In the 70s the multifactoral GE matrix was created by McKinsey consulting company for GE (General Electric Company). GE is famous for handling a wide array of complex and unrelated products under its umbrella. The company was not happy for the returns on investment it was getting from many of its products. After all running too many diverse businesses is not a joke. The method for investment decisions was based on various projections such as future cash flows, market growth, quarterly investments, employee retention and operational adversities etc. There projections remained unreliable and inaccurate. GE brought the consulting firm McKinsey & Co on board and the 9 box matrix was designed.
The matrix is a 3×3 grid. The Y-axis measures industry/market attractiveness while the x-axis measures the business unit strength. The scale is high, medium and low. A few key steps are necessary to create this matrix.
- List the entire range of products created or sold by a particular strategic business unit.
- Identify the factors that make a specific market attractive.
- Evaluate the strategic business unit’s position in the market.
- Calculate the business strength and market attractiveness.
- Determine the strategic business unit’s category: High, Medium or low.
Steps to use GE Matrix:
Step 1: Determine Industry Attractiveness of Different Business Units
Industry attractiveness can be determined by compiling a list of relevant factors which determine industry attractiveness. The company must assign scores to the factors such 5 for high, 1 for lowest. Then it must calculate the final scores of ach SBU.
Because there is no rule for assigning weights and ratings, companies will usually need to hire a consultant or an industry expert to help ensure that an accurate analysis is conducted.
Step 2: Determine the Competitive Strength of each Business Unit
In this step the firm must compile strengths and weaknesses of each SBU. Also, make sure of how to make best use of each SBU for the business on the whole.
Step 3: Plot the business units on a matrix
with all the scores needed in hand, the business units can now be plotted in the matrix. Each unit is denoted by a circle with the size of the circle representing the same proportion as the business revenue that the unit brings in for the company.
Step 4: Analysis of Information
Based on the position of each business unit in the matrix, there are three actions a company can take for each unit. These actions are to invest/grow selectivity/earnings and harvest/divest. Each unit falls within a certain set of boxes and this position determines the action to be taken.
Invest/Grow: These are the units that will gain the most investment as they promise the greatest future returns. Because of their growth potential, these units will also require large amounts of investment to allow them to grow or maintain their share in a growing industry.
Selectivity/Earnings: Investment is put into these business units if there is some to spare after giving it to those units in the grow category. These are uncertain businesses and it cannot be stated with any clarity if they will continue to grow in the future or decline. If the unit is in an important and bigger market, then it may be worthwhile to invest further to keep a step in the door.
Harvest/Divest: These are units in an unattractive industry with no sustainable competitive advantage. They are not able to achieve any advantage and perform under expectations. If the company has surplus cash, then there can be investment in those units who manage to make enough cash to break even and there is some strategic advantage to keeping them around. If this is not the case, then the units should be divested and liquidated.
Step 5: Identify future direction of each unit
This matrix only helps a company determine the current state of the industry and competitive strength with no indication of the future and where things may be headed. With the help of an industry analyst, the company may be able to determine the potential direction the future will take. Will the industry grow more or less attractive or will it stay the same? Within the matrix, an arrow is added to each circle, showing its future direction.
Step 6: Prioritize Investments
The final step in the matrix analysis is to decide how much amount to invest in SBUs? Are some units really worth the investment? How much should be invested in each unit? Which area within a unit should get more investment than others?
Example: For instance, in 2013 Apple Inc took help of this matrix. Apple Inc has a variety of business units each operating in a different market. Business units include desktop computers, laptops, tablets, portable music devices, smart phones, watches and smart phones etc. The market attractiveness access was determined easily by the researcher using information about external factors such as current market size, market growth rate, barriers to entry and state of technological development. The matrix showed that Apple remains moderately or very strongly in each of its units and is competing in many attractive and fast growing sectors such as tablets and smart phones. These units were unlikely to be divested and instead will be fed from the revenues of cash cows such as personal computers and iPods. There were significant barriers to entry in these high-tech markets with high investment required to gather the required expertise and technology, despite Apple’s dominance, the best areas to compete with Apple remain the newer and faster growing markets of tablets and smart phones.
Limitations of GE McKinsey Matrix:
- GE Matrix is costly to manage.
- The Matrix does not consider the synergies existing between the businesses (SBUs).
- The matrix cannot be interpreted without help of a senior business analyst to determine the company strength or industry attractiveness.
- It does not help predicting future of industry.
