What is the General Electric Approach?
The GE approach uses a matrix with two dimensions, with one axis representing industry looks. And the other axis represents a company’s strength in the industry. Like the Boston Consulting Group (BCG) approach. General Electric’s approach is a useful tool for business owners. And executives to analyze market opportunities and make informed decisions about investments.
What are the Benefits of using the General Electric Approach?
The GE method provides a comprehensive examination of potential investment opportunities. By taking both internal and external factors into account. By assessing the market conditions and a company’s strengths. The GE approach helps companies in choosing wisely how to allocate resources. As a result, there is a greater chance of success and a more efficient use of resources.
What Makes the General Electric Approach Different from Other Portfolio Planning Approaches?
The GE approach takes into account a company’s internal strengths and market conditions, unlike other portfolio planning tools. This unique combination of analysis provides a complete view of potential investment opportunities. And helps businesses in making viable resource allocation choices. The GE approach is also visual. And simple-to-understand tool for business owners and executives due to the use of a two-dimensional matrix.
The Legacy of Jack Welch and the General Electric Approach
Jack Welch, the former CEO of General Electric from 1981 to 2001, is widely regarded as a legendary leader in the business world. Although his leadership style may not be ideal for 21st-century executives, three aspects of his approach remain relevant today. Welch was known for his focus on efficiency, his willingness to take risks. And his commitment to developing leaders within the company.
Welch also implement the General Electric approach during his tenure as CEO, and the tool continues to be widely used in businesses today. The success of the General Electric company during Welch’s tenure speaks to the effectiveness of the GE approach as a portfolio planning tool.
Industry Attractiveness Index
GE’s industry attractiveness index considers more than just market growth rate. It uses an index made up of factors such as market size, market growth rate, industry profit margin, level of competition, seasonality and cyclicality of demand, and industry cost structure. Each of these factors is rated and combine to create the industry attractiveness index, which can be described as high, medium, or low.
For example, Kraft has identified several highly attractive industries such as natural foods, specialty frozen foods, physical fitness products, and others. However, the company has withdrawn from less attractive industries such as bulk oil and cardboard packaging.
Business Strength Index
The GE approach uses a business strength index instead of just a simple measure of relative market share. The index includes factors such as the company’s relative market share, price competitiveness, product quality, customer and market knowledge, sales effectiveness, and geographic advantages. These factors are rated and combined to create the business strength index, which can be described as strong, average, or weak.
Kraft, for example, has substantial business strength in the food and related industries but is relatively weak in the home appliances industry.
The Three Zones of the Grid
The GE strategic business-planning grid is divide into three zones. The green cells in the upper left corner of the grid are for strong SBUs that the company should invest in and grow. The yellow diagonal cells are for SBUs. That are medium in overall attractiveness, and the company should maintain its level of investment in these SBUs. The three red cells in the lower right corner of the grid indicate SBUs. They are low in overall attractiveness, and the company should seriously consider harvesting or divesting these SBUs.
The circles on the grid represent four company SBUs, and the areas of the circles. These are proportional to the relative sizes of the industries in which these SBUs compete. The pie slices within the circles represent each SBUs market share. For example, Circle A represents an SBU with a 75% market share in a good-sized, highly attractive industry in which the company has strong business strength. Circle B represents an SBU with a 50% market share but in a less attractive industry. Circles C and D represent two other company SBUs in industries where the company has small market shares and not much business strength.
Projected Positions and Strategic Issues
Management can also plot the projected positions of the SBUs with and without changes in strategies. By comparing the current and projected business grids, management can identify the major strategic issues and opportunities it faces.