GE McKinsey Matrix: A Multifactorial Portfolio Analysis in Corporate Strategy
Comparable to the BCG Matrix, the GE-McKinsey Matrix is a portfolio analysis technique used in corporate strategy to analyze strategic business units or product lines based on two variables: industry attractiveness and a business unit’s competitive strength. A corporation can map its business divisions and decide where to invest, keep their position, harvest, or dispose by merging these two variables into a matrix. The GE-McKinsey Matrix, in contrast to the BCG Matrix, combines a number of variables to calculate the measures of industry attractiveness and competitive strength. This is a crucial distinction since the BCG Matrix has received much criticism for using just one (possibly out-of-date) variable for each axis.
The framework got its name because General Electric (GE) recruited McKinsey & Company in 1970 to advise them on how to manage their extensive and intricate portfolio of key business divisions. Therefore, the framework was developed by McKinsey rather than GE to assist GE in managing its corporate-level strategic choices.
Industry Attractiveness
The GE McKinney Matrix’s vertical axis contains the variable Industry Attractiveness, which is broken down into three categories: High, Medium, and Low. A measure of an industry’s attractiveness is how advantageous it is for a firm to enter and compete within it, given the profit potential of that particular industry. An industry gets more appealing the larger its potential for profit. The degree of competition that exists today and any potential future changes to the competitive environment have an impact on an industry’s profitability. Because company investments often need long-term commitment, it is more important to consider how an industry will develop in the long run than in the immediate future when assessing sector attractiveness. The amount of rivalry in an industry and, consequently, its potential for profit are determined by a number of elements that combined make it desirable. The most typical elements to consider are:
- Industry size
- Long-run growth rate
- Industry structure (use Porter’s Five Forces or Structure-Conduct-Performance model)
- Industry life cycle (use Product Life Cycle)
- Macro environment (use PESTEL Analysis)
- Market segmentation
Competitive Strength
The competitive strength of a business unit, which may also be broken down into High, Medium, and Low, is shown on the horizontal axis. This variable assesses a company’s competitiveness within a certain industry by evaluating how strong or competent it is in comparison to its rivals. The qualities that set a business apart from its rivals and competitors are its strengths. These advantages are also known as firm-specific advantages (FSAs), unique selling points (USPs), or more commonly, sustainable competitive advantages. In addition to a company’s current competitive position, it is crucial to consider how sustainable that position will be over time. Therefore, whereas industry attractiveness refers to the amount of rivalry in the overall sector, competitive strength refers to a single company’s (future) capacity to compete inside that particular industry. Additionally, a company’s overall score for its competitive strength is determined by a number of different components. The most typical elements to consider are:
- Profitability
- Market share
- Business growth
- Brand equity
- Level of differentiation (use the Value Disciplines or Porter’s Generic Strategies)
- Firm resources (use the VRIO Framework)
- Efficiency and effectiveness of internal linkages (use the Value Chain Analysis)
- Customer loyalty (use the Net Promoter Score)
Strategic implications
The matrix, which consists of 9 separate boxes with 9 possible scenarios and related strategic actions, may be created based on the 3 degrees (High, Medium, and Low) of both Industry Attractiveness and Competitive Strength. There are three different strategic options: the Invest/Grow strategy, the Selectivity/Earnings approach (also known as the Hold strategy), and the Harvest/Divest plan.
Invest/Grow strategy
The Invest/Grow area is the ideal place for a business or division to be. If a corporation operates in a moderately to highly attractive industry and has a moderately to highly competitive position within that market, it might find itself in this situation. Such circumstances offer tremendous opportunity for development. However, a business requires resources like assets and finance to be able to expand. These expenditures are required to boost capacity, expand marketing efforts to attract new clients, or conduct R&D to enhance goods. In addition to organic growth, businesses can also opt to expand outside through mergers and acquisitions. Once more, a business will require capital to achieve such an endeavour. Resource limitations that prevent businesses in these sectors from expanding and achieving/maintaining market leadership are by far their biggest problem.
Selectivity/Earnings strategy
The businesses or divisions in the Selectivity/Earnings areas are a little bit trickier. They are either businesses with low to moderate levels of competition in a desirable sector or businesses with extremely high levels of competition in an undesirable industry. The prognosis for either an improvement in competitive position or the chance to switch to more exciting industry heavily influences whether or not to invest. Since you want to employ the majority of the capital available to the firms in the Invest/Grow area, these choices must be made very carefully. The firms in the Selectivity/Earnings segment with the most potential for improvement should receive the “leftover” investments, while being closely watched to gauge its development along the way.
Harvest/Divest strategy
Finally, what remains are businesses or business units that either operate in unappealing industries, have low competitive positions, or combine the two. These businesses should not be invested in because they no longer have bright futures. There are two key choices for corporate strategists to think about: 1. They sell the business units to a buyer who is interested in buying them for a fair price. It’s sometimes referred to as a carve-out. It is not at all odd to consider selling the company unit to another participant in the market who has a stronger competitive position. The purchaser may have superior skills to make it successful or they may be able to provide value by merging operations (synergies). Selling the business unit will provide cash, which may then be utilized to Invest/Grow other company units in the portfolio. 2. Alternatively, business strategists may decide on a harvest plan. In essence, this means that the business unit only receives the minimum amount of funding (or none at all) to maintain operations while collecting any residual benefits. This is a relatively short-term operation that enables corporate strategists to remove as much cash as they can, but it is likely to eventually lead to the liquidation of the company unit.
Also Read: VRIO: From Firm Resources to Competitive Advantage
GE McKinsey Matrix in Sum
The GE McKinsey Matrix is an excellent substitute for the BCG Matrix since it has the benefit of using two variables that are the combination of several elements. To measure elements like brand equity and industry structure and integrate them into a single figure that can be represented on the nine-box matrix may be a difficult undertaking. The model serves as a solid beginning point for business strategists to use when making investment decisions.
