1. HOFER’S MATRICES
AND DIRECTIONAL
POLICIES

2. 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.

3. 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

4. (COMPETITIVE POSITION)
(STAGE OF
EVOLUTION)
STRONG AVERAGE WEAK
DEVELOP
GROWTH
SUPER
GROWTH
MATURITY
DECLINE
HOFER’S MATRICES

5. 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.

6. 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”.

7. 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.

8. Advantages of Hofer’s 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 management’s attention from
the corporate level and focus on potential strategies
specific to the strategic business unit.

9. 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.

10. Directional Policy Matrix

11. 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.

12. Analysis of Your Enterprise Position
Invest Grow Harvest Divest
• High Market • High Market • Low Market • Low Market
Attractiveness Attractiveness Attractiveness Attractiveness
• High Business • Low Business • High Business • Low Business
Strengths Strengths Strengths Strengths
• This is the • You are in an • In this quadrant • Think carefully about
ideal quadrant. uncomfortable you have high what you are doing to
• Your strengths quadrant. strengths in a be in this quadrant.
are directed at a • The market potential market that has • The market is not
highly is attractive but you lost its particularly attractive
attractive do not have the attractiveness in and your business
market. business strengths terms of future strengths are below
• Invest your necessary for being potential. average here.
best resources really successful. • It is still good for • Keep in this segment
in those parts • The options facing near term profits, only if it supports a
of your you are either to take so maintain the more profitable part
business which what you can while it position for as of your business (for
are in this is still possible or to long as possible. instance, if this
quadrant. invest in building a segment completes a
better competitive product line range) or
position. if it absorbs some of
• You must be selective the overhead costs of
in your efforts here, a more profitable
as this segment will segment.
cost you to invest in
every aspect of the
business.

13. 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.

15. 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

17. Best Use
The DPM shows
• Markets categorised based on a scale of attractiveness to
the organisation
• The organisation’s 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.

18. Model Use and Applicability

19. 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.

20. Strategic Emphasis
• The McDonald DPM like other models of portfolio analysis attempts
to define a firm’s 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 (CSF’s). 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
customer’s point of view and are therefore more objective. In the
past defining the factors was a very subjective exercise from the
company’s 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.

21. 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
(CSF’s).
• Factors on both matrices are weighted and scored. Relative strength on the
x-axis is included in the mathematical calculation of the co-ordinates.
• 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.

22. 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

23. References
• Strategic Management-from Theory to
Implementation, 4th edition
David Hussey
• Business Portfolio Analysis by Hofer’s 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/