The General Electric / McKinsey Matrix

McKinsey and Company

GE asked McKinsey and Company, a consulting company in the USA, to

develop a portfolio approach with a wider dimension than the BCG matrix. In

1971 McKinsey and Co developed the business screen for General Electric to

differentiate the potential for future profit in each of the 43 strategic business

units. This matrix is also known as the industry attractiveness – business

strength matrix and the nine-box matrix.

Strategic Emphasis

This matrix was designed to overcome the shortfalls that companies were

encountering with the BCG matrix and to fill the requirement to compare

numerous and diverse businesses. The scope of application for this model

extends from a corporate level to a business level incorporating the products

making up the business.

The Approach

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 Matrix

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.

Industry Attractiveness

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.

IntroductionThis section is HEADED Introduction rather than Preface in the hope of decoyinghabitual skippers into reading for their own comfort. Before getting into detail discussion of the Capital budgeting & other section a brief introduction about telecommunications sector.

Normally any Financial Research report first contains the Company Profile &then the Industry Profile to facilitate the reader. I have changed the orderbecause it is hard to define Tejas Networks without knowing the Industry.

“Communication has joined food, clothing, housing &transportation as a basic human right.”

Telecommunication is the transmission of signals over a distance for thepurpose of communication. Based on the above definition & as per my understanding of the above definition I have classified the telecom sector into the following categories:

After going through the above classification of Telecom Sector, I give a try tounderstand Tejas Network. Basically Tejas is Telecom Infrastructure1

Company whose domain is Optical Infrastructure.

Tejas develops state-of-the-art products that bring the power of intelligentoptical networking to optical access.

Before getting into detail discussion of Capital Budgeting, a few words on thisProject. The aim of this Project is to “improve my own understanding” on thesubject of CAPITAL BUDGETING.This Project should be seen as an “academic project “not as a Professionalreport.Capital budgeting also referred to as Capital Investment or Capital project orjust project or project valuation.Organization of the Project

Organized in terms of the broad phases of capital budgeting, this project isdivided into five parts:

Part 1: Identifying consists of Topic 3 to 5; Part 1 covers the planning phase ofcapital budgeting. Topic3 consists of project proposal. Topic 4 discusses the keyconcepts, models & considerations that are helpful in articulating the capitalallocation strategy for this project. Topic 5 looks at the ways of screening theproject proposal.

Part 2: Analysis topic 6 to 8. Topic 6 basically focuses on gathering & analyzingthe basic information about the project. It discusses the key steps involved inmarket & demand analysis. Topic 7 dwells on the various facets of Technicalanalysis. Topic 8 explains how financial estimates & projections relating to aproject are developed.

Part 3: Selection focuses extensively the various investment criteria.

Part 4: Risk analysis expounds the techniques for measuring & evaluating therisk of the project. Topic 10 deals with project risk. Topic 11 deals with firmrisk & Topic 12 on market risk.

Part 5: Financing discusses how projects may be financed. I look forward to receiving suggestions from the readers for further improving my knowledge.

Mc Kinsey Matrix

McKinsey Matrix has two dimensions, viz, competitive position & industryattractiveness. The criteria or factors used for judging industry attractivenessand competitive position along with suggested weights for them are as follows:

Applying the above McKinsey Matrix criteria to Tejas Networks:

Strategic Planning & Capital BudgetingCapital expenditures particularly the major ones are supposed to sub serve thestrategy of the Firm. Hence relationship between strategic planning & capitalbudgeting should be properly recognized. Exhibit 1 presents a way of definingthis relationship. As emphasized in this exhibit Capital budgeting should besquarely related to corporate strategy.

STRATEGIC POSITION AND ACTION EVALUATION (SPACE)SPACE is an approach to hammer out an appropriate strategic posture for a firmand its individual businesses. An extension of the two-dimensional portfolioanalysis, SPACE involves a consideration of four dimensions:

Company’s competitive advantage Company’s financial strength Industry strength Environmental stability

Strategic Postures

The basic strategic postures associated with the SPACE approach are asfollows:

Aggressive Posture This is appropriate for a company which Enjoys a competitive advantage and considerable financial strength and Belongs to an attractive industry that operates in a stable environment.

Competitive Posture This is suitable for a company which Enjoys a competitive advantage but has limited financial strength, Belongs to an attractive industry operating in a relatively unstableEnvironment.

Conservative Posture This is appropriate for a company which Enjoys financial strength but has limited competitive advantage, and Belongs to a not-so-attractive industry operating in a relatively stableenvironment.

Defensive Posture This is suitable for a company which Lacks competitive advantage as well as financial strength, and Belongs to not-so-attractive industry operating in an unstableenvironment.

Applying the SPACE concept to Tejas NetworksTejas Networks falls under Competitive posture. The key planks of thecompetitive posture are as follows: Maintain and enhance competitive advantage by product improvementand differentiation Widen the product line Improve marketing effectiveness and Augment financial resources.There is a commonality between competitive posture described here and thegeneric strategy of product differentiation suggested by Michael Porter.The generic strategy of Porter and the key options associated with SPACE areshown below for Competitive posture.