The GE-McKinsey Matrix is a construct created by McKinsey & Co., consultants working on a project at General Electric (GE) during the 1970s. Similar to the BCG Growth-Share Matrix, the GE-McKinsey matrix is a tool to aid companies ranking or prioritizing the investment of resources in its strategic business units (SBUs). Companies the size of GE with many business units must work to allocate resources efficiently in order to achieve maximum growth at the holding company level and across all SBUs. Corporate managers will use this model to rank/categorize SBUs and make decisions on investing resources or withdrawing resources from a SBU.
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 SBU’s 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 SBU’s 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.