GE/McKinsey Matrix

The GE/McKinsey Matrix is a strategic tool used for analyzing the strength of business units within a large diversified corporation. It evaluates units based on industry attractiveness and competitive strength, aiding investment and divestment decisions.

Definition

The GE/McKinsey Matrix, also known as the GE Matrix or McKinsey Matrix, is a strategic tool used for analyzing the relative strengths and weaknesses of business units or brands within a large diversified corporation. The matrix helps in making investment decisions based on two primary factors:

  1. Market Attractiveness: This dimension includes factors such as the market growth rate, market size, profitability, competitive intensity, and entry barriers.
  2. Business Unit Strength: This dimension looks at factors like market share, product quality, brand strength, customer loyalty, and cost structure.

Each business unit or brand is evaluated on these two dimensions and plotted on a grid comprising nine cells, each representing different strategic possibilities. Businesses positioned towards the top-left of the grid are considered to be prime candidates for investment, while those towards the bottom-right are often considered for divestment.

Examples

  1. High Market Attractiveness & High Business Strength:

    • Example: An innovative tech startup in a rapidly growing AI industry with a strong product line and significant market share could fall into this category. Investment is highly recommended.
  2. Low Market Attractiveness & Low Business Strength:

    • Example: A legacy media company with declining subscriptions and weak digital presence. Divestment or strategic repositioning might be necessary.
  3. Intermediate Position:

    • Example: A mid-sized food and beverage company in a stable, moderately competitive market. This unit requires careful analysis and tactical investment for growth.

Frequently Asked Questions

What are the key dimensions of the GE/McKinsey Matrix?

The matrix evaluates business units based on:

  • Market Attractiveness: Factors such as market size, growth rate, and profitability.
  • Business Strength: Aspects like market share, competitive position, and operational efficiency.

How does the GE/McKinsey Matrix differ from the Boston Matrix?

While both serve similar purposes, the GE Matrix is more complex and considers multiple factors for each dimension, unlike the Boston Matrix which focuses primarily on market growth rate and relative market share.

What is a potential disadvantage of using the GE/McKinsey Matrix?

A significant drawback is the subjective nature of evaluating market attractiveness and business strength, which may lead to inconsistent results if not approached rigorously.

What are the strategic implications of the matrix?

The matrix aids in deciding where to invest, divest, or maintain, offering a visual representation of the strategic positioning of business units.

How is market size represented in the GE/McKinsey Matrix?

Market size is typically represented by the diameter of pie charts plotted on the grid, where larger pies indicate larger markets.

Can industry attractiveness change over time?

Yes, factors influencing industry attractiveness, such as technological advancements or regulatory changes, can shift, altering the strategic positioning of business units.

Is it necessary for all businesses to use the GE/McKinsey Matrix?

It is particularly useful for large diversified corporations with multiple business units or product lines. Smaller businesses might not derive the same benefits.

Boston Matrix

A simpler strategic planning tool focusing on market growth rate and relative market share.

Strategic Business Unit (SBU)

A discrete entity within a corporation, treated as a unique unit for strategic planning purposes.

Portfolio Analysis

The process of evaluating the mix of business units within a corporation to allocate resources effectively.

Market Attractiveness

A measure of the potential of the industry or market segment in terms of growth prospects and profitability.

Competitive Strength

An assessment of a business unit’s position within its market, considering factors like market share and competitive advantage.

Online References

  1. Investopedia: GE/McKinsey Matrix
  2. MBASkool: GE McKinsey Matrix
  3. Harvard Business Review: Tools and Models: GE/McKinsey Matrix

Suggested Books for Further Studies

  1. “Competitive Strategy: Techniques for Analyzing Industries and Competitors” by Michael E. Porter.
  2. “The McKinsey Way: Using the Techniques of the World’s Top Strategic Consultants to Help You and Your Business” by Ethan M. Rasiel.
  3. “Strategic Management and Business Policy” by Thomas L. Wheelen and J. David Hunger.
  4. “Cases in Strategic Management and Business Policy” by Lawrence R. Jauch and William F. Glueck.

Accounting Basics: “GE/McKinsey Matrix” Fundamentals Quiz

### Does the GE/McKinsey Matrix use two dimensions for evaluating business units? - [x] Yes, it evaluates market attractiveness and business strength. - [ ] No, it only evaluates market share. - [ ] No, it only evaluates market attractiveness. - [ ] No, it only evaluates business strength. > **Explanation:** The GE/McKinsey Matrix evaluates business units on two dimensions: market attractiveness and business strength. ### What is typically shown as pie charts on the GE/McKinsey Matrix? - [ ] Revenue projections - [ ] Business risks - [x] Market size and market share - [ ] Employee satisfaction > **Explanation:** In the GE/McKinsey Matrix, market size and market share are typically represented as pie charts, with the diameter of the pie indicating the size of the market and the slice size indicating the market share. ### Where should a corporation invest according to the GE/McKinsey Matrix? - [x] Top-left corner - [ ] Bottom-right corner - [ ] Middle of the grid - [ ] Bottom-left corner > **Explanation:** Corporations should invest in business units that appear towards the top-left corner of the GE/McKinsey Matrix as these units are in attractive markets and have strong competitive positions. ### How does the GE/McKinsey Matrix differ from the Boston Matrix? - [ ] It is simpler and considers fewer factors. - [x] It is more complex and considers more factors. - [ ] It does not use a grid. - [ ] It evaluates only startup businesses. > **Explanation:** The GE/McKinsey Matrix is more complex than the Boston Matrix and considers a broader range of factors for each dimension. ### What does low market attractiveness and low business strength suggest in GE/McKinsey Matrix? - [x] Consider divestment - [ ] Major investment required - [ ] Maintain current strategy - [ ] Joint ventures recommended > **Explanation:** Business units with low market attractiveness and low business strength are often considered for divestment in the GE/McKinsey Matrix. ### Which is a potential disadvantage of the GE/McKinsey Matrix? - [x] Subjective evaluation of factors - [ ] It is too simple - [ ] Lack of visual aids - [ ] It ignores competitive strength > **Explanation:** A potential disadvantage of the GE/McKinsey Matrix is the subjective nature of evaluating market attractiveness and business strength. ### What does 'market attractiveness' measure in the GE/McKinsey Matrix? - [ ] Employee skills - [x] Market growth, size, profitability - [ ] Marketing expenses - [ ] Number of competitors > **Explanation:** 'Market attractiveness' measures aspects like market growth rate, market size, and profitability amongst other factors. ### Why is business unit strength important in the GE/McKinsey Matrix? - [ ] It determines public relations strategy. - [x] It assesses competitive position. - [ ] It predicts long-term revenue. - [ ] It evaluates consumer trends. > **Explanation:** Business unit strength is important as it assesses the competitive position of the business unit, determining its ability to compete effectively within its market. ### What aspect is crucial for plotting on the GE/McKinsey Matrix? - [x] Accurate data on market attractiveness and business strength - [ ] Trends in office morale - [ ] Historical revenue figures - [ ] Regulatory compliance information > **Explanation:** Accurate data on both market attractiveness and business strength is crucial for effectively plotting business units on the GE/McKinsey Matrix. ### What kind of businesses primarily benefit from using the GE/McKinsey Matrix? - [ ] Small local companies - [ ] Non-profit organizations - [x] Large diversified corporations - [ ] Single-product companies > **Explanation:** Large diversified corporations with multiple business units benefit the most from using the GE/McKinsey Matrix for strategic planning.

Thank you for journeying through the GE/McKinsey Matrix and challenging yourself with our quiz. Keep up the pursuit of strategic excellence!

Tuesday, August 6, 2024

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