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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.
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 shou...