HOFERS MATRICES AND DIRECTIONAL POLICIES

BUSINESS PORTFOLIO ANALYSIS

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

POTENTIAL BENEFITS
It encourages the promotion of competitive

analysis at the level of strategic business units. Selective earmarking of financial resources by means of identification of strategic issues and by means of adoption of a standardized and objective negotiation process. It helps to reduce risks, increases concentration and involvement

(COMPETITIVE POSITION)
(STAGE OF EVOLUTION)

STRONG

AVERAGE

WEAK

DEVELOP GROWTH SUPER GROWTH MATURITY DECLINE

HOFERS MATRICES

Contd..
Strategic business unit A seems to be a potential
Star. It holds a large market share, it is in the stage of life cycle development and has a strong competitive position on the market. As such, unit A represents a potential candidate in the competition for corporate resource competition. Investments in unit B must take into account the fact that although it has a strong market position, its market share is quite small. strategy that may contribute to the increase of market share must be developed, thus accounting for the future necessary investment.

Contd
Unit C has a small market share, and it holds a
competitively weak position and it entered a small market whose development is underway. For the unit C a strategy residing in the elimination from the market must be applied, so that the investment for the first two units may be favored. Unit D is characterized by a strong competitive position on the market and it holds a large market share. In this case, it is recommended that investments be made with a view to maintaining the current position on the market. On the lung run, it will become a Cash Cow.

Contd
Unit E together with unit F are included into the

Cash Cow category and they should be capitalized on because of great cash flows that they generate. Unit G is included into the Dogs category and the management thereof is recommended, with a view to generating short-term cash flows in as much as it is possible. Nevertheless, on the long term, the strategy of limitation or liquidation on the market must be selected.

Advantages of Hofers Matrices

It provides an image regarding the manner of

distribution of the businesses undertaken by a company during specific stages of a life cycle. The company may predict how the present portfolio will develop in the future. It manages to divert the managements attention from the corporate level and focus on potential strategies specific to the strategic business unit.

Disadvantages
Identification of Key Success Factors. Weight assignment to different Key Success

Factors can be difficult. Managers tend to underestimate their weaknesses and overestimate their strengths.

Directional Policy Matrix

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

You can trace through the supporting analysis and its

conclusions, adjusting your input until you are satisfied your description accurately characterizes your enterprise.

Analysis of Your Enterprise Position Invest High Market Attractiveness High Business Strengths Grow High Market Attractiveness Low Business Strengths Harvest Low Market Attractiveness High Business Strengths 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. Divest Low Market Attractiveness Low Business Strengths 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.

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.

Shell Directional Policy Matrix

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

profitability, and along the vertical axis is a company's competitive capability The location of a Strategic Business Unit (SBU)

in any cell of the matrix implies different strategic decisions However decisions often span options and in practice the zones are an irregular shape and do not tend to be accommodated by box shapes. Instead they blend into each other.

Each of the zones is described as follows:

o Leader - Major resources are focused upon the SBU o Try Harder - Could be vulnerable over a longer period of time, but fine for now o Double or Quit - Gamble on potential major SBU's for the future o Growth - Grow the market by focusing just enough resources here o Custodial - Just like a cash cow, milk it and do not commit any more resources

o Cash Generator - Even more like a cash cow, milk here for expansion elsewhere
o Phased Withdrawal - Move cash to SBU's with greater potential o Divest - Liquidate or move these assets on a fast as you can

Best Use
The DPM shows Markets categorised based on a scale of attractiveness to the organisation The organisations relative strengths in each of these markets The relative importance of each market

Brief History

This Directional Policy Matrix uses the GE multi-factor

approach using the same fundamental ideas as the Boston Consulting Group Matrix. It provides for Market attractiveness on the y-axis and Relative Strength on the x-axis. The matrix is traditionally a four-box matrix but can also be a nine-box matrix.

Model Use and Applicability

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

Products-for-markets
This concept is confusing to many people and limits the analysis.

Strategic Emphasis
The McDonald DPM like other models of portfolio analysis attempts
to define a firms strategic position and strategy alternatives. The accepted level at which a firm can be analysed using the DPM is that of strategic business unit.

Professor Malcolm McDonald of the Cranfield School of Management

developed the matrix to define Business Strengths in terms of Critical Success Factors (CSFs). A critical success factor represents something that a company must do right in the eyes of the customer. customers point of view and are therefore more objective. In the past defining the factors was a very subjective exercise from the companys point of view. The Business Strengths in this matrix are relative strengths (relative to the best in the market) kind of SBU.

For the first time the business strengths are looked at from the

The DPM can be used at any level in the organisation and for any

Summary

Was developed to overcome the limitations seen in the BCG matrix and to

simplify the Shell directional policy and GE matrices, which both illustrated a nine box matrix. This matrix provides for Market attractiveness on the y-axis and Relative Business Strength on the x-axis and is made up of four quadrants (but nine quadrants can also be used). Business Strengths are defined in terms of Critical Success Factors (CSFs). Factors on both matrices are weighted and scored. Relative strength on the x-axis is included in the mathematical calculation of the co-ordinates. The circles are placed in any one of five positions on the matrix each with a specific generic strategy or guideline for management. These are
Invest for growth Maintain market position, manage for earnings Selective Manage for cash Opportunistic development

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

Conclusion
There is always a better strategy than the one you have; you just haven't thought of it yet Sir Brian Pitman, former CEO of Lloyds TSB,
Harvard Business Review, April 2003

References
Strategic Management-from Theory to
Implementation, 4th edition
David Hussey

Business Portfolio Analysis by Hofers Method

Ionescu Florin Tudor The Academy of Economic
Cescu tefan Claudiu The Academy of Economic

Studies, Bucureti Studies, Bucureti Studies, Bucureti

Cruceru Anca Francisca The Academy of Economic

http://www.cipher-sys.com/hofhelp/