STRATEGIC MANAGEMENT

IA – BS MATRIX & AD LITTLE LIFE CYCLE

APPROACH

K.CHITRA

11TM03

The Business Strength-Industry Attractiveness Matrix

• 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.

Business Strength and Industry Attractiveness Dimensions Horizontal axis – market

attractiveness;• Size • Growth• Customer satisfaction levels• Competition; quantity, types,

effectiveness, commitment• Price levels• Profitability• Technology• Government regulations• Sensitivity to economic trends

Vertical axis – business strength;

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

Fig. 9-3: Industry Attractiveness-Business Strength Matrix

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

Description of Dimensions

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 Rating Value

(importance (performance; (Weight

to the firm: 1=poor, 10= × Rating)

must add up excellent)

to 10)

Profit 3 8 24

Pro/ser qual. 3 8 24

Man. Skills 2 7 14

Location 1 6 6

Atmosphere 1 5 5

Total value for business strength 73

Industry Weight Rating ValueAttractiveness (present trend;

1=not attractive 10=very attractive)

Growth 2,5 5 12,5Profit margins 3,5 7 24,5Comp. intensity 3 5 15Remote env. 1 7 7

Total value for industry attractiveness 59

Industry Attractiveness

High Medium Low100

High

BusinessStrength 67

Medium

33Low

100 67 33 0

Premium Premium invest / invest / growgrow

Selective Selective invest / invest / growgrow

ProtectiveProtective

selectivity selectivity / earnings/ earnings

Challenge Challenge invest / invest / growgrow

Prime Prime selectivity selectivity / earnings/ earnings

RestructurRestructure harvest / e harvest / divestdivest

OpportunisOpportunistic tic selectivity selectivity / earnings/ earnings

OpportunitOpportunity harvest / y harvest / divestdivest

Harvest / Harvest / divestdivest

Strategy ImplicationsThe 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 theAttractiveness/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, labor costs and payment terms

• production factors: production flexibility and capacity, experience, technical skills, environmental protection, quality of management, skill or expertise, labor 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;

• Dominant - this position is very rare and most often is due to the posture of a monopoly company or market dominance exerted strong, from a technological point of view.

Strong - the company has a high level of freedom in terms of strategic options and can act without its market position to be threatened by competitors.

Favorable - this position is found in fragmented markets, where no competitor has a very clear market position and the most important companies have a high degree of freedom.

• Tenable - companies within this category are generally vulnerable to fierce competition exerted by organizations with proactive and strong market positions. However, they survive and are able to justify their existence on the market.

• Poor - the company performance is generally unsatisfactory, even if market opportunities exist, through which it can be improved.

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: McGraw-Hill/Irwin Publishing, 2007.

• Wilson, Richard M.S and Gilligan, Colin. “Strategic Marketing Management – Planning, Implementation and Control”, 3rd Edition, Elsevier Butterworth-Heinemann, 2005, p. 378