The GE-McKinsey Matrix has its roots in the Boston Consulting Group (BCG) portfolio analysis and it dates back to the early 1970s when General Electric (GE) asked McKinsey & Company to develop a portfolio management model for screening its 150 business units at that time.
The GE-McKinsey is crafted along two dimensions; the market attractiveness and the business unit strength and both dimensions are divided into three categories – low, medium and high. The GE-McKinsey assists companies in analyzing their SBU portfolio and in making better investment decisions.
In order to evaluate whether the market is attractive or not, various factors must be taken into consideration, including:
- Market size
- Market growth rate
- Industry size, structure and profitability
- Profit potential
- Pricing trends
- External threats and opportunities (SWOT analysis)
Business Unit Strength
This dimension examines whether a firm has the competences to compete in a particular market and industry. Again, many factors are considered:
- Brand awareness and recognition
- Access to resources
- Company profitability and market share growth
- Customer loyalty
- Core competences
After identifying the factors determining the above dimensions and rating them according to their magnitude, the chart must thereafter be plotted. With all the evaluations and scores in place, each strategic business unit must be represented by a circle on the chart and its size depends on the market size. The next step is to analyze the information and decide on the investment strategies to be followed based on where your business is situated.
There are three investment strategies for each strategic business unit. An arrow outside the circle shows where the SBU is expected to be in the future.
Investment/Grow: Firms should invest in business units that fall within this category as they promise the highest future returns. These business units will require a significant amount of investment including in research and development, brand expansion and advertising.
Selectivity/Earnings: Companies should invest in these business units only if they have the capital after prioritizing investment/grow business units and only if they believe that there is some potential in the future. This might be the case when business units are in big markets without a lot of competition.
Harvest/Divest: Business units within this category do not have a competitive advantage and are relatively underperforming. Companies should invest in these business units only if revenue will flow of of that investment. Otherwise, business units should be divested.
Although this tool is a very useful method for analyzing each strategic business unit within a business portfolio, it carries some limitations. Firstly, that the weight given to the factors that determine the market attractiveness and business unit strength is subjective and therefore end results might be biased. For this reason, it is advised that this procedure is done by a team of experienced consultants or specialized people that have the knowledge to provide objective assessments. Moreover, one more thing to note is that completing the GE-McKinsey Matrix can be very costly to a company.