06

 BCG Matrix
 GE Matrix
 SWOT Analysis
 Strength of mergers and acquisitions
 Weakness of mergers and acquisitions
 Opportunities for mergers and acquisitions
 Threats of mergers and acquisitions
 Porter’s Five Forces Module
 Bruce Henderson of the Boston Consulting Group
developed in 1970, a portfolio planning model and
called it the BCG Matrix.
 This is to help companies analyze their business units
or product lines.
 A company’s units are classified into four categories
based on the combinations of market growth and
market share relative to the largest competitor.
 Market growth serves a proxy for industry
attractiveness and relative market share serves as a
proxy for competitive advantage.
 The matrix aims to map the business unit’s position
within these two important profitability determinants.
 When the market growth and market share are
divided into two parts, a 2X 2 matrix emerges. The
cells are used to classify the business into categories-
cash cows, dogs, question marks and stars.
 Cash cows- Are units with market share in a slow-
growing industry. These units typically generate cash
in excess of the amount of cash needed to maintain
the business. They are regarded as staid and boring,
in a “mature” market, and every corporation would
be thrilled to own as many as possible.
 Dogs- Dogs or more charitably called pets, are units
which low market share in a mature, slow growing
industry. These units typically “break even”,
generating barely enough cash to maintain the
business market share.
 Question marks- question mark (also known as
problem child) are growing rapidly and thus consume
large amounts of cash, but because they have low
market shares they do not generate much cash.
 A question mark has the potential to gain market
share and become a star, and eventually a cash cow
when the market growth slows. If the question mark
does not succeed in becoming the market leader, then
after perhaps years of cash consumption it will
degenerate into a dog when the market growth
declines.
 Stars- Stars are units with a high market share in a
fast growing industry. The hope is that stars become
next cash cow. Sustaining the business unit’s market
leadership may require extra cash, but this is
worthwhile if that’s what it takes for the unit to
remain a leader.
 The GE Matrix was developed because it was argued
that the BCG Matrix is narrow in its approach and
exceedingly simple.
 General Electric developed this. It is portfolio
management technique that focuses on industry
attractiveness and competitive position.
 Often mergers and acquisitions turn sour and do not
achieve the benefits that are anticipated. Hence
before the first step towards M&A are taken it is
important that an analysis be done to support the
merger acquisition.
 A SWOT (Strength Weakness, Opportunities,
Threats) analysis is very useful in understanding
whether the merger or acquisition would be in the
company’s best interests.
 Increased market share- A merger or acquisition may
enable a company to enter a market that it did not
have a significant presence in or any presence at all.
When Centurion Bank merged with Bank of Punjab,
it got access to the Punjab where the Bank of Punjab
had several branches and a significant presence.
Similarly ICICI Bank got a big foothold in South
India by its acquisition of Bank of Madura
 Access to better technology- The target company
would get access to better technology and on being
merged, the acquiring company will benefit from this.
When Sony and Ericson combined both of them
benefited as they both had technological expertise.
 Increased profits- Entering into new markets and
expanding products range and customer base results
in increased profits and economies of scale. The
merger of Reliance Petroleum with Reliance
Industries resulted in cost savings from economies of
scale leading to increased profits.
 Acquisition of stock at minimal price- It is believed
that mergers occur when the market value of the
target company’s share does not reflect its true
market value. There may be several reasons for this
including the possibility that the company’s
management is not running the company to its full
potential.
 Reduction in debt- By restructuring or merging, the
company’s intangible assets and accumulated losses
are written off, making the Balance Sheet look
stronger.
 Opportunity to acquire end-to end solutions- Often
mergers occur because there are synergistic benefits.
These often increase productivity, reduce costs,
improve efficiency levels and provide end to end
solutions regarding technology, financial
reengineering and human resources.
 Competitive advantage- Mergers often occur as it has
the potential to help the companies involved multiply
their strengths using their core competencies. A
company could be very strong technologically while
another may have a very strong distribution network.
 Style of management- If the style of management is
autocratic and highly centralised growth may be
stifled.
 Aggressive trade unionism- Often trade unions, in
their quest to protect the interests of the employees,
may harm the merged entities by not permitting
technological improvements, growth plans and other
initiatives.
 Monopoly creation- The criticism most often leveled
at mergers and acquisitions is the creation or
monopolies. Consumers often feel exploited as they
are forced to pay higher prices and sometimes quality
suffers.
 Absence of skilled manpower- Mergers require not
only re-aligning the work culture but also skilled
manpower to carry out the plans effectively.
 Increasing costs- When entities merge there could be
a situation of two persons doing the same job. There
would be two sales managers, two human resources
managers, two head officer and the like.
 Opportunities are those conditions that are favourable
and help a company attain its objectives.
 If the merging entities can identify their
opportunities, they can use these to achieve their
targets.
 This includes growth in market share, expansion, the
ability to raise money and the likes.
 Expansion opportunities- By merging, entities can
enter markets that were earlier the domain of the
entity they have merged with. To enter these markets,
they do not have to spend time and money
developing the market and making the market aware
of their products themselves.
 Better ability to raise capital- Mergers and
restructuring help companies to revamp their balance
sheets to make them look healthy. This is done by
selling idle assets and writing of intangible assets
such as goodwill.
 Self reliance- The synergies that occur as a result of
merger and acquisition makes a company self reliant.
If a motor car company has bought a tyre company, it
becomes self reliant regarding tyres.
 Tax concessions- Companies on merger or
reconstruction often take over the accumulated losses
of the other entity and these losses can be used to
reduce their own profits.
 Demographic shifts- When companies enter into new
markets, they get the advantage of getting control
over a new market that could have a very different
demographic structure.
 Threats are external conditions that could damage the
company and create hurdles in the way of pursing
and attaining planned objectives.
 Threats have to be managed . Otherwise the company
would suffer.
 The common threats faced include unfriendly legal
framework, takeover threats, changes in technology
and changes in tastes and preferences.
 Unfriendly legal framework- The legal framework in
many countries is not favourable to mergers and
acquisitions there are several laws that cause
restrictions.
 Takeover threats- Companies merge and acquire
companies to become larger, more efficient and make
greater profits. When they achieve this, they become
targets for other companies to takeover
 Changes in technology- A company that mergers or
restructures and acquires the latest technology also
face a threat in terms of changing technology. As
technology becomes outdated and obsolete, the entity
has to invest more in new technology.
 Change in customer tastes and preferences- Changing
customer tastes and preferences is another threat. An
entity may invest heavily in technology. A change in
preferences may make the technology redundant
resulting in huge losses to the company.
 This theory is based on the submission that business
strategy of an entity to a large extent is determined by
the nature of competition prevailing in the industry.
 The degree and intensity of the competition in the
industry determines the profit potential of an entity.
 Porter’s model is based on the logic that a corporate
strategy should be able to counter the opportunities
and threats prevailing in the organization’s external
environment.
 Porter identifies five competitive forces that he
believed shaped every industry and every market.
 Threat of New entrants
 Power of suppliers
 Power of buyers
 Threat of substitute products
 Threat of rivalry among other firms