Knowing where and how to invest is extremely important, as GE matrix will help diversify your portfolio and also generate the most profits. That’s where a concept like the GE Mckinsey matrix comes into play. The main focus is on bringing in a way to invest with exceptional results for investors, while also minimizing risks. Doing that might not seem that hard at first, but there are a few things you need to take into consideration.
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- What is the GE Matrix?
- Understanding the industry attractiveness
- Strategic implications
- The Invest/Grow strategy
- Selectivity/Earnings strategy
- Harvest/Digest strategy
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What is the GE Matrix?
At its core, the GE Mckinsey matrix is a professional tool created for portfolio analysis. Normally, it’s used for corporate strategy creation. The idea here is to help assess the strategic business units, but also product lines. The GE Matrix was created in 1970, when General Electric hired McKinsey & Company to help them manage their large strategic business unit portfolio. It was McKinsey that created the framework to help identify and optimize any strategic decisions.
As you can see, the GE Matrix is focused mostly on the corporate level, and it normally covers 2 different dimensions. For starters, it focuses on the competitive strength of the business unit. It also covers the industry attractiveness. A company is able to direct business units and you can use the matrix to figure out your investment strategy. You can either divest or harvest, but also hold your position too, which is something to keep in mind.
Understanding the industry attractiveness
Industry attractiveness is a concept which focuses on how the business unit is able to generate industry profit. Normally when you assess the business and its attractiveness, you do need to focus on the exit/entry barrier, the profit and size of the industry, but also the potential growth in the long run. There are other things you have to consider here, like the environmental factors, but also the buyer and supplier power, which can obviously be a major factor to keep in mind.
The industry attractiveness within the GE Mckinsey matrix is also affected by labor requirements and the product/service you sell and how it can change as time goes by. It’s a very good idea to take all these things into account, and also focus on the future as a whole. After all, the investments focus on long term commitments, so you don’t have to see these just as a one time thing.
We can define the industry attractiveness as the profit that you can get if you enter the industry. Normally, if the potential profit is high, the industry is very attractive. With that in mind, the higher the potential profit you have, the more attractive the industry is. However, there are things like industry changes and competition level that can obviously affect industry attractiveness. That’s why a long term evaluation is needed instead of just a short term assessment.
What is competitive strength?
When you’re assessing a business unit, one of the main things to consider is how competitive it really is. The truth is that most industries have a lot of competition. Which means you really need to work hard and bring those ideas to life in a professional, engaging manner. That being said, there are a few things to take into account.
Some of the major factors are the market share and its potential growth, but also the brand awareness. At the same time, you also have to think about the customer satisfaction and loyalty, but also the uniqueness of services and products created by the company. And even the business profit margins are a thing that you need to take into consideration here, so you really have to assess all the options.
Any company with a competitive edge needs to see if that will work in the long run or if it’s just a temporary thing. A sustainable competitive advantage is preferred, since it will help you grow within a more challenging industry. Having an advantage over competitors will always help businesses, and it really brings in front an exceptional approach.
There are 3 main strategic actions you can choose for your business in the GE Matrix. These can be the Harvest/Digest strategy, the Selectivity/Earnings strategy and the Invest/Grow strategy. Each one of them comes with its own pros and cons.
The Invest/Grow strategy
The idea here is that a company is able to reach the scenario if it operates in an industry with quite a bit of attractiveness. It also needs to have a close to high competitive position. That’s what will help provide the competitive edge and in doing so results can be second to none. But that also means your business needs capital and assets.
Which is where the investment approach comes into play. You need to invest in order to boost the capacity of you business, connect with new clients and boost your marketing efforts. It’s also a great idea to grow externally with acquisitions and mergers. There can be resource constraints, which is why investments and acquisitions can be a very good idea to take into consideration.
It’s also known as the Hold strategy. It addresses companies that have a low-mid competitive position, or if they have a competitive position but the industry is not that attractive. Of course, figuring out what and how to invest here can be tricky, and that’s the thing that you need to balance.
At this point, narrowing down the right competitive move can matter quite a bit. You want to invest and grow, then use the remaining investments for earnings and selectivity. Perform these investments, and then you can do a course correction along the way if you want. It totally helps, and it can bring in a very good outcome.
You can use this type of strategy if your company has a low competitive position or/if it’s in an industry that’s not very attractive to clients. As you can see, this is the type of GE Matrix strategy that can be used if the company doesn’t have a very impressive outlook. Here you can pick a harvest strategy or you can divest your business units by selling.
It does make sense to try and sell the business unit to someone that has a better position within the same industry. Since you might not be able to make it a success, someone else with other resources and tools might actually be able to bring that to fruition. Another thing to note is that the buyer is able to generate value via combining all kinds of activities. All these things can really help quite a bit, and they make the entire process a whole lot easier.
The GE Matrix has multiple advantages. You get to simplify portfolio analysis and the investment allocation, while making the entire process seamless. You can also figure out what kind of business can generate profits and which ones are not able to do so. Another thing to note is that the GE Matrix framework is consistent, and also very replicable, which is something to keep in mind. It’s even possible to apply this over multiple industries too. If you want to enhance your investment strategies and make the most out of every penny you invest, then the GE Matrix is certainly worth taking into consideration!
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