GE-McKinsey Matrix

Determining Investment Priorities

GE-McKinsey Matrix - Determining Investment Priorities

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Understand where to focus your investments for maximum impact.

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

GE-McKinsey Matrix

 

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.

Note:

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:

Tip:

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
Attractiveness Factor Weight R WR R WR R WR
Market size 0.10 3 0.30 7 0.70 8 0.80
Market growth 0.30 4 1.20 7 2.10 5 1.50
Profit margins 0.25 2 0.50 8 2.00 4 1.00
Volatility 0.15 5 0.75 6 0.90 7 1.05
Strength of competition 0.20 3 0.60 7 1.40 5 1.00
TOTALS 1.00   3.35   7.10   5.35

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:

  • Market share (from the Boston Matrix).
  • Production capacity.
  • Production flexibility.
  • Product differentiation.
  • Company reputation.
  • Managerial competence.
  • Customer loyalty.

Tip:

SWOT Analysis is a useful framework for determining and evaluating business strength.

As before, brainstorm the factors that you'll use to evaluate how strong your business unit or product market is. Remember, you'll apply all of these factors to all business units or product lines.

Once you've done this, follow the same steps as you did to determine industry attractiveness: assign a weight of between 0.1 and 1.0 to each factor, to reflect how important it is, and check that they add up to 1.0. Then rate each business unit on each business unit strength factor, using a scale of 1–9:

1 = Extremely unattractive.
5 = Industry average.
9 = Extremely attractive.

Multiply the rating by the weight you assigned to reveal a score for each factor, for each business unit. Finally, add these scores together for each business unit or product line. 

You can see a worked example below:

    BU 1 BU 2 BU 3
Strength Factor Weight R WR R WR R WR
Market share 0.30 6 (45 percent) 1.70 4 (20 percent) 1.20 3 (10 percent) 0.90
Manufacturing capacity 0.15 5 0.75 3 0.45 4 0.60
Quality 0.25 7 1.75 7 1.75 5 1.25
Workforce skill 0.10 7 0.70 8 0.80 4 0.40
Marketing ability 0.20 8 1.60 3 0.60 8 1.60
TOTALS 1.00   6.60   4.80   4.75

Key: BU=Business Unit, R=Rating, WR=Weighted Rating

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Note:

In the table above, you'll notice that each business unit has been assigned a percentage against market share. This is worked out independently of the matrix, but will be used as part of the analyses in Step Three.

Step Three: Plot the Information

Plot your business units, or product groups, onto your matrix (see the example in figure 2). Use a circle for each business unit, following these guidelines:

  • Business unit strength and industry attractiveness are shown by the circle's position on the matrix.
  • Market size is represented by the size of the circle.
  • Market share is represented by a pie chart within the circle.

Figure 2 - Example of a Completed GE-McKinsey Matrix

GE-McKinsey Matrix

 

Note:

Sometimes a Matrix includes arrows leading from the circles. These arrows indicate the direction in which you expect the business unit to move, relative to competitors and the industry as a whole.

Interpreting the GE-McKinsey Matrix

The resulting matrix is easy to read, and it clearly identifies the strategic position of each of your business units or product lines. Essentially, you're looking for business units or product lines to be positioned as far to the left and as high up as possible (remember that the horizontal scale runs from high to low).

The Matrix outlines a set of strategies related to the positions of the business units:

  • Grow: Strategic Business Units (SBUs) in the top left corner (dark blue squares) have a relatively strong position in an attractive industry. 

    This indicates that it's a good idea to invest in these. Look for growth opportunities, and build on current strengths to improve your position in the market.

  • Hold: SBUs in the middle (light blue squares) are average. Some might have a good position in a slower industry, or they might have a weak position in a good market, but there's something positive that you can develop within these business units. 

    You could consider investing more resources, defending your current position, or attempting to find a niche, for example.

  • Harvest/Exit: SBUs in the bottom right corner (lightest blue squares) are in an unattractive industry, a weak position, or both. There are no promising scenarios, so it's probably best to look at exit strategies. 

    It would be unwise to invest any further in these business units, and it would make more sense to reallocate resources to units in other parts of your Matrix.

The Matrix provides a great visual summary of relative positions, and it's a good starting point for investigating the strategic direction that best fits each business unit or product line. However, it's important to remember that many other criteria may also be relevant when you analyze a business unit – not just the ones in the GE-McKinsey Matrix.

Tip:

We have a range of resources on Strategic Prioritization in our Strategy toolkit area, to help you when making business decisions.

Key Points

You can use the GE-McKinsey Matrix to consider where to invest resources in various parts of your organization. By analyzing a business unit based on its market strength and the attractiveness of its industry, you can quickly see how well positioned it is for growth and potential. 

The Matrix can give you an excellent overview of your strategic business units, or other segments of your company. From there, you can start a detailed investigation of the exact strategy to pursue – so that you maximize your market position, and best allocate your resources.

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Comments (6)
  • This week Michele wrote
    Hi RODRIGUESHB,

    Welcome to the club and thank you for the feedback on the GE-McKinsey Matrix. We strive to write clear and concise content that our members can readily apply to their work.

    Michele
    Mind Tools Team
  • This week RODRIGUESHB wrote
    Excellent explanation on how to use the GE-McKinsey Matrix.
  • This month Michele wrote
    Hi charlieswift,

    The update is fantastic and clearly explains and depicts how to use the tool. The template is an added bonus. If you haven't looked at the update, check it out.

    Michele
    Mind Tools Team
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