What is the GE-McKinsey Matrix?
The GE-McKinsey Matrix is a tool that helps companies decide which of its Products, Services or Business Units are worth investing into.
It focuses on 2 variables:
- Industrial Attractiveness.
- How attractive is the economic sector in which a certain Product, Service or Business Unit is located.
- Competitive Strength.
- How strong is the company in that particular sector.
These 2 variables are both quantified into three categories:
The result is a 3 x 3 Matrix with 9 scenarios but 3 main approaches:
- The Invest / Grow scenario.
- The Selectivity / Earnings scenario.
- The Harvest / Divest scenario.
Classic GE-McKinsey Matrix representation.
With these scenarios, companies can make better decisions about the future of their different Business units.
Difference between the GE-McKinsey and BCG Matrices
This Matrix may seem familiar: Isn’t it almost the same as the BCG matrix?
- Not exactly.
The GE-McKinsey matrix indicates in which Product, Service or Business Unit of your Portfolio it is worth investing.
- Its purpose is to manage the economic resources of the company.
On the other hand, the BCG matrix categorizes products based on their growth potential.
- It is a more “passive” approach: what you should expect from a product.
* We have a whole Page dedicated to the BCG matrix with plenty of useful examples. See the link below.
Now you may be wondering: “Ok, but… how can we assess the Industry Attractiveness or the Competitive Strength?”
Let’s see this:
How to assess Industry Attractiveness
This variable is not easy to evaluate.
Some Industrial sectors can be very attractive today and horrible in 2 years.
However, in general terms, you can assess how attractive an Industrial sector is by analyzing:
- Its Growth.
- If it is growing at higher or lower rates than the general economy.
- Number of competitors.
- The more saturated a market is, the worse.
- Entry barriers.
- The higher, the better, as long as you have access to it.
- Its average Profitability.
- How profitable it is.
- Are there substitute products that jeopardize this profitability?
Developing a Porter 5 Forces would be highly recommended.
- All these factors (except Growth) are studied in a Porter 5 Forces analysis.
- It would give more strength to the overall analysis.
* We have a whole Page dedicated to the “Porter 5 Forces” analysis. See the link below:
How to assess Competitive Strength
This Variable is easier to assess.
In the end… it is easier to estimate an internal variable rather than an external one.
You can use:
- Market share.
- Which is your Market share.
- Your average profitability.
- You can compare it with the market average.
- The size of your Product Mix.
- How deep you have penetrated the market.
- The strength of your Brand.
- How an average customer perceives your Brand.
You could develop a VRIO analysis.
- If you don’t know what this is: it is a useful Tool that helps evaluate Competitive Advantages with a 4-factor framework.
- It could be very useful here.
We have a whole Page dedicated to the VRIO analysis:
Strategies for the different scenarios of the GE-McKinsey matrix
Now that you know what this Tool is useful for, it is time to analyze the different strategies you should develop in each scenario.
Invest / Grow scenario
As its name indicates, if you have:
- A product placed in a very attractive Market.
- High Competitive Strengths.
You should Invest as much as possible in this Product line (or Business activity).
Selectivity / Earnings scenario
If you have:
- A product placed in a tempered market.
- Not growing, not declining, for example.
- On-average Competitive strengths.
- Not more, not less than your average competitor.
You should worry about keeping your Earnings and/or selecting them properly.
Harvest / Divest scenario
If you have:
- A product placed in a Low attractive market.
- For example, a declining obsolete market.
- Your Competitive Strengths are reduced.
You should “take your money and run away”.
It is very important to “run away” on time. Otherwise, you can lose everything you have.
We know that, these scenarios, are relatively obvious.
What about those other 6 scenarios?
What about Medium scenarios?
Intermediate positions are always the most difficult to assess.
If a company is earning billions of dollars with a product, if it has 90% of the Market share… it is very easy to say: “You are doing it very well. Keep it up”.
- What about those products that were successful in the past but their Market is now falling?
- What about companies with “terrible” products in very attractive markets?
For these intermediate Scenarios, we propose you these reflections:
Low Competitive Strength – Medium Industry Attractiveness:
- Is it worth improving your Strength?
- Is the Industry Attractiveness increasing or is it a declining Market?
Low Competitive Strength – High Industry Attractiveness:
- What would be more cost-effective: Improving internally or Partner with a third party?
- Wich are your opportunity costs?
Medium Competitive Strength – Low Industry Attractiveness:
- How much are you obtaining from this Business activity?
- Do you have a contingency plan for when the market falls?
Medium Competitive Strength – High Industry Attractiveness:
- Is it worth improving your Market position? Or is it better to keep being a “second player”?
- Should you worry about loosing your position?
High Competitive Strength – Low Industry Attractiveness:
- How much is costing you this Competitive Strength?
- Which are your Opportunity costs?
- How long will this situation last?
High Competitive Strength – Medium Industry Attractiveness:
- How much profitability do you get? Is it worth it?
- Is the Market declining, increasing, or is it stable?
As everything is better understood with examples, let’s see some:
GE-McKinsey Matrix examples
We’ll now share 3 real examples that perfectly explain how the GE-McKinsey matrix should be used:
Ford electric car - Invest / Grow scenario
Few years ago, analysts wondered why Ford wasn’t invest in the electric car.
It is one of the most important automakers in the world.
- What was going on?
There were 2 main reason that explained why Ford was not investing in electric cars:
Ford is very Strong in the “classic Automobile” sector, but not in the electric one.
Manufacturing and designing an electric car is very different from the traditional one:
- The Engine.
- The Powertrain.
The components are absolutely different.
- And Ford was not Strong there.
The market was not really booming.
- Demand was increasing, but people seemed to prefer traditional cars.
The electric car Sector didn’t seem really attractive at all.
What did Ford do?
They researched and prepared.
Once the market became more Attractive, and they got Stronger in the electric-vehicle Sector, they invested in it.
According to Google Trends, the term “Electric vehicle” increased in popularity as of 2018.
- And Ford announced that they had plans to invest in electric vehicles precisely in 2018.
DVD Video - Selectivity / Earnings scenario
The DVD-Video format is the perfect example of an “Earnings” scenario.
It’s been years since “Blue-Ray” was released.
- Now, we have HD, 4K, 8K…
But, has the Blue-Ray substituted the DVD-Video format?
- Not at all.
Today, people use mainly streaming platforms for watching movies (Netflix, HBO,DFisney +, etc).
These streaming platforms, and not the HD Discs, have been the natural successor of DVDs.
- Hence, the “physical” disk Market is not a very attractive sector.
However, although there are many new alternatives on the market, people still prefer DVDs to Blue-Rays, or other new formats.
What should DVD-Video companies do?
- The Market is declining.
- There are new and better products that will replace your product sooner or later.
As mentioned before, this scenario is the perfect example of a “Maintaining Earnings” scenario.
Companies should continue to make money with DVDs… while it lasts
If you check Google Trends, the term “DVD” has not been surpassed by “Blue-Ray”.
- It has declined a lot, of course, but it has stabilized.
Microsoft Zune mp3 player - Divest / Harvest scenario
You may be so young that you have not “lived” the mp3 player war.
There was a time when every technology company had its own mp3 player.
But only when Apple became the “reference” with its iPod, was it when Microsoft launched its own mp3 player: the Zune.
- It was 2006.
And what happened 1 year later? Apple introduced its iPhone.
Mp3 players were doomed.
The new and emerging smartphone Market, made mp3 players absolutely unnecessary.
- People could simply use their phones.
What did Microsoft do?
They discontinued the Zune (its mp3 player) in 2008.
That was an intelligent decision since:
- They were not Strong in the mp3-player market.
- Moreover, had not succeeded with its product.
- The mp3-player Market was no longer Attractive.
You can check in Google Trends how the Microsoft mp3 player was “late”.
- People were already losing interest in mp3 players.
The GE-McKinsey Matrix is a tool that helps companies decide which of its Business activities are worth investing into.
- It uses 2 variables for doing so:
- Industrial Attractiveness.
- Competitive Strength.
The result is 9 potential scenarios with 3 main approaches:
- A Invest scenario.
- A Maintain scenario.
- A Divest scenario.
Remember that it is very easy to highlight a Success, but retiring on time is always much more important.
- And the GE-McKinsey matrix can help you with this.