The ge mckinsey strategic business planning matrix allows. Stages of constructing the McKinsey matrix
One of the important issues is the company's future product portfolio. It is necessary to understand what these areas of activity will be, how they will be financed and what their positioning will be in the future.
Therefore, when developing a strategy, it is recommended to use one of two standard methods: the Boston Consulting Group (BCG) matrix or the McKinsey matrix. In accordance with these methods, all the company’s businesses are positioned in the following coordinates: the attractiveness of the market and the competitive status of the company in this market.
The fundamental difference between these two methods is to assess the attractiveness of the market and the competitive status of the company in this market. The BCG matrix uses the hypothesis that each of these indicators can be assessed using a single parameter. To assess the attractiveness of a market, the market growth rate is used, and to assess the competitive status of a company in this market, the market share occupied by the company is used. A company may use this simplified approach to begin with, but a more accurate assessment can be achieved by considering several parameters that influence the company's attractiveness and competitive status in these markets. And even then with the caveat that all market segments in which the company operates are growing. After all, the BCG matrix uses growth rates to assess attractiveness, and if growth is negative, then it is not at all clear how to position this market segment in the matrix. Thus, the BCG matrix is applicable only to growing markets, and each parameter of the matrix is assessed by only one indicator.
The McKinsey matrix uses a more sophisticated methodology to assess market attractiveness and a company's competitive status in those markets. It can be used both in growing markets and in stagnant ones. This is precisely the main difference between the BCG matrix and the McKinsey matrix, and not that one matrix has 4 squares, and the other has 9, as is described in some books. Each side of the matrix can be divided into at least 10 parts, the most important thing is how these sides of the matrix will be evaluated. Simply, if you divide the matrix into only 4 parts, then such a business screen will be more convenient to use. Therefore, most often these matrices are divided into 4 zones. Certain names for each of the four blocks have already been established (see Fig. 1). At the same time, there is already a more or less standard set of strategic decisions for areas of activity that fall into one or another zone of the matrix.
The matrix for strategic analysis of business areas offers the following set of strategic decisions (see. Rice. 1):
It should be noted that 10 years ago this tool was practically unsuitable for use in our companies, because The markets themselves were still just being formed and, accordingly, it was difficult to obtain any more or less reliable information. Now, of course, it cannot be said that everything has finally stabilized on the Russian markets, but at least at present companies already have much more opportunities to obtain the necessary information about the markets in which they operate. Some companies admit that the problem is precisely in processing and evaluation, and not in collecting information. Even in open sources you can collect a lot of data about the market.
Rice. 1. Matrix for analyzing areas of activity (product portfolio)
If you trace on the McKinsey matrix the main life stages that any business area implemented in a particular company has to go through, it will look something like this.
A new business direction, as a rule, is positioned in the “Wild Cats” square, and this is understandable. It is unlikely that anyone will develop a new business in a stagnating market. Naturally, one of the reasons for the emergence of the idea of diversification arises as a result of the emergence of a promising market. If a company is just starting to operate in a new market, then, of course, it will still occupy an insignificant share (exceptions are those cases when the company acquires an already existing enterprise that occupies a significant market share). Thus, it turns out that the attractiveness of this market is high, and the share that the company occupies in it is still insignificant (this is the “Wild Cats” square).
Then this new business direction for the company can either develop further, or for certain reasons a decision may be made to close the new business. If a new business direction in the company develops successfully, then the share occupied by the company in this market will begin to increase. Thus, this business direction for the company is gradually moving into the “Star” square. How long a given business will remain in the stars depends on two factors: the company’s performance in a given market and the prospects of the market itself. Business could return to the Wildcats if the company underperforms, but the market is still considered quite promising.
Or this business can move into the “Cash Cows” square. At the same time, the company already feels quite confident in this market, but the market itself is no longer recognized as as promising as before: either the market growth has slowed down significantly, or it has stopped altogether, or, on the contrary, the market has begun to decline. How long a given business will last in Cash Cows again depends on several factors. At this point, as a rule, competition becomes even tougher, the volume of the market itself, if not reduced, then the margin may decrease significantly, and as a result, it becomes no longer profitable for the company to continue supporting this business area. It slowly turns into "Angry Dogs". Therefore, the company collects the last cream from this market and transfers resources to the development of the Wildcats and Stars.
Here you need to pay attention to one feature that appears during all these transitions. If a company does not constantly monitor such a matrix and does not officially recognize the status of a particular business area within the company, then the logic of resource distribution between businesses, unfortunately, will not be entirely correct. The “Wild Cats” and “Stars” will need investments the most, but the leaders of the “Cash Cows” and “Evil Dogs” will have the greatest status and weight, because These business areas have existed in the company for a long time. It will be especially difficult for managers of new business areas.
Despite the promise of new business areas, resources will be drawn away by old areas that would once bring significant financial results to the company. That is, it will not be the future perspective that will be taken into account, but the actual results achieved. It is very important not to fall into such a trap of the past. When developing a strategic plan and allocating resources, one must first of all take the future into account, although psychologically it can be very difficult to say goodbye to the past. In addition, working in new markets and under new conditions, as a rule, requires, among other things, organizational restructuring. And most employees prefer that everything stay the same.
On Figure 2 An example is given of using the McKinsey matrix to position the businesses of a road construction company. The main activities of this company are a standard set of three services: road construction, road repair and road maintenance.
In the matrix, each business is depicted as a circle, the size of which schematically reflects the value of the market capacity, and the highlighted sector shows the company’s share in this market. At the time of the analysis, the situation was such that the road construction market had declined. The largest segment (in terms of value) was still the road construction segment, but it was getting worse and worse financed. Basically, the companies received from the Customer not money, but the debts of the enterprises for the road fund. Therefore, in fact, companies operating in this market received money not directly from the Customer, but through arrears of enterprises to the budget, and there was no guarantee that these receivables could be fully recovered from the debtors.
In addition, the company’s work was seasonal due to the fact that construction and major repairs of roads could only be carried out in the summer. Roads had to be maintained year-round, but this is a significantly smaller market than road construction and repair. Therefore, the company had the idea to open another line of activity related to civil engineering. The company had the opportunity to acquire an asset (one old house-building plant) that would allow it to become one of the serious market participants in the area in which the company operated. In addition, according to marketing estimates, housing construction was a very promising and growing market, and there was not yet fierce competition in it. Moreover, the company had already managed one project, namely, built a residential building on its own (naturally, some functions were outsourced), so it already had some experience in this market.
As a result, a decision was made to open a new line of activity. It was supposed to be financed from the existing “cash cows”. In this case, there were no particular problems in collecting market information to use the McKinsey matrix. Information about the market for road construction, repair and maintenance could be obtained without any problems from the regional highway department (they managed this budget). Information about the housing construction market was a little more complicated, but again no fundamental difficulties arose. Moreover, in this case, precise information was not required, because it was clear that the market was growing by more than 10% per year, while positive price dynamics were also observed. Naturally, this was a fairly promising market, with demand exceeding supply.
Rice. 2. Example of a McKinsey matrix for a company (road construction)
This decision was completely justified for this company, but when developing a specific strategy in this area, it is better to understand in advance how to position your company, because The housing construction market has a well-defined segmentation.
For example, when one regional company was just starting its activities, it chose luxury housing as its priority segment. The first projects gave very good financial results. But quite quickly the luxury housing market became saturated, and the company’s financial results sharply declined. The company tried to reach a more mass market, but found it difficult to do so. The city was not that big, so everyone who was interested in buying an apartment in a new building knew that this company builds very expensive houses. Therefore, no matter what they did, the company was still associated with luxury housing in the eyes of potential buyers. The company's owners had to decide to create a new company and essentially start working from scratch in the mass housing market.
In addition to the classic version of the BCG or McKinsey matrix, there is also a simplified version. Its appearance is due to the fact that in Russian conditions it is still quite difficult to follow this methodology in full. Especially if we are not talking about a large holding, and the company simply cannot afford to spend a large sum to collect information about market volumes and its share. Of course, this is a kind of departure from the methodology, but, nevertheless, even using such a simplified version can still be useful.
An example of a simplified version of the product portfolio analysis matrix for a group of medium-sized companies is shown at Figure 3. As can be seen from the figure, this is a diversified holding. In this simplified version of the methodology, the size of the ball characterizes not the market capacity, but the company’s revenue in this area of activity. Instead of revenue, you can use another indicator, for example, marginal profit, but still this is not the market capacity, accordingly, this matrix will not contain the market share that the company occupies in this market. To assess the attractiveness of markets and the competitive status of the holding in these markets, the parameters presented in Table 1.
Rice. 3. An example of a simplified business valuation matrix for a group of companies
The principle is quite simple. To evaluate each axis of the matrix in this example, six parameters were used. The way in which market attractiveness and competitive status were assessed varied slightly.
To assess markets, each parameter was assigned a value from 1 to 6. Then the final assessment of market attractiveness was calculated as the arithmetic mean of these values. When making such an assessment, you need to remember that the higher each parameter is rated, the more attractive the market will be.
Table 1. Example of parameters for assessing the attractiveness of the market and the competitive status of the company
That is, if the market is assessed, for example, according to the “Seasonality” parameter and if this market really has sharp seasonal fluctuations, then the assessment should be closer to “1” and not to “6”. Or if the market is assessed according to the “Market Dynamics” parameter, then if the dynamics are significant and positive, then the assessment will be closer to “6”, because this market is attractive. If the dynamics are insignificant (positive or negative), then the rating is closer to “3”. If the dynamics are significant and they are negative – to “1”. Or if there is no intense competition in the market, then the score is closer to “6”; if, on the contrary, it is closer to “1”. The same logic must be followed when assessing the market based on other parameters.
When assessing competitive status, a slightly different approach was used. First, for each of the markets in which the company operates, the weights of all parameters were determined. In other words, it was determined which parameters are more significant when assessing the competitive status of a company in a given market, and which are not so significant, but still need to be taken into account.
That is, if several companies were evaluated using this methodology, then the weights should be the same when assessing the competitive status of all these companies operating in these markets. Then the value of the competitive strength of a particular company operating in these markets was determined. That is, for each factor its value was assessed (in this example from 1 to 6 points). At the same time, the weight of some parameters may be large, but the value of the company’s competitive strength in this parameter is insignificant. That is why a more complex approach is used to assess the competitive status of a company than to assess the attractiveness of the market.
The assessment of the influence of each parameter was obtained by multiplying the weight of the factor by its value. This provided a weighted average assessment of the company's competitive status in each market in which it operated. When determining the values of competitive strength for each parameter, you need to remember that such an assessment should be given in comparison with competitors. That is, there is no absolute scale here. For example, for one case, a market share of 20% may be small if there are only 2 or 3 companies operating in the market. And for another situation, a market share of 10% may be large if there are many companies operating in the market, but each has a market share of less than 5%. Thus, all this is learned in comparison with competitors.
This procedure can be technically very easily implemented, for example, using spreadsheets. However, here you need to pay attention to one feature of using this technique in practice. Quite often it happens that, when conducting such an analysis, companies behave approximately as follows. First, they try to assess all parameters as truthfully as possible.
After this, the result is instantly visible, that is, the positioning of each area of activity on the matrix. And when it turns out that the director’s favorite area of activity suddenly ends up in, say, “Angry Dogs,” then the procedure for “selecting parameters” immediately begins, or, in simple terms, adjusting the results. Well, the director does not want to accept the fact that the area of activity or market segment to which he devotes so much time, which in the past has brought significant financial results and on which he has high hopes, turns out to be unpromising from the point of view of further strategic development.
Of course, the above method is not without subjectivity, but still it is closer to reality than an intuitive assessment. Although in practice there are cases when it was precisely due to the intuition of the first person that the company achieved significant success. In strategic management there is even such a thing as vision. This strategic vision of the company's top person may be out of logical chain of analysis and even contradict the main conclusions of the strategic analysis. But, nevertheless, the strategic vision of the company’s top person must be taken into account when developing a strategy, no matter how strange it may seem. Unfortunately, we have to state once again that
It is also called the “General Electric–McKinsey or GE/Mckinsey matrix.” The methodological foundation was proposed by the consulting firm Mckinsey during a project with General Electric.
The matrix appeared in the seventies of the twentieth century when the consulting firm Mckinsey carried out a project for General Electric.
The essence of the McKinsey matrix
If you look at the theory, it offers the following positions:
Winner No. 1 - implies a strategy of additional investment;
Winner No. 2 - the strategy of this position involves investment, but with the condition of eliminating weaknesses;
Winner No. 3 - investments are also needed, but more targeted, with segments identified;
Loser #1 - you need to find opportunities to exit this position or leave the market;
Loser No. 2 – again, you need to look for options to exit the position or sell the business;
Loser No. 3 - the position requires abandonment of investments or exit from the business;
Average position or medium business - selective and least risky investments;
Question mark - the position involves exiting the business, or concentrating it on a narrower segment;
Profit producer - only those investments that will give a return in the near future.
The results of the GM/McKinsey Matrix boil down to pointing out:
— which business goods and/or services are a priority
- which will only bring losses in the coming years and
— what business products/services you need to invest in
As you can see, all matrices, including this one, relate to portfolio analysis and are built on the “win or lose” principle. The flaw of this tool is its over-reliance on financial indicators.
Pros and cons of the McKinsey matrix
The advantages of the matrix include:
- unlike, there are a large number of positions (quadrants) for choosing a strategy.
Among this number of options, there are middle positions that provide some room for maneuver.
On the downside:
— The McKinsey Matrix indicates the failure of certain directions that are in the negative quadrants. Unfortunately, this ruthless element is present here too. As we have already noted, this drawback is inherent in almost all such tools.
— Another important drawback is the subjectivity of the assessments that appear based on the results of the analysis. This happens because it is impossible to take into account the boundaries and scale of the market and the market itself is constantly changing. In this case, the practice of cellular communications is indicative: back in the late 90s and early 2000s there were pagers (a whole market, by the way), then SMS and mms came, and now they are being replaced by text messengers like Viber or Whatsapp. In the intervals between changes in text data transmission technologies, events also occurred - paging companies were absorbed by cellular operators, cellular operators began to provide Internet service providers, etc. If mobile operators made decisions using the McKinsey Matrix, they would probably still have pagers today. But there are markets where processes happen even faster, such as the use of software.
This example will help assess the potential of various areas of the company’s business, analyze the potential of any market, take a closer look at the competitiveness of the product in the current market, and also assess the prospects of the product in new segments< и, конечно же, разработать правильную стратегию развития портфеля компании, выделив приоритетные направления деятельности, сократив усилия и инвестиции на развитие неперспективных товаров.
In calculating the level of competitiveness of a company’s product and the attractiveness of a market segment, an integral assessment indicator is used. The integral indicator increases the credibility of the assessment because it uses the weight (or importance) of the criteria.
Thus, criteria with greater weight (in other words, criteria that have the greatest impact on the performance) contribute more to the overall assessment score.
Step one: determine the criteria for the competitiveness of your product
The level of competitiveness of a product is the first key parameter of the McKinsey matrix. The marketing strategy of a business depends on how firmly a product occupies a position in the market and how confidently it can compete with similar products. Competitiveness criteria include an assessment of the strength of the product and brand, the resource and investment capabilities of the company, as well as an assessment of the level of intra-industry competition.
You can use any product competitiveness criteria that you consider important for your market, or you can use the following table:
After listing all the criteria, assign each criterion an importance level so that the sum of the importance of all criteria = 100%. The most important factors in a product’s competitiveness are its uniqueness and ability to satisfy the needs of the target audience as fully as possible.
The importance (or weight) of a criterion when assessing the competitiveness of a product shows how much the assessed parameter affects the sustainability of the company’s business
Step two: determine criteria for assessing market attractiveness
The attractiveness of a segment for business is the second key parameter of the McKinsey matrix.
The attractiveness of a segment influences the feasibility of high investments in product development in a given market and is an indicator for obtaining excess profits in the segment. Market attractiveness criteria include assessment of market factors, assessment of demand and market development trends.
You can use any attractiveness criteria that you consider important for your market, or you can use the following table:
After listing all the criteria, assign each criterion an importance level so that the sum of the importance of all criteria = 100%. The most important factors of market attractiveness are the presence of free market niches, pent-up demand, and the growth rate of the segment.
The importance (or weight) of a criterion when assessing the attractiveness of a market shows how much the assessed parameter influences the possibility of obtaining excess profits.
Step three: evaluate the attractiveness of segments and competitiveness of products
The assessment is carried out by assigning each factor a score from 1 to 10, where 1 is the lowest score, meaning that this factor determines the low attractiveness of the market and the competitiveness of the company in the segment, and 10 is the maximum score, meaning that the segment is very attractive for this factor and the company's competitiveness in this segment is potentially high.
An example of assessing segments based on the “competitiveness” criterion:
An example of assessing segments based on the “attractiveness” criterion:
Points are assigned based on expert assessment, but taking into account data from quantitative and qualitative research on the segment.
It is not recommended to assign scores using the “finger in the sky” principle, since important strategic decisions that determine the company’s success in the long term will depend on the final score. Evaluating factors is a rigorous analytical process in which every figure must be justified.
Step Four: Calculate the overall competitiveness and attractiveness score based on the importance of the criterion
Once each factor has been assigned a score, a composite factor score needs to be calculated based on its weight or importance. This operation is performed in a separate column by multiplying the weight of the factor by the assigned score.
Final score = all factors * factor severity score
After the final scores have been obtained based on the segment attractiveness criterion and the company competitiveness criterion in the segment, we proceed directly to constructing the Mckinsey/General Electric (GE) matrix.
Step five: arrange the analyzed segments and products in the matrix according to the number of points scored
Depending on the final score the product received in terms of competitiveness and the market in terms of attractiveness, its position in the matrix depends.
Interpretation of the obtained values:
from 0-3 points: low
from 4-7 points: average
from 8-10 points: high
Step six: identify key business areas and develop areas of work
The marketing strategy depends on the position of the product or market segment in the matrix:
- the higher the competitiveness of the product, and the higher the attractiveness of the market, the higher the potential for achieving success in this area of business
- the weaker the company’s product relative to its competitors, the lower the attractiveness of the industry, the lower the opportunities for business growth in this direction
A segment is assessed as promising for entry if it scores high on at least one of the criteria: either “high in attractiveness” or “high in competitiveness.”
Segments marked in gray in the matrix can be considered as targets in the case of:
- there are positive forecasts that the attractiveness or competitiveness of the segment will increase in the coming years (based on an assessment of market potential);
- or entering these segments will provide easier penetration in the future into the most attractive segments.
Segments rated “low” according to one of the criteria should be considered with extreme caution, as they pose high risks.
Concentrate all resources and efforts on attractive markets where the company's position is guaranteed due to the presence of competitive advantages. Exit or limit entry into unattractive markets where the company does not have a competitive advantage.
The success that accompanied the model of strategic analysis and business planning developed by Boston Consulting Group specialists stimulated methodological research in this area. One after another, analytical models began to appear, carrying a semantic load similar to BCG and even very similar to it in the fundamental idea, but, at the same time, in some ways different, and in some ways, undoubtedly superior to it.
In the early 1970s, an analytical model emerged, jointly proposed by General Electric Corporation and the consulting company McKinsey & Co. and called the “GE/McKinsey model”. By 1980, it had become the most popular multifactor model for analyzing the strategic positions of a business. At one time in the mid-1980s, it was estimated that approximately 36% of Fortune 1000 organizations and 45% of Fortune 500 organizations had adopted this analysis and planning methodology.
The GE/McKinsey model is a matrix consisting of 9 cells for displaying and comparative analysis of the strategic positions of the organization’s business areas. The main feature of this model is that for the first time, in order to compare types of businesses, not only “physical” factors began to be considered (such as sales volume, profit, return on investment, etc.), but also subjective characteristics of the business, such as variability of market share, technology, staffing status, etc.
This model can be found in the specialized literature on strategic management and planning under different names. Some names reflect some historical aspect. For example, the name “GE/McKinsey model” indicates who developed and proposed the model for use. Other names may indicate its purpose. For example, “matrix of market attractiveness and competitive positions.” Still other names emphasize the form of a given model rather than its content, such as the name “bubble chart.”
The matrix was originally developed by General Electric Corporation in an attempt to solve the problem of benchmarking its 43 distinctly important business activities. The developed matrix structure in itself was seen as a kind of methodological achievement, because it provided a partial solution to the problem of establishing a common comparative basis for analyzing the strategic positions of businesses that were very different in nature. By quantifying subjective factors and incorporating them into the analysis, the model provided the decision maker with a large amount of relevant information. It goes without saying that the final strategic decision was made not only on the basis of the results of positioning business types on the proposed matrix. However, now, with the help of such a model, the manager was able to better organize and compare individual types of businesses. At that time, the following phrase was even common among the management of the GE Corporation: “Our model is the only way to compare apples and oranges.” And even when non-numeric factors were not assigned specific weights, the end result of using the matrix was a quasi-quantitative positioning of businesses.
One of the main advantages of the GE/McKinsey model is that different factors (X and Y axes) can be given different weights depending on their relative importance for a particular type of business in a particular industry, which, of course, makes the valuation of each business more accurate.
Structure of the GE/McKinsey Model
The focus of the GE/McKinsey model is on the future profit or future return on investment that can be achieved by the organizations. In other words, the focus is on analyzing what impact additional investment in a particular type of business might have on profits in the short term.
Thus, all types of business of the organization under consideration are ranked as candidates in terms of receiving additional investments in both quantitative and qualitative parameters. In order for a particular type of business to “win” a good investment in the future, not only current sales volumes, profits and capital productivity (i.e. strictly quantitative parameters) are considered, but also other various factors, such as volatility of market share and technology , staff loyalty, level of competition, social need (i.e. parameters that are quite difficult to express quantitatively).
The GE/McKinsey matrix has a dimension of 3x3 (Fig. 1). Along the Y and X axes, integral assessments are given, respectively, of the attractiveness of the market (or business sector) and the relative advantage of the organization in the corresponding market (or the strengths of the organization’s corresponding business). Unlike the BCG matrix, in the GE/McKinsey model each coordinate axis is considered as an axis of a multifactorial, multidimensional dimension. And this makes this model richer in analytical terms compared to the BCG matrix and, at the same time, more realistic in terms of positioning types of businesses.
The parameters by which the position of a business along the Y axis is assessed are practically beyond the control of the organization. Their meaning can only be recorded, but it is almost impossible to influence their meaning. The positioning of an organization's business along the X axis is under the control of the organization itself and can be changed if desired.
Compared to the BCG model, which used a 2x2 strategic positioning matrix, the GE/McKinsey model increases the dimension of this matrix to 3x3. This made it possible not only to provide a more detailed classification of the types of businesses being compared, but also to consider broader opportunities for strategic choice.
The analyzed types of business are displayed on the matrix grid in the form of circles, or “bubbles,” the centers of which are uniquely determined by assessments of the attractiveness of the market (Y-axis) and the relative advantage of the organization in the market (X-axis). Each circle corresponds to the total sales volume in a certain market, and the share of the organization's business in this sales volume is shown by the segment in that circle.
Both the Y-axis and the X-axis are conventionally divided into three parts: top, middle and bottom rows. Thus, the grid turns out to consist of nine cells. The strategic position of a business improves as it moves on the matrix from right to left, from bottom to top.
The matrix distinguishes three areas of strategic positions: 1) the area of winners, 2) the area of losers, 3) the average area, which includes positions in which business profits are stably generated, average business positions and questionable types of business.
Types of businesses that, when positioned, fall into the “winners” area have better or average values of market attractiveness factors and organization advantages in the market compared to others. For these types of businesses, a positive decision regarding additional investment is likely to be made. These types of businesses, as a rule, promise further development and growth in the near future.
Rice. 1. Structure of the GE/McKinsey matrix
For a position that is conventionally named Winner 1, are characterized by the highest degree of attractiveness of the market and relatively strong advantages of the organization in it. The organization will most likely be the undisputed leader or one of the leaders in this market. It can only be threatened by the possible strengthening of the positions of individual competitors. Therefore, the strategy of an organization in such a position should be aimed at protecting its position primarily through additional investments.
For a position with a conditional name Winner 2 characterized by the highest degree of market attractiveness and the average level of relative advantages of the organization. Such an organization is clearly not a leader in its industry, but at the same time it is not too far behind it. The strategic objective of such an organization is to first identify its strengths and weaknesses and then make the necessary investments to capitalize on its strengths and improve its weaknesses.
Position Winner 3 deals with organizations with types of businesses whose market attractiveness is at an average level, but at the same time the advantages of the organization in such a market are obvious and strong. For such an organization it is necessary, first of all: to identify the most attractive market segments and invest in them; develop your ability to withstand the influence of competitors; increase production volumes and through this achieve an increase in the profitability of your organization.
The types of businesses that fall into the three cells in the lower right corner of the matrix are called Losers. These are species that have at least one of the lower and do not have any of the higher parameters plotted on the X and Y axes.
Additional investments by the organization in such types of businesses, as a rule, should be limited or stopped altogether, since there is no connection between such investments and the mass of the organization's profits.
For Loser 1 characterized by average market attractiveness and a low level of relative advantage in the market (middle cell in the right row).
For the type of business in this position, it is advisable to recommend trying to find opportunities to improve the situation in areas with a low level of risk, develop those areas in which this business has a clearly low level of risk, strive, if possible, to turn individual strengths of the business into profit, and if all this is not possible , then simply leave this business area.
For Loser 2 characterized by low market attractiveness and an average level of relative advantage in the market (middle cell in the bottom row). This position does not have any particular strengths or capabilities. The business industry can rather be called unattractive. The organization is clearly not a leader in this type of business, although it can be seen as a serious competitor to others. In this situation, it is advisable for the organization to concentrate efforts on reducing risk, protecting its business in the most profitable areas of the market, and if competitors are trying to buy out this business and offer a good price, then it is better to agree.
Positions Loser 3 determined by the low attractiveness of the market and the low level of relative advantages of the organization in this type of business. In this situation, you can only strive to make the profit that can be obtained, refrain from making any investments at all, or exit this type of business altogether.
The types of businesses that fall into the three cells located along the diagonal running from the lower left to the upper right edge of the matrix are called “ border“. These are types of businesses that can either grow under certain conditions or, conversely, shrink.
If the business is dubious species business (upper left corner), which is associated, as a rule, with relatively insignificant competitive advantages of an organization involved in a very attractive and promising business from the point of view of market conditions, the following strategic decisions are possible:
1) development of the organization in the direction of strengthening those of its advantages that promise to turn into strengths;
2) the organization identifies its niche in the market and invests in its development;
3) if neither 1) nor 2) turns out to be impossible, then it is better to leave this type of business.
Business related to average positions, is characterized by the absence of any special qualities: the average level of market attractiveness, the average level of relative advantages of the organization in this type of business. This situation also determines a cautious strategic line of behavior: invest selectively and only in very profitable and least risky activities.
Types of business of an organization whose position is determined by a low level of market attractiveness and a high level of relative advantage of the organization itself in a given industry are called Profit Producers. In this situation, investments should be managed from the point of view of obtaining an effect in the short term, because the collapse of the industry may occur at any time. At the same time, investments should be concentrated around the most attractive market segments.
Strengths and weaknesses of the GE/McKinsey model
Initially, 40 variables were used to build the GE/McKinsey model for any type of business. Later, their number was reduced, and by 1980 there were only 15 such variables. Six of these 15 variables were used to assess market attractiveness (Y-axis), and the remaining 9 were grouped into two factors - market position and competitive power - to describe relative advantage organizations in the relevant market (X-axis). These variables included the following (Table 2).
Table 2. Characteristics of organizational strengths and market attractiveness variables used in the GE/McKinsey model
| Characteristics of an organization's strengths (X axis) |
Characteristics of market attractiveness (Y axis) |
|
|
The focus of the GE/McKinsey model is on balancing investments. By determining the positions of each individual type of business in the space of strategic positions of the GE/McKinsey matrix, the expected contribution of each of them to the economic efficiency of the organization as a whole in the near future is revealed.
This model does not provide a clear answer to the question of how the structure of an organization’s business portfolio should be restructured. Finding an answer to this question lies beyond the analytical capabilities of this model. In most cases, the model can offer specific strategic guidelines in the form of general strategies.
The general strategic principle promoted by the GE/McKinsey model is to increase the amount of resources allocated to develop and maintain businesses in attractive industries if the organization has certain advantages in the market, and, conversely, reduce the resources allocated to this type of business , if the position of the market itself or the organization on it turns out to be weak. For any type of business that falls between these two positions, the strategy will be selective.
Naylor, for example, suggests the following strategies for various positions in the GE/McKinsey matrix:
Although Naylor's proposals seem overly broad, they do not answer the question of how to implement such strategies. The manager must be aware of potential problems. For example, there is a danger that the focus on the growth of businesses related to the Winners will one day turn into an overload of these areas with investment resources that will no longer give the expected effect. Moreover, in the short term it is very difficult to assess the correctness of investments in types of businesses related to the Winners, since the effect may appear much later. Therefore, if an organization becomes too Winner-oriented, the resources needed in the short term may be completely depleted, leading to cash flow problems. Naylor's proposals regarding the diagonal positions of the matrix can be subjected to similar criticism.
The GE/McKinsey model makes a number of methodological assumptions regarding the axes of the positioning matrix and their constituent variables. An organization's relative advantage in a particular industry (X-axis) is determined by comparing the level of profitability of the organization's relevant business compared to its position among its competitors. Although it is believed that the competitive position will deteriorate over time unless new sources of competitive advantage are found. Therefore, it would be wiser to position the organization's business in accordance with its prospects, and not just with its current status.
The assessment of market attractiveness (Y-axis) is based on the assumption that it is necessarily reflected in the average long-term profit potential of all participants in the industry.
The GE/McKinsey model recommends using strategies that, to put it mildly, seem naive and very superficial. They can rather be taken as a guide for further in-depth analysis, but cannot in any way be considered as a management decision.
The breakdown of the GE/McKinsey matrix axes is also highly controversial. Firstly, it does not change in any way when the set of assessed factors changes. Secondly, the rational grain of multifactoriality is lost as soon as several assessments are combined into one, which determines the coordinate of the business’s position on the corresponding axis.
Variations of the GE/McKinsey model
Today there are various variations of the GE/McKinsey model. All of them are, as a rule, based on the desire to increase the number and variety of factors taken into account during the analysis or to offer more options for strategic decisions for a particular position. Below are variations of the GE/McKinsey model, proposed at one time by Day and Monieson, respectively.
Day's variation of the GE/McKinsey model
| Market attractiveness |
Defend your position | Invest in development | Develop selectively |
| Strong | Invest in development to the maximum Focus your efforts on maintaining your strengths |
Fight for leadership Develop selectively in those areas in which you are strong Strengthen your vulnerable areas |
Focus around a small number of strengths Look for ways to overcome weaknesses Quit the business if there are no signs of sustainable growth |
| Develop selectively | Generate income | Small expansion | |
| Average | Invest heavily in attractive sectors Focus on increasing profitability through increased productivity |
Protect your existing program Concentrate investments in those segments where there is a good rate of return and relatively little risk |
Look for ways to develop without high risk; otherwise, minimize investment and improve organization at the operations level |
| Protect yourself and change your orientation | Generate income | Go out of business | |
| Weak | Try to earn money today Focus on attractive segments Protect your strengths |
Protect your positions in the most profitable segments Update your assortment Minimize your investment |
Sell your business when you can get the highest price Reduce fixed costs and avoid investments for a while |
| Strong | Average | Weak | |
| Competitive positions | |||
| Invest in Growth: This strategy is chosen when a highly attractive market offers opportunities for growth that may not exist in the market's maturity stage. Substantial investment will be required to build on its strengths and then maintain the high growth rates that characterize such markets. | |
| Generate revenue: This strategy involves strengthening the organization's position in segments with good margins and where barriers to entry by competitors may persist even as the position shifts to those segments where costs exceed revenue. | |
| Grow selectively or quit: With a weak position in an attractive market, it is usually advisable to look for protected niches in which to specialize. If this is not feasible or is too expensive and/or risky, then you should consider exiting the business. | |
| Generate Income: This involves repositioning the business to generate cash through minor investments and rationalization at the operations level. You can make small investments to increase the value of your business if the need arises. |
Day suggested selecting from the standard GE/McKinsey list only those factors that are determinants of industry profitability or relative profitability.
| Business attractiveness | Strengths of the competitive position |
| A. Market factors size (in value and physical terms) size of the product market market growth rate life cycle stage market diversity price elasticity purchasing power cyclicality (seasonality) of demand |
A. Market position relative market share rate of change in share fluctuations in share depending on segment perceived differentiation in quality, prices and service assortment image of the organization |
| B. Economic and technological factors intensity of investment nature of investment (conditions, working capital, lease agreements) ability to withstand inflation power of the industry level and period of use of technology barriers to entry and exit in the industry access to sources of raw materials |
B. Economic and technological position relative cost position capacity utilization level technological position patented technology, products, processes |
| B. Competitive factors type of competitors competitive structure threat of substitute products perceived changes among competitors |
B. Abilities strengths of the management system strengths of the marketing system distribution system labor relations |
A variation of the GE/McKinsey model proposed by Monieson:
| Industry position | Invest in growth | Selectively invest in growth | Invest for income |
| Strong |
|
|
|
| Invest in growth | Selectively invest for income | Generate income or go out of business | |
| Average |
|
|
|
| Selectively invest in real money | Protect your revenue system | Make a profit or go out of business | |
| Weak |
|
|
|
| Strong | Average | Weak | |
| Market attractiveness | |||
Monieson proposed using the following as factors for assessing the attractiveness of the market and the attractiveness of the industry:
| Market attractiveness | Attractiveness of the industry |
|
|
Literature:
- Naylor, Thomas H. The Corporate Strategy Matrix. New York: Basic Books, 1986.
- Day G.S. Analysis for Strategic Marketing Decisions. West Publishing Company, 1986.
- Monieson. D.D. Effective Marketing Planning: An Overview. 1986.
Matrix GE (General Electric), or McKinsey matrix (McKinsey) jointly proposed by the corporation General Electric and consulting company McKinsey&Co, is more advanced than matrix BCG, the following reasons.
1. Matrix GE/McKinsey is formed in a 3x3 format (Fig. 5.3), while the matrix BCG- in 2x2 format. Along the axes X And at Integral assessments are given according to the attractiveness of the market (or business sector) and the relative advantage of the organization in a given market (or the strengths of the organization’s business). Unlike the matrix BCG in the matrix GE/McKinsey each coordinate axis is considered as an axis of a multifactorial, multidimensional measurement. This allows you to use this matrix more productively and diversified in analytical terms compared to the matrix BCG and at the same time makes it more realistic from the point of view of positioning types of businesses.
Rice. 5.3. Graphical representation of the matrix G.E.
- 2. The Industry/Market Attractiveness scale is used as a measure of industry attractiveness instead of market growth, since industry/market attractiveness includes more factors than just the market growth rate in the matrix BCG.
- 3. The Competitive Advantage scale replaces market share as a parameter for assessing the competitiveness of a strategic business unit, since this concept also includes more factors than just market share in the matrix BCG.
Let's consider typical factors influencing the attractiveness of the market and the competitive advantage of a strategic business unit (Table 5.2).
Table 5.2
Typical factors influencing market attractiveness and competitive advantage of a strategic business unit
|
Typical external factors influencing market attractiveness (market attractiveness) |
Typical internal factors influencing competitive advantage (competitive strength) strategic business unit |
|
Market size Market growth rate Market profitability Trends Competitive situation (level of competition in the industry) Level of risk of investment in the industry Barriers to entry into the market Opportunities for differentiating products and services Demand variability Segmentation Distribution structure Technology development |
Asset and Competency Advantage Relative Brand Advantage Market Share Market Share Growth Rate Customer Loyalty Relative Cost Status (cost structure compared to competitors) Relative profit (compared to competitors) Advantage of distribution and production facilities Indicator of technological or other innovations Quality Access to financial and other investment resources Advantage of company management |
Model GE/McKinsey is a matrix consisting of nine cells and is used for the formation and further comparative analysis of the strategic positions of the areas of economic activity of the audited company. The main feature of this model is that for the first time, not only physical factors (such as sales volume, profit, return on investment, etc.), but also subjective business characteristics, such as share volatility, began to be used to evaluate strategic business units market, technology, state of staffing, etc.
Parameters by which the position of a business along the axis is assessed y, are beyond the control of the company. Their values can only be recorded, but it is almost impossible to influence the improvement of these indicators. The positioning of the organization's business along the x-axis is under the control of the audited company itself and can be changed if desired.
Strategic business units are also depicted in the matrix G.E. in the form of circles, where:
- the size of the circle indicates the size of the market;
- The circle share size represents the market share of the strategic business unit;
- the arrows reflect the direction and movement of strategic business units in the future.
The matrix distinguishes three areas of strategic positions: 1) the area of winners; 2) area of losers; 3) the middle area, which includes positions where business profits are stably generated, average business positions and questionable types of business (Fig. 5.4).
Rice. 5.4. Structure of matrix quadrants G.E.
Let's consider the features and possible strategies of the audited company when its strategic business unit falls into each of the quadrants of the matrix.
Types of businesses that, when positioned, fall into the “winners” area have better or average values of market attractiveness factors and organization advantages in the market compared to others. In relation to these types of businesses, most likely, a positive decision can be made regarding additional investments, since they are usually focused on further development.
The position, which is conventionally called “Winner (1)”, is characterized by the highest degree of attractiveness of the market and the relatively strong advantages of the organization in it. The audited company represented in this cell of the matrix will most likely be the undisputed leader or one of the leaders in its market. It can only be threatened by the possible strengthening of the positions of individual competitors. Therefore, the strategy of an organization in such a position should be aimed at protecting its position primarily through additional investments.
The position called “Winner (2)” is characterized by the highest degree of market attractiveness and the average level of relative advantage of the organization. A company located in this quadrant is not a leader in its industry, but at the same time it is not too far behind it. The auditors' strategic recommendations, after identifying strengths and weaknesses, may be to infuse the necessary investments into business units in order to extract maximum benefit from their strengths and improve their weaknesses.
The position “Winner (3)” can be occupied by an organization with types of business whose market attractiveness is at an average level, but at the same time the advantages of the organization in the market are obvious and strong. Such an audited company must first of all: identify the most attractive market segments and invest in them; develop your ability to withstand the influence of competitors; increase production volumes and, as a result, achieve an increase in the company’s profitability.
The types of businesses that fall into the three cells in the lower right corner of the matrix are called losers. These are types of businesses that have at least one of the lower and do not have any of the higher parameters plotted on the x and axes. u. Additional investments of the organization in them, as a rule, should be limited or absent altogether, since there is no connection between these investments and the mass of the organization’s profit.
The “Loser (1)” position is characterized by average market attractiveness and a low level of relative advantage in the market (middle cell in the right row). For a business unit in this position, auditors may offer the following recommendations:
- looking for opportunities for improvement in low-risk areas;
- development of those areas in which the business has a clearly low level of risk;
- concentration of the audited company on increasing the profits of certain strong business areas, and if it is impossible to obtain an increase in profits, leaving this business area.
The “Loser (2)” position is characterized by low market attractiveness and an average level of relative advantage in the market (middle cell in the bottom row). A business unit located in this quadrant does not have any special strengths or capabilities. The business industry can rather be called unattractive. The audited company represented in this quadrant is not a leader in this type of business, although it can be considered a serious competitor to the others. In this situation, it is advisable for the organization to concentrate efforts on reducing risk, protecting its business in the most profitable areas of the market, and if competitors are trying to buy out this business and offer a good price, then it is better to accept their offer.
The “Loser (3)” position is characterized by low market attractiveness and a low level of relative advantages of the organization in this type of business. In this situation, you can only strive to receive possible profits, refrain from making any investments, or exit this type of business altogether.
The types of businesses that fall into the three cells located along the diagonal running from the lower left to the upper right edge of the matrix are called borderline. These are types of businesses that can either grow under certain conditions or, conversely, shrink.
If the business belongs to a dubious type of business (upper right corner), which can be associated, as a rule, with its relatively insignificant competitive advantages for an organization involved in a very attractive and promising business from the point of view of market conditions, then the following strategic decisions are possible based on the results audit:
- the organization's concentration on enhancing those of its advantages that can turn into strengths;
- the company occupying a separate niche in the market and investing in its development;
- if it is impossible to implement the previous recommendations, leave this type of business.
A business classified as average is characterized by the absence of any special qualities, has an average level of market attractiveness, and an average level of relative advantages of the organization in this type of business. The placement of business units in these quadrants determines the company’s cautious strategic behavior in the market: invest selectively and only in very profitable and least risky projects.
Business areas of an organization that are determined by a low level of market attractiveness and a high level of relative advantage of the organization itself in a given industry are called producers of profit. In such cases, investments should be directed to obtain an effect in the short term, since the collapse of the industry may occur at any time. At the same time, investments should be concentrated around the most attractive market segments.
To implement the method GE/McKinsey It is necessary to carry out the following audit stages:
- highlight the driving factors of each parameter, i.e. those that are important to the overall strategy of the audited company;
- calculate the relative importance of each factor;
- determine indicators for strategic business units for each factor;
- multiply the weights by the indicators for each strategic business unit;
- analyze the resulting diagram and interpret
Perform sensitivity analysis.
A significant drawback of the matrices presented above is the lack of analysis of interactions between strategic business units.