- In consulting engagements with general cleelric in the 1970s Mckinsey and company developed a nine cell portfolio matrix as a tool for screening GE’s large portfolio of strategic business units.
- The GE [Mckinsey matrix] is similar to BCG growth share matrix in that it maps strategic units on a grid of the industry and SBU’s position in the industry.
- The GE matrix however, attempts to improve upon the BCG matrix in the following two ways.
- The GE matrix generalizes the ones as industry attractiveness and business unit strength whereas BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit.
- The GE matrix has nine cells v/s four cells in the BCG matrix.
- Industry attractiveness and business unit strength are calculated y first indentifying criteria for each, determining the value of each parameter in the criteria and multiplying that value by a weighting factor.
- The result is a quantitative measure of industry attractiveness and the business unit’s relative performance in that industry.
Steps in developing GE matrix
- Select factor and indicators
- Assign each indicator a weight (total =1) based on its importance.
- Rate the industry indicator and company on business indicators on scale of 1(weak) – 5 (strong)
- Multiply weight time rating and total for summary measure.
|GE Portfolio Example|
The vertical axis of the GE/ Mckinsey matrix is industry attractiveness, which is determinant by factors.
- Market growth rate
- Market size
- Demand variability
- Industry profitability
- Industry rivalry
- Global opportunities
- Macro environmental factors (PEST)
Business unit strength
- Market share
- Growth in market share
- Distribution channel access
- Production capacity
- Profit margin relative to competitors
- The business unit strength index can be calculated by multiplying the estimated value of each factor’s weighting as done for industry attractiveness.
Plotting the information
Each business unit can be portrayed as a circle plotted on the matrix with the information conveyed as follows:
- Market size is represented by the size of the circle.
- Market share is shown by using the circle as a pie chart.
- The expected future position of the circle is portrayed by means of an arrow.
|Overcome weakness. Find Niche or qurt
|Medium||Challenge leader/ build/ selectively
|Manage for earning
|Harvest gradually or limited expansion
Resource allocation recommendation can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix.
Nine cells can be divided into three zone and three columns. It is analoges to traffic signals. It is also called stop-light strategy model.
- This zone is characterized by the presence of both business strength and industry attractiveness.
- In the extreme left hand corner, both are high, which an ideal situation for growth.
- The other two cells are more realistic description of business situation.
- In high attractiveness and average strength, an organization can grow but it is dangerous in the long run.
- The third situation is the most realistic situation for growth. Although industry attractiveness is medium, the organization has strong strength which can help it in generating competitive advantage for itself.
- This zone presents a mixed situation in which the growth possibility is NIL.
- It presents an opportunity for the selective earning.
- The two cells- average strength with medium attractiveness and strong strength with low attractiveness indicate hold position.
- The third cell provides flexible situation. On one hand, it represents continued earning because of high industry attractiveness. While on the other hand, it suggests scope for improving strength.
- In case of strong strength and low industry attractiveness either the organization can go for vertical integration, or forward or backward integration depending on the nature of the industry.
- It can also seek diversification where the present strength can be utilized.
- In case of RED cells the organization has to stop. Here, harvesting or divesting strategy is suitable.
- Harvesting- to withdraw from business
- The objective is to earn short term profit as it is no longer attractive in the long term.