One of the more unique ways that companies can assess the success or failure of an individual strategic business unit (SBU) is to use the GE model. General Electric uses a simple diagram of nine boxes, and three essential designations in order to define each business unit’s importance in terms of its uniqueness and attractiveness to its industry, and that business unit’s overall strength within its industry.
These two criteria form the basis of an analysis that allows GE to assess the long-term viability of each individual strategic business unit. The idea is to assess each unit’s attractiveness and strength in order to define which units are currently successful, which are average or mediocre in terms of performance, and which are not successful and should therefore be abandoned.
Understanding Strategic Business Units
Before venturing into the GE model, it’s perhaps best to review what constitutes a strategic business unit. Most companies assume that these units are complex and strictly the domain of the large corporation. However, this simply isn’t the case. Simply put, a strategic business unit is a portion of your business that is large enough to stand on its own. For example, you may be operating within your current market, but have the chance to offer a new product, or even an existing product, into an entirely new industry, one that has different competitors, different market conditions, different vendors and creditors, and most importantly, different customers.
Operating in this new market may require your company to define a new business plan, one tailor-made to penetrating and succeeding in this new industry. In turn, that new business plan will likely call upon existing resources and assets, all with the aim of one day operating as a separate entity.
You may also need to have a separate sales, marketing and customer service team in order to succeed in this market. Once that happens, you’ll likely have to have a separate accounting department to handle finances. In turn, you may have to set up different distribution centers, and warehouse locations, which ultimately means defining a new set of conditions for that unit’s operations. In summary, a strategic business unit can operate on its own because it may need its own resources and tangible assets to succeed.
The GE Model of SBU Analysis
Companies adopting the GE model must be able to define each strategic business unit’s strengths in terms of them being strong or weak. Next, companies must be able to define their business unit’s uniqueness in terms of it being high or low. In some examples, the aforementioned uniqueness range is defined as being between high attractiveness and low attractiveness.
Businesses that are strong performers are ones with strong business strengths and high industry uniqueness values. Businesses that are average performers fall in the middle range, while poor business units have weak business strengths and low industry uniqueness. The entire model is depicted below.
Defining Business Strengths and Industry Uniqueness
One of the difficulties of the model is that it asks its users to define what it considers each unit’s business strengths and industry uniqueness. In essence, the company must analyze each of their strategic business units based on each unit’s market and industry. As such, this entire pursuit isn’t to be taken lightly. The simple fact is that the model can be quite an involved process. It requires an honest assessment of the unique characteristics within each strategic business unit’s market. That requires a substantial amount of analysis. However, a simple strategy might include grading each criteria and then using a weighted average rating in order to determine where each business unit sits on the grid.
For example, business strength is measured as either being weak or strong. Therefore the rating may simply go from 1 to 5 with 1 being “weak” and 5 being “strong” for each individual variable. Ultimately, it's up to your company to come up with its own variables pertaining to how it should define business strengths and industry uniqueness; this is therefore a business unit and industry specific exercise. Here are some guidelines on what you might include in terms of your analysis of business strengths and industry uniqueness.
Business Strengths
These characteristics should center on defining the company’s internal strengths. Focus this portion of the analysis on the business unit’s product and service offering. For instance, are customers loyal to both the product and the brand? Is the company strong in terms of research and development? Is it considered a market leader and innovator amongst its customer base? Finally, does the unit own any important patents and does it have a strong cost structure that allows it to dominate new product introductions? The focus of analyzing business strengths must take into consideration those characteristics that are deemed advantages for the company. Again, take each of your criteria and grade them on a scale of 1 to 5.
Business Strength Characteristics
Industry Uniqueness
A strategic business unit’s uniqueness should encompass a similar analysis to that of any company trying to determine their importance within their market. For instance, the characteristics that should be reviewed include the market’s size, the business unit’s market share, its revenue and profit, its excellence in product innovation and introduction, and the level of competition within the market. Once again, once you’ve determined your industry uniqueness criteria, you’ll want to grade each SBU on a scale of 1 to 5, with 1 being “low uniqueness” and 5 being “high uniqueness.”
Industry Uniqueness Characteristics
Individual Strategies for Each SBU Designation
The GE framework is based on using nine boxes within the grid, and then using nine different strategies for an individual business unit, depending upon which box that business unit falls under. When you've identified your specific business strength and industry uniqueness characteristics, you would then provide individual grades for each variable within each category. Afterwards, you would see where each business falls on the grid.
For a corporation of GE's size, it isn't uncommon to have dozens of business units all over the matrix. This is ultimately why having nine different strategies corresponding to each box is so important. Ultimately, a high number of business units implies that there should be multiple strategies to plan for any position on the grid.
This ultimately requires a substantial investment of time and resources, the likes of which most companies simply don’t have. This makes the model an extremely time consuming and involved affair. However, instead of dialing into the nine specific strategies, we’ll define individual strategies for our three strategic business unit designations. In essence, we'll simplify the analysis so that we can analyze three simple strategies for a successful business unit, an average business unit and a poor performing business unit. We'll use our aforementioned grading rule or score value of 1 to 5.
SBU Successful (scores between 4 and 5): In this case, a successful business unit is one that has "strong" business strengths and "high" industry uniqueness. Defend your position as the market leader. Focus your efforts on what is working and stay the course. Be cognizant of competition as they may try emulating your business unit and its strategies. Protect your business strengths and continually strive to improve upon them.
SBU Average (scores between 3 and 4): This is a business unit with average business strengths and average industry uniqueness. Isolate low grades and corresponding variables. Identify unique strategies to improve those lower grades. Define what is lacking and what ultimately needs to improve. Accentuate strengths and mitigate the impact of the weaknesses within the business.
SBU Poor (scores below 3): This is a strategic business unit that has "weak" business strengths and "low" industry uniqueness. Define the poor performance of this particular SBU. In some cases, it may simply be a short-term issue, one that will easily rebound once customer demand picks up. Before making any decisions on the future of this business unit, start first by defining the current conditions. However, if this has been a going concern for some time, then it’s likely time to abandon the business altogether.
An Example of the Grading System
Let's assume your company has used the aforementioned list of business strengths and industry uniqueness in order to grade each variable in each category. Your assessment might look something like the table below. The company's business growth characteristics have a total grade of 20. This is then divided by the five categories for an average grade of 4. Next, the company's industry uniqueness characteristics have a total grade of 21.
Again, divided by the five categories give us an average grade of 4.2. The cumulative grade is therefore 4.1. For this particular example, the strategic business unit has "strong" business strengths (between 4 to 5) and "high" industry uniqueness (between 4 to 5). However, be aware of the following important note.
SPECIAL NOTE: Be sure to analyze each category individually (strengths and uniqueness) in order to get a true indication of the total grade for each business unit. Also, there are always issues as to deciding whether your cumulative score should to dictate if a business unit is successful, average or poor and consequently, where that business should fall on the grid. You may have a business with extremely strong business growth characteristics, but very low industry uniqueness. While your cumulative score may give the impression of a successful business, it may simply be one with strong strengths with a low uniqueness grade - it's up to you to decide if that is what your business unit is striving for.
The Pros and Cons of the GE Matrix
Like all strategic planning tools, there are both pros and cons to using the GE Matrix. As previously mentioned, companies must come up with specific business strengths and industry uniqueness characteristics as no defined, or generic, variables exist with which to measure all strategic business units. The model also doesn't allow a parent company to use its own core competencies across multiple businesses as each business unit must be treated as a separate entity. In addition, the final designations of SBU successful, average and poor are often seen as being somewhat ambiguous as an argument can be made that each position may be a preferred rating for an business unit based on existing market conditions.
The variables of business growth and industry uniqueness may be biased and in favor of the parent company as it is done internally and managers can easily focus on what they consider important criteria, rather than what the market or industry would consider important criteria. This means the outcome can be tainted and based on managerial perceptions of what is considered a business strength, and an industry uniqueness characteristic. Finally, it's not always easy to find a location for an individual entity on the matrix if these aforementioned characteristics are weighted in favor of the business unit.
- No generic or simplified criteria for business strength and uniqueness
- Parent company can't use core competencies across multiple business units
- Biased criteria can be used for strengths and uniqueness
- Difficult to find a location for an business unit on the grid
The GE model allows companies of all sizes to assess the strengths and weaknesses of individual strategic business units. The focus isn’t just to use the GE model for those instances were companies or corporations have dozens, if not hundreds, of business units. Instead, it’s to use the model to assess each unit’s importance to the company’s overall future. Your particular company doesn’t have to be the size of a GE to benefit from using its strategies. All you need to do is to show a willingness to use the model to analyze each of your strategic business units. In this example, we've kept the original nine boxes of the matrix but have scaled down the analysis in order to focus on specific strategies for each SBU designation.
While this may not appeal to any large corporations, and may not adhere strictly to the GE framework, it still simplifies the analysis for companies who want a less complicated version of the matrix. A number of models use similar strategies and rely upon a simplified version of the grid. To read about additional sources of the matrix, and to glean insight into 9 unique strategies, please refer to: BCG Matrix & GE/McKinsey Matrix
The above video is from the post: Strategic Business Planning: SWOT & TOWS Analysis
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