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

What 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.

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.

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Compare with: BCG Matrix  |  ADL Matrix  |  Positioning  |  Product/Market Grid  |  Three Dimensional Business Definition  |  STRATPORT  |  Profit Pools  |  Four Trajectories of Industry Change  |  Product Life Cycle  |  Blue Ocean Strategy

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