Portfolio Analysis: Igniting a long-term spirit in a short-term world (XXIII). ADL matrix last commentary.
The last Friday of October has landed again to our inspiration. Wishing next month of November may become the beginning of our holidays season with love. Our goal for today is to conclude the analysis of the ADL Matrix, in consequence, it is the day for our strategic reflections’ episode. We will proceed with our own personal critique of this model too.
We also have decided to change the order of paragraphs. We will put the usual musical beginning at the end of each publication. Therefore at the bottom of this post, and before introducing the song of today, we will explain why we have designated the music from the preceding episode. Today, we will write about the three rock “Living on a prayer” versions of Bon Jovi at the bottom of this post. Alors, let´s begin.
What does happen with the ADL Matrix? As you have consistently observed over and over during this saga, the ADL matrix is also based on the degree of profitability and competitive position of the SBU (Strategic Business Unit). Regardless of the calculations of the factors considered for the measures in the X-Axis or Y-Axis, everything lands into profits or maximization of shareholder value. At the end of the day, all these 20 quadrants are guiding principles in terms of profitability, that have been considered for decades when it comes to a selection of corporate strategy options, and the further implementation of specific plans of actions of business strategy (strategic planning).
In these circumstances, the strategist is framed to decide based on the available recipe strategies for each quadrant, altogether accepting the legacy of competitive advantage. Particularly, the usage of quadrants positioning, with its pros and cons (particularly cost-cutting and destruction of the small players) are clearly expressed in the model.
Advantages and Disadvantages of the ADL Matrix.
ADL Matrix Advantages:
The ADL matrix was a clever move to consider the life-cycle. It has been an effort to provide a business intelligence tool at the corporate level, and it was considering the life cycle of an SBU. This was a clever move from the ADL consulting house because every single business unit of our entities (as us) has a lifespan given our specific conditions of quality of existence and type of pampering. We can´t compare or judge apples of one week, with pears of two months and frozen peaches. It is of tremendous help to compare SBUs using the corresponding life-cycle status for each.
The ADL matrix is for those who know how to use it. It added value to those who have gotten the time to learn it or those who by formal training or experience, knew how to use it. The fact that a tool utilized the nature of the industry evolution is directly correlated with the structure of causes and consequences for competition. But if professionals do not understand the theory behind the ADL matrix, little or no application or whatsoever will ever flow with righteousness. In addition, if the ADL matrix is not well understood by all the team players, there won´t be any alignment between the SBU managers and the Board of Directors representatives.
The ADL matrix is valuable only if it handles good data. It is valuable to infer corporate strategy decision-making, if and only if the data gathered to calculate and assess the weighted average measure of critical factors is correct. The ADL matrix activates the Board of Directors and managers to search for the right assumptions on how to gather and clean that information. The ADL matrix is an opportunity to invest time in reviewing the information that many times are false or adulterated.
The ADL Matrix can be modified to include integral strategy. In addition, the ADL Matrix industry evolution pattern provides clues to help industries to overcome the downfall of the declining process after maturing. Look again at the following two slides, please. Read them thoughtfully. And you will understand why we dedicated in the past a whole saga to pricing.
Price wars or price competition is the cause of the destruction of industries as soon as products and services begin to grow. Look at the yellow text under-lighted of the slides, and you will see the pattern of cost drivers all over the life-cycle: cost-cutting, increasing of cost efficiency, cost reduction, emerging excess capacity, growing competition at a local and international level, cost advantages precipitating shake-out of the industries, elimination of weaker companies, consolidation of the industry only with a few leaders, pricing competition eroding margins, bargaining power of distributors increases price reduction, etc…
If you wish to download the last slides in PDF Format click here:
The importance of plotting using the variable time. Plotting using an X-axis and Y-Axis is a wonderful method for establishing priorities when it comes to competition and industry evolution positions if there is consistency in the standard length of the stage for each industry. For example, two SBUs of different industries may last longer or smaller periods of time in each phase (embryonic introduction, growth, maturity, or decline). If industry representatives comprehend how important is to don´t let industries fade away, but to rejuvenate them, then the plotting becomes dynamic and circular.
ADL Matrix Disadvantages:
Ignorance about the usage of this tool. Most professors do not offer examples on how to assess a weighted average score plotting at the university. In consequence, managers have no idea or understanding of the toolkit. In management practice, the ADL matrix has never been heard as a planning tool by the majority of Board of Directors representatives, and it is not requested at consulting houses mandates.
The gap between theory and practice is abysmal. The ADL matrix looks good on paper or slides, but when it comes to quantifying the rates and determining the scales, little attention is given, even by the same consulting practitioners. When tools are difficult to apply (because of the difficulty of reliable data gathering or its complexity), then managers tend to avoid them.
The ADL matrix is not a unique option. When doing SBU portfolio analysis, it is convenient to do the 5 matrixes in parallel: The BCG matrix, the General Electric Matrix, the Shell Directional Policy Matrix, the ADL strategic condition matrix, and the classic Abell and Hammond´s matrix. Each of these matrixes has particular views that are complementary to each other. The best tool of course is the tailormade one, done with all the factors which are exclusive for your own company. But if you don´t have your own portfolio analysis matrix, it is recommended to start with these 5 frameworks which with time will help you to create your own, predictably and inexorably it will come because of using the existing ones.
How to reconcile qualitative factors with numbers at different stages of the life cycle?. This is the most crucial difficulty of the ADL matrix, that if overpassed, will provide judgment elements as essential requirements to assess a company SBU portfolio.
Our Final Critique about the ADL Matrix toolkit.
Eleonora Escalante Strategy’s final verdict about this tool is: it is worthy to use it in order to learn about the SBU industries and competitive factors for each SBU position. It is also an interesting complement to use with the rest of the “oldies” frameworks. What I like the most about these models is that they were conceived to go beyond the financial returns and profitability, and they allow a space for adjustment and modification of factors. Particularly if Design-Based Research is implemented, and the final adjusted ADL model is well designed and adjusted to your own corporate efforts. The key with the ADL Matrix toolkit is to revitalize it with excellent and reliable data or information.
The main problem is not the corporate strategy frameworks but the premises of competitive advantage: how to evolve from product price wars?. Just look at China’s business model, with a generic low-cost strategy on the belt road ahead, and it is now affecting the global trade and commerce survival of the Middle-class everywhere. And China is not guilty of its decision-making either. Neither us nor any other strategy professor who prepares its course material on books and papers written by those who coined these theories. So this is not an issue of any portfolio analysis matrix, but a problem on how to deal with the premises of competitive advantage that privilege the price wars as common and natural. We have a long way to go back in time and repair what is wrong: how to fix the big issue of “competing under the cost reduction premises” which only destroy humanity instead of rebuilding it.
Why did we choose Bon Jovi’s composition before? We selected Bon Jovi, not because we like rock per se. Of course, we grew up in times of Rock bands ‘music, but our particular taste was a bit tranquil, inclined more towards pop rock or pop ballads. If you listen carefully to any music message, the lyrics express exactly the same message: “The hope and faith of the working class are always hanging on a prayer”.
“Woah, we’re halfway there
Woah, livin’ on a prayer
Take my hand, we’ll make it I swear
Woah, livin’ on a prayer”
Song for today. Today´s piece of music has nothing to do with rock. We have traveled to this past decade, to the year 2015, to Bruno Mars and Mark Ronson’s song “Uptown Funk”. Enjoy!
Blessings and see you again next week. Thank you for reading to me.
Sources of reference utilized today to prepare our publication:
(1) Tudor, Ionescu Florin; Valeriu, Curmel “Product Portfolio Analysis-Arthur D. Little Matrix”. Bucharest Academy of Economic Studies, Marketing Faculty. https://www.researchgate.net/publication/227462822_PRODUCT_PORTFOLIO_ANALYSIS_-_ARTHUR_D_LITTLE_MATRIX
Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated
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