Directional policy matrix

The directional policy matrix, or DPM, helps management allocate attention and investment across a portfolio of business units, products, brands, segments or new ideas. It extends simple portfolio matrices by comparing two multi-factor judgements: how attractive an opportunity is and how strong the organisation is relative to competitors.

For marketing strategy, the unit of analysis is often a customer segment—a group whose shared needs or behaviours are relevant to the offer. Meaningful segmentation lets a supplier meet common needs efficiently without pretending every customer is identical.

When to use it

• Prioritise segments, business units, brands or new ideas.
• Translate portfolio evidence into a focused strategic direction.
• Combine the DPM with SWOT analysis to understand what could change each position.

Origins

General Electric and McKinsey developed the best-known multi-factor portfolio matrix during the nineteen seventies. It elaborated on the growth-share logic of the Boston matrix by assessing broader market attractiveness and competitive strength. Shell later adapted the approach into a directional policy matrix with modified labels and strategic prescriptions.

The broad recommendations are:

• High attractiveness/strong capability—invest to protect leadership.

• High attractiveness/medium capability—invest to build.

• High attractiveness/weak capability—focus on a defensible segment.

• Medium attractiveness/strong capability—build selectively.

• Medium attractiveness/medium capability—manage selectively or harvest.

• Medium attractiveness/weak capability—focus narrowly or harvest.

• Low attractiveness/strong capability—defend or refocus.

• Low attractiveness/medium capability—harvest.

• Low attractiveness/weak capability—consider withdrawal.

What it is

Candidate segmentation variables include:

• Physical characteristics—consumer demographics such as age, location, income and family context; or business firmographics such as employee count, revenue, industry, age and location.

• Behaviour—customer status, purchase frequency and value, product bundles, usage, sourcing pattern, loyalty, switching and the structure of the decision-making unit.

• Needs—functional requirements such as quality, durability, availability, price and technical support, plus emotional needs such as status, reassurance, excitement and safety.

• Psychographics—lifestyle, values, opinions, attitudes and interests.

The purpose is to identify groups with common economics and needs, then decide where the organisation should invest. Although frequently used for segments, the matrix can compare almost any portfolio of opportunities.

Attractiveness of the market

Estimate the opportunity’s future economic value, not merely its current size. Consider profitability, growth, segment scale, price elasticity, regulation, competitive intensity and uncertainty. A competitor’s exit or a regulatory change can materially alter the rating, so record the assumptions behind it.

Competitive capability

Assess the organisation relative to the alternatives available to the segment. Relevant factors may include customer-value-proposition strength, brand and loyalty, market access, manufacturing productivity, intellectual property and innovation capability.

Use market evidence, weights and ratings to make the judgement explicit. List the factors, weight their importance and score each opportunity—for example on a scale from 1 to 5, where 5 is strong and 1 is weak. Apply the same discipline to competitive position. The worksheets in Tables 16. and 16.2 illustrate the method.

The DPM is a prioritisation device. Its value comes from exposing the few factors that drive attractiveness and strength and connecting each position to an action.

Company

1. 2 0. 2 0. profitability

Brand value 0. 3 0. 1 0.

Dominance in

1. 2 0. 3 0. market Total score 1 3 2.

Plot the weighted attractiveness score on the Y axis and competitive capability on the X axis. In the worked example from Tables 16. and 16.2, Segment 1 is medium-to-high on both dimensions and supports investment. Segment 2 has respectable strength but lower attractiveness, suggesting harvest. A weak position in an attractive market may justify a focused niche; a strong position in an unattractive market may be defended or refocused. Weakness on both dimensions normally supports withdrawal.

Developments of the model

Consultancies have produced many variants. Shell’s refinement retained the two-axis logic while changing the recommended actions. Modern versions may also show uncertainty, strategic fit, investment need or sustainability, but additional dimensions should clarify rather than conceal the core choice.

How to use it

A ready-mix concrete supplier served 15, different customers each year, from large civil-engineering companies to small residential builders. Research identified groups based on customer needs and company size.

The “technical” segment required high-specification concrete and extensive advice for projects such as skyscrapers and railway viaducts. It was attractive, and the supplier already held a strong share, so the priority was to protect leadership.

The “value” segment consisted of construction companies buying substantial volumes for varied work. Precise delivery timing mattered because idle labour was costly. Competition was strong, but research revealed an opportunity to add timed deliveries, special mixes and hourly technical advice. Those services improved both differentiation and profitability.

The largest segment by customer count was “small fry”: occasional buyers needing concrete for small residential jobs. High service cost and limited growth initially suggested divestment. Experimentation showed that prices could rise substantially without losing much demand, improving the segment’s attractiveness and justifying focused treatment.

Some things to think about

• Use the matrix to force a portfolio choice, not merely to display circles.

• Improving competitive strength can create more value than accepting a static position, as the “value” and “small fry” examples show.

• Use SWOT evidence to identify which strengths, weaknesses, opportunities and threats could move a score.

Top practical tip

Record the factors, weights, evidence and uncertainty behind every plotted position. The conversation about why a segment sits in a cell is more valuable than the visual alone, and it reveals what management can change.

Top pitfall

Do not turn subjective ratings into false precision or assume the current position is permanent. Test how the strategy changes under different weights and use customer and competitor evidence to challenge internal optimism.

Further reading

• Wind, Y., Mahajan, V. and Swire, D.J. (nineteen eighty-three). “An Empirical Comparison of Standardized Portfolio Models.” Journal of Marketing.
• Hax, A.C. and Majluf, N.S. (nineteen eighty-four). Strategic Management: An Integrative Perspective. Prentice-Hall.