This document provides an overview of Hofer's matrices and directional policy matrices, which are tools used in business portfolio analysis. Hofer's matrices analyze a company's strategic business units based on their competitive position and stage of evolution. Directional policy matrices assess business units based on their market attractiveness and competitive strength to determine investment strategies. The document discusses the models' benefits and limitations, as well as how they can be used to evaluate strategic options and guide resource allocation across a company's business portfolio.

1. HOFER’S MATRICESHOFER’S MATRICES
AND DIRECTIONALAND DIRECTIONAL
POLICIESPOLICIES

2. BUSINESS PORTFOLIOBUSINESS PORTFOLIO
ANALYSISANALYSIS
• The analysis methods of the businessThe analysis methods of the business
portfolio analysis are used in order toportfolio analysis are used in order to
identify and examine the various strategicidentify and examine the various strategic
alternatives that must be approached atalternatives that must be approached at
corporate level.corporate level.

3. POTENTIAL BENEFITSPOTENTIAL BENEFITS
• It encourages the promotion of competitiveIt encourages the promotion of competitive
analysis at the level of strategic business units.analysis at the level of strategic business units.
• Selective earmarking of financial resources bySelective earmarking of financial resources by
means of identification of strategic issues and bymeans of identification of strategic issues and by
means of adoption of a standardized andmeans of adoption of a standardized and
objective negotiation process.objective negotiation process.
• It helps to reduce risks, increases concentrationIt helps to reduce risks, increases concentration
and involvementand involvement

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

5. Contd…..Contd…..
• Strategic business unit ”A” seems to be a potentialStrategic business unit ”A” seems to be a potential
”Star”. It holds a large market share, it is in the stage of”Star”. It holds a large market share, it is in the stage of
life cycle development and has a strong competitivelife cycle development and has a strong competitive
position on the market. As such, unit ”A” represents aposition on the market. As such, unit ”A” represents a
potential candidate in the competition for corporatepotential candidate in the competition for corporate
resource competition.resource competition.
• Investments in unit ”B” must take into account the factInvestments in unit ”B” must take into account the fact
that although it has a strong market position, its marketthat although it has a strong market position, its market
share is quite small. strategy that may contribute to theshare is quite small. strategy that may contribute to the
increase of market share must be developed, thusincrease of market share must be developed, thus
accounting for the future necessary investment.accounting for the future necessary investment.

6. Contd……Contd……
• Unit ”C” has a small market share, and it holds aUnit ”C” has a small market share, and it holds a
competitively weak position and it entered a smallcompetitively weak position and it entered a small
market whose development is underway. For the unit ”C”market whose development is underway. For the unit ”C”
a strategy residing in the elimination from the marketa strategy residing in the elimination from the market
must be applied, so that the investment for the first twomust be applied, so that the investment for the first two
units may be favored.units may be favored.
• Unit ”D” is characterized by a strong competitive positionUnit ”D” is characterized by a strong competitive position
on the market and it holds a large market share. In thison the market and it holds a large market share. In this
case, it is recommended that investments be made withcase, it is recommended that investments be made with
a view to maintaining the current position on the market.a view to maintaining the current position on the market.
On the lung run, it will become a “Cash Cow”.On the lung run, it will become a “Cash Cow”.

7. Contd……Contd……
• Unit ”E” together with unit ”F” are included into the “CashUnit ”E” together with unit ”F” are included into the “Cash
Cow” category and they should be capitalized onCow” category and they should be capitalized on
because of great cash flows that they generate.because of great cash flows that they generate.
• Unit ”G” is included into the “Dogs” category and theUnit ”G” is included into the “Dogs” category and the
management thereof is recommended, with a view tomanagement thereof is recommended, with a view to
generating short-term cash flows in as much as it isgenerating short-term cash flows in as much as it is
possible. Nevertheless, on the long term, the strategy ofpossible. Nevertheless, on the long term, the strategy of
limitation or liquidation on the market must be selected.limitation or liquidation on the market must be selected.

8. Advantages of Hofer’s MatricesAdvantages of Hofer’s Matrices
• It provides an image regarding the manner of distributionIt provides an image regarding the manner of distribution
of the businesses undertaken by a company duringof the businesses undertaken by a company during
specific stages of a life cycle.specific stages of a life cycle.
• The company may predict how the present portfolio willThe company may predict how the present portfolio will
develop in the future.develop in the future.
• It manages to divert the management’s attention fromIt manages to divert the management’s attention from
the corporate level and focus on potential strategiesthe corporate level and focus on potential strategies
specific to the strategic business unit.specific to the strategic business unit.

9. DisadvantagesDisadvantages
• Identification of Key Success Factors.Identification of Key Success Factors.
• Weight assignment to different Key SuccessWeight assignment to different Key Success
Factors can be difficult.Factors can be difficult.
• Managers tend to underestimate theirManagers tend to underestimate their
weaknesses and overestimate their strengths.weaknesses and overestimate their strengths.

10. Directional Policy Matrix

11. Characterize Your EnterpriseCharacterize Your Enterprise
The expert system will position your enterprise on theThe expert system will position your enterprise on the
chart based upon your description of:chart based upon your description of:
– Supplier Bargaining PowerSupplier Bargaining Power
– Threat of SubstitutesThreat of Substitutes
– Threat of New EntrantsThreat of New Entrants
– Competitive RivalryCompetitive Rivalry
– Buyer Bargaining PowerBuyer Bargaining Power
– Product QualityProduct Quality
– Product ValueProduct Value
– Relative Market ShareRelative Market Share
– ReputationReputation
– Customer LoyaltyCustomer Loyalty
– Staying PowerStaying Power
– ExperienceExperience
• You can trace through the supporting analysis and itsYou can trace through the supporting analysis and its
conclusions, adjusting your input until you are satisfiedconclusions, adjusting your input until you are satisfied
your description accurately characterizes youryour description accurately characterizes your
enterprise.enterprise.

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

13. Shell Directional Policy MatrixShell Directional Policy Matrix
• Another refinement upon the Boston MatrixAnother refinement upon the Boston Matrix
• Along the horizontal axis areAlong the horizontal axis are prospects forprospects for
sector profitabilitysector profitability, and along the vertical axis is, and along the vertical axis is
aa company's competitive capabilitycompany's competitive capability
• The location of aThe location of a Strategic Business Unit (SBU)Strategic Business Unit (SBU)
in any cell of the matrix implies different strategicin any cell of the matrix implies different strategic
decisionsdecisions
• However decisions often span options and inHowever decisions often span options and in
practice thepractice the zoneszones are an irregular shape and doare an irregular shape and do
not tend to be accommodated by box shapes.not tend to be accommodated by box shapes.
Instead they blend into each other.Instead they blend into each other.

15. Each of the zones is described as follows:Each of the zones is described as follows:
o LeaderLeader - Major resources are focused upon the SBU- Major resources are focused upon the SBU
o Try HarderTry Harder - Could be vulnerable over a longer period of time, but fine- Could be vulnerable over a longer period of time, but fine
for nowfor now
o Double or QuitDouble or Quit - Gamble on potential major SBU's for the future- Gamble on potential major SBU's for the future
o GrowthGrowth - Grow the market by focusing just enough resources here- Grow the market by focusing just enough resources here
o CustodialCustodial - Just like a cash cow, milk it and do not commit any more- Just like a cash cow, milk it and do not commit any more
resourcesresources
o Cash GeneratorCash Generator - Even more like a cash cow, milk here for expansion- Even more like a cash cow, milk here for expansion
elsewhereelsewhere
o Phased WithdrawalPhased Withdrawal - Move cash to SBU's with greater potential- Move cash to SBU's with greater potential
o DivestDivest - Liquidate or move these assets on a fast as you can- Liquidate or move these assets on a fast as you can

17. Best UseBest Use
The DPM showsThe DPM shows
• Markets categorised based on a scale of attractiveness toMarkets categorised based on a scale of attractiveness to
the organisationthe organisation
• The organisation’s relative strengths in each of theseThe organisation’s relative strengths in each of these
marketsmarkets
• The relative importance of each marketThe relative importance of each market
Brief HistoryBrief History
• This Directional Policy Matrix uses the GE multi-factorThis Directional Policy Matrix uses the GE multi-factor
approach using the same fundamental ideas as the Bostonapproach using the same fundamental ideas as the Boston
Consulting Group Matrix.Consulting Group Matrix.
• It provides for Market attractiveness on the y-axis andIt provides for Market attractiveness on the y-axis and
Relative Strength on the x-axis. The matrix is traditionally aRelative Strength on the x-axis. The matrix is traditionally a
four-box matrix but can also be a nine-box matrix.four-box matrix but can also be a nine-box matrix.

18. Model Use and Applicability

19. Model WeaknessesModel Weaknesses
• Quadrant namesQuadrant names
McDonald initially labeled the different quadrants asMcDonald initially labeled the different quadrants as
those in the Boston Consulting Group matrix andthose in the Boston Consulting Group matrix and
received a lot of criticism from this. These labels createdreceived a lot of criticism from this. These labels created
confusion. More recently he merely refers to theseconfusion. More recently he merely refers to these
positions but does not label the quadrants as they werepositions but does not label the quadrants as they were
in the past.in the past.
• Products-for-marketsProducts-for-markets
This concept is confusing to many people and limits theThis concept is confusing to many people and limits the
analysis.analysis.

20. Strategic EmphasisStrategic Emphasis
• The McDonald DPM like other models of portfolio analysis attemptsThe McDonald DPM like other models of portfolio analysis attempts
to define a firm’s strategic position and strategy alternatives. Theto define a firm’s strategic position and strategy alternatives. The
accepted level at which a firm can be analysed using the DPM isaccepted level at which a firm can be analysed using the DPM is
that of strategic business unit.that of strategic business unit.
• Professor Malcolm McDonald of the Cranfield School ofProfessor Malcolm McDonald of the Cranfield School of
Management developed the matrix to define Business Strengths inManagement developed the matrix to define Business Strengths in
terms of Critical Success Factors (CSF’s). A critical success factorterms of Critical Success Factors (CSF’s). A critical success factor
represents something that a company must do right in the eyes ofrepresents something that a company must do right in the eyes of
the customer.the customer.
• For the first time the business strengths are looked at from theFor the first time the business strengths are looked at from the
customer’s point of view and are therefore more objective. In thecustomer’s point of view and are therefore more objective. In the
past defining the factors was a very subjective exercise from thepast defining the factors was a very subjective exercise from the
company’s point of view. The Business Strengths in this matrix arecompany’s point of view. The Business Strengths in this matrix are
relative strengths (relative to the best in the market)relative strengths (relative to the best in the market)
• The DPM can be used at any level in the organisation and for anyThe DPM can be used at any level in the organisation and for any
kind of SBU.kind of SBU.

21. SummarySummary
• Was developed to overcome the limitations seen in the BCG matrix and toWas developed to overcome the limitations seen in the BCG matrix and to
simplify the Shell directional policy and GE matrices, which both illustrated asimplify the Shell directional policy and GE matrices, which both illustrated a
nine box matrix.nine box matrix.
• This matrix provides for Market attractiveness on the y-axis and RelativeThis 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 nineBusiness Strength on the x-axis and is made up of four quadrants (but nine
quadrants can also be used).quadrants can also be used).
• Business Strengths are defined in terms of Critical Success FactorsBusiness Strengths are defined in terms of Critical Success Factors
(CSF’s).(CSF’s).
• Factors on both matrices are weighted and scored. Relative strength on theFactors on both matrices are weighted and scored. Relative strength on the
x-axis is included in the mathematical calculation of the co-ordinates.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 aThe circles are placed in any one of five positions on the matrix each with a
specific generic strategy or guideline for management. These arespecific generic strategy or guideline for management. These are
– Invest for growthInvest for growth
– Maintain market position, manage for earningsMaintain market position, manage for earnings
– SelectiveSelective
– Manage for cashManage for cash
– Opportunistic developmentOpportunistic development
• This matrix is a good one to use if the organisation wishes to assess theThis 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 thecompetitors relative to themselves as it allows for a good analysis of the
strengths and weaknesses of the competitors from the customers point ofstrengths and weaknesses of the competitors from the customers point of
view.view.

22. ConclusionConclusion
There is always a better strategyThere is always a better strategy
than the one you have; you justthan the one you have; you just
haven't thought of it yethaven't thought of it yet
–– Sir Brian Pitman, former CEO of Lloyds TSB,Sir Brian Pitman, former CEO of Lloyds TSB,
Harvard Business Review, April 2003Harvard Business Review, April 2003

23. ReferencesReferences
• Strategic Management-from Theory toStrategic Management-from Theory to
Implementation, 4th editionImplementation, 4th edition
David HusseyDavid Hussey
• Business Portfolio Analysis by Hofer’s MethodBusiness 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/http://www.cipher-sys.com/hofhelp/