McKinsey’s GE matrix

Contents:
1. What is a McKinsey’s GE matrix (nine-box matrix, GE-McKinsey)? ...................................................1
2. What is assessed in GE matrix? .......................................................................................................2
3. Is the method any good? .................................................................................................................3
4. Using the tool .................................................................................................................................4
Step 1. Determine industry attractiveness of each business unit .....................................................4
Step 2. Determine the competitive strength of each business unit ..................................................5
Step 3. Plot the business units on a matrix ......................................................................................6
Step 4. Analyze the information ......................................................................................................7
Step 5. Identify the future direction of each business unit ...............................................................8
Step 6. Prioritize your investments ..................................................................................................9

1. What is a McKinsey’s GE matrix (nine-box matrix, GE-McKinsey)?

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 units1.

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.

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

1
McKinsey & Company (2008). Enduring Ideas: The GE–McKinsey nine-box matrix. Available at:
http://www.mckinsey.com/insights/strategy/enduring_ideas_the_ge_and_mckinsey_nine-box_matrix
2
David, F.R. (2009). Strategic Management: Concepts and Cases. 12th ed. FT Prentice Hall
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.

2. What is assessed in GE matrix?

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
 Profitability of the company
 Customer loyalty
 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

3. Is the method any good?

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.

4. Using the tool

There are no established processes or models that managers could use when performing the
analysis. However, you can use 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.
 Business Unit 1 Business Unit 2 Business Unit 3 Business Unit 4

Weighted Weighted Weighted Weighted

Factor Weight Rating Rating Rating Rating
score score score score

Industry growth
0.25 3 0.75 4 1 3 0.75 2 0.5
rate

Industry size 0.22 3 0.66 3 0.66 2 0.44 5 1.10

Industry
0.18 5 0.90 1 0.18 1 0.18 5 0.90
profitability

Industry
0.17 4 0.68 4 0.68 2 0.34 4 0.68
structure

Trend of prices 0.09 3 0.27 3 0.27 2 0.18 3 0.27

Market
0.09 1 0.09 3 0.27 2 0.18 3 0.27
segmentation

Total score 1.00 - 3.35 - 3.06 - 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 the list in the example 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’.
 Business Unit 1 Business Unit 2 Business Unit 3 Business Unit 4

Weighted Weighted Weighted Weighted

Factor Weight Rating Rating Rating Rating
score score score score

Market share 0.22 2 0.44 2 0.44 4 0.88 4 0.88

Relative growth
0.18 3 0.48 2 0.38 4 0.64 2 0.36
rate

Company’s
0.14 3 0.42 1 0.14 3 0.42 3 0.42
profitability

Brand value 0.10 1 0.10 2 0.20 3 0.30 3 0.30

Company’s
unique resources 0.20 1 0.20 4 0.80 4 0.80 4 0.80
or capabilities

Company’s
strength in
meeting critical 0,16 2 0.32 5 0.80 5 0.80 5 0.80
success factors in
the industry

Total score 1.00 - 1.96 - 2.74 - 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.

Box: Invest/Grow Selectivity/Earnings Harvest/Divest

Invest or not? Definitely invest Invest if there’s money Invest just enough to
left and the situation keep the business unit
of business unit could operating or divest
be improved

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 Unit 1 Business Unit 2 Business Unit 3 Business Unit 4

Industry Decrease Stay the same Stay the same Increase
attractiveness
Business unit Decrease Increase Increase Decrease
competitive
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.