The General Electric Screen

Posted by 22 September, 2008 Comments Off on The General Electric Screen

THE GENERAL ELECTRIC SCREEN

GE developed a more flexible, multidimensional matrix on the theory that the portfo­lio approach should not be limited to relative market share and market growth. Too great an emphasis on these two variables may mask many other factors that make a business or brand attractive and indicate its strengths. Also, relative share is of great­est importance where economies of scale and “experience curve” effects give the largest producer a significant cost advantage. (An experience curve reflects a decline in unit costs as more units are produced; it is the result of learning or “experience” in contrast to straight economies of scale.) Yet the experience curve does not always apply. As a result of such insights, many strategic planners have gone beyond the BCG approach to other approaches that rely on multiple measures of a firm’s ability to com­pete successfully. One of the first and best known of these alternative approaches is the investment opportunity chart or business screen developed by GE.

In the business screen approach, a strategic business unit (SBU) is classified ac­cording to how well it rates on certain success measures, referred to as its business strength. The industries in which SBUs operate are classified on the basis of measures of opportunity, referred to as industry attractiveness. Among the measures of business strength are the SBU’s product quality, price sensitivity, knowledge of the market, technological capability, image, and so on, whereas industry attractiveness is mea­sured by factors such as intensity of competition, seasonality of sales, legal con­straints, importance of technological change, and the like (Exhibit 2.5). Not all these factors can be measured as objectively and precisely as market growth, relative mar­ket share, and cash flow. On the other hand, the GE method offers much greater flex­ibility and comprehensiveness than the BCG approach.

The business screen is used in the following way: The nine cells shown in the il­lustration are placed in three zones. GE colored these zones green, yellow, and red; hence, this is often called the stoplight approach. The three zones at the upper left in­dicate industries that are attractive and match the SBUs’ strengths. They have a green light” for investment. The three cells along

(if you are having trouble viewing the image, click the below thumbnail to view the actual and clear image)

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the diagonal indicate industries of medium interest. They have a “yellow light” to denote caution; usually these SBUs warrant a strategy geared toward maintaining their present market share. The three cells at the lower right show weak SBUs for which a harvesting or divesting strategy may be the best option. The circles A through G represent the SBUs; their size is in proportion to the size of the industries in which they compete. The pie slices repre­sent each SBU’s market share within its industry.
The GE business screen’s history is representative of the history of strategic planning. Developed in the 1970s by William Rothschild at GE with Mike Allen of the consulting firm McKinsey & Company, the tool was carefully-and laboriously- applied in annual planning and forecasting by GE’s large central planning staff. Now, however, according to GE spokesman Bruce Bunch, the business screen “takes too much time” and is not used at GE any more.29 In fact, neither GE nor McKinsey will claim ownership of it today (in response to inquiries concerning permission to repro­duce it for publication). Once the heir apparent of the strategy throne, this method is a homeless orphan! (It remains a standard in the business school curriculum and im­portant for the concepts it represents, even though it is no longer in widespread use.)
What happened? The SBUs of GE and many other firms that were identified as winners according to the business screen were not necessarily better than other SBUs. They ought to have been-nobody could dispute that these represented great business opportunities. However, GE line managers did not necessarily know how to pursue the opportunities, and someone else-perhaps someone from Europe or Japan-might have pursued an opportunity more effectively. The model leaves out the focus-focus-focus factor after all.
As a result of problems in implementing strategies produced with such matri­ces, bigger companies, GE included, pushed planning back to the line managers and cut central staff. For example, in 1984, Michael Naylor, General Motor’s director of strategic planning, declared that “planning is the responsibility of every line man­ager,” and added that “the role of the planner is to be a catalyst for change-not to do the planning for each business unit.”
The case of GE’s Major Appliance Business Group is instructive. The group’s central planning staff numbered in the 50s at the beginning of the 1950s. Although some of the planners’ calls were right-for example, they identified the Japanese threat back in the 1970s-operating managers resisted the growing authority of plan­ning staff and tended to ignore them. They insisted on ignoring Japan and treating Sears as their major competitor, for example. In other cases, planners were dead wrong-their focus on numbers blinded them to realities of implementation. As GE’s Roger Schipke concluded when he took over the major appliance group (and booted out planners) in 1982, “An awful lot of conclusions were drawn by that group some­what in isolation. We had a lot of bad assumptions leading to some bad strategies.”

Business Week performed an interesting study in 1984, tracking a random sample of 33 planning strategies described in the magazine in 1979 and 1980. The tally: 19 clear failures and only 14 clear successes.32 A lot of planners lost their jobs that year!

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