ge-mckinsey-matrix

What Is The GE McKinsey Matrix And Why It Matters In Business

The GE McKinsey Matrix was developed in the 1970s after General Electric asked its consultant McKinsey to develop a portfolio management model. This matrix is a strategy tool that provides guidance on how a corporation should prioritize its investments among its business units, leading to three possible scenarios: invest, protect, harvest, and divest.

Understanding the GE McKinsey Matrix

The GE McKinsey Matrix is fundamentally a portfolio analysis. That is, it compares groups of products with their competitive power and market attractiveness.

The portfolios themselves are comprised of the full suite of products or services that a business offers to the market. In the context of General Electric, the matrix was created so that the company could analyse the composition of each of its 150 portfolios – otherwise known as strategic business units (SBU).

Ultimately, the GE McKinsey Matrix allows a large, decentralized company to determine where best to invest its cash. It does this by allowing the company to judge each SBU on its own merits according to metrics which determine future viability.

Structure of the GE McKinsey Matrix

The matrix comprises two axes. The competitive strength of the individual SBUs is represented on the x-axis, while market attractiveness is represented on the y-axis. 

Both competitive strength and market attractiveness are determined by a weighted score calculated from the relevant factors that apply to each. Each parameter is further divided into three categories – low, medium, and high. This creates a matrix with a total of nine cells.

The nine cells are then divided by a diagonal line, running from the bottom left to the top right of the matrix. When a product is placed on the matrix, its position relative to the diagonal line determines the strategy that should be used.

In other words, products that fall above the diagonal line are high performers with high growth or cash flow potential. Conversely, products that fall below the line have little potential for growth and are costing the company money to sell.

Drivers of the GE McKinsey Matrix

Before any business can plot their products on the matrix, they must first define both competitive advantage and industry attractiveness.

Competitive advantage may include:

  • Market share and growth in market share.
  • Profit margins, cash flow, and manufacturing costs.
  • Brand equity and customer loyalty.

On the other hand, industry attractiveness includes:

  • Market size and the potential for growth.
  • Buyer and supplier power.
  • The potential for new entrants (competition) or substitution with another product.

Strategic implications

As we touched on earlier, the position a product occupies on the matrix drives future strategy. Listed below are the three main strategies.

Growth/investment strategy

A growth strategy is prudent when a product has a competitive advantage in an attractive market. Investment in growth and a focus on maintaining strengths is a priority. Profitability can also be increased with an emphasis on productivity.

Hold strategy

A hold strategy occurs when a product has both average competitive advantage and market attractiveness. Here, businesses should invest in segments with high profitability and low risk, while also minimising their weaknesses.

Harvest strategy

If the product is at a competitive disadvantage and resides in an unattractive industry, a harvest strategy should be employed. Investment should be minimized at all costs, and assets should be sold when cash value is highest. The harvest strategy also ensures that low viability products do not negatively impact on other, high viability areas of a portfolio.

Divest

When the competitive strength of the business unit and the intrinsic attractiveness of the industry are low, the option to undertake is divestment. In this way, the resources can be reallocated to focus on more strategic areas, that can help gain a competitive advantage.

Key takeaways:

  • The GE McKinsey Matrix is a nine-cell portfolio matrix, originally developed for GE as a means of screening their large portfolio of strategic business units.
  • The drivers of the GE McKinsey Matrix for a product portfolio are competitive strength and market attractiveness.
  • The position of a product on the matrix ultimately decides whether the business should focus on growth or on minimizing investment and selling.
  • Read also: Business Strategy, Examples, Case Studies, And Tools

Other strategic frameworks by McKinsey

McKinsey Horizon Model

mckinsey-horizon-model
The McKinsey Horizon Model helps a business focus on innovation and growth. The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey’s Three Horizons of Growth.

McKinsey 7-S Model

mckinsey-7-s-model
The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.

More Business Frameworks

Ansoff Matrix

ansoff-matrix
You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived by whether the market is new or existing, and the product is new or existing.

Blitzscaling Canvas

blitzscaling-business-model-innovation-canvas
The Blitzscaling business model canvas is a model based on the concept of Blitzscaling, which is a particular process of massive growth under uncertainty, and that prioritizes speed over efficiency and focuses on market domination to create a first-scaler advantage in a scenario of uncertainty.

Blue Ocean Strategy

blue-ocean-strategy
A blue ocean is a strategy where the boundaries of existing markets are redefined, and new uncontested markets are created. At its core, there is value innovation, for which uncontested markets are created, where competition is made irrelevant. And the cost-value trade-off is broken. Thus, companies following a blue ocean strategy offer much more value at a lower cost for the end customers.

Business Analysis Framework

business-analysis
Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Gap Analysis

gap-analysis
A gap analysis helps an organization assess its alignment with strategic objectives to determine whether the current execution is in line with the company’s mission and long-term vision. Gap analyses then help reach a target performance by assisting organizations to use their resources better. A good gap analysis is a powerful tool to improve execution.

Business Model Canvas

business-model-canvas
The business model canvas is a framework proposed by Alexander Osterwalder and Yves Pigneur in Busines Model Generation enabling the design of business models through nine building blocks comprising: key partners, key activities, value propositions, customer relationships, customer segments, critical resources, channels, cost structure, and revenue streams.

Lean Startup Canvas

lean-startup-canvas
The lean startup canvas is an adaptation by Ash Maurya of the business model canvas by Alexander Osterwalder, which adds a layer that focuses on problems, solutions, key metrics, unfair advantage based, and a unique value proposition. Thus, starting from mastering the problem rather than the solution.

Digital Marketing Circle

digital-marketing-channels
digital channel is a marketing channel, part of a distribution strategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"