GE McKinsey Matrix - The Ultimate Guide - SM Insight

11/25/23, 1:05 AM GE McKinsey Matrix: The Ultimate Guide - SM Insight
GE McKinsey Matrix
Last updated: November 11, 2021 by Ovidijus Jurevicius
Definition
GE-McKinsey nine-box matrix is a strategy tool that offers a systematic approach

for the multi business corporation to prioritize its investments among its business
units.[1]
GE-McKinsey is a framework that evaluates business portfolio, provides further

strategic implications and helps to prioritize the investment needed for each business
unit (BU).[2]
https://strategicmanagementinsight.com/tools/ge-mckinsey-matrix/ 1/40
Understanding the tool
In the business world, much like anywhere else, the problem of resource scarcity is
affecting the decisions the companies make. With limited resources, but many
opportunities of using them, the businesses need to choose how to use their cash
best. The fight for investments takes place in every level of the company: between
teams, functional departments, divisions or business units. The question of where
and how much to invest is an ever going headache for those who allocate the
resources.
How does this affect the diversified businesses? Multi business companies manage
complex business portfolios, often, with as much as 50, 60 or 100 products and
services. The products or business units differ in what they do, how well they perform
or in their future prospects. This makes it very hard to make a decision in which
products the company should invest. At least, it was hard until the BCG matrix and its
improved version GE-McKinsey matrix came to help. These tools solved the problem
by comparing the business units and assigning them to the groups that are worth
investing in or the groups that should be harvested or divested.
In 1970s, General Electric was managing a huge and complex portfolio of unrelated
products and was unsatisfied about the returns from its investments in the products.
At the time, companies usually relied on projections of future cash flows, future
market growth or some other future projections to make investment decisions, which
was an unreliable method to allocate the resources. Therefore, GE consulted the
McKinsey & Company and as a result the nine-box framework was designed. The
nine-box matrix plots the BUs on its 9 cells that indicate whether the company
should invest in a product, harvest/divest it or do a further research on the product
and invest in it if there’re still some resources left. The BUs are evaluated on two axes:
industry attractiveness and a competitive strength of a unit.
Industry Attractiveness
Industry attractiveness indicates how hard or easy it will be for a company to

compete in the market and earn profits. The more profitable the industry is the more
attractive it becomes. When evaluating the industry attractiveness, analysts should
look how an industry will change in the long run rather than in the near future,
because the investments needed for the product usually require long lasting
commitment.
Industry attractiveness consists of many factors that collectively determine the

competition level in it. There’s no definite list of which factors should be included to
determine industry attractiveness, but the following are the most common: [1]
Long run growth rate

Industry size
Industry profitability: entry barriers, exit barriers, supplier power, buyer power,
threat of substitutes and available complements (use Porter’s Five Forces
analysis to determine this)
Industry structure (use Structure-Conduct-Performance framework to
determine this)
Product life cycle changes
Changes in demand
Trend of prices
Macro environment factors (use PEST or PESTEL for this)
Seasonality
Availability of labor
Market segmentation
Competitive strength of a business unit or a product
Along the X axis, the matrix measures how strong, in terms of competition, a
particular business unit is against its rivals. In other words, managers try to determine
whether a business unit has a sustainable competitive advantage (or at least
temporary competitive advantage) or not. If the company has a sustainable
competitive advantage, the next question is: “For how long it will be sustained?”
The following factors determine the competitive strength of a business unit:
Total market share

Market share growth compared to rivals
Brand strength (use brand value for this)
Profitability of the company
Customer loyalty
VRIO resources or capabilities (use VRIO framework to determine this)
Your business unit strength in meeting industry’s critical success factors (use
Competitive Profile Matrix to determine this)
Strength of a value chain (use Value Chain Analysis and Benchmarking to
determine this)
Level of product differentiation
Production flexibility
Advantages
Helps to prioritize the limited resources in order to achieve the best returns.
Managers become more aware of how their products or business units
perform.
It’s more sophisticated business portfolio framework than the BCG matrix.
Identifies the strategic steps the company needs to make to improve the
performance of its business portfolio.
Disadvantages
Requires a consultant or a highly experienced person to determine industry’s

attractiveness and business unit strength as accurately as possible.
It is costly to conduct.
It doesn’t take into account the synergies that could exist between two or
more business units.
Difference between GE McKinsey and BCG matrices
GE McKinsey matrix is a very similar portfolio evaluation framework to BCG matrix.

Both matrices are used to analyze company’s product or business unit portfolio and
facilitate the investment decisions.
The main differences:
Visual difference. BCG is only a four cell matrix, while GE McKinsey is a nine
cell matrix. Nine cells provide better visual portrait of where business units
stand in the matrix. It also separates the invest/grow cells from harvest/divest
cells that are much closer to each other in the BCG matrix and may confuse
others of what investment decisions to make.
Comprehensiveness. The reason why the GE McKinsey framework was

developed is that BCG portfolio tool wasn’t sophisticated enough for the guys
from General Electric. In BCG matrix, competitive strength of a business unit is
equal to relative market share, which assumes that the larger the market share
a business has the better it is positioned to compete in the market. This is
true, but it’s too simplistic to assume that it’s the only factor affecting the
competition in the market. The same is with industry attractiveness that is

measured only as the market growth rate in BCG. It comes to no surprise that
GE with its complex business portfolio needed something more
comprehensive than that.
Using the tool
There are no established processes or models that managers could use when
performing the analysis. Therefore, we designed the following steps to facilitate the
process:
Step 1. Determine industry attractiveness of each business unit
Make a list of factors. The first thing you’ll need to do is to identify, which
factors to include when measuring industry attractiveness. We’ve provided the
list of the most common factors, but you should include the factors that are
the most appropriate to your industries.
Assign weights. Weights indicate how important a factor is to industry’s
attractiveness. A number from 0.01 (not important) to 1.0 (very important)
should be assigned to each factor. The sum of all weights should equal to 1.0.
Rate the factors. The next thing you need to do is to rate each factor for each
of your product or business unit. Choose the values between ‘1-5’ or ‘1-10’,
where ‘1’ indicates the low industry attractiveness and ‘5’ or ‘10’ high industry
attractiveness.
Calculate the total scores. Total score is the sum of all weighted scores for
each business unit. Weighted scores are calculated by multiplying weights and
ratings. Total scores allow comparing industry attractiveness for each business
unit.
Industry Attractiveness (1/2)

Business Unit 1 Business Unit 2
Weighted Weighted
Factor Weight Rating Rating
Score Score
Industry growth 0.25 3 0.75 4 1

rate
Industry size 0.22 3 0.66 3 0.66
Industry 0.18 5 0.90 1 0.18

profitability
Industry structure 0.17 4 0.68 4 0.68
Trend of prices 0.09 3 0.27 3 0.27
Market 0.09 1 0.09 3 0.27

segmentation
Total score 1.00 – 3.35 – 3.06
Industry Attractiveness (2/2)
Weighted Weighted
Score Score
Total score 1.00 – 2.07 – 3.72
Weighted Weighted
Score Score
Industry growth 0.25 3 0.75 2 0.50

rate
Industry size 0.22 2 0.44 5 1.10
Industry 0.18 1 0.18 5 0.90

profitability
Industry structure 0.17 2 0.34 4 0.68
Trend of prices 0.09 2 0.18 3 0.27
Market 0.09 2 0.18 3 0.27

segmentation
Total score 1.00 – 2.07 – 3.72
This is a tough task and one that usually requires involving a consultant who is an
expert of the industries in question. The consultant will help you to determine the
weights and to rate them properly so the analysis is as accurate as possible.
Step 2. Determine the competitive strength of each business unit
‘Step 2’ is the same as ‘Step 1’ only this time, instead of industry attractiveness, the
competitive strength of a business unit is evaluated.
Make a list of factors. Choose the competitive strength factors from our list or
add your own factors.
Assign weights. Weights indicate how important a factor is in achieving
sustainable competitive advantage. A number from 0.01 (not important) to 1.0
(very important) should be assigned to each factor. The sum of all weights
should equal to 1.0.
Rate the factors. Rate each factor for each of your product or business unit.
Choose the values between ‘1-5’ or ‘1-10’, where ‘1’ indicates the weak
strength and ‘5’ or ‘10’ powerful strength.
Calculate the total scores. See ‘Step 1’.
Competitive Strength (1/2)
Weighted Weighted
Score Score
Market share 0.22 2 0.44 2 0.44
Relative growth 0.18 3 0.48 2 0.38

rate
Company’s 0.14 3 0.42 1 0.14

profitability
Brand value 0.10 1 0.10 2 0.20
VRIO resources 0.20 1 0.20 4 0.80
CPM Score 0.16 2 0.32 5 0.80
Total score 1.00 – 1.96 – 2.74

Competitive Strength (2/2)
Weighted Weighted
Score Score
Market share 0.22 4 0.88 4 0.88
Relative growth 0.18 4 0.64 2 0.36

rate
Company’s 0.14 3 0.42 3 0.42

profitability
Brand value 0.10 3 0.30 3 0.30
VRIO resources 0.20 4 0.80 4 0.80
CPM Score 0.16 5 0.80 5 0.80
Total score 1.00 – 3.92 – 3.56
Step 3. Plot the business units on a matrix
With all the evaluations and scores in place, we can plot the business units on the
matrix. Each business unit is represented as a circle. The size of the circle should
correspond to the proportion of the business revenue generated by that business
unit. For example, ‘Business unit 1’ generates 20% revenue and ‘Business unit 2’
generates 40% revenue for the company. The size of a circle for ‘Business unit 1’ will
be half the size of a circle for ‘Business unit 2’.
Step 4. Analyze the information
There are different investment implications you should follow, depending on which
boxes your business units have been plotted. There are 3 groups of boxes:
investment/grow, selectivity/earnings and harvest/divest boxes. Each group of boxes
indicates what you should do with your investments.
Investment implications
Box Invest/Grow Selectivity/Earnings Harvest/Divest
Definitely Invest if there’s money left Invest just enough to

Invest
invest and the situation of business keep the business unit
or not?
unit could be improved operating or divest
Invest/Grow box. Companies should invest into the business units that fall into
these boxes as they promise the highest returns in the future. These business units
will require a lot of cash because they’ll be operating in growing industries and will
have to maintain or grow their market share. It is essential to provide as much
resources as possible for BUs so there would be no constraints for them to grow. The
investments should be provided for R&D, advertising, acquisitions and to increase
the production capacity to meet the demand in the future.
Selectivity/Earnings box. You should invest into these BUs only if you have the
money left over the investments in invest/grow business units group and if you
believe that BUs will generate cash in the future. These business units are often
considered last as there’s a lot of uncertainty with them. The general rule should be
to invest in business units which operate in huge markets and there are not many
dominant players in the market, so the investments would help to easily win larger
market share.
Harvest/Divest box. The business units that are operating in unattractive industries,
don’t have sustainable competitive advantages or are incapable of achieving it and
are performing relatively poorly fall into harvest/divest boxes. What should
companies do with these business units?
First, if the business unit generates surplus cash, companies should treat them the
same as the business units that fall into ‘cash cows’ box in the BCG matrix. This
means that the companies should invest into these business units just enough to
keep them operating and collect all the cash generated by it. In other words, it’s
worth to invest into such business as long as investments into it doesn’t exceed the
cash generated from it.
Second, the business units that only make losses should be divested. If that’s
impossible and there’s no way to turn the losses into profits, the company should
liquidate the business unit.
Step 5. Identify the future direction of each business unit

The GE McKinsey matrix only provides the current picture of industry attractiveness
and the competitive strength of a business unit and doesn’t consider how they may
change in the future. Further analysis may reveal that investments into some of the
business units can considerably improve their competitive positions or that the
industry may experience major growth in the future. This affects the decisions we
make about our investments into one or another business unit.
For example, our previous evaluations show that the ‘Business Unit 1’ belongs to
invest/grow box, but further analysis of an industry reveals that it’s going to shrink
substantially in the near future. Therefore, in the near future, the business unit will be
in harvest/divest group rather than invest/grow box. Would you still invest as much
in ‘Business Unit 1’ as you would have invested initially? The answer is no and the
matrix should take that into consideration.
How to do that? Well, the company should consult with the industry analysts to
determine whether the industry attractiveness will grow, stay the same or decrease in
the future. You should also discuss with your managers whether your business unit
competitive strength will likely increase or decrease in the near future. When all the
information is collected you should include it to your existing matrix, by adding the
arrows to the circles. The arrows should point to the future position of a business
unit.
The following table shows how industry attractiveness and business unit competitive
strength will change in 2 years.
Business Business Business Business

Unit 1 Unit 2 Unit 3 Unit 4
Decrease Stay the Stay the Increase

Industry attractiveness
same same
Business unit Decrease Increase Increase Decrease

competitive strength
Step 6. Prioritize your investments
The last step is to decide where and how to invest the company’s money. While the
matrix makes it easier by evaluating the business units and identifying the best ones
to invest in, it still doesn’t answer some very important questions:
Is it really worth investing into some business units?
How much exactly to invest in?

Where to invest into business units (more to R&D, marketing, value chain?) to
improve their performance?
Doing the GE McKinsey matrix and answering all the questions takes time, effort and
money, but it’s still one of the most important product portfolio management tools
that significantly facilitate investment decisions.
Sources
1. McKinsey & Company (2008). Enduring Ideas: The GE–McKinsey nine-box

matrix.
2. David, F.R. (2009). Strategic Management: Concepts and Cases. 12th ed. FT
Prentice Hall
3. Wiki (2008). BCG Matrix & GE/McKinsey Matrix.
Related Articles:
McKinsey 7S Model
Boston Consulting Group (BCG) Growth-Share Matrix
Competitive Profile Matrix (CPM)
Strategic Tools and Management
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11/25/23, 1:05 AM GE McKinsey Matrix: The Ultimate Guide - SM Insight

GE-McKinsey nine-box matrix is a strategy tool that offers a systematic approach

GE-McKinsey is a framework that evaluates business portfolio, provides further

Understanding the tool

Industry attractiveness indicates how hard or easy it will be for a company to

Industry attractiveness consists of many factors that collectively determine the

Long run growth rate

Competitive strength of a business unit or a product

The following factors determine the competitive strength of a business unit:

Total market share

Requires a consultant or a highly experienced person to determine industry’s

Difference between GE McKinsey and BCG matrices

GE McKinsey matrix is a very similar portfolio evaluation framework to BCG matrix.

The main differences:

others of what investment decisions to make.

Comprehensiveness. The reason why the GE McKinsey framework was

competition in the market. The same is with industry attractiveness that is

Using the tool

Step 1. Determine industry attractiveness of each business unit

Industry Attractiveness (1/2)

Business Unit 1 Business Unit 2

Industry growth 0.25 3 0.75 4 1

Industry size 0.22 3 0.66 3 0.66

Industry 0.18 5 0.90 1 0.18

Industry structure 0.17 4 0.68 4 0.68

Trend of prices 0.09 3 0.27 3 0.27

Market 0.09 1 0.09 3 0.27

Total score 1.00 – 3.35 – 3.06

Industry Attractiveness (2/2)

Business Unit 3 Business Unit 4

Total score 1.00 – 2.07 – 3.72

Business Unit 3 Business Unit 4

Industry growth 0.25 3 0.75 2 0.50

Industry size 0.22 2 0.44 5 1.10

Industry 0.18 1 0.18 5 0.90

Industry structure 0.17 2 0.34 4 0.68

Trend of prices 0.09 2 0.18 3 0.27

Market 0.09 2 0.18 3 0.27

Total score 1.00 – 2.07 – 3.72

Step 2. Determine the competitive strength of each business unit

Competitive Strength (1/2)

Business Unit 1 Business Unit 2

Market share 0.22 2 0.44 2 0.44

Relative growth 0.18 3 0.48 2 0.38

Company’s 0.14 3 0.42 1 0.14

Brand value 0.10 1 0.10 2 0.20

VRIO resources 0.20 1 0.20 4 0.80

CPM Score 0.16 2 0.32 5 0.80

Total score 1.00 – 1.96 – 2.74

Competitive Strength (2/2)

Business Unit 3 Business Unit 4

Market share 0.22 4 0.88 4 0.88

Relative growth 0.18 4 0.64 2 0.36

Company’s 0.14 3 0.42 3 0.42

Brand value 0.10 3 0.30 3 0.30

VRIO resources 0.20 4 0.80 4 0.80

CPM Score 0.16 5 0.80 5 0.80

Total score 1.00 – 3.92 – 3.56

Step 3. Plot the business units on a matrix