It’s time to determine where to put your cash. But how do you know which products to further develop, which market segments to focus on or which product groups that need retiring or perhaps selling?
It’s not easy for a company with multiple business units or products to determine how best to allocate resources and budget – profitably. Turn to the GE-McKinsey Matrix, a practical solution for visualising the performance of several business units or products.
The GE-McKinsey Matrix, a nine-box framework, was created to respond to the need of multi-business enterprises for a better way of managing a number of business units profitably. It was originally created in the 70’s for General Electric, who at the time had 150 different business units. The 9 box matrix plots industry attractiveness on one axis against business unit strength across the other axis.
The GE-McKinsey framework helps decentralised businesses, where decision-making is spread out across individual business units or trading locations, to properly define their business portfolios. It helps them understand where to invest their money, resources and attention. Business units have many differences, so finding commonalities to compare them is not a simple task. The 9 box matrix states that all differences can be reduced down to two commonalities – industry attractiveness and the competitive strength of the business unit.
The matrix was not intended to be a final answer that determines a strategy. It was intend to help businesses determine where to put their cash. It does not help to define what you do with the money that invested in those business units or products.
Industry or market attractiveness
A range of weighted criteria is used to assess market attractiveness. A business selects criteria that is important to them for example:
- market size
- market growth rate
- profit potential
- social, political and legal factors
- competition strength in the market
A weighting scheme must be agreed on, with a weigting for each variable – producing a combined total of 1.0. The business then rates each business unit according to its market attractiveness on a scale of 1-9, with 9 being extremely attractive. Finally, it multiplies weighting by rating to achieve an overall score for each business unit that can be plotted on the matrix.
Business unit competitive strength
Next, competitive strength is then assessed on a range of weighted criteria. Examples of variables include:
- market share
- production capacity
- product differentiation
- brand strength and company reputation
- customer loyalty
- channel relationships
The business follows the same weighting and rating process but in this instance the 1-9 scale represents business-unit strength, with 9 being extremely strong. Individual business units are represented on the grid by a circle, positioned according to their industry attractiveness and strength. A larger circle will indicate the business unit occupies a larger market. And a pie chart within the circle represents its market share.
The GE-McKinsey Matrix helps a company to see which business units or products are performing well. It helps decision makers to identify the units with the most potential and, ultimately, the ones worth investing in.
When do you use the GE-McKinsey Matrix and how often?
When evaluating your business units, you could simply rely on the forecasts from each business unit leader. If you take this approach, your decisions will be influenced by the ability of ash business unit manager to get their point across. Each manager could also use different methods to reach their forecasts. The GE-McKinsey Matrix enables organisations to compare different business units based to two commonalities – market attractiveness and business strengths. It is useful in reconciling different points of view across the business, or unifying weightings methods used by different management teams.
Other models have been developed since this one, as more factors in todays business environment influence business competitive advantage and industry attractiveness, however the model still proves to be an excellent tool for guiding thinking when making annual investment decisions about different business units or product groups.
Who developed the GE-McKinsey Matrix?
Global management and consulting firm McKinsey & Company developed the GE-McKinsey Matrix in the 1970s when consulting with General Electric. The GE-McKinsey Matrix builds on the Boston Consulting Group (BCG) growth share Matrix, which plots growth against market share. You can read more about that model in a different blog. GE liked the visual nature of the BCG Matrix, but they wanted a model that better suited their needs. The GE-McKinsey 9 box matrix was the result, offering a wider, more precise measurement of how well a business unit is performing. You can listen to a podcast and read more about it on the McKinsey & Company website.
Once a month, we’ll take a look at a different strategy tool. We use a variety of strategy tools to help our clients define their marketing strategy. Essentially, the tools help you with your thinking and decision making during the strategic marketing planning process. We hope to give you a better understanding of the tools available, and how and when they can be applied.