The GE Portfolio approach evaluates a business on the basis of two composite dimensions: industry attractiveness and business strength. These dimensions, in turn, consist of a series of weighted factors. Both the factor weights and the factors themselves may vary from one application to another; for example, industry attractiveness includes measures of market size, growth rate, competitive intensity, and the like, whereas business strength normally includes such measures as market share, share growth, and product quality. Analysts assign each business a rating for each factor and a weight to each factor. Multiplying the factor ratings by the weights produces a position for each business on the strength/attractiveness matrix.

While designed to assist in the GE/McKinsey approach to portfolio management, this model can be used for any situation where a certain number of items are ranked on two sets of weighted factors. Optionally, multiple sets of weights can be used.

The GE Portfolio approach helps firms answer such questions as:

• On which products, offerings, or divisions should we focus our efforts?
• What method can we use to assess and understand the weights that various members of the management team assign to different dimensions?
• How can we reconcile different points of view?

Customer Lifetime Value (CLV) is a metric of a customer's value to the organization over the entire history of the relationship. Short-term sales are a factor, but so are overall customer satisfaction, the churn rate in the segment, and the costs to acquire a new customer and retain an existing customer.

The model uses the following input:

Segment Description

• Number of Customers per segment. As of today, how many customers does the company have in each segment?
• Gross Margins are the average margins that can be expected from a customer over each period (e.g., a year, a quarter), based on which segment this customer belongs to at the beginning of this period.
• Marketing Costs quantifies how much money the company spends per customer and per period, depending on which segment this customer belongs. Typically, active customers are followed more closely, receive more attention (e.g., direct marketing solicitations or sales representatives visits), and cost more to the firm.

Transition Matrix

• The Transition Matrix summarizes the likelihood a customer will switch segments at each period. This matrix should be read horizontally, and each line sums up to 100% (since all customers need to go somewhere). In the above example, an "active customer" has a 75% likelihood of still being in the same segment next period, and 25% chance of switching to the "warm customer" segment.