THE LIFE-CYCLE APPROACH TO STRATEGIC PLANNING

Arnoldo C. Hax and Nicolas S. Majluf

WP #1493-83 October 1983

 -1-

THE LIFE - CYCLE APPROACH TO STRATEGIC PLANNING

The life-cycle concept has long been recognized as a valuable tool

for analyzing the dynamic evolution of products in the market place. It

is derived from the fact that a product's sales volume follows a typical

pattern that can readily be charted as a four-phase cycle known as

embryonic, growth, maturity, and aging.

The managerial implications of the product life-cycle have been widely

documented. See, for example, Clifford (1980), Urban and Hauser (1980),

Kotler (1980). Moreover, the linkage between the product life-cycle and

strategic management has been a subject of increasing attention (Luck and

Ferrell, 1979; Porter, 1980, Chapter 8). Also much attention has been

given to the relationship between the product life-cycle and management of

innovation and product technology (Abernathy and Utterback, 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 under-

stand how often financial characteristics impact each stage, such as profit

and cash-flow. As shown in Figure 1, profits are negative throughout all

or most of the embryonic phase, but tend to increase sharply during the

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

negative, if there is not a timely disinvestment of the business or product.

What is even more impacting is the behavior of cash flows, which take large

negative values during the embryonic and growth stages, representing an

investment into the future, to be compensated during the maturity

and aging phases, when positive cash flows become significant.

 -2-

Embryonic Growth Maturity Aging

Figure 1: Yearly Sales, Cash-flow, and Profits Through the

Life-cycle Stages.
 -3-

Obviously, the patterns just described attempt to represent the

characteristics of the "natural" behavior of a typical product. There are

numerous exceptions to this, surrounded by a high degree of controversy on

the real meaning of the product life-cycle, which we will explore at the

end of this paper.

Despite this controversy, it is understandable that very many

industries, in particular high-technology ones with a rapid pace of

innovation, center a great deal of attention in the challenges of managing

products with short life time.

The implications of the product life-cycle become central for the

implementation and development of strategies in those industries. 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,

1980, Forbes and Bate, 1980, Arthur D Little, 1974, 1979, 1982).

This approach is supported by another type of portfolio matrix, whose

primary dimensions are the life-cycle stages and the competitive position.

Schematically, the ADL strategic planning methodology is summarized in Figure 2

The rest of this paper is directed to the presentation of that methodology.

1. The Life-cycle Portfolio Matrix

The business portfolio matrix suggested by ADL shares the same attributes

of the previous matrices we have discussed - the growth/share matrix, and the

industry attractiveness/business strength matrix -; that is, it is a pictorial

representation of all the businesses of the firm, in two dimensions. One

represents the impact of the external forces, normally uncontrollable by the

firm. ADL chose the four stages of the business life-cycle as descriptors of

the industry characteristics. The second dimension represents the strengths

the firm has in the industry in which each of its businesses compete. ADT,

selected six-categories of competitive positioning (dominant, strong, favorable,

tenable, weak, and non viable.).

------ _I I __ -__
 III

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Figure 3 presents the six-by-four resulting portfolio matrix. As is

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. Often, a major way of articulating those objectives is to

reflect upon a desirable market share position, the need to deploy financial

resources to support investment requirements, and the expectations with regard

to cash flows required from or contributed to the corporation. Figures 4,

5, and 6 provide some suggestions for strategic positioning according

to these three dimensions.

The use of this matrix is, therefore, conditioned to three primary tasks.

One is to segment the business of the firm into relatively independent SBUs,

which will lend themselves to being analyzed in terms of the two dimensions

of the matrix. Two? is to guide managers through a systematic process in

assessing the stage of the life-cycle in which each business falls. And three

is to provide some support to identify the categories of competitive positioning

of each individual business. These three subjects will be briefly reviewed now.

1.1 Criteria for Business Segmentation

ADL assigns the label "strategy center" to what we have referred to as

Strategic Business Unit (SBU). A strategy center is a natural business, that is,

a business area with an external marketplace for goods or services, and for

which one can determine independent objectives and strategies.

In order to build business strategies, the first task of managers is to

segment the firm into 4i set of natural businesses. To accomplish that, ADL suggests

the use f a set of clues which are grounded on conditions in the marketplace

rather than in internally shared resources, such as sharing of manufacturing

facilities, common technology, or joint distribution channels. Once again,

the emphasis on segmentation is articulated in terms of the external environ-

ment, attempting to establish the roots of business identification in the

behavior of competitors, instead of being driven by internal functional

_lle1___
 11

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Figure 3: The Life-cycle Portfolio Matrix

 -7-

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arrangements. The clues which ADL offers to define a strategy center are:

1) Competitors. A strategy center has a single set of competitors. If a

given business unit faces different sets of competiors in various segments

of the same industry, it might be split into more than one strategy center

in order to focus more sharply its strategic actions against the relevant

competitors.

2) Prices. All products belonging to a strategy center should be affected

similarly by price changes. However, if only some of the products of a

business unit are impacted, it is most likely that this unit should be

split into more than one strategy center. Alternatively, if price changes

also influence products in other organizational units, the strategy center

might have to be integrated into another unit of the firm.

3) Customers. A strategy center has a single set of customers. When many

different customer segments are being served, there is positive indication

that more than one strategy center ought to be defined. 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. In a strategy center properly defined, all product quality

or styling characteristics move harmonically. If a change in these

characteristics for some of the products belonging to a strategy center does

not have a corresponding response in the rest of the products, this might

indicate the need to differentiate more than one strategy center.

5) Substitutability. All products in a strategy center should be relatively

close substitutes. Also, there should be no close substitutes in different

strategy centers, because these would signal the need to melt those products

in the same unit.

 -11-

6) Divestment or Liquidation. The acid test for the definition of a

strategy center is the divestment or liquidation question. If a product

line can be eliminated without affecting the selling or marketing

effectiveness of other products in the startegy center, then it is most

likely that more than one business unit should be recognized. All

product lines of a strategy center are intimately linked in terms of

marketing and selling efforts.

1.2 Identifying the Stage of a Business Within the Life Cycle

ADL identifies eight external factors which are key descriptors of the

evolutionary stage in which a business resides within its life cycle. These

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 7

provides a checklist to help positioning a business unit in the life-cycle

stages according to each one of these descriptors. Obviously, it will be

unlikely that a strategy center falls consistently in a single stage in every

descriptor. As usual a judgmental call has to be made to finally capture

the essence of the industry maturity of the strategy center.

1.3 Identifying the Competitive Position of a Business

ADL has decided to address the question of competitive positioning in terms

of a set of subjective and qualitative categories, rather than ascribing a

numerical value such as market share, to this dimension of the matrix.

Figure 8 spells out the attributes of the first five competitive categories -

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, now or in the future, in that
 ll

-12- MEASURES TO ASSESS INDUSTRY MATURITY

Embr)onic Growth MIturt Atinl

I. Growth Rate Normally grows at rate much As new customers learn about Growth rate equals or becomes As needs continue to change it
faster than that of G.N.P. product, growth increases, and less than that of G.N.P. becomes mpossible to modify
more suppliers are attracted. At the product lines sufficiently to
some point growth rate begins to match those needs, and the
decelerate. markets shrink.

.. I I .. I 1 1 ,1 1
2. Predictability of Growth potential hard to define Increasing percentage of demand Growth potential s well under- Growth potential a known and
Growth Potential accurately; only a small portion is met and upper limits of de- stood. Competition satisfies limited quantity. a)
4J
of the demand is satisfied. mand become clearer. Mlay be specialized requirements. Viable
uncertain developments. sucn as market segments have pro- ()
price reductions based on liferated. U
economies of scale.

i 1 I i I
3. Product Line Competitive pressures increase as Proliferation of product line c- Proliferation of product line Demand slackens, unprotitab!e
Proliferation attracted competitors serve spe- curs rapidly. slows down or ceases. products are dropped. and
cialized customer requirements ultimately product line narrows.
with ariations of original pro-
duct. t44

4. Number of Number of competitors is depen- Number of competitors reaches C.ompanies become entrencned New entrantsunlikely Numberrof co>I
Competitors dent on unforeseeable cir- maximum. Entrants attracted by or drop out if without viable pro- competitors continues to drop.
cumstances. established record of growth and duct differentiation or acceptable -)
high margins. Industry con- cost position. r4
solidation and shake-out begins
in late growth stage. 0)

5. Market Share
1[ I
Share distribution reacts unpre- Large percentage of industry Share distribution oiten equally Share distribution either concen-
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Distribution dictably to entrepreneurial In- sales are controlled by only a few concentrated. Very few compan- trates further as ompetitors fall
(Concentration) sights and timing. Shares are un- or even one company. Shares are ,es control a large percentage of out or fractionaes as ndustrv
and, or Share stable and tend to fluctuate somewhat more stable and the sales. Industry increasingly tends to segment or localize. -g- tJD
Stability among competitors. typically several competitors resistant o hange. and market ing shares are usually stable. c-
enlarge shares against the com- shares staolizie. Qiv c¢iraor- Howe'er. the collapse ,)f
petition. dinary eents such as strikes and marginal competitors masv
natural disasters cause significant enlarge shares of malor om-
share shifts. panies. Weak competitors may
continue token participation.

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on
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6. Customer Stability Customers accept products on a While some repeat customers Customers have well developed Customers are extremely stanle n
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trial basis without significant aevelop, others actively seek buying patterns. ompet:tors identity ad tpc..- A\s suppliers 0
loyalty to the supplier. alternative suppliers. understand the dynamics of ur- dwindle. customers have ewer
chase decisions, and Itss difficult alternatives and become less g-
for a new supplier to win over ac- grcssive In seeking them.
counts.
'ri

7. Ease of Entry
L I. I
Easy to enter. because no one
I I I
Entry tends to be more difficult
It II
Market entry is difficult. Corn-
.
Because Industry s usually
I
dominates. Pricing strategies are as competitors accumulate cer- petitors with dominant positions declining. there i%little or no n-
being developed. and customer tain market franchises. However. have leverage in economies of centive o enter.
expectations are uncertain. If a vigorous market growth reduces scale. Low market growth means
significant harrier to entry exists, risk of entry, because ihare can new competitors must capture
it will probably be guts and high be obtained wuihout directly at- share from cxisting competitors.
technological and related capital tacking competitors. Entry s)
requirements. achieved by locating customers
-r4
with somewhat specialized re-
quirements. '-4

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1 Tchnolotv Technolog plavs an mportant tie process olten continues Customer Iechnological reuire- Technological oiolent Is known.
and solatile role in matching pro- through the mildusIry' growth monts re wll known iand. stable and accessibc.
duct charJcteristics lo market phae. generalls not deln:mndnlrg Tc h
needs. ('usomer requirefncti noloSy hiut, Ioward process and
tend to he pororly etined o) pro- material imlpro)~cmenis and cilt.
Juct i. likels to undergo ,c, crai i;tncy To renew itsell. new tch-
modi ficat oon nologies must be tound bs in-
dustrv or business to replace cur-
rent products wih new decsigns.
I_____ --
 -13-

I. Dominant * Controls behavior of other competitors (performance and/or

strategy).

* Has a wide choice of strategic options (widest choice of options

both natural and selected).

2. Strong * Able to take independent stance or action without endangering

long-term position.

* Able to maintain long term position regardless of competitors'

actions.

3. Favorable * Has a strength which is exploitable in particular strategies.

* Has a more than average opportunity to improve position.

4. Tenable * Sufficiently satisfactory performance to warrant continuation

in business.

· Usually exists at the sufferance of the dominant company or in-

dustry in general.

· Has a less than average opportunity to improve position.

5. Weak * Currently unsatisfactory performance but opportunity exists

for improvement.

* May have most of characteristics of better position but obvious

shortcoming.

* Inherently short-term condition: must change.

~~~~~~~~~~~~~~~
ll I I !

Figure 8: Criteria for Classification of Competitive Position

 II]

-14-

particular business, and therefore, exiting is the only strategic response.

Although the broad descriptions provided in Figure 8 are meaningful

enough to characterize the difference among each competitive position, it might

be useful to comment briefly on the nature of their distinct role. There is

only one firm in an industry, if any, that can assume a dominant role. If such

a firm exists, it truly sets up the standards of the industry. It is Kodak

in films, Boeing, in commercial aircraft, and IBM in mainframe computers. A

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. A favorable position means that there is something unique

about the business. It could result from a differentiating strategy on the

exploitation of a particular niche where the firm happens to excell. But

we are talking now about attributes in some facets of the industry, as

opposed to dominant or strong positions industry-wide. A tenable business is

beginning to have some symptoms of erosion and misperformance; however, there is

little question that the business deserves full attention and has a good

probability for effective recovery. Finally, a business in a weak position is

in a transitory situation which can not be sustained in the long run. 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. Figure 9 represents the overall portfolio of the business

of a firm in the life-cycle matrix, and Figure 10 further documents the financial

contribution of each of these businesses. This information is helpful

 -15-

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Distribtuion of Corporate Sales (%) Distribution of Corporate Net Income (%)

Life Cycle Stages Life Cycle Stages

E G M A Total E C, M A Total

D -- 34.7 -- 6.8 41.5 D -- 50.9 -- 15.8 66.7

0 S 1.0 14.4 4.4 -- 19.8 S 1.1 25.9 5.9 -- 32.9

E-4
H
Vo

F -- 25.8 0.3 -- 26.1 F -_ _- 12.5 0.5 -- 13.0

pJ
0
H
l... T
H T
H
el
"t0 W 1.5 - 11.1 -- -- 12.6 -1.3 -11.3 -- __ -12.6
W

Total 2.5 886.0 4.7 6.8 100 Total -0.2 78.0 6.4 15.8 100

])istrbution of Corporate Assets(%) Return on Net Assets(%)

Life Cycle Stages Life Cycle Stages
E G M A Total E G M A Total
! - I
I
I
D -- 26.9 -- 5.8 32.7 D 13.3 -- 19.1 14.3
I

0 S 1.1 14.8 3.5 -- 19.4 I S 6.5 12.3 11.8 -- 11.9

I
E-4
H
to
F -- 32.3 0.3 -- 32.6 F -- 2.7 11.7 -- 2.8
0

H
T T

2.8 .6 .
W 1.7 13.6 - ..__. 15.3 .1 W -5.3 -5.0 . __ -5.7

Total
.,
100 Total -0.5
- 0.51
6.3 11
6.3 1l1.8 j 19.1
19.11 i7.0
Keys: E: Embryonic, G: Growth, M: Maturity, A: Aging, D: Dominant,
S: Strong, F: Favorable, T: Tenable, W: Weak

Figure 10: Disbribution of Corporate Sales, Net Income, Assets and

Return on Net Assets by Life-Cycle Stages and Competition
Positioning
 -17-

to confirm the role that an individual business should play according to its

classification in the matrix. Obviously, a firm will be better off by having

a large fraction of its business in a dominant or strong position, and those

businesses are expected to have handsome financial performances. However,

when looking at the industry maturity dimension, a firm would benefit from

having a reasonably well-balanced portfolio. If all businesses are projected

toward the aging dimension, the firm might enjoy an excellent current

profitability, but very little in terms of future expectations. On the

contrary, if the portfolio is biased toward the embryonic side, the firm

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 life-

cycle 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. Figure 11 shows broadly

where each of these four families fit. A "natural development" family

corresponds to a business which, because of its industry maturity and its

competitive strength, deserves a strong support to assure an industry-wide

growth. A "selective development" family, as its name implies, requires

concentration of resources in industries which are either particularly

attractive or where the firm has singular competitive skills to exploit.

"Prove viability" is inherently a transitory situation which cannot be

sustained, calling for immediate actions to change the state of affairs.

 III

-18-

FAMILIES OF THRUSTS
Natural Development: Selective Development: Prove Viability: Withdrawal:

Startup Find niche(maintain Catch up(late entry Withdraw (from

Grow with industry(maintain 'selectively) usually into specific
position aggressively) Exploit niche(build growth or mature) markets)
Gain position gradually aggressively) Renew (may or Divest
Gain position aggressively Hold niche (maintain may not change
(products,
Defend position selectively) position)
assets)
Harvest Turn around
Abandon
(recapture
position)
Hang in (prolonged
existance)

Figure 11: Natural Strategic Thrusts

 -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. These are given in the bottom of Figure 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. These conditions exist when the competitive position is either

dominant or strong,. and the industry has reached a certain stage of maturity.

- Gain position, gradually useful when modest increase in market share are required

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 order to support the development of the preferred thrust.

These strategies are described in Figure 12.

ADL does not presume that this list of generic strategies exhaust the

full spectrum of alternatives for strategy creation. In fact, they are

------I
 III

-20-

Figure 12: Generic Strategies Proposed by Arthur D. Little, Inc.

Survey
Code
A Backward Intearaion - To incorporate within the business organization the
functions, operations, or products that were previously external and that
served to supply and support existing business operations.
B DeveZopment of Overseas Business - To establish overseas a separate business
unit in the same industry as the domestic business unit, but in a market with
different characteristics.
C Development of Overseas Facilities - To invest in off-shore production plants
for products to be sold in domestic markets by domestic business unit.
D Distribution Rationalization - To prune back the distribution system to a
more effective network; this may include cutting back to the highest volume
distributors or shaping by geography or type.
E Excess Capacity - To provide additional capacity for existing products beyond
current needs - not incremental capacity - in order to meet anticipated future
growth.
F Export/Same Product - To invest in marketing selected products of the domes-
tic business unit in foreign markets; these may or may not have the same
competitors and market dynamics as the domestic market.
G Forward Intearation - To incorporate within the business organization exter-
nal functions between the current business and the ultimate consumer so that
more effective distribution or increased control over the marketplace can be
achieved.
H Hesitation - To slow down or establish a 1-year moratorium on new capital in-
vestment 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.
I InitiaZ Market Development - To invest in creating a primary demand for a
brand-new product; typically undertaken by the first company to develop a
new market, often when that company has a clear technological edge.
J Licensing Abroad - To exploit through licensing in foreign countries the use
of domestic technology, patents, know-how, brand franchise, etc., belonging
to the domestic business unit.
K Complete Rationalization - To strip down a business to currently most profit-
able piece and reinvest the proceeds of divestments in the successful opera-
tions retained.
L Market Penetration - To increase market share through manipulating the market-
ing mix; e.g., lower price, product line breadth, increased product and sales
service, increased advertising.
M 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.
N Methods and Functions Efficiency - To invest in new ways of doing existing
tasks by adding new "soft" technology - e.g., new patterns of work flow, com-
puter-aided production planning and inventory control, etc. - so as to improve
effectiveness or efficiency.
 -21-

Figure 12: Continued

Survey
Code
O New Prodcts/New Markets - To invest in developing, manufacturing, and market-
ing 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.
P New Products/ScLe Market - To develop, broaden, or replace products in the
present product line, selling them into the existing market served.
Q Pro-ducticn Pationalization - To increase standardization of designs, compo-
nents, and manufacturing processes and/or concentrating facilities and/or
subcontracting out elements of production.
R Product Line Rationalization - To narrow the product line to the most profit-
able products.
S Pure SuyNoival - To maintain existence of the business unit in periods of ex-
tremely adverse business conditions by eliminating functions, products, or
by underfinancing any activity.
T Same Products/Vew . a:rkets - To expand existing domestic market by geography
or type for the existing product line.
U Same Product/cire'!Markets - To execute those strategies required to maintain
the present competitive position of the existing business unit...with the
existing product in existing markets.
V Technological Efficiency - To improve operating efficiency through technolo-
gical improvements in physical plant, equipment, or process.
W Traditional Cos Cutting Efficiency' - To reduce costs uniformly through
management edicts.
X Unit Abandonment - To divest a business unit because of its inability to re-
main viable within the corporation or because the unit may be of greater
value to someone else.

_1_·1__11__1_1I_.__
 ll

-22-

persistently encouraging managers to add, expand, innovate, and offer new

strategic alternatives. However, they feel the 24 generic strategies

suggested constitute a reasonable broad set, so as to cover some of the more

significant options related to the task of strategy formulation.

We have found it useful to group those strategies into sub-

categories which communicate the main area of concern addressed by the

strategy. The resulting categories are given in Figure 13.

In order to link these three concepts of families, strategic thrusts,

and generic strategies, ADL has provided a mapping which is given in

Figure 14. Another way of assisting managers in the selection of generic

strategies congruent with the stage of the life cycle and the business

competitive position is given in Figure 15. Obviously, these suggestions

should not be taken in a mechanistic sense.

Strategy formulation can never be reduced to simplistic rules of thumb.

However, a framework such as this one might be useful, first, to reinforce the

concept of natural strategies - namely, to uncover courses of action which

might be consistent with the industry and competitive portion of a business -

and second, to facilitate a diagnostic process. In this capacity, the ADL

framework can assist managers simply by providing a checklist against which

to contrast both the strategies which are already in place, as well as those

which are being proposed for the development of a business.

4. Performance Analysis

In the ADL methodology, the portion of a business in the life cycle

affects directly the performance measurements used to monitor the quality

of strategy implementation.

One tool used for this purpose is what ADL refers t 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. When that number is

 -23-
I. Marketing Strategies
F. Export/Same Product
I. Initial Market Development
L. Market Penetration
0. New Products/New Markets
P. New Products/Same Market
T. Same Products/New Markets

II. 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 13 Grouping of Generic Strategies by Main Areas of Concern

IIXIXI _____·_ll^-Y^-^__11__11· _.
 ,i

-24-

II I
I ' - Ii I -
I I
I [
'
1

trategie
'Thrusts
A B C D E F G H I J K L M N 0 P Q |R S T W X
..
I[ W I I I I

NATURAL DEVELOPMENT

Startup E I - L
Growth with
industry A B C F G J - N P T
- U
Gain position
graduallvy
Gain position
aggressively B C E IG L N OIP
Defend position A CI I IU I I I I I w
Harvest D H_ K N R. U W

SELECTIVE DEVELOPMENT

Find niche A | | 1G I L |M IR

K
T

Exploit niche B C
C JE |L N IP V
Hold niche D ,
I
,

PROVE VIABILITY

Catchup D E IL , T
Renew D MI I IQ R 0 U
Turn around D | I |M I I Q R I I IV WI
Prolong existence A D F JK MN IR S T I W
WITHDRAWAL

Withdraw D I I I I I I M I I Q R I Wu
w
)ivest B I EI I I .. K Q S
Abandon
---

Figure 14: Families, Strategic Thrusts and Related Generic

Strategies
 -25-
Figure 15: Generic Strategies by Stage in the Life-cycle and
Competitive Position

ladustr /Matlrity
Charactertzaela

Enmbld Growth Mutuf

I. nitial Market_
zDtelopmment DSFTW DSF
L. Market Pe.trato _
DSFrw I DSF
U. Siam Products/
Same Markets . TW T
T. Same Products.'
Sw Markets DSF DSF DSF
P. New Products/
Same Markets DSF DSF

O. NNeI Products/
New Markets _ 4 DS "
A. Backw.rd
laltei~rattiont ~ DSF I DSF I
G. Forward t
Integrantion DSF
F. Lxport/
i Smee
Products 1 FT'
,
FTW
I
J. Ucstnt j *
Abroad FTW FTW
C. Development of
Oweras Factilite , DS ' DS _

FOvnen
B. Deelopmenl of
Overeas Busnesa
P ,,il t I ___
SF
DSF DSF 1 _

L. Exce Caaci 'DSF j

M. Market
Rationalizatlon TW I FW I SFT
D. Distributiona ' I
Rationalluttioni ' i SFT
R. Product Line
Ratlonaliution _ T S"
Q. Prholcton I
Rationalizatlon I FT' SFT
V. Technioticll I _
.rficln- ~ DSFT I DSF
N. Method std
n
Functions r:flcnieftek DSFT DSF
WU.Tddilllonal ot
| C (~~uttin~ l~ ________W WFT
H. Hiltation F iS
I{ IFT ! SFT

K. Copktl Ronalaton |
FT' SFT
S. Pure ur al
_I _ _ ___ _ __I~~~~~~~~~~~~~~~~~~~~ _DS
X. llt Abandonment i i j.

Competitive Position: Span of Arrow Indicates Normal Investment

D - Dominant (Time. Effort..onty) Timeframe In Whuch
S - Stuong To Implement Gven Strateg,
F - Fvorale
T - Tenable
- ' We k
 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

business. In the Ronagraph, each business unit is represented by a circle,

whose area is proportional to the investment attached to that business unit.

Figure 16 illustrates a typical Ronagraph, which is used not only to

show some key financial characteristics of the business units, but also to

compare them with the performance of leading competitors. The zones in the

graph indicate the performance to be expected from a strong competitor, which

is maintaining its position. Business B is performing exactly according to

those expectations, while businesses C and A are above and below this bench-

mark, respectively.

This consistency between financial performance and stages of the life-cycle

is not limited exclusively to RONA. A host of other indicators are also

expected to perform in accordance with the industry maturity. 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 1 the expected behavior of sales, profits,

and net cash flows, as the business travels through the life cycle. Moreover,

Figures 5 and 6, establish the expected investment requirements, and

profitability and cash flow requirements, respectively, according to the

position of the business in the life-cycle matrix.

For an excellent illustration of the approach for allocating resources

derived from the life-cycle matrix, and the financial implications for

strategic performance, see Osell and Wright (1980).

 -27-

II
RONA(%)

O Business
C

Prof it
Deployi
300 200 100' 0
Dis-
Cash user I Cash producer inves
cash ment
neutral

Figure 16 A Typical Ronagraph

I I_
 III

-28-
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 -29-

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 -30-

5. Managerial Systems Analysis

The primary characteristic of strategic management is to seek congruency

among all the administrative systems, with the corporate culture. The ADL

strategic planning approach subscribes strongly to this philosophy, providing

once more a consistency check among managerial systems within the stages of

the life-cycle. The central idea is that the management tasks significantly

change as a business goes from embryonic to aging, and therefore, administrative

systems, structure and organizational climate should change accordingly.

Figure 17 provides a remarkably compact description of the primary characteristics

of the managerial systems and organizational climate, within each stage of the

life-cycle.

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

being assessed in terms of the predictability of profit performance, the

more unpredictable it becomes, the greater the risk.

The risk assessment involves an exercise of high subjectivity. ADL

identifies seven factors which contribute to risk to be assessed independently.

These factors are:

- Maturity and competitive position, which is given by the position of the

business within the 'life-cycle matrix. The highest risk exists on an

embryonic business, which is in a weak competitive position. The lower risk

is the dominant business in an aging industry. The risk decreases when

moving in the life-cycle matrix horizontally from left to right and vertically

from the bottom to the top.

- Industry; some industries are inherently less predictable than others at the

same stage of maturity.

 -31-

- Strategy; some strategies are more aggressive than others, and consequently

imply a larger risk.

- Assumptions; the hypotheses regarding the future, in which the strategies

are based, could contain also different degrees of risk.

- Past performance, units with a good track record are less risky than those with

erratic records.

- Management; the demonstrated ability of the managers in charge of the unit is

a central determinant to the predictability of earnings.

- Performance improvement; the magnitude of the gap between existing and

expected performance is the last important conditioner of risk.

Figure 18 exhibits the format proposed by ADL for the assessment

of the risk analysis.

7. A Critique of the Life-cycle Approach

There are some major contributions that ADL has made in the area of

strategic planning by proposing a comprehensive and structured process

to assist 'managers in the identification of strategic choices. 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. However, it has been ADL's contribution to raise that

concept to a prominent position within strategic planning, thoroughly

exploiting the strategic implicationsof the life cycle.

The resulting methodological approach is, certainly, highly creative,

searching for consistency of industry maturity, not only with strategic

planning, but with all the other key administrative processes, organizational

climate, and structure. From this perspective, the ADL methodology not only

is relevant to strategic planning; it addresses also some of the key concerns

of strategic management.
 III

-32-

Risk Level
Factors

Low Medium High

Maturity Position

Industry

Strategy

Assumptions

Past Performance

Management Factors

Performance Improvement

Overall Risk Level

. ~~~ ~ ~ ~ ~ ~ ~ ~ * _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Figure 18: Risk Analysis

 -33-

Finally, the articulation of strategic thrusts and generic strategies

consistent with industry maturity and competitive position of the business

might either offer constructive suggestions for managers who are not well

seasoned in the practice of strategic planning, or, at least, might

constitute a useful diagnostic base against which to contrast the existing

strategies of an on-going business.

We turn our attention now to limitations that can be raised on the

ADL methodology. First, is the overall controversy surrounding the use-

fulness of the life-cycle concept. Dhalla and Yuspeh (1976) claim that

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 done more harm than

good, by persuading top executives to neglect existing brands, and place

undue emphasis on new products." Dhalla and Yuspeh particularly deplore

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. Sometimes, industries rejuvenate after a period of decline.

Occasionally, industries skip stages, particularly when they are affected

by passing fads. Also, economic conditions, such as depression, might

obscure the true developmental stage corresponding to a given industry.

- Firms can affect the shape of the life-cycle curve, primarily through

1_
___I__1_III· -XII^IIIIII__
 III

-34-

product innovation and repositioning

- The nature of competition is quite variable from industry to industry,

depending on the life-cycle stage. For example, some industries evolve

from a very fragmentary structure to a highly concentrated one. (i.e.

automobiles). Others go just the other way around. They begin as concentrated

industries and, as time passes, they become more and more fragemented

(i.e. bank cash dispensers). A legitimate question to be raised is if there

is any broadly applicable strategic implication to be derived from the

position of a business in the life-cycle, when such important structural

changes are occurring simultaneously in the industry.

All of these comments serve to stress the point that, although the life-

cycle approach is a useful frame of reference, it has to be applied in a

highly judicious way.

There is a final warning that we would like to address pertaining to the

use andapplicability of the ADL strategic planning process. There are clearly

some advantages in having a well organized, disciplined methodology to facilitate

the formulation and development of strategies. Its counterpart, however,

is that excessive rigidity could lead to a mechanistic type of thinking which

would stifle rather than enhance creativity. Although ADL would never intend

to apply its methodology that way, in uninitiated hands that tool could hinder

a truly innovative way of thinking.

 -35-

References

Abernathy, William J., and James M. Utterback, "Patterns of Industrial

Innovation", in Michael L. Tuchman and William L. Moore, Readings

in the Management of Innovation, Pitman, Boston, 1982

Arthur D. Little, Inc. A System for Managing Diversity, Cambridge, Ma.,

December 1974.

Arthur D. Little, Inc., Discovering the Fountain of Youth: An Approach to

Corporate Growth and Development, San Francisco, California, 1979.

Arthur D. Little, Inc., A Management System for the 1980's, San Francisco,

California, 1979.

Clifford, Donald K., Jr.,' "Managing the Product Life Cycle" in Philip Kotler

and Keith Cox, Eds., Marketing Management and Strategy. A Reader,

Prentice-Hall, Englewood Cliff, New Jersey, 1980.

Dhalla, Nariman K., and Sonia Yuspeh, "Forget the Product Life Cycle

Concept!", Harvard Business Review, Vol. 54, No. 1, Jan.-Feb. 1976,

pp. 102-109.

Forbes, Edward H., and Thomas J. Bate II , "The Life Cycle Approach to Strategic

Planning", unpublished master thesis,, Sloan School of Management,

Cambridge, Mass., 1980.

Hayes, Robert H., and Steven C. Wheelwright, "Link Manufacturing Process and

Product Life-Cycle". Harvard Business Review, Vol. 57, No. 1, Jan-Feb.

1979a, pp. 133-140.

Hayes, Robert H., and Steven C. Wheelwright, "The Dynamics of Process Products

Life Cycles", Harvard Business Review, Vol. 57, No. 2, March-April 1979b,

pp. 127-135.

- --- rn _
 -36-

Kotler, Philip, Marketing Managment, 4th Ed., Prentice-Hall, Inc., Englewood Cliffs,

New Jersey, 1980.

Luck, David J., and O.C. Ferrell, Marketing Strategy and Plans, Prentice-Hall,

Englewood Cliffs, New Jersey, 1979.

Moore, William L, and Michael L. Tushman, "Managing Innovation over the Product

Life-Cycle", in Michael L. Tushman and William L. Moore, Readings in the

Management of Innovation, Pitman, Boston, 1982.

Osell, Roger R., and Robert V. L. Wright, "Allocating Resources: How to do it

in Multi-Industry Corporations", in Kenneth J. Albert (editor),

Handbook of Business Problem Solving, McGraw-Hill, New York, 1980,

Chapter 8, pp. 1.89 - 1.109.

Porter, Michael E., Competitive Strategy, The Free Press, New York, 1980.

Urban, Glen L., and John R. Hauser, Design and Marketing of New Products,

Prentice-Hall, Englewood Cliffs, New Jersey, 1980.

Utterback, James M. "Management of Technology". in Arnoldo C. Hax (Ed,),

Studies in Operations Management, North-Holland, Amsterdam, 1978,

pp. 137-160.