More than twenty years ago, Michael Porter wrote an article in Harvard Business titled "What is Strategy? " He wrote, “Competitive strategy is simply to be different. This means choosing a different set of activities to deliver a unique combination of value to customers.” He also added a “no” to activities, products, or services that create no added value for customers, and he recommends identifying a strategic position that is not being occupied by other companies and competitors and the profit model is clearly built and creates value in a way that others cannot. Gary Hamel described strategic goals as ambition that transcends current resources and capabilities of the company and this approach indicates that companies should expand their resources to meet their ambitions rather than limiting strategies to existing resources.
The SPACE and SWOT are two important tools for defining the strategic position of organizations and the key difference among them is that the SWOT matrix focuses on highlighting the strengths and weaknesses (as internal factors) and opportunities and threats (as external factors) to form the strategy, while the SPACE matrix concentrate on evaluating the strategic position related to the competitive position of the organization by analyzing the financial strength and competitive advantage (as internal factors), environmental stability and industry strength (as external factors) to shape and formulate the strategy. Each of the internal and external factors in the SPACE matrix has specific KPIs, as the financial strength factor is measured by evaluating: return on investment, financial leverage, liquidity, required capital, cash flow, ease of exit from the market and the risks involved in the work, and the competitive advantage factor is measured by evaluating: market share, product quality, product life cycle, customer loyalty, technological knowledge and vertical integration, the industry strength factor is measured by evaluating: growth rate, profit potential, financial and technological stability, know-how, resource utilization, capital intensity, and easy access to the market. As for the environmental stability factor, it is measured by evaluating: technological change, inflation rates, demand change, barriers to entry to the market, competitive pressure, and the price range of competing products. The SPACE Matrix is divided into four parts where each quarter suggests a different type of strategy depending on which quadrant the result of the analysis places in the organization.
1. Address the metrics under the key factors to determine financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS).
2. Create ratings ranging from +1 (worst) to +6 (best) for each of the metrics that make up financial and industry strength.
3. Create ratings ranging from -1 (best) to -6 (worst) for each of the measures that constitute environmental stability and competitive advantage
4. Calculate the mean score for all four factors by summing the given values and dividing by the number of measures included in the respective dimension.
5. Plotting the average scores for all four factors on the Y & X axis.
6. Determine the strategic directions recommended for adoption by the organization: aggressive, competitive, defensive, or conservative.
When the strategy indicator is located in the aggressive quadrant (upper right quadrant) of the SPACE matrix, the organization is in a good position to use internal strength: to take advantage of external opportunities, to overcome internal weaknesses, and to avoid or reduce external threats. Whereas if the indicator is located in the conservative quadrant (top left quadrant) of the space matrix, the organization will be in a favourable position to adopt penetration strategies, develop and diversify products.
When the indicator is located in the lower-left or defensive quadrant of the space matrix, this indicates that the company may need to focus on correcting internal weaknesses and avoiding external threats and that's include cost-cutting, divest strategy, and focused diversification. Finally, when the indicator appears in the lower right quadrant or competitive quadrant of the space matrix, it indicates that competitive strategies are appropriate. Competitive strategies include backward, forward, and horizontal integration; market penetration; market development, product development; a joint venture.