Portfolio Analysis: Igniting a long-term spirit in a short-term world (XI). Sloan legacy.
Today is a fantastic Tuesday. The DBR methodology has already been explained and done. My broken foot has started to heal, or at least the pain that I felt initially has lessened a bit. Of course, I still can’t put any pressure on my foot. Instead of using crutches, the aluminum walking frame (walker) has been my outstanding mobility tool at home. In addition, it takes time to get used to the short walking boot. Although shifting my mind to see it as a heavy load hurdle, I attempted to find it as my best rehabilitation friend. Still, my welcoming gracious boot and I, both together, will need to get through several more weeks to accomplish the whole metatarsal restoration process. So, patiently, there are still four weeks ahead.
Our aim for today is to write about how to philosophy concerning how to choose the criteria and the variables that we are going to use for portfolio analysis. It is a general introduction that applies to each and all the product portfolio frameworks that we will visit over the next weeks. Please refresh where we stand with the outline.
Portfolio Analysis from the point of view of SBUs. The SBU or Strategic Business Units are the base to design and research portfolio analysis. The term SBU opens its utilization in 1923 (almost 100 years ago). Do you know that the term SBU was introduced for the first time by Alfred Sloan Junior at the General Motors (GM) Group?
But who was Alfred Pritchard Sloan Jr? Mr. Sloan is remembered in the United States of America as someone who changed the way in which big corporations performed businesses. His last name of Scottish/Gaelic/Irish roots set him to be born in New Haven, Connecticut in 1875. He passed away at the age of 91 years old (in 1966). He is well known as the organizational genius of American corporate strategy, and a top philanthropist who headed General Motors (GM) as his president and chairman for more than a quarter of a century.
Not so many know that Mr. Sloan earned a degree in electrical engineering from the Massachusetts Institute of Technology (MIT) in 1895. After finishing his studies with the highest merit, he started as a draftsman (a designer or drawings sketcher) for the Hyatt Roller Bearing Company (HRBC) in New Jersey. With time, 6 years later, Mr. Sloan’s talents put him in the spotlight as the president of HRBC, a company that was later acquired by General Motors (GM). Eventually, Sloan faculties helped him to escalate in several GM high caliber positions; and by the year 1923, Mr. Sloan became president and chief executive officer of GM.
Mr. Sloan and 20 years of DBR thinking. Instead of describing his “shareholder value and profitable” achievements in HRBC and General Motors, I would like to focus on Mr. Sloan’s abilities, character, personality, and endurance of spirit. Even before he joined GM, Mr. Sloan had a DBR (Design-based research) mind. Yes, dear readers. When I was reading the paper “Contributions to Administration by Alfred P. Sloan, Jr. and GM” (1), I understood that he is well known as an organization-administrative genius. What amused me about this story, is to infer how Mr. Sloan used DBR without knowing. What we observed in Mr. Sloan before he was named General Motors’ top man, was a process of more than 20 years of DBR about how to help GM to grow.
I never give orders. I sell my ideas to my associates if I can. I accept their judgment if they convince me, as they frequently do, that I am wrong. I prefer to appeal to the intelligence of a man rather than attempt to exercise authority over him.
Alfred P. Sloan, Jr.
Mr. Sloan started to use his fantastic DBR mind even before he realized that he was going to change the booming automotive industry management. HRBC was acquired by General Motors in 1916. But Sloan understood GM from the HRBC backstage. It took him 20 years of DBR study and research. Mr. Sloan with his engineering problem-solving mind observed the GM organization. And he was worried, concerned about the managerial shortcomings that he witnessed. Mr. Sloan was knowledgeable of what was happening not just in terms of operations, but in terms of offering an integrated solution for the situation. In May 1920, Mr. Sloan prepared an elaborated report on the GM organization, embodying a plan for the systematization of management and the introduction of administrative skills. Once Mr. Sloan was appointed President of GM, he had all the theory and empiric robust awareness and familiarity that “transformed GM from a loose cluster of several business units into an archetype of the modern business enterprise, giving it an organizational structure that was emulated by many other corporations through much of the 20th century. He reorganized the company into five different automobile divisions, with each producing cars in a different price range. He decentralized production, giving each operating division the freedom of initiative to compete for more business, while he centralized administration, creating a strong central office that had large financial and advisory staffs in order to devise and coordinate overall company policies. Under Sloan, GM surpassed the Ford Motor Company in American automobile sales in the late 1920s and eventually became the largest business corporation in the world. GM came to dominate the market, accounting for more than half of American auto sales” (2).
Mr. Sloan outlined his management policy in the book “My Years with General Motors” (1964) and wrote (with Boyden Sparkes) “Adventures of a White-Collar Man” (1941). Finally, without children, Mr. Sloan inherited and endowed all his fortune to a foundation named for him. He supported various philanthropies projects particularly in higher education and research support, including the Memorial Sloan-Kettering Cancer Center in New York City, a center for advanced engineering study at the Massachusetts Institute of Technology (MIT), and the MIT Sloan School of Management.
Sloan legacy in portfolio analysis. Why go back in time to remember Mr. Sloan’s legacy? Since Mr. Sloan’s arrival to corporate America, the term SBU was invited to the red carpet. Mr. Sloan’s correctness to elevate the organization from the feudal system authoritarian regime style to an organizational one was the beginning of the middle class. The fact that Mr. Sloan raised middle managers to run each SBU, also helped to create centralized coordination committees of operations, advisory staff, financial and accounting, personal support, etc… This organizational change triggered the concept of SBU general managers of operational units, that received absolute administrative control (“as great as the CEO of an independent administrative corporation”) over their own manufacturing, sales, financial, and engineering staff. The key role of dividing business required that Mr. Sloan make a huge effort to educate its staff in administrative skills such as forecasting, policymaking, people relationships, public relations, partnerships with dealers, and SBU managers designed to reward individual and team contributions to provide bonus plans from top to bottom.
The beginning of the middle-class in the United States was triggered by the GM modus operandi organization. Mr. Sloan’s organization plan was copied and replicated by a considerable number of very large corporations, not just in the automotive industry, but in many medium-sized firms, as well as government agencies. The administrative thought that Mr. Sloan procured, “decentralized operations and coordinated controls”, was not only inspirational, but it gave the truth of a promise for a greater opportunity to the individual. Sloan’s philosophy provided the rising of the economic middle-class lifestyle to all his talented individuals who were able to learn, study, prepare, apply the scientific and administrative frameworks to produce results. All these middle managers and supervisors were raised, helping them to leave conditions of poverty. The promise of acquiring new management skills applied under “scientific and empiric” conditions at work began at GM because Mr. Sloan opened that door.
What is a criterion? For Mr. Sloan, the concept of criteria was most treasured because he lived in his own skin the lack of DBR from his predecessor (William Durant), who lacked it properly once the company grew by acquisitions (3).
A criterion is nothing else than a set of standards, rules, or tests on which a judgment or decision-making can be based. In 1920, Sloan’s organizational framework was the consequence of how he applied DBR for 20 years to develop the right-correct criterion to judge General Motors. As I mentioned previously, Sloan prepared an elaborated report on the GM organization based on the problems, managerial shortcomings, and how to systematize management solutions to reorganize the company. In fact, Sloan wanted good people to rule the SBUs. He knew that for creating good people, he had to educate them and provide the means for satisfactory well-being, because each SBU success (in terms of profits and market share, and so on) depended on the talent of the individual, and it required a balance between freedom and some control at the headquarters office.
The criterion for portfolio analysis depends on the overall DBR process for SBUs design-creation. But there are certain basic criteria that some traditional authors (Abell) recommend us to consider when differentiating SBUs (4).
- The customers groups that are being or will be served (which market segment) or demand
- The customer needs that will be satisfied, and
- The product/service/technology (understood as the combo of manufacturing, expertise, skills and resources) that will be used to meet those needs
Other authors (5), for example, Wilson and Gilligan, use a different approach in relation to what criteria to use to set up boundaries and define each SBU. For them, each SBU is defined because:
- Has a scope for independent planning and which might feasible standalone from the rest of the organization
- Holds its own set of competitors
- Has a manager who has responsibility for strategic planning and profit performance and who has control of all the profit influencing factors.
Nevertheless, be sure that Mr. Sloan’s legacy is still alive every time we want to apply criteria to define and make a delimitation of an organization in different SBUs. Which methodology to apply for diagnosing, formulating, delimiting, implementing, and monitoring each SBU is more than a scientific-empiric approach, it is also corporate strategy as an art.
After Sloan`s pioneering methodology to define SBUs in 1923, the list of main theorists/researchers professors, or authors that have written about the different criteria’s to perform the delimitation of an organization in SBUs are: Springer (1973); Ansoff (1976); Abell (1980); Wind & Mahajan (1981); Hall (1986); Hax Majluf (1991); Kotler (1999); Perrault & McCarthy (1996); Lindgren & Shimp (1995); Wilson & Gilligan (1992); Johnson & Scholes (2005, 2011); and many more on top of those who created the models that we will study afterward.
The variables of the Portfolio Analysis techniques will be studied on each portfolio analysis framework because each uses different variables. Thank you for reading to me.
Sources of reference cited today:
(1) Dole, E. Contributions to Administration by Alfred P. Sloan, Jr., and GM. Administrative Science Quarterly, Jun 1956, Vol 1, No. 1 pp 30-62. https://www.jstor.org/stable/2390839
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.
Leave a Reply