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.

Other strategy frameworks

More resources:

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two 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 in touch with Gennaro here