ADL matrix

The ADL matrix, developed by the consulting firm Arthur D. Little, helps managers choose a strategy for a business unit or product portfolio by considering two conditions: its stage in the industry life cycle and the strength of its competitive position. A young, dominant business generally has reason to invest aggressively in market share; an ageing, weak business may be better prepared for withdrawal.

When to use it

• To evaluate and strengthen a product portfolio or group of strategic business units.
• To identify a strategic direction that fits each unit’s life-cycle stage and competitive standing.

Origins

Arthur D. Little developed the matrix in the late 1970s, after the rival Boston Consulting Group introduced its product-portfolio matrix in 1970. The Boston Consulting Group (BCG) matrix compares market attractiveness with a business’s competitive position. ADL retained competitive position as one dimension but paired it with the business or industry life-cycle stage. Although conceptually related to the BCG approach, the ADL matrix never achieved the same level of adoption.

What it is

The life cycle phases

The ADL matrix distinguishes four life-cycle stages. A business in its embryonic phase is usually less profitable than one at maturity and often requires substantial investment. Later in the cycle, the same business may generate cash rather than consume it. ADL defines the stages as follows.

Embryonic

The business unit is new, profits have yet to emerge and considerable financial support may be necessary. The market remains unsettled, with numerous fragmented suppliers and no established structure.

Growth

Demand and the business unit are expanding rapidly. In such a fast-moving environment, a company may find it difficult to determine whether it is gaining or losing ground relative to the market. Attention centres on scaling quickly and creating enough capacity to satisfy customers.

Maturity

Growth begins to slow, rationalisation takes place and both the market structure and competitive landscape become easier to read. The priority shifts from producing as much as possible towards positioning the brand, segmenting the market and maximising profit.

Ageing

Sales decline as the business ages. Careful management may still allow the unit to harvest attractive profits, particularly as competitors leave and the remaining firms settle around an established market leader. Even so, management must decide whether the business can be rejuvenated or should leave the market.

The strength of the company

The matrix expresses the strength of a strategic business unit (SBU) through its competitive position. Relevant evidence includes market share, financial performance relative to rivals, influence over customers or the value chain, brand strength and pricing power. ADL groups that position into five categories.

Dominant

A dominant company leads its market and may even hold a monopoly. Its share and influence make premium prices and strong profitability easier to sustain.

Strong

A strong company may be one of a small number of major suppliers in an oligopolistic market. Those firms still compete, but the structure often provides room to divide demand and earn healthy returns.

Favourable

A favourable business operates in a fragmented market without a clear leader. It faces several competitors but may possess a meaningful advantage within a particular segment.

Tenable

A tenable position is sustainable within a defined niche, such as a limited geography or a specialised product category.

Weak

A weak business combines poor financial performance with a small foothold in an aggressive market. Its scale may be insufficient for long-term survival.

Six strategies for any business

ADL identifies six broad strategic routes, with particular relevance for units in weak or ageing positions:

1. Market strategies: enter new geographies, develop additional segments or strengthen the brand.

1. Product strategies: introduce new offers, differentiate existing products and position them around the needs of selected segments.

1. Management and system strategies: build an advantage through superior processes, such as lower-cost production or better customer service.

1. Technology strategies: invest in research and development so the portfolio contains fresh products with strong market appeal.

1. Retrenchment strategies: use customer loyalty to rebuild the business, capture a greater share of customer spending or support higher prices.

1. Operations strategies: improve logistics, accelerate delivery or increase operating efficiency to create an advantage.

Developments of the model

Life-cycle models share a fundamental measurement problem: the stages are understandable, but the transition from one to another is often difficult to observe. A young company is readily distinguished from an ageing one, yet the precise boundary between adjacent phases may remain ambiguous. Nor is there a standard duration. The cycle for an electronic product may last only a few years, while many raw-material markets can persist for far longer.

How to use it

An organisation with several products or business units can apply the matrix in three steps.

Step 1: determine the position of the business in its life cycle

Because the boundaries between phases are blurred, this judgement is not always straightforward, even though the extremes of embryonic and ageing are often visible. Four diagnostic questions help locate the unit:

• What is the size of the market?

• How many companies serve it?

• How large are those suppliers?

• How long have they been operating?

Numerous small, young competitors point towards an embryonic market; a few large, established players are more consistent with maturity or ageing.

Step 2: determine the competitive position of the business

Competitive position is generally easier to assess than life-cycle stage. A strong unit normally combines a distinctive offer with pricing power, meaningful share, healthy growth and attractive profitability.

Step 3: plot the position of the business on the matrix

Plotting the unit appears simple, but real businesses often seem to straddle two or three cells. When that happens, revisit the evidence from the first two steps before choosing the best-supported position. The resulting strategic guidance can be summarised as follows:

• New or growing unit with a strong or dominant position: defend the advantage and increase market share where possible.

• Mature or ageing unit with a strong or dominant position: protect the position, grow in line with the market or consider harvesting profits.

• New or growing unit with a weak position: secure a defensible niche or consider withdrawal if profitability cannot be achieved.

• Mature or ageing unit with a weak position: improve competitiveness if feasible; otherwise, prepare to exit.

Some things to think about

• Consider ADL’s growth routes for every strategic business unit or product, not only those in obvious difficulty.

• Even when placement is difficult, the exercise can provide a valuable indication of long-term strategic direction.

Top practical tip

Test ADL’s six growth routes against every strategic business unit or product; the options can reveal opportunities even outside weak or ageing positions.

Top pitfall

Do not mistake an uncertain cell assignment for precise fact. Use the matrix to inform long-term direction, then revisit the placement as market and performance evidence improves.

Further reading

• Hofer, C.W. and Schendel, D. (nineteen seventy-eight). Strategy Formulation: Analytical Concepts. West Publishing.
• Hax, A.C. and Majluf, N.S. (nineteen eighty-four). Strategic Management: An Integrative Perspective. Prentice-Hall.