MODULE 2

M&A – A Strategic Perspective

PLC - Product Life Cycle

 The purpose of having a diagram is to help you

understand the changes, in the revenue that is
made, as you go through the different stages of
selling a product, from the beginning, to the end.
 Stages in the Product Life Cycle

Digital cameras

Mini-disc
Electric cars
DVD
VR*

*= virtual reality The time at each stage varies

greatly
 Stages in the Product Life Cycle

Introduction Growth Maturity Decline

Introduction
•The seller tries to stimulate demand
•Promotion campaigns to get increase public awareness
•Explain how the product is used,
•You will lose money, but you expect to make profits in the future
 Stages in the Product Life Cycle

Introduction Growth Maturity Decline

Introduction
•Sales are low, and profits are below the line because your costs are greater than the
amount of money you make
•you have “negative” profit
•Need to spend a lot of money on promotion
 Stages in the Product Life Cycle

Introduction Growth Maturity Decline

Growth
A lot is sold - The seller tries to sell as much as possible
Other competitor companies watch, and decide about joining in with a competitor
product
“success breeds imitation” (Text)
Growth will continue until too many competitors in the market - and the market is
saturated
 Stages in the Product Life Cycle

Introduction Growth Maturity Decline

Growth
•At the end of the growth stage, profits start to decline when competition means you
have to spend more money on promotion to keep sales going.
•Spending money on promotion cuts into your profit
 Stages in the Product Life Cycle

Introduction Growth Maturity Decline

Maturity
Many competitors have joined - the market is saturated
The only way to sell is to begin to lower the price - and profits decrease
It is difficult to tell the different between products since most have the same F.A.B. -
Features, Advantages & Benefits
Competition can get “Nasty” and commercials are intense
 Stages in the Product Life Cycle

Introduction Growth Maturity Decline

Maturity
“Persuasive Promotion” becomes more important during this stage
That is to say, you have commercials almost begging the customer to still buy your
product because you still make it just as good.
 Stages in the Product Life Cycle

Introduction Growth Maturity Decline

Decline
Newer products are now more attractive - even a low low price does not make
consumers want to buy.
Profit margin declines - and so the only way to make money is to sell a high volume
 Stages in the Product Life Cycle

Introduction Growth Maturity Decline

Decline
To increase volume you try to
1. Increase the number of customers - get new customers
2. Increase the amount each customer uses
 Mergers and Industry Life Cycle
Introduction stage

 Newly created firms may sell to larger firms in mature or

declining industry .
Reasons/advantages:
1. Convert personal income to capital gains
2. Avoid large investments in the hands of managers not having a
long record of success.

Horizontal mergers of smaller firms in this stage enables

- Pooling of management and capital resources.
Mergers and Industry Life Cycle
Exploitation stage
Similar to mergers during introductory stage.
More visible indications of prospective growth and profits.
Higher growth rate.
Mergers and Industry Life Cycle
Maturity stage
Mergers undertaken to achieve:
 Economies of scale (in research, production, marketing.
 To match low cost and price performance of other firms.
 Rounding out management skills.
 Providing broader financial base.

 Merge with competitors

Mergers and Industry Life Cycle
Declining stage

1. Horizontal mergers-To ensure survival

2. Vertical mergers - To increase efficiency and profit
margins.
3. Concentric mergers-To provide opportunities for
synergy and carryovers.
4. Conglomerate Acquisitions- To utilize the accumulating
cash position of mature firms whose internal flow of
funds exceeds investment requirements.
BOSTON CONSULTING GROUP
MATRIX
INTRODUCTION
 BOSTON CONSULTING GROUP (BCG) MATRIX is
developed by BRUCE HENDERSON of the
BOSTON CONSULTING GROUP IN THE EARLY
1970’s.

 According to this technique, businesses or products are

classified as low or high performers depending upon their
market growth rate and relative market share.
 Two dimensions of BCG
 Market share
 Market growth rate
THE BCG GROWTH-SHARE
MATRIX
 It is a portfolio planning model which is based on the
observation that a company’s business units can be classified in
to four categories:
 Stars
 Question marks
 Cash cows
 Dogs

 It is based on the combination of market growth and market

share relative to the next best competitor.
STARS
High growth, High market share

 Stars are leaders in business.

 They also require heavy investment, to maintain its
large market share.
 It leads to large amount of cash consumption and cash
generation.
 Attempts should be made to hold the market share
otherwise the star will become a CASH COW.
CASH COWS

Low growth , High market share

 They are foundation of the company and often the

stars of yesterday.
 They generate more cash than required.
 They extract the profits by investing as little cash as
possible
 They are located in an industry that is mature, not
growing or declining.
DOGS
Low growth, Low market share

 Dogs are the cash traps.

 Dogs do not have potential to bring in much cash.
 Number of dogs in the company should be minimized.
 Business is situated at a declining stage.
QUESTION MARKS
High growth , Low market share

 Most businesses start of as question marks.

 They will absorb great amounts of cash if the market
share remains unchanged, (low).
 Why question marks?
 Question marks have potential to become star and
eventually cash cow but can also become a dog.
 Investments should be high for question marks.
 BENEFITS
 BCG MATRIX is simple and easy to understand.
 It helps you to quickly and simply screen the
opportunities open to you, and helps you think about
how you can make the most of them.
 It is used to identify how corporate cash resources can
best be used to maximize a company’s future growth and
profitability.
 LIMITATIONS
 BCG MATRIX uses only two dimensions, Relative market
share and market growth rate.
 Problems of getting data on market share and market
growth.
 High market share does not mean profits all the time.
 Business with low market share can be profitable too.
PRACTICAL USE

ITC
 The BCG Matrix for ITC Ltd.

Stars ?
•Hotels •FMCG- Others
•Paperboards/
Packaging.
•Agri business.
Cows Dogs
•FMCG-Cigarettes •Maybe ITC
Infotech.
What is SWOT Analysis?
 SWOT Analysis is an important planning tool that
helps a Person or an Institution identify, in a
systematic and organized way, its internal
strengths/weakness
 Helps it match these strengths/weaknesses with
the opportunities or threats in the environment.
CATEGORIES OF STRENGTHS

 Financial
 Marketing
 Expertise
 Personal Capabilities and Commitments
 Resources / Production methods
 Human Resource management
Identifying Resource Weaknesses
and Competitive Deficiencies
 A weakness is something a firm lacks, does poorly, or a
condition placing it at a disadvantage
 lack of resources
 Lack of technical know
 Lack of strategies and so on
CATEGORIES OF OPPORTUNITIES

Ways to grow your business because of

changes in:
• Competition
• Economy
• Government Policy
• Technology
• Social Trends
CATEGORIES OF THREATS

• Competitors
• Industry Trends
• Consumer Trends
• Economic
• Government
• Environmental
• Technology
Porter’s Five Forces
 Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation

Entry
Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of

Scale

Government Policy
 Bargaining Power of Suppliers
Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms

Suppliers exert
power in the
industry by: Suppliers’ products have few substitutes
* Threatening to raise
prices or to reduce Buyer is not an important customer to supplier
quality
Powerful suppliers
can squeeze Suppliers’ product is an important input to
buyers’ product
industry
profitability if firms
Suppliers’ products are differentiated
are unable to
recover cost Suppliers’ products have high switching costs
increases
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Products are undifferentiated

Buyers compete with
Buyers face few switching costs the supplying industry
by:
Buyers’ industry earns low profits

Buyer presents a credible threat of backward * Bargaining down prices

integration
* Forcing higher quality
Product unimportant to quality
* Playing firms off of
Buyer has full information each
other
 Threat of Substitute Products
Keys to evaluate substitute products:

Products with Products with improving

similar function price/performance tradeoffs relative to
limit the prices present industry products
firms can
charge

Example:

Electronic security systems in place of

security guards

Fax machines in place of overnight ma

delivery
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur
when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
High exit barriers
The purpose of
Five-Forces Analysis
 The five forces are environmental forces that impact
on a company’s ability to compete in a given market.
 The purpose of five-forces analysis is to diagnose the
principal competitive pressures in a market and assess
how strong and important each one is.