GE-McKinsey Nine-Box Matrix

Definition
GE-McKinsey nine-box matrix is a strategy tool that offers a
systematic approach for the multi business corporation to
prioritize its investments among its business units.[1]
GE-McKinsey is a framework that evaluates business portfolio,
provides further strategic implications and helps to prioritize the
investment needed for each business unit (BU).[2]
Understanding the tool
In the business world, much like anywhere else, the problem of
resource scarcity is affecting the decisions the companies make.
With limited resources, but many opportunities of using them,
the businesses need to choose how to use their cash best. The
fight for investments takes place in every level of the company:
between teams, functional departments, divisions or business
units. The question of where and how much to invest is an ever
going headache for those who allocate the resources.
How does this affect the diversified businesses? Multi business
companies manage complex business portfolios, often, with as
much as 50, 60 or 100 products and services. The products or
business units differ in what they do, how well they perform or
in their future prospects. This makes it very hard to make a
decision in which products the company should invest. At least,
it was hard until the BCG matrix and its improved version GE-
McKinsey matrix came to help. These tools solved the problem
by comparing the business units and assigning them to the
groups that are worth investing in or the groups that should be
harvested or divested.

In 1970s, General Electric was managing a huge and complex

portfolio of unrelated products and was unsatisfied about the
returns from its investments in the products. At the time,
companies usually relied on projections of future cash flows,
future market growth or some other future projections to make
investment decisions, which was an unreliable method to
allocate the resources. Therefore, GE consulted the McKinsey &
Company and as a result the nine-box framework was designed.
The nine-box matrix plots the BUs on its 9 cells that indicate
whether the company should invest in a product, harvest/divest
it or do a further research on the product and invest in it if
there’re still some resources left. The BUs are evaluated on two
axes: industry attractiveness and a competitive strength of a unit.
Industry Attractiveness
Industry attractiveness indicates how hard or easy it will be for a
company to compete in the market and earn profits. The more
profitable the industry is the more attractive it becomes. When
evaluating the industry attractiveness, analysts should look how
an industry will change in the long run rather than in the near
future, because the investments needed for the product usually
require long lasting commitment.
Industry attractiveness consists of many factors that collectively
determine the competition level in it. There’s no definite list of
which factors should be included to determine industry
attractiveness, but the following are the most common: [1]
 Long run growth rate
 Industry size
 Industry profitability: entry barriers, exit barriers, supplier
power, buyer power, threat of substitutes and available
complements (use Porter’s Five Forces analysis to
determine this)
 Industry structure (use Structure-Conduct-Performance
framework to determine this)
 Product life cycle changes
 Changes in demand
 Trend of prices
  Macro environment factors (use PEST or PESTEL for this)
 Seasonality
 Availability of labor
 Market segmentation
Competitive strength of a business unit or a product
Along the X axis, the matrix measures how strong, in terms of
competition, a particular business unit is against its rivals. In
other words, managers try to determine whether a business unit
has a sustainable competitive advantage (or at least
temporary competitive advantage) or not. If the company has a
sustainable competitive advantage, the next question is: “For
how long it will be sustained?”
The following factors determine the competitive strength of a
business unit:
 Total market share
 Market share growth compared to rivals
 Brand strength (use brand value for this)
 Profitability of the company
 Customer loyalty
 VRIO resources or capabilities (use VRIO framework to
determine this)
 Your business unit strength in meeting industry’s critical
success factors (use Competitive Profile Matrix to
determine this)
  Strength of a value chain (use Value Chain
Analysis and Benchmarking to determine this)
 Level of product differentiation
 Production flexibility
Advantages
 Helps to prioritize the limited resources in order to achieve
the best returns.
 Managers become more aware of how their products or
business units perform.
 It’s more sophisticated business portfolio framework than
the BCG matrix.
 Identifies the strategic steps the company needs to make to
improve the performance of its business portfolio.
Disadvantages
 Requires a consultant or a highly experienced person to
determine industry’s attractiveness and business unit
strength as accurately as possible.
 It is costly to conduct.
 It doesn’t take into account the synergies that could exist
between two or more business units.
Difference between GE McKinsey and BCG matrices
GE McKinsey matrix is a very similar portfolio evaluation
framework to BCG matrix. Both matrices are used to analyze
company’s product or business unit portfolio and facilitate the
investment decisions.
The main differences:
 Visual difference. BCG is only a four cell matrix, while
GE McKinsey is a nine cell matrix. Nine cells provide
better visual portrait of where business units stand in the
matrix. It also separates the invest/grow cells from
harvest/divest cells that are much closer to each other in the
BCG matrix and may confuse others of what investment
decisions to make.
 Comprehensiveness. The reason why the GE McKinsey
framework was developed is that BCG portfolio tool wasn’t
sophisticated enough for the guys from General Electric. In
BCG matrix, competitive strength of a business unit is
 equal to relative market share, which assumes that the
larger the market share a business has the better it is
positioned to compete in the market. This is true, but it’s
too simplistic to assume that it’s the only factor affecting
the competition in the market. The same is with industry
attractiveness that is measured only as the market growth
rate in BCG. It comes to no surprise that GE with its
complex business portfolio needed something more
comprehensive than that.
Using the tool
There are no established processes or models that managers
could use when performing the analysis. Therefore, we designed
the following steps to facilitate the process:
Step 1. Determine industry attractiveness of each business
unit
 Make a list of factors. The first thing you’ll need to do is to
identify, which factors to include when measuring industry
attractiveness. We’ve provided the list of the most common
factors, but you should include the factors that are the most
appropriate to your industries.
 Assign weights. Weights indicate how important a factor is
to industry’s attractiveness. A number from 0.01 (not
important) to 1.0 (very important) should be assigned to
each factor. The sum of all weights should equal to 1.0.
 Rate the factors. The next thing you need to do is to rate
each factor for each of your product or business unit.
 Choose the values between ‘1-5’ or ‘1-10’, where ‘1’
indicates the low industry attractiveness and ‘5’ or ‘10’
high industry attractiveness.
 Calculate the total scores. Total score is the sum of all
weighted scores for each business unit. Weighted scores are
calculated by multiplying weights and ratings. Total scores
allow comparing industry attractiveness for each business
unit.
Industry Attractiveness (1/2)

Business Unit 1 Business Unit 2

Factor Weight Rating Weighted Score Rating Weighted Score

Industry growth rate 0.25 3 0.75 4 1

Industry size 0.22 3 0.66 3 0.66

Industry profitability 0.18 5 0.90 1 0.18

Industry structure 0.17 4 0.68 4 0.68

Trend of prices 0.09 3 0.27 3 0.27

Market segmentation 0.09 1 0.09 3 0.27

 Business Unit 1 Business Unit 2

Factor Weight Rating Weighted Score Rating Weighted Score

Total score 1.00 – 3.35 – 3.06

Industry Attractiveness (2/2)

Business Unit 3 Business Unit 4

Factor Weight Rating Weighted Score Rating Weighted Score

Industry growth rate 0.25 3 0.75 2 0.50

Industry size 0.22 2 0.44 5 1.10

Industry profitability 0.18 1 0.18 5 0.90

Industry structure 0.17 2 0.34 4 0.68

Trend of prices 0.09 2 0.18 3 0.27

Market segmentation 0.09 2 0.18 3 0.27

Total score 1.00 – 2.07 – 3.72

Step 2. Determine the competitive strength of each business
unit
‘Step 2’ is the same as ‘Step 1’ only this time, instead of
industry attractiveness, the competitive strength of a business
unit is evaluated.
 Make a list of factors. Choose the competitive strength
factors from our list or add your own factors.
 Assign weights. Weights indicate how important a factor is
in achieving sustainable competitive advantage. A number
from 0.01 (not important) to 1.0 (very important) should be
assigned to each factor. The sum of all weights should
equal to 1.0.
 Rate the factors. Rate each factor for each of your product
or business unit. Choose the values between ‘1-5’ or ‘1-10’,
where ‘1’ indicates the weak strength and ‘5’ or ‘10’
powerful strength.
 Calculate the total scores. See ‘Step 1’.
Competitive Strength (1/2)

Business Unit 1 Business Unit 2

Factor Weight Rating Weighted Score Rating Weighted Score

 Business Unit 1 Business Unit 2

Factor Weight Rating Weighted Score Rating Weighted Score

Market share 0.22 2 0.44 2 0.44

Relative growth rate 0.18 3 0.48 2 0.38

Company’s profitability 0.14 3 0.42 1 0.14

Brand value 0.10 1 0.10 2 0.20

VRIO resources 0.20 1 0.20 4 0.80

CPM Score 0.16 2 0.32 5 0.80

Total score 1.00 – 1.96 – 2.74

Competitive Strength (2/2)

Business Unit 3 Business Unit 4

Weighted Weighted
Factor Weight Rating Rating
Score Score
 Business Unit 3 Business Unit 4

Weighted Weighted
Factor Weight Rating Rating
Score Score

Market share 0.22 4 0.88 4 0.88

Relative
0.18 4 0.64 2 0.36
growth rate

Company’s
0.14 3 0.42 3 0.42
profitability

Brand value 0.10 3 0.30 3 0.30

VRIO
0.20 4 0.80 4 0.80
resources

CPM Score 0.16 5 0.80 5 0.80

Total score 1.00 – 3.92 – 3.56

Step 3. Plot the business units on a matrix

With all the evaluations and scores in place, we can plot the
business units on the matrix. Each business unit is represented
as a circle. The size of the circle should correspond to the
proportion of the business revenue generated by that business
unit. For example, ‘Business unit 1’ generates 20% revenue
and ‘Business unit 2’ generates 40% revenue for the
company. The size of a circle for ‘Business unit 1’ will be
half the size of a circle for ‘Business unit 2’.
Step 4. Analyze the information
There are different investment implications you should
follow, depending on which boxes your business units have
been plotted. There are 3 groups of boxes: investment/grow,
selectivity/earnings and harvest/divest boxes. Each group of
boxes indicates what you should do with your investments.
Investment implications
Box Invest/Grow Selectivity/Earnings Harvest/Divest

Invest if there’s money left and Invest just enough to

Invest Definitely
the situation of business unit keep the business unit
or not? invest
could be improved operating or divest
Invest/Grow box. Companies should invest into the business
units that fall into these boxes as they promise the highest
returns in the future. These business units will require a lot of
cash because they’ll be operating in growing industries and
will have to maintain or grow their market share. It is
essential to provide as much resources as possible for BUs so
there would be no constraints for them to grow. The
investments should be provided for R&D, advertising,
acquisitions and to increase the production capacity to meet
the demand in the future.
Selectivity/Earnings box. You should invest into these BUs
only if you have the money left over the investments in
invest/grow business units group and if you believe that BUs
will generate cash in the future. These business units are often
considered last as there’s a lot of uncertainty with them. The
general rule should be to invest in business units which
operate in huge markets and there are not many dominant
players in the market, so the investments would help to easily
win larger market share.
Harvest/Divest box. The business units that are operating in
unattractive industries, don’t have sustainable competitive
advantages or are incapable of achieving it and are
performing relatively poorly fall into harvest/divest boxes.
What should companies do with these business units?
First, if the business unit generates surplus cash, companies
should treat them the same as the business units that fall into
‘cash cows’ box in the BCG matrix. This means that the
companies should invest into these business units just enough
to keep them operating and collect all the cash generated by it.
In other words, it’s worth to invest into such business as long
as investments into it doesn’t exceed the cash generated from
it.
Second, the business units that only make losses should be
divested. If that’s impossible and there’s no way to turn the
losses into profits, the company should liquidate the business
unit.
Step 5. Identify the future direction of each business unit
The GE McKinsey matrix only provides the current picture of
industry attractiveness and the competitive strength of a
business unit and doesn’t consider how they may change in
the future. Further analysis may reveal that investments into
some of the business units can considerably improve their
competitive positions or that the industry may experience
major growth in the future. This affects the decisions we
make about our investments into one or another business unit.
For example, our previous evaluations show that the
‘Business Unit 1’ belongs to invest/grow box, but further
analysis of an industry reveals that it’s going to shrink
substantially in the near future. Therefore, in the near future,
the business unit will be in harvest/divest group rather than
invest/grow box. Would you still invest as much in ‘Business
Unit 1’ as you would have invested initially? The answer is
no and the matrix should take that into consideration.
How to do that? Well, the company should consult with the
industry analysts to determine whether the industry
attractiveness will grow, stay the same or decrease in the
future. You should also discuss with your managers whether
your business unit competitive strength will likely increase or
decrease in the near future. When all the information is
collected you should include it to your existing matrix, by
adding the arrows to the circles. The arrows should point to
the future position of a business unit.
The following table shows how industry attractiveness and
business unit competitive strength will change in 2 years.
Business Business Business Business
Unit 1 Unit 2 Unit 3 Unit 4

Industry Stay the Stay the

Decrease Increase
attractiveness same same

Business unit
competitive Decrease Increase Increase Decrease
strength
 Step 6. Prioritize your investments
The last step is to decide where and how to invest the
company’s money. While the matrix makes it easier by
evaluating the business units and identifying the best ones
to invest in, it still doesn’t answer some very important
questions:
 Is it really worth investing into some business units?
 How much exactly to invest in?
 Where to invest into business units (more to R&D,
marketing, value chain?) to improve their performance?
Doing the GE McKinsey matrix and answering all the
questions takes time, effort and money, but it’s still one of
the most important product portfolio management tools that
significantly facilitate investment decisions.
Sources