Is GE-McKinsey Matrix important in IBBI Valuation Exam?

Is GE-McKinsey Matrix important in IBBI Valuation Exam?


Business strategies are an easy scoring area in the Insolvency and Bankruptcy Board of India’s (IBBI) valuation examination. Don’t miss!

The GE-McKinsey Matrix topic appears under the heading Valuation Applications in the syllabus (https://ibbi.gov.in/SFAsyllabuswef01062020.pdf) for the Insolvency and Bankruptcy Board of India’s (IBBI) valuation examination. IBBI has assigned a weightage of 35% to topics under Valuation Applications. In addition to GE-McKinsey Matrix, other business strategies such as Porter’s five forces, SWOT, PEST etc are discussed.

Cleary, these are theory areas and a reasonable effort in this section would translate to good scores in the valuation exam. The questions are fairly easy, testing only a basic understanding of these topics. Typically, students ignore these areas and focus on harder topics, looking to score well in those areas. Whereas, a topic like the GE-McKinsey Matrix is a low hanging fruit.

From a professional perspective as well, these business strategies give the IBBI registered valuer the necessary tools to analyse a business or industry. Therefore, rightly so, business strategies like the GE-McKinsey Matrix are tested in the IBBI exam.

Now, let’s move to understand the basics of the GE-McKinsey Matrix.

The GE-McKinsey Matrix

The 20th century saw an increase in the multi-business enterprise. During these times, companies began to struggle with managing variety of business units and achieving profitably. In response, the head of managements developed frameworks to deal with this new complexity. In the early 1970s, GE–McKinsey nine-box framework was introduced and wildly accepted as a solution for the new complexity that businesses were facing.

The nine-box matrix offers a scientific approach for the decentralized corporation to find out the best option to open a position. Rather than taking into account each business unit's projections of its future prospects, the corporate can judge a unit by two factors which will determine whether it will perform positively in the future: the attractiveness of the relevant industry and therefore the unit’s competitive strength within that industry.

Depending on where a business unit fell within the matrix, it could determine its future. The matrix provides an analytic map for managing the business units. Based on their location on the matrix, there were three main possible outcomes for the future of the units.

If the units positioned themselves above the diagonal, it meant they had great opportunities and the company should flood them with investment in order to achieve larger growth. If the units were placed along the diagonal, it meant that the unit was stable and could receive some amount of selective investment. If the units placed below the diagonal, the future of the unit might be either to be liquidated, or run purely for cash.

Sorting units into these three categories is an important start line for the analysis, but judgment is required to weigh the trade-offs involved. For example, a robust unit in a weak industry is in a very different situation than a weak unit during a highly performing industry.

The nine-box matrix is the forerunner of variety of portfolio models, including MACS and therefore the portfolio of initiatives. The criteria for assessing industry attractiveness and competitive strength have evolved as years pass by. To this day, most large companies with a proper approach to modelling their businesses use the nine-box matrix or some descendant of it.

In the business world, very similar to anywhere else, the matter of resource scarcity affects the choices the businesses make. With limited resources, but many opportunities of using them, the companies got to choose the way to use their cash best.

The competition to decide which unit can receive more investments takes place in every level of the company. It takes place between teams, departments, divisions or business units. The question of where and the way much to take a position is an ever-going headache for those that allocate the resources.

How does this affect the diversified businesses? Multi business companies manage complex business portfolios, often, with the maximum amount as 50, 60 or 100 products and services.

The products or business units differ in what they are doing, how well they perform or in their future prospects. This makes it very hard to form a choice in which products the corporate should invest. These tools solved the matter by comparing the business units and assigning them to the groups that are worth investing in or the groups that ought to be harvested or divested.

In 1970s, General Electric was managing an enormous and sophisticated portfolio of unrelated products and was unsatisfied about the returns from its investments within the products. At the time, companies usually relied on projections of future cash flows, future market growth or other future projections to form investment decisions, which was an unreliable method to allocate the resources.

In order to find a solution, GE went to McKinsey & Company and as the end product; the nine-box matrix was created. The

nine-box matrix plots the BUs on its 9 cells that indicate whether the corporate should invest during a product, harvest/divest it or do an extra research on the product and invest in it if there’re still some resources left. The BUs is evaluated on two axes: industry attractiveness and a competitive strength of a unit.

Industry attractiveness indicates how hard or easy it'll be for a corporation to compete within the market and earn profits. The more profitable the industry is that the more attractive it becomes. When evaluating the industry attractiveness, analysts should look how an industry will change in the long run instead of the near future, because the investments needed for the product usually require long lasting commitment.

The collections of many factors determine the competition level in an industry and its attractiveness. There’s no definite list of which factors should be included the foremost common are:

• Long run growth rate

• Industry size

• Industry profitability (Use Porter’s Five Forces)

• Industry structure

• Product life cycle changes

• Changes in demand

• Trend of prices

• Macro environment factors (Use PEST Analysis)

• Seasonality

• Availability of labour

• Market segmentation

Along the X axis, the matrix measures how strong, in terms of competition, a specific business unit is against its rivals. In other words, managers attempt to determine whether a business unit features a sustainable competitive advantage or not. If the corporate features a sustainable competitive advantage, subsequent question is: “For how long it'll be sustained?”

This article, hopefully, has kindled your interest in business strategies in general. An IBBI registered valuer is required to add these skills to his tool kit. Along with macroeconomics, business environment and business strategies widen the valuer’s perspective.

Quite aptly the Insolvency and Bankruptcy Board of India (IBBI) expects its future valuers to get acquainted with these topics. The GE-McKinsey matrix is a frequently asked question in the examinations. It’s easy to understand and easy to score! Therefore, don’t miss this opportunity!