Directional Policy Matrix (DPM) | Understanding Business Position and Industry Attractiveness: A Beginner’s Guide

In today’s competitive business environment, organizations often face tough decisions about where to invest their resources. Should they focus on a thriving industry, even if their position is weak? Or should they sustain operations in a less attractive market where they already excel? To navigate these challenges, businesses use tools like the Directional Policy Matrix (DPM), which evaluates two critical factors:

1. Industry Attractiveness: How lucrative the market or industry is.
2. Business Competitive Position: How strong the company is compared to competitors in that market.

This guide will walk you through these concepts step-by-step, providing detailed examples to help you understand and apply this framework.

What is the Directional Policy Matrix (DPM)?

The DPM is a sophisticated alternative to the Boston Consulting Group (BCG) Matrix. While the BCG Matrix evaluates products based on market growth and market share, the DPM provides a more detailed analysis by considering broader factors under Industry Attractiveness and Business Competitive Position. This makes it particularly useful for companies with diverse product portfolios.

The DPM divides products or business units into categories based on their position in a 3×3 grid:

• Industry Attractiveness: High, Medium, or Low.
• Business Competitive Position: Strong, Medium, or Weak.

Each cell in the matrix represents a different strategic recommendation, such as investment, divestment, or cash generation.

Directional Policy Matrix (DPM)

Understanding the Axes of Directional Policy Matrix

1. Industry Attractiveness

This axis measures how attractive the industry is for investment or growth. It goes beyond simple metrics like market growth to include factors such as:

• Market Size: Is the industry large enough to support growth?
• Industry Profitability: Are companies in this industry generating good margins?
• Competition: Is the market saturated or fragmented?
• Market Concentration: Are there dominant players, or is it evenly distributed?
• Seasonality and Cycles: Is demand steady, or does it fluctuate?
• Regulatory Environment: Are there barriers to entry or significant compliance costs?

Example:

• The electric vehicle (EV) industry is highly attractive due to rapid growth, high demand, and a focus on sustainability.
• The DVD rental industry, on the other hand, is a low-attractiveness market because it has been disrupted by streaming services.

2. Business Competitive Position

This axis evaluates how well-positioned the business is within its industry. It takes into account:

• Market Share: Does the company control a significant share of the market?
• Price Competitiveness: Can the company offer better prices due to cost advantages?
• Brand Reputation: Does the company have a strong, trusted brand?
• Product Quality: Are the products superior or innovative?
• Geographic Strengths: Is the company well-established in key markets?
• Customer Knowledge: Does the company understand and address customer needs effectively?

Example:

• Tesla has a strong competitive position in the EV market due to its brand, technology, and market share.
• A small, regional EV manufacturer would have a weaker position because it lacks Tesla’s scale and recognition.

How the Directional Policy Matrix Works

The DPM combines the two axes to create a nine-cell grid. Each cell corresponds to a strategic recommendation:

1. High Attractiveness, Strong Position: Invest heavily to grow and maintain leadership.
2. High Attractiveness, Medium Position: Improve competitive position through strategic investments.
3. High Attractiveness, Weak Position: Consider entering through partnerships or improving capabilities.
4. Medium Attractiveness, Strong Position: Maintain current position, focus on efficiency.
5. Medium Attractiveness, Medium Position: Selective investment to improve or sustain.
6. Medium Attractiveness, Weak Position: Reevaluate involvement and consider divestment.
7. Low Attractiveness, Strong Position: Maximize cash flow but avoid new investments.
8. Low Attractiveness, Medium Position: Gradually phase out or divest.
9. Low Attractiveness, Weak Position: Exit the market entirely.

Examples of Directional Policy Matrix (DPM) Applications

Let’s explore a few scenarios to see how the DPM is applied:

Scenario 1: High Attractiveness, Strong Position

• Example: Unilever’s ice cream business operates in a high-growth market with strong profitability. With its strong competitive position (global distribution, strong brands like Magnum), Unilever continues to invest heavily to expand into new markets.

Scenario 2: Low Attractiveness, Strong Position

• Example: Coca-Cola’s traditional sugary soda market is losing attractiveness due to health trends. However, Coca-Cola’s strong position allows it to generate cash while gradually shifting focus to healthier beverages like teas and sparkling water.

Scenario 3: High Attractiveness, Weak Position

• Example: A small renewable energy company might consider partnerships or niche markets to improve its position in the highly attractive clean energy sector dominated by large players like Tesla or Siemens.

Steps to Create a DPM

1. Assess Industry Attractiveness:
   • Gather data on market growth, competition, profitability, and other factors.
   • Score each factor and combine them into a composite index.
2. Evaluate Business Competitive Position:
   • Analyze your market share, brand strength, pricing, and customer insights.
   • Develop a composite score for a competitive position.
3. Plot on the Matrix:
   • Position each product or business unit on the grid based on the scores.
4. Develop Strategic Recommendations:
   • Use the matrix to decide whether to invest, divest, maintain, or reposition.

Advantages of the DPM

• Comprehensive Analysis: Considers multiple factors for a nuanced view of performance.
• Strategic Clarity: Helps prioritize investments and focus on profitable areas.
• Actionable Insights: Provides clear recommendations for each category.

Challenges of the Directional Policy Matrix (DPM)

• Data Intensity: Requires detailed data and analysis, which can be time-consuming.
• Subjectivity: Judgments about attractiveness and position may be influenced by biases.
• Dynamic Markets: Results may become outdated quickly in fast-changing industries.

Conclusion

The Directional Policy Matrix (DPM) is a powerful tool for businesses to evaluate their portfolios and make strategic decisions. By understanding the dynamics of Industry Attractiveness and Business Competitive Position, companies can allocate resources effectively and focus on areas with the highest potential. While the DPM requires effort to implement, its insights can be invaluable for long-term success.

Whether you’re a large corporation managing diverse products or a small business looking to understand your position, the DPM offers a structured approach to making smarter business decisions. So, why not give it a try and steer your business in the right direction?