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Portfolio analysis on SBU's using market attractiveness and competitive strength. Explanation of McKinsey Matrix.


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GE McKinsey matrix portfolio analysisWhat is the McKinsey Matrix?

The McKinsey Matrix is a model to perform a business portfolio analysis on the Strategic Business Units of a corporation. Synonyms for this method are; GE Matrix, Business Assessment Array and GE Business Screen.

What is a portfolio?

A business portfolio is the collection of Strategic Business Units that together form a corporation. The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets.

What is a Strategic Business Unit?

A Strategic Business Unit (SBU) can either be an entire medium size company or a division of a large corporation. As long as it formulates its own business level strategy and has separate objectives from the parent company.

The aim of portfolio analysis

  1. Analyze its current business portfolio and decide which SBU's should receive more or less investment
  2. Develop growth strategies for adding new products and businesses to the portfolio
  3. Decide which businesses or products should no longer be retained.

The BCG Matrix (Boston Consulting Group Matrix) is the best-known portfolio planning framework. The McKinsey Matrix is a later and more advanced form of the BCG Matrix.

The McKinsey Matrix

The McKinsey Matrix is more sophisticated than the BCG Matrix in three aspects:

  1. Market (Industry) attractiveness is used as the dimension of industry attractiveness, instead of market growth. Market Attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry / market. Compare also: Five Forces
  2. Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit.
  3. Finally, the GE Matrix works with a 3*3 matrix, while the BCG Matrix has only 2*2. This also allows more sophistication.

Typical (external) factors that affect Market Attractiveness:

- Market size
- Market growth rate
- Market profitability
- Pricing trends
- Competitive intensity / rivalry
- Overall risk of returns in the industry

- Entry barriers
- Opportunity to differentiate products and services

- Demand variability
- Segmentation
- Distribution structure

- Technology development

Typical (internal) factors that affect Competitive Strength of a Strategic Business Unit:

- Strength of assets and competencies
- Relative brand strength (marketing)
- Market share

- Market share growth
- Customer loyalty
- Relative cost position (cost structure compared with competitors)

- Relative profit margins (compared to competitors)
- Distribution strength and production capacity
- Record of technological or other innovation

- Quality
- Access to financial and other investment resources

- Management strength

Often, Strategic Business Units are portrayed as a circle plotted in the GE Matrix, whereby:

  • The size of the circles represent the Market Size
  • The size of the pies represent the Market Share of the SBU's
  • Arrows represent the direction and the movement of the SBU's in the future

A six-step approach for the implementation of the McKinsey Matrix

  1. Specify drivers of each dimension. The corporation must carefully determine those factors that are important to its overall strategy.
  2. Determine the weight of each driver. The corporation must assign relative importance weights to the drivers.
  3. Score the SBU's on each driver.
  4. Multiply weights and scores for each SBU.
  5. View resulting graph and interpret it.
  6. Perform a review/sensitivity analysis. Make use of adjusted other weights and scores (there may be no consensus).

Some limitations of the McKinsey Matrix

  • The valuation of the realization of the various factors.
  • Aggregation of the indicators is difficult.
  • Core Competences are not represented.
  • Interactions between Strategic Business Units are not considered.

McKinsey Matrix / GE Business Screen Forum
  How to Analyze an Industry with Several Companies?
Can I apply the McKinsey Matrix to analyze an industry with several companies operating in it under different management, but in the same field?...
  Pitfalls of using McKinsey Matrix
Beware of the stereotypical pitfall: often the outcomes of these kind of portfolio management models / methods are based on assumptions rather than facts. Models as well as their inputs variables should be validated beforehand. Be sure to convince an...
  Assessment of Corporate Strategy for a Multi Business Organization
Are there generic models to assess a public company's corporate strategy? The company should be a multi business company. I have an assignment to assess a company's corporate strategy of my choice for a final year MBA....
  Example of McKinsey Matrix
Who can provide an example on this matrix in any industry to understand this tool practically... Please....
  Other Kinds of Portfolios Analysis than Business Sectors and SBUs
Generally speaking, a portfolio is a collection of assets. Managers use portfolio analysis in a number of ways and at different levels, not just for deciding what markets or industries to in which to invest.
One example, is analysis of a new ...
  Arrow direction in McKinsey Matrix
We plot the organization's current position through this. Where does the input for the arrow of the bubble (market) come from?...
  Strategies associated with boxes
The picture should contain what each box represents i.e. build, harvest, divest. An explanation of these terms would also be useful....
  Calculation of Weights and Attributes in McKinsey Matrix
The y-axis parameter (vertical) is attractiveness(value) which is the result of the Sum of (a1*w1+a2*w2...) .
The evaluation process of w1, w2 .. as well as a1, a2 ... itself needs serious market research and inventions. Where a - Attribute w-...

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