The traditional way of looking at the business units’ strengths and weaknesses as well as comparing business sector prospects was to use historical and forecast rates of return on capital employed. This was done because a sector where prospects were favourable and the company’s position strong tended to show higher profitability. Shell found that these records and forecasts were not sufficient for the guidance of management in the corporate planning and allocation of resources.
Reasons for this being:
Records and forecasts do not provide a systematic explanation why one business sector has more favourable prospects than another or why the company’s position in a particular sector is strong or weak.
Records and forecasts do not provide enough insight into the underlying dynamics and balance of the individual business sectors or the balance between the sectors.
Using the forecast and record method, when new products are being considered, actual experience cannot be consulted.
Worldwide inflation has severely weakened validity and credibility of financial forecasts especially in the case of businesses that are affected by oil process.
The basic method of the directional policy matrix is to identify and place on the horizontal and vertical axes
The main criteria by which prospects for a business may be judged to be favourable or unfavourable (favourable meaning a high profit and growth potential)
The main criteria by which a company’s position in a sector may be judged to be strong or weak
Horizontal Axis
Horizontal labels for the quadrants are the reverse of those on the GE matrix. The extreme left quadrant is labelled unattractive while the corresponding quadrant on the GE matrix is labelled High
The horizontal axis is labelled ‘Business Sector Prospects’ while the vertical axis is named ‘Company’s Competitive Capabilities/Position’
Vertical Axis
Note that the y-axis labels are the reverse of those in the GE McKinsey matrix and the lowest quadrant is labelled Strong versus the GE matrix Low.
The Shell directional policy matrix can be used to analyse different business sectors in an industry as well as competitors within a business sector