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 analyze the composition of each of its 150 portfolios – otherwise known as strategic business units (SBUs).

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 according to whether it will do well in the future.

That is, the attractiveness of the industry and the SBU’s competitive strength in that industry.

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:

  • Actual market share and market share growth potential.
  • Profit margins, cash flow, and manufacturing costs.
  • Brand equity and customer loyalty.
  • Product or service uniqueness.

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.
  • Industry profitability. 
  • Entry and exit barriers.

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.

To calculate a weighted score for each SBU, follow these steps:

Make a list of factors

What are the competitive strength and market attractiveness features that are most relevant to the organization?

Refer to the previous section for examples.

Attribute weights

These define the relative importance of each factor.

The scale that is used is up to the discretion of the business.

For example, one may use a value of 1 to denote extreme unimportance with a value of 100 denoting extreme importance.

In this case, the individual weights that are assigned to each factor should add up to 100.

Rate the factors

Then, rate the factors according to how well each SBU satisfies them.

Most businesses use a scale of 1 to 10.

For example, one SBU may score a 6 for industry size while a smaller industry may score a 3.

Calculate total scores

To arrive at a total score for each SBU, multiply the weight assigned in step two with the rating assigned in step three.

Market segmentation for one SBU that is weighted at 17 and rated at 5, for example, receives a score of 85.

Repeat the process for each factor and sum each score to arrive at a total score.

Plot the scores on the matrix

With the total scores identified for industry attractiveness and competitive strength, the x and y-values of each SBU can be plotted on the matrix using a circle.

The size of each circle should correspond to how much revenue the small business unit generates.

That is, an SBU that generates 40% of company revenue should be twice the size of an SBU that generates 20% of revenue.

Note also that the nine cells are 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.

Products that fall above the diagonal line tend to be better performers with high growth or cash flow potential.

Conversely, products that fall below the line tend to have little potential for growth and are costing the company money to sell.

Strategic implications of the matrix

With each SBU plotted on the matrix, the business can choose one of three strategies according to whether it has low, medium, or high competitive strength and industry attractiveness.

Let’s take a look at these below.

Grow/invest 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.

This is a position every business aspires to and is characterized by moderate to high industry attractiveness and moderate to high competitive strength.

The biggest challenge for businesses in this area of the matrix is a lack of assets or capital that prevents growth or hinders it from maintaining a dominant market position.

For those who can afford to do so, growth strategies may involve increasing production capacity, targeting new consumer demographics, or mergers and acquisitions.

Hold strategy

A hold strategy occurs when a product has both average competitive advantage and market attractiveness.

The way forward, in this case, is a little more difficult to define than in the previous example.

Depending on the outlook of the company, it could either shift to a more attractive industry or strive to improve its competitive position in the current industry.

If the business decides to improve the current competitive position of one of its SBUs, it should only do so if there is capital leftover from investments in the grow/invest strategy

Harvest strategy

If the product is at a competitive disadvantage and resides in an unattractive industry, a harvest strategy should be employed.

This means investing just enough capital to keep the SBU afloat and continuing to invest as long as the investment made does not exceed the cash that is generated.

Business units that are making a loss, on the other hand, should be sold as soon as possible or when the cash value is at its peak.

These strategies ensure that low viability products do not negatively impact other, more profitable SBUs.

GE McKinsey matrix vs. BCG matrix

The Boston Consulting Group (BCG) matrix is another tool businesses use to guide long-term strategic planning across multiple business units.

The matrix was developed by Bruce D. Henderson in 1968 and served as the template for the GE McKinsey matrix in the following decade.

As a result, the two matrices are similar but with a few key differences which are outlined below.

Purpose

The GE matrix is a multifactor portfolio matrix that tells a firm which strategy to follow based on the position a product occupies in the grid.

The matrix has nine cells that account for varying degrees of industry attractiveness and competitive advantage.

The earlier BCG matrix, on the other hand, is more primitive.

It features only four cells and categorizes products according to their relative market share and growth rate. Each cell, or quadrant, is described as follows:

  1. Dogs – low market share/low market growth.
  2. Question marks – low market share/high market growth.
  3. Stars – high market share/high market growth.
  4. Cash cows – high market share/low market growth.

Level of detail

The GE McKinsey matrix provides concrete instruction on how a business can calculate industry attractiveness and competitive advantage or business unit strength.

As noted earlier, the organization lists important factors and then assigns a weighting to each.

The resultant calculation then yields x and values that can be plotted on the matrix to determine the best course of action moving forward. 

The BCG matrix does not clarify how market share and market strength should be calculated.

In fact, one of the main criticisms of the matrix is that it is too simplistic.

Smaller businesses with market shares that are too small to quantify may also find that the BCG matrix is unsuitable for their needs.

Strategy

The nine-box GE matrix features three different strategies that in some interpretations are color-coded in the following way:

  • Grow/invest (green) – any product that falls in a green box is representative of a business in a good position.
  • Hold (amber) – with the way forward more difficult to define, these boxes require the skilled decision-making of experienced personnel.
  • Harvest (red) – these products require close attention because they have the potential to negatively impact the company’s bottom line.

Strategies here are based on strong, average, and weak competitive advantage and high, medium, and low industry attractiveness.

Conversely, the less versatile BCG matrix is mostly concerned with identifying the business units where investment should be prioritized.

Market share and market growth are only measured in terms of high or low, which makes the resultant strategy far more general and imprecise:

  • Dogs – in most cases, these products should be removed from the portfolio because they are a drain on resources. 
  • Question marks – as the name suggests, these are products that may or may not respond to increased investment. Some may turn into stars, while others will turn into dogs or fall somewhere in between.
  • Stars – or products that require ongoing investment to sustain market dominance.
  • Cash cows – these are mature, well-established products that should be “milked” as long as possible.

GE McKinsey matrix of Volkswagen

Volkswagen is a German automotive manufacturer that was founded in 1937 by the German Labour Front with a mission to make vehicles more affordable for working-class citizens.

The company is best known for its iconic Beetle, with its 80-year production run finally ending in Mexico in July 2019.

Today, Volkswagen is a dominant force in the automotive industry with a portfolio of 10 core brands across sports cars, passenger cars, motorcycles, and commercial vehicles.

The company also manages additional brands and business units that offer vehicle financing and leasing.

Let’s take a look at some of these brands in the context of the GE McKinsey matrix below.

Grow/invest strategy

Volkswagen Passenger Cars is by far the company’s most valuable brand with 2.719 million vehicles sold in 2021

Some 453,000 of these sales were electric vehicles, representing an increase of 95% over the previous year.

Like most of its competitors, Volkswagen is investing heavily in electric vehicles.

In releasing its Q1 2022 results, the company announced a growth strategy to achieve a 10% market share of battery-electric vehicles (BEVs) in the United States.

To achieve this, the Volkswagen Passenger Cars brand will feature 25 separate models by the end of this decade with $7.1 billion slated to be invested in BEV research, development, and manufacturing.

This investment forms part of the company’s New Auto – Mobility for Generations to Come strategy which also encompasses fully networked autonomous transportation.

Hold strategy

Seat is a brand that may be classified as average market attractiveness and competitive advantage.

The brand was the fourth most popular for Volkswagen in 2021 with 494,000 vehicles sold, with the vehicle more popular in Germany and the United Kingdom than in its home country of Spain.

Elsewhere, Seat has had mixed success. In a similar way that Skoda gained a foothold in India, Seat has been a strong representative of VW in North Africa.

However, a move to enter the Chinese market with a small, low-cost EV was ultimately thwarted by a looming recession, reduced governmental incentives, and continued COVID-19 lockdowns.

Despite sales in the brand increasing by 10% in 2021 with the addition of a new sports model, the brand reported an operating loss of €371 million.

Seat president Wayne Griffiths blamed the loss on a semiconductor shortage which resulted in a decrease in production volume.

Harvest strategy

While Volkswagen has not harvested any specific brands in their entirety, it did announce in April 2022 that around 60 petrol and diesel models across several brands would be scrapped to focus on more profitable electric vehicles.

The measure was also seen as a reversal of the company’s previous global dominance strategy, where it flooded the unprofitable North and South American markets with new models amidst heavy financial losses.

This quasi-harvest strategy will allow Volkswagen to remove the less profitable models of some brands and keep the products with higher margins and higher potential.

The so-called “survivors” will then receive more attention, more investment, and more focus and become integral parts of the company’s sustainable EV growth strategy moving forward.

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.

GE matrix of Nestle

Nestle is a multinational food and drink conglomerate corporation headquartered in Vevey, Switzerland.

nestle-business-model
Nestlé is a powerhouse of consumer brands spanning baby foods, bottled waters, powdered drinks, cereals, coffee, drinks, pet care, and more. The company made almost $92 billion in 2018, with high margins on its powdered and liquid beverages (coffee, cocoa, malt beverages, and tea categories).

The company, which owns 29 brands with sales of at least $1 billion and more than 2,000 brands in total, sells products such as baby food, bottled water, breakfast cereals, pet food, snacks, coffee, healthcare nutrition, and confectionery.

With thousands of brands in multiple industries and markets, we consider Nestle to be an ideal candidate for a GE-McKinsey matrix analysis.

The results of this analysis posit that a brand has three potential courses of action according to where each is positioned in the matrix itself.

These alternatives are the grow/invest, hold, and harvest strategies.

Let’s take a look at each of these with respect to some of Nestle’s brands.

Grow/invest strategy

Growth or investment strategies are suited to products that have a competitive advantage in an attractive industry that may be characterized by size, growth potential, profitability, and the presence of entry barriers.

As the largest food company in the world, it is perhaps no surprise that Nestle has many product brands in this section of the matrix.

Nestle’s instant coffee brand Nescafe is, according to Forbes, its largest brand with a valuation of $20.4 billion alone

Nescafe has dominated the instant coffee market since it was introduced in the Second World War to U.S. soldiers, using its previous expertise in milk processing to offer a product now available in more than 180 countries.

Hold strategy

Hold strategies are reserved for products characterized by average competitive advantage and market attractiveness.

As a result, a specific course of action is a little harder to identify and depends on the specific ideals of the company in question.

Nestle Milo is a chocolate-flavored malt drink that is normally mixed with milk or hot water.

The drink was invented in Australia in 1934 where it remains the most popular drink in a relatively small market.

However, Milo is also a staple in Malaysia and popular in other parts of South Asia such as Singapore and Japan.

Milo has been released in other countries such as Portugal, Brazil, and the United Kingdom to limited success and is not available at all in the lucrative United States market.

In other areas, it competes directly with fellow Nestle drink brand Nesquik. 

As of February 2022, Nestle is looking to expand its presence in the popular South Asia region with a new soy-based version of Milo.

Since over 40% of Thai consumers consume plant-based diets, this may be a way for the brand to increase its market share and industry attractiveness in the country and indeed the broader region.

Harvest strategy

When a product resides in an unattractive industry at a competitive disadvantage, a harvest strategy should be employed.

Products that break even should be dedicated just enough capital to remain afloat, while loss-making products should be discontinued.

Nestle has a long list of products that have been discontinued for whatever reason.

A low sugar version of its popular white chocolate Milkybar was pulled from sale in 2020 just two years after it was launched because of a disagreeable taste.

The company also phased out a line of smoothies after four months in a joint-venture with juice company Boost.

Other products to have suffered the same fate include hot cocoa mixes, power bars, and flavored mineral waters. 

Nestle has several brands in this area of the GE matrix for a couple of reasons.

Like any sizeable company, its failed innovations are more numerous than other companies with smaller budgets.

But there is a far more significant reason: Nestle is a multinational food company in a market that now demands healthy and nutritious food. 

Since much of Nestle‘s success has been built on confectionery and other unhealthy foods, the company has found it difficult to shift its brand perception among consumers.

The company even went as far as acknowledging that over 60% of its food and drink options did not meet a “recognized definition of health”. 

In response to the shift toward healthier food, Nestle sold its entire confectionery business in the United States in 2018 to Ferrero for $2.8 billion.

Key takeaways from Nestle case study:

  • Nestle is a multinational food and drink conglomerate corporation headquartered in Vevey, Switzerland. The company owns 29 brands with sales of at least $1 billion and over 2,000 brands in total.
  • Nestle’s instant coffee brand Nescafe is a dominant brand in over 180 countries around the world. Flavored malt drink Milo is a brand that has average market attractiveness and competitiveness since most sales are confined to Asia and Oceania.
  • As a company built on the back of unhealthy food item sales, Nestle has several brands in the harvest strategy of the GE matrix. These include power bars, cocoa mixes, confectionary, and smoothies.

Nestle SWOT Analysis

Another way to look at Nestle is to look at it through the SWOT Analysis.

nestle-swot-analysis
Nestlé is a large multinational food and beverage manufacturer with more than 2000 brands spread across 197 countries. Some of Nestlé’s well-known brands include Nescafe, Kit-Kat, Purina, Aero, Butterfinger, Maggi, and Haagen-Dazs. Originally a producer of infant food in 1867, it is now considered to be the world’s largest food manufacturer.

What is GE Matrix used for?

The GE Matrix is a strategic tool that is useful for assessing and prioritizing the development of a portfolio of products for specific business units. The matrix helps corporations prioritize their investments among their business units, leading to three possible scenarios: invest, protect, harvest, and divest.

Is GE matrix better than BCG?

The strength of the BCG Matrix is its simplicity. Both tools help prioritize the investment activities of corporations toward products that can lead to business growth. Whereas the GE Matrix is a bit more complex, the BCG Matrix is a more straightforward tool. Both can be extremely useful for corporations to identify business opportunities and products worth pursuing.

What are the components of GE matrix?

The main components of the GE Matrix comprise:

  1. Competitive advantage, which may include:
  • Actual market share and market share growth potential.
  • Profit margins, cash flow, and manufacturing costs.
  • Brand equity and customer loyalty.
  • Product or service uniqueness.

2. Industry attractiveness that includes:

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

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 from whether the market is new or existing, and whether 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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