McKinsey matrix: how to build and interpret it?

The McKinsey matrix is a strategic decision tool for companies. The more important a decision has consequences for a company, the more difficult it is to make.

This is why it is recommended to include each strategic reflection in a well-defined process. The McKinsey matrix uses a scientific approach method to support informed and rational decision-making.

What is a Strategic Business Area (DAS)?

A company brings together a range of different activities and professions. When positioned in several markets, it can group its activities into strategic business areas (DAS). This set of activities shares identical resources. They have common means of production, products, and customers. DAS serves as an element of analysis in the McKinsey matrix.

A concrete example could be that of the electronic equipment sector. It is possible to consider it as a DAS in an office supplies company. In this case, this subset shares the same production lines as well as common competitors.

To complete the attractions/assets matrix, a company must identify the different DAS inherent to its organization.

What is the purpose of the McKinsey matrix?

The mcKinsey matrix aims to measure the attractiveness of an activity, its value, and its assets for the development of a company. It is therefore very relevant support to build a business strategy. Investing in or divesting from an activity has strong consequences for the future of a company. This is why the matrix offers a clear vision of opportunities regarding:

• The creation of a new activity.
• The sustainability of a project already started, but about which doubts have emerged.
• The eventual withdrawal of an activity that does not bring the expected results, but that seems to be able to work.

This tool helps companies to engage or not in new market niches:

• He believes that a particular market is attractive.
• It assesses the maturity of a company in the market that corresponds to its field of activity.
• It integrates the differentiating assets of the company compared to those of the competition.

The matrix is built inside a table that integrates the different DAS of a company. It must be understood that any project is a set of activities. It is these activities that need to be organized into strategic areas of activity. This is the reason why building the McKinsey matrix effectively requires several steps.

How to build the McKinsey matrix?

• Evaluate the need to use the McKinsey matrix.
• Convert the circumstance into a strategic area of activity.
• Indicate the key success criteria for each business area in the matrix cells.
• Multiply the weights and points for each SAR.

Assess the need to use the McKinsey matrix 

The in-depth and methodical analysis of this tool implies deploying many resources. That's why the McKinsey matrix is used in decision-making about major changes in a company's strategy.

Convert the circumstance into a strategic business area 

To identify the SARs intrinsic to a company, it is necessary to identify common criteria. They concern:

• Means of production and technologies.
• Resources and know-how.
• Competition.
• The clientele.

The more value a DAS creates, the greater the means and resources will be.

Indicate the key success criteria for each business area in the matrix cells 

The key success criteria correspond to the competitive advantages that allow a company to stand out in the market. Also known as Key Success Factors (FCS), these elements possess technological or commercial quality.

To determine them, it is often necessary to conduct customer surveys and market research. Indeed, a key success criterion is perceived through the eyes of the customer (or the market).

Thus, in the case of the sale of electronic equipment, the technical knowledge of the sellers constitutes an FCS. To approach new companies that want to equip themselves, it is important to have accurate and up-to-date information on products and the evolution of technologies.

The key criteria also correspond to the attractiveness of the market. Are they weak, medium, or strong? To determine this, several elements must be evaluated:

• Its size.
• Its growth.
• Its profitability.
• The intensity of competition.
• The development of technologies.

Multiply weights and points for each SAR 

On the matrix, a SAR is represented by a circle more or less large depending on its weight in the company. The wider the circle, the more the DAS is linked to a profitable activity for the company.

Within each circle, the weight of the company in the market is also represented. In other words, the market share held by the company is visible within each DAS.

The points of each SAR will then be calculated according to their position on the matrix.

The matrix is built around two inputs, themselves divided into three dimensions:

• La position concurrentielle : forte, moyenne ou faible. 
• The attractiveness of the market: high, medium, or low.

How to interpret the McKinsey matrix?

The interpretation of the matrix gives the future directions for investment. In particular, it offers a clear view of the SARs on which the company has an interest in focusing.

Zone 1: Strengthening and development 

Zone 1 of the strategic grid corresponds to strong and moderately strong positions. When the DAS is located in this area, it is part of a promising market for the company. It is then to its advantage to invest to strengthen its position on the market or to develop a new activity.

Zone 2: Maintenance and profitability 

Zone 2 corresponds to the average positions in the strategic grid. When the DAS is located in this area, the market is not very buoyant. In this case, a company has every interest in focusing on the profitability of its activity. Investments will therefore be selective. They will maintain the market position and profitability of the business.

Zone 3: partial withdrawal and abandonment 

Zone 3 corresponds to the weak and moderately low positions in the strategic grid. When the DAS is located in this area, the market is unattractive. If the company holds a strategic competitive position, the withdrawal will only be partial. If, on the other hand, it does not have competitive advantages, the withdrawal of activities may be total.

The advantages and limitations of the McKinsey matrix

This tool offers the advantage of providing great analytical wealth to companies. It helps to have a clear vision of the strategic positioning within a market. It even goes further by proposing perspectives for action to be put in place.

The matrix also has limitations. It is proving to be laborious to use for small and medium-sized enterprises (SMEs). In addition, it represents a major investment of resources and time to carry out research and analysis. However, it remains a valuable decision support tool for companies.