Determining Investment Priorities
If you had endless amounts of money and time, you probably wouldn't need to worry about how and where to allocate your resources.
But, in reality, we all have to prioritize our investments – particularly when economic conditions are tough.
When faced with this challenge in your organization, how do you decide which product groups to continue investing in, which market segments to focus on, and which business units to sell? You could just make educated guesses, but surely there's a more methodical and reliable way?
There is, and it's called the GE-McKinsey Matrix. This tool helps you to understand where to invest your resources, based on logic and robust evaluation. It provides the means to understand and objectively assess the potential of your business portfolio.
In this article, we explore what the GE-McKinsey Matrix is, what you can use it for, and how to put it into practice.
What Is the GE-McKinsey Matrix?
In the 1970s, the Boston Consulting Group (BCG) developed the Boston Matrix. The Boston Matrix uses market growth and market share as a way of screening opportunities, to help organizations to choose those that will likely give the best results. In the 2x2 Boston Matrix, the more market share and market growth your product line has, the more attractive it is – and, therefore, the more you should invest in it.
General Electric (GE) liked the visual aspect of BCG's matrix, but not the dimensions, so the company asked its consulting firm, McKinsey & Company, to create a model that better suited its needs. See the 3x3 GE-McKinsey Matrix (also called the McKinsey Matrix, the Business Strength Matrix, and the Nine-Box Matrix), shown in figure 1.
Figure 1 - The GE-McKinsey Matrix
Adapted from 'Enduring Ideas: The GE-McKinsey Nine-Box Matrix,' September 2008, McKinsey Quarterly, www.mckinsey.com. Copyright (c) 2016 McKinsey & Company.
The GE-McKinsey Matrix uses the dimensions of industry attractiveness and business unit strength. Both dimensions include a wide variety of factors – the organization itself chooses which to focus on.
The original GE-McKinsey Matrix showed industry attractiveness on the x-axis (horizontal), and business unit strength on the y-axis (vertical). Over time, it has become more common to do the opposite, which is what you see in figure 1.
Also note that the horizontal scale runs from high to low.
Most people consider the GE-McKinsey Matrix to be more sophisticated than the Boston Matrix because it has more flexibility and a wider scope. By plotting the positions of various business units, product lines, or products, a company can quickly visualize how best to allocate its resources. Many organizations find this quick summary approach effective for developing, evaluating and communicating strategic decisions.
Using the GE-McKinsey Matrix
There are three steps involved in using the Matrix:
To help you to carry out your analysis, download and print off our free template, and use it to write down answers to the following questions.
Step One: Determine Industry Attractiveness (vertical axis)
Several factors define the attractiveness of an industry, and you can use them to help to decide whether you want to enter a particular market in the first place. Here are some common examples that may or may not be appropriate for your business:
- Market growth (from the Boston Matrix).
- Market size.
- PEST factors – Political, Economic, Sociocultural, and Technological.
- Porter's Five Forces factors – supplier power, buyer power, strength of competition, threat of substitution, and barriers to entry.
- Workforce availability.
- Fluctuations/changes in demand.
- Profit margins.
- Legal and/or regulatory pressures.
Use this list as a starting point to brainstorm the factors that you'll use to determine how attractive your markets are. This is a subjective process, and different organizations will come up with different conclusions. Just be aware that you'll need to apply these factors to all of the business units or product lines that you evaluate. This helps you to compare the overall attractiveness of each unit or product that you're considering.
Assign a weight of between 0.1 and 1.0 to each factor to reflect how important it is, and ensure that they add up to 1.0. Then rate each business unit on each of your industry attractiveness factors, using a scale of 1–9:
1 = Extremely unattractive.
5 = Industry average.
9 = Extremely attractive.
Next, multiply the rating by the weight you assigned to reveal a score for each factor, for each business unit, and add these scores together for each business unit or product line.
You can see a worked example of this in action below:
|BU 1||BU 2||BU3|
|Strength of competition||0.20||3||0.60||7||1.40||5||1.00|
Key: BU=Business Unit, R=Rating, WR=Weighted Rating
You can see in this example that BU2 has the highest industry attractiveness, followed by BU3, and finally BU1. We'll plot these scores on the Matrix in Step Three.
Step Two: Determine Business Unit Strength (horizontal axis)
The "business unit strength" dimension combines factors that determine how strong a particular business unit or product is, compared to others in its industry. It focuses on elements that your company can (largely) control.
However, do bear in mind that operating in an attractive market may not be profitable; for example, if your organization lacks the ability to supply customers effectively with what they want.
Again, you can use various factors to gauge business unit strength, including: