SPACE Analysis is an analytical technique used in strategic management and planning. SPACE is an acronym of Strategic Position and ACtion Evaluation. The analysis allows to create an idea of the appropriate business strategy for the enterprise. The analysis assesses the internal and external environment and allows to design an appropriate strategy.
The analysis describes the external environment using two criteria:
- Environmental Stability (ES) - it is influenced by the following subfactors: technological change, inflation rate, demand volatility, price range of competitive products, price elasticity of demand, pressure from the substitutes
- Industry Attractiveness (IA) - it is influenced by the following subfactors: growth potential, profit potential, financial stability, resource utilization, complexity of entering the industry, labor productivity, capacity utilization, bargaining power of manufacturers
The inside environment is also described by two criteria:
- Competitive advantage (CA) - it is influenced by the following factors: market share, product quality, product lifecycle, innovation cycle, customer loyalty, vertical integration
- Financial strength (FS) - it is influenced by the following indicators: return on investment, liquidity, debt ratio, available versus required capital, cash flow, inventory turnover
How to use the SPACE analysis in practice?
According to this model the SPACE analysis is used in strategic management. It concerns of key decisions that are made by CEO and senior management of the organization.
- For each subfactor in each criterion a value of 0-6 is assigned (for CA and ES it is 0 to -6)
- For each criterion, the value of the total factor is expressed as the mean of the individual factors.
- The values of factors are put into the relevant axes of the matrix (see figure)
- In the quadrant, where the largest part of the surface of the resulting quadrilateral is, there is a suitable altermative of the business behavior.
The strategic position of the company and alernatives of the strategic behavior are following:
- Aggressive position - an attractive and relatively stable industry, the company has a competitive advantage and it can protect it, a critical factor is the possible entry of new competitors into the industry, it may be considered new acquisitions, increasing market share and focusing on competitive products
- Competitive position - attractive and relatively unstable environment, the company has some competitive advantage, a critical factor is the company’s financial strength - the company should look for ways of their attachment, the solution is the possibility of joining another company, increasing production efficiency and strengthening cash flow
- Conservative position - a stable industry with low growth rate and financially stable company, a critical factor is in the product competitiveness, company should protect its succesfull products and develop new ones and think about the possibilities of the penetration into the industry more attractive and reduce costs.
- Defensive position - an unattractive industry, the company lacks competitive products and financial resources, a critical factor is the competitiveness, the company should reduce costs, reduce investment and consider leaving the industry.