THE SPACE MATRIX

Contents
Contents..................................................................................................................... 1 1.Introduction.............................................................................................................. 2 2.Literature review......................................................................................................2 3. INSURANCE COMPANY ............................................................................................5 4.RECOMMENDATIONS................................................................................................8 Market penetration is suggested strategy for the insurance company because it enters the market in which its products already exist. The best way is to gain competitors' part of their market share. Also, through marketing and promotion strategies company can attract non-users of the products or persuade current users to start using more products for example, those customers who are already using life insurance can be attracted to car insurance and similar. ...................................8 5. CONCLUSION........................................................................................................... 8 LITERATURE ............................................................................................................... 9

1.Introduction
This assignment is about application of the SPACE Matrix method of strategic management for evaluation of a chosen company an international insurance company. The aim is to provide managers information for the preparation of the strategic plans for the company. The core concept of the paper is development of the systematic procedures in the decision making process about the companys future. We will discuss the characteristics of the target company, take a closer look of strategic management, define a planning process, evaluate tools and analysis techniques, present some issues to avoid and conclude with some suggested future activities. We will use the SPACE Matrix to define the companys market position and recommend the best suitable strategy. The SPACE matrix is a management tool used to analyze a company and its environment in order for the managers to be able to determine what type of a strategy a company should undertake in various situations on markets, for example when entering new markets, or introducing new products etc. The Strategic Position & ACtion Evaluation matrix i.e. SPACE matrix focuses on strategy formulation related to the competitive position of a company.

2.Literature review
Strategic planning is a necessity if a company wishes to respond successfully to the challanges and the opportunities on the highly competitive global market. Strategic planning can be defined as a process which describes a direction a company pursues in its environment and guidelines in the allocation of resources and efforts.1 The Strategic Position and Action Evaluation (SPACE) Matrix, is an important tool in strategic management. It can be best described through the Figure 1.

Six principles for making new growth initiatives work, Adrian Slywotzky and Richard Wise, Ivey Business Journal, May/June 2003. Available at http://www.iveybusinessjournal.com/topics/strategy/three-strategies-for-achievingand-sustaining-growth 2

Figure 1. The Space Matrix

Conservative

FS +6 +5 +4 +3 +2 +1

Aggressive

CA -6 -5 -4 -3 -2 -1 0 -1 -2 -3 -4 -5 Defensive -6 ES Competitive +1 +2 +3 +4 +5 +6

IS

Source: H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading, Massachusetts: Addison-Wesley Publishing Co. Inc., 1982): 155. The four-quadrant system divides space into four possible strategies : aggressive, conservative, defensive, or competitive. Each is the most suitable for the chosen company. This system is referred to as a SPACE Matrix. The vertical axis of the SPACE Matrix represent two internal factors of a company, its financial strength FS and competitive advantage CA . The horizontal axis represents two external dimensions -environmental stability ES and industry strength IS. These factors are considered to be the most important factors of a company's overall strategic position.
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Depending on the type of organization, there is a number of factors that can be included into dimensions on the axes of the SPACE Matrix such as return on investment, leverage, liquidity, working capital and cash flow . The SPACE Matrix is created for each organization alone, based on the information gathered while studying it. The process of creating particular companys SPACE Matrix can be done through several steps 2. First step is choosing the factors which will be defined as financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS). Internal strategic factors are financial strength (FS) and competitive advantage (CA). Financial strenght can be chosen among return on investment, working capital, risk involved in business, leverage, cash flow and others. Competitive advantage can be selected from product quality, technological know-how, market share, product life cycle, control over suppliers and distributors, customer loyalty etc. Environmental stability and industry strength are external factors. Dimensions of environmental stability can be demand variability, technological changes, price elasticity of demand, rate of inflation, barriers to entry into market, competition and others. Industry strength dimension can be represented by financial stability, growth potential, resource utilization, productivity, profit potential, technological know-how, capacity utilization etc. Next step is to assign a numerical value ranging from +1 (worst) to +6 (best) to each of the factors for both vertical and horizontal axis. Then, calculate average score for FS, CA, IS, and ES by summing the values given to the variables of each dimension and dividing by the number of variables summed. Draw the points of the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE Matrix. Join the two scores with the values on the x-axis and mark the resulting point X. Add the two scores on the y-axis and plot the resultant point on Y. Then, plot the intersection of the new xy point and draw a directional vector from the origin of the SPACE Matrix through the new intersection point. This vector represents the strategy recommended for the organization in question: aggressive, competitive, defensive or conservative. For example, if a companys directional vector is drawn in the aggressive quadrant of the SPACE Matrix, this company is in a position to utilize its internal strengths in order to take advantage of external opportunities, overcome internal weaknesses and avoid external threats. For this company market penetration and development, horizontal integration, conglomerate or horizontal diversification, or combination of these strategies is recommended. On the other hand, if the directional vector is in the upper-left conservative quadrant of the SPACE Matrix, taking excessive risks might not be a good solution. Most common conservative strategies are market development, product development, and concentric diversification. If the directional vector is located in the lower-left defensive quadrant of the SPACE Matrix, it could suggest that a company should focus on avoiding external threats. Defensive strategies often include retrenchment, and concentric diversification. The directional vector located in the lower-right competitive quadrant of the SPACE Matrix, indicates competitive strategies such as backward, forward, and horizontal integration, market penetration, product development and joint venture.3

H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading, Massachusetts: Addison-Wesley Publishing Co. Inc., 1982): 155.
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3. INSURANCE COMPANY
As an example of the utilization of the SPACE Matrix, we have chosen an insurance company. It is an international company, and it has a branch in Serbia. Serbian insurance market is rather competitive. Many global insurance companies have its subsidiaries here, and they compete for their market share. Also, the market is unstable, in both political and economical terms. The public awareness of the importance of the insurance, especially when it comes to life insurance as one of the most important products of the company, is yet to be developed. Our company is still new to the market, but it has a long years of successful practice in other countries in Europe, it is well known and with good reputation. The company has 150 years long tradition. It is present in over 20 Europian countries and in 2011 its profit on ordinary activities was increased by 19.2% to 54 million while recurring premiums were increased by 2.4%.Insurance benefits are decreased by 5.3% but he claims and benefits ratio increased across all insurance lines by 1.9 %. The loss ratio improved to 56.5% . Overall operating expenses fell by 1.7% . Investments increased by 3.3% compared to 2010. Net investment income rose by 18% . The total equity of the insurance company was increased by 17% compared with December 2010 to 1,200 million.The average number of employees in the company was around 15000 in the end of 2011 of which 40 % employed in sales and the rest in administration. FINANCIAL STRENGTH Insurance companys profit increased by 19.2% compared to the earlier year - rating +5 Net investment income rose by 18% compared to the earlier year - rating +3 The total equity of the insurance company was increased by 17% compared to the earlier year rating +2 The loss ratio improved to 56.5% compared to the earlier year - rating +1 INDUSTRY STRENGTH Deregulation enables easy market entry rating +3 The market has a significant growth potential - rating +3 Deregulation in the insurance market increases competition- rating +1 ENVIRONMENTAL STABILITY

H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading, Massachusetts: Addison-Wesley Publishing Co. Inc., 1982): 155.
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Developing countries experience high inflation and political instability - rating -4 Deregulation in the banking system creates instability throughout the industry- rating -5 Both local and international competition- rating -3 COMPETITIVE ADVANTAGE The company has developed technological know-how - rating -1 The company has 150 years long tradition and good reputation rating -2 The companys product quality is guaranteed by a large number of satisfied cutomer rating -3

FINANCIAL STRENGTH Total : +11 INDUSTRY STRENGTH Total : +7 ENVIRONMENTAL STABILITY Total : -12 COMPETITIVE ADVANTAGE Total : -6 FS FINANCIAL STRENGTH Average: +2.75 IS INDUSTRY STRENGTH Average : +2,3 ES ENVIRONMENTAL STABILITY Average : -4 CA COMPETITIVE ADVANTAGE Average : -2 DIRECTIONAL VECTOR COORDINATES : Horizontal axis IS + CA = 2.3+(-2) =+ 0.3 Vertical axis FS +ES = 2.75 +(-4)= -1.25 The coordinates of the directional vector will be plotted into the Space matrix as shown in the Figure 2.

Figure 2. The Space Matrix with directional vector

Conservative

FS +6 +5 +4 +3 +2 +1

Aggressive

CA -6 -5 -4 -3 -2 -1 0 -1 -2 -3 -4 -5 Defensive -6 ES Competitive +1 +2 +3 +4 +5 +6

IS

The SPACE Matrix shows that the bank should pursue competitive strategies since directional vector is located in the competitive quadrant, in the lower-right quadrant of the SPACE Matrix. Competitive strategies include backward, forward, and horizontal integration, market penetration, market development, product development and joint venture4.

M.E.Porter, Competitive Advantage:Creating and sustaining superior performance,The Free Press, New York, 1985

4.RECOMMENDATIONS
Market penetration is suggested strategy for the insurance company because it enters the market in which its products already exist. The best way is to gain competitors' part of their market share. Also, through marketing and promotion strategies company can attract non-users of the products or persuade current users to start using more products for example, those customers who are already using life insurance can be attracted to car insurance and similar. Market development is a growth strategy which includes development of the product variations suitable to the new market customers, which could be useful considering the low purchasing power and strong competition. Different pricing policies is a good strategy to attract new customers or create new market segments. Also, technologically developed market allows application of new distribution channels, like Internet. Product development requires that the company should develop modified insurance products which can appeal to the new markets.

5. CONCLUSION
Above analysis shows that the SPACE Matrix can be used as the basis of strategy selection. Plotting the directional vector is based on the mean values of each chosen dimension. The mean values are calculated from specific ratings assigned to each chosen variable in the dimensions. The SPACE Matrix depends on the choice of the variables constituting each factor and on how much these values really represent the quantification of the factors. The selection and the ratings assignment should be done by managers with long working experience and extremely good knowledge of the company and the environment. It is required that the selection of the variables is done with great care, eliminating the less important and paying attention to the key success factors. If organized apropriatelly the SPACE Matrix can provide an insight into the organizations key strengths and weaknesses. If recognized, the strengths can be exploited in development and improvement of the companys business, enabling it to profit from further opportunities and preventing through appropriate measures possible deficiencies.

LITERATURE
1. H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A

Methodological Approach (Reading, Massachusetts: Addison-Wesley Publishing Co. Inc., 1982): 155. 2. M.E.Porter, Competitive Advantage:Creating and sustaining superior performance,The Free Press, New York, 1985
3. Slywotzky A.and Wise R., Six principles for making new growth initiatives work, ,Ivey Business Journal, May/June 2003. Available at http://www.iveybusinessjournal.com/topics/strategy/three-strategies-forachieving-and-sustaining-growth

Internet sources 1.http://tutor2u.net/business/strategy/ansoff_matrix.htm, accessed date 28.06.2012 2.http://www.investopedia.com/terms/h/horizontalintegration.asp#ixzz1z8Bc3KsR, accessed date 28.06.2012 3.http://www.maxi-pedia.com/SPACE+matrix+model+strategic+management+method, accessed date 28.06.2012 4.http://mba-lectures.com/tag/space-matrix-example, accessed date 28.06.2012 5.www.researchandwriting.org/index2.php, accessed date 28.06.2012