Learn how to use the GE Matrix to identify the best business opportunities – WAU
The GE Matrix is a management tool aimed at a company’s business unit portfolio. It makes it possible to identify the best product portfolio and the most attractive markets.
Since the last century, the accelerated increase in the number of companies with multiple units is undeniable. With this growth, organizations also end up having to deal with new pains, such as the difficulty of managing the profitability of each unit (Business Units).
And, as expected, new pains also require new solutions. That was how, in the 1970s, some tools capable of solving the new complexity emerged, such as the BCG Matrix.
Shortly thereafter, competing business consulting firm McKinsey developed an even more advanced model to help multinational General Electric.
For this reason, it came to be called GE Matrix or GE-McKinsey Matrix.
Today, this matrix is nothing less than one of the techniques most widely used by decentralized companies worldwide to prioritize investments in business units.
Learn to follow everything about the GE Matrix to invest wisely in your company’s portfolio!
What is the GE Matrix?
The GE Matrix is a management tool created by McKinsey to facilitate the allocation of investments between corporate business units.
It enables a systematic approach to increase the return on investments in the company’s units.
Thus, the GE Matrix facilitates the assessment of the business unit portfolios so that companies develop growth strategies by introducing new products or businesses in these portfolios.
With this graphical analysis, the decision-maker comes to understand which business units to invest in and which ones are not so worth it.
How does the structure of the GE Matrix work?
First, let’s understand what each of the two axes of the GE-McKinsey Matrix means:
- attractiveness: how is the market’s performance in general and expectations for the long term;
- competitive strength: what is the competitive advantage of each business unit and what will be its performance in relation to this market in general.
The business units to be analyzed are then divided between two criteria by degree, which will indicate their position in the matrix.
That is: the units may have low, medium or high degrees in terms of competitive strength, just as the market sector may have low, medium or high attractiveness.
The characterization among these criteria, to varying degrees, is that it will define the three main decisions that the company can make in relation to its business unit investments:
- Invest or grow;
- Selective gains;
- Go out or harvest.
In the next few topics, we’ll explain each of these implications better.
Invest or grow
If the business unit is in a very promising sector of the market but does not have enough strength, it is time to receive investments! This is because they have the potential to bring the greatest returns to the company and, therefore, they must maintain or increase their market share.
These investments can be, for example, in Marketing, Research & Development or in acquisitions and to increase production capacity.
This implication demands more from the decision maker, who must be able to discern in which situations to invest in the business units in this group, which have average attractiveness and competitive strength. The investment should be released only if the resources are not at the limit and if the projections promise satisfactory returns.
In general, it is recommended to invest in the business units in large and fragmented markets, so that the investments enable an increase in market share.
Get out or harvest
If the strength of the unit is great but the sector in that market is not attractive, it will only be worthwhile to maintain the investments if they do not exceed the cash generated, which the GE Matrix calls “harvesting”.
Otherwise, those business units that generate losses must be discontinued, as they are unsustainable for the company.
What are the advantages of the GE Matrix?
According to Mckinsey herself, this model today is even more important than at the time it was developed.
For this reason, the GE Matrix is, in a way, used by most large corporations.
The main advantages of the GE Matrix for the organization and the decision makers are:
- simplifies analysis by visual presentation;
- facilitates decisions in decentralized companies;
- the model is more sophisticated than the BCG Matrix;
- organizes priorities on allocating limited resources;
- overcomes the difficulty of comparing the business units, analyzing them jointly based on two unique criteria.
If your organization has several units and you are having trouble understanding how to direct investments between them, the time has come to apply this methodology!
Follow the step by step below to avoid getting lost on the way.
1. Determine the attractiveness of each business unit’s sector
For this, we must consider factors such as the growth rate, profitability and the size of the market, competition and the macroenvironment in general (political, economic, social etc.).
To make it easier, you can set weights for some main criteria that make the sector attractive.
After that, it is possible to classify each factor for each business unit on a scale of 1 (not attractive) to 10 (very attractive) and obtain its weighted score multiplying the weight of the factor by the unit rate.
2. Determine the competitive strength of each business unit
Step 2 is similar to step 1, but instead of the attractiveness of the sector, we try to discover the unit’s competitive strengths.
Again, it is necessary to identify the competitive strengths of the business units in question.
For this, we can take into account: market share, growth rate, profitability, brand reputation and customer service.
3. Position the business units in the matrix
With the weighted scores of the units, it is possible to position each one in the matrix.
For example, let’s say that Unit A and Unit B score 29 and 41 in the attractiveness of the industry, and 18 and 35 in the unit strength, respectively.
Each unit is represented by a circle with its size, showing the market size of the unit.
The units that are above the matrix diagonal would then be strong candidates to receive additional investments, unlike those that are below it.
4. Determine the strategy option for the unit
The time has come to apply the three implications we talked about earlier: (1) invest or grow, (2) selective gains and (3) go out or reap.
In the example of the two units above, Unit A is in the “selective earnings” category and Unit B is in the “invest or grow” category.
5. Predict scenarios.
Now we come to the last step of building the GE Matrix.
Our example shows that Unit B is in the investment category. But can we immediately conclude that it will receive more resources?
The answer is no.
That is why it is so necessary to rely on the wisdom of business analysts to forecast market prospects.
In the case of Unit B, then, if your industry’s prospects show that the market is likely to decline and may lose momentum, it ends up becoming much less attractive for investment.
On the other hand, if the future scenario of Unit A shows that its industry is ready to grow, the unit, now placed in the “selective earnings” category by the parent company, will become attractive for investment.
These scenarios were illustrated with arrows in the image to indicate the future direction of the units.
As we have seen, the GE Matrix has several advantages, but it can also be complex to use without the expertise of a specialist.
We hope that this tool will be very useful for building action plans within your company.
To better structure this project and define responsibility, also visit the RACI Matrix to ensure organization and compliance with deadlines.