WHAT IS THE MCKINSEY MATRIX?

The McKinsey Matrix is a model to perform a business portfolio analysis on the Strategic
Business Units of a corporation. Synonyms for this method are; GE Matrix, Business
Assessment Array and GE Business Screen.

WHAT IS A PORTFOLIO?
A business portfolio is the collection of Strategic Business Units that together form a corporation.
The optimal business portfolio is one that fits perfectly to the company's strengths and helps to
exploit the most attractive industries or markets.

WHAT IS A STRATEGIC BUSINESS UNIT?

A Strategic Business Unit (SBU) can either be an entire medium size company or a division of a
large corporation. As long as it formulates its own business level strategy and has separate
objectives from the parent company.

THE AIM OF PORTFOLIO ANALYSIS

1. Analyze its current business portfolio and decide which SBU's should receive
more or less investment
2. Develop growth strategies for adding new products and businesses to the
portfolio
3. Decide which businesses or products should no longer be retained.
The BCG Matrix (Boston Consulting Group Matrix) is the best-known portfolio planning
framework. The McKinsey Matrix is a later and more advanced form of the BCG Matrix.

THE MCKINSEY MATRIX

The McKinsey Matrix is more sophisticated than the BCG Matrix in three aspects:
1. Market (Industry) attractiveness is used as the dimension of industry
attractiveness, instead of market growth. Market Attractiveness includes a broader range
of factors other than just the market growth rate that can determine the attractiveness of
an industry / market. Compare also: Five Forces
2. Competitive strength replaces market share as the dimension by which the
competitive position of each SBU is assessed. Competitive strength likewise includes a
 broader range of factors other than just the market share that can determine the
competitive strength of a Strategic Business Unit.
3. Finally, the GE Matrix works with a 3*3 matrix, while the BCG Matrix has only
2*2. This also allows more sophistication.
Typical (internal) factors that affect
Competitive Strength of a Strategic
Typical (external) factors that affect Market
Business Unit:
Attractiveness:

- Strength of assets and competencies

- Market size
- Relative brand strength (marketing)
- Market growth rate
- Market share
- Market profitability
- Market share growth
- Pricing trends
- Customer loyalty
- Competitive intensity / rivalry
- Relative cost position (cost structure compared
- Overall risk of returns in the industry
with competitors)
- Entry barriers
- Relative profit margins (compared to
- Opportunity to differentiate products and
competitors)
services
- Distribution strength and production capacity
- Demand variability
- Record of technological or other innovation
- Segmentation
- Quality
- Distribution structure
- Access to financial and other investment
- Technology development
resources
- Management strength

Often, Strategic Business Units are portrayed as a circle plotted in the GE Matrix, whereby:
• 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
A SIX-STEP APPROACH FOR THE IMPLEMENTATION OF THE MCKINSEY MATRIX
1. Specify drivers of each dimension. The corporation must carefully determine
those factors that are important to its overall strategy.
2. Determine the weight of each driver. The corporation must assign relative
importance weights to the drivers.
3. Score the SBU's on each driver.
4. Multiply weights and scores for each SBU.
5. View resulting graph and interpret it.
6. Perform a review/sensitivity analysis. Make use of adjusted other weights and
scores (there may be no consensus).
SOME LIMITATIONS OF THE MCKINSEY MATRIX
• The valuation of the realization of the various factors.
• Aggregation of the indicators is difficult.
• Core Competences are not represented.
• Interactions between Strategic Business Units are not considered.