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Lecture 7

GMS 200 Lecture Notes - Lecture 7: Ge Aviation, Ge Healthcare, Ge Capital

Global Management Studies
Course Code
GMS 200
Shavin Malhotra

of 4
GMS 200 Global Management Lecture 7 Tuesday March11, 2014
Chapter 8: Strategy and Strategic Management
What are the useful planning tools and techniques?
SWOT, Scenario Planning and Contingency planning, Porter’s 5 forces model, BCG
Matrix (Growth Share Matrix) heavily used in firms to create long-term plans
- Porters 5 forces Model (Michael Porter)
-Tools for external environment Analysis-Porters Five Forces Model: New
entrants, customers, Suppliers, Substitute Products and middle/main is rivalry
1. Potential Entry for new competitors: When a firm can easily enter a new industry
competition in the industry will increase (impacts profitability) and this threat is
aggravated when new entrants can leverage their existing cash flows in other
businesses. (Ex. Pepsi Co. made a new entry into the water bottle industry
(Aquafina) which completely changed the industry and had tremendously came to
the #1 company in that industry therefore Coke came in as Dasani bottled water and
those two firms are top 2 firms in the water bottle industry), Music industry changed
by Apple (ITunes)
- Increases barriers to entry through: - large economies of scale, strong brand
2. Threat of Substitutes: the industries with close competition with producers of
substitute products have higher competition (Ex: Contact Lenses/Have laser eye
surgery industry so if the laser eye surgery industry goes down the contacts lenses
must go down also, another example, newspapers to online (cost to purchase) news
telecast (free of charge), normal mail competes with emails, business travel vs.
Skype/Web Conferences
- More pressure on pricing
- As pricing for substitute products decline higher competitive pressure on the industry
3. Bargaining Power of Suppliers: There are very large suppliers and the industry
you are in depends on it and it will impact by they will cost the raw materials high and
as an organization you decide and they price the products because you cannot
bargain or else consumers won’t purchase and therefore you have to reduce profit
margin so it does impact
- Cost of switching raw materials is high
- Ex. Microsoft is supplied to Schools, most computer manufacturers (95% before
depend on Microsoft because that was the only product there in the industry)
Toshiba, HP and other computer manufactures share Microsoft cause they compete
with each other
- Included Suppliers of Labour ( if the labour is extremely high then it impacts the
4. The Bargaining Power of Consumers: When customers are large and buy in bulk,
they enjoy more power (I.e. Walmart because they get products from suppliers at
GMS 200 Global Management Lecture 7 Tuesday March11, 2014
Low Prices because they buy them in Bulk and when consumer buys in Large Bulk
they receive discounts and Walmart does that by selling their products at discounts)
- Bargaining power of customers is also higher when product is standard or
undifferentiated and they can easily switch to competing brands , and consumers
have a strong power when sellers are struggling in the face of falling in consumer
Configuration of these forces differ across industries
- Certain industries may not get impacted by suppliers because they will be substitutes
- Use tactics designed specifically to reduce the share of profits leaking to other
players (i.e. to counter customer products, you differentiate products )
- To count customer power
- Expand your services so it’s harder for customers to leave you for a rival (Higher
switching costs)
- To temper price wars initiated by established rivals
- Invest more heavily in products that differ significantly for competitors’ offerings
- To scare off new entrants: You can elevate the fixed costs by competing; for
instance, by escalating your R&D expenditures
Strategic Business Unit? Commonly referred to as SBU
- SBU: Describes a business focused on a particular product-market
- Ex. General Electric and they have many SBU’s (1) GE Healthcare for the Health
Market (2) GE aviation (Aviation Business) (3) GE Appliances (House Hold
Appliances) (4) GE Money (5) GE Security (6) GE Media (NBC Universal) (7) GE
Water (Water Market) (8) GE Energy  there are more 18-20 SBU’s which are
independent companies and are listed on stock exchanges, have their own
accounting statement, each of the SBU’s is the standalone entities
- Conglomerates: large number of strategic business units which focus on different
industries, like GE
Rise of Conglomerates
- Matsushita, Mitsubishi, Toyota (Keiretsu, known in Japan)
- Chaebols in South Korea (all multiple industries) i.e. Hyundai, Samsung, LG
- Business Houses in India (Minacs, Tata, Reliance)
- BCG (Bruce Henderson, 1963) who came up with a framework to put all SBU’s the
frame to see how well they are doing
- BCG Matrix (Boston Consulting Group)
BCG Matrix
GMS 200 Global Management Lecture 7 Tuesday March11, 2014
- Horizontal Axis (from Low to high) Relative Market Share
- Vertical Axis (From High to Low) Market Growth Rate
- ABC represents 3 different Business units in an Organization
How to construct a growth-share matrix: Market Growth Rate= 100x (Total Market
year 2)-Total market 1)/ Total Market in year 1= %growth rate
- Any market growing market is attractive
How will you select a cut off?
You need to determine high and low growth business, cut off is decided depending on
the type of SBU’s
- if you are in a high diversified firm then the cut-off could be from the growth of gross
Nation Product
- when you have a highly diversified firm you look at weighted average of the growth
rate of each individual businesses
- corporate growth rate: when a firm decided to be above the corporate growth rate
- Relative Market Share= Business Sales in year 1/ Leading Competitors Sales in year
1 (which will give the ratio)
- When Sony is looking at globally then leading competitor is Samsung
- If you see a ratio of 0.5 half of leading competitor, 1:Same as competitors 2: Sales is
twice as much as the next leading competitor
- Weak Position on left side and Dominant Position on the right side of the BCG Matrix
Measuring the Contribution of each business to the firm
- It represents the area in the Matrix= measured as the sales of the business
- Large circle means they generate most sales in the organization and it is the most
Cash Cow: SBU bring in the maximum amount of cash for company, not growing high in market
growth, large positive cash flow, can be used to fund/ finance the Stars (High market Share Low
market Growth)
Stars: (High market growth, High Market Share) Dominant SBU, High growing SBU, modest
positive or modest negative cash flow, spending a lot of money to maintain high position i.e.
Question Marks: (High market growth, Low Market Share) should you leave the market/not?
Should I invest more? Largest negative cash flow, organizations have to spend a lot of money to
come to stars, money is going out and not much coming in, Cash Cows can fund/finance for?