ADL matrix - competition vs. sector maturity
- The sector maturity matrix (ADL) is a strategic tool that enables companies to assess growth prospects, identify the business environment and balance their production portfolio.
- In the development of strategic management and portfolio analysis in companies, it is important to take into account both market absorption and the phase of the product life cycle and the relationship between the two.
- The ADL matrix describes a company's strategy based on competitiveness and sector maturity, where different combinations of these variables correspond to a dominant, strong, favorable, unfavorable or marginal position.
- The ADL matrix makes it possible to determine a company's growth trajectory in different sectors, indicating development strategies.
- Disadvantages of the ADL matrix we can include subjectivity, difficulty in identifying the phases of the sector cycle, and limitations in application for smaller companies.
The development of strategic management in enterprises forces the continuous search for and development of portfolio analysis methods. Research aimed at competition analysis and all the behavior of enterprises and market laws have directed the attention of researchers and managers to the fact that the factor of market attractiveness is not only its absorptive capacity. Also to be taken into account is the current phase of the life cycle in which the products are located and the interrelationships between them.
What is an ADL matrix?
From this search was born the technique of portfolio analysis - the ADL matrix Also known as the sector maturity matrix. It was created at a consulting firm Arthur D. Little in the 1970s. The concept of the ADL matrix developed by this company is based on the assumption that the ability of a product to bring profit to an organization is based on the competitive position of the company, on the one hand, and the degree of maturity of the sector, on the other. The stronger a product's competitive position, the greater its ability to generate a surplus. It is also worth noting that the concept of the product life cycle phase is relevant here.
ADL matrix structure
The ADL matrix is constructed on the basis of two variables: the competitive position of the company (or the degree of competitiveness of the product) and the degree of maturity of the sector.
- dominant - Controlling the behavior of competitors,
- strong - to carry out a policy on the choice made and at the same time not to risk losing the position in the long term,
- beneficial - execution of the strategy and maintaining a stable position over the long term,
- unfavorable - explain the continuity of business, which is the result of sufficiently good performance, make available the opportunity to benefit from the general tolerance of the strongest competitors,
- marginal - despite unsatisfactory results to enable improvements, which must be significant in nature.
The second variable consists of the four phases of the product life cycle:
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Strategic trajectories and development strategies
The ADL matrix makes it possible to determine strategic trajectories, i.e. the course of the company's development in each sector according to success and failure scenarios. The classic trajectory of success is a line showing the development of a sector from entry to start-up phase with a marginal position until taking a dominant position in the declining phase.
Another example shows dominant or strong positions in all phases of the sector's life - this is represented by the top solid line. The dashed line indicates trajectories of failure as a consequence of mistakes in product and investment policies.
Connected to the ADL matrix is the concept of natural strategies. Thick, diagonal lines separate areas and sectors of the matrix that may be strengths of the company from questionable and definitely unfavorable sectors, and indicate the desired direction of product development.
For areas that are above the top line as a result of the analysis, the natural strategy is development, for those located between the top line, selective investment is recommended. In contrast, sectors below the bottom line have no prospect of development, and are therefore inclined to liquidate.
The natural growth strategy targets companies that operate in sectors that are in the early stages of their life cycle and have a relatively strong competitive position. Development is based on committing resources to areas of the company that have a good competitive position.
When investing selectively, focus on weak segments (by trying to make them competitive). It is important to decide whether we should focus on all sectors or on the more promising ones. The decommissioning strategy is to reduce or abandon activity in areas of weakness.
Advantages of the ADL matrix
The sector maturity matrix gives an indication of the degree to which different strategic options are selected and the chance to balance the production portfolio. Moreover, it is transparent and flexible in assessing market attractiveness. It allows an assessment of how much the current state of a company's operations offers prospects for growth in the next few years. In addition, the use of the ADL matrix in many cases makes it possible to identify the company's environment. For example, to better understand the strategies of competitors, suppliers, and to detect potential substitutes for a product or service.
Disadvantages of using an ADL array
Instead, it has been criticized for excessive subjectivity in selecting and evaluating factors. It is also worth noting that there can sometimes be difficulties in identifying the phases of the cycle that a sector is in. This is because not all sectors develop in the same way. An important disadvantage is its limited practicality due to the fact that the method primarily serves large companies with an extensive structure. For medium and small companies, the usefulness of the method is less. Based on the ADL matrix, one can see a close correlation between the competitive position and the ability to generate a surplus.
ADL matrix vs. BCG matrix
ADL matrix (Sector maturity matrix) and BCG matrix (Boston Consulting Group) are two popular strategic tools used in business portfolio analysis. Although both matrices are used to evaluate different aspects of a company's business, they have important differences in their approach.
The ADL matrix focuses on sector maturity and growth prospects, allowing to assess market attractiveness and surplus generation capacity.
On the other hand, the BCG matrix focuses on market share and growth analysis, classifying products or business units based on their position relative to competitors. Although both tools are useful, they differ in their scope and purpose, making their use complementary in a comprehensive strategic analysis of a company.
The ADL matrix is an important tool for strategic analysis
It allows companies to assess their growth prospects, taking into account both the absorptive capacity of the market and the phase of the product life cycle.It is also worth noting that this is only one of the tools available in business portfolio analysis, and its use can be complemented by other methods, such as the BCG matrix, to comprehensively assess a company's strategy.