GE McKinsey Matrix: A Multifactorial Portfolio Analysis in Corporate Strategy

The GE-McKinsey Matrix (a.k.a. GE Matrix, General Electric Matrix, Nine-box matrix) is just like the BCG Matrix a portfolio analysis tool used in corporate strategy to analyse strategic business units or product lines based on two variables: industry attractiveness and the competitive strength of a business unit. By combining these two variables into a matrix, a corporation can plot their business units accordingly and determine where to invest, where to hold their position, and where to harvest or divest. However, different from the BCG Matrix, the GE-McKinsey Matrix uses multiple factors that are combined to determine the measure of the two variables industry attractiveness and competitive strength. This is an important distinction, since the BCG Matrix has been criticized a lot on its use of only one single (and perhaps outdated) variable for each axis.

The name of the framework stems from the year 1970 in which General Electric (GE) hired the strategy consulting firm McKinsey&Company to consult GE in managing their large and complex portfolio of strategic business units. Therefore, it is McKinsey (not GE) that created the framework as a means to help GE cope with its strategic decisions on a corporate level. 

Figure 1: GE McKinsey Nine Box Matrix

Industry Attractiveness

On the vertical axis of the GE Mckinsey Matrix, we find the variable Industry Attractiveness which can be divided into High, Medium and Low. Industry attractiveness is demonstrated by how beneficial it is for a company to enter and compete within a certain industry based on the profit potential of that specific industry. The higher the profit potential of an industry is, the more attractive it becomes. An industry’s profitability in turn is affected by the current level of competition and potential future changes in the competitive landscape. When evaluating industry attractiveness, you should look at how an industry will change in the long run rather than in the near future, because the investments needed for a business usually require long lasting commitment. Industry attractiveness consists of many factors that collectively determine the level of competition and thus its profit potential. The most common factors to look at are:

• Industry size
• Long-run growth rate
• Industry structure (use Porter’s Five Forces or Structure-Conduct-Performance model)
• Industry life cycle (use Product Life Cycle)
• Macro environment (use PESTEL Analysis)
• Market segmentation

Competitive Strength

On the horizontal axis we find the Competitive Strength of a business unit which can also be divided into High, Medium and Low. This variable measures how strong or competent a particular company is against its rivals: it is an indicator of its ability to compete within a certain industry. A company’s strengths are its characteristics that give it an advantage over others (competitions/rivals). These strengths are often referred to as unique selling points (USP’s), firm-specific advantages (FSA’s) or more widely known as sustainable competitive advantages. Apart from a company’s competitive position right now, it is also very important to look at how sustainable its position is in the long run. So where Industry Attractiveness is about the level of competition in the entire industry, Competitive Strength is about the (future) ability to compete of one single company within that specific industry. Competitive strength also consists of multiple factors that together make up a company’s total score. The most common factors to look at are: 

• Profitability
• Market share
• Business growth
• Brand equity
• Level of differentiation (use the Value Disciplines or Porter’s Generic Strategies)
• Firm resources (use the VRIO Framework)
• Efficiency and effectiveness of internal linkages (use the Value Chain Analysis)
• Customer loyalty (use the Net Promoter Score)

Figure 2: GE McKInsey Matrix Strategies

Strategic implications

Based on the 3 degrees (High, Medium and Low) of both Industry Attractiveness and Competitive Strength, the matrix can be crafted consisting of 9 different boxes with 9 different scenarios and corresponding strategic actions. The strategic actions to choose from are: Invest/Grow strategy, Selectivity/Earnings strategy (sometimes referred to as Hold strategy), and the Harvest/Divest strategy. 

Invest/Grow strategy

The best section for a company or business unit to be in is the Invest/Grow section. A company can reach this scenario if it is operating in a moderate to highly attractive industry while having a moderate to highly competitive position within that industry. In such a situation there is a massive potential for growth. However, in order to be able to grow, a company needs resources such as assets and capital. These investments are necessary to increase capacity, to reach new customers through more advertisements or to improve products through Research & Development. Companies can also choose to grow externally via Mergers & Acquisitions apart from growing organically. Again, a company will need investments in order to realize such an endavour. The most notable challenge for companies in these sections are resource constraints that block them from growing bigger and becoming/maintaining market leadership.

Selectivity/Earnings strategy

Companies or business units in the Selectivity/Earnings sections are a bit more tricky. They are either companies with a low to moderate competitive position in an attractive industry or companies with an extremely high competition position in a less attractive industry. Deciding on whether to invest or not to invest largely depends on the outlook that is expected of either the improvement in competitive position or the potential to shift to more interesting industries. These decisions have to be made very carefully, since you want to use most of the investments available to the companies in the Invest/Grow section. The “left-over” investments should be used for the companies in the Selectivity/Earnings section with the highest potential for improvements, while being monitored closely to measure its progress on the way.

Harvest/Divest strategy

Finally we are left with companies or business units that either have a low competitive position, are active in an unattractive industry or a combination of the two. These companies have no promising outlooks anymore and should not be invested in. Corporate strategists have two main options to consider: 1. They divest the business units by selling it to an interested buyer for a reasonable price. This also known as a carve-out. Selling the business unit to another player in the industry that has a better competitive position is not a strange idea at all. The buyer might have better competences to make it a success or they can create value by combining activities (synergies). The cash that results from selling the business unit can consequently be used in Invest/Grow business units elsewhere in the portfolio. 2. Or corporate strategists can choose a harvest strategy. This basically means that the business unit gets just enough investments (or non at all) to keep the business running, while reaping the few fruits that may be left. This is a very short-term perspective action that allows corporate strategists to subtract as much remaining cash as possible, but is likely to result in the liquidation of the business unit eventually.

GE McKinsey Matrix In Sum

The GE McKinsey Matrix is a good alternative for the BCG Matrix and has the advantage that the two variables used consist of multiple factors combined. It may be quite a task however to quantify factors such as brand equity and industry structure,F and combine them all into a single number that can be plotted on the nine-box matrix. For corporate strategist in portfolio management, the model functions as a great starting point to base investment decisions on.

Further Reading:

• McKinsey & Company (2008). Enduring Ideas: The GE–McKinsey Nine-box Matrix. McKinsey Quarterly.