GE - McKinsey Matrix - Explained
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What is the GE Matrix?
The GE-McKinsey Matrix is a tool to help prioritize and strategize your business investments among smaller business units. The GE-McKinsey Nine-box matrix functions by providing strategic options on how to get maximum yield from each small business unit, it also helps to evaluate all types of business portfolios and provides the best strategic implications on the business.
Back To: BUSINESS STRATEGY
What determines Industry Attractiveness?
The attractiveness of a company is solely dependent on its profit returns and its market base, i.e the amount of profits it earns on a monthly and annually. When a company has a high profit margin, it will definitely attract the attention of competitors and possible investors Some business analysts sometimes fail to look into long-lasting commitment of clients, customers, rather they look at the investments of the company in the nearest future. There are quite a lot of factors that determine the attractiveness of a company. We have decided to mention just a few among the factors that determine a company or industry attractiveness.
- Availability of labor
- Business growth
- Company size
- The structure of the business
- Change in the product life cycle
- Change in the market price
- Market segmentation
- Environmental factor
- The profitability of the business/industry.
What Determines the Strength of a Product or Business Unit.?
The matrix on the X axis determines the strength of a company against its major competitors. Business managers analyze the business strength and determine if it has advantages against its rival or not. If the company is on the advantage side, and for how long will the company be on the advantage side? Below are some determinants of business unit competitive strength
- Loyalty of the customers
- The strength of the brand
- Total share in the market
- The amount of profit generated monthly/yearly
- Differentiation in production level
- The strength of the business value chain
- Flexibility of production
- VRIO resources
- Strength of the company is determined by the companies decision at critical times.
Structure of the GE-McKinsey Matrix
The GE-McKinsey matrix uses the strength of a business unity and the attractiveness of the market or industry as the primary quantifiable categories in ranking a SBU.
Employing the GE- McKinsey Matrix
The following steps are useful in effectively employing the matrix.
1. Determine the attractiveness of the business unit.
The requires looking at the potential of the industry, including the size, growth rate, profitability (margins), competitive landscape, and environmental factors affecting the industry. In determining attractiveness, managers may employ other models, such as a SWOT analysis, PESTLE analysis, or other approach to better understand the industry. The manager would then assign weights (1-10) to the importance of each industry factor identified as making the industry attractive. 1 is not important while 10 is very important. The total of weights for the important factors should equal 10. This provides a percentage strength for each factor. For example, if competitiveness is a 5, growth rate may be a 3, and profit margins may be a 2. Once each factor is given a weight, examine these factors for the SBU being evaluated. Use a 1 to 10 scale and, again, the total value assigned to each factor should equal ten. 1 is not positive, 10 is very positive. So, if the relevant SBU has a 7 for competitiveness, 2 for growth rate, and 1 for profit margins. Now, take the weight for the factor and multiply it by the rating of the company by that factor. In our example (5 x 7) + (3 x 2) + (2 x 1) = 43
2. Determine the competitive strength of each business unit.
Identify the competitive strengths of value to the SBU, such as the market share, growth rate, profitability, brand strength or reputation, and customer service. Decide which of these competitive factors are most important and, just as we did with desirability of the industry, give them weights (1-10). If the growth rate is most important, it will receive a higher value. Values for all competitive factors must add up to 10. Again, this gives a percentage weight to the factor. Rate these factors for each business unit being analyzed on a scale of 1-10. Again, all combined ratings for the SBU must equal 10. Calculate the total value of the SBU by multiplying the weighted factor x the SBU rating (7 x 5) + (2 x 3) + (1 x 2) = 43. You will do this for each business unit.
3. Determine the position of each SBU in the matrix.
Now that we have an industry attractiveness score and a competitive strength score for each SBU, we can plot them on the matrix. Each SBU should be represented by a circle that demonstrates the SBUs market size relevant to other SBUs. The circle may be a pie chart demonstrating the percentage of market share of the company.
4. Determine the strategic possibilities for the SBUs.
Next, a diagonal line is drawn corner to corner (low strength & attractiveness to high strength & attractiveness). SBUs located above or to the left of the diagonal line would be deserving of additional investment. Those below are either divested or receive less funding. Alternatively, if they are generating revenue, this revenue is redirected to SBUs worthy of additional investment. This is commonly referred to as a harvest or divest strategy. Those falling very close to the line are generally on hold or maintain with regard to investment or resources. The company may increase or decrease investment depending upon the rankings of other SBUs.
5. Projecting the potential or future for the SBUs.
The projections for the industry and the SBUs competitiveness must be taken together. A promising SBU in an unattractive industry may need to be divested of resources. Likewise, a non-competitive SBU in a promising industry may be attractive if there is potential for growth with adequate investment of resources.
- Analyze the key areas the business portfolio needs to be improved by the company decision.
- It allows the business managers to monitor their products performance in the market.
- It operates on a more complex portfolio framework compared to the BCG matrix
- It helps in maximizing results with little effort.
- It is costly to manage
- Synergies that exist between more business are not taken into consideration
- The service of an experienced business analyst is required to interpret the company strength and attractiveness.
Academic Research on the GE Matrix
- Towards a new model for product portfolio analysis, Proctor, R. A., & Hassard, J. S. (1990). Management Decision, 28(3). As every investor in the stock market has a portfolio for different types of investments, with each investment having different risk and return rates attached to them. Likewise all organizations have a portfolio of products and services rendered. The role of the business manager/management in an organization is to find out how to create a balance between different products of the organization. There are different prescriptive models that have been proposed to business managers to help with product analysis and selection. The most important proposed product analysis models are The GE-McKinsey model and The Boston Consulting Group model. There are other models, but fot the sake of this research paper we will be looking into the two. The GE-McKinsey model and The Boston Consulting Group model have their limitations noted and proposed model which helps in limitations compared to earlier models.
- Competition and business strategy in historical perspective, Ghemawat, P. (2002). Business history review, 76(1), 37-74. This paper is all about how major business strategies being used today came into existence. Leaving no stone unturned kudos to all the academic and practitioners contributions towards developing these business strategies. The major focus is efforts made in 1970s and 1980 to analyze industry attractiveness and competitive advantages, and to determine the best business strategies to use in each situation
- A three-step matrix method for strategic marketing management, Jan, Y. C. (2002). Marketing Intelligence & Planning, 20(5), 269-272. This paper suggests a three step matrix that helps in accessing the market base. An industry perspective matrix is developed to assess opportunities and threats in the business environment. Furthermore a competitive matrix is designed; this helps in determining the strength and weakness of the any business unit or organization. The combination of the twop matrix yields a market situation matrix. Any organization can make use of its business strategic unit into these matrices using it to determine its current and predicted future position in a particular market place. It is an easy to use approach as it provides different options to choose from instead of a single matrix.
- GE/Mc Kinsey Matrix, Sood, A. (2010). Wiley International Encyclopedia of Marketing. This is an encyclopedia entry for the GE Martrix.
- The Application of MKinsey Matrix in Determination of Route Attractiveness and Resource Allocation in Kenya Airways, Mokaya, S. O., Wakhungu, B., & Gikhunda, R. M. (2012). International Journal of Humanities and Social Science, 2(3), 259-268. This is an application method for the McKinsey matrix within Kenyan Airlines.
- A Three-Dimensional Matrix Model for Determining the Optimal Strategic Choice for a Company, Kokodey, T. (2013). A Periodica Polytechnica Social and Management Sciences, 21(2), 59-65. This paper conducted a research on the three dimensional matrix model designed by McKinsey matrix and Hodograph method, which leaves the user an option of choosing a time series for optimal strategies which helps in maximizing the competitive advantage and general growth of the company. The major determinant for the option is the three coordinate axes: Favorability of the environment where the business is situated(y), and time(x). The level at which the organization competition advantage stands (x)
- Use of the customer value/mission (CV/M) matrix in strategic nonprofit marketing analysis, Knowles, P., & Gomes, R. (1997). Journal of Nonprofit & Public Sector Marketing, 5(2), 43-63. It is very difficult to apply traditional portfolio marketing methods to nonprofit situations. Traditional portfolio requires detailed market strength; customer base/market growth market share and account information regarding the profits generated overtime, which can be very hard for most nonprofits to provide considering the type of products and services offered by most nonprofits. The recent proposed product portfolio model, which is Customer Value/Mission Matrix, is the best tools in helping nonprofits in planning and marketing all their products. The Customer Value/Mission Matrix serves nonprofit organizations and as well serve profit making ventures. The model shows the differential advantage and customer value chain to the consumers of the products/services. This paper helps in highlighting the advantages and disadvantages of the older portfolio matrix that has been suggested to nonprofit organization against the newer portfolio matrix.
- Product diversity and firm performance: An empirical investigation, P." Rajan" Varadarajan. (1986). The Journal of Marketing, 43-57.
- Portfolio analysis models: a review, Udo-Imeh, P. T., Edet, W. E., & Anani, R. B. (2012). Portfolio analysis models: a review. European Journal of Business and Management, 4(18), 101-117. In this study, the concept of portfolio analysis as regards business portfolio analysis is discussed extensively. The four major types of business portfolios which are Shell directional policy matrix, Arthur D. Little strategic condition matrix, General Electric industry-attractiveness, and Boston Consulting growth-share matrix, where discuss in terms of their features and implications to business marketing and business management. We also discussed some of the limiting factors of each portfolio analysis models. The study showed that none out of the portfolio model was superior to one another, as they all have advantages and disadvantages. Furthermore the determinant of the type of model to be used is determined by the type of organization and the environment where the business is situated. The study also shows that new discovered variants are not theoretically popular in the management and marketing practice and business literatures. Finally the portfolio analysis is not the major determinant in making strategic decision, rather but to provide you with data which helps in guiding you through decision making
- Succeeding at new businesses: a matrix to measure flexibility, J. Burns, D. (2014). Journal of Business Strategy, 35(5), 23-30. The sole reason for writing this paper is to suggest an alternative model to the opportunity Assessment Matrix. This will help in addressing the major problems as regards decision making in businesses. The need and usefulness of strategic planning is on the rise daily, thereby leading to the reduction in the use for classic tools, such as portfolio models.