portfolio analysis: igniting a long-term spirit in a short

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Portfolio Analysis: Igniting a long-term spirit in

a short-term world.

GE Multidimensional Portfolio Business Screen (II)

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05-Oct-21

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General OutlineI. Introduction

II. Rationale, Philosophy and Objectives

III. Portfolio analysis roots: Don´t put all your eggs in one basket

IV. Research design in portfolio analysis

V. Sloan Legacy: Selecting criteria and variables for portfolio analysis

VI. Growth patterns matter

VII. An abstraction about Portfolio Analysis frameworks

VIII. The Boston Consulting Group Growth-Share Matrix

IX. The General Electric Portfolio model

X. Shell Directional Policy Matrix

XI. Arthur D. Little Strategic Condition Matrix

XII. Abell and Hammond 3x3 Investment Opportunity Matrix

XIII. Other existing frameworks

XIV. Comparative Advantages and Limitations of Portfolio analysis

XV. Igniting a long-term spirit in a short-term world

XVI. Short sightedness

XVII.Long Term Planning

XVIII.Our own approach to portfolio analysis. An abstraction.

XIX. Summary and Conclusions Updated:

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The GE Business Screen – Some background

In the early 1970s, McKinsey consulting house in conjunction with General Electric Corporation developed a new portfolio planning tool.

The objective: to overcome the limitations of the BCG Matrix.

General Electric mandated the design of the GE Portfolio Model to evaluate GE different business units, in order to find how to help them to grow.

The GE portfolio model is a bi-dimensional grid, and we plot in two axis:

Horizontal X Axis: Competitive position (called Business strength)

Vertical Y Axis: Industry attractiveness (called long term Product-Market Attractiveness)

Each of these two measures are composite, which means that several factors are included to calculate each axis value or number.

The General Electric’s nine-cell business portfolio matrix was the first framework that tried to offer a consciously formulated strategy portrayed in multidimensional measures of factors for each axis.

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What choices or

SBUs to initially do,

stay in and get out

of

How to do corporate

parenting for those

choices or SBUs

What priorities and

guidelines for

resource allocation

to SBUs

How to get ahead

with the portfolio

mix in an uncertain

future

What SBU choices initially do, stay in or get out of:

The choice of SBUs: products, services, markets, technologies

and types of businesses the firm intends to enter, stay-in or

leave.

How to do corporate parenting to those SBUs:

Whether and how distinguishably different SBUs and

corporate headquarters can be synergistically

coordinated or otherwise fit together to make a more

workable whole

What priorities and guidelines for resource allocation to

each SBU?:

What priorities and course of action are to be observed in

allocating the firm`s resources among various SBUs

How to get ahead with the SBUs portfolio mix:

The strategic importance of a firm`s scope and mix of SBUs

determines how the company will position itself to deal with

an uncertain future and how to cope with perpetual change.

The GE Business Screen – A matrix designed with a multidimensional

corporate strategy purpose

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The General Electric Business Screen is a graphic tool

designed as an analytical technique for dealing with the

questions of the corporate strategy domains mentioned in

our predecessor slide

The creation and assembly of a matrix, a SBU portfolio

matrix that displays the relative position of each SBU based

on several strategically relevant multidimensional variables.

The GE industry attractiveness-business strength matrix is

also called as the GE multifactor portfolio model, and it

requires the identification of internal and external factors

for each of the Axis of the graph.

Horizontal X Axis: The critical internal factors are

agglutinated all together in the scale of the horizontal axis

(X)

Vertical Y Axis: The critical external factors are cohered

all together in the scale of vertical axis (Y), which represents

the industry´s long term attractiveness.

Each of the factors (internal or external) is assigned a

weight of critical importance and a scale numerical grade

or point score. For the Vertical Y axis, visualize a numerical

scale between 1 to 5; (1 being very unattractive and 5

highly attractive). For the Horizontal X axis, conceive a

numerical scale between 1 to 5 (1 being a weak position

and 5 a very strong competitive position).

The art of executing the GE multifactor matrix relies in the

“truth” of each of the critical internal factors and critical

external factors. In addition, the good judgement of

assigning the relative “weight” to define the final score;

and the experienced knowhow of the industry of the

people in charge, to rate or rank accordingly each factor

influence over the corresponding axis.

The quantitative approach of assigning a weight, a rate

score and its further calculations that offer the number in

both scales is called a weighted-score approach.

Any matrix built with a weighted-score approach requires

the truth of good judgment, experience knowhow of the

industry and the fine adjustments of a DBR mindset.

The GE Business Screen – Definition and Purpose

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The GE Business Screen – Look and Feel

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Business Strength Competitive Position

AXIS X

Composite of Critical Internal Factors

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The GE Business Screen – Look and Feel

Top

Winner

Invest and

Growth

Winners:

Invest and

Growth

Maintain

and Hold:

Question

marks

Winners:

Invest and

Growth

Maintain

and Hold:

Average

Businesses

Losers:

Harvest or

Divest

Maintain

and Hold:

Profit

Producers

Losers

Harvest or

Divest

Losers:

Harvest or

Divest

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AXIS X


Strong Average Weak

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The GE Matrix explained

Industry attractiveness is measured by external factors that are not controllable by the corporation.

These factors are used to determine the overall allure of the industry in which each of the SBU belongs.

Industry external factors are the basic characteristics of the industry and competitive structure in which the SBU operates. These factors must include the socio-political, economic, legislative, regulatory and demographics.

Several authors and consultants have recommended their own view of the critical external factors to consider. You will find different criterions here.

Industry Attractiveness

AXIS Y Composite of Critical External Factors

Critical External Industry Factors

Market Size

Market Growth Rate

Industry profit margins

Competitive intensity and structure

Pricing

Seasonality

Cyclicality

Scale economies

Supply volume (capacity)

Supply growth

Economic Factors: inflation, currency, wage level, inputs supply, manpower supply, etc.

Technological factors: Internet, technical role, productivity, etc.

Social Factors: work ethics, consumer protection, personnel adaptability, social-class

well-being

Environmental Factors: ecological criteria to consider as energy impact

Government Factors: legislation, regulation, taxation, government support

STEP 1. definition of critical external factors.

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The GE Matrix explained


AXIS X


Critical Internal Business Competitive Strength Factors

Market share and Relative Market Share

SBU growth Rate

Breadth of product line

Sales Distribution mix and effectiveness

Key account management

SBU Price and competitiveness

Marketing Mix effectiveness

Facilities Location success

Capacity and Productivity

Experience Curve Effects

Raw Materials Attainment

Relative product quality

Research & Development Advantage Positioning

Branding

Caliber of Personnel Education

Financial Indicators Ratios

The internal factors are those which to a

large extent, are controllable by the firm

These are mainly the functional activities

that can be deployed by each SBU to succeed

against competition.

Selecting each critical internal factor is

specific to each SBU and involves managers

and people inside each SBU in a collective

effort to identify and assess those factors.

To identify each internal factor requires a

great degree of intelligence, experience and

knowledge about the business and the

industry.

STEP 1. definition of critical intternal factors.

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GE Matrix explained

Assessing each value in the axis X and axis Y for each SBU is done under a weighted score approach

It requires simply to create a table in which the talent of the specialists set up a weight for each critical factor, assign a rating between 1 to 5, and then the weighted score is the multiplication of the weight x Rating.

The final value for each SBU score, in the X axis and in the Y axis is the sum of all parts: the sum of all the factors weighted scores

Look at your right table, the value 3.38 is the Y or vertical value for this specific SBU. It must be graphed in the Y axis

To calculate the score for the X value (Business strength), the same weighted score method is applied to the critical internal factors listed for that specific SBU.

Source: Hax and Maijluf. The Use of Industry Attractiveness-Business Strength Matrix

in Strategic Planning. Interfaces. April 1983. Vol 13 no. 2.

STEP 2. Assessment of critical external factors.

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GE Matrix explained

For the Business Strength assessment

with the weighted score approach, let’s

see the tabulation and calculation of the

data.

This value of 4.30 is the value that has to

be graphed in the X axis.

The score location for this specific SBU is

X1:4.30

Y1: 3.38

Source: Hax and Maijluf. The Use of Industry Attractiveness-Business Strength Matrix

in Strategic Planning. Interfaces. April 1983. Vol 13 no. 2.

STEP 3. Assessment of critical internal factors.

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After calculating each Horizontal and Vertical score for each SBU,

each SBU is positioned with a circle.

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In positioning each SBU in the GE

attractiveness/strength matrix with

the weighted score approach, each

circle is centered on the

coordinates that we calculated. The

area of the circle represents the

size of the industry and the shaded

darker wedge, the firm´s current

market share.

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Strong Average Weak

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SBU1

(X1, y1) = (4.30, 3.38)

5 4 3 2 1

4.30

3.38

STEP 4.Current Positioning of the SBU in the matrix.

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3 2 1

The bigger the area of the circle, the bigger the size of the industryThe darker arearepresents themarket share of theSBU1 in thatindustry.Units: dollars.

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. In

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SBU1

SBU2

SBU4

SBU3

SBU5

(X1, y1)

(X4, y4)

(X2, y2)

(X3, y3)

(X5, y5)

STEP 4.Current Positioning of the SBU in the matrix.

portfolio analysis: igniting a long-term spirit in a short

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