GE Matrix and portfolio analysis

Focusing Effort to Give the Greatest Returns

Imagine that you're reviewing your organization's products. You need to decide which ones you should focus investment on.One of the products is doing well financially. However, demand has fallen, and this trend looks set to continue.Another product is also doing well, but it's in a new market, and needs a lot of cash to support it. Should you continue investing in it?

And another product is barely profitable, although its market is growing. Should you kill it or keep it? To make these decisions, you need to look beyond the income that the products are currently bringing in. You need to assess how they're likely to perform in future.  The Boston Matrix, also called the Boston Consulting Group (BCG) Matrix, is a simple, visual way to examine the likely financial performance of your product or business portfolio.

Understanding the Boston Matrix

Management consultants at the Boston Consulting Group developed their matrix in the early 1970s. They designed it to help managers at large corporations decide which business units they should invest in.

However, managers in all kinds of organizations now also use it to decide which of their product lines or products to invest in, and which to dispose of or to shut down.

The matrix, shown in figure 1, places products into four categories based on their market share and market growth.

Figure 1 – The Boston Matrix

The categories are:

• Dogs: Low Market Share and Low Market Growth Dogs are business units or products that have low market share in a low-growth market. They often don't make much profit, but they don't need much investment either. Much of the time, you'll need to offer a price discount to sell Dog products.
• Cash Cows: High Market Share and Low Market Growth These businesses or products are well established. They're likely to be popular with customers, which makes it easier for you to exploit new opportunities. However, you should avoid spending too much effort on these, because the market is only growing slowly, and opportunities are likely to be limited.
• Stars: High Market Share and High Market Growth Businesses and products in this quadrant are seeing rapid growth. There should be some good opportunities here, and you should work hard to realize them.
• Question Marks (Problem Children): Low Market Share and High Market Growth These are the opportunities that no one knows how to handle. They aren't generating much revenue right now, because you don't have a large market share. But they're in high-growth markets, so they could become Stars or even Cash Cows if you can build market share. However, if you cannot increase market share, Question Marks could absorb a lot of effort with little return. 

    GE / McKinsey Matrix

GE / McKinsey Matrix

		Business Unit Strength
		High	Medium	Low
	High
	Medium
	Low

It maps strategic business units on a grid of the industry and the SBU's position in the industry. The GE matrix however, attempts to improve upon the BCG matrix in the following two ways:

• The GE matrix generalizes the axes as "Industry Attractiveness" and "Business Unit Strength" whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit.
• The GE matrix has nine cells vs. four cells in the BCG matrix.

Industry Attractiveness

The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is determined by factors such as the following:

• Market growth rate
• Market size
• Demand variability
• Industry profitability
• Industry rivalry
• Global opportunities
• Macroenvironmental factors (PEST)

Each factor is assigned a weighting that is appropriate for the industry. The industry attractiveness then is calculated as follows:

Industry attractiveness    =		factor value1   x   factor weighting1
	+	factor value2   x   factor weighting2
	. . .
	+	factor valueN   x   factor weightingN

Business Unit Strength

The horizontal axis of the GE / McKinsey matrix is the strength of the business unit. Some factors that can be used to determine business unit strength include:

• Market share
• Growth in market share
• Brand equity
• Distribution channel access
• Production capacity
• Profit margins relative to competitors

The business unit strength index can be calculated by multiplying the estimated value of each factor by the factor's weighting, as done for industry attractiveness.

Plotting the Information

Each business unit can be portrayed as a circle plotted on the matrix, with the information conveyed as follows:

• Market size is represented by the size of the circle.
• Market share is shown by using the circle as a pie chart.
• The expected future position of the circle is portrayed by means of an arrow.

The following is an example of such a representation:

The shading of the above circle indicates a 38% market share for the strategic business unit. The arrow in the upward left direction indicates that the business unit is projected to gain strength relative to competitors, and that the business unit is in an industry that is projected to become more attractive. The tip of the arrow indicates the future position of the center point of the circle.

Strategic Implications

Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix as follows:

• Grow strong business units in attractive industries, average business units in attractive industries, and strong business units in average industries.
• Hold average businesses in average industries, strong businesses in weak industries, and weak business in attractive industies.
• Harvest weak business units in unattractive industries, average business units in unattractive industries, and weak business units in average industries.

There are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry.
 
 While the GE business screen represents an improvement over the more simple BCG growth-share matrix, it still presents a somewhat limited view by not considering interactions among the business units and by neglecting to address the core competencies leading to value creation. 

Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units. At this point, you can make a "go/no-go" decision. If you decide to "go," carry on to develop your business plan.