Historical Context
The GE Matrix, also known as the McKinsey Matrix, is a strategic tool developed in the 1970s by the consulting firm McKinsey & Company. It was first used in their work for General Electric (GE), hence the name. The matrix was designed to help GE manage its vast portfolio of business units by evaluating the relative strengths of these units and their market attractiveness.
Key Concepts and Structure
The GE Matrix evaluates businesses based on two dimensions:
- Market Attractiveness: This dimension includes factors such as market size, growth rate, profitability, competitive intensity, and overall industry attractiveness.
- Business Unit Strength: This dimension considers aspects such as market share, brand strength, production capability, and distribution network.
Types/Categories
The matrix consists of a 3x3 grid, resulting in nine cells, each representing different strategic recommendations:
- High Market Attractiveness and High Business Strength: Invest/Grow.
- Medium Market Attractiveness and High Business Strength: Selective Investment.
- Low Market Attractiveness and High Business Strength: Maintain/Manage for Earnings.
- High Market Attractiveness and Medium Business Strength: Selective Growth.
- Medium Market Attractiveness and Medium Business Strength: Selective Investment.
- Low Market Attractiveness and Medium Business Strength: Harvest/Divest.
- High Market Attractiveness and Low Business Strength: Invest/Grow.
- Medium Market Attractiveness and Low Business Strength: Harvest/Divest.
- Low Market Attractiveness and Low Business Strength: Divest.
Key Events
- 1970s: Development and implementation of the GE Matrix by McKinsey & Company for General Electric.
- 1980s-Present: Adoption of the GE Matrix by various corporations for strategic planning and portfolio management.
Detailed Explanation
The Nine Cells of the GE Matrix
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Top Left (High-High):
- Invest/Grow: Business units in this cell are ideal for investment and growth initiatives. They promise high returns due to their strong market position and attractive industry conditions.
-
Top Center (Medium-High) and Top Right (Low-High):
- Selective Investment: Businesses here need to be evaluated carefully for selective investments. The goal is to fortify their strengths to eventually move them to the top-left cell.
-
Middle Row (High, Medium, Low):
- Selective Growth/Investment/Management: These businesses show medium strength and market attractiveness. Strategies should focus on optimization, selective investments, or maintaining current performance.
-
Bottom Row (High-Low, Medium-Low, Low-Low):
- Harvest/Divest: The bottom row generally indicates weaker business units in less attractive markets. Strategies may involve divestment or harvesting the business for immediate returns with minimal investment.
Mathematical Models/Charts
GE Matrix Structure in Mermaid Format
graph TD
A[High Market Attractiveness] -->|High Business Strength| B[Invest/Grow]
A -->|Medium Business Strength| C[Selective Investment]
A -->|Low Business Strength| D[Harvest/Divest]
E[Medium Market Attractiveness] -->|High Business Strength| F[Selective Investment]
E -->|Medium Business Strength| G[Selective Investment]
E -->|Low Business Strength| H[Divest]
I[Low Market Attractiveness] -->|High Business Strength| J[Manage for Earnings]
I -->|Medium Business Strength| K[Harvest/Divest]
I -->|Low Business Strength| L[Divest]
Importance and Applicability
The GE Matrix is crucial for diversified corporations to:
- Allocate resources effectively.
- Make informed investment or divestment decisions.
- Balance their portfolios by identifying which business units to grow, maintain, or divest.
Examples
Example 1: General Electric
Using the GE Matrix, GE identified high-growth, high-attractiveness units such as its aviation and healthcare sectors for heavy investment, while divesting less attractive units.
Example 2: Unilever
Unilever applied the GE Matrix to decide on investments in its home and personal care divisions while divesting from less promising food businesses.
Considerations
- Data Accuracy: The effectiveness of the matrix depends heavily on accurate, up-to-date data.
- Subjectivity: Evaluating market attractiveness and business strength involves some subjectivity.
- Dynamic Markets: Rapid changes in market conditions can alter the positioning of business units within the matrix.
Related Terms
- BCG Matrix: Similar to the GE Matrix but simpler, focusing on market share and market growth.
- SWOT Analysis: Analyzes strengths, weaknesses, opportunities, and threats of a business unit or product.
Comparisons
GE Matrix vs. BCG Matrix
- Complexity: GE Matrix is more complex, considering multiple factors for both dimensions.
- Grid Size: GE Matrix has 9 cells while the BCG Matrix has 4.
- Axes: GE Matrix uses market attractiveness and business strength; BCG Matrix uses market growth and relative market share.
Interesting Facts
- The GE Matrix was a pivotal tool in the transformation of General Electric under CEO Jack Welch.
- The matrix’s emphasis on both market attractiveness and business strength allows for nuanced strategic decisions.
Inspirational Stories
Jack Welch and the GE Matrix
Jack Welch, during his tenure as CEO of GE, used the GE Matrix to streamline the company’s operations, focusing on businesses that could be first or second in their markets, which ultimately led to GE’s immense growth and profitability in the 1980s and 1990s.
Famous Quotes
- Jack Welch: “If you don’t have a competitive advantage, don’t compete.”
- Peter Drucker: “Strategy is not just about being better at what you do, but also about deciding where you will and won’t compete.”
Proverbs and Clichés
- Proverb: “Don’t put all your eggs in one basket.”
- Cliché: “The cream always rises to the top.”
Expressions, Jargon, and Slang
- Expression: “Move the needle.”
- Jargon: “Strategic fit,” “Portfolio management.”
- Slang: “Game plan,” “Playbook.”
FAQs
Q1: What is the primary use of the GE Matrix?
A1: It is used for strategic planning to assess business units or product lines within a corporation and make decisions on where to invest, hold, or divest.
Q2: How does the GE Matrix differ from the BCG Matrix?
A2: The GE Matrix is more comprehensive and considers a broader range of factors for both market attractiveness and business strength compared to the BCG Matrix, which focuses on market growth and relative market share.
Q3: Can the GE Matrix be used for small businesses?
A3: While designed for diversified corporations, small businesses can adapt the principles of the GE Matrix for strategic planning and resource allocation.
References
- McKinsey & Company. (1970s). Development of the GE Matrix.
- General Electric Annual Reports and Strategic Planning Documents.
- Drucker, P. (1994). The Practice of Management. Harper Business.
Final Summary
The GE Matrix (or McKinsey Matrix) is a powerful strategic tool enabling corporations to evaluate their diverse business units or brands based on market attractiveness and business strength. By positioning each unit within a 3x3 grid, companies can make informed decisions about investment, management, and divestment. This comprehensive approach ensures efficient resource allocation and strategic growth, balancing short-term returns with long-term value creation.
