GE Matrix

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. 

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is an important distinction, since the BCG Matrix has been criticized a lot on its use of only one single (and perhaps outdated) variable for each axis.

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 the Porter's 5 Forces Analysis or Structure-Conduct-Performance model)

·         Industry life cycle (use Product Life Cycle)

·         Macro environment (use the PEST/PESTEL Analysis )  

·         Market segmentation

 

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)

 

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.

General Electric (or McKinsey) matrix uses market attractiveness as not merely the growth rate of sales of the product, but as a compound variable dependent on different factors influencing the future profitability of the business sector. These different factors are either subjectively judged or objectively computed on the basis of certain weightages, to arrive at the Industry Attractiveness Index. The Index is thus based on a thorough environmental assessment influencing the sector profitabilities.

Factors that determine Industry Attractiveness		Typical weightage
SL NO	PARTICULARS
1)	Size of market	10%
2)	Rate of growth of sales and cyclic nature of business	15%
3)	Nature of competition including vulnerability to    foreign competition	15%
4)	Susceptibility to technological obsolescence and new products	10%
5)	Entry conditions and social factors	10%
6)	Profitability	40%
Total		100%

       Against each of these factors, the concerned business is rated on a scale of 1 to 10, and then the weighted score is determined from a maximum of 10. This gives the Industry Attractiveness Index for the business under consideration.

Factors determining Competitive Position of the Company as with Industry attractiveness, the Competitive Position of the Company is analysed not only in terms of company’s market share, but also in terms of other factors often appearing in the Strength and Weakness analysis of the company. Thus, product quality, technological and managerial excellence, industrial relations etc. are also incorporated besides market share and plant capacity.

The Industry Attractiveness Index is then plotted along the vertical axis and divided into low, medium and high sectors. Correspondingly, the Competitive Position is plotted along the Horizontal axis divided into Strong, Average and Weak segments. For each business in the portfolio, a circle denoting the size of the industry is shown in the 3 x 3 matrix grid while shaded portion corresponds to the company’s market share as shown in Figure :

                                

GE rates each of its businesses every year on such a framework. If Industry’s Attractiveness as well as GE’s Competitive Position is low, a no-growth red stoplight strategy is adopted. Thus, GE expects to generate earnings but does not plan for any additional investments in this business. If for a business the Industry Attractiveness is medium and GE’s Competitive Position is high, a growth green stoplight strategy is evolved for further investment. But if a business has high Industry Attractiveness Index and low GE’s Competitive Position, this is branded as yellow stoplight business that may be moved either to growth or no growth category. Such grids are developed at different managerial levels. The final strategic decisions are made by GE’s Corporate Policy Committee comprising the Chairman, the Vice-Chairman and Vice-Presidents of Operational areas, including finance.

Comparison of BCG Matrix and GE Matrix

 The major differences between the BCG Matrix and GE matrix are tabulated below:                                                                 

BASIS FOR COMPARISON	BCG MATRIX	GE MATRIX
Meaning	BCG Martrix, is a growth share model, representing growth of business and the market share enjoyed by the firm.	GE Matrix implies multifactor portfolio matrix, that assist firm in making strategic choices for product lines based on their position in the grid.
Number of cells	Four	Nine
Factors	Market share and Market growth	Industry attractiveness and Business strengths
Objective	To help companies deploy their resources among various business units.	To prioritize investment among various business units.
Measures used	Single measure is used.	Multiple measures are used.
Classification	Classified into two degrees	Classified

Limitations of GE/Mckinsey Matrix:

While the GE approach overcomes some of the problems for the BCG model, both have further limitations:

 

(a) It is complicated and cumbersome.

(b) Aggregation of the indicators is difficult.

(c) Core competencies are not represented.

(d) Interactions between SBUs are not considered.

(e) It does not depict the position of new products or business units in developing industries.

(f) It does not provide specific strategy to use or how to implement that strategy.

(g) Trying to fit all business units in nine cells may prove difficult for some businesses.

(h) The process of selecting factors, assigning weights, rating and computing values, in reality is based on subjective judgments.

This model is an improvement over the BCG Matrix in the sense that while BCG Matrix bases industry attractiveness on a single variable (industry growth rate) in this model industry attractiveness is measured by a number of factors like size of the market growth rate industry profitability, competitive intensity, technological requirements, etc.

Similarly, while the BCG matrix bases business strength entirely on relative market share, in this model, the business strength is rated considering a number of factors such as market share, market share growth rate, profitability, distribution efficiency, brand image, etc. Also, this 9-cell model is a refinement of the 4-cell BCG Matrix (only high and low) which is too simplistic and in which the link between market share and profitability is not necessarily strong. Low share business can be profitable and vice versa.

Those who read this, also read:

1. Organizational Capability Profile