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
- Structure of the GE McKinsey Matrix
- Drivers of the GE McKinsey Matrix
- Strategic implications
- Key takeaways:
- Other strategic frameworks by McKinsey
- Other strategy frameworks
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.
As we touched on earlier, the position a product occupies on the matrix drives future strategy. Listed below are the three main strategies.
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.
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.
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.
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.
- 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
Other strategy frameworks
- Porter’s Five Forces
- Ansoff Matrix
- Blitzscaling Canvas
- Business Analysis Framework
- Business Model Canvas
- Blue Ocean Strategy