If you've been around the trading and investing community for any length of time you have no doubt heard of the GE Matrix. But just what is it? Can you use it to determine where to invest your money? And how reliable is it as a tool to help you pick stocks?
The GE Matrix looks at two different attributes of the overall market: the human factors that make up the buying behaviour of the buying public and the fundamental factors that affect that behaviour. It uses the standard deviation of the real-time data of past market behaviour to calculate what the probability is that an investment will perform well in the near future. It then looks at the characteristics of that market to try to figure out which investments will be more likely to earn that high, medium, or low score. A high, medium or low score on this scale is considered to be ideal by investors who want to maximize their return on investment (ROI). Investors who are looking for investments that will perform well now and in the future also want to pick the best performing investments.
Let's take a look at what the standard deviation of the buying behaviour looks like for each of the three product lines. The high end of the scale has a very high value on the x-axis and a very low value on the y-axis. The middle range has a good range but the returns don't break much above the mean. Finally, the low end of the McKinsey matrix distribution has very poor values and very high outliers. The main difference between these three price points is the product line's ability to diversify its product offerings to capture a better part of the overall market.
One of the reasons why the GE matrix can be used to determine competitive strength is because it performs well when the economic environment is stable. The market is not all that different than during normal economic times but fluctuates significantly during recessions. During a recession, stocks of the larger companies tend to suffer large losses and smaller companies struggle to stay afloat. A solid business unit performing under average or below average results in a much-diminished return on investment. Investors need to look at the stability of the economy in order to determine if it is conducive to a good investment climate.
Now let's take a look at the differences in the two product lines. The higher end of the distribution has slightly stronger returns than the lower end but the margins are a bit narrower. That said, the mid-range has very good returns and very narrow margins. In addition, the GE Financial product lines include products from several of the largest GE companies so you are exposed to a wide variety of global pricing and market conditions.
It's important to remember that a company's financial attractiveness is often based upon other external factors as well. It's important to consider market size, debt, market cap, and PEG ratios. As you think about how you would analyze the various factors that are important to your portfolio, take a look at the GE matrix. You'll likely find several factors that would add value to your portfolio.
There are several methods of analysing the market position and market share of the company and the product share on thekeepitsimple Also, the things related to management.
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