Today’s market puts a lot of pressure on entrepreneurs to look for more and more ways to stand out and grow. Another analytical tool to explore sector potential and build your enterprise portfolio is McKinsey matrix.
McKinsey matrix – table of contents:
- What is the McKinsey matrix?
- The attractiveness of the industry
- Competitive power
- McKinsey matrix case study-online handicraft store
- Advantages and disadvantages of the McKinsey matrix
What is the McKinsey matrix?
The tool, developed by McKinsey & Company, allows you to make decisions about investing and launching new products or services in the market. By referring to two levels – the attractiveness of the industry and the competitive strength of the selected entity, it indicates what actions will come as most profitable for the future of your company.
The conditioning of the two mentioned dimensions is influenced by many factors that should be taken into account during the evaluation.
The attractiveness of the industry
When talking about the attractiveness of an industry, we take into account internal and external factors in the market that determine the degree of difficulty in making profits in a particular market. These include:
- Barriers to entry – circumstances that can make it difficult to start a business;
- Profitability – indicates whether the business is profitable;
- Product life cycle – depending on the phase it is in, the product is more profitable and displaces older ones from the market;
- Market growth rate – indicates how fast the industry is growing;
- Competition – how many market rivals do you have that you have to fight with for customers;
- Demand – the propensity of consumers to purchase your product;
- Price volatility – the economic situation affects the prices of raw materials, commodities, energy, etc..;
- Market segmentation – you should target your products to clearly defined groups of consumers;
- Seasonality – some industries see some spikes or dips in popularity depending on the specifics of the time of year;
- Macro environment – consists of political, economic, social, legal, technological factors that shape the market situation. They can be studied through PEST analysis.
Determines the competitive position of the company against market rivals. It is determined by such elements as
- Customer loyalty – the tendency of consumers to choose your offerings over others – indicates a positive relationship between the customer and the company;
- Brand strength – indicates the perception of customers, what associations they have with your company and whether they trust it;
- Market share – sales of your product compared to the competition;
- Achieved profit – positive financial results, real earnings resulting from operations;
- Availability of distribution channels – opportunities related to transportation of needed materials, finished products, as well as ways to communicate with the customer;
- Diversification of products/services – diversification of the range of products offered;
- Crisis management strategy – the effectiveness of dealing with unforeseen situations that may threaten the stability of the company.
McKinsey matrix case study-online handicraft store
We will try to show how you can apply the described method in your own business. We will analyze the McKinsey matrix on the example of an online store selling handicrafts such as soy candles.
- Determine industry attractiveness and competitive strength
- Give weights to selected factors
- Assign ratings to each factor
- Apply the obtained results to the matrix
Keeping in mind the previously mentioned factors influencing the characteristics of the selected sector, select those that demonstrate its profitability. These may include, for example, low barriers to entry, high competition, and seasonality. Then consider which elements increase your advantage in the market. E.g., diversification of offerings, customer loyalty or availability of distribution channels.
Assign the weights, and indicate how the factors translate into the profitability of doing this type of business. The higher the weight, the greater the importance to the sector. The sum of all weights should be 1.
Use a Likert scale for this – from 1 to 5.
|Factor||Weight||Evaluation||The product of|
|Low barriers to entry||0,4||5||2|
|Factor||Weight||Evaluation||The product of|
|Diversification of offerings||0,2||4||0,8|
|Availability of distribution channels||0,4||5||2,0|
Depending on where on the matrix the unit is placed, this is the strategy you should adopt. We distinguish the following 3 approaches:
- Invest – focuses on expansion activities, product development;
- Maintain your position – you should be a bit more cautious in your actions so as not to lower the profitability of the company;
- Withdraw – withdraw the product from the market so as not to generate losses.
Given the nature of the industry and the competitive force, how can you invest in your product and what it entails – to increase the profitability of your business? Selling handicrafts on the Internet has great potential, so there are many opportunities for growth, among others:
- Diversify your offer – you can start creating candles in non-standard shapes, colors, offer the possibility of personalization according to consumer preferences, or expand your assortment with handmade jewelry, hand-decorated kitchen accessories, etc., which will increase complementary sales;
- Explore various distribution channels – make sure you have a social media presence and proper communication to promote your business. In addition, publish your offer on various platforms designed for e-commerce sales, e.g. Amazon, eBay, Facebook Marketplace and many others, and create your website;
- Use trends to your advantage – the highest candle sales are during the fall and winter, so make sure to increase the availability of your assortment then.
Advantages and disadvantages of the McKinsey matrix
Each method of analysis has its pros and cons. The McKinsey matrix takes into account many factors, making the analysis more extensive. This way you get a full picture of your current situation and the possibilities for product or service development. However, there are some risks involved, because the evaluation of individual factors is subjective, which has its limitations. A wrong perception of certain issues can result in the selection of an inadequate strategy.
Read also: What is the ADL matrix?