When you have a vast product line or offer many services in different niches, how do you know which part of the business you should invest in? You need to be able to make business and marketing strategy decisions on these regularly. And this may involve knowing when to grow a business unit or when to sell it off or stop it. The GE Mckinsey matrix was developed for this express purpose.
Developed in the 1970s by McKinsey & Co. to help automotive giant, General Electric with a very specific problem. GE wanted alternatives to measuring success in its various business units that didn’t just take the financial performance into consideration. The 9-box GE McKinsey matrix was created to solve this very problem.
Let’s first talk about why the GE Mckinsey matrix is so effective.
Why use the GE McKinsey matrix?
Here are the top 5 reasons why using the matrix can benefit your business or organization:
- Prioritize different parts of your business for success
- Connect performance to more elements than just financial aspects
- Uncover potential and business limitations
- Utilize resources more efficiently
- Inform strategic decisions on a corporate level
What factors are considered for the GE McKinsey matrix?
The two discerning factors for assessing any of your business units for this matrix are Industry attractiveness and Competitive strength. Let’s take a look at each of these in detail to understand it better.
Industry attractiveness
If you’re a multinational organization, then your diversification strategy has led you to have multiple products and services across many industries. However, even small and medium enterprises (SMEs) may serve different niches and sub-segments, so you have to assess the environment of that industry and the external factors affecting it.
From a financial angle, you want to be in a profitable industry that is showing strong growth and potential. You need to understand challenges and opportunities to discern trends. The attractiveness of the industry is tied to consumer demand and pricing trends as well.
Another huge consideration when assessing an industry or segment’s attractiveness is assessing threats. Porter’s 5 forces model covers this extensively and looks at:
Threats of substitution by alternatives or new technologies
Threats of new entrants and competitors
Power or buyers and consumers
Power of suppliers and partners
Strength and attributes of competitors
All these factors severely affect how attractive the industry is and provides the context of whether your business can compete and benefit from being a part of it. This leads us to the next element of the matrix.
Competitive strength
Along with understanding the industry you are going to compete in, you have to know where you stand in relation to the competition. You have to determine the metrics and key performance indicators (KPIs) that equal success and try to rank yourself in relation to other players in the same industry or segment.
You want to understand the brand strength so using a competitor array for brand marketing competitor research might be a viable solution. Lastly, you also need to look at the share of the market (by volume and revenue), along with your profit margins and assets. The loyalty of your customers contributes heavily to how customers perceive your brand and can be a leading source of sustained competitive advantage for your brand and business.
Performing a VRIO analysis can really help understand the position of your business unit and the advantage it holds based on internal resources and capabilities.
What are the 3 implications of the GE McKinsey matrix?
The GE McKinsey has 3 strategic implications that arise for your business unit or segment. These are:
- Invest or Grow
You obviously want to invest heavily in parts of your business that give you great opportunities. Seizing the right opportunities will promise the highest chances of success along with the best returns on your investment. For any segments or business units that fall in this range, you want to maximize your resource allocation for development, marketing, advertising and capability building. A lot of market penetration strategies (from the Ansoff Matrix) will align perfectly here.
- Selectivity or Earnings
Your secondary investment considerations will fall in this range of the matrix. You will have to be able to discern which units or segments are a priority or have the most potential between them before deciding to selectively invest in them. You also have to be more critical in measuring and analyzing the performance of these units and segments.
- Harvest or Divest
For any business unit or segment of your business that doesn’t have a clear and sustainable competitive advantage, you want to harvest them. By harvesting, you invest just enough money to continue to generate net positive returns. These may be from industries or segments that are past their peak market penetration. At any point, when these units and segments start giving losses to the overall business, it is time to divest by liquidating all assets related to the business by either selling or in worst cases, seizing all operations.
So, now all that remains is to put it all together. You can implement a GE McKinsey matrix among all the business units or segments using the following steps.
How to use the GE McKinsey matrix?
Use this 5-step process to implement the matrix for your business
Determine the industry attractiveness for each business unit/segment
| Industry Attractiveness | KPI score on a scale of 1 to 10 | |||||
| KPI 1 | KPI 2 | KPI 3 | KPI 4 | Overall | Weighted Score | |
| Weightage | 30% | 40% | 20% | 10% | Score | 0.3x KPI1 + 0.4x KPI2 + 0.2x KPI3 + 0.1x KPI4 |
| Unit/Segment A | 6 | 5 | 8 | 7 | 26 | 1.8+2+1.6+0.7= 6.1 |
| Unit/Segment B | 5 | 9 | 8 | 6 | 28 | 1.5+3.6+1.6+0.6= 7.3 |
| Unit/Segment C | 8 | 6 | 7 | 9 | 30 | 2.4+2.4+1.4+0.9= 7.1 |
| Unit/Segment D | 8 | 8 | 9 | 6 | 31 | 2.4+3.2+1.8+0.6= 8.0 |
You have to do a lot of market research and review regional or international industry data to determine how each segment can be evaluated for this calculation. Your KPIs can include the growth rate of the industry, the average profitability, pricing trends, and market segmentation. You can also rank for specific factors from a PESTLE analysis or Porter’s 5 forces or any other environmental analysis. Your weightage factor should be assigned based on a scale that is primed for business success in the specific industry. This could significantly alter your results so choose carefully.
Determine the competitive strength of each business unit/segment
| Competitive Strength | KPI score on a scale of 1 to 10 | |||||
| KPI 1 | KPI 2 | KPI 3 | KPI 4 | Overall | Weighted Score | |
| Weightage | 30% | 40% | 20% | 10% | Score | |
| Unit/Segment A | 6 | 5 | 8 | 7 | 26 | 1.8+2+1.6+0.7= 6.1 |
| Unit/Segment B | 5 | 9 | 8 | 6 | 28 | 1.5+3.6+1.6+0.6= 7.3 |
| Unit/Segment C | 8 | 6 | 7 | 9 | 30 | 2.4+2.4+1.4+0.9= 7.1 |
| Unit/Segment D | 8 | 8 | 9 | 6 | 31 | 2.4+3.2+1.8+0.6= 8.0 |
The example above is a measure of how each business unit or segment performs. The KPIs here can include market share, company profitability, brand strength, and customer satisfaction scores. It’s also important to include resource availability and capabilities here by highlighting factors from your VRIO analysis. Once again, you have to be wary when choosing your weightage factors. You want to prioritize those KPIs that affect the success of your goals more. And these are usually your financial goals or market share. Remember to use the SMARTER goal setting framework when setting these.
Plot these on the GE-McKinsey matrix graph
Once you have the scores from steps 1 and 2, it’s time to plot them on a graph to visualize how they rank on the GE-McKinsey matrix
Assess the strategic implications of each unit/segment
From the graph, you should be able to determine which business unit or segment can be assigned one of the 3 strategic implications. Those on the top right will fall under Invest/Grow. Those with a balance fit best into selectivity, and the bottom left need to be considered for harvesting or divesting.
Prioritize the use of your resources and create action plans
This is where the real work begins. Once you’ve determined which business units need aggressive investment and which segments need more calculated approaches, you also need to determine how much investment, what goals you’re trying to achieve, and how you are going to achieve that. Your marketing strategy then needs to be planned, using a planning model like SOSTAC and then you have to apply marketing models such as the 7P Marketing mix or the STDC framework for marketing communications.
Conclusion
Although the GE McKinsey matrix is great to assess business units and segments, you may find it hard to quantify KPIs in steps 1 and 2. The key is to use consistent terminology that reflects the state of the industry and your organization. A by-product of the research means you are well versed in the nuances of the industry you operate in, as well.
The strategic direction provided by the GE McKinsey matrix serves as a great starting point for decisions at critical points of a business. It helps you make the most of your resources in changing times.
