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HOFERS MATRICES

AND DIRECTIONAL
POLICIES
BY:
(039)
(045)

AMIT JHA
GAURAV GANDHI

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
EVOLUTIO
N)

STRONG

AVERAGE

WEAK

DEVELO
P
GROWT
H
SUPER
GROWT
H
MATURIT
Y
DECLIN
E

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.

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.

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

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

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 coordinates.
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


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 /