CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 181

environment may not be revealed in a single matrix. Third, SWOT analysis may lead the
firm to overemphasize a single internal or external factor in formulating strategies. There
are interrelationships among the key internal and external factors that SWOT does not
reveal that may be important in devising strategies.

The Strategic Position and Action Evaluation (SPACE) Matrix

The Strategic Position and Action Evaluation (SPACE) Matrix, another important Stage 2
matching tool, is illustrated in Figure 6-4. Its four-quadrant framework indicates whether
aggressive, conservative, defensive, or competitive strategies are most appropriate for a
given organization. The axes of the SPACE Matrix represent two internal dimensions
(financial position [FP] and competitive position [CP]) and two external dimensions
(stability position [SP] and industry position [IP]). These four factors are perhaps the most
important determinants of an organization’s overall strategic position.5
Depending on the type of organization, numerous variables could make up each of the
dimensions represented on the axes of the SPACE Matrix. Factors that were included
earlier in the firm’s EFE and IFE Matrices should be considered in developing a SPACE
Matrix. Other variables commonly included are given in Table 6-2. For example, return on
investment, leverage, liquidity, working capital, and cash flow are commonly considered to
be determining factors of an organization’s financial strength. Like the SWOT Matrix, the
SPACE Matrix should be both tailored to the particular organization being studied and
based on factual information as much as possible.

FIGURE 6-4

The SPACE Matrix

Conservative FP Aggressive
• Market penetration +6 • Backward, forward, horizontal
• Market development integration
• Product development +5 • Market penetration
• Related diversification • Market development
+4 • Product development
• Diversification (related or unrelated)
+3

+2

+1

0
CP IP
–7 –6 –5 –4 –3 –2 –1 0 +1 +2 +3 +4 +5 +6 +7

–1

Defensive –2 Competitive
• Retrenchment • Backward, forward, horizontal
• Divestiture –3 integration
• Liquidation • Market penetration
–4 • Market development
• Product development
–5

–6

–7
SP
Source: Adapted from H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A
Methodological Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982): 155.
182 PART 2 • STRATEGY FORMULATION

TABLE 6-2 Example Factors That Make Up the SPACE

Matrix Axes
Internal Strategic Position External Strategic Position
Financial Position (FP) Stability Position (SP)
Return on investment Technological changes
Leverage Rate of inflation
Liquidity Demand variability
Working capital Price range of competing products
Cash flow Barriers to entry into market
Inventory turnover Competitive pressure
Earnings per share Ease of exit from market
Price earnings ratio Price elasticity of demand
Risk involved in business
Competitive Position (CP) Industry Position (IP)
Market share Growth potential
Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Extent leveraged
Capacity utilization Resource utilization
Technological know-how Ease of entry into market
Control over suppliers and distributors Productivity, capacity utilization

Source: Adapted from H. Rowe, R. Mason, and K. Dickel, Strategic Management and
Business Policy: A Methodological Approach (Reading, MA: Addison-Wesley Publishing
Co. Inc., © 1982): 155–156.

The steps required to develop a SPACE Matrix are as follows:

1. Select a set of variables to define financial position (FP), competitive position (CP),
stability position (SP), and industry position (IP).
2. Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the vari-
ables that make up the FP and IP dimensions. Assign a numerical value ranging
from -1 (best) to -7 (worst) to each of the variables that make up the SP and CP
dimensions. On the FP and CP axes, make comparison to competitors. On the IP
and SP axes, make comparison to other industries.
3. Compute an average score for FP, CP, IP, and SP by summing the values given to
the variables of each dimension and then by dividing by the number of variables
included in the respective dimension.
4. Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE
Matrix.
5. 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.
6. 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: aggressive, competitive, defensive, or conservative.
Some examples of strategy profiles that can emerge from a SPACE analysis are shown
in Figure 6-5. The directional vector associated with each profile suggests the type of
strategies to pursue: aggressive, conservative, defensive, or competitive. When a firm’s
directional vector is located in the aggressive quadrant (upper-right quadrant) of the SPACE
Matrix, an organization is in an excellent position to use its internal strengths to (1) take
advantage of external opportunities, (2) overcome internal weaknesses, and (3) avoid exter-
nal threats. Therefore, market penetration, market development, product development,
backward integration, forward integration, horizontal integration, or diversification, can be
feasible, depending on the specific circumstances that face the firm.
 CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 183

FIGURE 6-5

Example Strategy Profiles

Aggressive Profiles
FP FP
(+1,+5)
(+4,+4)

CP IP CP IP

SP SP

A financially strong firm that has achieved A firm whose financial strength is a
major competitive advantages in a growing dominating factor in the industry
and stable industry
Conservative Profiles
FP FP

(–2,+4)
(–5,+2)

CP IP CP IP

SP SP
A firm that has achieved financial strength A firm that suffers from major competitive
in a stable industry that is not growing; the disadvantages in an industry that is
firm has few competitive advantages technologically stable but declining in sales
Competitive Profiles
FP FP

CP IP CP IP

(+5,–1)
(+1,–4)
SP SP
A firm with major competitive advantages An organization that is competing fairly
in a high-growth industry well in an unstable industry
Defensive Profiles
FP FP

CP IP CP IP

(–1,–5)

(–5,–1)
SP SP
A firm that has a very weak competitive A financially troubled firm in a very
position in a negative growth, stable industry unstable industry
Source: Adapted from H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading,
MA: Addison-Wesley Publishing Co. Inc., © 1982): 155.
184 PART 2 • STRATEGY FORMULATION

When a particular company is known, the analyst must be much more specific in
terms of implied strategies. For example, instead of saying market penetration is a recom-
mended strategy when your vector goes in the Conservative quadrant, say that adding 34
new stores in India is a recommended strategy. This is a very important point for students
doing case analyses because a particular company is generally known, and terms such as
market development are too vague to use. That term could refer to adding a manufacturing
plant in Thailand or Mexico or South Africa—so students—Be specific to the extent possi-
ble regarding implications of all the matrices presented in Chapter 6.
The directional vector may appear in the conservative quadrant (upper-left quadrant) of
the SPACE Matrix, which implies staying close to the firm’s basic competencies and not tak-
ing excessive risks. Conservative strategies most often include market penetration, market
development, product development, and related diversification. The directional vector may be
located in the lower-left or defensive quadrant of the SPACE Matrix, which suggests that the
firm should focus on rectifying internal weaknesses and avoiding external threats. Defensive
strategies include retrenchment, divestiture, liquidation, and related diversification. Finally,
the directional vector may be located in the lower-right or competitive quadrant of the SPACE
Matrix, indicating competitive strategies. Competitive strategies include backward, forward,
and horizontal integration; market penetration; market development and product development.
A SPACE Matrix analysis for a bank is provided in Table 6-3. Note that competitive
type strategies are recommended.

TABLE 6-3 A SPACE Matrix for a Bank

Financial Position (FP) Ratings
The bank’s primary capital ratio is 7.23 percent, which is 1.23 percentage points over the generally required ratio of 6 percent. 1.0
The bank’s return on assets is negative 0.77, compared to a bank industry average ratio of positive 0.70. 1.0
The bank’s net income was $183 million, down 9 percent from a year earlier. 3.0
The bank’s revenues increased 7 percent to $3.46 billion. 4.0
9.0
Industry Position (IP)
Deregulation provides geographic and product freedom. 4.0
Deregulation increases competition in the banking industry. 2.0
Pennsylvania’s interstate banking law allows the bank to acquire other banks in New Jersey, Ohio, Kentucky, the
District of Columbia, and West Virginia. 4.0
10.0
Stability Position (SP)
Less-developed countries are experiencing high inflation and political instability. -4.0
Headquartered in Pittsburgh, the bank historically has been heavily dependent on the steel, oil, and gas industries. -5.0
These industries are depressed.
Banking deregulation has created instability throughout the industry. -4.0
-13.0
Competitive Position (CP)
The bank provides data processing services for more than 450 institutions in 38 states. -2.0
Superregional banks, international banks, and nonbanks are becoming increasingly competitive. -5.0
The bank has a large customer base. -2.0
-9.0
Conclusion
SP Average is -13.0 ÷ 3 = -4.33 IP Average is +10.0 ÷ 3 = 3.33
CP Average is -9.0 ÷ 3 = -3.00 FP Average is +9.0 ÷ 4 = 2.25
Directional Vector Coordinates: x-axis: -3.00 + (+3.33) = +0.33
y-axis: -4.33 + (+2.25) = -2.08
The bank should pursue Competitive Strategies.