In 1975, the British-Dutch Chemical Organization Shell developed and put into practice strategic analysis and planning its own model, called the Direct Policy Matrix. Its appearance was directly related to the peculiarities of the dynamics of the economic environment in the conditions of the energy crisis that took place at that time: the overflow of the world market with crude oil, the steady fall in crude oil prices, low and constantly declining industry profit margins, high inflation. Traditional Methods financial forecasting turned out to be useless when it came to choosing a long-term investment strategy in such conditions. In contrast to the BCG and GE/McKinsey models already widespread at the time, the Shell/DPM model relied least of all on assessing the achievements of the analyzed organization in the past and mainly focused on analyzing the development of the current industry situation.
In such vertically integrated corporate structures as the Shell structure, as well as in the structures of most other large oil organizations, decisions are required both about the financing of individual refineries and other business units, and about the allocation of available volumes of crude oil. This condition makes it difficult to directly use models of strategic analysis and planning of the type BCG matrices. Another difficulty is that the entire business in such organizations is built around one technological line, on which separate business units share the same production equipment. The whole set of products targeted at various market segments is the output of the same refinery, and thus the corresponding volumes and production costs, as well as profits, turn out to be completely interdependent. In addition, it should be added that very often products coming out of one such plant simply compete with each other in the market.
The Shell/DPM matrix is similar in appearance to the GE/McKinsey matrix and is a kind of development of the idea of strategic business positioning, which is the basis of the BCG model. However, there are fundamental differences between them. But compared to the one-factor BCG 2x2 matrix, the Shell/DPM matrix, like the GE/McKinsey matrix, is a two-factor 3x3 matrix based on multiple assessments of both qualitative and quantitative business parameters. Moreover, the multivariate approach used to assess the strategic position of a business in the GE/McKinsey and Shell/DPM models turned out to be more realistic in practice than the approach used by the BCG matrix.
The Shell/DPM model puts even more emphasis on business quantification than the GE/McKinsey model. If the strategic choice criterion in the BCG model was based on the assessment of cash flow (Cash Flow), which, in fact, is an indicator of short-term planning, and in the GE / McKinsey model, on the contrary, on the assessment of return on investment (Return of Investments), which is an indicator of long-term planning, the Shell / DPM model suggests that when making strategic decisions, focus simultaneously on these two indicators.
The other most notable feature of the Shell/DPM model is that it can consider businesses at different stages of their development. life cycle. Therefore, consideration of the change in the picture of the strategic positioning of business types after some time becomes an integral part of modeling on Shell / DPM.
But despite the apparent advantages of the Shell / DPM model as a matrix of multi-parametric strategic analysis, its popularity has been limited to a number of very capital-intensive industries, such as chemistry, oil refining, and metallurgy.
Initially, when using the DPM model, the Shell organization was more concerned with ensuring a rational cash flow. In the literature, one can find a description of the first use of the DPM model as a criterion for classifying types of business when deciding on the placement of financial, material and highly qualified labor resources.
However, later it was noticed that individual cells of the 3x3 matrix of strategic positioning are oriented towards the strategy of “cash generation”. Therefore, such a model is suitable both for analyzing business dynamics in terms of the prospects for return on initial investment, and for analyzing the financial balance sheet of the entire business portfolio of an organization in terms of cash flow. The underlying idea of the Shell/DPM model is the idea, borrowed from the BCG model, that the overall strategy of the organization should be to maintain a balance between cash surplus and cash deficit by developing promising new businesses based on the latest scientific and technological developments that will absorb excess money supply generated by businesses that are in the maturity phase of their life cycle. The Shell/DPM model directs managers to redistribute certain cash flows from business areas that generate money in a business area with a high potential for return on investment in the future.
Structure of the Shell/DPM Model
Like all other classic models strategic planning, the DPM model represents a two-dimensional table, where the X and Y axes represent, respectively, strengths organization (competitive position) and industry (product-market) attractiveness (Fig. 11). More precisely, the x-axis reflects the competitiveness of the organization's business sector (or its ability to take advantage of the opportunities available in the relevant business area). The y-axis is thus a general measure of the state and prospects of an industry.
Rice. 11. Shell/DPM Model Representation
The breakdown of the Shell/DPM model into 9 cells (in the form of a 3x3 matrix) was not done by chance. Each of the 9 cells corresponds to a specific strategy.
Position "Business Leader"
The industry is attractive and the organization has a strong position in it, being a leader; the potential market is large, the market growth rate is high; Weaknesses of the organization, as well as obvious threats from competitors, are not noted.
Possible Strategies: continue to invest in the business as long as the industry continues to grow, in order to protect its leading position; large capital investments will be required (more than can be provided by own assets); continue to invest, sacrificing momentary gains in the name of future profits.
Position “Growth strategy”
The industry is moderately attractive, but the organization has a strong position in it. Such an organization is one of the leaders, which is in the mature age of the life cycle of this business. The market is moderately growing or stable, with good margins and no other strong competitor.
Possible Strategies: try to maintain their positions; position can provide the necessary financial resources for self-financing and give also additional money that can be invested in other promising areas of business.
Position “Cash Generator Strategy”
The organization occupies a fairly strong position in an unattractive industry. It is, if not the leader, then one of the leaders here. The market is stable but shrinking, and the rate of return in the industry is declining. There is also a certain threat from competitors, although the productivity of the organization is high and the costs are low.
Possible Strategies: A business that falls into this box is the main source of income for the organization. Since no development of this business is required in the future, the strategy is to make small investments, extracting the maximum income.
Position “Strategy for Strengthening Competitive Advantages”
The organization occupies a middle position in an attractive industry. Since the market share, product quality, and reputation of the organization are high enough (almost the same as that of the industry leader), the organization can become a leader if it allocates its resources appropriately. Before incurring any costs in this case, it is necessary to carefully analyze the dependence economic effect from investments in this industry.
Possible Strategies: invest if the business area is worth it, while doing the necessary detailed investment analysis; to move into a leadership position, large investments will be required; a business area is considered highly suitable for investment if it can provide increased competitive advantage. The required investment will be greater than the expected return and therefore additional capital investment may be required to further compete for market share.
Position “Continue business with care”
The organization occupies an average position in the industry with an average attractiveness. The organization does not have any special strengths or opportunities for additional development; the market is growing slowly; the industry average rate of return is slowly declining.
Possible Strategies: Invest carefully and in small portions, being sure that the return will be quick, and constantly conduct a thorough analysis of your economic situation.
Position “Partial Curtailment Strategies”
The organization is in the middle position in an unattractive industry. The organization has no particular strengths and, in fact, no opportunities for development; the market is unattractive (low rate of return, potential surpluses production capacity, high capital density in the industry).
Possible Strategies: since it is unlikely that, getting into this position, the organization will continue to earn significant income, insofar as the proposed strategy will not develop this species business, and try to turn physical assets and market position into the money supply, and then use their own resources to develop more promising businesses.
Position “Double production or wind down the business”
The organization is in a weak position in an attractive industry.
Possible Strategies: invest or leave this business. Since an attempt to improve the competitive position of such an organization by attacking on a broad front would require a very large and risky investment, insofar as it can only be undertaken after a detailed analysis. If it is established that the organization is capable of competing for a leading position in the industry, then the strategic line is “doubling down”. Otherwise, the strategic decision should be to leave the business.
Position “Continue business with caution or partially curtail production”
The organization is in a weak position in a moderately attractive industry.
Possible Strategies: no investment; all management should be focused on the balance of cash flow; try to stay in this position as long as it makes a profit; phase out the business.
Position “Business exit strategy”
The organization is in a weak position in an unattractive industry.
Possible Strategies: Since an organization that falls into this box is generally losing money, every effort should be made to get rid of such a business, and the sooner the better.
The following variables can be used in the Shell/DPM model to characterize an organization's competitiveness and industry attractiveness (Table 6).
Table 6 Organizational Competitiveness and Industry Attractiveness Variables Used in the Shell/DPM Model
| Variables that characterize the competitiveness of an organization (X axis) |
Variables characterizing the attractiveness of the industry (y-axis) |
|
|
|
Like many other classical models of strategic analysis and planning, the Shell/DPM model is descriptive and instructive. This means that the manager can use the model both to describe the actual (or expected) position determined by the relevant variables, as well as to determine possible strategies. The strategies defined should, however, be considered with caution. The model is designed to help management decisions rather than replacing them.
The Shell/DPM model can also take time into account. Since each segment represents a specific point in time, a manager who wants to see changes after a certain period needs only to use the database for each period and compare the results. It should be noted that this model is especially effective for visualizing changes and developing strategic positions over time, since it is not tied to financial indicators and therefore does not experience the influence of factors that can cause errors (for example, inflation).
The strategic decisions made on the basis of the Shell/DPM model depend on whether the manager's focus is on the life cycle of the type of business or the cash flow of the organization.
In the first case (Fig. 11, direction 1), the following trajectory for the development of the organization’s positions is considered optimal: from Doubling the volume of production or closing the business - to the Strategy for strengthening competitive advantages - to the Strategy of the leader of the type of business - to the Growth strategy - to the Cash generator strategy - to Strategies of partial curtailment - to the Strategies of curtailment (exit from business).
Let's bring brief description stages of this movement.
Stage of doubling production or winding down the business
A new area of business is selected, which, of course, needs to be developed as part of the overall corporate strategy. The market is attractive, but since the business area is new to the organization, the organization's competitive position in this business is still weak. Strategy is investment.
Stage of strengthening competitive advantages
With investment, the position of the organization in the business area improves, which is the reason for the horizontal movement to the right edge of the matrix. The market continues to grow. The strategy is to keep investing.
Business type leader stage
With continued investment, the organization's position in the business area continues to improve, which is the reason for further horizontal movement to the right. The market continues to grow and investment continues.
growth stage
The growth rate of the market is starting to slow down. This causes the beginning of the vertical movement of the organization's position down. The profitability of the business area for the organization is growing at the same level as the industry average.
Cash Generator Stage
The development of the market stops, causing further downward movement of the organization's position. The strategy is to invest only at the level necessary to maintain the achieved positions and ensure the profitability of the business.
Partial coagulation stage
The market begins to shrink, the profitability of the industry decreases, and the position of the organization naturally also begins to weaken.
Further investment in this business can be completely stopped, and then a decision is made to curtail it altogether.
In the case of increased attention to cash flow (Fig. 11, direction 2), the trajectory of the development of the organization's positions from the lower right cells of the Shell/DPM matrix to the upper left ones is considered to be optimal. This means that the cash generated by the organization during the Cash Generator and Drawdown stages is used to invest in business areas that are aligned with Doubling Output and Strengthening Competitive Advantage.
Strategic balance involves, first of all, the balance of the efforts of the organization in each of the areas of business, depending on the stage of the life cycle in which they are. Such balancing ensures that at the maturity stage of the business area there will always be a sufficient number of financial resources to support the organization's reproductive cycle by investing in new perspective views business. Financial balance means that income-generating businesses have sales that are sufficient to finance a growing business.
Strengths and weaknesses of the Shell/DPM model
Most of the underlying theoretical assumptions in the Shell/DPM model are similar to those in the GE/McKinsey model.
Allocation as an X-axis of the competitiveness of the organization's business suggests that the market is an oligopoly. That is why for organizations with a weak competitive position, a strategy of instantaneous or gradual curtailment of such a business is recommended. It is assumed that the existing gap in the competitive position of organizations by type of business will necessarily increase if a new source of competitive advantage is not found.
The Y-axis (attractiveness of the business sector) suggests the existence of long-term development potential for all participants in this business, and not just for the organization in question.
In practice, there are two main mistakes when using the Shell/DPM model, which are essentially the same as for the GE/McKinsey model. First, managers often take the strategies recommended by this model very literally. Secondly, it is also common to attempt to evaluate as many factors as possible, with the implication that this will lead to a more objective picture. In fact, the opposite effect occurs and organizations whose positions are evaluated in this way, as a rule, always end up in the center of the matrix.
One of the main advantages of the Shell/DPM model is that it solves the problems of combining qualitative and quantitative variables into a single parametric system. Unlike the BCG matrix, it does not depend directly on the statistical relationship between market share and business profitability.
As a criticism, the following can be said:
- the choice of variables for analysis is very conditional;
- there is no criterion by which it would be possible to determine how many variables are required for analysis;
- it is difficult to assess which of the variables are most significant;
- assigning specific weights to variables when constructing matrix scales is very difficult;
- it is difficult to compare business areas across industries, as the variables are highly industry-specific.
1. Hichens R.E., Robinson S.J.Q. and Wade D.P.. The Directional Policy Matrix: A Tool for Strategic Planning. Long Range Planning, Vol. 11 (June 1978), pp. 8-15.
The Shell DPM model (British-Dutch Shell, Direct Policy Matrix) was proposed in 1975 during the energy crisis. The current situation did not allow efficient use famous models BCG and McKinsey, focused on assessing the achievements of the organization in the past, but required a focus on analyzing the development of the current industry situation. The Shell matrix was intended for entrepreneurial companies vertically integrated around one business, in which all enterprises included in it produce a full range of products, competing with each other.
The Shell model matrix is based primarily on quantitative estimates business parameters (duration of technology life cycle phases, speed and prospects for demand growth, profitability, level of instability, etc.), which in practice is more promising than the BCG approach (Table 8.2).
Table 8.2 - Shell DPM Matrix
The main objective of the Shell model, like BCG, is to manage financial performance for the development of new promising types of business. However, here the emphasis is not only on the current cash flow, but also not on the prospective return on investment, which allows us to give a commercial assessment of the attractiveness of businesses in the future. In accordance with the positions occupied in the matrix, the following types of market structures are distinguished.
1. business leader, with a strong position in an attractive industry. Its potential market is quite large, growth rates are high, there are practically no weaknesses, and there are no obvious threats from competitors. For him, an investment strategy is recommended as long as the industry is promising, allowing you to protect your leading position.
2. Growth- the position occupied by a strong firm in a moderately attractive industry in the absence of serious competitors. Stable or growing sales provide a high rate of return. A strategy of maintaining the status quo is used to ensure that the necessary funds are received.
3. cash generator- a firm with a fairly strong and well-established business, but in an unattractive industry where the market is stable or declining, and the profit rate is falling. Investments are recommended to maintain current returns.
4. Strengthen competitive advantages- the position of medium-sized and efficient firms operating in attractive industries. It is expedient for them if the business is promising, and the market share, product quality and business reputation high enough to make an investment. In this case, there is a chance to become a leader.
5. Continue business with care can companies that have no special prospects. They usually occupy intermediate positions in medium attractive industries. Since the growth of the market and the decline in the industry rate of return are slow, it is possible to apply the strategy of consistently investing in small portions in the hope of a quick return.
6. Partially wind down business and gradually transferring assets to other areas is recommended if the company does not have any strengths and opportunities. This occurs when the market is unattractive, the rate of return is low, and there is excess capacity.
7. Double the volume or wind down the business maybe a corporation with a weak position in an attractive industry. With a favorable situation, an attack along the entire front is possible (but it requires significant funds). Otherwise, you need to leave the business.
8. Continue business with caution or curtail production appropriate for companies with a weak position in a moderately attractive industry. Here, new investments are not made, and objects that do not bring profit are gradually liquidated.
9. Curtail business and to get rid of enterprises that bring losses is necessary in a weak position in an unattractive industry.
In general, when focusing on cash flow, the optimal strategy is to invest the profits created in the field of cash generator and received as a result of partial winding down of the business, in the field of doubling production and strengthening competitive advantages. In general, the strategic decisions made on the basis of the Shell DPM model depend on what is the focus of management - the life cycle of a type of business or the company's cash flow.
Another model of strategic analysis is the "directed policy matrix" (DPM - DirectPoliticMatrice), which was developed by the British-Dutch company Shell. The Shell/DPM model was created as a development of the Boston Advisory Group (BCG) model. The directional policy matrix has an outward resemblance to the General Electric-McKinsey matrix, but at the same time it is a kind of development of the idea of strategic business positioning, embedded in the BCG model. The Shell/DPM matrix is a two factor 3x3 matrix. It is based on assessments of both quantitative and qualitative business parameters.
The following indicators are located along the axes of the Shell/DPM matrix:
· perspectives of the business sector;
business competitiveness.
The Shell/DPM model puts more emphasis on quantification than the GE-McKinsey model. The Shell/DPM model evaluates both cash flow (BCG matrix) and return on investment (GE-McKinsey matrix). As in the GE-McKinsey model, businesses that are at different stages of their life cycle can be valued here.
The X-axis in the directed policy matrix reflects the strengths of the enterprise (competitive position), and the Y-axis reflects industry attractiveness. The y-axis is a general measure of the state and prospects of an industry.
Each of the nine cells of the matrix corresponds to a specific strategy:
business leader– the company has a strong position in an attractive industry. The development strategy of the enterprise should be aimed at protecting its leading positions and further developing the business.
Growth strategy– the company has a strong position in a moderately attractive industry. The company needs to try to maintain its position.
Cash Generator Strategy The company has a strong position in an unattractive industry. The main task of the enterprise is to extract the maximum income.
Strategies for Strengthening Competitive Advantage The company is in the middle position in an attractive industry. It is necessary to invest in order to move into a leadership position.
Continue business with care- the company occupies an average position in the industry with an average attractiveness. Careful investment with a quick return.
Partial collapse strategy The company is in the middle position in an unattractive industry. You should extract the maximum income from what is left, and then invest in promising industries.
Double production or shut down business The company is in a weak position in an attractive industry. The company must either invest or leave the business.
Continue business with caution or cut production partially- the company occupies a weak position in a moderately attractive industry. Try to stay in the industry while it makes a profit.
Business exit strategy The company is in a weak position in an unattractive industry. The company needs to get rid of such business.
V.S. Efremov
In 1975, the British-Dutch chemical company Shell developed and introduced into the practice of strategic analysis and planning its own model, called the directed policy matrix 2 . Its emergence was directly related to the peculiarities of the dynamics of the economic environment in the conditions of the energy crisis that took place at that time: the overflow of the world crude oil market, the steady fall in crude oil prices, low and constantly declining industry profit margins, high inflation. Traditional methods of financial forecasting proved to be useless when it came to choosing a long-term investment strategy in such conditions. In contrast to the BCG and GE/McKinsey models that were already widespread at the time, the Shell/DPM model relied least of all on assessing the achievements of the analyzed company in the past and mainly focused on analyzing the development of the current industry situation.
In vertically integrated corporate structures such as Shell's, so are most other structures. oil companies, decisions are required both on the financing of individual refineries and other business units, and on the allocation of available volumes of crude oil. This condition makes it difficult to directly use models of strategic analysis and planning such as the BCG matrix. Another complication is that the entire business in such corporations is built around one technological line, on which separate business units share the same production equipment among themselves. The whole set of products targeted at different market segments is the output of the same refinery, and thus the corresponding volumes and production costs, as well as profits, turn out to be completely interdependent. In addition, it should be added that very often products coming out of one such plant simply compete with each other in the market.
The Shell/DPM matrix is similar in appearance to the GE/McKinsey matrix, and is also a kind of development of the idea of strategic business positioning, which is the basis of the BCG model. However, there are fundamental differences between them. But compared to the one-factor BCG 2x2 matrix, the Shell/DPM matrix, like the GE/McKinsey matrix, is a two-factor 3x3 matrix based on multiple assessments of both qualitative and quantitative business parameters. Moreover, the multi-variable approach used to assess the strategic positions of a business in the GE/McKinsey and Shell/DPM models turned out to be more realistic in practice than the approach used by the BCG matrix.
In the Shell/DPM model, compared to the GE/McKinsey model, there is an even greater emphasis on the quantitative parameters of the business. If the strategic choice criterion in the BCG model was based on the assessment of cash flow (Cash Flow), which is essentially an indicator of short-term planning, and in the GE / McKinsey model, on the contrary, on the assessment of return on investment (Return of Investments), which is an indicator of long-term planning, then the Shell / DPM model suggests that when making strategic decisions, focus simultaneously on these two indicators.
The next most notable feature of the Shell/DPM model is that it can consider businesses at different stages of their life cycle. Therefore, consideration of changes in the pattern of strategic positioning of types of business after some time becomes an integral part of Shell / DPM modeling.
But despite the apparent advantages of the Shell / DPM model as a matrix of multi-parametric strategic analysis, its popularity turned out to be limited to a number of very capital-intensive industries such as chemical, oil refining, and metallurgy.
Initially, when using the DPM model, Shell was more concerned about ensuring a rational cash flow. In the literature, one can find a description of the first use of the DPM model as a criterion for classifying types of business when deciding on the allocation of financial, material and highly skilled labor resources3. However, later it was noticed that individual cells of the 3x3 matrix of strategic positioning are oriented towards the strategy of “cash generation”. Therefore, such a model turns out to be suitable both for analyzing business dynamics in terms of the prospects for return on initial investment, and for analyzing the financial balance sheet of the company's entire business portfolio in terms of cash flow. The underlying idea of the Shell/DPM model is the idea, borrowed from the BCG model, that the overall strategy of the firm should be to maintain a balance between cash surplus and cash deficit through regular new promising types of business based on the latest scientific and technological developments, which will absorb excess money supply generated by businesses that are in the maturity phase of their life cycle. The Shell/DPM model directs managers to redistribute certain cash flows from business areas that generate money in a business area with a high potential for return on investment in the future.
Like all other classical strategic planning models, the DPM model presents a two-dimensional table, where the X and Y axes reflect the strengths of the enterprise (competitive position) and industry (product-market) attractiveness, respectively (see Figure 1). More precisely, the x-axis reflects the competitiveness of the company's business sector (or its ability to take advantage of the opportunities that exist in the corresponding business area). The y-axis is thus a general measure of the state and prospects of an industry.
Figure 1. Shell/DPM Model View
The division of the Shell/DPM model into 9 cells (in the form of a 3x3 matrix) was not done by chance. Each of the 9 cells corresponds to a specific strategy.
Position “ Business Leader”
The industry is attractive and the company has a strong position in it, being a leader; the potential market is large, the market growth rate is high; Weaknesses of the enterprise, as well as obvious threats from competitors, are not noted.
Possible strategies: continue to invest in the business while the industry continues to grow in order to protect its leading position; large capital investments will be required (more than can be provided by own assets); continue to invest, sacrificing momentary gains in the name of future profits.
Position “Growth Strategy”
The industry is moderately attractive, but the company has a strong position in it. Such an enterprise is one of the leaders, which is in the mature age of the life cycle of this business. The market is moderately growing or stable with a good rate of return and no other strong competitor present.
Possible strategies: try to keep positions; the position may provide the necessary funds for self-financing and also provide additional money that can be invested in other promising areas of the business.
Position “Cash Generator Strategies”
The company occupies a fairly strong position in an unattractive industry. It is, if not the leader, then one of the leaders here. The market is stable but shrinking, and the rate of return in the industry is declining. There is also a certain threat from competitors, although the productivity of the enterprise is high and the costs are low.
Possible strategies: A business that falls into this box is the main source of income for the enterprise. Since no development of this business is required in the future, the strategy is to make small investments, extracting the maximum income.
Position “Strategy for Strengthening Competitive Advantage”
The company occupies a middle position in an attractive industry. Since the market share, product quality, and reputation of the enterprise are quite high (almost the same as that of the industry leader), the enterprise can become a leader if it allocates its resources appropriately. Before incurring any costs in this case, it is necessary to carefully analyze the dependence of the economic effect on investments in this industry.
Possible strategies: invest if the business area is worth it, while doing the necessary detailed investment analysis; to move into a leadership position, large investments will be required; a business area is considered highly suitable for investment if it can provide increased competitive advantage. The required investment will be greater than the expected return and therefore additional capital investment may be required to further compete for market share.
Position “Continue business with care”
The company occupies an average position in the industry with an average attractiveness. The enterprise does not have any special strengths or opportunities for additional development; the market is growing slowly; the industry average rate of return is slowly declining.
Potential Strategies: Invest carefully and in small increments, being sure that the return will be quick and constantly conduct a thorough analysis of your economic situation.
Position “Partial Curtailment Strategies”
The company occupies a middle position in an unattractive industry. The enterprise has no particular strengths and, in fact, no opportunities for development; the market is unattractive (low rate of return, potential excess capacity, high capital density in the industry).
Possible strategies: since it is unlikely that, getting into this position, the company will continue to earn significant income, so far as the proposed strategy is not to develop this type of business, but to try to turn physical assets and market position into money supply, and then use its own resources to develop more promising business.
Position “Double production or shut down business”
The company is in a weak position in an attractive industry.
Possible strategies: invest or leave the business. Since an attempt to improve the competitive position of such an enterprise by attacking on a broad front would require a very large and risky investment, insofar as it can only be undertaken after a detailed analysis. If it is established that the enterprise is able to compete for a leading position in the industry, then the strategic line is “doubling”. Otherwise, the strategic decision should be to leave the business.
Position “Continue business with caution or curtail production”
The company occupies a weak position in a moderately attractive industry.
Possible strategies: no investment; all management should be focused on the balance of cash flow; try to stay in this position as long as it makes a profit; phase out the business.
Position “Business exit strategy”
The company is in a weak position in an unattractive industry.
Possible Strategies: Since a company that falls into this box is generally losing money, every effort should be made to get rid of such a business, and the sooner the better.
The following variables can be used in the DPM/Shell model to characterize the competitiveness of an enterprise and the attractiveness of an industry:
|
Variables characterizing the competitiveness of the enterprise (X-axis) |
Industry Attractiveness Variables (Y-Axis) |
|
Relative market share |
Industry Growth Rate |
|
Distributor network coverage |
Relative industry rate of return |
|
Distribution network efficiency |
Buyer price |
|
Technological Skills |
Buyer brand loyalty |
|
Product Line Width and Depth |
The Importance of Competitive Preemption |
|
Equipment and location |
Relative stability of the industry rate of return |
|
Production efficiency |
Technological barriers to entry into the industry |
|
Experience Curve |
Significance of contractual discipline in the industry |
|
Productive reserves |
Influence of suppliers in the industry |
|
Product quality |
Influence of the state in the industry |
|
Research potential |
Industry Capacity Utilization |
|
Economies of scale in production |
Product replacement |
|
After-sales service |
The image of the industry in society |
Like many other classical models of strategic analysis and planning, the Shell/DPM model is descriptive and instructive. This means that the manager can use the model both to describe the actual (or expected) position determined by the relevant variables, as well as to determine possible strategies. The strategies defined should, however, be considered with caution. The model is designed to help make managerial decisions, not replace them.
The Shell/DPM model can also take time into account. Since each segment represents a specific point in time, a manager who wants to see changes after a certain period needs only to use the database for each period and compare the results. It should be noted that this model is especially effective for visualizing changes and developing strategic positions over time, since it is not tied to financial indicators, and therefore is not influenced by factors that can cause errors (for example, inflation).
The strategic decisions made on the basis of the Shell/DPM model depend on whether the manager's focus is on the life cycle of the type of business or the company's cash flow.
In the first case (see Figure 1, direction 1), the following trajectory for the development of the company's position is considered optimal: from Doubling the volume of production or curtailing the business - to the Strategy for strengthening competitive advantages - to the Strategy of the Leader of the type of business - to the Growth strategy - to the Cash generator strategy - to the Strategy of partial curtailment - to the Strategy of curtailment (out of business).
Let us give a brief description of the stages of such a movement.
The stage of doubling the volume of production or curtailing the business
A new area of business is selected, which, of course, needs to be developed as part of the overall corporate strategy. The market is attractive, but since the business area is new to the enterprise, the company's competitive position in this business is still weak. Strategy - investment.
Stage of strengthening competitive advantages
With investment, the position of the company in the business area improves, which is the reason for the horizontal movement to the right edge of the matrix. The market continues to grow. The strategy is to keep investing.
Business type leader stage
With continued investment, the company's position in the business area continues to improve, which is the reason for further horizontal movement to the right. The market continues to grow and investment continues.
growth stage
The growth rate of the market is starting to slow down. This causes the beginning of the vertical movement of the company's position down. The profitability of the business area for the company is growing at the same level as the industry average.
Cash Generator Stage
The development of the market stops, causing further downward movement of the company's position. Strategy - investing only at the level necessary to maintain the positions achieved and ensure the profitability of the business.
Partial coagulation stage
The market starts shrinking, the profitability of the industry decreases and the company's position naturally also begins to weaken.
Further investment in this business can be completely stopped, and then a decision is made to curtail it altogether.
In the case of increased attention to cash flow (see Figure 1, directions 2), the optimal trajectory of the development of the company's position from the lower right cells of the Shell/DPM matrix to the upper left ones is considered. This means that the cash generated by the company during the Cash Generator and Partial Roll-off stages is used to invest in business areas that correspond to Doubling Output and Strengthening Competitive Advantage positions.
Strategic balance involves, first of all, the balance of the company's efforts in each of the areas of business, depending on the stage of the life cycle in which they are. Such balancing gives confidence that at the maturity stage of the business area there will always be a sufficient amount of financial resources in order to maintain the reproduction cycle of the enterprise by investing in new promising types of business. Financial balance means that income-generating businesses have sales that are sufficient to finance a growing business.
Most of the underlying theoretical assumptions in the Shell/DPM model are similar to those in the GE/McKinsey model. Here, as in the GE/McKinsey model, business areas are assumed to be autonomous, unrelated to others either in terms of resources or results. Singling out the competitiveness of a company's business as the X-axis suggests that the market is an oligopoly. That is why for companies with a weak competitive position, a strategy of instantaneous or gradual curtailment of such a business is recommended. It is assumed that the existing gap in the competitive positions of companies by type of business will necessarily increase if a new source of competitive advantage is not found.
The Y-axis (attractiveness of the business sector) implies the existence of a long-term development potential for all participants in this business, and not just for the company in question.
In practice, there are two main mistakes when using the Shell/DPM model, which are essentially the same as for the GE/McKinsey model. First, managers often take the strategies recommended by this model very literally. Secondly, it is also common to attempt to evaluate as many factors as possible, with the implication that this will lead to a more objective picture. In fact, the opposite effect is obtained and enterprises whose positions are evaluated in this way, as a rule, always end up in the center of the matrix.
One of the main advantages of the Shell/DPM model is that it solves the problems of combining qualitative and quantitative variables into a single parametric system. Unlike the BCG matrix, it does not depend directly on the statistical relationship between market share and business profitability.
As a criticism, the following can be said:
- the choice of variables for analysis is very conditional.
- there is no criterion by which it would be possible to determine how many variables are required for analysis.
- it is difficult to assess which of the variables are most significant.
- assigning specific weights to variables when constructing matrix scales is very difficult.
- it is difficult to compare business areas across industries, as the variables are highly industry-specific.
1 Continued. See the beginning in Nos. 1, 2.
2 DPM-Direct Policy Matrix
3 Hichens, R.E., Robinson, S.J.Q, and Wade, D.P. (1978). ‘The directional policy matrix: a tool for strategic planning,’ Long Range Planning, Vol. 11 (June), pp. 8-15.
In 1975 the British-Dutch Chemical Company Shell developed and implemented in the practice of strategic analysis and planning its own model, called the directed policy matrix (Direct Policy Matrix or DPM)(hereinafter referred to as the Shell/DPM model) (Table 4.11, Figures 4.9 and 4.10).
Table 4.11
Variables used in the Shell/DPM model
|
Characteristics of the attractiveness of the industry |
Characteristic enterprise competitiveness |
|
Industry growth rate Relative industry rate of return Buyer price Buyer brand loyalty Significance of competitive lead Relative stability of the industry rate of return Technological barriers to entry into the industry Significance of contractual discipline in the industry Influence of suppliers in the industry Influence of the state in the industry Level of use of industry capacities Product substitution Image of the industry in society |
Relative market share Distribution network coverage Distribution network efficiency Technological Skills Product Line Width and Depth Equipment and Location Production Efficiency Experience Curve Inventory Product Quality R&D Capability Economy of scale production After-sales service |
In the Shell / DPM model, as in other strategic models, the abscissa and ordinate axes reflect the strengths of the enterprise (competitive position of the company) and market attractiveness, respectively.
Rice. 4.9.
katelnost. Each of the 9 cells corresponds to a specific strategy.
The Shell/DPM matrix is similar in appearance to the McKinsey/GE matrices and develops the ideas of strategic business positioning underlying the BCG model.
However, there are fundamental differences between them. Thus, compared to the single-factor BCG model, the Shell/DPM matrix, like the McKinsey matrix, is a multi-factor matrix with a dimension of 3x3, based on multiple assessments of both qualitative and quantitative business parameters. The Shell/DPM model puts even more emphasis on the quantitative parameters of the business, suggests that when making strategic decisions, it is necessary to take into account both the assessment of cash flow (an indicator of short-term planning) and the assessment of return on investment (an indicator of long-term planning).
Rice. 4.10.
The Shell/DPM model identifies business lines that generate money supply, and with a high potential for return on investment in the future, directs managers to redistribute financial flows.
Advantage of the Shell/DPM model is that it solves the problems of combining qualitative and quantitative variables into a single parametric system and does not depend on the statistical relationship between market share and profitability. With regard to the petrochemical industry, special methods have been developed, compiled according to the principle of a "tree of goals". This allowed the authors, depending on the mutual combination of values or characteristics of the factors under consideration, to obtain generalized estimates of the degree of market attractiveness and competitiveness of the enterprise.
Disadvantages of the Shell/DPM model:
- descriptive and constructive character;
- the significance of variables has not been determined, and their determination is very difficult;
- specific boundaries for the breakdown of the scales of the axes (distinguishing markets according to their degree of attractiveness and classifying companies according to competitive advantage three categories)
- variables are highly industry-specific.
- Efremov V.S. Decree. op. S. 82.
