Strategic Analysis with GE-McKinsey Matrix

 

By Omodiaogbe Samuel

Last Updated: November 26, 2023

Introduction

The GE-McKinsey nine-cell matrix is a strategy framework that offers a systematic approach for multi-business corporations to prioritize their investments among the business units. The Matrix is used to assess the attractiveness of individual Strategic Business Unit (SBU) on the basis of two coordinates: the X-axis characterizes the competitive strength of the organization in the industry, and the Y-axis is the attractiveness of the industry it competes in. The general strategic principle promoted by the GE-McKinsey model is to increase the number of resources allocated to the development and maintenance of business in attractive industries, if the organization has certain advantages in the market. Conversely, to reduce the resources allocated to the SBU, if the position of the business in such market turns out to be weak. For diversified businesses, the fight for resource allocation is intense, because multiple business units need to be managed. Also, the matrix is not only used to analyze SBUs, but could also be used to prioritize individual products or product types of the company. As a result, the matrix helps companies to make these decisions in a more systematic and informed manner.

 

The two coordinates: Industry attractiveness and Competitive strength of the SBU

Industry Attractiveness

The vertical axis is the industry attractiveness. This dimension helps determine the attractiveness of the market by analyzing the benefits a company is likely to get by entering and competing within the market. 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: market size, rate of growth, profit potential, competitors, structure of the industry, product life cycle, demand variability, pricing trends, macro environmental factors, market segmentation, etc. It’s important to note that 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

 

Competitive Strength of the SBU

On the horizontal axis we find the Competitive Strength of a business unit which measure how strong, in terms of competitiveness, a particular business unit is against its rivals. When evaluating a business unit along this dimension, you need to consider how it fares relative to its competitors within the industry. Some factors that can help a business assess its competitive advantage in an industry are: market share it commands, market share growth potential, brand awareness, profit margins of the business, customer loyalty and satisfaction, uniqueness of its products or services, level of differentiation, firm resources, assets and competencies, the strength of the business value chain, cash flow, etc. Apart from a company’s competitive position right now, it is also very important to look at how sustainable its position will be in the long run. So, while Industry Attractiveness is about the level of competition in the entire industry, Competitive Strength is about the ability to compete of one single company within that specific industry. Therefore, if the company has a sustainable competitive advantage, the next question is: “For how long it will be sustained?”

Step-By-Step Approach to Developing the Matrix

Step 1: Determine Industry Attractiveness of Different Business Units

Industry attractiveness can be determined by the following steps:

  • Compile a list of factors: The first step is to identify and compile a list of relevant factors which help determine industry attractiveness. There are some common factors across industries, and so you should include those factors that are most appropriate for your business.
  • Assign Weights: Once the factors have been listed down, it is necessary to give them weights. These weights determine the importance of the factor to the determination of industry attractiveness. The weight could be from 0.01 (not important) to 1.0 (very important). The total of all the weights assigned should be equal to one. All chosen factors should be assigned a weight.
  • Rate the Factors: Once weighted, the factors are now rated for each product or business unit. Values can be between 1-5. 1 is an indicator of low industry attractiveness while the higher value signifies higher industry attractiveness.
  • Calculate Final Scores – With the weights and ratings in hand, a total score can then be determined. This is achieved by multiplying the weight of each factor by the rating of each factor. Add them up to achieve one figure for each business unit. The total score can then be used to compare industry attractiveness.

Step 2: Determine the Competitive Strength of the SBU

The next step is to look at the competitive strength for each business in much the same manner as step 1. Competitive strength is based of internal factors of the corporation

  • Compile a list of factors: As before, you can choose from a list of common determinants of competitive strength but should try to make them as relevant to your business as possible.
  • Assign weights:  The chosen factors are then assigned weigh according to their importance in helping the company achieve sustainable competitive advantage. As before, the weights can be between 0.01 to 1.0 with the total equal to 1.
  • Rate Factors: Once the weights have been assigned, the rating for each factor needs to be determined for each product or business unit. These ratings can be between 1-5. 1 is the weakest while 5 will be strongest ratings.
  • Calculate Total Score – Multiple the weight of each factor with the rating for each of the business units and add up to achieve a total score.

Step 3: Plot the business units on a matrix

With all the scores needed in hand, the business units can now be plotted in the matrix. Each unit is denoted by a circle with the size of the circle representing the same proportion as the business revenue that the unit brings in for the company.

 

Step 4: Determine the strategy option for the units

Based on the position of each business unit in the matrix, there are three actions a company can take for each unit. These actions are to invest/grow, selectivity/earnings and harvest/divest. Each unit falls within a certain set of boxes and this position determines the action to be taken.

  • Invest/Grow – These are the units that will gain the most investment as they promise the greatest future returns. Because of their growth potential, these units will also require large amounts of investment to allow them to grow or maintain their share in a growing industry.
  • Selectivity/Earnings. These are uncertain businesses and it cannot be stated with any clarity if they will continue as is, grow in the future or decline. If the unit is important to the bigger market, then it may be worthwhile to invest further in them.
  • Harvest/Divest – These are units in an unattractive industry with no sustainable competitive advantage. They are not able to achieve any advantage and perform under expectations.

Step 5. Forecast the future of the units

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. But with the help of an industry analyst, you may be able to determine the potential direction the future will take.

 

Step 6: Prioritize Investment

The last step is to decide where and how to invest your 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 such as if the investment is worth it, how much to invest in, and where to invest? To overcome those challenges, you may need to provide answers to these questions: Are some units really worth the investment? How much should be invested in each unit? Which area within a unit should get more investment than others?

Case Study

Okoroh Energy Services

Okoroh Energy Services is an energy services company that provide solutions to oil & gas, power plants, petrochemical, and other construction companies in Nigeria. The company has five Strategic Business Units (SBUs) comprising of maintenance, fabrication, electrical & Instrumentation (E&I), drilling, and installation services. The company performance is not in a good shape, and therefore a critical evaluation is required. As a result, the company has decided to conduct strategic analysis on each unit to determine their performance and contribution to the corporation. The outcome of the analysis would inform the corporation resource allocation and strategic direction.  Without understanding the performance and contribution of each of the divisions, it would be very difficult for the company to formulate the corporate strategic planning for the entire company. Therefore, the analysis would help the company to determine the strategy to pursue on each of the SBU

For Okoroh Energy Service to understand the type of strategy to pursue or effectively allocate resources to each of the strategic business units, it has decided to use the GE-McKinsey matrix to conduct the analysis and formulate the corporate strategy. The GE-McKinsey matrix is used for assessing the competitiveness of individual Strategic Business Units (SBU) on the basis of two coordinates: The Industry Attractiveness on the vertical axis and Competitive Strength on the horizontal axis. Together, the industry attractiveness and the competitive strength enables an organization to set its strategy which could range from grow/invest, selectivity/earnings and harvest/divest. For diversified company like Okoroh Energy Services, determining the industry attractiveness and understanding the performance of the SBUs would help in resource allocation, and setting a clearer strategic direction. Essentially, the results from the GE-McKinsey analysis would help Okoroh Energy Services to improve on its corporate strategic planning, enhances decision-making, and to determine the resource allocation mechanism

Let’s now compute the Industry Attractiveness, Competitive Strength, and the Strategic Analysis of Okoroh Energy Services

.On the Industry Attractiveness, the factors listed are the external factors that influences the oil & gas industry in Nigeria. Irrespective of the players in the industry, these are the factors they have to contend with. The weight assigned is based on our research on the impact of the respective factors on the industry. The ranking on the other hand is measured by the importance of such factor on the industry attractiveness.  The same weight applies to all the SBUs, while the ranking is specific to the respective SBUs. The weighted score is simply the multiplication of the weight by the ranking. While the total weighted score is the summation of the weighted score. On the Maintenance unit, the total weighted score is 2.38, Fabrication is 2.94, E&I is 2.09, Drilling is 3.13, while Installation is 4.38. These factors would later be used to determine where each of the units falls on the 3X3 matrix of the GE-McKinsey matrix

The same procedure is used in computing the Competitive Strength. The major difference is on the factor. While the factors on the industry attractiveness are external to the company, the factors on the competitive strength are internal to the company. That means the company has influence on them, and can compute them with better accuracy. On the competitive strength, the Maintenance total weighted score is 1.36, Fabrication is 1.89, E&I is 2.27, Drilling is 3.18, while Installation is 4.36. Also, these figures will be required in computing the 3X3 matrix

 

To determine the nine cells of the GE-McKinsey matrix, the figures on the industry attractiveness will be used against that of competitive strength. For example, on the Maintenance, we had 1.86 on the industry attractiveness, while we had 1.38 on the competitive strength. The same applies to the other strategic business units. Therefore, to determine where each of the SBU falls on the 3X3 matrix, we labelled both sides high, medium, and low, ranging from 0-5. Because Installation was 4.38 & 4.36, it means it falls on the high-high region. On the other hand, Drilling is high-medium, E&I medium-medium, Maintenance is medium-low, and Fabrication is low-low

 

                                                          Strategies

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. These actions are to invest/grow, selectivity/earnings and harvest/divest.

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. And so, the business units that fall within this category attract investment by the corporation because they are in a position to bring high returns in the future. However, in order to be able to grow, the company needs resources to fund the growth. Therefore, investments in resources such as research and development, acquisitions, advertisement and brand expansion, as well as an expansion in production capacity are required. However, the most notable challenge for companies in these sections are resource constraints that could prevent them from growing bigger or maintaining their market leadership. For Okoroh Energy Services, the SBU that falls on the Invest/Grow strategy are Installation and Drilling. As a result, the company need to invest more on these units because of the higher expected return.

 Selectivity/Earnings strategy

This is also referred to as Hold strategy. Companies or business units in this section are a bit 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. So, if the business unit strength or attractiveness is average, then you hold the business as it is. It might be that the market is dropping in value, or that there is much high competition that prevents the business unit from growing. In both cases, the business unit might not give optimum returns even if resources are invested. Thus, in that situation, you wait and hold the business unit to see if the market environment would change or if the business unit gains importance in the market as compared to other players. Essentially, these business units are in a more ambiguous position and it is unclear whether they will grow in the future or become stagnant. Investments in them may happen after money has already been put into ‘grow’ units and if there is a strategic purpose for them.

 Deciding on whether to invest or not to invest largely depends on the outlook that is expected. Therefore, you should invest into these SBUs only if you have the money left over the investments in invest/grow business unit group, and if you believe that SBUs will generate cash in the future. For Okoroh Energy Services, the SBU that falls on this region is the E&1. Therefore, the company need to be cautious on further investment in the unit. Essentially, the number one focus should be the invest/grow. But if the company discover that investment on this unit would have a synergetic impact on the other units of the corporation, then such investment is worthwhile

Harvest/Divest strategy

These are business units that are operating in unattractive industries, they don’t have sustainable competitive advantages, and are performing relatively poorly. These units have no promising outlooks anymore and therefore may not require further investments. As a result, you are left with two strategic options to consider: 1: You divest the business units by selling it to an interested buyer―also known as a carve-out. The cash that results from selling the business unit can consequently be used to further fund the units under the Invest/Grow section. 2: You can choose a harvest strategy―meaning the business unit gets just enough investments (or none at all) to keep the business running, while reaping the few fruits that may be left. Although, this is a very short-term perspective action that allows you to appropriate as much remaining cash as possible, but liquidation may be the eventual outcome of the business unit

Maintenance and Fabrication units of Okoroh Energy Services are on this region. Because of the low industry attractiveness and low competitive strength, it’s not wise for the company to continue to invest on these unit. However, further analysis needs to be conducted to determine the strategic actions that need to be taken on these units. Such actions could range from carve-out, liquidation, or keeping them, depending on their synergetic contribution to the whole.

 

                                                 Strategic Options

 

On each of the cells above, the strategic options are listed. Therefore, it’s left to the company to decide the right strategy that fits the company’s mission, values, and strategic direction. Several factors need to be put into consideration in determining the right strategy to pausue. In most cases, further strategic analysis should be conducted using other strategic management tools such as BCG matrix, SPACE matrix, Porter 5 Forces, VRIO, TWOS, I-E matrix, etc.

                                      Advantages and Disadvantages of the Matrix

 

Advantages:

The GE-McKinsey Matrix has the following advantages

  • The matrix helps in analyzing the key areas the business portfolio needs to be improved.
  • Helps to prioritize the limited resources in order to achieve the best returns.
  • It allows the business managers to monitor their business performance in the market.
  • The matrix helps in identifying the strategic steps the company needs to make to improve the performance of its business portfolio
  • It operates on a more complex portfolio framework compared to the BCG matrix
  • It helps in maximizing results with little effort.
  • The matrix helps managers to become more aware of how their products or business units are performing.

Disadvantages

As with any tool, there are some limitations to keep in mind. For the GE-McKinney matrix, these limitations include:

 

  • Requires a consultant or a highly experienced person to determine industry’s attractiveness and business unit strength as accurately as possible
  • The weight given to different factors can be subjective as there is no set of rules to determine it.
  • It doesn’t take into account the synergies that could exist between two or more business units.
  • The entire exercise can be costly to conduct for a company
  • Companies could be limited by resources even if the business unit falls on the Invest/Growth section. Thus, it might not be able to take action due to financial constraints

                                   Conclusion

Many businesses have multiple strategic business units (SBUs), all competing for resources. In that situation, it can be difficult for an organization to decide where to invest its limited resources. The GE-McKinsey Matrix provides a structured framework to help organizations understand where to make strategic investments. It works by plotting both industry attractiveness and market competitiveness for each SBU. The mapping is done not only for the current situation of the business, but also for where the business expects to be in the future. The information about current and future business attractiveness can then be used as an input to making investment decisions. For corporate strategist in portfolio management, this model serves as a great starting point to base their investment decisions. Although, it’s advised that they should combine the model with other strategic management tools for effective strategic decision-making.  As every framework, the GE-McKinsey Matrix has its pros and cons. Despite the limitations, the Matrix is still one of the best strategic management tools for corporate decision-making

 

Omodiaogbe Samuel, MSc. CMC, ChMC, FIMC

Omodiaogbe is a Strategic Management Consultant, and he the Principal Consultant/CEO at Vast Thinking Consults Ltd where he help organizations and business leaders to create superior value. Omodiaogbe holds BSc. and MSc. in Economics. Also, he is a Certified Management Consultant (CMC), a Chartered Management Consultant (ChMC), and a Fellow, Institute of Management Consultants, Nigeria. He is an Instructor on Coursera, where he teaches 25 courses in Strategic Management. Omodiaogbe is one of the world’s leading learners on Coursera and Edx with over 500 Certificates from top-ranked Universities, Business Schools, and Organizations.

Contact him:
Email; somodiaogbe@vastthinking.com.ng
Visit: www.vastthinking.com.ng

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