Professional Documents
Culture Documents
WP #1493-83
October 1983
-1-
It
is derived from the fact that a product's sales volume follows a typical
pattern that can readily be
Kotler (1980).
1982, Utterback
1978, Hayes and Wheelwright 1979a and 1979b, Moore and Tushman, 1982).
Although normally the stages within the product life-cycle are
characterized by their corresponding sales growth, it is important to understand how often financial characteristics impact each stage, such as profit
and cash-flow.
As shown in Figure
growth phase, prior to leveling off and subsequent steady decline at the
maturity phase, when normally competitive pressure begins to erode profit
margins.
At the very end of the aging phase, profits could even turn
become significant.
-2-
Embryonic
Growth
Maturity
Aging
Figure
1:
There are
According-
ly, Arthur D. Little Inc. (ADL) has proposed a fairly structural methodology
to guide strategic choices based on the life-cycle concept (Osell and Wright,
Forbes and Bate, 1980, Arthur D
1980,
paper
One
the firm has in the industry in which each of its businesses compete.
ADT,
I __ -__
III
-4-
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the case with all of the previously discussed matrices, the position of a
business unit within it suggests the pursuit of some natural strategic
objectives.
reflect upon a desirable market share position, the need to deploy financial
resources to support investment requirements, and the expectations with regard
Figures
4,
5, and
And three
managers is to
channels.
Once again,
the emphasis on segmentation is articulated in terms of the external environment, attempting to establish the roots of business identification in the
behavior of competitors, instead of being driven by internal functional
_lle1___
11
-6-
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arrangements.
If a
business unit are impacted, it is most likely that this unit should be
split into more than one strategy center.
When many
Also, if another
unit of the organization shares the same set of customers, the strategy
center may be too narrowly defined, and it might be convenient to broaden
this definition by joining two or more units of the organization under a
single strategy center.
4) Quality/Style.
If a change in these
strategy centers, because these would signal the need to melt those products
in the same unit.
-11-
6) Divestment or Liquidation.
If a product
All
descriptors are: market growth rate, market growth potential, breadth of the
product lines, number of competitors, distribution of market share among
competitors, customer loyalty, entry barriers, and technology. (All of these
correspond to the category of external uncontrollable factors, which we have
addressed in the industry attractiveness/business strength matrix).
Figure
Obviously, it will be
As usual
dominant, strong, favorable, tenable, and weak - . The sixth one, non-viable,
does not need a formal description, because it represents the final recognition
that the firm has really no strength whatsoever,
ll
-12-
I. Growth Rate
Embr)onic
Growth
MIturt
Atinl
.. I
2. Predictability of
Growth Potential
i
3. Product Line
Proliferation
4. Number of
Competitors
6. Customer Stability
L I. I
()
U
Proliferation of product
slows down or ceases.
line
. J_ ._)
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Share distribution reacts unpredictably to entrepreneurial Insights and timing. Shares are unstable and tend to fluctuate
among competitors.
1 Tchnolotv
,1
1[
5. Market Share
Distribution
(Concentration)
and, or Share
Stability
7. Ease of Entry
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-13-
I.
Dominant
2. Strong
3. Favorable
4.
Tenable
5. Weak
~~~~~~~~~~~~~~~
ll
Figure
II]
-14-
8 are meaningful
There is
only one firm in an industry, if any, that can assume a dominant role.
If such
strong business enjoys a most definitive advantage over its competitors, with
relative market share beyond 1.5, but has not reached the absolute dominance
of the formercategory.
about the business.
A favorable
But
A tenable business is
It is
either up or out.
2. Portfolio Vision in the Life-cycle Matrix
It is useful not only to present the position of all the business units of a
firm in a portfolio matrix, but also to provide the contribution of each business
unit by means of a set of financial indicators, such as sales, profits, assets,
and return or net assets.
of a firm in the life-cycle matrix, and Figure 10 further documents the financial
contribution of each of these businesses.
-15-
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Total
6.8
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Total
15.8
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5.9
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15.8
100
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Total
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--
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4.7
6.8
12.6
100
Total
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-11.3
Total
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5.8
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I
Total
!
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12.3
11.8
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to
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Total
100
.,
Keys:
Figure
.1
Total
-5.3
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- 0.51
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6.3
11
6.3 1l1.8
__
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19.1
19.11
i7.0
-17-
to confirm the role that an individual business should play according to its
classification in the matrix.
However,
when looking at the industry maturity dimension, a firm would benefit from
having a reasonably well-balanced portfolio.
toward the aging dimension, the firm might enjoy an excellent current
profitability,
On the
could have great future potential, but might be unable to achieve it, because
of the lack of a current base to support the large commitment of resources
required.
3. The Concept of Natural Strategic Thrust and Generic Strategy
Once the portfolio of businesses has beenproperly positioned in the lifecycle matrix, ADL introduces three conceptual aids to assist managers in
the process of identifying an appropriate strategy for each strategy center.
The first of these concepts is the so called families of thrusts.
ADL
postulates that there are four families which cover the entire spectrum of
business positioning within the portfolio matrix: natural development, selective
development, prove viability, and withdrawal.
where each of these four families fit.
Figure
11 shows broadly
III
-18-
FAMILIES OF THRUSTS
Selective Development:
Natural Development:
Find niche(maintain
Startup
'selectively)
Grow with industry(maintain
niche(build
Exploit
position aggressively)
aggressively)
Gain position gradually
Gain position aggressively Hold niche (maintain
selectively)
Defend position
Harvest
Figure
11:
Prove Viability:
Withdrawal:
Withdraw (from
specific
markets)
Divest
(products,
assets)
Abandon
-19-
And "withdrawal" calls for concerted actions to withdraw from the business.
Having selected the family of strategic thrust most appropriate for a
given business, the manager should select now one specific thrust belonging
to that family.
11 .
For
example, the thrusts available for the natural development family are:
- Start up, which could be applied in an embryonic stage, when the business
unit has strong competitive potential to acquire rapidly a significant
strength in that market.
- Growth with industry, which is applicable when the firm is satisfied with the
current position of the business, and wants to maintain its existing market
share.
dominant or strong,. and the industry has reached a certain stage of maturity.
- Gain position,
for tle business to have a more solid position, perhaps applicable when the firm
enjoys a favorable status in a growth industry.
- Gain position aggressively, a clear thrust when the firm has a tenable or
weak position in the early stages of maturity, and
wants to improve
dramatically its current standing to avoid being left out from an attractive
industry.
- Defend position, which could apply when the firm enjoys an either dominant
or strong position in earlier stages of maturity.
- Harvest, clearly relevant for the aging stages.
The third concept is that of generic strategy. Having selected a specific
thrust within the family, ADL proposes a set of 24 generic strategies to
choose from, in
------I
III
-20-
Figure
Survey
Code
A
Export/Same Product - To invest in marketing selected products of the domestic business unit in foreign markets; these may or may not have the same
competitors and market dynamics as the domestic market.
Forward Intearation - To incorporate within the business organization external functions between the current business and the ultimate consumer so that
more effective distribution or increased control over the marketplace can be
achieved.
Hesitation - To slow down or establish a 1-year moratorium on new capital investment and new expenses; does not prohibit expense or capital investment
for normal maintenance of the business, e.g., because of capital limitations,
dangers of overextending management, or market uncertainties.
Complete Rationalization - To strip down a business to currently most profitable piece and reinvest the proceeds of divestments in the successful operations retained.
Market Penetration - To increase market share through manipulating the marketing mix; e.g., lower price, product line breadth, increased product and sales
service, increased advertising.
Market Rationalization - To prune back the market served by the business unit
to most profitable segments and/or higher volume segments, or by particular
type or geography, in order to concentrate marketing focus.
-21-
Figure
Survey
Code
O
12: Continued
New Prodcts/New Markets - To invest in developing, manufacturing, and marketing products related or unrelated to the present product line for new markets
that are different in geography or by type from the present markets served by
the business unit.
Pro-ducticn Pationalization - To increase standardization of designs, components, and manufacturing processes and/or concentrating facilities and/or
subcontracting out elements of production.
Product Line Rationalization - To narrow the product line to the most profitable products.
Pure SuyNoival - To maintain existence of the business unit in periods of extremely adverse business conditions by eliminating functions, products, or
by underfinancing any activity.
Technological Efficiency - To improve operating efficiency through technological improvements in physical plant, equipment, or process.
Unit Abandonment - To divest a business unit because of its inability to remain viable within the corporation or because the unit may be of greater
value to someone else.
_1_1__11__1_1I_.__
ll
We have found it useful to group those strategies into subcategories which communicate the main area of concern addressed by the
strategy.
13.
14.
strategies congruent with the stage of the life cycle and the business
competitive position is given in Figure
15.
might be consistent with the industry and competitive portion of a business and second, to facilitate a diagnostic process.
as the
Ronagraph, which shows on the vertical axis the return on net assets (RONA)
generated by each of the businesses of the firms portfolio, and on the
horizontal axis the internal deployment of earnings.
Integration Strategies
A. Backward Integration
G. Forward Integration
III.
Go Overseas Strategies
B. Development of an Overseas Business
C. Development of Overseas Production Facilities
J. Licensing Abroad
IV.
Logisitcs Strategies
D. Distribution Rationalization
E. Excess Capacity
M. Market Rationalization
Q. Production Rationalization
R. Product Line Rationalization
V.
Efficiency Strategies
N. Methods and Functions Efficiency
V. Technological Efficiency
W. Traditional Cost Cutting Efficiency
VI.
Harvest Strategies
H. Hesitation
K. Little Jewel
S. Pure Survival
U. Maintenance
X. Unit Abandonment
Figure
IIXIXI ______ll^-Y^-^__11__11
_.
13
,i
-24-
trategie
II
I '
D E
'Thrusts
..
G H
I[
'
1
[
|R
NATURAL DEVELOPMENT
Startup
Growth with
industry
Gain position
graduallvy
Gain position
aggressively
Defend position
E IG
CI
Harvest
IU I
H_
OIP
R.
w
U
SELECTIVE DEVELOPMENT
Find niche
Exploit niche
JE
Hold niche
1G
|M
IR
|L
IP
PROVE VIABILITY
Catchup
Renew
Turn around
Prolong existence A
IL
I
JK
MI
IQ
|M
I Q
MN
IR
0
I
S
I
T
IV
I
WI
W
WITHDRAWAL
Withdraw
)ivest
B I EI
I
I
I
I ..
I
K
Q R
Q
Wu
w
Abandon
---
Figure
14:
-25Figure
15:
ladustr /Matlrity
Charactertzaela
Enmbld
I.
L.
nitial Market_
zDtelopmment
DSFTW
DSF
Market Pe.trato
DSFrw
U. Siam Products/
Same Markets
T.
Mutuf
Growth
DSF
TW
Same Products.'
Sw Markets
DSF
DSF
DSF
P. New Products/
Same Markets
O.
DSF
NNeI Products/
New Markets
DSF
A. Backw.rd
laltei~rattiont
~ DSF I
G. Forward
F. Lxport/
i Smee
Products
DSF
DSF
Ucstnt
FT'
FTW
FTW
FTW
Abroad
C.
"
Integrantion
J.
DS
Development of
Oweras Factilite
DS
FOvnen
B. Deelopmenl of
Overeas Busnesa
,,il
L. Exce
Caaci
'
DS
DSF
SF
___
'DSF
DSF
M. Market
Rationalizatlon
TW
D. Distributiona
Rationalluttioni
FW
'
I SFT
'
I
i SFT
R. Product Line
Ratlonaliution
Q. Prholcton
V.
S"
I
Rationalizatlon
Technioticll
I
I
.rficln-
DSFT
FT'
SFT
_
DSF
N. Method std
n
Functions
r:flcnieftek
DSFT
DSF
WU.Tddilllonal ot
|
C (~~uttin~
l~
WFT
________W
H. Hiltation
F
I{
K. Copktl
Ronalaton
FT'
_I
llt
Abandonment
Competitive Position:
D
S
F
T
Dominant
Stuong
Fvorale
Tenable
' We k
SFT
S. Pure ur al
X.
iS
!
IFT
_ ___
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i
_DS
j.
SFT
III
-26-
100%, all earnings are redeployed and the business is cash neutral.
Above a
100%, the business becomes a cash user, and below 100%, a cash generator.
Moreover, a negative number means that a disinvestment strategy is being
applied, because more than 100% of profits are being taken out of the
In the Ronagraph, each business unit is represented by a circle,
business.
show some key financial characteristics of the business units, but also to
compare them with the performance of leading competitors.
those expectations, while businesses C and A are above and below this benchmark, respectively.
This consistency between financial performance and stages of the life-cycle
is not limited exclusively to RONA.
Some of those
indicators are: profits after taxes, net assets, net working capital/sales, costs
of goods sold/sales, fixed costs/sales, variable costs/sales, profit after
taxes/sales, operating cash flows/sales and net cash flow to corporation/sales.
We have briefly commented on Figure
and net cash flows, as the business travels through the life cycle.
Figures
5 and
Moreover,
-27-
II
RONA(%)
Business
C
Prof it
Deployi
300
200
100'
Cash user
I
cash
neutral
Figure
I I_
16
A Typical Ronagraph
0
Cash producer
Disinves
ment
III
-28-
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-30-
5.
The ADL
6. Risk Analysis
The last step in the ADL methodology consists of mixing the degree of risk
implicit in the strategy pursuit by an individual business unit.
Risk is
of high subjectivity.
ADL
-31- Strategy; some strategies are more aggressive than others, and consequently
imply a larger risk.
- Assumptions;
By selecting
the life cycle as the central conceptual framework behind that process, ADL
has recognized a relevant and widely accepted concept which has deep
implications for strategic development, particularly in high technology.
Implicitly, the life cycle has been part of the previously described
portfolio matrices.
III
-32-
Risk Level
Factors
High
Medium
Low
Maturity Position
Industry
Strategy
Assumptions
Past Performance
Management Factors
Performance Improvement
~~~
Figure
__
-33-
the life-cycle has little validity, and that the marketing strategies
typically recommended for succeeding stages of the cycle, are likely to
cause trouble: "In some respects, the concept has
the branch managers tendency to assume that some slump in sales is evidence
of having reached its aging stage, prompting the abandonment of the brand.
However, their view is drawn from non-durable goods, like cereals and
cosmetics, stressing the behavior of brand sales as opposed to business units
sales.
Porter (1980) also raises some criticisms regarding the life cycle:
- The duration of the life-cycle stages varies widely from industry to industry,
and it is hard to specify what stage prevails in an industry at a given point
in time.
- The industry maturity does not always evolve into a well behaved S-shaped
pattern.
1_
___I__1_III
-XII^IIIIII__
III
-34-
industries and, as time passes, they become more and more fragemented
(i.e. bank cash dispensers).
to apply its methodology that way, in uninitiated hands that tool could hinder
a truly innovative way of thinking.
-35-
References
- --- rn
-36-
Kotler, Philip, Marketing Managment, 4th Ed., Prentice-Hall, Inc., Englewood Cliffs,
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