Understanding McKinsey Matrix and Generic Business Strategies

GE or McKinsey Matrix

It is also known as GE Nine cell matrix. This matrix was developed in1970s by the General Electric Company with the assistance of the consulting firm, McKinsey Co, USA. This is also called GE multifactor portfolio matrix. The GE matrix has been developed to overcome the obvious limitations of BCG matrix. This matrix consists of nine cells (3X3) based on two key variables:

1. Industry attractiveness
2. Business strength.

In the figure below, three possible values of each of these two dimensions are plotted resulting in a nine cell 3 x 3 matrix.  The horizontal axis represents business strength and the vertical axis represents industry attractiveness.

The nine cells of the GE matrix represent various degrees of industry attractiveness (high, medium or low) and business strength (strong, average and weak). After plotting each product line or business unit on the nine-cell matrix, strategic choices are made depending on their position in the matrix. GE matrix is also called “Stoplight” strategy matrix because the three zones are like green, yellow and red of traffic lights.

1. Green indicates invest/expand – if the product falls in green zone, the business strength is strong and industry is at least medium in attractiveness, the strategic decision should be to expand, to invest and to grow.
2. Yellow indicates select/earn – if the product falls in yellow zone, the business strength is low but industry attractiveness is high, it needs caution and managerial discretion for making the strategic choice
3. Red indicates harvest/divest – if the product falls in the red zone, the business strength is average or weak and attractiveness is also low or medium, the appropriate strategy should be divestment.

Advantages of GE Nine-cell matrix 

1. It used 9 cells instead of 4 cells of BCG
2. It considers many variables and does not lead to simplistic conclusions
3. High/medium/low and strong/average/low classification enables a finer distinction among business portfolio
4. It uses multiple factors to assess industry attractiveness and business strength, which allow users to select criteria appropriate to their situation

Limitations of GE Nine-cell matrix 

1. It can get quite complicated and cumbersome with the increase in businesses
2. Though industry attractiveness and business strength appear to be objective, they are in reality subjective judgements that may vary from one person to another
3. It cannot effectively depict the position of new business units in developing industry
4. It only provides broad strategic prescriptions rather than specifics of business policy

Difference between BCG Matric and GE matric

BCG Matrix	GE Matrix
BCG matrix consists four cells	GE matrix consists nine cells
The business unit is rated against relative market share and industry growth rate	The business unit is rated against business strength and industry attractiveness
The matrix uses single measure to assess growth and market share	The matrix uses multiple measure to assess business strength and industry attractiveness
The matrix uses two types of classification i.e. high and low	The matrix uses three types of classification i.e. high /medium/ low and strong/average/weak
It has many Limitation	Overcome many Limitations of BCG and is an improvement over it

Generic Strategies

Generic strategies were used initially in the early 1980s, and seem to be even more popular today. They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage.

Each of the three options is considered within the context of two aspects of the competitive environment

1. Sources of competitive advantage
2. Are the products differentiated in any way, or are they the lowest cost producer in an industry?
3. Competitive scope of the market
4. Does the company target a wide market, or does it focus on a very narrow, niche market?

The generic strategies are:

1. Cost Leadership. - The low-cost leader in any market gains competitive advantage from being able too many to produce at the lowest cost. Factories are built and maintained. labor is recruited and trained to deliver the lowest possible costs of production. ‘Cost advantage' is the focus. Costs are shaved off every element of the value chain. Products tend to be 'no frills.' However, low cost does not always lead to low price. Producers could price at competitive parity, exploiting the benefits of a bigger margin than competitors. Some organizations, such as Toyota, are very good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy.
2. Differentiation - Differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin. The benefits of differentiation require producers to segment markets in order to target goods and services at specific segments, generating a higher-than-average price. For example, British Airways differentiates its service. The differentiating organization will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs must be recovered. There is also the chance that any differentiation could be copied by competitors. Therefore, there is always an incentive to innovated and continuously improve.
3. Focus or Niche strategy - The focus strategy is also known as a 'niche' strategy. Where an organization can afford neither a wide scope cost leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus. With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. There are potentially problems with the niche approach. Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale e.g. telecommunications.

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Sandeep Ghatuary

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