The GE McKinsey Matrix is a strategy tool that enables multi-business corporations to prioritize its investments among its business units.
In this article, I’ll describe three components related to the GE McKinsey Matrix:
- Industry Attractiveness
- Business Unit Strength
- Strategic Implications of the GE McKinsey Matrix
In the 1970s, General Electric requested consultation from McKinsey & Company to manage a huge and complex portfolio of unrelated products. As a result of this consultation, this nine-box matrix was born.
One important thing to know is that you could use this matrix to prioritize individual products or product types (instead of just business units) in your company.
This nine-box matrix plots the business units on its nine cells. These cells indicate whether a company should:
- Invest in a product (Grow)
- Leave a product as is (Hold)
- Drop a product (Divest)
The business units are evaluated on two axes:
- Industry attractiveness
- Business unit strength
Various factors under industry attractiveness and business unit strength determine to what degree a company should invest or divest a business unit.
The vertical axis of the GE McKinsey matrix is industry attractiveness, which is determined by factors such as the following:
- Industry growth rate
- Industry size
- Industry profitability
- Demand variability
- Industry rivalry
- Global opportunities
- Macro environmental factors (PESTLE)
Each factor is assigned a weight that is appropriate for the industry. The industry attractiveness is then calculated using this equation:
Industry attractiveness = (factor value1 x factor weighting1) + (factor value2 x factor weighting2)…..
Business Unit Strength
The horizontal axis of the GE McKinsey matrix is business unit strength. Some factors that can be used to determine business unit strength include:
- Market share
- Growth in market share
- Profit margins relative to competitors
- Level of product differentiation
- Customer Loyalty
- Brand equity
- Distribution channel access
- Production capacity
- Production flexibility
The business unit strength index can be calculated by multiplying the estimated value of each factor by the factor’s weight, as done for industry attractiveness. Here’s what the equation looks like:
Business Unit Strength = (factor value1 x factor weighting1) + (factor value2 x factor weighting2)…..
Strategic Implications of the GE McKinsey Matrix
Based on a business unit or product’s position on this matrix, you can make recommendations on whether you should grow, hold, or divest it. Here are explanations of each of those three types of recommendations:
- Grow – business units in these boxes promise the highest returns in the future. Investments should be provided for R&D, advertising, acquisitions and to increase the production capacity to meet demand in the future. It’s essential to provide the cash and resources required to eliminate all constraints to their growth. Examples of business units that are likely to grow:
- Strong business units in attractive industries
- Average business units in attractive industries
- Strong business units in average industries
- Hold – business units in these boxes are the most uncertain, and you should only invest cash and resources that you have left over from investing in stronger performing business units. Examples of business units that are uncertain include:
- Average business units in average industries
- Strong business units in weak industries
- Weak business units in attractive industries
- Divest – these business units are performing relatively poorly. Furthermore, they don’t have sustainable competitive advantages and they are incapable of achieving these advantages. You should consider dropping these business units so that you can devote more time and resources toward business units that can generate larger returns. Examples of business units you should divest and harvest include:
- Weak business units in unattractive industries
- Average business units in unattractive industries
- Weak business units in average industries
- Enduring Ideas: The GE–McKinsey nine-box matrix. (2017). McKinsey & Company. Retrieved 29 March 2017, from http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/enduring-ideas-the-ge-and-mckinsey-nine-box-matrix
- Jurevicius, O. (2014). How to Invest in a Great Portfolio with GE-McKinsey. Strategic Management Insight. Retrieved 29 March 2017, from https://www.strategicmanagementinsight.com/tools/ge-mckinsey-matrix.html
- GE / McKinsey Matrix. (2017). Quickmba.com. Retrieved 29 March 2017, from http://www.quickmba.com/strategy/matrix/ge-mckinsey/
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