A grand strategy matrix consists of a four-quadrant graph, similar to a SWOT matrix, that lists strategic options for companies in either strong or weak competitive positions in industries experiencing either rapid or slow growth.
The idea of a strategy matrix is to utilize a variety of analyses—or matrices—in order to consider whether a company is manipulating its Strengths, Opportunities, or Weaknesses for optimal position in an industry as well as its exposure to a Lagging area.
Matrix planners often seek growth as a way to strengthen themselves against competitors and the overall industry.
Analysis of industry position leads to decision making on how to utilize company resources such as capital or R&D more efficiently and defines strategies for the different types of industry growth, either rapid or slow. All strategic decisions affect other areas of a company’s strategy. Thus one needs to consider possible competitive reactions and possible changes in customer behavior. Sometimes an analysis of the weaknesses of competitors, or of industry trends, suggests the need to develop new products or technologies.
Structure Of The Strategy Matrix
Matrix structure is defined by the position of the company in relation to the strength, opportunity, and weakness of the industry or market, and in regard to the growth rate of the industry. Figure 1 shows an example of a strategy matrix with “strong” and “weak” company positions. Position is defined relative to the industry above and below in the matrix. Thus, the matrix begins with the best-performing companies—those of the greatest strength—at the top left of the matrix. The bottom right corner of the matrix displays the weakest companies, while the bottom left corner of the matrix depicts the companies with the greatest weakness.
The next four segments of this article explore the four-quadrant strategy matrix in a sequential manner. The order of the quadrants is very significant because of their relationship in both industry growth and company strengths and weaknesses. In this matrix, R&D strength is the upper right-hand quadrant. Industry growth is therefore in the bottom right half of the matrix. Company weakness then lies in the bottom left of the matrix.
Quadrant 1: The strongest companies in the industry with the strongest R&D spending may choose to invest more money into R&D efforts in order to proactively combat the most threatening weaknesses such as low quality and limited functionality. Conversely, companies in this quadrant can decrease R&D spending and allow competitors in the strategy matrix to grow faster and take the lead in the industry.
Quadrant 2: The strongest companies often increase investment in R&D, depending on how they view their opportunities in the industry. Companies with strong market share and R&D spending may choose to increase their R&D spending in order to promote dominance of market share and possibly increase their market share further. However, these companies may also choose to rely on the growth of their market share instead of increasing spending, take the lead, and allow other companies to increase their market share, while still beating out the competition with value-added products.
Quadrant 3: Companies under the “weak” label are typically based on size of market share. Their strategic decisions can include R&D to increase their market share, out-spend the industry on R&D, or rely on differentiation to increase market share. Companies that are weak or leap-frogging relative to industry growth may be more willing to take the lead in research and development than companies with strong positions.
Quadrant 4: Companies in this quadrant are “weak relative to the industry” as well as “weak relative to R&D spending.” Companies that are in this quadrant are most fearful of industry growth over a short amount of time. These firms are likely to choose to operate in the slow growth or no-growth industry yet may need to invest in R&D to continue to innovate and provide changes that meet their customers’ ever-changing needs. Although these companies may choose to invest in R&D, they must choose to do so at a lower rate (relative to industry growth) than other companies.
Matrices have the ability to apply different strategies to different situations in order to maximize the potential. When a knowledge of one’s position in this strategy matrix is obtained, it is possible to choose the best strategy to maximize the effects of a strategy tool based on the information.
Let’s now examine the strategy matrix through the lenses of growth, R&D spending, and market share.
Position In The Strategy Matrix: Growth
Each foundation of the matrix develops a different strategy which determines a company’s position in the strategy matrix. The foundation of this matrix is growth.
The chart below illustrates the growth rates of a variety of industries. “Rapid growth” is defined as double digit or more than 10% a year for more than two consecutive years, while “slow growth” is defined as less than 10% a year. The importance of these industry growth figures should be understood. A company is likely to have a R&D spending rate that is higher than an industry, and is probably more profitable in these industries than in low-growth industries. High growth might lead to high R&D spending in a wide variety of industries including automotive, biotechnology, and computers. These industries often display superior earnings and stock market performance.
If the industry is rapidly growing, a strategy can utilize a low R&D spending and focus on a degree of differentiation strategy. If the industry is slowly growing, then a relatively higher R&D spending level can be used to increase market share.
In the case of rapidly growing industries, a high level of differentiation will generally produce higher returns than a low level of differentiation. However when the growth is very high or in the case of no-growth industries, increasing the differentiation level may only yield additional costs (with no returns). This is the case for industries where a company can maintain a leading market position but other industries can outperform the growth of the market.
A Company With A Weak Position Within The Industry
More generally, let say that a company is strong in R&D spending, industry growth and company size, but is weak in terms of pure R&D spending. An example of this is the computer industry relative to the semiconductor industry. For this weak company, you may begin with an equilibrium of investing less than the market and selling a similar product to the market. By increasing the expenditure in R&D, the company may be able to build its competitive advantage in the market and increase its market share.
When you increase investment in R&D in a weak industry, the resulting increase in sales may provide a boost to its market position. Next, it may take market share to increase its investment in R&D in order to build its strengths and ultimately to move into a strong industry position. For example, a computer manufacturer that enters a rapidly growing market sector probably follows a growth strategy.
A Company With A Strong Position In The Industry
For a strong company, its R&D spending is generally high, and it may be satisfied with its market share for the industry it is in. The growth of the industry may be low or a little higher than the company’s industry size, but R&D spending is high relative to the industry, usually due to its strong market position and established product. If R&D spending is not at the forefront of the strategic objectives, it may decrease its R&D spending, which increases market share and generates a better balance of the company’s cash flow. This strategy will allow the company to decrease research expenditures and still maintain its competitive position with the increased spending of the industry.
A Company With A Weak Position In R&D Spending
When a company has a weak position in terms of R&D spending, it may have a favorable growth rate or a high market share. However, a low level of R&D spending creates a weakness and is the primary cause of the company’s weakness. Thus, the company must improve its R&D spending to increase its market share.
A Company With Market Growth And Weak R&D Spending
The basic objectives of a growth strategy are to increase market share and maximize profits. The difference between the two objectives, as stated, is that to maximize profits, R&D spending must be increased in order to increase market share and return on investment.
Part 2: Definition Of Basic Words Used In This Article
Market share is the volume of sales in an industry or market expressed as a percentage of the total sales from all participants in the industry or market. For example, a share of 30% means that the company has 30 units of sales in the industry or market while the other 70% of the companies are divided among the remaining 70 companies.
Growth rate is the change in industry sales or market over a specific time period. Industry growth is calculated by taking the overall industry sales at the beginning of the time period and then subtracting the sales at the end of the time and dividing that by the market size at the beginning. The growth rate is typically reported in terms of a growth percentage.
EBIT stands for earnings before interest and taxes. It is a measure of profitability that takes interest and taxes into account. More specifically, EBIT is the factor by which net income is reduced to security the view of operating units with different capital structures, tax rates, and cost structures. In other words, EBIT is more comprehensive method by which to view a company’s total profit because it takes into account extra factors that may influence net income such as interest, taxes, and other expenditures. One can calculate EBIT by either taking net income and subtracting federal and state taxes and other expenditures or:
Gross margin is the percentage the company earns before subtracting additional expenses such as interest, taxes, and depreciation.
Net Profit Margin
Net Profit Margin is the ratio of net profit (or gross margin) under the business accounting. Net profit is the result after subtracting additional expenses such as interest, depreciation, and taxes from revenue.
Return On Investment
Return on investment is a company’s net income divided by its total investment. This ratio shows how much profit a company earned in relation to the revenue it put out in the form of investment.