The matrix was developed by General Electric and their consultants McKinsey and Company to differentiate the potential for future profit in each of the 43 strategic business units and therefore to differentiate resources allocation priorities.
It was developed in response to the limitations seen in the Boston Consulting Group’s matrix –the Growth Share Matrix. It is a more flexible approach to portfolio planning.
The axes of the matrix measure industry attractiveness on the x-axis and business strength on the y-axis. The size of the circles represents the size of the industry with a wedge representing the firm’s current share of the industry.
The scope of application for this model extends from a corporate level to a business level incorporating the products making up the business.
The matrix consists of nine boxes allowing the rating of the factors to be high, medium, low compared to the BCG’s low and high ratings.
The model proposes that the profitability of each unit is influenced by the unit’s business strength and that the ability and incentive of a firm to maintain or improve its position in a market depends on the industry attractiveness.
A highly attractive market implies high present or potential cash flow and similarly high business strength also implies high present or future cash flow.
This model ascertains that industry attractiveness and business strengths are made up of any number of varying factors and that these factors may differ from organisation to organisation.
Factors on both axes are weighted and rated to give the co-ordinates on the plot
The matrix is divided into three general areas of invest / grow, selectivity / maintain, milk / divest.
Forecasting of these factors into the future and plotting the businesses on the matrix assists with the strategic planning of a firm.
The matrix has been criticised as being too complicated and paying too little attention to the business environment. This second criticism led to the development of the Environmental Strategy Matrix.
Other models that can be considered as versions or adaptations of the original GE McKinsey matrix are the Shell directional policy matrix and McDonald’s directional policy matrix.