Stop-Light Strategies Model
Another popular “Corporate Portfolio Analysis” technique is the result of pioneering effort of General Electric Company along with McKinsey Consultants which is known as the GE NINE CELL MATRIX.
GE nine-box matrix is a strategy tool that offers a systematic approach for the multi business enterprises to prioritize their investments among the various business units. It is a framework that evaluates business portfolio and provides further strategic implications.
Each business is appraised in terms of two major dimensions – Market Attractiveness and Business Strength. If one of these factors is missing, then the business will not produce desired results. Neither a strong company operating in an unattractive market, nor a weak company operating in an attractive market will do very well.
The vertical axis denotes industry attractiveness, which is a weighted composite rating based on eight different factors. They are:
- Market size and growth rate
- Industry profit margins
- Intensity of Competition
- Product Life CycleChanges
- Economies of scale
- Social, Environmental, Legal and Human Impacts
What does the horizontal axis represent?
It indicates business strength or in other words competitive position, which is again a weighted composite rating based on seven factors as listed below:
- Relative market share
- Profit margins
- Ability to compete on price and quality
- Knowledge of customer and market
- Competitive strength and weakness
- Technological capability
- Caliber of management
The two composite values for industry attractiveness and competitive position are plotted for each strategic business unit (SBU) in a COMPANY’S PORTFOLIO. The PIE chart (circles) denotes the proportional size of the industry and the dark segments denote the company’s respective market share.
The nine cells of the GE matrix are grouped on the basis of low to high industry attractiveness, and weak to strong business strength. Three zones of three cells each are made, indicating different combinations represented by green, yellow and red colors. So it is also called ‘Stoplight Strategy Matrix’, similar to the traffic signal.
The green zone suggests you to ‘go ahead’, to grow and build, pushing you through expansion strategies. Businesses in the green zone attract major investment.
Yellow cautions you to ‘wait and see’ indicating hold and maintain type of strategies aimed at stability.
Red indicates that you have to adopt turnover strategies of divestment and liquidation or rebuilding approach.
This matrix offers some advantages over BCG matrix in that, it offers intermediate classification of medium and average ratings. It also integrates a larger variety of strategic variables like the market share and industry size.
- Helps to prioritize the limited resources in order to achieve the best returns.
- The performance of products or business units becomes evident.
- It’s more sophisticated business portfolio framework than the BCG matrix.
- Determines the strategic steps the company needs to adopt to improve the performance of its business portfolio.
- Needs a consultant or an expert to determine industry’s attractiveness and business unit strength as accurately as possible.
- It is expensive to conduct.
- It doesn’t take into account the harmony that could exist between two or more business units.