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
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
- Analyze its current business portfolio and decide which SBU's should
receive more or less investment
- Develop growth strategies for adding new products and businesses to
- 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
- 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:
- 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.
- 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 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
- 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
- Access to financial and other investment resources
- Management strength
Often, Strategic Business Units are portrayed as a circle plotted in the GE
- 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
A six-step approach for the implementation of the McKinsey Matrix
- Specify drivers of each dimension. The corporation must carefully determine
those factors that are important to its overall strategy.
- Determine the weight of each driver. The corporation must assign relative
importance weights to the drivers.
- Score the SBU's on each driver.
- Multiply weights and scores for each SBU.
- View resulting graph and interpret it.
- 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 Special Interest Group
Special Interest Group (154 members)
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 fa...
Pitfalls of Applying Portfolio Matrices
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ADL Matrix |
Product/Market Grid |
Business Definition | STRATPORT
| Profit Pools |
of Industry Change |
Product Life Cycle |
Blue Ocean Strategy
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