GE / McKinsey Matrix
In consulting engagements with General Electric in the 1970's, McKinsey & Company developed a nine-cell portfolio matrix as a tool for screening GE's large portfolio of strategic business units (SBU). This business screen became known as the GE/McKinsey Matrix and is shown below: The GE matrix has nine cells vs. four cells in the BCG matrix.
The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps strategic business units on a grid of the industry and the SBU's position in the industry. The GE matrix however, attempts to improve upon the BCG matrix in the following two ways: The GE matrix generalizes the axes as "Industry Attractiveness" and "Business Unit Strength" whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit.
Industry Attractiveness
The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is determined by factors such as the following: Market growth rate Market size Demand variability Industry profitability Industry rivalry Global opportunities Macroenvironmental factors (PEST)
Each factor is assigned a weighting that is appropriate for the industry. The industry attractiveness then is calculated as follows:
Business
The
Unit Strength
horizontal axis of the GE / McKinsey matrix is the strength of the business unit. Some factors that can be used to determine business unit strength include:
Market
share
Growth
Brand
in market share
channel access
equity
Distribution
Production
Profit
The
capacity
margins relative to competitors
business unit strength index can be calculated by multiplying the estimated value of each factor by the factor's weighting, as done for industry attractiveness.
GE MATRIX contd..
Industry
attractiveness and business unit strength are calculated by first identifying criteria for each, determining the value of each parameter in the criteria, and multiplying that value by a weighting factor. The result is a quantitative measure of industry attractiveness and the business unit's relative performance in that industry
Industry
attractiveness
factor value1 x factor weighting1 + factor value2 x factor weighting2+
Plotting the Information
Each
business unit can be portrayed as a circle plotted on the matrix, with the information conveyed as follows:
Market
circle. chart.
The
size is represented by the size of the share is shown by using the circle as a pie
Market
expected future position of the circle is portrayed by means of an arrow.
The following is an example of such a representation:
The
shading of the above circle indicates a 38% market share for the strategic business unit. The arrow in the upward left direction indicates that the business unit is projected to gain strength relative to competitors, and that the business unit is in an industry that is projected to become more attractive. The tip of the arrow indicates the future position of the center point of the circle.
Strategic Implications
Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix as follows: Grow strong business units in attractive industries, average business units in attractive industries, and strong business units in average industries. Hold average businesses in average industries, strong businesses in weak industries, and weak business in attractive industries.
Harvest weak business units in unattractive industries, average business units in unattractive industries, and weak business units in average industries.
There
are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry.
LIMITATION GE
While the GE business screen represents an improvement over the more simple BCG growth-share matrix, it still presents a somewhat limited view by not considering interactions among the business units and by neglecting to address the core competencies leading to value creation. Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units.
GE Mckinsey Matrix
Bus Str STR AVERA - ONG GE Ind at High AVERAGE Low HOLD
GROW HOLD HARVEST
WEAK
