McKinsey GE Stoplight Matrix.
McKinsey GE Stoplight Matrix.
The GE-McKinsey Nine Field (or Box) Matrix framework offers a systematic approach to prioritize investments among products or business units.
GE McKinsey Matrix
General Electric Matrix was given by McKinsey in 1970 to manage a large and complex portfolio of strategic business units.
This model was developed when General Electric engaged McKinsey and Company to help companies take strategic decisions at the corporate level. The strategic planning tool helps the organization to prioritize its investment in different business units by considering three possible scenarios which include protect, harvest, and divest. It consists of the Nine-cell Matrix that considers the industry attractiveness as well as business strengths while proposing and guiding various business strategies. You also need to consider that it is one of the good alternatives to the BCG Matrix as the two factors i.e. industry attractiveness and business strengths considered in this Matrix consist of various multiple factors which help to make the best decisions.
Similar to BCG’s well-known growth share matrix, but more comprehensive, the GE McKinsey Matrix offers a “systematic approach for the multi-business corporation to prioritize its investments among its business units.”
GE McKinsey Matrix Strategies.
There are 3 main strategies in the GE McKinsey matrix which are growing, hold and harvest.
Grow – If the business unit is strong against a strong attractiveness, you grow the business. This means, that you are ready to invest a higher percentage of your resources in these businesses. These business units have high market attractiveness and high business unit strength. They are most likely to be successful if backed up with more resources. The quadrants marked in green are the places where you can grow your business.
Hold – 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 which the business unit will be hard put to catch up. In both cases, the business unit might not give optimum returns even if resources are invested. Thus, in this case, you wait and hold the business unit to see if the market environment changes or if the business unit gains importance in the market compared to other players.
Harvest – If the business unit or market has become unattractive then you either sell or liquidate the business or you can hold it for any residual value that it has. This strategy is used in the GE McKinsey matrix when the business unit strength is weak and the market has lost its attractiveness. The best measure, in this case, is to harvest the inefficient businesses and reinvest the money earned into business units that are in growth
Advantages and Disadvantages of The GE McKinsey Matrix
GE McKinsey Matrix 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.
GE McKinsey Matrix 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.
GE McKinsey Matrix Dimensions
Unlike the BCG Matrix The BCG Matrix has been criticized a lot on its use of only one single dimension for analysis., the GE-McKinsey Matrix uses multiple variables to determine the two dimensions:
Industry attractiveness, and
Competitive strength
Industry Attractiveness
This factor refers to the ease with which the business unit will be able to accrue profit in the industry. When evaluating the business along this dimension, consider the long term growth potential, industry size, industry profitability, entry and exit barriers, etc. Furthermore, evaluate the power of suppliers and buyers as well as any other environmental factors that could influence industry attractiveness.
In addition, consider your product or service, how they change over time, pricing and labor requirements. It is important to consider all these dimensions, focusing on the distant future. This is because investments require a long-term, rather than a short-term, commitment.
The vertical axis of this matrix – Industry Attractiveness – is divided into High, Medium, and Low. Industry attractiveness represents the profit potential of the industry for a business to enter and compete in that industry. The higher the profit potential, the more attractive is the industry. An industry’s profitability is affected by the current level of competition and future changes in the competitive landscape. When evaluating industry attractiveness, evaluate how an industry will change in the long run rather than in the short term.
Competitive Strength
When evaluating a business unit along this dimension, 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
The uniqueness of its products or services
If the business has a competitive edge, consider whether its competitiveness is sustainable in the long term or only temporary. Finally, if the business has a sustainable competitive advantage, determine the duration that it can leverage its position in the industry.
The horizontal of this matrix – Competitive Strength – is divided into High, Medium, and Low. This dimension measures the business’s competitiveness among its rivals. This dimension indicates the business’s ability to compete in that industry. A business’s strengths give it an advantage over its rivals.
These strengths are often referred to as unique selling points (USPs), firm-specific advantages (FSAs) or as sustainable competitive advantages.
In addition to a business’s competitive position today, it’s important to look at its sustained competitiveness in the long run.
Strategic implications
The three degrees (High, Medium, and Low) of Industry Attractiveness and Competitive Strength provide 9 different strategic postures for a business. The strategic actions to choose from are:
Invest / Grow strategy
Selectivity / Earnings strategy, and
Harvest/Divest strategy
Invest/Grow strategy
The best position for a business to be in is the Invest/Grow section. A business 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 massive growth potential.
However, to grow, a business needs resources, such as assets and capital. These investments are necessary to increase capacity, reach new customers through marketing or improve products through Research & Development. A business can also choose to grow externally via Mergers & Acquisitions (M&A), in addition to organic growth. Again, it will require investments to execute M&A activities.
The most notable challenges for a business in these sections are resource constraints that block it from growing bigger and becoming/maintaining market leadership.
Selectivity/Earnings Strategy
This strategy is also referred to as Hold strategy. A business in the selectivity/earnings section is a bit more tricky. The business is either in a low – moderate competitive position in an attractive industry or in an extremely high competitve position in a less attractive industry. Deciding whether to invest or not to invest largely depends on the business’s outlook. It could expect to, either improve its competitive position or shift to a more attractive industry.
The business should carefully decide its competitive move. As a business, you want to use most of your investments in the Invest/Grow section. Then, use the remaining investments in the selectivity / earnings section to improve your competitive position. You should closely monitor the progress and improvements and correct course as necessary.
Harvest/Divest strategy
This strategy is most appropriate for a business that:
has a low competitive position
is active in an unattractive industry, or
a combination of the two
These businesses do not have too many promising outlooks. The strategic responses to consider are:
Divest the business units by selling it to an interested buyer for a reasonable price. This also known as a carve-out, or
Choose a harvest strategy
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, the buyer can create value by combining activities i.e. leverage synergies. The business can use the cash it results from divestment in Invest/Grow section elsewhere in its portfolio.
Harvesting means that the business unit gets just enough investments to keep it operational. In other words, the business cashes whatever is left. This is a very short-term perspective that allows a business to subtract as much remaining cash as possible. However, such businesses are eventually liquidated and exit the industry.
Summary
While industry attractiveness is about competition level in an industry, a business's competitive strength is about its ability to sustainably compete in the future. 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. However, it is challenging to quantify such factors as brand equity and industry structure, and combine them into a single number that can be plotted on the nine-box matrix. Nevertheless, for corporate strategist in portfolio management, this model serves as a great starting point to base their investment decisions.
How to apply the GE McKinsey Matrix?
GE-McKinsey Nine-box Matrix can be used by considering the industry attractiveness and strengths of the product and business unit. The industry attractiveness can be determined by considering the industry size, profitability, environmental factors, pricing and labor requirements, etc. The industry attractiveness is plotted on the vertical axis which includes measures of industry attractiveness as high, medium, and low. The higher industry attractiveness represents higher profitability which then encourages the other firms to enter the industry.
After considering the industry attractiveness, the competitive strength of the product and business unit is evaluated by analyzing the market share, average profitability, strength of the brand, customer loyalty, etc. This segment is plotted on the horizontal axis of this Matrix which is also segmented into three categories i.e. high, medium, and low.
After evaluating industry attractiveness and competitive strength, each strategic business unit is placed in the matrix which then helps to determine the strategic possibilities for each SBUs. The diagonal line can also be drawn from corner to corner from low strength to high industry attractiveness. The organization can invest more in the SBUs above the diagonal line whereas the organization can divest from or provide lower funding to SBUs that are below the diagonal line. Thus, the organization can increase or decrease the investment on the basis of the position of each strategic business unit.
GE-McKinsey Matrix real example
Probing further, let us highlight the Apple GE-McKinsey Matrix for practical understanding. The different product lines of Apple include iTunes, iPod, iPad, iPhones, laptops, desktops, and iMac.
To prepare this Matrix, we first need to consider the industry attractiveness for different strategic business units. The industry attractiveness for smartphones and iPad is very high due to increasing demand for these products, lower bargaining power of the customers, higher profitability, product differentiation, etc. Different features such as long-lasting batteries, high-speed processors, large screens, etc. are also influencing the demand of tablets and smartphones. However, the industry attractiveness for iMac, iTunes, and iPod is generally medium as there is a lack of product differentiation in regard to these products and the number of competitors in the market for laptops, online music streaming apps, etc. is rising. The global laptop market is also growing only at the CAGR rate of 0.4% as increasing sales of smartphones are restraining the growth of the laptop market.
Now, let us consider the company strengths to position each strategic business unit and product in the GE McKinsey Matrix. Apple has achieved a leading position in the smartphone market due to higher product innovation and uniqueness. Apple iPhone 12 also has been recognized as the world’s bestselling 5G smartphone due to mmWave support features, premium product features, etc. The Apple iPad also dominates the global tablet market and has grabbed 37 % market share in the first quarter of 2021. The impressive sales boost of Apple iPad is the result of the remote working conditions and uniqueness of the product.
We all know that the demand for laptops is also rising in the current times but the presence of a large number of competitor firms has resulted in wider choices being available to the customers. iMAC enjoys medium competitive strength in the market as, despite recent developments and innovations, Mac market share accounts for only 8.5 % in the industry. However, Apple iTunes and iPods enjoy a strong competitive advantage in the market as iTunes and the iPod revolutionized the whole music industry, and around 72 million individuals subscribed to Apple Music by the end of June 2020.
On the basis of the above analysis, the GE McKinsey Matrix for Apple is prepared as follows-
Now, the organization can also engage in strategic planning considering the position of each line of the product to invest in the most profitable areas. The company should invest in IPad, iPhones, Apple iTunes, and iPods as all these products fall in the growth investment area. The higher growth potential of the organization also helps to ensure higher returns of the organization which also supports that Apple should invest in all these product areas. However, Apple needs to hold the iMac product line as the position of this business unit is ambiguous and the future growth of this product is unclear. The company also needs to increase sales of iMac by improving customer loyalty, increasing investment in advertisements, etc. Hence, the use of this strategic model can help the organization to consider the current position of its strategic business unit and plan future growth strategies.
🔥 Top three quotes from our Instagram page
Constantly think about how you could be doing things better. Keep questioning.
— Elon MuskRisk comes from not knowing what you're doing. — Warren Buffett
There are no tiny features when you’re doing things properly.
📺 Tech Snippets: iPhone 14’s new Dynamic Island
Dynamic Island is just the term Apple coined for its new pill-shaped cutout at the top where your selfie camera used to be.
If you take dynamic island at face value, it’s a “very insignificant change” in form & UI. IOS 16 Dynamic island is a new form of notification and area of interaction for its users. For instance, when using Apple Maps for navigation, you can tap on the Dynamic Island for an update on your navigation instructions. The Dynamic Island can also show things like album art for content in the Music app, controls for FaceTime, specific background activities, and more. “The Dynamic Island enables new ways to interact with iPhone, featuring a design that blends the line between hardware and software, adapting in real-time to show important alerts, notifications, and activities.” This concept of blending physical form & digital form is exactly why Apple has placed such an emphasis on Dynamic Island throughout the reveal, and why it's gonna reshape UX design in 2023. With Dynamic Island, Apple is not only embracing the fact that this widget needs to exist, but it's leaning into the hardware limitations, rather than away from it, to make a better software experience.
