 Last class we saw about the porters 5 forces model study the characteristic of an industry and measure how attractive an industry is now we saw the porters diamond for country level analysis the porters 5 forces for industry level analysis a porters diamond could probably give some inputs on how different countries are competitively placed from different perspectives industry analysis how one industry is structurally attractive than the other industry these are all very important models when it comes to taking decisions as to whether this country is better than this country this industry is better than the other industry now suppose there are entities or organizations which are very huge where they have multiple business interest big corporations conglomerates we call them or one big corporation or an organization that has multiple product streams a product portfolio and as the chairman or as the group leader as the leader for these group companies how do I know whether within the same conglomerate company a company b company c there are different entities within a conglomerate now how to understand and study how each of them differ just as different industries we are able to characterize and tell that this is better than the other can we do a similar analysis to understand the competitiveness or how one business operation within a conglomeration is placed relative to another business operation within the corporation or the conglomerate now that we can do by again understanding a different model in this case we will be I will be explaining to the class two models that we would be using the first at a broad level we should understand why this is necessary I gave you an example this is this is necessary let us for example say that we have a big conglomerate now what is a conglomerate before I go and tell you what it is now we should first understand there is a need for big corporations which has a number of subsidiaries or we call them the strategic business units or one big organization that has multiple product streams and we need to understand the performance of each of these subsidiaries or each of this product relative to the other just as we had the five forces to understand the attractiveness of an industry we also need some structured model to understand the relative performance of one SBU over the others one product line over the others now conglomerates are big entities under whom they have different business enterprises classic example is G in our case in the in India we have Tata the Tata sons and subsidiaries or the other group entities are the Tata chemicals the Tata power the Tata consultancy services that we see these are all the subsidiaries of the big conglomerate called the Tata or ITC or in Japan the Mitsui or the Mitsubishi these are called usually in Japan they were used to be called the Zybatsus and now the Kerutsus so these are the big conglomerates or in Korea they were they referred to as the Cheybals the Samsung in Korea or in some pharma companies for example it could be one pharma company they have multiple product lines one for neural disorders one for cancer one for cardiovascular diseases and each of them by itself is a big business proposition so you have multiple product which can also be viewed as individual subsidiaries of a big conglomerate within the same organization but the requirement is that we need to understand the relative performance of each of these entities relative to the others within the umbrella so that we get a bird's eye view of the entire corporation suppose I am Ratan Tata as the chairman of the Tata group I need to know how Tata chemicals is performing how Tata power is performing how Tata T is performing for that we have two models one is the BCG matrix and the other is the GE McKinsey matrix which can be used to make this bird's eye view analysis of a big corporation which has a number of subsidiaries or an organization which has critical business I mean product lines and to make this relative analysis let us first take the BCG matrix as the name suggests BCG is the acronym for the Boston consulting group which is a leading management consulting firm in the world one of the leading management consulting firms in the world and this was developed in the 70s by Bruce Henderson from the BCG group now the matrix it divides the entire portfolio into four distinct categories these portfolios could be as I said before different companies or different product lines and each of them will fall under four specific categories and these categories are based on two parameters one is the market growth the growth in the market and the other parameter is the market share based on these two parameters these four categories are formulated and also that some businesses need cash to grow some businesses generate cash and since we are talking about the bird's eye view a business that generate cash the cash from that business will be used to invest in a different business under the same group because that business is in a growing market and hence we need investment and cash from a cash rating business gets invested into another business which needs to grow and over a period of time that might also start generating cash but the understanding that is required is that there is a need to invest get the market share and become the market share leader and if we are able to do this over a period of time and this you can do only if the markets grow if it is a growing market and in the process there is this experience curve learning and the gains of that learning actually develops into a cost advantage so in a growing market with investments into a business making that business gets a market share and able to do this over a sustained period of time with the learning curve experience businesses get the cost advantage so these two important things are required that the market should grow and in a growing market that the business has to also acquire some market share let us understand the definition for market share in a very simple layman's term it is the proportion of if you are talking about the market share of a business a particular business it is the proportion of the business share in the total market this proportion could be measured in terms of the number of units of the product that is being sold or the volume of the service or product that is being sold or delivered or the value of the sales itself so both are measurable and with that also we can calculate both of these we can calculate the market share let us say the market share of business X then the market share of business X is the sales value which means the total amount of rupees that selling X has generated or the total number of units of X that has been sold divided by the entire sales in that particular market which includes sales by competitors that gives you the market share suppose I want to know the market share of TVS Suzuki bike it is the number of bikes that TVS motor sells or the total rupees the TVS motor generates as sales divided by the total number of bikes sold by the two wheeler industry as a whole which includes the total number of bikes sold by Hero Honda by Bajaj then TVS motor and all other two wheeler manufacturing units so this gives the market share there is also another term that you should know that is called the relative market share let us again take the example if I need to calculate the relative market share of TVS motor company then the relative market share is TVS motor's market share divided by the market share of its closest and strongest competitor I think closest would be a better word its closest competitor and the relative share is greater than one then you are the market leader because it will be your market share divided by your closest competitor if he has a lesser market share then your RMS is greater than one the highest RMS means that you are the market leader it is always greater than one so this relative market share measures the market leaders the organizations market share relative to its closest competitor now there is also another indicator which is the market growth market growth measures the attractiveness of a market now market growth rate is let us say this year sales minus the previous year sales divided by previous year sales is greater than one then it is a growing market and always in a growing market since the market grows it always attracts competition because the size of the pie keeps on increasing and everybody wants to have a share of the pie and to have incremental shares of the pie you need additional investment so a growing market attracts competition and also needs investment to gain more market share in this growing market so there are two important parameters that we will be using in the BCG matrix the market growth as well as the market share relative market share now as I said before the BCG matrix divides these group companies into four distinct categories and they call the stars the cash cows the dogs and question mark now we are using two important parameters the market growth as well as market share because market growth is a proxy for the attractiveness of the market and needs investment cash investment and market share is a proxy for competitive advantage because the more and more somebody gets market share it means there is something competitive that the service of the product has got to offer and it also proxy for cash generation so market growth is for industry attractiveness and cash investment and market share is a proxy is a reasonable proxy for competitive advantage and cash generation so if you look at the BCG matrix on two axis which is market share at the x axis and the market growth in the y axis based on whether they are higher or low these four categories are being placed the dogs the question mark the stars and the cash cows so these are the four predominant categories in a BCG matrix and what each of them characterize stars as you see here high relative market share and high market growth and stars are typically the leaders within that group and that is the most desirable business that any group will like to be in any business would like to be in the stars category and these stars category because it is high growth rate and also high market share which needs to keep on growing requires heavy investment to maintain its large market share as well and indeed it leads to large amount of cash conception because investment is required and since it is also a high market share and growing market it also leads to cash generation because as I said before growing market market share both is related to cash and growth is cash investment and market share is cash generation and if you are high on both means you are investing in cash as well as generating cash and since I said this is the desirable sell that many businesses that want to be many of them would be attend to be under this category and assume that over a period of time that the growth in the market declines and market share remains the same then is the next category which will make stars to become cash cows now cash cows as you see in this matrix low market growth and high market share. So these are typically yesterday stars and this cash cow also forms a foundation of the corporation itself because these are the ones that will be generating cash this will generate more cash than required because the cash that is generated is not been invested because we are talking about a declining market growth a low market growth and a high market share. So it keeps on generating cash and it extracts profit and we are talking about profitable business typically you find companies in this category they will be in industry that is mature which means there is no room for further growth and typically these are the cash cow firms are the ones that provide funds for the group R and D the group admin expenses dividends to be distributed to service corporate debts. So these are the firms that provide the corporates cash requirement as well the next would be the dogs as we see here this will be low in market share as well as low in market growth. Now these are the cash traps they do not have the potential to bring in much cash and these are the types of firms that we need to eliminate how do we eliminate them we just liquidate them sell it sell it for cash and these are companies where there when there is no market growth there is no market share there is no point holding companies under this category. So these turnaround plans we have to be really cautious when we are examining these turnaround plans because we are talking about companies under this category which has both a low market growth as well as a low market share and these are companies that are fit candidates for disposal for cash. The fourth category is the question mark which belongs to the high market growth and low market share invariably many businesses start this way because you do not start with the high market share at day one so you find there is a grid potential for growth in the market and when you start you have low market share and the cash characteristic appears to be the worst because you are using a lot of cash and starting with low market share generating very little cash. Now why is this because this is the characteristic for any new business we need to start somewhere and we start from the question mark category what will happen over a period of time is question marks will eventually have the potential to go into the stars which means they would have relatively grown and also along with growing market also have a growth in the market share and finally when the market declines will become cash cause. The challenge is to identify such candidates if you look at this when you are at question mark stage the challenge is to identify good question mark candidates invest in those that have the potential to be converted to start so you have to prioritize good question mark candidates and convert them into stars and the rest you divest away from that business that is a very tough challenge to choose from the question mark categories. Now why are we doing this this I said before it is to assess various businesses or various product lines and the cash behavior of each of these businesses and product lines whether they are generating cash or consuming cash and based on this how we can allocate the resources there is no point in allocating extra resources for a firm that is in the dog category and if you find that there is a potential for a firm in the question mark category to be converted to stars then we are able to invest into those firms which can be potentially converted to stars. Now this we can do only if we are able to place these firms in these different categories. How do we do this now let us say I have a big corporation and there are easily identifiable businesses or different product lines or different strategic business units within the same firm take each of the firms relative market share and the growth of the industry in which the firm is participating or each of the products relative market share and the growth of that particular product itself in the industry and then classify all of these products or businesses into these BCG matrix and then you get a clear picture which measures the relative position of each of these firm against each other and then that becomes easy for you to make strategic decisions this is the use for a BCG matrix because it helps you to quickly scan the corporate scorecard and then based on that you will be able to take quick decisions how to deploy these cash extra cash that is been generated from cash goes whether we need to put it in stars or question mark definitely not in dogs but this decision you will be able to take only if you are able to categorize these into all these four categories and this is very important from the perspective of maximizing the future growth and profitability of a corporation. Of course there are limitations to it because this is based only on two data that is the relative market share and market growth data times even getting the data becomes very difficult also high market share does not mean profits all the time so there are times where units businesses could have the highest market share from a profitability perspective it is not that good and also businesses with low market share can be profitable as well and sometimes even the dogs generate more than cash cause because liquidation can even generate more cash than the cash cause themselves. So there are some limitations to this BCG matrix that we should be cognizant of before we use them and being aware of these limitations we still can use the BCG matrix. The next matrix is the GE McKinsey matrix this is actually developed by McKinsey for GE which again uses two parameters the business units strength and the industry attractiveness the industry in which the business unit is situated and then characterizes each of the business unit into nine different categories high high high medium high low and so forth. The broad requirement why we need to do this is all the same both maps strategic business units on a grid in this case the GE McKinsey uses the industry attractiveness and the SB use position the strategic business units position in the industry and in BCG matrix we used just the relative market share and the market growth whereas in GE McKinsey matrix the industry attractiveness and the business unit strength is measured on various other parameters which I will be giving later. In BCG you just have four categories whereas in GE matrix you have nine cells. Now the industry attractiveness and the business unit strength in this matrix are calculated and quantified we give a value to this. Now how do we do this we identify various criteria that we think measures industry attractiveness or is relevant for business unit strength and not only that how much relevant it is suppose let us say industry attractiveness and identify ten parameters and give a weight age to each of that and then we have a relevant score to each of the parameter and the weight age multiplied by the score and the weighted average gives the final quantified score that measures industry attractiveness or business unit strength. Based on that score we place the entity into any of these nine cells. Now what are the factors that we may use I am not saying this is the exhaustive list we can add more to this list as long as we feel that these factors are important to measure the industry attractiveness. Again we are going to use market growth rate and market size, demand variability, industry profitability, industry rivalry, global opportunities, the macroeconomical factors best is the political, economic, technological and social context some will appear to be qualitative but the challenge is to provide some valid scores to the qualitative indicators a quantifiable score and how much weight age to each of these parameters. So once we attach weight age to each of these parameters and a relevant score to each of these parameters and they are arithmetic and the weighted average provides one score that measures the industry attractiveness. Likewise for business unit strength see GE is a big conglomerate it has GE healthcare, GE power, it has the aerospace so it has a variety of such businesses. So if we are talking about GE aerospace the industry attractiveness of the aerospace industry has one score and GE aerospace which is the business unit strength the strength of GE aerospace as a business has one score and then we are going to put it in a particular cell which again is measured based on the market share of GE aerospace growth in market share, the brand equity that it has the distribution channel access if I am talking about let us say if it is GE electric consumable electrics through distribution channels the production capacity which is more these are all relevant to the business unit the profit margin relative to competitors and again this is not the exhaustive list you can add more to this list and finally based on the weight age to each of the factors and the score to each of the factor we have a particular score that measures the business unit strength. So each business unit now can be portrayed as a circle plotted in this matrix I will give you an illustrative GE mechanism matrix for you to interpret and understand this better in which the circle that gets into the matrix I will just show this and then you will understand this. So we have a circle we have a percentage here. So what it means the size of the circle represents the market size and the market share is shown by the pie in the circle and the expected future position you see an arrow here is portrayed by means of that arrow that actually it actually forecast the future position of that particular strategic business unit. Now for example if we are using this matrix and arriving at the matrix for a big conglomerate this is how it will look based on this course this particular SBU let us say the circle is as I said before the size of the circle represents the market size of that particular SBU and if it is bigger it means it is a bigger market if it is small it is a small market and within that market it has 65% and an arrow pointing towards that in this case a strategic business unit strength is low but the market attractiveness is very high which means we need to build that unit selectively build it. So we take different decisions based on where this strategic business unit is in this matrix and take decision to invest or consolidate or just maintain manage or divest or harvest from that business so that explains this illustration if you have a high and low here it tells you to build selectively high business unit strength but low market attractiveness so you need to be very selective in your building and if a high market attractiveness and high strategic business unit strength you will have to protect that position or you need to invest if market attractiveness is very high and you have a medium business unit strength you invest to build and consolidate the business unit strength. So you have different combinations that are possible and just as we used BCG matrix to get this bird's eye view of a corporation we used a similar GE vacancy matrix to again see where this business unit is positioned and compare the positions of various business units and measure on a relative basis and then take decisions whether to invest or divest and what to do to just manage and stay where we are. So these two are the important models that we use to understand the relative position of different entities and businesses under a corporate umbrella and the best way to understand this better is to work out on serious examples. As I said before a very good example that you can use and work is the group of Tata the Tata group and then you do this analysis and put different entities in different cells and put yourself in the shoes of Ratan Tata and ask the question what am I to do with those businesses that are in dogs or in question marks you can do this analysis if you do a BCG matrix of the Tata group or a GE vacancy matrix of the Tata group. So the best way to understand this and appreciate this better is to take such example the Tata or the ITC or the Reliance and come out with a BCG matrix on your own and in fact I would suggest that this is an assignment for you that you come out with a BCG matrix for the Tata or the GE vacancy matrix for Reliance and then you will understand this concept better before I conclude I will also show you a small video of a very good explanation of the BCG matrix of a very famous corporation and once you watch this video you will also understand the thought process behind this matrix requirement and this in my opinion will also help you in preparing a matrix for an example that I asked you to do so I will you just watch this video and then as an assignment you can start preparing a matrix for any of the corporation that interests you the most thank you.