By Denise Harrison, Senior Consultant
GE is spinning off its Major Appliance division, highlighting the importance of making choices in strategic planning. In this case, Jeff Immelt, GE’s CEO, is making the choice to focus on the higher margin energy, power, aviation, and health care businesses. This decision exemplifies the purpose of strategic planning:
- Identify sound and appropriate course and direction that will truly optimize your company’s future potential
- Sharply focus resources in support of that course and direction.
Some comments on GE: Everyone remembers Jack Welch’s focus on being number one or two in an industry or get out. However, this is just a simplistic version of what the analysis looked like. To simply try to be number 1 or 2 in an industry could lead to poor financial performance, as we saw when GM tried to hold on to its number one position by buying market share, which, instead of generating success, led to poor financial performance and bankruptcy.
Choosing Where to Play
In choosing where to play, there are a number of aspects to consider:
- Assess where you have a competitive advantage – what do you have that has high value to your customers and differentiates you from the competition?
- What are the growth opportunities for the business? In general, growing markets provide more opportunities to profit than markets that are shrinking. This is, of course, dependent on the uniqueness of your position.
- What is the profitability of the industry? What is your ability to charge a premium for your products and/or services? Are you charging for the value that you are providing to your customers or are you pricing on a cost plus model?
- What other choices do you have? Do you have a greater differential advantage in other areas? Is there more profit in other segments?
Let’s look at another GE example – this time, GE Plastics. With its plastics business, GE chose to maintain its market leadership in the engineering plastics niche of the plastics market. This is important – GE did not try to become the market leader in plastics; instead, GE selected a specific segment of the industry where it had differentiated products. Additionally, GE believed that the industry had significant growth potential and due to the uniqueness of its products, GE predicted that it could sustain a competitive advantage.
However, over time its competitive advantage eroded and engineering plastics became a niche where there was less differentiation and lower margins. At that point, GE chose to sell its business to SABIC even though it was still a market leader. GE focused instead on other businesses where its differentiation, profitability and growth were more attractive than in engineered plastics. Note: GE did not wait until its business was in trouble; it made the decision based on optimizing its future success by allocating its resources in areas where it has a higher return.
We see this scenario playing out again with its Major Appliance division. The appliance division is not in trouble, but GE decided that there were other businesses that would achieve higher returns, and thus chose to focus on these businesses. It did not wait until the business was in trouble or losing money, instead it made the decision to re-allocate its resources. By selling a healthy business it was able to achieve a high price and use the proceeds in areas where there was more potential. Being a market leader is not the only criteria for staying in a business; critically, you must also assess whether or not this business provides the highest and best use for your scarce resources.
- Being big or the market leader in a segment is not necessarily a reason to remain in a particular industry segment – it is only one aspect to consider
- Selecting a niche where you can be a market leader by having a differential advantage that has high value to the customers and is sustainable, is also important
- Understanding your choices and focusing on the few, rather than trying to spread resources around, allows you to gain traction faster
Fundamentally it is all about choices. Teams that are able to gather good information about their markets, truly understand market niches and make choices concerning the highest and best use of their resources will achieve higher margins and optimize their future potential than those who stay in businesses where differentiation is eroding.
If you have questions about how to better focus your resources and make right choices during your strategic planning process please email me at: firstname.lastname@example.org .
For more information on how to take your strategic planning to the next level please listen to our webinar: Why Isn’t My Strategic Planning Working?
Denise Harrison is a senior consultant for the Center for Simplified Strategic Planning, Inc. She can be reached at email@example.com.
© Copyright 2014 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.