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The GE / McKinsey Matrix is divided into nine cells - nine alternatives for positioning of any SBU or
product offering. Based on the strength of the business and its market attractiveness each SBU will
have a different position in the matrix. Further, the market size and the current sales will distinguish
each SBU. Based on clear understanding of all of these factors decision makers are able to develop
effective strategies.
The nine cells in the matrix can be grouped into three major segments:
Segment 1: This is the best segment. The business is strong and the market is attractive. The company
should allocate resources in this business and focus on growing the business and increase market share.
Segment 2: The business is either strong but the market is not attractive or the market is strong and the
business is not strong enough to pursue potential opportunities. Decision makers should make judgment on how
to further deal with these SBUs. Some of them may consume to much resources and are not promising while
others may need additional resources and better strategy for growth.
Segment 3: This is the worst segment. Businesses in this segment are weak and their market is not attractive.
Decision makers should consider either repositioning these SBUs into a different market segment, develop
better cost-effective offering, or get rid of these SBUs and invest the resources into more promising and
attractive SBUs.
The business portfolio is the collection of businesses and products that make up the company.
The best business portfolio is one that fits the company's strengths and helps exploit the most
attractive opportunities.
(1) Analyse its current business portfolio and decide which businesses should receive more or
less investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at
the same time deciding when products and businesses should no longer be retained.
The two best-known portfolio planning methods are the Boston Consulting Group Portfolio
Matrix and the McKinsey / General Electric Matrix (discussed in this revision note). In both
methods, the first step is to identify the various Strategic Business Units ("SBU's") in a company
portfolio. An SBU is a unit of the company that has a separate mission and objectives and that
can be planned independently from the other businesses. An SBU can be a company division, a
product line or even individual brands - it all depends on how the company is organised.
The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly,
market attractiveness replaces market growth as the dimension of industry attractiveness, and
includes a broader range of factors other than just the market growth rate. Secondly, competitive
strength replaces market share as the dimension by which the competitive position of each
SBU is assessed.
The diagram below illustrates some of the possible elements that determine market attractiveness
and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:
Whilst any assessment of market attractiveness is necessarily subjective, there are several factors
which can help determine attractiveness. These are listed below:
- Market Size
- Market growth
- Market profitability
- Pricing trends
- Competitive intensity / rivalry
- Overall risk of returns in the industry
- Opportunity to differentiate products and services
- Segmentation
- Distribution structure (e.g. retail, direct, wholesale
An industry is a group of firms that market products which are close substitutes for each other
(e.g. the car industry, the travel industry).
Some industries are more profitable than others. Why? The answer lies in understanding the
dynamics of competitive structure in an industry.
The most influential analytical model for assessing the nature of competition in an industry is
Michael Porter's Five Forces Model, which is described below:
Porter explains that there are five forces that determine industry attractiveness and long-run
industry profitability. These five "competitive forces" are
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness.
The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in
some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate
agency, restaurants). Key barriers to entry include
- Economies of scale
- Capital / investment requirements
- Customer switching costs
- Access to industry distribution channels
- The likelihood of retaliation from existing industry players.
Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability because
they limit price levels. The threat of substitute products depends on:
- Buyers' willingness to substitute
- The relative price and performance of substitutes
- The costs of switching to substitutes
Suppliers are the businesses that supply materials & other products into the industry.
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant
impact on a company's profitability. If suppliers have high bargaining power over a company,
then in theory the company's industry is less attractive. The bargaining power of suppliers will be
high when:
- There are few dominant buyers and many sellers in the industry
- Products are standardised
- Buyers threaten to integrate backward into the industry
- Suppliers do not threaten to integrate forward into the buyer's industry
- The industry is not a key supplying group for buyers
Intensity of Rivalry
- The structure of competition - for example, rivalry is more intense where there are many
small or equally sized competitors; rivalry is less when an industry has a clear market leader
- The structure of industry costs - for example, industries with high fixed costs encourage
competitors to fill unused capacity by price cutting
- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have
greater rivalry; industries where competitors can differentiate their products have less rivalry
- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a
significant cost associated with the decision to buy a product from an alternative supplier
- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is
more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry
is less
- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down
factories) - then competitors tend to exhibit greater rivalry.
Shell matrix
The Shell Directional Policy Matrix is another refinement upon the Boston Matrix. Along the
horizontal axis are prospects for sector profitability, and along the vertical axis is a company's
competitive capability. As with the GE Business Screen the location of a Strategic Business Unit
(SBU) in any cell of the matrix implies different strategic decisions. However decisions often
span options and in practice the zones are an irregular shape and do not tend to be accommodated
by box shapes. Instead they blend into each other.
Each of the zones is described as follows:
HYPERMARKET WARS
Been away with loads of work recently and did not have the time to do postings
It seems that the WORLD of MARKETING in MALAYSIA just got exciting. I just
heard that Wal-mart is coming to Malaysia. Now that is a site to watch as the T-rex of
low cost retailing is coming to town to meet the smaller creatures that have been
terrorising the Malaysian population.
VS
Now each of the players have already taken a piece of the market, with both top players
in Malaysia GIANT and TESCO head to head with each other.
With the entrance of WAL-MART, it would add the triangular war pattern that was
similar to the legendary Chinese WAR of the THREE KINGDOMS
This time, is indeed a time for enemies to get together and plot the destruction of the T-
rex else all is lost. If the T-rex makes a landing in Malaysian lands, it is definitely a
matter of time before the strongholds are overwhelmed. This is what happened in
Japanese attack of Malaya, where, once they made land, it was a matter of time before the
strongholds of the British was overwhelmed.
Question now is how are two mortal enemies going to sit down and fortify themselves to
a defensive position. Loyalty cards are no longer seen as a strong bastion of defence
against price cuts and improved services.
Since both players were using the COST LEADERSHIP route of competition, they are
now suffering the limitations of such a strategy, that is that there will always be a bigger
and more resource rich entity that can out price them due to larger economies of scale.
THIS is the same threat that AIRASIA is going to face very soon.
The profitability indicators that are being watched by the big boys are such that once a
market is attractive, it begin to move in the SHELL DIRECTIONAL POLICY MATRIX.
Once the market enters the secondary target or prime target zone, then it is a matter of
time before the BOD decides to enter into it. Sort of like an alien creature that watches
out for fertile planets to take over using advance scanners.
In this case I believe that MALAYSIA was on the watch list for some time, but WAL
MART decision making system had classified it as potential only. Recent changes in the
demographic indicators and the amount of money being sloshed around the market by the
government billion dollar projects may have increased the markets attractiveness.
Marketing decision making system must have upgraded the market to either a prime or
secondary target.
With the ability to kill TESCO and GIANT already in their skill bank, they would
consider the market as easy pickings.
The Shell Directional Policy Matrix is another refinement upon the Boston Matrix. Along
the horizontal axis are prospects for sector profitability, and along the vertical axis is a
company's competitive capability. As with the GE Business Screen the location of a
Strategic Business Unit (SBU) in any cell of the matrix implies different strategic
decisions. However decisions often span options and in practice the zones are an irregular
shape and do not tend to be accommodated by box shapes. Instead they blend into each
other.
Each of the zones is described as follows:
Leader - major resources are focused upon the SBU.
Try harder - could be vulnerable over a longer period of time, but fine for now.
Double or quit - gamble on potential major SBU's for the future.
Growth - grow the market by focusing just enough resources here.
Custodial - just like a cash cow, milk it and do not commit any more resources.
Cash Generator - Even more like a cash cow, milk here for expansion elsewhere.
Phased withdrawal - move cash to SBU's with greater potential.
Divest - liquidate or move these assets on a fast as you can.