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Business Strategy - the GE/ McKinsey Matrix

Business Strategy - the GE/ McKinsey Matrix


The GE/ McKinsey Matrix
This is a form of portfolio analysis used for
classifying product lines or strategic business units
within a large company
It was developed by McKinsey for the US General
Electric Company
It assesses areas of the business in terms of two
criteria:
The attractiveness of the industry/market concerned
The strength of the business

Business Strategy - the GE/ McKinsey Matrix
How does it differ from the Boston Matrix?
There are similarities:
Two dimensions are used to create a matrix
Each cell suggests an appropriate strategy
In both cases we are concerned with the future strategy for a
particular area (eg a division) within the firm
There are major differences
The GE matrix involves a wider analysis of the firms operations
The dimensions of the GE matrix are industry attractiveness and
business strength (rather than market share and market growth)
There are nine cells and a wider choice of strategies
The Boston Matrix focuses on products within the firms product
range The GE matrix can be extended to look at strategic business
units
Business Strategy - the GE/ McKinsey Matrix
Strategic Business Units (SBUs)
Definitions of a SBU:
A particular product market combination that typically
requires its own business plan
A part of a company that is large enough to have its own
well defined markets, attract its own set of competitors and
demand tangible resources and capabilities from the
overall corporation
A discrete grouping within an organisation with delegated
responsibility for strategically managing a product/ service
or group of product of services
A division within a large national or multinational company
is a SBU
Business Strategy - the GE/ McKinsey Matrix
Industry attractiveness
The vertical axis of the matrix is industry
attractiveness
This concerns the attractiveness to a firm of
entering, or remaining, in a particular industry
Industry attractiveness is assessed by considering
a range of factors each of which is given a
weighting to produce a composite picture
Business Strategy - the GE/ McKinsey Matrix
Criteria which makes a market attractive
Market size
Growth rate
Overall returns in the
industry
Industry profitability
Intensity of competition
Profit margins
Differentiation
Industry fluctuations
Customer/supplier
relations



Variability of demand
Rate of technological
change
Volatility
Availability of market
intelligence
Availability of work force
Global opportunities
PEST factors
Entry and exit barrier
Government regulation
Business Strategy - the GE/ McKinsey Matrix
Business unit strength
The horizontal axis of the matrix is the strength of the
business unit
This refers to how strong the firm or SBU is in terms of the
market
A market might be very attractive but the firm lacks
strengths in terms of supplying the market
As with industry attractiveness a composite of industry
strength is based on weighting a range of factors
Notice that the Boston Matrix dimensions are included in
the GE matrix- market growth is an element of industry
attractive and market share is an element in business
strength
Business Strategy - the GE/ McKinsey Matrix
Assessing internal strengths
Production capacity
Production flexibility
Unit costs
R and D capabilities
Quality
Reliability
Company image
Product uniqueness
Cost and profitability
Profit margins relative to
competitors
Manufacturing capability
Organisational skills

Market share
Growth in market share
Marketing capabilities
Management competence
Skills of workforce
Distribution network
Size and quality of sales force
Service quality
Customer loyalty
Brand recognition


Business Strategy - the GE/ McKinsey Matrix
The GE/ McKinsey Matrix
High strength Medium strength Low strength
High
attractiveness
X Cell 1 Y Cell 2 Y Cell 3
Medium
attractiveness
Y Cell 4 Y Cell 5 Y Cell 6
Low
attractiveness
Y Cell 7 Y Cell 8 Z Cell 9
Business Strategy - the GE/ McKinsey Matrix
The matrix
Arranges the companys SBUs in three bands and nine
boxes
Band X - Successful SBUs in which the business is
strong and the industry is attractive
Band Y - Mediocre SBUs in which either the industry is
less attractive and/or the business is lacks strengths
Band Z - Disappointing SBUs - in which the business is
weak and the industry unattractive
Business Strategy - the GE/ McKinsey Matrix
Recommended strategies
Grow -strong business units in attractive industries
-average business units in attractive industries
-strong units in average industries
Hold -average business units in average industries
-strong units in weak industries
-weak units in attractive industries
Harvest -weak units in unattractive industries
-average units in unattractive industries
-weak units in average industries
Business Strategy - the GE/ McKinsey Matrix
Options for each cell
1Protect position -maintain
position
2Try harder - challenge the
leader
3Be choosy - keep an eye
of opportunities if risk is
low
4Harvest - reduce cost to
maximise profits
5Manage carefully

6Grow wisely - invest in
attractive areas
7Regroup - preserve cash
flow, defend strengths
8Keep investment to a
minimum- protect the
position that you have
9Get out

Business Strategy - the GE/ McKinsey Matrix
Invest for growth (cell 1)
This is a very attractive market in which the firm
has great strength
Distinctive competences can be harnesses to good
advantages
Recommended strategies:
-Invest for growth
-search for global opportunities
-maximise market share
-seek dominance
-concentrate on building up strength in this area
Business Strategy - the GE/ McKinsey Matrix
Manage selectively (cells 2 and 4)
These two cells record a high rating in either
business strength or industry attractiveness and a
medium rating in the other This suggests that
these SBUs show some promise
Recommended strategy:
Investment for growth
Invest to expand existing segments
Search for new segments
Build on existing strengths in order maintain competitive ability and
even to challenge for leadership


Business Strategy - the GE/ McKinsey Matrix
Manage selectively (cells 3,5,7)
In each case the SBU has certain positive features
high in one of the dimensions or middling in both
Recommended strategy
Invest for earnings
Maintain/defend market position
Concentrate on selected segments
Specialise in niches where strengths could be built on
Invest selectively

Business Strategy - the GE/ McKinsey Matrix
Harvest (cells 6 and 8)
In each case either market attractiveness or
business strength is low and other one is only
medium
Recommended strategies:
Manage for cash
Avoid unnecessary investment
Move to the most profitable segments
Prune product lines
Specialise in profitable niches
Consider exit
Business Strategy - the GE/ McKinsey Matrix
Divest (Cell 9)
This is an unattractive market in which the firm has
no strength
Recommended strategy:
Exit the market
Time the exit in order to sell at a time that will maximize cash value
In the meantime, cut fixed costs and avoid investment