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McKinsey Matrix

Summary of the GE Matrix. Abstract

 

GE McKinsey matrix portfolio analysisThe GE matrix / McKinsey matrix (MKM) is a model to perform a business portfolio analysis on the Strategic Business Units of a corporation.


A business portfolio is the collection of Strategic Business Units that make up a corporation. The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets. A Strategic Business Unit (SBU) can either be an entire mid-size company or a division of a large corporation, that formulates its own business level strategy and has separate objectives from the parent company.


The aim of a portfolio analysis is:


1) Analyze its current business portfolio and decide which SBU's should receive more or less investment, and
2) Develop growth strategies for adding new products and businesses to the portfolio

3) Decide which businesses or products should no longer be retained.

The BCG Matrix (Boston Consulting Group Matrix) is the best-known portfolio planning framework. The MKM is a later and more advanced form of the BCG Matrix.


MKM versus BCG Matrix


The MKM is more sophisticated than the BCG Matrix in three aspects:


1. Market (Industry) attractiveness replaces market growth as the dimension of industry attractiveness. Market Attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry / market. Compare also: Porter's Five Competitive Forces model

2. Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit.

3. Finally the MKM works with a 3*3 grid, while the BCG Matrix has only 2*2. This also allows for more sophistication.



Typical (external) factors that affect Market Attractiveness:


- Market size
- Market growth rate
- Market profitability
- Pricing trends
- Competitive intensity / rivalry
- Overall risk of returns in the industry

- Entry barriers
- Opportunity to differentiate products and services

- Demand variability
- Segmentation
- Distribution structure

- Technology development

 

Typical (internal) factors that affect Competitive Strength of a Strategic Business Unit:


- Strength of assets and competencies
- Relative brand strength (marketing)
- Market share

- Market share growth
- Customer loyalty
- Relative cost position (cost structure compared with competitors)

- Relative profit margins (compared to competitors)
- Distribution strength and p
roduction capacity
- Record of technological or other innovation

- Quality
- Access to financial and other investment resources

- Management strength

 


Often, Strategic Business Units are portrayed as a circle plotted in the MKM, whereby:

- The size of the circles represent the Market Size

- The size of the pies represent the Market Share of the SBU's

- Arrows represent the direction and the movement of the SBU's in the future


A six-step approach to implementation of portfolio analysis (using the MKM) could look like this:

1. Specify drivers of each dimension. The corporation must carefully determine those factors that are important to its overall strategy
2. Weight drivers. The corporation must assign relative importance weights to the drivers
3. Score SBU's each driver
4. Multiply weights times scores for each SBU
5. View resulting graph and interpret it
6. Perform a review/sensitivity analysis using adjusted other weights (there may be no consensus) and scores.
 

Some important limitations of the MKM are:

- Valuation of the realization of the various factors

- Aggregation of the indicators is difficult

- Core competencies are not represented

- Interactions between Strategic Business Units are not considered


This method is also called "Business Assessment Array" and "GE Business Screen".

See also:  BCG Matrix  |  ADL Matrix  |  Positioning  |  STRATPORT  |  Profit Pools  |  Four Trajectories of Industry Change  |  Product Life Cycle  |  Blue Ocean Strategy

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