The Ge Business Screen Portfolio Model Evaluates Business On Dimetion

The GE Business Screen, also known as the McKinsey/GE Matrix, is a strategic tool employed to evaluate business units or product lines within a diversified corporation. It assesses these entities based on two key dimensions: industry attractiveness and business unit strength. This model offers a more nuanced approach to portfolio management compared to simpler methods like the BCG Matrix, allowing for a more sophisticated allocation of resources and strategic decision-making.

Understanding the GE Business Screen

The GE Business Screen provides a framework for analyzing a company's portfolio of businesses. Instead of simply categorizing businesses as "stars," "cash cows," "question marks," and "dogs" (as in the BCG Matrix), the GE Business Screen evaluates each business unit on a multi-factor scale, considering a wider array of variables. This results in a more granular assessment, helping companies make informed decisions about where to invest, grow, harvest, or divest.

The model is visually represented as a 3x3 matrix, with industry attractiveness on one axis and business unit strength on the other. Each cell within the matrix represents a different strategic recommendation.

Dimensions of Evaluation

The GE Business Screen hinges on a thorough evaluation of two critical dimensions:

1. Industry Attractiveness: This dimension assesses the overall appeal and potential of the industry in which the business unit operates. It considers factors external to the company, evaluating the industry's overall potential for growth and profitability.
2. Business Unit Strength: This dimension focuses on the internal capabilities and competitive advantages of the business unit. It measures how well the business unit is positioned to succeed within its industry.

Let's delve deeper into each of these dimensions:

Industry Attractiveness: Factors to Consider

Assessing industry attractiveness involves evaluating several external factors that can influence a business unit's performance. Here are some key factors to consider:

• Market Size and Growth Rate: A large and growing market offers greater opportunities for revenue and profit growth. This includes assessing both the current market size and its projected growth rate over the next few years.
• Industry Profitability: The average profitability of companies within the industry is a crucial indicator. High profitability suggests a healthy and attractive industry. Metrics like profit margins, return on assets (ROA), and return on equity (ROE) can be used to gauge profitability.
• Industry Rivalry: The intensity of competition within the industry can significantly impact a business unit's profitability. High rivalry can lead to price wars, reduced margins, and increased marketing expenses. Factors contributing to high rivalry include a large number of competitors, similar products or services, and low switching costs for customers.
• Threat of New Entrants: The ease with which new companies can enter the industry is a key determinant of its attractiveness. High barriers to entry, such as significant capital requirements, economies of scale, or strong brand loyalty, make the industry more attractive.
• Threat of Substitute Products or Services: The availability of substitute products or services can limit the industry's potential for growth and profitability. If customers can easily switch to alternatives, the industry's pricing power is reduced.
• Bargaining Power of Suppliers: The power of suppliers to raise prices or reduce the quality of their products can impact the industry's profitability. Industries with strong suppliers are less attractive.
• Bargaining Power of Buyers: The power of buyers to demand lower prices or higher quality can also impact the industry's profitability. Industries with strong buyers are less attractive.
• Regulatory Environment: Government regulations can significantly impact the industry's attractiveness. Favorable regulations can promote growth and profitability, while unfavorable regulations can hinder them. This includes environmental regulations, labor laws, and antitrust regulations.
• Technological Changes: Rapid technological changes can create both opportunities and threats for businesses within the industry. Industries that are adapting quickly to technological advancements are generally more attractive.
• Social and Economic Trends: Changes in social and economic trends can also impact the industry's attractiveness. For example, growing consumer demand for eco-friendly products can create opportunities for businesses in the renewable energy sector.

Each of these factors should be carefully evaluated and weighted based on its relative importance to the specific industry. A scoring system can be used to quantify the overall attractiveness of the industry.

Business Unit Strength: Factors to Consider

Assessing business unit strength involves evaluating the internal capabilities and competitive advantages of the business unit. Here are some key factors to consider:

• Market Share: A high market share indicates a strong competitive position and can lead to economies of scale and increased profitability. Market share is typically expressed as a percentage of total industry sales.
• Growth Rate: The business unit's growth rate relative to the industry average is a key indicator of its performance. A growth rate that exceeds the industry average suggests that the business unit is gaining market share and outperforming its competitors.
• Profit Margin: A high profit margin indicates that the business unit is efficiently managing its costs and generating strong profits. Profit margin is typically expressed as a percentage of revenue.
• Brand Image: A strong brand image can command premium prices and increase customer loyalty. Brand image can be assessed through surveys, focus groups, and other market research methods.
• Customer Satisfaction: High customer satisfaction leads to repeat business and positive word-of-mouth referrals. Customer satisfaction can be measured through surveys, online reviews, and customer feedback.
• Technology and Innovation: The business unit's ability to innovate and adopt new technologies is crucial for maintaining a competitive edge. This includes investing in research and development, developing new products and services, and adopting new technologies.
• Marketing Effectiveness: The business unit's ability to effectively market its products and services is essential for attracting and retaining customers. This includes developing effective advertising campaigns, building a strong online presence, and managing customer relationships.
• Production Capabilities: Efficient and reliable production capabilities are essential for meeting customer demand and maintaining cost competitiveness. This includes investing in modern equipment, optimizing production processes, and managing inventory effectively.
• Management Quality: The quality of the business unit's management team is a critical determinant of its success. Effective managers can make sound strategic decisions, motivate employees, and drive performance.
• Financial Resources: Access to adequate financial resources is essential for investing in growth opportunities and weathering economic downturns. This includes access to debt financing, equity financing, and internal cash flow.

Similar to industry attractiveness, each of these factors should be carefully evaluated and weighted based on its relative importance to the specific business unit. A scoring system can be used to quantify the overall strength of the business unit.

The 3x3 Matrix and Strategic Implications

Once industry attractiveness and business unit strength have been evaluated, the results are plotted on a 3x3 matrix. The matrix is divided into nine cells, each representing a different strategic recommendation.

Here's a breakdown of the strategic implications for each cell:

High Industry Attractiveness / Strong Business Unit Strength (Top Left Cell):

• Strategic Recommendation: Invest aggressively.
• Description: These businesses are "stars" and have the highest potential for growth and profitability. They should receive significant investment to maintain their competitive advantage and capitalize on growth opportunities. This could involve expanding production capacity, launching new products, or entering new markets.

High Industry Attractiveness / Medium Business Unit Strength (Top Center Cell):

• Strategic Recommendation: Selectively invest.
• Description: These businesses have the potential to become "stars" but require strategic investment to strengthen their competitive position. This could involve investing in marketing, product development, or process improvements. Careful evaluation is needed to determine which investments are most likely to yield the highest returns.

High Industry Attractiveness / Weak Business Unit Strength (Top Right Cell):

• Strategic Recommendation: Selectively invest or harvest/divest.
• Description: These businesses operate in attractive industries but lack the strength to compete effectively. A decision needs to be made about whether to invest in improving their competitive position or to harvest the remaining value and divest the business. This decision depends on factors such as the potential for improvement, the cost of investment, and the availability of alternative investment opportunities.

Medium Industry Attractiveness / Strong Business Unit Strength (Middle Left Cell):

• Strategic Recommendation: Selectively invest.
• Description: These businesses are "cash cows" and generate significant cash flow. They should receive sufficient investment to maintain their competitive position, but not necessarily aggressive investment. The focus should be on maximizing cash flow and using it to fund investments in other parts of the portfolio.

Medium Industry Attractiveness / Medium Business Unit Strength (Center Cell):

• Strategic Recommendation: Selectively invest.
• Description: These businesses are in a neutral position and require careful evaluation to determine their strategic potential. Investment decisions should be made on a case-by-case basis, considering factors such as the potential for improvement, the cost of investment, and the availability of alternative investment opportunities.

Medium Industry Attractiveness / Weak Business Unit Strength (Middle Right Cell):

• Strategic Recommendation: Harvest/divest.
• Description: These businesses are in a weak competitive position and operate in moderately attractive industries. The best course of action is typically to harvest the remaining value and divest the business.

Low Industry Attractiveness / Strong Business Unit Strength (Bottom Left Cell):

• Strategic Recommendation: Harvest/divest.
• Description: These businesses are dominant players in unattractive industries. While they may be generating cash flow, their long-term prospects are limited. The best course of action is typically to harvest the remaining value and divest the business.

Low Industry Attractiveness / Medium Business Unit Strength (Bottom Center Cell):

• Strategic Recommendation: Harvest/divest.
• Description: These businesses are in a weak competitive position and operate in unattractive industries. The best course of action is typically to harvest the remaining value and divest the business.

Low Industry Attractiveness / Weak Business Unit Strength (Bottom Right Cell):

• Strategic Recommendation: Divest.
• Description: These businesses are "dogs" and have the lowest potential for growth and profitability. They should be divested as quickly as possible to free up resources for more promising opportunities.

Advantages of the GE Business Screen

The GE Business Screen offers several advantages over simpler portfolio management tools like the BCG Matrix:

• More Comprehensive Analysis: The GE Business Screen considers a wider range of factors than the BCG Matrix, providing a more comprehensive and nuanced assessment of each business unit.
• More Granular Recommendations: The GE Business Screen provides more specific strategic recommendations than the BCG Matrix, helping companies make more informed decisions about resource allocation.
• Forward-Looking Perspective: The GE Business Screen encourages companies to consider the future potential of each business unit, rather than simply focusing on past performance.
• Improved Resource Allocation: By providing a more detailed assessment of each business unit's potential, the GE Business Screen helps companies allocate resources more effectively.
• Enhanced Strategic Decision-Making: The GE Business Screen provides a framework for making more informed strategic decisions about which businesses to invest in, grow, harvest, or divest.

Disadvantages of the GE Business Screen

Despite its advantages, the GE Business Screen also has some limitations:

• Subjectivity: The assessment of industry attractiveness and business unit strength can be subjective, relying on the judgment of managers and analysts. This can lead to inconsistencies and biases in the analysis.
• Complexity: The GE Business Screen is more complex than the BCG Matrix, requiring more data and analysis. This can make it more time-consuming and expensive to implement.
• Static View: The GE Business Screen provides a snapshot of the business portfolio at a particular point in time. It does not capture the dynamic nature of the business environment and the potential for change.
• Potential for Over-Reliance: Companies should avoid relying solely on the GE Business Screen for strategic decision-making. It should be used in conjunction with other analytical tools and frameworks.
• Implementation Challenges: Implementing the GE Business Screen effectively requires strong leadership, clear communication, and a commitment to data-driven decision-making.

Implementing the GE Business Screen: A Step-by-Step Guide

To effectively implement the GE Business Screen, follow these steps:

1. Define Business Units: Clearly define the business units or product lines that will be evaluated. This is crucial for ensuring consistency and accuracy in the analysis.
2. Identify Key Factors: Identify the key factors that will be used to assess industry attractiveness and business unit strength. These factors should be tailored to the specific industry and company context.
3. Develop a Scoring System: Develop a scoring system for evaluating each factor. This will help to quantify the assessment and reduce subjectivity.
4. Gather Data: Gather the necessary data to evaluate each factor. This may involve conducting market research, analyzing financial statements, and interviewing managers and employees.
5. Assess Industry Attractiveness: Evaluate the industry attractiveness for each business unit, considering the key factors and using the scoring system.
6. Assess Business Unit Strength: Evaluate the business unit strength for each business unit, considering the key factors and using the scoring system.
7. Plot the Results on the Matrix: Plot the results of the assessments on the 3x3 matrix.
8. Develop Strategic Recommendations: Develop strategic recommendations for each business unit based on its position on the matrix.
9. Allocate Resources: Allocate resources based on the strategic recommendations.
10. Monitor and Review: Monitor the performance of each business unit and review the strategic recommendations periodically to ensure they remain relevant.

Real-World Examples of the GE Business Screen in Action

While specific details of how companies utilize the GE Business Screen internally are often confidential, we can infer its application through observing their strategic decisions. For example:

• General Electric (GE): Historically, GE used a portfolio management approach similar to the GE Business Screen to manage its diverse portfolio of businesses. They would invest heavily in businesses with high growth potential and strong competitive positions, while divesting businesses that were less attractive. While GE has significantly restructured in recent years, the underlying principles of portfolio analysis remain relevant.
• Procter & Gamble (P&G): P&G has a vast portfolio of consumer products. They likely use a matrix similar to the GE Business Screen to prioritize investments in brands with strong market positions and high growth potential, while divesting or streamlining brands with weaker performance.
• Large Conglomerates: Many large conglomerates with diverse business units use portfolio management tools like the GE Business Screen to make strategic decisions about resource allocation and business development.

These examples illustrate how the GE Business Screen can be used to inform strategic decision-making in a variety of industries.

Conclusion

The GE Business Screen is a powerful tool for evaluating business units and making strategic decisions about resource allocation. By considering both industry attractiveness and business unit strength, the model provides a more comprehensive and nuanced assessment than simpler portfolio management tools. While it has some limitations, the GE Business Screen can be a valuable asset for companies seeking to optimize their business portfolios and drive long-term growth and profitability. Remember that the key to successful implementation lies in a thorough and objective assessment of the relevant factors, coupled with a commitment to data-driven decision-making. The model should be viewed as a guide to strategic thinking, rather than a rigid formula, allowing for flexibility and adaptation based on the specific circumstances of each business.