A problem that executives often face is finding a tool to identify where and how to compete, identify profitable markets, evaluate investment options, and price their products rightly.
GE-McKinsey Matrix is one such strategic planning tool that helps the executives make investment decisions and manage their product portfolio based on sound analysis. Outlined by McKinsey & Co. in the 1970s, GE-McKinsey Matrix is, basically, an adaptation of the BCG analysis, which facilitates in analyzing the current portfolio of business units and develop strategies to achieve growth through addition of new products or through divesture options.
The GE-McKinsey Matrix is a more sophisticated strategic business portfolio tool compared to the BCG matrix. It guides the strategic direction an enterprise takes to enhance productivity of its business units and keeps the leaders informed on and manage the performance of their products and units. The GE-McKinsey Matrix is a 3×3 grid comprising 3 core components:
- Industry Attractiveness
Plotted on the Y-axis of the grid, it measures the advantage for an enterprise to enter or compete in a market (as “high,” “medium,” or “low” scores). Evaluating the Industry Attractiveness warrants predicting how the industry will transpire in the long term. Industry attractiveness signifies assessing key elements including long-term growth, industry structure and profitability, price trends, demand patterns, market segmentation, and manpower availability.
- Business Unit Strength
Plotted on the X-axis, this dimension measures the ability of a firm to compete in the market. Market share, brand position (value), customer loyalty, company profitability, production flexibility, and value chain strength are some critical factors affecting this dimension.
- Investment Strategies
Once the business unit(s) strengths and market attractiveness has been plotted on the GE-McKinsey Matrix, executives can finalize an appropriate investment strategy from one of the following:
- Invest/Grow: If the business units fall into these boxes on the GE-McKinsey Matrix, a firm should Invest in these BUs, as they are functioning in growing markets and have the potential to yield high returns.
- Hold: If the BUs fall under these boxes on the matrix, a company should invest in these BUs only if the leadership trusts that these BUs have the capacity to become profitable in future and if there are any funds left after investing in the Grow/Invest BUs.
- Harvest / Divest: The BUs that fall in this category are those that are functioning in unattractive industries, lack sustainable competitive advantage, or performing inadequately. A company should invest in these BUs as long as the investments do not surpass the revenue generated by them, or liquidate the BUs that are constantly under-performing and are unable to become profitable.
GE-McKinsey Matrix Approach
The formulation of the GE-McKinsey Matrix encompasses the following critical steps:
- Establish Industry Attractiveness of each business unit
- Ascertain the Competitive Strength of each business unit
- Outline the position of business units on the Matrix
- Analyze the data
- Ascertain the future direction and prioritize investments.
Let’s dive deeper into the first 3 steps of the approach.
Establish Industry Attractiveness of Each Business Unit
The first step is to determine the industry attractiveness of a business unit. To achieve this, senior leaders need to identify the factors affecting industry attractiveness—e.g., market, size, industry growth rate, industry profitability, and competition. They need to then assign weights to each factor based on its importance—e.g., a number from 1 (not important) to 10 (very important). Each factor (for each of your product or unit) should be then rated based on the assigned weights. This facilitates in obtaining weighted scores for each factor (by multiplying the weight of the factor by its rate).
Ascertain the Competitive Strengths of Each Business Unit
The second step to formulating the GE-McKinsey Matrix involves gauging the competitive strengths of all business units. This is done by determining the factors that influence the competitive strengths of business units—e.g., growth rate, market share, profitability, or brand reputation—; assigning weights to each factor based on the importance of a factor in achieving competitive advantage; rating all factors for each of the product or business units on a scale of 1 (least important) to 10 (very important); and calculating the weighted score for each factor.
Outline the Position of Business Units on the Matrix
This step involves plotting the weighted scores of the strengths of the business units—obtained in the previous step—on the GE-McKinsey Matrix. Specifically, the step entails representing each business unit by a circle corresponding to the revenue generated by that BU and placing a diagonal line on the matrix. The units that lie above the diagonal are suitable for additional investments (Invest/Grow); the units that fall below the diagonal should be divested; whereas those that fall exactly over the diagonal should be put on “hold,” and invested with caution.
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