Business Strategy - the GE/ McKinsey Matrix

Business Strategy - the GE/ McKinsey Matrix

The GE/ McKinsey Matrix

• This is a form of portfolio analysis used for classifying product lines or strategic business units within a large company

• It was developed by McKinsey for the US General Electric Company

• It assesses areas of the business in terms of two criteria: – The attractiveness of the industry/market concerned– The strength of the business

Business Strategy - the GE/ McKinsey Matrix

How does it differ from the Boston Matrix?

• There are similarities:– Two dimensions are used to create a matrix– Each cell suggests an appropriate strategy– In both cases we are concerned with the future strategy for a

particular area (eg a division) within the firm

• There are major differences– The GE matrix involves a wider analysis of the firm’s operations– The dimensions of the GE matrix are industry attractiveness and

business strength (rather than market share and market growth)– There are nine cells and a wider choice of strategies– The Boston Matrix focuses on products within the firms product

range The GE matrix can be extended to look at strategic business units

Business Strategy - the GE/ McKinsey Matrix

Strategic Business Units (SBUs)

• Definitions of a SBU:

• A particular product market combination that typically requires its own business plan

• A part of a company that is large enough to have its own well defined markets, attract its own set of competitors and demand tangible resources and capabilities from the overall corporation

• A discrete grouping within an organisation with delegated responsibility for strategically managing a product/ service or group of product of services

• A division within a large national or multinational company is a SBU

Business Strategy - the GE/ McKinsey Matrix

Industry attractiveness

• The vertical axis of the matrix is industry attractiveness

• This concerns the attractiveness to a firm of entering, or remaining, in a particular industry

• Industry attractiveness is assessed by considering a range of factors each of which is given a weighting to produce a composite picture

Business Strategy - the GE/ McKinsey Matrix

Criteria which makes a market attractive

• Market size

• Growth rate

• Overall returns in the industry

• Industry profitability• Intensity of competition• Profit margins

• Differentiation

• Industry fluctuations

• Customer/supplier relations

• Variability of demand

• Rate of technological change

• Volatility

• Availability of market intelligence

• Availability of work force• Global opportunities

• PEST factors

• Entry and exit barrier

• Government regulation

Business Strategy - the GE/ McKinsey Matrix

Business unit strength

• The horizontal axis of the matrix is the strength of the business unit

• This refers to how strong the firm or SBU is in terms of the market

• A market might be very attractive but the firm lacks strengths in terms of supplying the market

• As with industry attractiveness a composite of industry strength is based on weighting a range of factors

• Notice that the Boston Matrix dimensions are included in the GE matrix- market growth is an element of industry attractive and market share is an element in business strength

Business Strategy - the GE/ McKinsey Matrix

Assessing internal strengths

• Production capacity

• Production flexibility

• Unit costs

• R and D capabilities

• Quality

• Reliability

• Company image

• Product uniqueness

• Cost and profitability

• Profit margins relative to competitors

• Manufacturing capability

• Organisational skills

• Market share

• Growth in market share

• Marketing capabilities

• Management competence

• Skills of workforce

• Distribution network

• Size and quality of sales force

• Service quality

• Customer loyalty

• Brand recognition

Business Strategy - the GE/ McKinsey Matrix

The GE/ McKinsey Matrix

High strength Medium strength Low strength

High attractiveness

X Cell 1 Y Cell 2 Y Cell 3

Medium attractiveness

Y Cell 4 Y Cell 5 Y Cell 6

Low attractiveness

Y Cell 7 Y Cell 8 Z Cell 9

Business Strategy - the GE/ McKinsey Matrix

The matrix

• Arranges the company’s SBUs in three bands and nine boxes

• Band X - Successful SBUs – in which the business is strong and the industry is attractive

• Band Y - Mediocre SBUs – in which either the industry is less attractive and/or the business is lacks strengths

• Band Z - Disappointing SBUs - in which the business is weak and the industry unattractive

Business Strategy - the GE/ McKinsey Matrix

Recommended strategies

Grow -strong business units in attractive industries-average business units in attractive industries-strong units in average industries

Hold -average business units in average industries-strong units in weak industries-weak units in attractive industries

Harvest -weak units in unattractive industries-average units in unattractive industries-weak units in average industries

Business Strategy - the GE/ McKinsey Matrix

Options for each cell

• 1Protect position -maintain position

• 2Try harder - challenge the leader

• 3Be choosy - keep an eye of opportunities – if risk is low

• 4Harvest - reduce cost to maximise profits

• 5Manage carefully

• 6Grow wisely - invest in attractive areas

• 7Regroup - preserve cash flow, defend strengths

• 8Keep investment to a minimum- protect the position that you have

• 9Get out

Business Strategy - the GE/ McKinsey Matrix

Invest for growth (cell 1)

• This is a very attractive market in which the firm has great strength

• Distinctive competences can be harnesses to good advantages

• Recommended strategies:– -Invest for growth– -search for global opportunities– -maximise market share– -seek dominance– -concentrate on building up strength in this area

Business Strategy - the GE/ McKinsey Matrix

Manage selectively (cells 2 and 4)

• These two cells record a high rating in either business strength or industry attractiveness and a medium rating in the other This suggests that these SBUs show some promise

• Recommended strategy: – Investment for growth – Invest to expand existing segments– Search for new segments– Build on existing strengths in order maintain competitive ability and

even to challenge for leadership

Business Strategy - the GE/ McKinsey Matrix

Manage selectively (cells 3,5,7)

• In each case the SBU has certain positive features – high in one of the dimensions or middling in both

• Recommended strategy– Invest for earnings– Maintain/defend market position– Concentrate on selected segments– Specialise in niches where strengths could be built on– Invest selectively

Business Strategy - the GE/ McKinsey Matrix

Harvest (cells 6 and 8)

• In each case either market attractiveness or business strength is low and other one is only medium

• Recommended strategies:– Manage for cash– Avoid unnecessary investment– Move to the most profitable segments– Prune product lines– Specialise in profitable niches– Consider exit

Business Strategy - the GE/ McKinsey Matrix

Divest (Cell 9)

• This is an unattractive market in which the firm has no strength

• Recommended strategy:– Exit the market– Time the exit in order to sell at a time that will maximize cash

value– In the meantime, cut fixed costs and avoid investment