McKinsey matrix: definition, construction methods, pros and cons

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The McKinsey matrix is one of the most common methods for determining the place of an enterprise in a particular segment and in comparison with other companies. With the correct construction of the matrix and taking into account the necessary details, entrepreneurs clearly understand where and how they need to move.

General characteristics

The General Electric McKinsey Matrix, or the Business Screen as it is also called, is a method used in brand marketing and management to help managers make decisions about product development. There is a conceptual similarity with the BCG (Boston Consulting Group) matrix, but the described tool is an order of magnitude more complicated.

The McKinsey General Electric matrix was developed by the McKinsey consulting company specifically for General Electric in the 70s of the last century. Ten years later, the model has become very popular for determining the position of a business and product in the market.

The main feature of the described method is the use of weightcoefficients and taking into account all trends in the development of the industry. This analysis provides answers to the following questions:

• in what direction it is necessary to develop;
• activity that will bring big losses;
• what products do not meet the requirements of a potential client;
• which product is a priority in the promotion;
• how to rationally and efficiently allocate resources, etc.

Step by step development

Development of the McKinsey matrix is a rather time-consuming and difficult process. In general terms, it can be divided into five separate phases.

1. Detailed analysis of the assortment. Selection of criteria and factors for further evaluation. They should relate to the attractiveness of the segment and the level of competitiveness of a particular company in all areas of interest.
2. Determining the weight or importance of the selected criteria.
3. Estimation of all segments according to selected indicators at the time of matrix creation.
4. Approximate forecasting of the potential of each segment, based on consumer requirements and market trends.
5. Targeting and fair distribution of resources.

All steps are much easier to understand when you have a ready-made example of the McKinsey matrix in front of your eyes.

Segment attractiveness score

First you need to understand the concept of "attractiveness" of the industry. It shows whether it is profitable for a company to enter a given market and compete with established firms and newcomers. Among the main factors influencing the assessment,three groups appear:

• Market. These include: market size, level of development, growth rate of the segment over the past three years, the number of players in this "site" and the degree of advertising support.
• Consumer: the scope of the target audience, the culture of consumption and the level of loy alty to the offers of competitors.
• Market trends. Here it is necessary to highlight consumer trends and risks caused by changes in the macro environment (we are talking about demographic, social, cultural, scientific and technological, environmental and other factors).

Attractive market is considered when:

• large volumes of potential sales;
• low barriers to entry;
• opportunities to secure long-term profits for the company;
• minimum risk.

Assessing the competitiveness of a product

As for competitiveness, everything is much simpler here. At this stage, the strength of the company to deal with existing and potential competitors is assessed. The main indicators for evaluation are:

• Competitiveness of a product, namely its unique trading advantage.
• Company resources. Attention is drawn to the brand, resources in various areas (logistics, finance, marketing, sales, etc.), staff qualifications.
• The strength of competition, its intensity, the formation of barriers and monopolies.

These criteria help to reflect the long-term ability of a firm to compete with othersindustry representatives to take a leadership position in the market. When the indicators have already been determined and all the coefficients have been placed, you can create the McKinsey matrix using the example of an enterprise.

Depending on which of the quadrants the company or individual business units (SBUs) are in, a strategic complex is selected.

Choice of strategy

When allocating resources and investments, it is important to define a strategy at all levels.

1. Grow. This is possible if the company or the SBU have extremely worthy positions. They attract investors due to guaranteed returns in the future. It is best to devote resources to research and technological development, extensive advertising and expansion of production by buying the latest achievements of science.
2. Selectivity, or ambiguity. In this case, it is necessary to invest money only taking into account the potential development of the business due to corporate and managerial abilities. Accordingly, it is necessary to finance the management sphere.
3. Harvest. The firm operates in an unattractive industry and does so extremely poorly. Here, a transition to another sphere or urgent liquidation is necessary. The best solution is to sell products at the best prices and avoid investment.

So, all possible outcomes are considered. A competent manager and investor will be able to correctly combine the necessary strategies into a complex, which will help the company break through towinners.

Matrix flaws

The General Electric matrix, despite its popularity, has a number of disadvantages:

• difficulty in objectively assessing the weight of each category;
• hard work costs a lot of money;
• the company's place in the matrix and the selected improvement alternatives are purely advisory.

Besides this, the matrix considers the development of the company and all its parts in one direction. In fact, there is a need to re-develop functional strategies for each business unit.

Also, the matrix does not take into account unexpected situations, abrupt changes not only in the local market, but also in the global one. Because of this, the results of the study are not highly accurate.

Method advantages

Despite the shortcomings, the model under study has some advantages that make it highly popular in the development of business strategies for enterprises:

• raising awareness of managers about the effectiveness of their activities and the competitiveness of the proposed product;
• understanding the desires of the client and the dynamics of his preferences;
• providing data on potential market opportunities;
• wide strategic choices;
• studying information about the strengths and weaknesses of the company, correcting mistakes;
• this is a more detailed method than the BCG matrix.

So ifclearly understand that the McKinsey matrix is only advisory in nature, then you can correctly build an individual strategic portfolio, taking into account all the features of the company.