The GE-McKinsey Matrix
Determining Investment Priorities
If you had endless amounts of money and time, there would probably be no need to figure out how best to allocate your resources.
But, in reality, we all have to prioritize our investments – particularly in difficult economic conditions.
When faced with this challenge in your organization, how do you decide which product groups to continue, which market segments to focus on, or which business units to sell? To make that decision, you must first understand your business portfolio – and you start by determining the benchmarks to define your portfolio.
In the 1970s, the Boston Consulting Group (BCG) developed the Boston Matrix, which uses market growth and market share as a way of screening opportunities, so that organizations can choose the ones that are likely to give the best results. In the BCG 2x2 Matrix, the more of each dimension your product line has, the more attractive it is – and, therefore, the more you should invest in it.
General Electric (GE) liked the visual part of BCG's matrix, but not the dimensions. GE therefore asked its consulting firm, McKinsey & Company, to create a model that better suited GE's needs. The result was the 3x3 GE-McKinsey Matrix (also called the McKinsey Matrix, the Business Strength Matrix, or the Nine-Box Matrix) shown in Figure 1 below.
The original GE Matrix showed industry attractiveness on the x-axis, and business unit strength on the y-axis. Over time, it has become more common to do the opposite, which is what you see above.
The GE-McKinsey matrix uses the dimensions of industry attractiveness and business unit strength. Both of these include a wide variety of factors that the organization itself chooses. The GE matrix is considered more sophisticated than the BCG 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 ‘see' how best to allocate its resources. As such, you may find this quick summary approach particularly effective for developing, evaluating, and communicating strategic decisions.
Using the GE Matrix
Step One: Determine Industry Attractiveness (vertical axis)
There are several factors that define the attractiveness of an industry, and they're often used to help you determine whether or not you want to enter a particular market in the first place. Here are some examples of attractiveness factors that may or may not be appropriate for your business:
- Market growth (from BCG's matrix).
- Market size.
- PEST factors – Political, Economic, Sociocultural, and Technological factors.
- 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.
Follow these steps to determine industry attractiveness:
- Brainstorm the factors 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're evaluating. This helps you compare the overall attractiveness of each unit or product that you're considering.
Assign a weight to each factor. Your weights must add up to 1.0 when you're finished.
Then, rate each business unit on each industry attractiveness factor. Use this scale of 1–9:
1 = Extremely unattractive.
5 = Industry average.
9 = Extremely attractive.
- Multiply the rating by the weight you assigned to calculate a score for each factor for each business unit. Then, add these scores together for each business unit or product line. You can see an example of this 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
Step Two: Determine Business Strength (horizontal axis)
'Business strength' brings together a combination of factors that determine how strong a particular business unit or product is, compared with others in its industry. Again, you can use a variety of factors to gauge your business strength, including the following:...