This model suggests that the long run 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.
Assumptions for the GE-McKinsey MatrixA 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.
The external factors constituting the industry attractiveness are factors such as socio-political, economic, legislative, regulatory and demographic factors. The firm cannot readily control them and they are the basic characteristics of the industry and the competitive structure in which the firm operates. A market or industry is considered to be attractive if its potential for providing a significant contribution to objectives for earning growth and return on investment is judged to be high.
The factors are usually identified by a representative, experienced group of managers from the firm including corporate, business and functional managers.
An explicit understanding of what constitutes a potentially profitable environment is essential to the formulation of strategy and for the understanding of the potential impact of competitors.
A market or industry is considered to be attractive if its potential for providing a significant contribution to objectives for earnings growth and return on investment is judged to be high.
Different strategists and consultants have devised different sets of variables for industry or market attractiveness indicating that there is no consensus regarding the factors that make up industry attractiveness but the final factor selection is a subjective evaluation conducted by the firm.
Not all of the factors have equal attractiveness to every company. They must be weighted accordingly to determine how much each factor contributes to the attractiveness of the industry to which the business belongs.
The criteria or factors must be consistent for all the industries that the firm competes in so that comparisons between the various strategic businesses can be made.