Ge mckinsey matrix

The GE McKinsey Matrix is a strategic management tool that helps companies, particularly those with diverse portfolios, assess their various business units or product lines. It is a framework within the broader field of strategic management. This matrix assists organizations in making informed decisions about resource allocation, investment, and divestment by evaluating two key dimensions: industry attractiveness and business unit strength.

History and Origin

The GE McKinsey Matrix was developed in the early 1970s through a collaboration between General Electric (GE) and the consulting firm McKinsey & Company. At the time, GE, a large multinational conglomerate, sought a more sophisticated method for managing its extensive portfolio of unrelated businesses and product lines, as it was not achieving desired returns from its investments. The matrix was conceived as an evolution and improvement upon the simpler Boston Consulting Group (BCG) Growth-Share Matrix, which primarily used market growth and market share as its evaluation factors⁶³, ⁶⁴, ⁶⁵. McKinsey developed a 3x3 matrix, offering a more nuanced analysis based on a broader range of criteria for both market attractiveness and competitive strength⁶². This directional policy matrix helped GE make more informed and strategic investment decisions⁶¹.

Key Takeaways

• The GE McKinsey Matrix is a 3x3 grid used for portfolio analysis, evaluating business units based on industry attractiveness and business unit strength.
• It aids multi-business corporations in prioritizing resource allocation and making strategic decisions about investment, growth, or divestment.
• The matrix helps to visualize the current state of a company's diverse portfolio, offering insights for strategic planning.
• Industry attractiveness considers external factors like market size, growth rate, and profitability, while business unit strength assesses internal factors such as market share, brand equity, and profitability compared to competitors.
• Strategic recommendations typically involve "invest/grow," "selectivity/earnings," or "harvest/divest" approaches based on a business unit's position in the matrix.

Interpreting the GE McKinsey Matrix

The GE McKinsey Matrix plots strategic business units (SBUs) on a 3x3 grid, with "Industry Attractiveness" on the vertical (y) axis and "Business Unit Strength" on the horizontal (x) axis⁶⁰. Both axes are typically divided into three categories: high, medium, and low⁵⁹.

• Industry Attractiveness: This dimension represents the external factors that make an industry appealing for investment. Factors contributing to high industry attractiveness include large market size, high market growth, strong profitability, favorable competitive dynamics, and low barriers to entry. Conversely, low industry attractiveness would indicate factors like declining market size or intense competition⁵⁶, ⁵⁷, ⁵⁸.
• Business Unit Strength: This dimension reflects the competitive position of a specific business unit within its industry. High business unit strength is characterized by a strong market share, robust brand equity, high customer loyalty, superior product quality, and efficient distribution channels. Low strength suggests a weak competitive position or limited resources⁵³, ⁵⁴, ⁵⁵.

The matrix's nine cells offer strategic implications:

• Green Zone (Invest/Grow): Business units falling into the high attractiveness and high strength cells (top-left) are typically seen as strong candidates for significant investment and growth. These are often the core businesses for future expansion and resource allocation⁵¹, ⁵².
• Yellow Zone (Selectivity/Earnings): Business units in the middle cells (orange in some representations) require careful consideration. Decisions here depend on further analysis and specific company objectives. Strategies might involve selective investment, seeking to improve competitive position, or maintaining current operations for earnings⁴⁹, ⁵⁰.
• Red Zone (Harvest/Divest): Business units in the low attractiveness and low strength cells (bottom-right) are often candidates for harvesting (extracting cash with minimal investment) or divestment (selling or phasing out). These units may be a drain on resources and offer limited future potential⁴⁷, ⁴⁸.

By mapping its portfolio on the GE McKinsey Matrix, a company gains a visual representation of its business units' current states, guiding strategic decisions and resource allocation efforts⁴⁶.

Hypothetical Example

Consider a diversified conglomerate, "Global Innovations Inc.," which operates in several distinct markets. They decide to apply the GE McKinsey Matrix to their three main strategic business units (SBUs):

1. SBU A: Renewable Energy Solutions

   • Industry Attractiveness: High (driven by growing global demand for sustainable energy, supportive government policies, and high potential for innovation).
   • Business Unit Strength: High (leading market share, strong R&D capabilities, established brand reputation, and efficient production).

   Placement: SBU A would fall into the "Invest/Grow" zone (top-left). Global Innovations Inc. would likely allocate substantial capital and human capital resources to this SBU, focusing on expanding operations and market penetration.

2. SBU B: Traditional Manufacturing Components

   • Industry Attractiveness: Medium (mature market, moderate growth, but stable demand).
   • Business Unit Strength: Medium (solid market position, but facing increasing competition and some outdated production facilities).

   Placement: SBU B would likely land in the "Selectivity/Earnings" zone (middle). Global Innovations Inc. might pursue selective investment to modernize production, improve cost efficiency, or explore niche markets, while aiming to maintain current earnings. Operational efficiency would be a key focus.

3. SBU C: Legacy Consumer Electronics

   • Industry Attractiveness: Low (declining market, intense price competition, and rapid technological obsolescence).
   • Business Unit Strength: Low (dwindling market share, low brand loyalty, and limited R&D investment).

   Placement: SBU C would be placed in the "Harvest/Divest" zone (bottom-right). The conglomerate would consider either gradually reducing investment, focusing on maximizing short-term cash flow, or initiating a divestiture strategy to reallocate funds to more promising ventures.

Practical Applications

The GE McKinsey Matrix is a versatile strategic planning tool with broad applications across various industries and business scenarios. It helps corporations with diversified product lines or business units to prioritize resource allocation by identifying which strategic business units (SBUs) are most deserving of investment⁴⁵.

• Portfolio Management: Companies use the GE McKinsey Matrix to maintain an optimal mix of high-potential and mature business units, balancing risk and growth potential⁴⁴. For instance, a consumer goods company might use the matrix to evaluate its diverse portfolio, including household products, personal care items, and food and beverages, and decide to invest heavily in emerging organic products while divesting from stagnating segments⁴³. Similarly, a technology company could use it to prioritize investment in high-potential areas like cloud computing while scaling down less promising ventures⁴².
• Strategic Planning: The matrix aids in overall strategic planning by providing a visual representation of the company's competitive landscape and market opportunities. It helps businesses to identify which markets might be best for their products and services⁴¹.
• Mergers and Acquisitions (M&A): In mergers and acquisitions, the GE McKinsey Matrix can be used to evaluate the attractiveness of target companies' business units and their strategic fit with the acquiring company's portfolio.
• International Market Entry: For companies considering expanding into international markets, the matrix can help assess the attractiveness of various foreign markets and the company's competitive strength within those specific regions, guiding international market entry strategies⁴⁰.
• Product Development and Innovation: It can inform decisions about where to focus new product development efforts and innovation investments, guiding the company toward areas with high attractiveness and strong competitive standing³⁹.

For a detailed academic application of the GE McKinsey Matrix in the fashion industry, a study exploring Italian fashion companies provides a methodological demonstration of its utility in analyzing competitive scenarios and informing diversification strategies.³⁷, ³⁸

Limitations and Criticisms

While the GE McKinsey Matrix is a valuable strategic tool, it has several limitations and criticisms that businesses should consider.

Firstly, the assessment of "Industry Attractiveness" and "Business Unit Strength" can be highly subjective³⁶. The selection and weighting of factors for these dimensions often depend on managerial judgment and can lead to different interpretations and placements of business units within the matrix³⁴, ³⁵. This subjectivity can make it challenging to ensure consistency in evaluation across different teams or over time.

Secondly, the GE McKinsey Matrix provides a static snapshot of a business portfolio at a particular point in time³³. It does not inherently account for dynamic changes in market conditions, competitive landscapes, or a business unit's trajectory over time. Future growth or decline of an industry or SBU is not explicitly modeled, requiring regular re-evaluation and external analysis tools like SWOT analysis or Porter's Five Forces to gain a comprehensive understanding³².

Thirdly, the matrix can be resource-intensive to implement effectively. Gathering the necessary data and conducting thorough analyses for each business unit across multiple factors for both dimensions can require significant time and effort³¹. This complexity might be a deterrent for smaller businesses with limited analytical resources.

Additionally, some critics argue that the GE McKinsey Matrix, like other portfolio matrices, can oversimplify complex business realities into a two-dimensional grid. It may not fully capture the synergistic effects between different business units or the strategic importance of certain units that might not score highly on the matrix but are crucial for the overall corporate strategy, such as maintaining a complete product line or serving a niche customer segment. This can lead to potentially overlooking the strategic value of seemingly weaker businesses within a diversified portfolio.

GE McKinsey Matrix vs. BCG Matrix

The GE McKinsey Matrix and the BCG Matrix are both portfolio analysis tools used in strategic management, but they differ significantly in their complexity and the factors they consider.

While the BCG Matrix provides a quicker, high-level assessment of products based on their growth potential and market share, the GE McKinsey Matrix offers a more comprehensive and detailed analysis, allowing for a deeper understanding of a business unit's position and future strategic direction¹³. The GE McKinsey Matrix is often seen as an extension or improvement upon the BCG Matrix due to its expanded analytical scope¹¹, ¹².

FAQs

What is the primary purpose of the GE McKinsey Matrix?

The GE McKinsey Matrix's primary purpose is to help multi-business corporations evaluate their diverse portfolio of strategic business units (SBUs) or product lines and prioritize investment decisions based on industry attractiveness and business unit strength⁹, ¹⁰.

How are "Industry Attractiveness" and "Business Unit Strength" measured?

These dimensions are measured using a range of factors relevant to the specific industry and company. Industry Attractiveness factors can include market size, market growth rate, profitability, competitive intensity, and regulatory environment. Business Unit Strength factors can include market share, brand strength, profitability margins, customer loyalty, and access to distribution channels⁶, ⁷, ⁸. These factors are typically weighted and scored to arrive at a composite measure for each dimension⁵.

Can the GE McKinsey Matrix be used by small businesses?

While often applied to large, diversified corporations like General Electric, the principles of the GE McKinsey Matrix can be adapted by smaller businesses to evaluate their product lines or service offerings. However, the complexity of assessing multiple factors for both dimensions might be more resource-intensive for smaller entities compared to simpler tools⁴.

What are the main strategic recommendations derived from the GE McKinsey Matrix?

The main strategic recommendations are typically "Invest/Grow" for strong business units in attractive industries, "Selectivity/Earnings" for units in intermediate positions requiring careful consideration, and "Harvest/Divest" for weaker units in less attractive industries², ³. The matrix helps guide where to allocate, maintain, or withdraw resources.

Is the GE McKinsey Matrix a quantitative or qualitative tool?

The GE McKinsey Matrix is a hybrid tool, incorporating both quantitative and qualitative aspects. While factors like market share and profitability can be quantified, others such as brand equity or competitive intensity often involve qualitative assessment and subjective judgment in their scoring and weighting¹.