating short-term cash flows in as much as it is possible. Nevertheless, on the long much as it is possible. Nevertheless, on the long term, the strategy of limitation or liquidation on term, the strategy of limitation or liquidation on the market must be selected.the market must be selected.

Advantages of Hofer’s MatricesAdvantages of Hofer’s Matrices

• It provides an image regarding the manner of It provides an image regarding the manner of distribution of the businesses undertaken by a distribution of the businesses undertaken by a company during specific stages of a life cycle.company during specific stages of a life cycle.

• The company may predict how the present The company may predict how the present portfolio will develop in the future.portfolio will develop in the future.

• It manages to divert the management’s attention It manages to divert the management’s attention from the corporate level and focus on potential from the corporate level and focus on potential strategies specific to the strategic business unit.strategies specific to the strategic business unit.

DisadvantagesDisadvantages

• Identification of Key Success Factors.Identification of Key Success Factors.

• Weight assignment to different Key Weight assignment to different Key Success Factors can be difficult.Success Factors can be difficult.

• Managers tend to underestimate their Managers tend to underestimate their weaknesses and overestimate their weaknesses and overestimate their strengths.strengths.

Directional Policy Matrix

Characterize Your EnterpriseCharacterize Your EnterpriseThe expert system will position your enterprise on The expert system will position your enterprise on the chart based upon your description of: the chart based upon your description of: – Supplier Bargaining Power Supplier Bargaining Power – Threat of Substitutes Threat of Substitutes – Threat of New Entrants Threat of New Entrants – Competitive Rivalry Competitive Rivalry – Buyer Bargaining Power Buyer Bargaining Power – Product Quality Product Quality – Product Value Product Value – Relative Market Share Relative Market Share – Reputation Reputation – Customer Loyalty Customer Loyalty – Staying Power Staying Power – Experience Experience

• You can trace through the supporting analysis and You can trace through the supporting analysis and its conclusions, adjusting your input until you are its conclusions, adjusting your input until you are satisfied your description accurately characterizes satisfied your description accurately characterizes your enterprise.your enterprise.

Analysis of Your Enterprise Position

Invest Grow Harvest Divest

High Market Attractiveness

High Business Strengths

High Market Attractiveness

Low Business Strengths

Low Market Attractiveness

High Business Strengths

Low Market Attractiveness

Low Business Strengths

This is the ideal quadrant.

Your strengths are directed at a highly attractive market.

Invest your best resources in those parts of your business which are in this quadrant.

You are in an uncomfortable quadrant.

The market potential is attractive but you do not have the business strengths necessary for being really successful.

The options facing you are either to take what you can while it is still possible or to invest in building a better competitive position.

You must be selective in your efforts here, as this segment will cost you to invest in every aspect of the business.

In this quadrant you have high strengths in a market that has lost its attractiveness in terms of future potential.

It is still good for near term profits, so maintain the position for as long as possible.

Think carefully about what you are doing to be in this quadrant.

The market is not particularly attractive and your business strengths are below average here.

Keep in this segment only if it supports a more profitable part of your business (for instance, if this segment completes a product line range) or if it absorbs some of the overhead costs of a more profitable segment.

Shell Directional Policy MatrixShell Directional Policy Matrix

• Another refinement upon the Boston MatrixAnother refinement upon the Boston Matrix• Along the horizontal axis are Along the horizontal axis are prospects for prospects for

sector profitabilitysector profitability, and along the vertical , and along the vertical axis is a axis is a company's competitive capabilitycompany's competitive capability

• The location of aThe location of a Strategic Business Unit Strategic Business Unit (SBU) (SBU) in any cell of the matrix implies in any cell of the matrix implies different strategic decisionsdifferent strategic decisions

• However decisions often span options and in However decisions often span options and in practice the practice the zoneszones are an irregular shape and are an irregular shape and do not tend to be accommodated by box do not tend to be accommodated by box shapes. Instead they blend into each other.shapes. Instead they blend into each other.

Each of the zones is described as follows:Each of the zones is described as follows:

o LeaderLeader - Major resources are focused upon the SBU - Major resources are focused upon the SBU

o Try HarderTry Harder - Could be vulnerable over a longer period of - Could be vulnerable over a longer period of time, but fine for nowtime, but fine for now

o Double or QuitDouble or Quit - Gamble on potential major SBU's for the - Gamble on potential major SBU's for the futurefuture

o GrowthGrowth - Grow the market by focusing just enough resources - Grow the market by focusing just enough resources herehere

o CustodialCustodial - Just like a cash cow, milk it and do not commit - Just like a cash cow, milk it and do not commit any more resourcesany more resources

o Cash GeneratorCash Generator - Even more like a cash cow, milk here for - Even more like a cash cow, milk here for expansion elsewhereexpansion elsewhere

o Phased WithdrawalPhased Withdrawal - Move cash to SBU's with greater - Move cash to SBU's with greater potentialpotential

o DivestDivest - Liquidate or move these assets on a fast as you can - Liquidate or move these assets on a fast as you can

Best UseBest UseThe DPM showsThe DPM shows

• Markets categorised based on a scale of Markets categorised based on a scale of attractiveness to the organisationattractiveness to the organisation

• The organisation’s relative strengths in each of The organisation’s relative strengths in each of these marketsthese markets

• The relative importance of each marketThe relative importance of each market

Brief HistoryBrief History• This Directional Policy Matrix uses the GE multi-This Directional Policy Matrix uses the GE multi-

factor approach using the same fundamental factor approach using the same fundamental ideas as the Boston Consulting Group Matrix. ideas as the Boston Consulting Group Matrix.

• It provides for Market attractiveness on the y-axis It provides for Market attractiveness on the y-axis and Relative Strength on the x-axis. The matrix is and Relative Strength on the x-axis. The matrix is traditionally a four-box matrix but can also be a traditionally a four-box matrix but can also be a nine-box matrix.nine-box matrix.

Model Use and Applicability

Model WeaknessesModel Weaknesses

• Quadrant namesQuadrant namesMcDonald initially labeled the different quadrants McDonald initially labeled the different quadrants as those in the Boston Consulting Group matrix as those in the Boston Consulting Group matrix and received a lot of criticism from this. These and received a lot of criticism from this. These labels created confusion. More recently he merely labels created confusion. More recently he merely refers to these positions but does not label the refers to these positions but does not label the quadrants as they were in the past.quadrants as they were in the past.

• Products-for-marketsProducts-for-marketsThis concept is confusing to many people and This concept is confusing to many people and limits the analysis. limits the analysis.

Strategic EmphasisStrategic Emphasis• The McDonald DPM like other models of portfolio analysis The McDonald DPM like other models of portfolio analysis

attempts to define a firm’s strategic position and strategy attempts to define a firm’s strategic position and strategy alternatives. The accepted level at which a firm can be alternatives. The accepted level at which a firm can be analysed using the DPM is that of strategic business unit.analysed using the DPM is that of strategic business unit.

• Professor Malcolm McDonald of the Cranfield School of Professor Malcolm McDonald of the Cranfield School of Management developed the matrix to define Business Management developed the matrix to define Business Strengths in terms of Critical Success Factors (CSF’s). A Strengths in terms of Critical Success Factors (CSF’s). A critical success factor represents something that a critical success factor represents something that a company must do right in the eyes of the customer. company must do right in the eyes of the customer.

• For the first time the business strengths are looked at from For the first time the business strengths are looked at from the customer’s point of view and are therefore more the customer’s point of view and are therefore more objective. In the past defining the factors was a very objective. In the past defining the factors was a very subjective exercise from the company’s point of view. The subjective exercise from the company’s point of view. The Business Strengths in this matrix are relative strengths Business Strengths in this matrix are relative strengths (relative to the best in the market)(relative to the best in the market)

• The DPM can be used at any level in the organisation and The DPM can be used at any level in the organisation and for any kind of SBU.for any kind of SBU.

SummarySummary• Was developed to overcome the limitations seen in the BCG matrix Was developed to overcome the limitations seen in the BCG matrix

and to simplify the Shell directional policy and GE matrices, which and to simplify the Shell directional policy and GE matrices, which both illustrated a nine box matrix.both illustrated a nine box matrix.

• This matrix provides for Market attractiveness on the y-axis and This matrix provides for Market attractiveness on the y-axis and Relative Business Strength on the x-axis and is made up of four Relative Business Strength on the x-axis and is made up of four quadrants (but nine quadrants can also be used).quadrants (but nine quadrants can also be used).

• Business Strengths are defined in terms of Critical Success Factors Business Strengths are defined in terms of Critical Success Factors (CSF’s).(CSF’s).

• Factors on both matrices are weighted and scored. Relative Factors on both matrices are weighted and scored. Relative strength on the x-axis is included in the mathematical calculation strength on the x-axis is included in the mathematical calculation of the co-ordinates.of the co-ordinates.

• The circles are placed in any one of five positions on the matrix The circles are placed in any one of five positions on the matrix each with a specific generic strategy or guideline for each with a specific generic strategy or guideline for management. These are management. These are – Invest for growthInvest for growth– Maintain market position, manage for earningsMaintain market position, manage for earnings– SelectiveSelective– Manage for cashManage for cash– Opportunistic developmentOpportunistic development

• This matrix is a good one to use if the organisation wishes to This matrix is a good one to use if the organisation wishes to assess the competitors relative to themselves as it allows for a assess the competitors relative to themselves as it allows for a good analysis of the strengths and weaknesses of the competitors good analysis of the strengths and weaknesses of the competitors from the customers point of view.from the customers point of view.

ConclusionConclusion

There is always a better strategy There is always a better strategy than the one you have; you just than the one you have; you just haven't thought of it yethaven't thought of it yet

– – Sir Brian Pitman, former CEO of Lloyds Sir Brian Pitman, former CEO of Lloyds TSB, Harvard Business Review, April 2003TSB, Harvard Business Review, April 2003

ReferencesReferences

• Strategic Management-from Theory to Strategic Management-from Theory to Implementation, 4th editionImplementation, 4th edition

David HusseyDavid Hussey

• Business Portfolio Analysis by Hofer’s MethodBusiness Portfolio Analysis by Hofer’s Method– Ionescu Florin Tudor The Academy of Economic

Studies, Bucureti– Cescu tefan Claudiu The Academy of Economic

Studies, Bucureti– Cruceru Anca Francisca The Academy of Economic

Studies, Bucureti • http://www.cipher-sys.com/hofhelp/