IA – BS MATRIX & AD LITTLE LIFE CYCLE APPROACH

K.CHITRA 11TM03

• To eliminate some of the limitations of the BCG growth/share matrix, a more complete matrix analysis was developed by the General Electric planners and mostly used McKinsey & Co - a management consulting firm. • The primary improvement of BS/IA matrix is that it allows for the analysis of multiple variables (rather than only market share and growth) depending on the context. • And, rather than focusing on cash flow , it concerns potential future return on investment.

The Business Strength-Industry Attractiveness Matrix

Business Strength and Industry Attractiveness Dimensions  Horizontal axis – market attractiveness;  Vertical axis – business
• • • • Size Growth Customer satisfaction levels Competition; quantity, types, effectiveness, commitment Price levels Profitability Technology Government regulations Sensitivity to economic trends

strength;
• • • • • • • • • • • Size Growth Share of segment Customer loyalty Margins Distribution Technology skills Patents Marketing Flexibility Organization

• • • • •

Industry Attractiveness-Business Strength Matrix
Description of Dimensions Industry Attractiveness Subjective assessment based on broadest possible range of external opportunities & threats beyond the strict control of management Business Strength Subjective assessment of how strong a competitive advantage is created by a broad range of the firm’s internal strengths & weaknesses

Weight, Rating, Value?
In BS/IA matrix, each of the key variables used must be given a weight, rating and value. • The weight will be based on its importance to the company, relative to other selected variables. The total point must equal 10. the weights can be determined by management or, when possible, by customer surveys. • A rating (or grade) will be given for each business strength variable. E.g. a strength would receive a high score, a weakness would receive a low score.

• The rating for each variable is then multiplied by its weight to obtain the variable’s value. • The values are individual summed for total value for business strength for that particular business. • For industry attractiveness, influencing variables will be given a weight based on their importance to the business, and a rating based on favorable or unfavorable conditions in the environment (opportunity or threat?). • The total value for industry attractiveness is calculated in the same manner as for business strength. • The two scores for each business unit are then used to position the business on the matrix.

Business Strength

Weight (importance to the firm: must add up to 10)

Rating (performance; 1=poor, 10= excellent)

Value (Weight × Rating)

Profit 3 Pro/ser qual. 3 Man. Skills 2 Location 1 Atmosphere 1 Total value for business strength

8 8 7 6 5

24 24 14 6 5 73

Industry Attractiveness

Weight

Rating Value (present trend; 1=not attractive 10=very attractive)

Growth 2,5 5 Profit margins 3,5 7 Comp. intensity 3 5 Remote env. 1 7 Total value for industry attractiveness

12,5 24,5 15 7 59

Industry Attractiveness
High
High
Premium invest / grow

Medium
Selective invest / grow

Low
Protective selectivity / earnings Restructure harvest / divest Harvest / divest

100

Business Strength
Medium

Challenge invest / grow

Prime selectivity / earnings Opportunity harvest / divest

67

Low

Opportunistic selectivity / earnings

33

100

67

33

0

Strategy Implications
The position on the matrix (determined according to the weight, rating and value) will indicate the appropriate strategy (as in the BCG matrix). • Green cells define the businesses that will receive the resources to grow; the so called “green light” businesses. The market is high or medium in attractiveness and the organization has high or enough skills and resources to take advantage of the market.

• Red cells define the businesses that lack opportunity in terms of market and or company capabilities; the so called “red light” businesses. They are managed to harvest their resources or are just divested. • Yellow cells define businesses that are to receive selective investment, and where caution (the yellow light) is the operating style.

Ind. Attractiveness/ Business Strength Cell Matrix
• • • • • • Takes many strategic variables into account Allows for weighting & range of rankings Use to prioritize investments & channel funds No real guidance on specifics of business strategy Doesn’t address strategic coordination issues Doesn’t adequately deal with new business in emerging industry

Strategy Implications of Attractiveness/Strength Matrix
• Businesses in upper left corner – Accorded top investment priority – Strategic prescription - grow and build • Businesses in three diagonal cells – Given medium investment priority – Invest to maintain position • Businesses in lower right corner – Candidates for harvesting or divestiture – May, on occasion, be candidates for an overhaul and reposition strategy

Appeal of the Attractiveness/Strength Matrix

• Incorporates a wide variety of strategically relevant variables • Stresses concentrating corporate resources in businesses that enjoy
– High degree of industry attractiveness and – High degree of competitive strength

• The lesson here is emphasize businesses that are market leaders or that can contend for market leadership

Limitations of BS/IA Matrix
• Although richer and more broadly applicable than the BCG growth-share matrix, it can be more subjective in the selection and weighting of the factors. • Different business units may involve different factors which makes the analysis ambiguous. • As it is the case with the BCG growth-share matrix, the results are very sensitive to the definition of the product market. E.g. luxury cars, all cars?

AD LITTLE LIFE CYCLE APPROACH
• This model of strategic analysis is structured like a matrix with five rows and four columns (5 x 4) resulting from combining two performance indicators: industry life-cycle stage and market competitive position

• With reference to the specific market characteristics, the present method, which considers the life cycle stage of a product, points out that a market, in a certain period of time, may be in one of the following four stages: introduction, growth, maturity and decline. Each specific stage within the product life cycle can be identified, assessed, quantified and characterized by a system of indicators.

• • •


Arthur D. Little model focuses on factors that must be taken into account in order to assess the competitive position held by a company that operates in a given market. - supply factors: long-term contracts, labour costs and payment terms; - production factors: production flexibility and capacity, experience, technical skills, environmental protection, quality of management, skill or expertise, labour productivity and production cost; - commercialization factors: the power and quality of distribution network, credit conditions, the image of the product, product range, market share, sales force and price; - financial factors: profitability, financial stability, cash flow and technological protection;

The advantages and disadvantages of the ADL matrix
• Unlike other models of product portfolio analysis the ADL matrix is based on an enhanced applicability because it fits to all situations of competition encountered in a marketplace. • Also the ADL matrix can be applied to the fragmented industries, holding a small competitive advantage but with a large number of ways of obtaining it (provides multiple ways of differentiation). As such we can say that the ADL matrix has a high degree of adaptability to situations of a qualitative nature.

• A first disadvantage is that the matrix does not take into account a number of phenomena that can generate long-term involution in the products life cycle of a company. • Another weakness is related to the high level of difficulty in terms of objective evaluation of the ADL model variables. This is often the case for the competitive position indicator. In other words, the difficulty lies in the fact that some factors are qualitative in nature and there is a high risk of bias in their use.

• In conclusion, we can say that the ADL matrix provides clearer results as a company is more diversified and enable synchronization on decisions relating to competition.

Bibliography
• Dess, Gregory G. and Lumpkin, G. T. Strategic management: creating competitive advantages. 3rd Edition, Boston: McGrawHill/Irwin Publishing, 2007. • Wilson, Richard M.S and Gilligan, Colin. “Strategic Marketing Management – Planning, Implementation and Control”, 3rd Edition, Elsevier ButterworthHeinemann, 2005, p. 378

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