McKinsey Profitability Index Matrix
The McKinsey Profitability Index (MPI) Matrix is a management tool used to assess a company’s profit performance. The index measures a company’s capability to generate economical value. It identifies business value drivers, enabling executives to identify and implement value-adding actions.
The MPI Matrix consists of six parameters:
The cost of capital
The level of operating efficiently
The level of total debt
The scales of operational activity
The levels of market penetration
The speed of strategic moves
These parameters combine to form a comprehensive view of a company’s profitability landscape. Each value can range from -2 to +2, with negative being unfavorable and positive being favorable. A final score is calculated by adding up the six value results.
The MPI Matrix is used to analyze two types of decision rules regarding the business performance: “Sell” or “Invest.” “Sell” means that the company’s performance is below average, meaning that disposing of the business unit might be preferred. “Invest” means that the company is expected to create value in the long term.
The MPI Matrix helps executives to identify the value drivers that should be actively managed for maximum profitability. This can range from evaluating resources allocation efficiency to uncovering latent customer demand. Additionally, it is used to reveal existing market opportunities, allowing executives to capitalize on the need of customers.
The MPI Matrix contains many different metrics that have to be considered when assessing a company’s performance. In order to avoid potential misinterpretations of the metrics, it is important to weight each value accordingly to the company’s activity cycles. Assessing a company’s MPI score can be difficult without good data, but understanding and utilizing the metrics will help to improve company profitability in the future.
