McKinsey matrix / GE matrix

portfolio analysis model

Portfolio analysis - Strategic Business Units

GE model framework McKinsey 

 

the GE matrix / McKinsey matrix is a model to perform a business portfolio analysis on the Strategic Business Units of a corporation.

 

A business portfolio is the collection of Strategic Business Units that make up a corporation. The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets. A Strategic Business Unit (SBU) can either be an entire mid-size company or a division of a large corporation, that formulates its own business level strategy and has separate objectives from the parent company.

 

The aim of a portfolio analysis is:

 

1) Analyze its current business portfolio and decide which SBU's should receive more or less investment, and2) Develop growth strategies for adding new products and businesses to the portfolio

3) Decide which businesses or products should no longer be retained.

The BCG Matrix (Boston Consulting Group Matrix) is the best-known portfolio planning framework. The GE / McKinsey Matrix is a later and more advanced form of the BCG Matrix.

 

The McKinsey matrix / General Electric Matrix

The GE / McKinsey Matrix is more sophisticated than the BCG Matrix in three aspects:

 

1. Market (Industry) attractiveness replaces market growth as the dimension of industry attractiveness. Market Attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry / market. Compare also: Porter's Five Competitive Forces model

2. Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit.

3. Finally the GE / McKinsey Matrix works with a 3*3 grid, while the BCG Matrix has only 2*2. This also allows for more sophistication.

 

 

Typical (external) factors that affect Market Attractiveness:

- Market size- Market growth rate- Market profitability - Pricing trends - Competitive intensity / rivalry

Typical (internal) factors that affect Competitive StrengthUnit:

- Strength of assets and competencies- Relative brand strength (marketing)- Market share

- Overall risk of returns in the industry

- Entry barriers - Opportunity to differentiate products and services

- Demand variability- Segmentation - Distribution structure

- Technology development

 

- Market share growth- Customer loyalty- Relative cost position (cost structure compared with competitors)

- Relative profit margins (compared to competitors)- Distribution strength and production capacity- Record of technological or other innovation

- Quality- Access to financial and other investment resources

- Management strength

 

Often, Strategic Business Units are portrayed as a circle plotted in the GE McKinsey 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

 

A six-step approach to implementation of portfolio analysis (using the GE / McKinsey Matrix) could look like this:

1. Specify drivers of each dimension. The corporation must carefully determine those factors that are important to its overall strategy2. Weight drivers. The corporation must assign relative importance weights to the drivers 3. Score SBU's each driver4. Multiply weights times scores for each SBU5. View resulting graph and interpret it 6. Perform a review/sensitivity analysis using adjusted other weights (there may be no consensus) and scores.  

Some important limitations of the GE matrix / McKinsey Matrix are:

- Valuation of the realization of the various factors

- Aggregation of the indicators is difficult

- Core competencies are not represented

- Interactions between Strategic Business Units are not considered

strategy - portfolio analysis - ge matrixThe business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities.

The company must:

(1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.

The two best-known portfolio planning methods are the Boston Consulting Group Portfolio Matrix and the McKinsey / General Electric Matrix (discussed in this revision note). In both methods, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.

The McKinsey / General Electric Matrix

The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. Secondly, competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed.

The diagram below illustrates some of the possible elements that determine market attractiveness and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:

Factors that Affect Market Attractiveness

Whilst any assessment of market attractiveness is necessarily subjective, there are several factors which can help determine attractiveness. These are listed below:

- Market Size- Market growth - Market profitability - Pricing trends - Competitive intensity / rivalry - Overall risk of returns in the industry - Opportunity to differentiate products and services - Segmentation - Distribution structure (e.g. retail, direct, wholesale

Factors that Affect Competitive Strength

Factors to consider include:

- Strength of assets and competencies- Relative brand strength- Market share- Customer loyalty- Relative cost position (cost structure compared with competitors)- Distribution strength- Record of technological or other innovation- Access to financial and other investment resources