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Methods and concepts for Value Based Management (VBM)

McKinsey

The GE matrix / McKinsey matrix is a model to perform a business portfolio analysis on the Strategic Business Units of a corporation. A business portfolio is the collection of Strategic Business Units that make up 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. A Strategic Business Unit (SBU) can either be an entire mid-size company or a division of a large corporation, that formulates its own business level strategy and has separate objectives from the parent company. The aim of a portfolio analysis is:

• Analyze its current business portfolio and decide which SBU's should receive more or less investment, and
• Develop growth strategies for adding new products and businesses to the portfolio
• 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 GE / McKinsey Matrix is a later and more advanced form of the BCG Matrix.

The McKinsey matrix / General Electric Matrix The GE / McKinsey Matrix is more sophisticated than the BCG Matrix in three aspects:

Market (Industry) attractiveness replaces market growth as the dimension of industry attractiveness. 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: Porter's Five Competitive Forces model.

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 / McKinsey Matrix works with a 3*3 grid, while the BCG Matrix has only 2*2. This also allows for more sophistication.

Often, Strategic Business Units are portrayed as a circle plotted in the GE McKinsey 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 to implementation of portfolio analysis (using the GE / McKinsey Matrix) could look like this:

• Specify drivers of each dimension. The corporation must carefully determine those factors that are important to its overall strategy
• Weight drivers. The corporation must assign relative importance weights to the drivers
• Score SBU's each driver
• Multiply weights times scores for each SBU
• View resulting graph and interpret it
• Perform a review/sensitivity analysis using adjusted other weights (there may be no consensus) and scores.

Some important limitations of the GE matrix / McKinsey Matrix are:

• Valuation of the realization of the various factors
  
• Aggregation of the indicators is difficult
  
• Core competencies are not represented
  
• Interactions between Strategic Business Units are not considered
  

This method is also called "Business Assessment Array" and "GE Business Screen".