ADL matrix - competition vs. sector maturity
The development of strategic management in enterprises has necessitated 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.
From this search was born the technique of portfolio analysis - the ADL matrix Also known as the sector maturity matrix. It was developed at Arthur D. Little's consulting firm in the 1970s. Developed by this company, the concept of the ADL matrix is based on the assumption that the ability of a product to generate profit for 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 is used for the same purposes as the BCG matrix and the McKinsey matrix. Also, the rules of construction of these models are the same.
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:
Strategic trajectories and development strategies
ADL matrix allows the determination of strategic trajectories, i.e. the course of a company's development in each sector according to success and failure scenarios. The classic success trajectory is a line showing the development of a sector from entering the start-up phase with a marginal position to taking a dominant position in the decline phase. Another example is showing a dominant or strong position in all phases of the sector's life - this is represented by the top continuous line. The dashed lines indicate trajectories of failure as a consequence of product and investment policy mistakes.
Z ADL matrix is linked by 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 liquidation.
The natural development strategy addresses 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, it is important to 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. A decommissioning strategy is to reduce or abandon activity in areas of weakness.
Advantages and disadvantages of ADL matrices
The sector maturity matrix gives an indication of the degree to which different strategic options are selected and a chance to balance the production portfolio. Moreover, it is transparent and flexible in assessing market attractiveness. It allows you to assess to what extent the current state of a company's operations offers growth prospects over 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. However, it has been criticized for excessive subjectivity in the selection and evaluation of factors. It is also worth noting that there can sometimes be difficulties in identifying the phases of the cycle in which 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 ADL matrix one can see a close correlation between the competitive position and the ability to generate a surplus.