Portfolio Analysis: Igniting a long-term spirit in a short-term world (XXI). Shell DPM resumed.
Have a lovely week of October, the month of the pumpkins. Today´s purpose is to finish covering the Shell Directional Policy Matrix (DPM). Basically, this Shell DPM tool methodology is quite similar to the past two matrixes that we have revealed. The only difference is that each axis has different factors to assess. In summary, first, we identify the Y-axis critical factors or characteristics that come attached to the external factors to the SBUs or industry attractiveness, or prospects for the profitability of the specific business & economic sector of each SBU. Second, we categorize the X-axis critical factors that are associated with the business competitive capabilities or internal factors to each SBU. Afterward, we calculate a number (a value) that is the composite weighted score for each axis. For this to happen, third, we make an assessment: we create a list of factors per axis, we assign a weight, and then we rate each factor with a degree of relevance, impact, importance, or advantages (using a scale that suits your ratings). Fourth, we calculate the weighted average of the numerical grades. This cardinal measurement will allow the exact positioning of the business unit within the matrix on each axis. Finally, we plot the position and show a circle centered on the coordinates for X and Y. For the GE matrix, the area of the circle represents the size of the industry and the shaded wedge, the SBU´s current market share. For the Shell DPM, we do not use a circle, but only the position. And, Voilà we have understood how to do it. Nevertheless, today´s publication is about what is the meaning of each cell (1), and we will dedicate the rest of our publication to that.
Before proceeding further, we will explain why we chose the Ennio Morricone song last Friday.
“The mission”. This movie was released when I was 16 years old (1986), I was a teenager then. If you have not seen it, it is about the Jesuits’ mission to evangelize the indigenous original communities living in the Portuguese part of South America during the 18th century. The movie shows the Jesuit relationship with the Guaranis, their unconditional friendships, and the conflicts of the Jesuit’s mission with the Crown of Spain-Portugal of that time. The Jesuits on that mission lined and defended the Guaranis; and aided them into extremes. The thematic is well applicable now, with other contexts and other kingdoms trying to impose their crazy economic models (including the digital technological excesses) in Latin America. Some of these kingdoms perceive our mixture of Spanish with native Mayan, Aztec, Inca, or Pipil blood as in demerit of our human and brain capabilities. Some of these kingdoms still consider our Mulato mixed race as a human defect, an intellectual deficiency, and a shortage for us to marry. And that still happens in the XXI century. Ennio Morricone composed this piece of emotional content that touches our heart, perhaps one of his best compositions, but you have to compare it with another of his oeuvres “Cinema Paradiso”. “The” Mission won the Cannes Film Festival Palme d’Or and the Academy Award for Best Cinematography. In April 2007, it was elected number one on the Church Times’ Top 50 Religious Films list.
Our aim is not to impose the taste of the classic, but to create awareness of its beauty. No one can force anyone to delight in the symphonic arrangement type of music, but our aim is to generate a counterweight. When the music industry is in imbalance, it privileges the digital-created music by computers and machines. Sorry, but that is not real music played by people, but by software using a keyboard. You can listen to it and may sound equivalent, but that is artificial music. And we wish to show you how beautiful is the music created with real instruments in a band or orchestra, regardless of the genre. That is why we shared symphonic rock too. The Oscar´s organization (without knowing) has kept the symphonic orchestra production during this century, by offering a prize to best soundtracks year by year. Ennio Morricone is one of these winners, “Gabriel´s Oboe” song from the movie “The mission” is just a tiny example of it. Mr. Morricone passed away last year because of a complication of a femur fracture. So sad. His memory will remain in his songs, as much as the traditional oeuvres of Mozart, Bach, Handel, Beethoven, Tchaikovsky, Vivaldi. There are plenty of other symphonic contemporary composers’ examples, those who have coined every Oscar winner movie, and many other classic musicians that will sooner or later emerge to compose new symphonic themes. Eleonora Escalante Strategy wishes to show their names and music production during the rest of the saga, as much as other present-day music production that is not created by machines, that are much appreciated by the youngsters. I believe that many of the young emerging artists will try to become the new Mozarts of this century, producing works of music with real bands, with real orchestras, that is of more distinction than any type of artificial music you can regard.
Meaning and Interpretation of the 9-Cell Shell Directional policy matrix (1):
Leader: When the positioning of the SBUs or Business segments (you can use this matrix for interpreting business segments or sectors of your enterprise as in the case of Royal Dutch Shell) appears in the upper bottom of the column of your left, then we have the case of a leader SBU. The recipe is to give absolute priority to these products with all the resources necessary to hold his market position. A growing sector ignited by high demand will need to install extra capacity of manufacturing. The fastest growth causes a mess when companies are dealing with different SBUs. An SBU with a lead character seems to be profitable enough to offer enough cashflows to finance a high rate of new CAPEX (Capital expenditures), but usually, cashflows only help to cover the working capital requirements (current assets minus current liabilities) and execution of short-term strategic planning tasks or existing operational expenses. So cash must be found from another sector of the company (usually the cash generators SBUs). Leader SBUs are forced to look for fresh cash outside. In this context, some leading SBUs may lose sight and fail, because by trying to finance its´ own fastest growth through agility responsiveness, “leaders” forget to strengthen their Research and Development capabilities, or in other words, these companies forget the “human factor purpose”.
Try Harder: It is terrible to be a “number 2 choice”, or the “backup”. Those who win contests in any field, know the feeling I am talking about. The guidance to this type of SBUs is to focus on the details because just a minimum detail makes the difference. The competitive capabilities that need refinement are usually located not in the production factor, but in the Research and Development and the Human Quality of their workforce. During the last 20 years, SBUs mistakenly have invested in technologies to substitute humans, and that is not an integral value-creation for the long run.
Double or Quit: According to the Shell Intl. Chemical Co. authors of the academic paper in which I have based this publication (1), “this is the zone of the matrix from which products that are destined to become the future highfliers should be selected”. Even though they hold a weak competitive capability measure, their industry is judged to be attractive enough to don´t be abandoned but to invest double. If the building of market share, process economics, CAPEX and technologies, innovation, problem-solving, value chain improvements, or R&D is such a burden impossible to overcome, the corporate decision is to quit.
Growth Leader: This position is usually reserved to SBUs, with the moderate market share which is one or two from four major competitors, backed up by commensurate production capability and R&D. Prevalent of this quadrant is the SBU that is able to be a leader, but the recommendation is to don´t but to allocate sufficient resources to continue growing with the market in anticipation of a reasonable rate of return. Steady growth is one of the most treasured core decisions to make because products in this zone will in general be earning sufficient cash to finance their own (average) rate of expansion.
Custodial Growth: This is a very interesting position for SBUs: the center of the matrix. These SBUs are as teenagers, in need of guardianship and protection; with distinct average weaknesses either in a combination of aspects related to external profitability or in aspects related to inner competitiveness delusions. Typically, as teenagers that are building their own personality, character, and purpose when in high school; custodial growth SBUs require some strategy of support and care in the weaker of the factors despite the many competitors at that level. To be in the center of the matrix requires maximizing cash generation without the further commitment of resources. Once the SBU graduates from high school and matures enough, the next investment is “to continue study at the University”. So if the SBU improves its strength or business prospect for profitability, a new corporate decision will come either to become a growth leader, a leader or a second choice (backup).
Phased withdrawal: “An SBU with an average to weak position in a low-growth sector is unlikely to be earning any significant amount of cash and the keyword in this quadrant is phased withdrawal”. The idea here is to make a plan to get out and put the money to more profitable use, or at least turn around the product in such a way that a new SBU is created with the same resources. The reason to withdraw could be because of weak competitive SBU powers (inner causes), or because of unattractive prospects for the sector profitability (external causes).
Cash Generator: This is the jewel of the crown. The classy SBU. These SBUs are particularly the classic posh ones. The ones with a strong position in inner competitiveness, the traditional SBU that earns satisfactory profits no matter what happens on earth. For example, cash generators are companies related to health and pharma, to electricity production and distribution, to garbage collection, to food production commodities for our survival, to the hard-core activities of our lives that will be needed no matter what in the future, because of the nature of our humanity. These companies are not to be dismissed: with little need of further financing for expansion, these can be a source of cash for other faster-growing sectors.
Divest: Finally, these SBUs are not only losing money. Which is the less problem for them. But they are in unattractive sectors, doing nothing but to make them more unattractive. These SBUs usually lack innovation and other competitive advantages. Usually, these SBUs are quickly categorized to be disposable, in order to use the resources assigned to them in other SBUs. “In general, unless the prospects for the sector have been completely transformed as the result of some rapid technological or environmental or pandemic change, it will be rare for a well-managed company to find that any of its SBUs lies within the divest area”.
Evolving of the Shell DPM to our days. Why is it important to learn about the existence of these toolkits? Regardless of their old allure? Because the DPM was originated by one of the biggest corporations on earth, and it was used then. By now, it has evolved and translated into other current toolkits. But because the DPM has also been misunderstood, under-utilized, and used mistakenly. We have rewound the winds of time to the original frameworks of portfolio analysis using the old DPM, or the GE, or the BCG because we certainly believe that correcting them would make new miracles.
When these portfolio analysis plots allow to include all that is missing, then they can work wonders. If the applicable factors of environment 3R (recycle-reduce-reuse), long term education, human development of employees, middle-class creation and maintenance, ethics, research and development with a purpose, etc. are included, our portfolio oldies will be rejuvenated, polished, and will become the base for further DBR (Design-based research) that may magnify the force for good so much needed in our current times.
In our next post, we will continue with the Arthur D. Little strategic condition matrix.
The song for today is an interpretation of Yo-Yoma and Chris Botti of Cinema Paradiso oeuvre from Ennio Morricone. Enjoy!
Blessings and see you again soon. Thank you for reading to me.
Sources of reference utilized today:
(1) Robinson, J., Hichens, R.E and Wade, D.P. “The directional Policy Matrix-Tool for Strategic Planning”. Long Range Planning. June 1978. Vol. 11. Pp. 8-15
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
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