GE-MCKINSEY MATRIX- 9 Cell Model

GE Matrix also called McKinsey Matrix is a strategic

management tool for conducting portfolio analysis.
This tool GE or McKinsey Matrix is a kind of
extension of the BCG Matrix
The GE grid differs from BCG model in two respects
as follow;
1. The GE grid has considered a number of factors in assessing
the industry attractiveness and business strength instead of
the single measure for each of two dimensions market
share and market growth .
2. The GE matrix has nine cells Vs four cells in the BCG matrix
. GE grid considers three degrees of a dimensions high
,medium , and low as compared to two degrees high and
low employed by BCG model .

Thus, the objective of the analysis is to position

each SBU on the chart depending on the SBU's
Strength and the Attractiveness of the Industry
Sector or Market on which it is focused. Each axis
is divided into Low, Medium and High, giving the
nine-cell matrix as depicted below. SBUs are
portrayed as a circle plotted on the GE/McKinsey
Matrix, where the size of the circle represents a
factor such as Market Size.

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
Microenvironment (PEST)

Each factor is assigned a weighting that is approximate for the

industry.The industry attractiveness then is calculated as follows;
Industry attractiveness= factor value 1 * factor weighting 1
+ factor value 2 * factor weighting 2
.
.
.
+ factor value N * factor weighting N

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
factors 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:
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
The following is an example of such a representation:

38%

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.

GE Matrix Positions and Strategy

The GE / McKinsey Matrix is actually divided into

nine cells. These 9 cells represent the nine alternatives
for positioning of any SBU or product / service
offering. Based on the strength of the business and its
market attractiveness each SBU will have a different
position in the matrix. Further, the market size and the
current sales will distinguish each SBU. Based on clear
understanding of all of these factors decision makers
are able to develop effective strategies.
The nine cells in the matrix can be grouped into three
major segments. Each zone is depicted by different
colours: green, yellow and red.:

 Segment 1 ( Invest / Expand):

This is mostly the best segment. The business in this position is strong
and the market is attractive, the business has the opportunity to grow
further with investment and expansion. In the extreme left hand corner,
both the business strength and industry attractiveness are high which is
ideal situation for growth, however the business does not remain in this
situation for a long run.

 Segment 2( Select / Earn)

The business is either strong but the market is not attractive or the market
is strong and the business is not strong enough to pursue potential
opportunities hence it is a mixed situation. The opportunity for
selective earning exists because either one of the two dimensions
business strength and industry attractiveness is high or both stand in
the middle. Decision makers should make judgment on how to further
deal with these SBUs or products. Some of them may consume too
many resources and are not really promising any strong potential while
others may need additional resources and better strategy for growth.

Segment 3( Harvest / Divest)

This is the worst positioning segment. Businesses or products and

services in this segment are very weak and their market is not
attractive. Decision makers should consider either harvesting or
divesting strategy. Harvesting involves a decision to repositioning
these SBUs into a different market segment or getting rid of these
weak SBUs and invests the resources in more promising and
attractive SBUs

Strategic Position and Action Evaluation

(SPACE)
Strategic Position and Action Evaluation

(SPACE) is an extension of two dimensional

portfolio analyses which helps an organization
to hammer out an appropriate strategic posture.
SPACE involves a consideration of four
dimensions:

Organizations competitive advantage

Organizations financial strength
Industry strength
Environmental stability

Competitive advantage
Financial strength
Industry strength
Environmental StabilityCompetitive Advantage
Industry Strength Market share Profit Potential Product
qualityGroeth PotentialProduct Life Cycle Financial
StabilityProduct replacement CycleTechnical Know- Hoew
Customer LoyaltyResource utilizationCompetitions capacity
UtilizationCapital IntensityTechnical Know-How Ease of entry
into market Vertical IntegrationProductivity, capacity
utilizationFinancial StrengthEnvironmental
stabilityReturn Of InvestmentTechnological changes
Levarage Rate of inflationLiquidity Demand
variabilityCapital Required and available Price range of
competing products Cash Flow Competitive pressure Ease of
exit from marketPrice Elasticity of Demand Risk involved in
the businessEntry Barriers

Various SPACE factors are measured in terms of degrees ,

often quantified from 0 to 5 with 0 indicating the most
unfavorable and 5 indicating the most favorable . Based on
these degrees , SPACE diagram is prepared as shown in
figure :
Financial strength

Conservative

Aggressive

Competitive
Advantage

Defensive

Competitive

Environmental Stability
Figure : SPACE Diagram and Strategic Postures

Industry
Strength

Depending upon the four dimensions i.e organizational financial strength,

its competitive advantage, industry strength and environmental stability, the
organization may adopt any one of the following strategic postures;

Aggressive Posture: is adopted when an organization enjoys

competitive advantage and has a strong financial strength
followed by industry attractiveness and stable environment. Such
a strategic posture leads to concentric expansion, vertical
integration and concentric diversification. For eg; Hero Honda
has adopted a massive concentric expansion for its motorcycles
as all the four dimensions are highly favorable.
Competitive Posture: Competitive posture is suitable to an
organization which enjoys competitive advantage but has limited
financial strength. It operates in attractive industry but has limited
financial strength. It operates in attractive industry but
environment is relatively unstable. Such as strategic posture leads
to concentric merger, conglomerate merger and turnaround. For
eg: Bata India operates in such a condition and a concentrated on
turnaround and concentric merger to some extent.

Conservative Posture: conservative posture is

adopted when an organization has financial strength
but has very limited competitive advantage. The
industry in which it operates is not attractive though
environment is relatively stable. Such a strategic
posture leads to stability strategy and conglomerate
diversification. for eg: TISCO operates in this
situation and concentrated on stability strategy.
Defensive Posture: Defensive posture is suitable
when an organization has low financial strength and
lacks competitive advantage .It operates in an
industry which is not attractive and environment is
relatively unstable. Such a posture leads to
divestment, liquidation and other forms of
retrenchment. For eg : most of the jute bag
manufacturers operate in such a situation.

Porters Five Forces Model of Competition

Michael Porter (Harvard Business School

Management Researcher) designed the five
competitive forces model that determines industry
structure. According to Porter, the nature of
competition in any industry is personified in the
following five forces:
The threat of new entrants and the appearance of new
competitors
The degree of rivalry among existing competitors in the
market
The bargaining power of buyers
The bargaining power of suppliers
The threat of substitute products or services which could
shrink the market

Risk of entry by potential competitors: Potential competitors refer to the

firms which are not currently competing in the industry but have the potential
to do so if given a choice. Entry of new players increases the industry
capacity, begins a competition for market share and lowers the current costs.
The threat of entry by potential competitors is partially a function of extent of
barriers to entry. The various barriers to entry are
Economies of scale

Brand loyalty

Government Regulation

Customer Switching Costs

Absolute Cost Advantage

Ease in distribution

Strong Capital base

Rivalry among current competitors: Rivalry refers to the competitive
struggle for market share between firms in an industry. Extreme rivalry among
established firms poses a strong threat to profitability. The strength of rivalry
among established firms within an industry is a function of following factors:

Extent of exit barriers

Amount of fixed cost

Competitive structure of industry

Presence of global customers

Absence of switching costs

Growth Rate of industry

Demand conditions

Bargaining Power of Buyers: Buyers and none but the

customers who finally consume the product. Bargaining power
of buyers refer to the potential of buyers to bargain down the
prices charged by the firms in the industry or to increase the
firms cost in the industry by demanding better quality and
service of product. Strong buyers can extract profits out of an
industry by lowering the prices and increasing the costs. They
purchase in large quantities. They have full knowledge about the
product and the market. They emphasize upon quality products.
They pose credible threat of backward integration. In this way,
they are regarded as a threat.
Bargaining Power of Suppliers: Suppliers refer to the firms
that provide inputs to the industry. Bargaining power of the
suppliers refer to the potential of the suppliers to increase the
prices of inputs( labour, raw materials, services, etc) or the costs
of industry in other ways. Strong suppliers can extract profits out
of an industry by increasing costs of firms in the industry.
Suppliers products have a few substitutes. Strong suppliers
products are unique. They have high switching cost. Their
product is an important input to buyers product. They pose
credible threat of forward integration. Buyers are not significant
to strong suppliers. In this way, they are regarded as a threat.

Threat of Substitute products: Substitute products refer to the

products having ability of satisfying customers needs
effectively. Substitutes pose a ceiling (upper limit) on the
potential returns of an industry by putting a setting a limit on the
price that firms can charge for their product in an industry.
Lesser the number of close substitutes a product has, greater is
the opportunity for the firms in industry to raise their product
prices and earn greater profits (other things being equal).
The power of Porters five forces varies from industry to
industry. Whatever be the industry, these five forces influence
the profitability as they affect the prices, the costs, and the
capital investment essential for survival and competition in
industry. This five forces model also help in making strategic
decisions as it is used by the managers to determine industrys
competitive structure.