31363068 hofer’s-matrices-and-directional-policies

1. HOFER’S MATRICES HOFER’S MATRICES
AND DIRECTIONAL AND DIRECTIONAL
POLICIESPOLICIES

2. 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 strategic identify and examine the various strategic
alternatives that must be approached at alternatives that must be approached at
corporate level.corporate level.

3. POTENTIAL BENEFITSPOTENTIAL BENEFITS
•It encourages the promotion of competitive It encourages the promotion of competitive
analysis at the level of strategic business units.analysis at the level of strategic business units.
•Selective earmarking of financial resources by Selective earmarking of financial resources by
means of identification of strategic issues and by means of identification of strategic issues and by
means of adoption of a standardized and means of adoption of a standardized and
objective negotiation process.objective negotiation process.
•It helps to reduce risks, increases concentration It helps to reduce risks, increases concentration
and involvementand involvement

4. ((COMPETITIVE POSITION)COMPETITIVE POSITION)
STRONG AVERAGE WEAK
DEVELOP
GROWTH
SUPER
GROWTH
MATURITY
DECLINE
HOFER’S MATRICES
(STAGE OF
EVOLUTION)

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

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

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

8. Advantages of Hofer’s MatricesAdvantages of Hofer’s Matrices
•It provides an image regarding the manner of distribution It provides an image regarding the manner of distribution
of the businesses undertaken by a company during of the businesses undertaken by a company during
specific stages of a life cycle.specific stages of a life cycle.
•The company may predict how the present portfolio will The company may predict how the present portfolio will
develop in the future.develop in the future.
•It manages to divert the management’s attention from It manages to divert the management’s attention from
the corporate level and focus on potential strategies the corporate level and focus on potential strategies
specific to the strategic business unit.specific to the strategic business unit.

9. DisadvantagesDisadvantages
•Identification of Key Success Factors.Identification of Key Success Factors.
•Weight assignment to different Key Success Weight assignment to different Key Success
Factors can be difficult.Factors can be difficult.
•Managers tend to underestimate their Managers tend to underestimate their
weaknesses and overestimate their strengths.weaknesses and overestimate their strengths.

10. Directional Policy Matrix

11. Characterize Your EnterpriseCharacterize Your Enterprise
The expert system will position your enterprise on the The expert system will position your enterprise on the
chart based upon your description of: 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 its You can trace through the supporting analysis and its
conclusions, adjusting your input until you are satisfied conclusions, adjusting your input until you are satisfied
your description accurately characterizes your your description accurately characterizes your
enterprise.enterprise.

12. 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.

13. 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 axis is , and along the vertical axis is
a a company's competitive capabilitycompany's competitive capability
•The location of aThe location of a Strategic Business Unit (SBU) Strategic Business Unit (SBU)
in any cell of the matrix implies different strategic in any cell of the matrix implies different strategic
decisionsdecisions
•However decisions often span options and in However decisions often span options and in
practice the practice the zoneszones are an irregular shape and do are an irregular shape and do
not tend to be accommodated by box shapes. not tend to be accommodated by box shapes.
Instead they blend into each other.Instead they blend into each other.

15. Each of the zones is described as follows:Each of the zones is described as follows:
oLeaderLeader - Major resources are focused upon the SBU - Major resources are focused upon the SBU
oTry HarderTry Harder - Could be vulnerable over a longer period of time, but fine - Could be vulnerable over a longer period of time, but fine
for nowfor now
oDouble or QuitDouble or Quit - Gamble on potential major SBU's for the future - Gamble on potential major SBU's for the future
oGrowthGrowth - Grow the market by focusing just enough resources here - Grow the market by focusing just enough resources here
oCustodialCustodial - Just like a cash cow, milk it and do not commit any more - Just like a cash cow, milk it and do not commit any more
resourcesresources
oCash GeneratorCash Generator - Even more like a cash cow, milk here for expansion - Even more like a cash cow, milk here for expansion
elsewhereelsewhere
oPhased WithdrawalPhased Withdrawal - Move cash to SBU's with greater potential - Move cash to SBU's with greater potential
oDivestDivest - Liquidate or move these assets on a fast as you can - Liquidate or move these assets on a fast as you can

17. Best UseBest Use
The DPM showsThe DPM shows
•Markets categorised based on a scale of attractiveness to Markets categorised based on a scale of attractiveness to
the organisationthe organisation
•The organisation’s relative strengths in each of these The organisation’s relative strengths in each of these
marketsmarkets
•The relative importance of each marketThe relative importance of each market
Brief HistoryBrief History
•This Directional Policy Matrix uses the GE multi-factor This Directional Policy Matrix uses the GE multi-factor
approach using the same fundamental ideas as the Boston approach using the same fundamental ideas as the Boston
Consulting Group Matrix. Consulting Group Matrix.
•It provides for Market attractiveness on the y-axis and It provides for Market attractiveness on the y-axis and
Relative Strength on the x-axis. The matrix is traditionally a Relative Strength on the x-axis. The matrix is traditionally a
four-box matrix but can also be a nine-box matrix.four-box matrix but can also be a nine-box matrix.

18. Model Use and Applicability

19. Model WeaknessesModel Weaknesses
•Quadrant namesQuadrant names
McDonald initially labeled the different quadrants as McDonald initially labeled the different quadrants as
those in the Boston Consulting Group matrix and those in the Boston Consulting Group matrix and
received a lot of criticism from this. These labels created received a lot of criticism from this. These labels created
confusion. More recently he merely refers to these confusion. More recently he merely refers to these
positions but does not label the quadrants as they were positions but does not label the quadrants as they were
in the past.in the past.
•Products-for-marketsProducts-for-markets
This concept is confusing to many people and limits the This concept is confusing to many people and limits the
analysis. analysis.

20. Strategic EmphasisStrategic Emphasis
•The McDonald DPM like other models of portfolio analysis attempts The McDonald DPM like other models of portfolio analysis attempts
to define a firm’s strategic position and strategy alternatives. The to define a firm’s strategic position and strategy alternatives. The
accepted level at which a firm can be analysed using the DPM is accepted level at which a firm can be analysed using the DPM is
that of strategic business unit.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 Strengths in Management developed the matrix to define Business Strengths in
terms of Critical Success Factors (CSF’s). A critical success factor terms of Critical Success Factors (CSF’s). A critical success factor
represents something that a company must do right in the eyes of represents something that a company must do right in the eyes of
the customer. the customer.
•For the first time the business strengths are looked at from the For the first time the business strengths are looked at from the
customer’s point of view and are therefore more objective. In the customer’s point of view and are therefore more objective. In the
past defining the factors was a very subjective exercise from the past defining the factors was a very subjective exercise from the
company’s point of view. The Business Strengths in this matrix are company’s point of view. The Business Strengths in this matrix are
relative strengths (relative to the best in the market)relative strengths (relative to the best in the market)
•The DPM can be used at any level in the organisation and for any The DPM can be used at any level in the organisation and for any
kind of SBU.kind of SBU.

21. SummarySummary
•Was developed to overcome the limitations seen in the BCG matrix and to 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 simplify the Shell directional policy and GE matrices, which both illustrated a
nine box matrix.nine box matrix.
•This matrix provides for Market attractiveness on the y-axis and Relative 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 Business Strength on the x-axis and is made up of four quadrants (but nine
quadrants can also be used).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 strength on the Factors on both matrices are weighted and scored. Relative strength on the
x-axis is included in the mathematical calculation of the co-ordinates.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 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 specific generic strategy or guideline for 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 assess the 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 competitors relative to themselves as it allows for a good analysis of the
strengths and weaknesses of the competitors from the customers point of strengths and weaknesses of the competitors from the customers point of
view.view.

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

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