Portfolio Analysis: Igniting a long-term spirit in a short-term world (XVII). GE Portfolio Matrix Crescendo
“But butterflies are free to fly, and so they fly away
Always on your side. Sheryl Crow, 2005.
And I’m left to carry on and wonder why
Even through it all, I’m always on your side”
Today´s post is about getting ahead with the GE Multidimensional Portfolio Model. We are also celebrating the beginning of the wondrous first week of October, the month in which autumn really unfolds us with its colorful terracotta colors.
Pumpkin Pie spice is all over. This is a month that gifts us with the aroma of pumpkin pie and pumpkin caramel coffee. There is something so distinctive when we begin to sense the autumn spices of nutmeg, vanilla, allspice, cinnamon, and a touch of cloves or ginger all over this month. This is a lovely season that I simply adore, much more than spring.
As a Christocentric person, I do not celebrate Halloween, well we don´t celebrate it in El Salvador. It is not a tradition in our country. And I don’t find it pertinent or significant when it comes to commemorations. My love for October is obviously based on the change from chaud to froid season, the cold windy invitation for a hygge sweater, a comfortable blanket, the cozy smell ambiance of bouncy pumpkin spices, the colorful foliage palette which is simply exquisite in all its splendor.
Let’s begin.
We left our last publication with a door open. Today, I have updated it and made some improvements to it. Look at this final version, please. Download the file in PDF.
Even though this material seems to be far away from us, in terms of time, we can’t proceed further to change our portfolio analysis models, if we don’t understand where we are coming from. The past helps us to comprehend why are we doing things as we are undertaking them now. That is why we travel to the past. To discover, to decipher, to make it out. That is why we must wind back in time to history, to the archives of the knowledge keepers to read, to explore, to grasp the causes, and find the scope or extent of how, when, what, where and why everything commenced. The whole rationale of keeping our reminiscences (books, papers, research and development documents, films) is to keep our memories alive. To always have a timetable to go back in time and understand.
In summary, at the time in which GE and McKinsey formed this tool, there was a systematic methodology for developing and using the GE Attractiveness/Strength Matrix (1). It works for the present and the future, step by step. In our last publication, we explained how to do the first 4 steps, that belong to the Analysis of the Current Portfolio Situation.
| Analysis of Current Situation | Analysis of Future Situation |
| STEP 1. Definition of critical internal and external factors | Step 5. Forecasting of trends for each external factor |
| STEP 2. Assessment of external factors (Y-Axis) | Step 6. Developing the desired position for each internal factor |
| STEP 3. Assessment of internal factors (X-axis) | Step 7. Desired positioning of each business in the matrix |
| STEP 4. Positioning of the business in the attractiveness-strength matrix. | Step 8. Formulation of strategies for each business. |
When identifying the major steps to implement the attractiveness-strength matrix, it is clever to separate the present from the future. During the first 4 steps (which we already explained the process in detail in the PDF document attached above); the positioning of each SBU in the current matrix requires an objective evaluation of overall industry attractiveness and business strengths based on historical and current data.
Data gathering is a major issue when we land into the analysis of the current situation of the company SBUs.
Data Gathering based on truth.
The United States and other European countries have been paving information gathering for decades. There are major private and public efforts to provide information about every industry “online”. From public info found at the US Bureau of Labor Statistics to Edgar Online, to specific industry associations, to private paid industry and economic sector databases or reports; it is a precondition requirement to find the accurate truth about how data is collected and check twice or more before using it into the GE screen model. We have stated this several times during our publications journey. If the data coming from the industry, or data from your internal activities is wrong or is not well assessed in terms of weights and ratings, everything will be mistaken.
As a former consultant, I was able to assert that data collection from the industries is typically left to the youngest inexperienced team members, who travel back and forth between the corporate office to the SBUs. Usually, the information is taken from the internet or by buying industry reports. Nevertheless, the conditions between countries differ and sometimes are dramatically opposed, depending on the context and the state of technologies employed. Once the partner or the directors assigned to each consulting portfolio analysis responsibility join the review process of the data, it is too late to change the course of the research. Finally, the pressure of deadlines to introduce presentations and results to the clients mounts up; and the final portfolio analysis is wrongly determined and evaluated.
Nowadays the majority of data gathering is done via the internet. That is a mistake. It is a necessity for middle managers to supervise the work of the young associates, not just to keep the certainty of the data flow, but also to stay put with each industry-particular information, to identify and assess the critical external factors correctly. Nothing good comes out from online analysis without checking reality. It is imperative to leave the consulting expert cap, switch the mindset to the DBR cap (design-based research) and learn to breathe every single factor that will be the input for our assessments.
Professors Hax and Majluf have provided an interesting table that was suggested by William Rothschild, who at that time was a specialist in strategic planning at General Electric. Rothschild simplified the procedure of measuring the critical internal (X-axis) and critical external (Y-axis) factors. Let´s see how he recommended us to do it:
| Factors | Attractiveness Industry (Y-Axis) | SBU Business Strength Factors (X-Axis) |
| Market Factors | Size (dollars, units, or both) Size of Key Segments Growth rate per year (for the total industry, for segments of the industry to each SBU) Diversity of market sensitivity to price, service, features & external factors Cyclicality Seasonality Captive customers | Market Share (in equivalent terms) Market Share of key segments Annual growth rate (for the total firm, for the SBUs) SBU Participation SBU Influence on the market Sales lag or lead The extent to which sales are captive |
| Competitive Factors | Types of competitors Degrees of concentration Changes in type and mix Entries and exits Position changes in share Functional substitution Degrees and Types of integration | Where the SBU fits, how the SBU compares Segments the SBU has entered or left Relative share change Vulnerability Own level of integration |
| Financial & Economic Factors | Profitability: ratios, dollars Contribution margins Leverage factors such as economies of scale Barriers to entry or exit (both financial and non-financial) Capacity of utilization | SBU Profitability performance (Ratios, dollars) Contributed value Competitive advantage the SBU possess Problems the SBU would have in entering or exiting Utilization |
| Technological Factors | Maturity and volatility Complexity Differentiation Patents and Copyrights Technology required Process of manufacturing | Ability to cope with change Depths of SBU skills Type of SBU skills SBU tech Position SBU Resources |
| Socio-Political Factors | Social attitudes and trends Laws and government agency regulations Influence with pressure groups and government representatives Human factors such as unions and community acceptance | SBU responsiveness and flexibility SBU ability to cope SBU aggressiveness SBU relationships |
Gaining an understanding of the business.
The idea to delimit the factors (on the Y-axis and the X-axis) was recommended by Rothschild since the 1980s. Nevertheless, each SBU has different factors, and it could be misleading to dismiss them, particularly when in the process of gaining a deeper and common understanding of the business strength competitive position, and an understanding of the industry attractiveness.
In our next post, we will continue with the Analysis of the Future Portfolio situations when using the GE Matrix. We will take our time to explain all the methodology. Don´t worry. It takes time to learn, and we are not excused from it. Next week I will illustrate with an example.
The song chosen for you today doesn´t have a huge lyrics message, but it is such a lovely arrangement in the hands of Cinematic Pop Choir and Orchestra, a song originally from Coldplay. Without a solo, this melody captivated me. We selected it because the message is lifted by the choir, in such an angelical sound, that touches our hearts. Personally, we got goosebumps when hearing these voices. The Reign of God´s Love is what we need to include in the GE screen too.
Blessings, see you on Friday.
Sources of reference utilized today to prepare the slides above:
(1) Hax, A. and Majluf, N. “The use of the Industry Attractiveness-Business Strength Matrix in Strategic Planning”. Interfaces. 1983. Vol 13 NO. 2.
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.
Eleonora Escalante Strategy 