The Approach

This approach depends on four basic building blocks:

1.    Identification of SBU’s

2.    A common language is necessary to facilitate planning dialogues between the units

3.    The use of competitive position/market evolution matrices to classify businesses according to their stage of market development and competitive position and to then identify and select suitable strategic alternatives

4.    Testing the chosen strategy for fit and then evaluating the associated risks.

Identifying SBU’s - The natural business unit is made up of a product or product lines with identifiable independence from other products and product lines in terms of six criteria. A D Little states these criteria as being:

a.) Common rivals

b.) Prices

c.) Customers

d.) Quality/style

e.) Substitutability

f.) Divestment or Liquidation.

Many other criteria can be added to these such as lack of transfer pricing, shared experience, shared facilities and overhead burden, shared distribution channels.

Strategies should be able to be set independently in each strategic business unit without affecting other SBU’s.

Determination of Industry Maturity – The AD Little Company found that industry maturity is determined by and has an impact on observable business actions. Maturity of the industry can be tracked by assessing the level and rate of change in variables such as technology, breadth of product line, rate of growth compared to GNP growth, degree of market concentration and conditions for entry and exit Business market share, investment and profitability or cash flow are also used as guidelines in assessing the industry maturity.

AD Little grouped the life cycle of an industry into four stages.

The Embryonic Stage – this is usually characterised by rapid growth, changes in technology, pursuit of new customers and fragmented and changing shares of the market.

The Growth Stage – is a still rapidly growing stage but customers, shares and technology are more stable and entry into this market is more difficult than at the earlier stage.

The Mature Stage – is characterised by stability in known customers, technology and market share. The industry may still be competitive.

The Ageing Stage – is characterised by a falling demand, a declining number of competitors and often a narrowing of the product line.

Identifying the Competitive Position – The assessment is subjective and based on the following guidelines;

Dominant – these are rare as dominance results from a near monopoly or protected leadership

Strong – a strong SBU can usually follow a strategy without consideration of rival countermoves

Favourable – the industry is fragmented and there is no clear leader among stronger rivals

Tenable – the SBU typically has a niche position, either geographically or defined by the product

Weak – the SBU is typically too small to be profitable or to survive over the long term. It may be a large firm but it suffers from prior mistakes or a critical weakness.

A Guide to Assessing the Life Cycle Stage and Competitive Position

The assessment is made on the basis of business market share, investment, and profitability or cash flow

Positioning in terms of market share