The GE-McKinsey Matrix is a business framework to perform a business portfolio analysis on the Strategic Business Units of a corporation. It is also commonly referred to as GE Matrix, McKinsey Matrix, GE Multi-factoral Analysis, Business Assessment Array, and GE Business Screen.
It was developed jointly by McKinsey and General Electric in the early 1970s as a derivation of the BCG Growth Share Matrix. GE, by that time, had approximately 150 different business units and was disappointed with the profits derived from its investments. This raised internal concerns about the approach the organization had to investment decision making. While exploring new models to implement, GE started to be interested in visual strategic frameworks like the Growth-Share Matrix created by the Boston Consulting Group (BCG) a few years before. However, the BCG Matrix showed to have some limitations. It was considered not flexible enough to include all the broader issues that a company was facing while operating in a fast changing global environment. The GE-McKinsey Matrix solves most of the issues of the BCG model and proposes a more sophisticated and comprehensive approach to investment decision making.
How It Works
The GE-McKinsey Matrix is a nine-cell (3 by 3) matrix and it is primary used to perform business portfolio analysis on the strategic business units (SBU) of a corporation. A business portfolio is the collection of all the business units within a corporation and a large corporation has normally many SBUs. Each SBU is a distinctive and unique unit that falls under the same strategic hat. A well balanced portfolio is one of the top priorities of a large organization. The strategic business units are the basic blocks that compose a business portfolio. A unit can be a divisions or even a whole company owned by the parent organization.
The nine-box matrix provides decision makers with a systematic and effective framework for a decentralized corporation to make better supported investment decisions and for developing strategies for future product development or new market segment entries. Instead of looking solely at each unit’s future prospects, a corporation can adopt a multi-dimensional approach based on two components that will indicate how well the unit will perform in the future. The two components used to evaluate businesses, which also serve as the axes of the matrix, are the ‘attractiveness’ of the relevant industry and the unit’s ‘competitive strength’ within the same industry. Each axis is then divided into Low, Medium and High.
Each product, brand, service, or potential product is mapped as a pie chart onto this industry attractiveness/business strength space. The diameter of each pie chart is proportional to the Volume or Revenue accruing to each opportunity, and the solid slice of each pie represents the share of the market enjoyed by the planning company.
The planning company should invest in opportunities that appear to the top left of the matrix. The rationale is that the planning company should invest in segments that are both attractive and in which it has established some measure of competitive advantage. Opportunities appearing in the bottom right of the matrix are both unattractive to the planning company and in which it is competitively weak. At best, these are candidates for cash management; at worst candidates for divestment. Opportunities appearing ‘in between’ these extremes pose more of a problem, and the planning company has to make a strategic decision whether to ‘redouble its efforts’ in the hopes of achieving market leadership, manage them for cash, or cut its losses and divest.
There are six steps to implementing the GE-McKinsey analysis.
- Determine which factors are relevant for the corporation in the industry where it operates
- Assign a weight to each factor
- Score each factor
- Multiply the relative scores and weights
- Sum all up and interpret the graph
- Perform a review / sensitivity analysis
Often, Strategic Business Units are portrayed as a circle plotted in the GE Matrix, whereby:
- The size of the circles represent the Market Size
- The size of the pies represent the Market Share of the SBU’s
- Arrows represent the direction and the movement of the SBU’s in the future
- The valuation of the realization of the various factors.
- Aggregation of the indicators is difficult.
- Core Competences are not represented.
- Interactions between Strategic Business Units are not considered.
- No proven relationship between market attractiveness and business position.
- The relationships between different units are not taken into account.
- The core-competencies that lead to value creation are not taken into consideration.
- The approach requires extensive data gathering.
- Scoring is personal and subjective (risk of bias).
- There is no hard and fast rule on how to weight elements.
- The GE-McKinsey Matrix offers a broad strategy and does not indicate how best to implement it.
If you are illustrating the outcomes of this analysis in a business presentation, you may find this collection of management models in PowerPoint useful.
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