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.
 Introduction
This section is HEADED Introduction rather than Preface in the hope of decoying
habitual 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 order
because 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 the
purpose 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 to
understand 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 intelligent

optical networking to optical access.

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

Organized in terms of the broad phases of capital budgeting, this project is

divided into five parts:

Part 1: Identifying consists of Topic 3 to 5; Part 1 covers the planning phase

of
capital budgeting. Topic3 consists of project proposal. Topic 4 discusses the
key
concepts, models & considerations that are helpful in articulating the capital
allocation strategy for this project. Topic 5 looks at the ways of screening the
project proposal.

Part 2: Analysis topic 6 to 8. Topic 6 basically focuses on gathering &

analyzing
the basic information about the project. It discusses the key steps involved in
market & demand analysis. Topic 7 dwells on the various facets of Technical
analysis. Topic 8 explains how financial estimates & projections relating to a
project are developed.

Part 3: Selection focuses extensively the various investment criteria.

Part 4: Risk analysis expounds the techniques for measuring & evaluating the
risk of the project. Topic 10 deals with project risk. Topic 11 deals with firm
risk & 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 & industry
attractiveness. The criteria or factors used for judging industry attractiveness
and competitive position along with suggested weights for them are as follows:
Applying the above McKinsey Matrix criteria to Tejas Networks:

Strategic Planning & Capital Budgeting

Capital expenditures particularly the major ones are supposed to sub serve the
strategy of the Firm. Hence relationship between strategic planning & capital
budgeting should be properly recognized. Exhibit 1 presents a way of defining
this relationship. As emphasized in this exhibit Capital budgeting should be
squarely related to corporate strategy.
STRATEGIC POSITION AND ACTION EVALUATION (SPACE)
SPACE is an approach to hammer out an appropriate strategic posture for a
firm
and its individual businesses. An extension of the two-dimensional portfolio
analysis, 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 as
follows:

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 unstable
Environment.
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 stable
environment.

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 unstable
environment.

Applying the SPACE concept to Tejas Networks

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