Hofer and Schendel felt that the major weakness with the General Electric business screen was that it didn’t effectively depict the positions of new businesses that are just starting to grow in new industries. The Hofer-Schendel matrix takes into account the concept that changes in basic competitive positions are easier to accomplish at certain stages in the evolution of an industry than others.
The magnitude and type of opportunities and threats that face a business vary according to the stage of evolution of that industry as well as its competitive position within that industry. The model concentrates on positioning existing SBU’s on the product-market evolution matrix thereby establishing an ideal future portfolio.
Four steps determine the basic strategic position and this in turn determines the investment strategy of the business. These steps are: the short-term financial condition, the relative competitive position, and the position of evolution of the market that the business competes in. A plot is then made of the business’s basic strategic position with regards to the competitive position and the stage of product/market evolution.
Different opportunities and threats face a business as the product/market segments in which it competes, evolve over time. Charles W. Hofer and Dan Schendel described seven stages of the life cycle, each with certain characteristics by which the position of the market can be identified. The 7 stages are development, growth, shakeout, maturity, saturation, petrification, and decline
Major changes in basic competitive position occur in the stages of development, shakeout and decline because in these stages the basic nature of competition changes. It is more difficult to make changes to competitive position in the other stages of growth, maturation and saturation as the bases for competition are usually well established.
From the positioning on the matrix it can be seen that there are various generic strategies, corresponding to the positions determined by the x and the y-axis. The position of the SBU/etc. can fall in one of 16 quadrants.
The six strategies devised by Hofer and Schendel are:
Share increasing strategies
Growth strategies
Profit strategies
Market concentration and asset reduction strategies
Turnaround strategies
Liquidation and divestiture strategies
This matrix is used when a firm wants to know what the investment potential of the businesses is likely to be – the product /market evolution gives a good indication of this. It may be usefully applied to balancing the corporate portfolio and assigning strategies to each SBU using the generic strategies.
Criticisms of the model include the argument that stages vary enormously from industry to industry, not all industries have the typical shaped curve of a lifecycle, firms can alter the shape of the life cycle and competition varies from industry to industry. It is sometimes difficult to know which stage of evolution a product/market is at.
The AD Little matrix is very similar to the Hofer-Schendel matrix. It is also a portfolio planning system based on the two dimensions of competitive position and industry maturity. This matrix will be discussed separately.