In this article, we will delve into the intricacies of The McKinsey / General Electric Matrix and explore how it can benefit your business.
In the dynamic world of business, companies constantly seek effective tools to optimize their product portfolios. The business portfolio is the collection of businesses and products that make up the company.
The best business portfolio is one that fits the company’s strengths and helps exploit the most attractive opportunities. In order to do that, the company must:
- Analyse its current business portfolio and decide which businesses should receive more or less investment.
- Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.
The two best-known portfolio planning methods are The Boston Consulting Group Matrix and The McKinsey / General Electric Matrix (discussed in this revision note).
In both methods, the first step is to identify the various Strategic Business Units (SBUs) in a company portfolio.
Strategic Business Units (SBUs) is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.
What is The McKinsey / General Electric Matrix?
The McKinsey / General Electric Matrix, a strategic framework that helps businesses evaluate and prioritize their investments across various products or business units.
The GE-McKinsey Matrix was developed in the 1970s when McKinsey & Company was hired by GE (General Electric) company to develop a tool or model for analysis and management of a business portfolio that is best suitable as per their requirements.
It is a more advanced version of The Boston Consulting Group Matrix, offering a more nuanced approach to portfolio analysis and overcoming a number of the disadvantages.
Two dimensions of The McKindsey / General Electric Matrix
The McKinsey / General Electric Matrix considers a wider range of factors unlike The Boston Consulting Group Matrix which focuses on market share and market growth rate.
Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. Secondly, competitive strength replaces market share as the dimension by which the competitive position of each Strategic Business Unit (SBU) is assessed.
It evaluates business units or products based on two key dimensions:
- Industry Attractiveness: This dimension assesses the overall attractiveness of the industry in which a business unit operates. Factors considered include market size, growth rate, profitability, competitive intensity, and regulatory environment.
- Competitive Strength: This dimension evaluates the business unit’s competitive position within its industry. Factors considered include market share, profitability, brand image, technological capabilities, and management expertise.
These two dimensions are plotted on a 3×3 grid, creating nine distinct boxes that represent different strategic positions.
A. Factors that affect Market Attractiveness
This dimension assesses the overall attractiveness of the industry in which a business unit operates. These are listed below:
– Market size
– Market growth
– Market profitability
– Pricing trends
– Competitive intensity / rivalry
– Overall risk of returns in the industry
– Opportunity to differentiate products and services
– Segmentation
– Distribution structure (e.g. retail, direct, wholesale, etc.)
– Regulatory environment
Whilst any assessment of market attractiveness is necessarily subjective, these several factors can somewhat help to determine attractiveness.
B. Factors that affect Competitive Strength
This dimension evaluates the business unit’s competitive position within its industry. Factors to consider include:
– Strength of assets and competencies
– Relative brand strength
– Profitability rates
– Market share
– Customer loyalty
– Relative cost position (cost structure compared with competitors)
– Distribution strength
– Technological capabilities
– Record of technological or other innovation
– Access to financial and other investment resources
– Management expertise
By understanding the intricacies of this matrix and applying it effectively, you can gain a competitive edge and steer your business towards success.
Interpreting The McKinsey / General Electric Matrix
The nine boxes of The McKinsey / General Electric Matrix can be broadly categorized into three zones:
- GROW: Business units in the top-left boxes are in attractive industries and have strong competitive positions. These units should be prioritized for investment and growth.
- HOLD: Business units in the middle boxes are in moderately attractive industries or have moderate competitive strength. These units should be maintained and selectively invested in.
- HARVEST: Business units in the bottom-right boxes are in unattractive industries or have weak competitive positions. These units may be considered for divestment or harvesting.
In summary, The McKinsey / General Electric Matrix is a valuable tool for businesses seeking to effectively manage their product portfolios.
By considering a wide range of factors and providing a clear visual representation, it helps businesses make informed decisions about resource allocation and growth strategies.
While it has some limitations, its benefits make it a worthwhile tool for any business looking to optimize its product portfolio and achieve sustainable growth.
