A properly designed business management plan should determine a company’s competitiveness in its sector and, on that basis, its strategic position. This is essential to survive in a challenging business environment and to further develop the company. Another method that helps in decision-making processes and looking for opportunities is the SPACE analysis. How does it work? Let’s find out!
What is the SPACE analysis? – table of contents:
- The SPACE analysis in a nutshell
- 4 elements of the SPACE analysis
- Scoring the SPACE analysis matrix
- 4 postures of the SPACE analysis
The SPACE analysis in a nutshell
SPACE is an acronym that stands for Strategic Position and Action Evaluation. External factors (environmental stability and industry attractiveness) and internal factors (competitive advantage and financial strength) are responsible for the company’s specific position.
The above technique is most often used to evaluate strategic plans, processes, and can also complement a SWOT analysis or BCG matrix.
4 elements of the SPACE analysis
The SPACE strategic analysis uses a matrix that shows the areas influencing the company. There are four of them, to which you can assign sample indicators:
- Environmental stability (ES) – inflation rate, technological change, pressure from substitutes, price range of competitive products, price elasticity of demand, and demand volatility. It is located in the lower part of the Y axis on the matrix.
- Industry attractiveness (IA) – growth potential, profit potential, resource utilization, complexity of entering the industry, labor productivity, capacity utilization, manufacturer bargaining power, and financial stability. It is located on the right side of the X axis on the matrix.
- Competitive advantage (CA) – market share, product quality, product lifecycle, innovation cycle, customer loyalty, and vertical integration. It is located on the left side of the X axis on the matrix.
- Financial strength (FS) – inventory turnover, cash flow, debt ratio, available vs. required capital, return on investment, and liquidity. It is located at the top of the Y axis on the matrix.
Scoring the SPACE analysis matrix
A certain number of points are assigned to each of the mentioned areas – environmental stability and competitive advantage can get a score between -6 and 0, where the lower the score, the weaker the company’s position. As for the industry attractiveness and financial strength – they receive a score between 0 and 6, where a higher score means a stronger position. Then, an average score for IS, ES, CA, and FS is calculated. The individual quadrants indicate a type of strategy the company should use to improve its market position. They are also referred to as postures.
4 postures of the SPACE analysis
After moving the received data to the matrix, we can choose a type of strategy that will bring the most benefits to the company at the moment and what actions we need to take.
Typically, such a posture is adopted by financially stable businesses operating in sustainable markets. It’s worth focusing on advantages within the organization, while avoiding excessive confrontation with competitors, so as not to jeopardize the company’s position. In order to increase market share, it’s advisable to:
- Improve existing products and develop new ones,
- Expand into other business areas.
It applies to companies in a stable industry that choose to compete with other players. It is an advantageous position that allows them to use their strengths and opportunities to contribute to the company’s growth. Their strategy should include:
- Improving the quality of the existing offer and diversifying it,
- Intensifying marketing efforts to gain greater market share,
- Merging with another existing company or taking one over,
- Reducing prices,
- Investing in development (e.g. software),
- Embracing their strengths and looking for opportunities.
Representatives of this tactic have weaker clout in a fiercely competitive environment. They must take appropriate steps to protect themselves from worsening their position and falling. Sample solutions may include:
- Reducing investments,
- Reducing production costs,
- Focusing on the main area of business,
- Merging with another company,
- If other solutions don’t work – shutting down the business.
A strategy that can be used by entrepreneurs operating in an attractive sector, however, without financial strength. For this reason, it is necessary to:
- Obtain financial capital from investors, in the form of a loan, etc.,
- Establish a coopetition with any of the market rivals or mergers,
- Increase process efficiency,
- Penetrate or diversify the market,
- Minimize the impact of weaknesses on the company’s operations.
The SPACE analysis is a useful tool for entrepreneurs and executives to make decisions. Thanks to a holistic approach, where both external and internal factors are taken into account, it is possible to take the right direction for future actions.
Read also: What is a strategic analysis?