Boston Consulting Group Analysis - BCG Matrix Explained cover

What is a BCG Matrix? Explanation with Example!

Hey fellow readers! Today’s topic of concentration is how do analysts perform the Boston Consulting Group – BCG Matrix Analysis on companies! Initially, it might seem like a big deal but the truth is, with a little knowledge and awareness, any layman can execute the BCG analysis to get an apparent outlook about the company. Applying this Analysis on a company can also help an individual to gain an edge if they are particularly looking to invest in the company! Well, without much adieu, let’s dive in!

Boston Consulting Group Analysis

The Boston Consulting Group is a management consulting firm that was founded in 1963. It helps organizations to improve their performance by working on the key areas like the right implementation of technology, development of strategies and improvement in operational services.

As a result of their exposure and relationships with top-notch organizations, they are supremely aware of the industry’s best practices. In Fortune Magazine‘s 2007 Survey of “100 Best US Companies to Work For”, Boston Consulting Group (BCG) has received the 8th rank amongst all for their immense contribution.

In the year 1970, BCG shaped up a Product Portfolio Matrix to assess long term growth opportunities in the business by analyzing the product lines and thereafter untap their real capabilities. Even after 49 years of its establishment, the BCG matrix still remains a priceless apparatus for assisting companies in reaping the visions.

The tool is employed in reference to the distribution of resources in appropriate segments and utilizes them in the marketing of brands, product administration, strategic management, and portfolio perceptivity. However, the method is also referred to as the Growth-Share Matrix.

BCG Matrix Dimensions

Let us now understand the Boston Consulting Group (BCG) matrix in a subjective way.

Growth-Share Matrix is a graphical planning tool for corporate and businesses where the company’s products and services are plotted on axes and conclude major business verdicts.

Two prominent dimensions like Competitive Position (Relative Market Share) and Industry Attractiveness (Growth Rate Of That Industry) are taken help to estimate the true capacity of a business brand portfolio and advice further investment programs. These two dimensions determine the likely profitability of the business portfolio in terms of required cash to back the unit and cash generated by it. The conventional agenda of the inquiry is to understand the areas of investment, divestment, and development.

It is one of the most accepted methods of Portfolio Analysis and segregates a firm’s product and services into a 2/2 Matrix or, into four quadrants. Each quadrant is labeled as low or, high according to their performance which is again further based on the Relative Market Share and Growth Rate Of The Market.

  1. The Horizontal Axis i.e. x-axis indicates the extent of the market share of a product and its consecutive firmness in the particular market. It also helps to quantify a company’s competitiveness.
  2. On the other hand, the vertical axis ie. y-axis indicates the growth rate of a product and its ability to grow in a particular market.

1. Relative Market Share

  1. A higher market share generally means higher cash return and the logic behind the allotment of this dimension is dependent on its relationship with the experience curve.
  2. The usual notion is that when the company generates more number of products, it enjoys the advantage of low input costs and leads to increased profits.
  3. The market share of a company is always taken into consideration in relation to the marker share its major peer.
  4. It reveals the brand’s position amongst its competitors and is a subtle indication of its future prospects.

2. Market Growth Rate

  1. A high growth rate in the market is an indication of higher earnings and higher profits.
  2. It also refers to a higher level of investment in the product lines. This is a positive sign of consistent growth and an expectation to get a handsome return on investment.
  3. The market growth rate gives us significant data about the position of the brand other than the cash flow.
  4. It is also a reliable parameter of the stability of the market and attractiveness of the industry.

In addition, the four quadrants in the Growth-Share Matrix are as follows: Stars, Question marks, Cash cows, Dogs

bcg matrix analysis boston consulting group

The postulation of the Growth-Share Matrix is that an increment in the relative market share will lead to higher cash flow.

Firms acquire an upper hand from using economies of scale and yields a cost advantage in relation to its competitors. The growth rate of the market differs from industry to industry where growth rates more than 10% are seen as high while growth rates less than 10% are seen as low.

Also read: SWOT Analysis for Stocks: A Simple Yet Effective Study Tool.

BCG Matrix Breakdown

1. The BCG Matrix: Stars

Stars are business entities that have a mammoth market share in a fast-pacing industry. These product lines have a crystal clear niche and need sound investment to maintain their market position, push growth, and carry out a competitive advantage. Stars absorb a considerable amount of cash and also spawn huge cash flows.

Investments in the Stars can be a wise decision since they are the primary units and are awaited to become Cash Cows. Generation of positive cash flow takes place as the market reaches its mature stage and the products successfully retain their dominant position. Stars are the prized possession of a company and are placed in the top categories in a firm’s product portfolio.

Anyways, not all Stars end up as Cash Flows because random new products can soon be outjumped by innovative technological advancements in the course of rapidly dynamic industries. The strategic choices which can be incorporated are Vertical integration, market penetration, horizontal integration, product development, and market development.

2. The BCG Matrix: Question Marks

Question Marks are those business entities that have low market shares in a fast pacing market. Question marks are the most managerially radical products and need pervasive investment and resources to escalate their market share. They also need extensive monitoring because investments in question marks are broadly funded by cash flows.

Question marks do not always see the lights of success and even after the colossal amounts of investments they toil hard to gain market share and gradually transform into dogs. The natural or, typical cycle for most products in that they flag off their journey as Question Marks and eventually become stars with the clarification in their position.

When there is a slowdown in market growth, they metamorphose into Cash Cows and finally, the Cash Cow turns into  Dogs. The strategic choices which can be incorporated are Market Development, Market Penetration, Product Development, and divestiture.

3. The BCG Matrix: Cash Cows

The product lines under the Cash Cows Quadrant has an enormous share of the market in a sluggish -growing industry. In this case, the generation of the revenue outpasses the initial investments which are necessary to preserve their business. Products in the cash cows quadrant are looked up to as products that are the leadmen in the market. These products already have an important chunk of investments and do not demand more investments to withhold their position.

Cash cows are termed as the most prosperous brands and should be “milked” to generate consistent cash flow as much as possible. These Cash flows are generally utilized to finance Stars and Question Marks to nurture their future growth. It is advised by different Financial Analysts that corporates should invest less in Cash Cows and reap the generated profits from the existing products.

However, this point always doesn’t hold true as Cash Cows are usually big corporations that are proficient in creating new products that might become Stars in the long run. The strategic choices which can be incorporated are product development, diversification, divestiture, retrenchment.

3. The BCG Matrix: Dogs

Dogs are those business entities that have a scanty market share in a ripened and slow-growing market. Products falling under the dogs quadrant are somehow able to protract themselves by initiating cash flows and sustain the market share.

Usually, this unit is mainly valueless to the company in terms of earning capability. However, it might give rise to other small scale benefits such as the production of jobs and mutualism that help other business units. Firms sell off products belonging to the Dogs Quadrant unless the products are complementary to existing products or are used to act as a shield to oppose the moves of the competitors.

According to financial analysts, corporate should avoid investing in such product lines because they lead to negative cash returns. Dogs can massively affect the investors’ sentiments and their personal views about the management of a company. The strategic choices which can be incorporated are retrenchment, Divestiture, and  Liquidation.

According to the Boston Consulting Group, a branched out company with an equitable portfolio is in the standardized gallery to utilize its strengths to capitalize on the opportunities of expansion and multiplication. However, an equitable portfolio is one which has

  1. Stars to embolden future success.
  2. Question marks that have a probability to turn into Stars with some consideration, management, and investment.
  3. Cash cows to generate funds for future growth.

BCG Matrix Analysis

Now that we have gained an insight into the basics of BCG Matrix, let us now learn the steps for its application.

1. Choose the unit:

Strategic Business Units(SBU), Independent  Brands, Product Lines or the Firm as a unit can be researched using the BCG matrix. The selected unit steers the whole analysis and crucial definitions. As the market, industry, competitors, and position will all be driven based on the chosen unit, it is extremely important to define the unit demarcated for analysis.

2. Define the market

The most momentous stage for the entire matrix is the key definition of the market. An erroneously defined market will make way for an erroneous classification of the unit. Suppose, if we would do the analysis for the Gucci dresses in the regular clothing market it would end up as a Dog but it would be a Cash Cow in the luxury clothing sector. Therefore, It is a major task to transparently explain the market in order to get a solid grip on a firm’s portfolio position.

3. Calculation of Relative Market Share

Relative Market Share can be enumerated in terms of revenues or, market share. It is calculated by dividing the brand’s market share by the market share of the market leader/supreme competitor in an industry.

For example, if the competitor’s market share in the automobile industry is  37% and a firm’s brand market share is  13% in a year, the relative market share would amount to 0.35.

4. Calculation of Market Growth Rate

The growth rate of an industry can be found from the industry reports released every year and are put up on official websites. It can also be calculated by considering the average revenue growth of the leading industrial enterprises. However, it is to be kept in mind that the growth rate of a Market is expressed in terms of percentage.

5. Draw the circles on a matrix

After calculating all the parameters, one can easily plot the brands on the matrix. The plotter should draw a circle for each brand within a unit, or for all the brands in a company. The size of the circle should be in proportion to the generated revenue of the brand.

Let’s apply these steps to analyze an India Company!

amul products

For ease of understanding the concept, we are taking ‘Amul’ a well-known company in India as our example.

Amul brand is a prominent and popular name in the dairy industry in India. It produces milk, butter, and other dairy-related products and successfully caters to the Indian population.

The exercise of BCG Matrix on the brand can furnish critical information about the products and the product lines that are a pivotal source of revenue for the organization. The BCG matrix for Amul is as follows:

1. Stars

The products which are considered as Stars of Amul are Amul Ice cream and Amul Ghee.  These two products have a high market share and have adequate possibilities to grow in the near future. Amul Ghee has also been a Star for the company as the brand has been able to acquire a 30% hike in its sales while the market share clinged by the product is around 18% along with a yearly turnover of more than Rs 1,700 Crores.

2. Question Mark

Amul Lassi is diagnosed as a Question Mark as their capability as a major derivation of profitability remains quite bleak. Amul lassi has been brought about in the market with the agenda to magnify the market share and give a tough competition with the other beverages available in the market. The healthy milk from Amul possesses a huge potential to swell in the future considering the expansion of interest and demand for healthy products, refreshments, and beverages.

3. Cash Cows

There are three products under the umbrella of Amul that come under the Cash Cow category and they are  Amul Milk, Amul Butter, and Amul Cheese. The market share of these products is not likely to undergo colossal gains but their current spot makes them a high revenue contributor.

4. Dogs

Amul has two products that have not been able to generate sales and revenues as per the estimation. One of the noteworthy examples in this regard is Amul Chocolates and Amul Pizza. The competitors make it tough to amplify the market shares to a notable degree which can turn this product to become an outstanding source of sustainable revenues. However, if the sales figures do not proceed towards betterment, a probable measure would be to take the path of divestment of the above-mentioned brands.

Benefits of BCG Matrix Analysis

Every theory and model exiting in the books have their pros and cons. Similarly, Boston Consulting Group( BCG) has its own set. Here are a few of the benefits of BCG Matrix:

  1. The BCG Matrix is beneficent for managers to assure a  balance in the companies’ current portfolio consisting of Stars, Cash Cows, Question Marks, and Dogs.
  2. BCG-Matrix is befitting to large-cap companies that usually look for volume and experience effects.
  3. The model is coherent and easy to apply and also provides a base for management to take decisions and jack up for future activities.

Limitations of BCG Matrix Analysis

Here are a few of the common limitations of using BCG matrix for analyzing companies:

  1. Growth-share analysis has been highly disapproved of for its simple calculations and absence of a fruitful application.
  2. Market share and Industry Growth are not the sole factors of profitability. Besides, high market share always does not mean high profits.
  3. This matrix does not take into consideration any other factors that may have an effect on both competitive advantage & industry attractiveness.
  4. It denies the correlation between different existing units. In reality, products under  Dogs may be assisting another unit to gain a competitive advantage.
  5. The definition of a market is taken from a broader perspective and often neglects smaller aspects.

Summary

Let us quickly summarise what we discussed in this article. The Boston Consulting Group (BCG) is a management consulting firm that helps organizations to make informed decisions from the business point of view.

They introduced the Growth-Share Matrix which is a designing and a planning tool that prepares graphical representations on the basis of a company’s products and services. The Growth-Share Matrix categorizes a firm’s products into four divisions namely Dogs, Cash Cows, Stars, and Question Marks. The four divisions are based on the Relative Market Share and Growth Rate Of The Market. This Matrix immensely helps the company to make decisions regarding investment,  divestment, liquidity, and retrenchments.

January 30, 2020 Investment Basics 2 comments
Revisiting 2008-09 Economic Crisis - Causes & Aftermath

Revisiting 2008-09 Economic Crisis – Causes & Aftermath!

The Financial Crisis which occurred between the time period of 2008–2009 was a mammoth economic crisis encompassing worldwide. It was an enormous setback to the global financial system and had a series of aftermath. The crisis is contemplated as the grimmest financial crisis since the Great Depression of the 1930 s by many eminent economists around the world.

The fracture of the economic system-induced monetary damage on millions of Americans and gradually escalated to other economies. The reasons and causes behind the catastrophe are not solely driven by one factor, but it is a conflux of several prominent factors. Let’s look at it step by step what caused the financial crisis of 2008!

What caused the 2008-09 Economic Crisis?

— Sub Prime Mortage

Subprime Mortgage commenced in the year 2007 with a crunch in the Subprime Mortgage Market in the United States. Subprime Mortgages and the Subprime Meltdown are usually termed as the felons for the onslaught of The Great Recession.

A subprime mortgage is generally remitted to borrowers with low credit ratings because the lender perceives the borrower with high-risk appetite regarding defaulting on the loan. Lending organizations often put a burden of high-interest rates on subprime mortgages compared to prime mortgages due to the exposure to steep risk.  Such mortgages didn’t require any down payment or, any proof of income.

Later, when the housing market took a crashing downturn, the borrowers found themselves in a precarious situation with their home values lesser than the value of their mortgage. Many of the borrowers lapsed because the associated interest rates were variable in nature according to the clause.  Initially, the lending institutions provided loans with low-interest rates but they swelled over time and as a result, the borrowers were underwater. Due to ballooning up of interest rates upon the principle, it was difficult for the borrowers to pay down the principal amount. Many lending institutions were flexible in the provision of these loans due to high capital liquidity and a golden opportunity to make a lump sum profit.

Immense greed also led them to pool in the mortgages and sell off to the investors. The heightened increase of population who could all of a sudden purchase mortgages resulted in a situation of a housing shortage which led to a rise in housing prices. The soaring demand for the housing market made way for easy sanction of loans. When a large chunk of people started defaulting on their mortgages, the loan sharks lost all their lent money and so did many financial institutions that had invested extensively in the pack of mortgages. The subprime mortgage deadlock continued to exist and eventually transformed into a global recessionary situation as its repercussions beamed thoroughly in the financial markets and economies around the globe.

— Lehman Brothers

lehman brothers bankruptcy 2008 09

The highly talked about Financial crash of 2008 had elongated lineage but it wasn’t palpable until September 2008 when its flak became quite noticeable to the world. The news of the bankruptcy of Lehman Brothers is heavily claimed to be the torchbearer of the great economic crisis.

The filing of the bankruptcy was one of the grand incidents in the pages of history. Lehman was the fourth-largest. an investment bank in the USA with $639 billion in assets, $619 billion in debt and consisted of 25,000 employees all over the world. The investment bank is considered to be the largest victim of the Subprime Mortgage generated Financial Crisis that mopped away all the financial markets in the year 2008. The deflation of Lehman’s was an extremely crucial event that tremendously added fuel to the fire and eroded an approximate amount of $10 trillion in market capitalization from global markets.

However, in spite of its stamina to emerge victorious from previous disasters, the downfall of the U.S. Housing Market completely brought Lehman to a rock bottom. Lehman’s hovering amount of leverage and its extensive portfolio full of mortgage securities pushed it to extreme vulnerability under declining market conditions. Finally, on 15th  September 2008 Lehman Brothers, filed for bankruptcy. The further announcement of “No Bailouts”  intensified the panic-stricken scenarios. Lehman’s paralysis agitated global financial markets for days, weeks, months and years.

Also read: The Collapse of Lehman Brothers: A Case Study

— Politics and Other Factors

Since the era of the 1980s, bankers and politicians have constructed a peevish partnership. Politicians had dramatically bribed banks into generating absurd loans to un-creditworthy borrowers on the pretext of the confirmation of bank mergers according to the Community Reinvestment Act. Politicians effectively advertised the expansion of the American idea of homeownership without calculating the possible risks and negative consequences.

Bankers were paid ludicrous amounts of money to securitize pernicious subprime mortgages. On the other hand, Rating Agencies swept in profits by labeling virulent securities as worthy of investment ie. “A” grade. The firms that followed the herd and gave into the riskiest hazardous types of subprime mortgages, securities, and derivatives were the first to backslide when the house of cards stumbled one after the other. CITIGROUP is the most prominent example of falling under this category!

AFTERMATH: 2008-09 Economic Crisis

— Crisis on Banking Sector

lehman brothers crisis

The financial crisis viciously slaughtered the banking sector where a large number of banks had to be bailed out by governments while others were mandated into unions with stronger heads. Institutions like Merrill Lynch, American International Group, Halifax Bank of Scotland, Royal Bank of Scotland, Fortis, Bradford & Bingley, Hypo Real Estate, and Alliance & Leicester were apprehended to pursue the road to bankruptcy but the announcement of a US Federal Bailout worth $85 Billion rescued them from absolute collapse. In spite of the “Bailouts” by the US Federal government, it became much more harrowing to take loans from the bank.

— Effect on the Equity Market

The 2008 crisis was a worldwide anomaly as it severely disturbed almost all the economies with a heightened degree of invasion. When the gigantic investment banks and eminent insurance companies were under immense pressure,  they started selling equities to get some liquid cash for debt payments. The selling pressure induced a relentless crash in the equity markets around the globe. Since almost all Capital markets consist of foreign institutional investors, the impact was noticeable everywhere. The Asian markets in China, Hong Kong, Japan, and  India were promptly affected and became parched after the U.S. Sub-Prime Crisis. Whenever there is a crucial correction in the markets in the USA it triggers all other markets as well because the rate of return in stocks is extremely correlated globally.

Also read: How Does The Stock Market Affect The Economy?

— Investor’s Catastrophe

The Bank Stocks went through a bloodbath where their respective dividends were ripped off and consequently led to the loss of wealth amongst investors. The majority of the population had much of their money parked in bank stocks because they were generating such high dividends.

— Declination in Consumer Wealth

The financial crisis caroused a critical role in the downfall of grass-root businesses and declination in consumer wealth. It also completely contributed to the European Sovereign-Debt Crisis which later manifested into a full-swing international issue and cornered the world’s banking system towards a deflation. Economies paced down during this phase as there was a decrease in international trade and the tightening of credits.

— Fall in Income & Opportunities

The Great Recession immediately fueled cutbacks in many reputed and non-reputed companies and there was a considerable fall in income. Great Recession restricted the opportunities for career enhancement and income raises. Financial flexibility was tremendously tampered by the Great Recession to a vast extent.

unemployment economic crisis

— Calamity in Economic Policies

The engineering of economic policies also altered thoroughly. Central Banks & Governments took on additional functions in regulating the financial system to managing monetary policy and also deployed new apparatuses like “Quantitative Easing” and ‘Austerity’. Quantitative Easing synthetically escalated the values of many fiscal assets, benefitting the existing wealthy section of the society. On the contrary, “Austerity Programmes” declined the aids and support available for the people belonging to the lowest rung of the income distribution. Austerity Programmes also led to the creation of high unemployment and curtailed public services.

Amidst the financial crisis, due to unfair structural reform, “Rich became richer” and “Poor became poorer.”

January 17, 2020 Economics No comments yet
100 Minus Your Age Rule - The Easiest Asset Allocation Method cover

100 Minus Your Age Rule – The Easiest Asset Allocation Method!

100 minus your age rule: It’s always tricky to decide how much you should save and how much you should invest. Especially in riskier investment options like stocks or mutual funds. This is because the answer varies on different factors like the age, geography, or financial situation of the person. Moreover, the investing strategy of a 22-year-old need not be the same as that of a 60-year old. But, how much you should actually invest in different assets at the particular stage of your life?

There is no single correct answer to this question, and there can be multiple answers. However, it this post we are going to discuss one of the most popular allocation methods, known as the 100 minus your age rule.

What is 100 Minus Age Asset Allocation?

The 100 Minus Age Asset Allocation Rule is one of the earliest and elementary methods of Asset Allocation, which proffers a rational procedure to determine the distribution of equity and debt in the portfolio.

This rule is devised on the vital axiom of curtailing risks as we gradually turn old. It also interprets the Asset Allocation which is completely based on the stage of your life. Over time, various theories and models have been devised in an endeavor to lend advice about this crucial decision. The 100 Minus Age Asset Allocation Rule provides extensive assistance to decide the ratio of our investment in debt and equity.

The 100 Minus Age Asset Allocation Rule which states that we should take 100 as the minuend and our age as the subtrahend.  The enumerated difference is the percentage of our network that we should be designating in stocks as of today, i.e. at our current age.

Examples of 100 Minus Age Asset Allocation Rule

At first, we will decode the definition by taking a person belonging to the younger age bracket.

AGE OF AN INDIVIDUAL: 22 YEARS

As per the definition, we will subtract it from 100.

(100-22) Years  = 78 Years  = 78/100*100= 78 %

Thus, according to the rule, he/she should keep 78% of his/her portfolio in equities. The rest of the portion should include high-grade bonds, government debt, fixed deposits, and other relatively safer assets. On the other hand, when he/she reaches the age of  80,  he/she would diminish his/her allocation to stocks to just  20%.

asset allocation

Now, we will explain the definition by taking a  person belonging to the older age bracket.

AGE OF AN INDIVIDUAL: 67 YEARS

As per the definition, we will subtract it from 100.

(100-67) Years  = 33 Years  = 33/100*100= 33 %

Thus, according to the rule, he/she should keep 33% of his/her portfolio in stocks or riskier investment options. The rest of the portion should include high-grade bonds, government debt, fixed deposits, and other relatively safer assets.

How does the 100 Minus Age Rule work?

The logic is simple. When you are old, you will have a lot more responsibilities and expenses compared to when you’re young. For example, if you’re at 58, you might be worried about the retirement fund, retirement home, higher education of your kids, the marriage of your daughter/son, etc. On the contrary, when you are young, you do not have much expenses or responsibility. That’s why it is considered wise to take more risks and invest in high risk, high return investment opportunities when you are young.

In professional vocabulary, this is  attributed  as a “Declining Equity Glide Path.” Every year or, at an interval of a few years, we would have to decline our share in equities which in turn will diminish the volatility and level of uncertainty of our investment portfolio.

As we get older, one of the most essential guidelines of investing is to eventually scale down our risk level since retired personnel get no scope for second chances in reference to the revival of the market after a sharp plunge. Therefore, this example depicts the simple perception behind the 100 Minus Age Asset Allocation Rule that strives to conclude that lesser the age, higher the risk-withstanding capacity &  more the age, lesser the competency to combat the storm of the stock market and vice versa.

Drawbacks of the 100 Minus Age Rule

100 Minus Age Asset Allocation Method comprises of several loopholes. Let us analyze each of them in a detailed discussion.

1. Presumption of the fact that the process of financial planning is similar for everybody

The ultimate truth is that the procedure of financial planning varies from person to person where everyone has their exclusive preference and needs for  Asset  Allocation.

2. Inconsiderate about the basic factors for asset allocation

Asset Allocation requires a well-defined consideration of diversified factors like financial situation, preferences, risk-taking ability, time horizon, goals, and investors’ psychology.

However, the recognized path to asset allocation is to elaborate our risk profile at the very first stage. Assessing our risk profile will aid us to contemplate the approximate risk we are ready to undertake for the investment.

The second thing that needs to be taken into account is the time horizon for the purpose of investment. On the basis of the analyzed risk profile and time horizon, the decision regarding the asset class is executed!

For example, if you are an aggressive risk pursuer and have a long term time horizon for investment then you can allocate a major portion of your asset to equities. The percentage can be 80 % or,  90% to stocks and rest into debts. In exceptional cases, if you are someone having a supreme risk appetite, you can even invest 100 % of your assets. On the contrary, if you have a short time horizon in your mind, then it always recommended investing in a debt fund despite being an aggressive risk-taker.

3. Inconsiderate about the change in Life Expectancy

Over the past few decades, there has been an unwavering increment in life expectancy around the globe. The hike is driven mainly by improvements in medical facilities and infrastructure. However, as the majority of the people have started surviving longer than before, many financial advisors feel that there is a dire need for amendment in the rule.

According to experts, the modified figures should be closer to 110 minus the age or, 120 minus the age. There is another aspect that has been absolutely overlooked by the 100 Minus Age Asset Allocation Method. On average, women live nearly four to five years longer than men and thus, required corrections definitely need to be made in the rule to cater to the investment needs of women population.

4. Inconsistent results in reference to market fluctuations

Academicians and researchers had commenced a project to test the accuracy and performance of the 100 Minus Age Asset Allocation Method aka Declining Equity Glide Path in different market cycles. Intensive research reports display that in bear cycles or, during poor market conditions, this method has delivered distressing outcomes. In reference to the market happenings of 1966, if somebody retired during that year, they would have run out of money 30 years after retirement.

The same experiment was also applied to a bull cycle or, in strong market conditions. During the booming period, the 100 Minus Age Asset Allocation Method generated good results with the strongest ending account values. However, it is not possible to predict or foresee future market performances at the time of an individual’s retirement. Thus, it would be wise to chalk out a sound allocation method that sails through the crests and troughs of the stock market.

Conclusion

The 100 minus your age is a simple, yet effective way to easily allocate assets depending on the stage of your life. This age rule is based on the principle of minimizing risks as you grow old and hence, simplifies the asset allocation. However, this rule also has a lot of drawbacks and hence while deciding the asset allocation, you should keep in mind your priorities and financial situation.

Also read: How to Invest in Share Market? A Complete Beginner’s Guide

That’s all. I hope it post is useful to the readers. Happy Investing.

January 10, 2020 Personal Finance, Save money 1 comment
What is the TOWS Matrix? And how it is used?

What is the TOWS Matrix? And how it is used?

What is the TOWS Matrix? And how it is used?

Apple, Amazon, and Google — we all have heard the renowned names of these gigantic companies and are quite familiar with their products. They have been sustaining through the zig-zags of an economy and have successfully created a brand value since their establishment.  All three companies must have done something right which helped them to stay in the game for the long run, unlike other companies that couldn’t sustain or, have fizzled out. In order to find out the answers to such statements, analysts take the help of marketing strategies.  Today, we will discuss one such theory called TOWS Matrix to find out the awaited answers. Well, without further adieu, put on your reading glasses and jump in!

TOWS Matrix can be interpreted as a framework to assess, create, compare, and finally decide upon the business strategies. It is a modified version of a SWOT analysis and is an abbreviation that stands for Threats, Opportunities, Weaknesses, Strength. It was invented by an American business professor called Heinz Weirich in 1982 to examine businesses from a practical approach in reference to administration and marketing. The evaluation is done by amalgamating the external opportunities and threats with a company’s internal strengths and weaknesses.

What is the TOWS Matrix?

TOWS Matrix begins with an audit of external threats and opportunities. Such scrutiny gives a clear insight and helps to adopt long term strategies. Thereafter, the internal strengths and weaknesses of a company are taken into consideration. In the next stage, the internal analysis gets intertwined with external analysis to devise a strategy.

TOWS Analysis goes way beyond the conventional SWOT Analysis and aids organizations to remain one step ahead in the ever-changing competitive landscape. The TOWS Matrix can also help in the generation of amazing ideas in relation to fruitful marketing strategies, decision-making, protection against threats, opportunities, diminishing threats, overcoming weaknesses and awareness regarding potential shortcomings.

tows matrix analysis

Although internal and external factors are incompatible features, there still exists a balance between them. Strengths and Weaknesses fall under internal factors and consist of HR policies, manufacturing processes, goals and objectives, attributes of the products and services offered to the target market, core values, work culture, staff, and fundamentals of the company.

On the contrary, Opportunities, and Threats fall under external factors and consists of government policies, dynamic nature of the market, evolving tastes and preferences of the customers, competition in the market, fluctuation rates of the raw materials required for the production and etcetera.

Now, we will move on to the discussion where we will discuss the four potential strategies of the TOWS Matrix. The four TOWS strategies are :

  • Strength/Opportunity (SO)
  • Weakness/Opportunity (WO)
  • Strength/Threat (ST)
  • Weakness/Threat (WT)

Strengths and Opportunities (SO) / Maxi-Maxi Strategy

The aim of a Maxi-Maxi Strategy is to utilize internal strengths to make optimum use of the external opportunities available to the company. In other words, the company has to utilize the strengths by using its resources to cash in on potential opportunities.

For example, if a  company has reasonably established a brand name in the market and has won the hearts of the consumers, there lies a golden opportunity to explore the new market locations or introducing a new line of products and services for the same target market. Such a step can turn out to be the best for the upliftment of the firm.

TOWS Matrix internal external

(Image Credits: B2U)

Strengths and Threats (ST) / Maxi-Mini Strategy

The aim of a Maxi-Mini strategy is to maximize the strengths of a company while minimizing the threats with the support of these strengths. Thus, a company should take advantage of the internal strengths to avoid massive external threats. This strategy indicates that the management of the organization can employ all the internal strengths to counter any of the possible threats that can come in the way of the business as obstacles.

Example: In the market, there is always a cut-throat competition amongst peers or, between new and old entrants. In such a scenario, to beat the competition, the lagging company needs to take advantage of the internal strengths such as quality, manufacturing techniques, legacy and customer service.

Weakness and Opportunities (WO) / Mini-Maxi Strategy

The Mini-Maxi strategy attempts to minimize the weaknesses and to maximize the opportunities. The aim is to revamp internal weaknesses by making use of external opportunities. The management of the company will detect various alternatives to look past the weaknesses and take control of the opportunities that come up in the course. It is always a wise decision to decline or correct the weaknesses and untap the opportunities.

Example: If the company doesn’t possess any expertise in any of the business domains which is necessary for the growth and is gifted an opportunity to ally with another company that has the needed expertise, it works as a fairly convenient situation for both the companies.

Weakness and Threats (WT) / Mini-Mini Strategy

The aim of the Mini-Mini strategy is to minimize weaknesses and minimize threats. This is definitely the most defensive spot in the TOWS Matrix. It is mostly utilized when a company is in a  deplorable position. In such a scenario, the company operates in an aggressive environment and has little or no development opportunities. The mini-mini strategy is nothing but a pessimistic style of liquidation of a company.

EXAMPLE: A company has lost its shine and glory and has lost the faith of the stakeholders. Thus, there exists a threat of losing out on funding and investment by investors. In this case. it might close down poor-selling products, cut down underperforming employees and build a hostile technique of selling. If optimistic, the company might look for merging with another suitable company to leverage its expertise and resources for hanging on to funding.

TOWS Matrix – Apple INC

apple steve jobs

Let us now apply these four strategies of TOWS Analysis to a famous company called Apple.

Apple Inc. is an American multinational organization specialized in technology and has its headquarters in Cupertino, California. Apple fabricates, builds and sells computer software, electronic products, and online services. The tech giant was established by Steve Jobs,  Ronald Wayne, and Steve Wozniak in April 1976. It is considered as the world’s largest technology company by means of revenue and is also one of the world’s most valuable companies.

According to statistics, it is the world’s third-largest mobile phone manufacturer after Samsung and Huawei. Apple’s renowned products consist of the iPad tablet computers, HomePod smart speaker, iPod portable media player, iPhone smartphone, Mac personal computer, Apple Watch smartwatch, AirPods wireless earbuds, and Apple TV digital media player. The online services provided by Apple are iTunes Store, Mac App Store, Apple TV+, iCloud, Apple Music, the iOS App Store, and  Apple TV+. In Fiscal YEAR 2018, the worldwide revenue of Apple totaled to $265 billion.

The strengths, weaknesses, opportunities, and threats of Apple are mentioned below. After glancing through them, we will begin performing our TOWS Matrix according to the rule.

— Strengths

  1. Apple is known as a Market leader and thus, maintains a high standard across several products and services. It is the most trusted brand in the entire marketplace.
  2. It has a strong brand image and thus helps the audience to differentiate Apple from other competitors and positively influences the purchasing decisions.
  3. It possesses extensive financial strength and thus has higher profitability and liquidity.
  4. Apple has also a highly innovative and highly sophisticated supply chain which helps in maintaining efficiency.
  5. It also has High-profit margins because of the consistent sales of its popular products.
  6. The premium quality of its products allows Apple to enjoy a large and loyal customer base.

— Weakness

  1. Apple Products are not priced by keeping the competition in mind and can be afforded by a certain section or class.
  2. There is an availability of a narrow product range compared to its competitors.
  3. The products and services are only compatible with Apple products and are incompatible with the products of other brands.

— Opportunities

  1. There is a constant rise in demand and craze for mobile devices irrespective of the quoted price.

— Threats

  1. In spite of being market leaders, there has been an emergence of competitors.
  2. The cost of manufacturing has been constantly on the rise.
  3. There has been also a decline in the market share of Apple due to the falling demand of Laptops and Personal Computers.

— Strengths and Opportunities (SO) of Apple:

Since there has been an increase in demand for mobile devices, the company should increase its focus by concentrating on manufacturing and marketing to generate profit. Apple should also leverage its brand value and financial strength to enter into new products and consequently increase their sales and profit. Such a step will aid Apple benefit from its existing customer base and customer loyalty. Further, if it partners with other brands to mass-produce compatible products and create mutually advantageous relationships, it will highly assist Apple in hack into the customer base of other brands.

— Strengths and Threats (ST) of Apple:

Apple should build a diversified range of products to fabricate its customer base and diminish the pressure of competitiveness. Another most important point is to consider the cultural variance to retain the competitive advantage created by  Steve Jobs.

— Weakness and Opportunities (WO) of Apple

Since Apple has only high-end products, it should release a cluster of products at an affordable price to make it feasible for middle-class consumers. Creating a larger product sets and thereby, entering into a new product arena will also help Apple to serve new customer segments.

— Weaknesses and Threats (WT) of Apple

Releasing a range of competitively priced products to attract middle-class customers can change the scenario altogether to reduce the pressure from competitors. It should also widen the product sets and try to cash in on the capability of the existing supply chain to decrease the manufacturing costs.

Also read:

Advantages & Disadvantages of TOWS Analysis

We will now elaborate on the major pros and cons of TOWS Analysis.

Advantages of TOWS Matrix

  1. TOWS Analysis helps to stumble upon strategic ideas by interconnecting the internal and external factors for the organizations.
  2. It is cost-effective in nature.
  3. It’s user-friendly and can be performed by any layman after learning a few parameters.
  4. TOWS Analysis can be applied to any company irrespective of the industries and economies.
  5. It helps organizations to upgrade their strategies with changing dynamics.

Disadvantages of TOWS Matrix

  1. TOWS analysis becomes tough to handle if we are overloaded with information.
  2. On many occasions, TWOS Matrix doesn’t take the ever-changing competitive environment into consideration and can affect the main agenda of finding out strategies for business in attaining elevated profits, higher sales, creation of brand value and etcetera.

Summary

TOWS Matrix is a framework to assess, create, compare, and finally decide upon the business strategies. It is a modified version of a SWOT analysis. The TOWS Matrix helps in the generation of amazing ideas in relation to fruitful marketing strategies, decision-making, protection against threats, opportunities, diminishing threats, overcoming weaknesses and awareness regarding potential shortcomings.

The four TOWS strategies are Strength/Opportunity (SO), Weakness/Opportunity (WO), Strength/Threat (ST), and Weakness/Threat (WT).

TOWS Analysis can be applied to any company irrespective of the industries and economies. It is user-friendly and can be performed by any layman after learning a few parameters. However, the TOWS analysis becomes tough to handle if we are overloaded with information.

December 4, 2019 Economics, Investment Basics No comments yet

How to do a PESTLE Analysis? (Explanation & Example)

How to do a PESTLE Analysis? (Explanation & Example)

Hello readers! We are back with another interesting article that will help to enlighten your knowledge horizon regarding the nitty-gritty of strategic management for running a prosperous business.

Are you someone who is planning to take the road of entrepreneurship and set up a new business by quitting your 9 to 5? Then, this article is most definitely for you! Well, to start off, there are a lot of factors that are needed to take into consideration for establishing a start-up business. Interestingly, it is not only the startups but also the Blue Chip Companies who need to constantly gauge strategies for sustaining their businesses and make a prominence. Today, we are going to discuss a strategic management framework known as PESTLE (Political, Economic, Social, Technological, Legal, Environmental) Analysis which has emerged to be an important apparatus for scanning the internal and external factors impacting a business.

Let us first learn the definition to understand the concept of PESTLE Analysis.

What is PESTLE Analysis?

A PESTLE Analysis is a hypothesis under the category of marketing principles ensuring business growth and profitability.

Francis J. Aguilar, a professor at Harvard Business School is considered to be the founder of the PESTLE Analysis in 1964. However, it didn’t commence as PESTLE but started as ETPS and covered four broad factors namely  Economic, Technical, Political and Social aspects.

Initially, it was known as PEST Analysis. It is anatomy and a strategic management tool that helps to scrutinize the macro-environmental factors that may have a resonating influence on an organization’s accomplishments. The acronym PESTLE is the shortened form of Political, Economic, Social, Technological, Legal factors and Environmental factors. The concept largely helps companies to acquire a transparent insight into the intramural and extramural factors affecting their organization. It also provides a general overview of the environment from multifarious points before launching a new project, new product, new service, etc.

PESTLE Analysis is contemplated as the backbone of strategic management that interprets the approach of a company and defines an organization’s strategies and intertwined futuristic goals.  The theory can be applied to different industries in divergent scenarios because of its analytical flexibility. In order to conduct the PESTLE Analysis, it is utterly important to understand each letter of the “PESTLE” in depth.

PESTLE ANALYSIS Flow

— Political Factors

Political factors usually indicate the authoritative powers that a government possesses in the economy or, in case of a certain industry. Such factors consist of policies of the government, extent of political stability, foreign trade policy, fiscal policy, trade tariffs, labor law, health regulations, education system, environmental law, infrastructure, corruption, and etcetera. All these aspects need to be taken into account when evaluating the lucrativeness of a potential market.

Example: A government may levy a new tax policy or fiscal policy or trade tariffs in a new financial year which can affect the revenue generation of organizations to a large extent. Recently, the Government Of India has reduced corporate tax rates to 22% from 30%. Consequently, this move will help the top-notch companies to revive their profitability and would be a  good catalyst for luring investment from foreign investors. The announcement also arrives at a perfect time because major American organizations are involved in a trade war with China and are finding alternative global manufacturing pedestals.

— Economic Factors

Economic factors are crucial determinants and plays an important role in the performance of an economy. Such factors generally end up becoming a key decision-maker in the success or, failure of a company. A surge in the rate of inflation of any economy can affect the pricing pattern of a companies’ products and services. In addition, it also impacts the purchasing power parity of the consumers and brings about a change in the forces of demand and supply in the economy. The economic factors include inflation rates, exchange rates, interest rates, economic growth, gross domestic product, unemployment rates, economic growth and disposable income of consumers.

EXAMPLE: In  India, in the past few weeks, vegetable prices have skyrocketed and as a result, there is a rise in the rate of inflation. Consequently, due to the hike in prices, the purchasing power of people has gone down which ultimately indicates that there will be a fall in consumer demand.

— Social Factors

Social factors pin-point the social environment in relation to the industries and constitute the demographic features, customs, norms, and values of the population within the operating periphery of the organization. Social factors consider the population trends such as age distribution, cultural barriers, income distribution, the growth rate of population, lifestyle attitudes, career inclinations, and health consciousness.

All the above-mentioned aspects are very significant for marketing strategists when earmarking the customer bases. Apart from that, the factors also reveal information about the local workforce and their compliance to work under certain conditions.

EXAMPLE: In today’s era, the demand for junk foods like Pizza and Burgers has gone up extensively, especially amongst the younger generation. Thus, companies like Dominos, Pizza Hut, Burger King and KFC are churning out huge profits because of the consumers’ behavior. On the contrary, the same doesn’t hold true for the people in rural areas. This is how social factors affect companies’ revenue structure.

— Technological Factors

Technological Factors have relevance to modernization in technology which influences the performance of an industry. Such factors include a level of innovation, research, and development (R&D) activity, amount of technological awareness, technology incentives and automation. Technological Factors highly affect the decisions regarding entry/exit in an industry, launching of a new product and outsourcing production-related activities. Possessing a sound knowledge regarding technology helps companies from spending a lump sum amount of money on obtaining a technology that would become obsolete in the near future due to the innovation of newer technologies globally.

EXAMPLE: The business space is filled with cautionary sagas of large scale companies that became failures due to their inability to keep up with the dynamic technological innovation. One such prominent example is Kodak, a technology company that used to produce camera-centric products and hegemonized the photographic film market during most of the 20th century. The breakthrough in digital photography contributed to the catastrophic misfortune of their film-based business model.

— Legal Factors

Legal factors include laws such as health and safety laws, discrimination laws, safety standards, employment laws, consumer protection laws, copyright and patent laws and antitrust laws. Every company is bound to have awareness regarding the laws for the purpose of conducting ethical business. In addition, a business owner also needs to be aware of any possible alteration in legislation which may have an impact on the business in the long term. Interestingly, the set of rules and regulations varies from country to country. Analysis of legal factors figures out strategies based on the backdrop of the legislations. However, it is always advised to have an appointed lawyer or an attorney to guide through the complexities.

EXAMPLE: Nestle had to take away the packets of Maggi from the stores’ shelves after the  Food Safety and Standards Authority of India (FSSAAI) summoned Nestle because of their negligence to adhere with the laws of food safety. Regulators found lead content beyond the permissible limit in its instant noodle product.

— Environmental Factors

Environmental factors have appeared to become a pivotal character recently. They have become utterly valuable due to carbon footprint targets, scarcity of raw materials and pollution targets fixed by governments. Environmental factors include ecological facets like climate change, weather conditions, environmental offsets which highly govern tourism, agriculture, and farming industries. Especially, large-scale campaigns regarding the burning issue of climate change are leading to the change in operation and products of the companies. Therefore, practices of Corporate Social Responsibility (CSR) and Sustainability forms an integral part of the companies and is taking new shapes with each passing day.

EXAMPLE: Due to the imposition of government rules as a measure to curb global warming, regulations on fossil fuel industries have increased considerably and as a result, this move has started threatening the thriving coal, oil, and gas industries.

PESTLE Analysis Example — SONY

sony corporation

SONY is a Japanese MNC  and has abruptly metamorphosed into one of the dominant entertainment organizations in the world. Its versatile business products consist of electronics, entertainment gaming,  and financial services. The company is the owner of the largest music entertainment business around the globe and also a chief player in the film and television entertainment industry.

Political Factors

SONY is a world-class brand and has a prominent presence in several countries around the world.  The political scenario in different countries largely impacts the SONY’s success. As we know, political Stability ignites growth and political instability, on the other hand, paralyzes the rules and regulations of an economy. In Sony’s context, its supply chain is located in China. Thus, any kind of political disturbance in China will have a heavy influence on Sony’s generation of profits.

Economic Factors

SONY products fall under the category of luxury goods. Such goods are not items of necessity but are usually purchased when people want to splurge on themselves. In a nutshell, if you living paycheck to paycheck, a SONY product would not be a priority in your list of necessities. In another instance,  economic instability and the high rate of unemployment in a country will never attract buyers for the high-end SONY products. Consequently, the profits will touch a rock bottom. Therefore, it is crystal clear that a big giant like SONY extensively depends on stable and emerging economies to merchandise their entertainment products.

Social Factors

Traditions, culture, age distribution, taste, and preferences vary from nation to nation. SONY offers entertainment products beginning with movies to music which basically acts as an escape to reality. It is to be kept in mind that not every nation has the same pattern of entertainment. Therefore, it is extremely important for SONY to keep up to date regarding the buying trends of the consumers and consequently tailor the products and services fitting the requirements of the customers.

Technological Factors

SONY is a true blue technology company because every other product is correlated with the usage of technology in some way. The company’s  Video Game  Consoles are nothing but computer devices that produces video signal or,  optical image to exhibit a video game for multiple players. On the other hand, laptops help users to stay connected to social media and other websites on the world wide web. In today’s era, the availability of the internet has removed all the possible obstacles of communication and SONY has bagged this opportunity to market their products online. It has become convenient for the company to announce any new launch of products via the medium of the internet.

Legal Factors

Since SONY is an international company and sells its products across many countries, it also has to abide by the diversified legal regulations of different countries. Any failure to adhere to the legalization like labor laws to tax policies, the company might end up in serious legal trouble or lawsuits which can further affect their prosperous business.

Environmental Factors

Sony believes that their corporate pursuits will be possible when there is a practice of sustainable development and thus they are so full of conviction regarding climate change, conservation of biodiversity, renewability of resources and other valuable measures to save the environment. SONY has taken up initiatives regarding environmental activities since the 1990s.  In April’10, a new environmental plan was introduced by SONY to set up a sustainable community by accomplishing a zero carbon footprint by the year 2050.

We will now elaborate on the major pros and cons of PESTLE Analysis.

Advantages And Disadvantages of PESTLE Analysis

— Advantages of PESTLE Analysis

  1. PESTLE Analysis has a basic framework and follows a simple process for conducting an assessment.
  2. It furnishes a mechanism that allows an organization to pinpoint and cash in on golden opportunities and utilize them to reinforce a firm’s business model.
  3. It helps to diminish the impact and consequences of possible threats to an organization.
  4. It sanctions a company to examine the process of entering untapped markets both nationally and internationally.
  5. It helps to build a custom of strategic thinking for strengthening the company’s position.
  6. It is absolutely cost-effective and the cost to do any level of the assessment isn’t exposed to oscillations.

— Disadvantages of PESTLE Analysis

  1. PESTLE analysis cannot showcase the full picture because it only focuses on six factors that are external in nature. In strategic planning, one needs to go beyond these six factors which can provide internal insights as well.
  2. The Political, Economic, Social, Technological, Legal and Environmental factors are very dynamic in nature. Any shift in any of these factors can change the result of PESTLE Analysis drastically.
  3. PESTLE Analysis is time-consuming in general and requires loads of data. Each of the factors needs to be thoroughly examined to come to a conclusion and thus, takes up a lot of time.

Summary

PESTLE Analysis provides a basic framework and follows a simple process for conducting an assessment. It is a hypothesis under the category of marketing principles ensuring business growth and profitability. In order to conduct the PESTLE Analysis, it is utterly important to understand each letter of the “PESTLE” in-depth i.e. Political Factors, Economic Factors, Social Factors, Technological Factors, Legal Factors & Environmental Factors.

November 27, 2019 Economics, Investment Basics No comments yet
BLUE OCEAN STRATEGY meaning

What is Blue Ocean Strategy? Examples, Pros & Cons!

What is Blue Ocean Strategy? Examples, Pros & Cons!

Hello readers! It is a new day and we are back with a new topic of discussion exclusively for you all!

Almost all of us have been to beaches for a weekend getaway or long vacations! If not holidays, we have definitely come across visuals of oceans and seas on social media and televisions. Haven’t we? Well, oceans are vast, deep, massive, wide and are the most baffling natural wonders of the world. Proper explorations and researches can give way to incredible discoveries and provide us information about its scopes and untapped prospects.

In a similar fashion, a path-breaking strategy, known as Blue Ocean Strategy, was introduced by  W. Chan Kim and Renée Mauborgne. It is a pacifist marketing scheme and is considered a strategic planning tool for assessing a business. A Blue Ocean Analogy is utilized to unlock the wider, unfathomable, powerful and vast potential in the unexplored market space in terms of profitable growth. This strategic planning theory is an escape from the general notion of benchmarking the competition and focusing on lump sum figures.

What exactly is a Blue Ocean Strategy?

Blue Ocean Strategy is all about devising and acquiring the uncontested market forum by spawning a new demand.

Since the industries are in a state of non-existence, there is absolutely no relevance of peer comparison. The strategy bags the new demand by familiarizing unique products with advanced features that stand apart from the crowd.

In other words, the strategy spurs companies to offer extremely valuable products to the consumers. Thus, it supports the company to incur large profits and surpass the competition. The price tags of the products are generally kept on the steeper side because of their monopoly. Blue Ocean approach shuns the ideology of outperforming the competition and asserts to recreate the market boundaries and operate within the nascent space.

The kind of leadership and management required to initiate a Blue Ocean Strategy differs from the management of corporations that have short-term ambitions and mainly concentrates on increasing shareholder value by pushing up the stock prices via buybacks, mergers, and acquisitions. The Blue Ocean Strategy can be applied to all the sectors or, businesses and is not limited to just one kind.

On the contrary to the concept of Blue Ocean Industries, there exists Red Ocean Industries. Let us understand the concept in brief before moving to further analysis.

Red Ocean Industries

Red Oceans are those industries that are currently in existence or, what we call the contested market forum.

In Red Oceans, there are well-defined industry perimeters that are known and out in open to all. Due to the acquaintance with the competitive rules and acceptance of the drawn boundaries, the market space gets crowded and there is a consequent reduction in growth and profitability. When the product comes under the burden of pricing pressure there is always a chance that a firm’s operations could come under notable menace.

Companies under Red oceans strive to outperform their rivals by grasping a higher proportion of existing market share at another company’s loss. In order to keep themselves afloat in the marketplace, proponents of Red Ocean Strategy concentrate on creating competitive advantages by examining the blueprints of their peers/competitors. Such a saturated market space makes way for a toxic competition which ends up as nothing but an ocean full of rivals fighting over a dwindling profit pool. Such firms mainly seek to capture and redistribute wealth instead of creating wealth.

These kinds of market forums can be correlated with the shark-infested ocean waters which remain spilled with blood. Hence, the coinage of the term Red Oceans. Thus, the business world has pulled up their socks and is striving to skip the “Red Oceans” to create their very own “Blue Oceans”.

Examples of Blue Ocean Industry

Let us learn how organizations that have followed the path of Blue Ocean Strategy has undergone outstanding growth and profitability!

1) UBER

Uber Cab is a brainchild of the Blue Ocean Strategy and has dramatically transformed the picture of the transportation industry by discarding the nuisance of booking cabs, denial of services, meter issues and unwanted arguments.

It is a ridesharing service that enables customers to book their rides with the ease of swipes and taps. It also permits users to trace a  driver’s progression towards the pickup point in real-time through the medium of a smartphone application called Uber App.

Uber devised a new market by the amalgamation advanced technology and modern devices. It tried to differentiate itself from the regular cab companies and in turn developed a low-cost business model that offers flexible payments, pricing strategies and generates good revenues for both the drivers and the company. In the initial stages, Uber was successful in capturing the uncontested market space but was eventually flooded by the competitors. In spite of that, it continues to command the market and is speedily expanding across the world. As of 2019, Uber approximately has 110 million riders worldwide and holds 69% of the market share in the United States.

2) iTunes

Apple headed into the space of digital music with its unique and eminent product ie. iTunes in 2003. In previous days, conventional mediums like compact discs (CD) were put to use to disseminate and listen to music.

When iTunes ventured into the market, it solved the basic problems which were faced by the recording industry. As a result, iTunes cut down the practice of illegally downloading music while simultaneously catering to the demand for single songs versus entire albums in a digitalized version. High-quality music at a reasonable price offered by Apple became a talk of the town. All the available Apple products have iTunes to download music and have largely ruled the market space for decades. It is also recognized for driving the growth of digital music.

These examples of the Blue Ocean Strategy can enlighten future startups regarding the execution of a  strategic planning scheme and successfully unlocking new demand.

How to find and develop/Launch them?

Blue Ocean Strategy becomes the need of the hour when supply surpasses demand in a market. When there is limited scope for further growth, businesses try and search for verticals for discovering new business lines where they can enjoy the advantage of uncontested market share or ‘Blue Ocean’.

In order to find and identify an attractive  Blue Ocean, one needs to take into consideration the “Four Actions Framework” to devise the aspects of buyer value in creating a new value curve. The Four Actions Framework emulates strategic triumphs and guides towards the path of launching a Blue Ocean initiative.

The framework poses four key questions, namely:

A) Raise

It includes points that must be blossomed by industry in reference to the line of products, price tags and caliber of services. A startup must analyze the pros and cons of the existing organizations and their strategies for key aspects of differentiation.

2) Reduce

It points out the arenas of an organization’s product or, service which foreplays a crucial character in the industry but is not absolutely essential in nature. Therefore,  the proportion of the products can be curtailed without entirely eradicating them.

3) Eliminate

It points out the arenas of an organization or industry which could be eliminated absolutely for the purpose of cutting down the costs and also to fabricate a completely new market. At times, newly invented products can lead to self-assassination of the existing products and thus,  leads to an unwillingness to interfere with the current revenue source.

4) Create

It nudges the companies to shape up trailblazing products. The introduction of an entirely new product line or, service leads to the establishment of a new market and points of differentiation. Identification of the needs of the target market provides sound knowledge regarding the addition of unique measures and consequently tracking the progress for illustrating a Blue Ocean.

Now that we have discussed the Blue ocean strategy and how to find them, let us also discuss the pros and cons of this strategy.

Pros of Blue Ocean Strategy

Here are a few of the advantages of using the blue ocean strategy:

  1. Blue Ocean Strategy cooperates with organizations to find uncontested markets and avoid matured and saturated markets.
  2. It assists to move from the impediments of competing within the existing industry and cost structure and to gradually migrate towards constructive value improvement. In short, it demonstrates how to break free from the traditional strategic models and to expand profitability and demand for the industry by using the analysis.
  3. Value innovation is the backbone of a Blue Ocean Strategy. Value innovation is the alliance of innovation with price, utility, and cost positions. It eventually creates new value/demand for consumers and thereby, expands the chances of growth potential.
  4. Blue Ocean Strategy enables a fundamental transformation in mindset. It develops mental horizons and helps in recognizing the opportunities.
  5. Blue Ocean Strategy is based on “time and again” proven data rather than unproven theories. It is based on practical approaches that have proven results during live market executions.
  6. Products under the concept of the Blue Ocean Strategy doesn’t make a consumer choose between value and affordability. It is the simultaneous pursual of differentiation and low-cost theorem.
  7. Creating blue oceans is non-zero-sum with high payoff possibilities.

Cons of Blue Ocean Strategy

Let’s us also look at a few of the common cons of using this strategy:

  1. It’s quite difficult to come up with futuristic ideas and identify colossal and untapped markets.
  2. Nominating an articulate Blue Ocean Strategy is a result of a calculated and detailed research process backed by extensive analysis. It is to be kept in mind that there is no magic formula or, silver bullet.
  3. Venturing into a market in the early phase comes with baggage of risk. There is a high possibility that the customers might not understand the grass root of the products and services because of the absence of a fully developed technology.
  4. Production of a new market is never easy because an organization has to be smart and clear regarding its customer base and ways to impart education about new ideas, new products, and new solutions. It also requires clarity about the trade-offs, obstacles and the workforce.
  5. Opting for a different ocean i.e the Blue Ocean, requires a lot of patience, persistence trust, preparation, and faith. It is also extremely paramount to look at initial indicators for confirming the fact that “fishing”  is not being done in a dead sea.
  6. On finding a new ocean, other sharks from the saturated markets aka the Red Oceans and other adjacent oceans will be lured to the new market. Thus, building strategically defensive alternatives would be a wise step. Defensive alternatives majorly consist of brand power, technological advancement, and speed of execution.

Also read: What is a BCG Matrix? Explanation with Example!

Summary

Let us quickly summarise what we discussed in this article.

A path-breaking strategy known as Blue Ocean Strategy is a pacifist marketing scheme and is considered a strategic planning tool for assessing a business. It is all about devising and acquiring the uncontested market forum by spawning a new demand. Since, the industries are in a state of non- existence, there is absolutely no relevance of peer comparison. The strategy bags the new demand by familiarizing unique products with advanced features that stand apart from the crowd. Blue Ocean approach shuns the ideology of outperforming the competition and asserts to recreate the market boundaries and operate within the nascent.

These days, the Blue Ocean Strategy becomes the need of the hour when supply surpasses demand in a market. In order to find and identify an attractive  Blue Ocean, one needs to take into consideration the “Four Actions Framework” to devise the aspects of buyer value in creating a new value curve. The framework poses four key questions, namely, Raise, Reduce, Eliminate & Create.

That’s all for this article. Let me know what you think about the blue ocean strategy in the comment section below. Cheers!

November 6, 2019 Economics No comments yet
1o best Mutual Fund books of all time

10 Best Mutual Fund Books Of All Time!

10 Best Mutual Fund Books Of All Time: Hello readers! Anyone not living under a rock most definitely has overheard a lot about Mutual Funds. All thanks to the frequent advertisements which pop up in between our television programs “Mutual Funds Sahi hai” with a quick disclaimer for two seconds. The most interesting fact is that with the advent of technology, they have even started appearing on social media platforms as sponsored posts.

In this era where financial awareness is growing in leaps and bounds, almost everybody is jumping into the bandwagon of investing in mutual funds to grow their money over time. Gone are the days when people used to park their money in savings accounts and would avoid the avenue of investment in the stock market.

What are Mutual Funds?

A mutual fund is nothing but a type of financial instrument consisting of a pool of funds accumulated from various investors to infuse in securities like equities, money market, bonds, and other financial assets. Mutual Funds are run by qualified fund managers who distribute the fund’s assets and strive to harvest capital gains on investments by the investors. A mutual fund’s portfolio is designed and maintained to match up to the aims of the investment as stated in the prospectus.

However, it is quite important for any individual or a firm to have an in-depth judgment about the global financial markets and its structure before investing in Mutual Funds. Risk is a part and parcel of  Mutual Funds because they are absolutely dependent on market conditions. Thus, everyone should be extra careful while staking their hard-earned money in it. Most of us are clumsy & lack sound knowledge when it comes to the assessment of risk before investing in the Mutual Funds. One needs to take a stern decision on the basis of their goals, time horizon & risk-bearing ability.

Well, does all these sound like a big deal? Undoubtedly, it is but don’t worry! We are here to enlighten you and fathom into the world of investments.

The first and foremost step in which you should partake in this regard is to concentrate on increasing your knowledge bank about the fundamentals of investing in Mutual Funds. As books are considered to be the best tool to enhance knowledge, we have compiled a list of 10 best mutual fund books in the forthcoming sections to help you in your investment journey.  Stay glued!

10 Best Mutual Fund Books Of All Time

1. Common Sense of Mutual Funds 

common sense on mutual funds

Author: John C. Bogle

Common Sense On Mutual Funds is considered to be a trustworthy and an ideal book for both the beginners and seasoned investors who are keen on digging deeper about Mutual Funds. The author who wrote the book was the creator of the world’s first index fund. It has received the highest of laurels in the investment community and continues to be a bestseller.

Key Highlights of the book:

  1. This book determines the mechanism of mutual fund investments in the swirling market conditions and provides a timeless piece of advice in reference to knitting a greatly diversified investment portfolio.
  2. The book has extensive explanations about the elemental structure of investments that are applicable to different market cycles.
  3. The common sense of mutual funds book discusses the regulatory and structural alterations across the global mutual fund’s industry in a lucid manner.
  4. The author has put the Index Funds under the limelight and has also highlighted the significance of adopting a long term strategy.
  5. The writing style is simple with a effective display of common sense and transparency.

2. Mutual Fund For Dummies

mutual fund for dummies by eric tyson

Author: Eric Tyson

Mutual Fund For Dummies helps any novice investors to scout through the various implications of Mutual Fund investment. The book was released in the year 1998 and is seen as a timeless asset for planning and implementing a successful investment strategy.

Key Highlights of the book:

  1. This book guides through regarding the identification of the efficiently managed funds to match your financial goals.
  2. It discusses the latest investment techniques that heighten your chances of success and prevents you from drowning into vicious investment traps along with illustrations about Sample Fund Portfolios.
  3. Mutual fund for dummies book also provides informative cues to maintain and assemble an investment portfolio while analyzing a fund’s performance at the same time.
  4. It grooms the readers and push up their confidence to strategically invest in the Mutual Funds and consequently earn sustainable long-term profits.
  5. The book has elaborated chapters based on Exchange-Traded Securities and Tax Laws impacting the fund investments.

3. Bogle on Mutual Funds

bogle on mutual funds

Author: John C. Bogle

Bogle on Mutual Funds is another magnum opus that has redefined our outlook towards finance and investments. This masterpiece is brilliantly crafted to make an addition to the existing concepts about investing in Mutual Funds.

Key Highlights of the book:

  1. This book has chapters that are completely dedicated to Passively Managed Funds and how they can reap higher returns.
  2. It points out the difference between different spectrums like stocks, bonds, money market, and balanced funds. Drawbacks regarding placing weighted bets on individual securities, sectors and the economy are also highlighted.
  3. As you dig deeper, the book evaluates the correlation between risks and returns on investments across mutual funds.
  4. The book has portions covering how low cost has a more reliable investment structure and techniques for choosing among the four fundamental types of fund funds.
  5. It also highlights the possible reasons for below-average performances of different funds and the common mistakes committed by investors. The author provides well-structured guidance on the importance of perseverance and persistence in the course of the creation of wealth ie. Via Mutual Funds.
  6. In addition, Bogle on Mutual Funds book also includes parameters for pinpointing misleading advertisements and to look for the hidden truth.

4. The Mutual Funds Book

the mutual funds book by alon northcott

Author: Alan Northcott

The author of the book has punched in some unique concepts with a major concentration on investment advice and Mutual Fund theorems.

Key Highlights of the book:

  1. The book has a detailed explanation of the pros and cons of investing in Mutual Funds and how to generate profits through investments based on the  “Minimal Risk And Maximized Returns” idea.
  2. In this book, you can read the comparison and evaluation of the risk associated with mutual funds investment against other types of financial investments along with avenues to compare various funds on an after-tax basis.
  3. Alan Northcott has also covered approaches to figure out the perfect time to sell any security and to liquidate the money invested in funds in his book.
  4. There are separate sections on easy strategies for allocating the assets across various classes of stocks such as small-cap, micro-cap, mid-cap, and large-cap companies.
  5. The book also explains disclosure of the important definitions like ratings, net asset value, share classes, plans and etc associated with the investing procedure along with the inclusion of a background of the economic history of mutual funds including their scandals.

5. Morningstar Guide to Mutual Funds

morning star guide to mutual funds

Author: Christine Benz

The Morningstar Guide to Mutual Funds by Christine Benz helps to emerge out of the dense mist with a well-defined volume of productive information. It’s a no-nonsense guidebook that should be found in every investor’s cupboard.

Key Highlights of the book:

  1. The book covers the importance of bond funds, index funds, and exchange-traded funds in a portfolio.
  2. You can find a clear explanation of crucial terms like expense ratios, fund charges and loads which are neglected in general.
  3. The author has covered the estimation of a fund’s risks and how to invest in active funds, and improve the odds of your success? Alongside this, the book also explains an analysis of the quality of a fund’s manager, and consecutive steps to be undertaken regarding any alteration.
  4. A few of the crucial sections on this book cover the pros and cons of concentrated and diversified funds, red alerts against chasing high returns in a sector and assessment of quarterly and annual reviews for keeping the portfolio on the right track.
  5. Christine Benz also explains the strategy of investing in underperforming sectors and riding on their waves during a revival.
  6. Finally, there’s also a section on the importance of rebalancing the portfolio periodically and creating an articulate temperament for standing strong during volatility.

6. The Mutual Fund Industry Handbook

the mutual fund industry by Lee Gremillion

Author: Lee Gremillion

The Mutual Fund Industry Handbook by Lee Gremillion has a noticeable and systematic series of data and knowledge. Such volumes of information will assist anyone with a keen interest in this industry. The book was originally published in 2005.

Key Highlights of the book:

  1. This book covers the interpretation of various functions executed in the day-to-day operations of the Mutual Fund industry including front-office functions, back-office functions, buying and selling process, settlement, custody, accounting, and reporting.
  2. A few of the clears pivotal concepts explained in the book are regulatory protection, liquidity, diversification & professional management.
  3. The author also describes the roles being played by transfer agents, distributors, custodial banks, investment advisors, fund managers, and several other external service providers.

Also read: 7 Best Value Investing Books That You Cannot Afford to Miss.

7. Mutual Funds for Wealth Building

mutual funds for wealth building

Author: John Mcquilkin

The book is solely for beginners and amateurs who have newly become aware of the financial markets. Mutual funds for wealth building by John Mcquilkin presents an exhaustive analysis regarding investing in mutual funds right from scratch.

Key Highlights of the book:

  1. The book covers the definition and introduction of Mutual Fund, benefits and Limitations of Mutual Funds, different types of funds along with hidden costs of a Mutual Fund.
  2. The author also covers detailed investing strategies for Mutual Fund to discover how to create wealth with Mutual Funds to upgrade the standard of living and fulfill goals.
  3. The best part is an explanation in layman’s language with an utmost easy format.

8. Beating the Street

beating the street by peter lynch

Author: Peter Lynch

First of all, let me give you an introduction to Peter Lynch, the author of this book if you already do not know him already.

Peter Lynch is an American Investor and a former fund manager.  He was the manager of the Magellan fund at Fidelity Investments between 1977 and 1990. During this period, Lynch averaged a 29.2% annual return on the investments. This return was consistently double than the market index and during this period of 13 years, the asset under the management which was originally $18 million in 1977 increased to $14 billion. He is one of the rare fund managers who gave a fairly good return to their investors for thirteen long years in a row.

The exclusivity of the “BEATING THE STREET” is that it imparts teachings to develop a winning investment strategy and provides advice regarding the agglomeration of a rewarding investment portfolio.

Key Highlights of the book:

  1. In this book, Peter Lynch explains the “Invest In What You Know” strategy for both the big and small investors.
  2. He covers lucrative suggestions about architecting a profitable investment portfolio, based on your own experience,  insights and do-it-yourself research. He also covers the operative methods of fund managers belonging to large fund houses.
  3. The author reasons why a bear cycle is a fantastic opportunity to haul up stocks at a rock bottom price left behind by panic-stricken investors and advantages of markets in faster-growing economies (EG: INDIA).
  4. Peter Lynch explains why over a long-time period, a portfolio of well-chosen equity mutual funds will always surpass the returns of a portfolio consisting of bonds and money market funds.
  5. Besides, Peter Lynch’s “20 Golden Rules” are a part of this book as well.

9. Ladder to Wealth Creation

ladder to wealth creation by vivek k negi

Author: Vivek K Negi

Financial freedom is the penultimate agenda for everyone during a lifetime. The aim cannot be achieved only by saving one’s money. The idle funds lying in the bank account must be put to use for compounding wealth. It’s a procedure of strategic planning and investment from a tender age. Hence, this book comes to our rescue and explains all the minute catches and tricks.

Key Highlights of the book:

  1. The book explains what are Systematic Investments Plans (SIPs) and how initiating SIPs from a young age generates huge corpus in the long run via the method of compound interest.
  2. The author covers the advantages of investing in meager amounts at regular intervals over a long period of time in different asset classes.

Also read: 3 Amazing Books to Read for a Successful Investing Mindset.

10. How to make a fortune through Mutual Funds: Hunt with the hounds

how to make a fortune through mutual funds ashu dutt

Author: Ashu Dutt

If you are keenly looking forward to investing in mutual funds and your foremost objective is to yield high returns, this book is a must-have for you! How to make a fortune through mutual funds by Ashu Dutt breaks some acclaimed myths surrounding the concept of Mutual Funds and has been written by one of Asia’s leading investment managers.

Key Highlights of the book:

  1. The language of the book is clean and can be effortlessly grasped by the beginners.
  2. The book covers the achievement of extraordinary returns from Mutual Funds by investing in the actively managed funds.
  3. Author Ashu Dutt does explain how mutual Funds singles out the elements of emotions in due course of the investment and advocates the strategy of investing at points of maximum pessimism and exiting during euphoria.
  4. The book has separate sections on Open-Ended versus Close Ended Funds, Investing in Cycles, Trends, and Rallies etc.
  5. In the book, you can find a detailed analysis of different funds like Active Equity Funds, Index Funds, ETFs, Income Funds, Gilt Funds, Commodity Funds, and Real Estate Funds.
  6. The author has also included the topic of how to pick the correct funds during various market cycles along with how to time your entries and exits in Mutual Funds. Overall, he has shared his hushed secrets of profitability.

Summary

It is quite important for any individual or a firm to have an in-depth judgment about the global financial markets and its structure before investing in Mutual Funds. The first and foremost step in which you should partake in this regard is to concentrate on increasing your knowledge bank about the fundamentals of investing in Mutual Funds.

As Books are considered to be the best tools to enhance knowledge, in this article, we covered the 10 Best Mutual Fund books of all time. In case we missed any best mutual fund books that you believe should be covered in this list, feel free to comment below. Also mention which one is your favorite mutual fund book. Cheers!

October 25, 2019 Books, Mutual Funds No comments yet
What is Corporate Governance? Principles, Examples & More

What is Corporate Governance? Principles, Examples & More

Hello readers! Today we are back with another intriguing topic from the core world of finance – Corporate Governance! Put your reading glasses on and stay glued!

In this era of globalization where information is just a tap away, we all are pretty much familiar with the names of top-notch companies like Coca-Cola, Starbucks, Asian Paints, ITC, Unilever, and etcetera! Over the years, they have continued to grow in manifolds in spite of the emergence of various substitutes. Have you ever wondered what could be the secrets behind the success and sustainability of these companies apart from their brand value and consistent sales? Well, let’s dive in without further delay!

In order to flag off the session on a lighter note, we will put forward an example on a micro-level.

In schools and colleges, the fests are held annually with pomp and glory! The responsibilities and tasks are carried out in a chained way. Preparations begin prior to one to two months and require proper governance!  The absence of a good governing committee would have led them to a path of big failure. Similarly, every company require sound corporate governance to grow and augment in the long run.

What is Corporate Governance?

Corporate Governance is the procedure by means of which a  corporation guidelines itself. In a nutshell, it is a process of administering a company like a monarchial state which installs its own customs, laws, and policies from the highest to the lowest levels.

In financial terms, Corporate Governance is the collaboration of well -defined rules, processes and laws by which functions and regulations of business take place. Most companies leave no stone unturned to achieve a high degree of corporate governance. It is the responsibility of the board of directors to build a  framework for corporate governance that syncs with the objectives and mission of the business.

In the last decade, corporate governance has gained immense and serious attention because of high-profile scams and criminal activity by corporate officers in power. Poor corporate governance can have an adverse effect on a company’s financial health and level of trustworthiness.

The structure and frame of the Corporate Governance comprise of the Board Of Directors, Management and Shareholders! Let us first understand each of their key roles in-depth.

The Structure of Corporate Governance

— Board of Directors

The Board Of Directors plays a pivotal character in commanding the company’s management and business blueprints to accomplish long-term value creation. The most important functions of the board are:

  • Determine the company’s vision and mission to guide and set the pace for its current operations and future development.
  • Monitoring/examining the CEO’s performance and overseeing the procedure regarding CEO succession.
  • Understand and take into account the interests of shareholders and relevant stakeholders.
  • Avoiding conflicts of Interest

— Management:

Chief Executive Officer (CEO) leads the management of the company. Important aspects like strategic planning, risk alleviation, and financial reporting falls under the umbrella of the management. An efficient team of management escorts the company with the determination of achieving the business strategies over a considerable time horizon and avoids focusing on short-term metrics.

— Shareholders:

Shareholders invest in a public company by purchasing its stock from the exchange via brokers and earn capital gains with a rise in the price of the stocks. However,  Shareholders are not embroiled in the day-to-day management of business affairs but enjoy the right to elect representatives i.e. Directors. They also receive a Quarterly/Annual Report which consists of information regarding investments and voting decisions.

Competent Corporate Governance needs crystal clear generosity and interaction between Board Of Directors, Management and Shareholders in accelerating a company’s performance. Efficient corporate governance shapes up a transparent bunch of rules and regulations in which directors, management and shareholders have aligned ambitions. The framework allows the board of directors to affirm fairness, accountability, and transparency in a company’s relationship with all stakeholders (management, financiers, customers employees, government, and the community).

Also read: What is a BCG Matrix? Explanation with Example!

Principles of Corporate Governance 

A company that follows the hardcore core fundamentals of good corporate governance will generally surpass other companies in terms of financial advancement. The core principles of sound corporate governance include Fairness, Accountability, Responsibility & Transparency. Let us discuss all these principles one by one.

corporate governance pillars

— Fairness

Fairness touches on the points of uniform and equal treatment of all the shareholders in reference to receival of considerations regarding shareholdings. The fairer the company appears to stakeholders, the more likely it is that it can endure in the league.

— Accountability

Corporate accountability is an act of responsibility and obligation to provide an explanation for the company’s actions and activities. Corporate Accountability includes the  followings:

  • Presentation of a balanced and simple analysis of the company’s orientation and prospects.
  • Responsibility for determining the character and extent of the adopted risks by the company.
  • Maintenance of  adequate risk management and internal control structure.
  • Setting up formal and unclouded arrangements for corporate reports and a suitable relationship with the company’s auditor.
  • Proper communication with shareholders regarding diversification, progress and financial reports at frequent

— Responsibility:

The CEO and Board of Directors are accountable to the shareholders on behalf of the company regarding the execution of responsibilities. Thus, they should exercise their authority with full responsibility. The Board of Directors is responsible for conducting the management of the business, appointing the suitable CEO, overseeing the affairs of the company and keeping an eye on the performance of the company.

— Transparency:

Transparency means a company should reveal an informative piece of data about their activities to shareholders and other stakeholders. It also includes the open-mindedness and willingness to divulge financial figures which are genuine and correct in reality. The unveiling of reports regarding the organization’s accomplishments and activities should be on time and strive for accuracy. Such steps ensure the investors’  access to transparent and factual data which finely mirrors the financial, environmental and social position of the organization.

Benefits of Corporate Governance

Here are a few of the major benefits of having good corporate governance in a company:

— A good corporate governance practice gives rise to a strict compliance culture. It is advantageous in multiple ways and is directly related to improved performances. Due to the existence of such a strict environment, all the members are bound to adhere to the work culture, establish proper lines of communication with the rest of the organization and are promptly responsive to any evidence when there is any signal of non-compliance.

— Marvelous Corporate Governance has instant access to information and excellent communication. Rapid access to information and good communication among the members of a company leads to the formulation of robust strategies. Such strategies include efficient allocation of resources, leveraging technology and etcetera.

— Good Corporate Governance can lift up a company’s influence and reputation. Strong schemes like strict fiscal policies and internal controls help to gain trust and reliability among stakeholders.  Such genuine practices also help the company to borrow funds at a lower rate than those with weak corporate governance because lenders will be able to have faith in an organization that is seen to be stable, reliable and able to mitigate potential risks In today’s volatile environment.

— Increasing cognizance and consensus about the importance of good corporate governance among investors results in more number of investments in companies that have a prosperous track record. It also shields investors from possible scandals and aids to raise capital efficiently by gaining investors’ confidence. Thus, there is a positive influence on the share price and helps in brand formation and development.

— In this age of globalization and liberalization, there is a positive correlation between an excellent Corporate Governance and inflow of Foreign Investment. According to statistics, studies imply that Foreign Institutional Investors (FII) take notice of well- managed companies and respond positively by infusing capital for investment in the capital market. In order to reap the full benefits of the global capital markets and attract long-term capital, it is extremely important to implement basic principles of good corporate governance which can be well understood across borders. The huge influx  of foreign investment will immensely  churn up the economic growth and will prove to be a priceless step in enabling the organization to stand against tough economic storms and back a company’s

— Demonstration of good corporate governance also enables corporate social responsibilities like environmental awareness, health, education, sanitation, and other social aspects.

— At times, good corporate governance can help ensure that officials of a company do not take unwarranted advantage at the expense of their shareholders. For example- of Insider Trading.

Insider Trading refers to trading inequities of a company by internal members (directors, managers,em­ployees) of the company based on the sensitive information which is unknown to outsiders. It is a scandalous activity that is committed by the officials of the company and is critically connected to the arenas of Corporate Governance. The wisest way of handling this problem is by pushing the companies to imbibe self- regulation and adopting preventive measures. Such prophylactic action sends off a signal regarding the exercise of self-regulatory practices and assurance of safety to invest in the company’s securities. Hence, Good corporate governance also reduces corruption.

— Good corporate governance also provides the elasticity to apply customized practices that fits the companies’ requirements and to alter those practices in light of ever-changing conditions, benchmarks, and standards.

Examples of Corporate Governance

Now, after the elongated discussion and explanation, let us understand the concept with two examples!

— HDFC Bank

(Industry – Private Banking and Financial Services)

HDFC Bank identifies the significance of good corporate governance, which takes care of the long-term interests of shareowners and helps to win the public trust in the Company. Therefore, the Corporate Governance scheme is introduced to proffer a course and structure for managing and regulating the bank in accordance with the principles of superlative corporate governance policies.

HDFC  Bank was amongst the first four companies which earned a Corporate Governance and Value Creation (GVC) rating by The Credit Rating Information Services of India Limited (CRISIL). The bank has been successful in achieving a ‘CRISIL GVC Level 1’ rating for the last two consecutive years. This symbolizes that the bank has the potential to create wealth for all its stakeholders while preaching the highest degree of corporate governance practices. The Bank truly believes in transparent disclosures and the empowerment of shareholders for weaving value.

The chart shows the past 17 years of data from the year 2000. Going by the chart,  HDFC bank has generated huge wealth over the years and is known for its laurel worthy Corporate Governance.

hdfc bank share price

On the contrary, in recent times, there are several specimens that have grabbed headlines regarding massive failures of corporate governance. One such is the Punjab National Bank ( PNB) Scandal.

— Punjab National Bank (PNB)

(Industry: Public Sector Bank)

Punjab National Bank (PNB) scam was put up across all news channels for a scam size of size 12,000 crores. The fact that the main accused i.e.  Nirav Modi was able to siphon off funds without being suspected by investigating committees or, the income tax department points out to the mammoth loopholes in the governance. The existence of proper corporate governance in  Punjab National Bank (PNB) could have singled out the large scale scandal of this level.

PNB Share price

In the chart, it is clearly evident how te share prices started falling just prior to the announcement of the scam and went on a downhill journey since then.

Also read: 3 Past Biggest Scams That Shook Indian Stock Market

Summary

Let us quickly summarize what we discussed in this article. Corporate Governance is the procedure by means of which a corporation guidelines itself. In a nutshell, it is a process of administering a company like a monarchial state which installs its own customs, laws, and policies from the highest to the lowest levels.

In financial terms, Corporate Governance is the collaboration of well -defined rules, processes and laws by which functions and regulations of business take place. Most companies leave no stone unturned to achieve a high degree of corporate governance. The structure and frame of the Corporate Governance comprise of the Board Of Directors, Management and Shareholders!

A company that follows the hardcore core fundamentals of good corporate governance will generally surpass other companies in terms of financial  The core principles of sound corporate governance include Fairness, Accountability Responsibility, and Transparency. There is a multitude of benefits arising out of good governance which helps a company to ride on the waves of growth.

October 24, 2019 Investment Basics No comments yet
What is derivative trading

What is Derivative Trading? Futures & Options Explained

Hello readers. One of the most frequently asked questions by Trade Brains’ readers is what is futures and options trading. In this article, we are going to cover this topic and discuss what is derivative trading along with explaining futures and options. Let’s get started.

What are Derivatives?

A derivative is a device whose monetary value is extracted from the value of one or more primary variables called bases. Here, the bases mainly indicate underlying assets, interest rate or indexes. These underlying assets further comprise equity, foreign exchange, commodity, or any other asset.

As the value of these underlying assets keeps fluctuating, these changes in value can help traders to earn profits from derivative trading. The most common types of derivatives are futures, options, forwards and swaps.

This evolution of the market for derivative products like Forwards, Futures, and Options dates back to the compliance of risk hesitant economic advocates to shield themselves against volatilities emerging out of ups and downs in asset prices. In other words, it acts as a hedging apparatus against oscillation in commodity prices.

Post-1970, financial derivatives majorly came under the limelight due to thriving fluctuations in the markets. Ever since they seeped into the picture, these products have gained quite a popularity and have reckoned for about two-thirds of total transactions in derivative products by 1990.

In the class of equity derivatives, Future and Options have acquired more eminence than individual stocks. The trend is especially prominent among institutional investors who are frequent partakers of index-linked derivatives. Financial markets are marked by an escalated amplitude of volatility but with the utilization of derivative products, it is viable to partially or fully shift the price risks by remanding the asset prices.

As equipment of risk management, these generally do not determine the inconstancy in the underlying asset prices. However, by tapping in asset prices, derivative products reduce the influence of fluctuations in asset prices on the profitability and cash flow scenario of risk-afraid investors.

Factors driving the Growth of Derivatives

In the last thirty years, the derivatives market has seen an exemplary advancement. A huge variety of derivative contracts have been introduced at exchanges across the globe. Some of the factors which are surging the cultivation of financial derivatives are:

  1. Elevated synthesis of national financial markets with the global markets.
  2. Considerable development in communication amenities and acute declination in their costs.
  3. Growth of more sophisticated risk management devices, providing economic agents with a variety of choices.

Derivative Products

Derivative contracts have diversified variants. The most basic variants are Forwards, Futures & Options. 

1. Forward Contract :

A forward contract is a customized contract between two individuals, where settlement takes place on a definite date in the future at the current pre-compiled price. Other contract details like delivery date, price, and quantity are negotiated bilaterally by the parties. The forward contracts are generally traded outside the exchanges.

On the expiration date, the contract has to be settled by the delivery of the asset. If the party wishes to counterpole the contract, it has to imperatively go to the same counter-party, which often results in charging higher prices. In certain markets, Forward Contracts have become standardized like in the case of foreign exchanges. Such standardization reduces transaction costs and increases transaction volumes.

For example, let us consider an exporter who expects to receive payment in dollars three months later. He is exposed to the risk of exchange rate fluctuations. Thus, utilizing the currency forward market to sell dollars forward, he can clinch on to a rate today and diminish his uncertainty.

2. Futures Contract:

A futures contract is an alliance between two parties to purchase or sell an asset at a stipulated time in the future at a specific price. Futures contracts are special types of forward contracts that are traded on exchanges. Future Contracts also facilitate the elimination of risk and provide more liquidity to a market participant. The terminology of the Futures Contract consists of Spot Price, Futures Price, Contract Cycle, Expiry Date & Contract Size.

For example, if you buy/sell a crude oil futures contract, you are agreeing to buy/sell a set amount of crude oil at a specific price (the price you place an order at) at some future date. You don’t actually need to take delivery of the crude oil, rather you make or lose money based on whether the contract you bought/sold goes up or down in value relative to where you bought/sold it. You can then close out the trade at any time before it expires to lock in your profit or loss.

3. Options  Contract:

Options are of two types namely, Calls & Puts. Calls give the buyer the authority but not the obligation to purchase a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the authority, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Unlike, Futures Contract, the purchase of an Option requires up-front payment. 

Also read: What Drives Stock Returns? (Divergence Analysis)

Participants in the Derivative markets

There are four broad categories of participants namely Hedgers, Speculators, Margin Traders, and Arbitrageurs. Let’s discuss each of them now:

1. Hedgers: Traders who aspire to secure themselves from the risk involved price actions generally participate in the derivatives market. They have been called hedgers because they try to hedge the price of their assets by undertaking an exact opposite trade in the derivatives market. 

2. Speculators: Unlike hedgers, Speculators look for opportunities to take on risk in the hope of making returns. These stark contrast in risk figuration and market views sets apart hedgers from speculators.

3. Margin Traders: Dealing with derivative products doesn’t require payment of the total value of the upfront position. Instead,  depositing only a fraction of the total sum does the work and is known as Margin Trading. Margin Trading results in a high leverage factor in derivative trade because, with a small deposit, one is able to keep a large outstanding position.

4. Arbitrageurs: Derivative instruments are valued on the basis of the underlying asset’s value in the spot market. However, there are times when the price level of stock in the cash market is lower or higher in comparison to its price in the derivatives market. Arbitrageurs tap the opportunities and exploit these blemishes and disorganization to their favor.

Arbitrage trade is a low-risk trade, where a parallel deal in securities is done in one market and a corresponding sale is executed in another market. Such a trade is carried out when the same securities are being quoted at different prices in two different markets.

For example, in the cash market, let us consider the price is quoting at Rs. 1000 per share. On the other hand, it is at Rs. 1010 in the futures market. An arbitrageur would purchase 100 shares at Rs. 1000 in the cash market and sell 100 shares at Rs. 1010 per share in the futures market, thereby making a profit of Rs. 10 per share.

Also read: The Stock Market Cycle: 4 Stages That Every Trader Should Know!

Summary: Derivative Trading

A derivative is a device whose monetary value is extracted from the value of one or more primary variables called bases. Here, the bases mainly indicate underlying assets, interest rate or indexes. Further, the asset can be anything from stocks, commodities, currency to interest rates.

The most common types of derivatives are futures, options, forwards and swaps. In derivative trading, the traders take advantage of the fluctuating value of underlying assets to make profits.

October 11, 2019 Investment Basics, Stocks, Trading 1 comment
Primary and Secondary market

Primary Market and Secondary Market – How do they work?

Stock markets are an important component of the financial system. It is a powerful tool that works like an auction for the exchange of capital/credit and has two autonomous and indivisible segments: Primary Market and Secondary Market.

In financial words, Stock Markets can also be defined as a procedure that permits people to trade in stocks and bonds, commodities, etc. which facilitates: 

  • Issue of new shares ( IPO)
  • Raising of capital ( IPO, Bonds)
  • Transfer of risk (Derivative market)
  • Transfer of liquidity (Money markets) 
  • International trade (Currency markets)

In this article, we are going to discuss the primary and secondary market in order to under how stock market exactly works. Let’s get started.

1. Primary Market

The primary market is a market for new issues i.e. Market for fresh capital. It provides a sale for new securities. The primary market provides an opportunity to issuers of securities like government and corporations to raise resources to meet requirements of investment or, discharge some obligation.

The corporate entities mainly issue debt and equity instruments (shares, debentures) while the governments issue debt securities (treasury bills). The issues might be released at face value or, at a discount/ premium which later molds into various forms such as equity, debt, etc. However, these issues can be released in both domestic or, international markets.

The primary market issuance is either done through public issues or, private placement. When an insurance of securities is made to new investors for becoming part of shareholders’ family, it is called a public issue. The public issue can be further classified into:

Public Issue:

— Initial Public Offering (IPO):

IPO takes place when an unlisted company makes either a fresh issue of securities. This flags off an avenue for listing and trading of the securities issued in the stock exchanges.

— Follow-on Public Offering (FPO):

An FPO takes place when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document.

Also Read: What is Nifty and Sensex? Stock Market Basics (For Beginners).

Private Placement

When an issuer makes an issue of securities to a specific group of persons where the number of members should not be more than  49, it is called a private placement. However, it is neither a rights issue nor a public issue. Private Placement of shares by a listed issuer can be of two types:

— Preferential Allotment

When a listed issuer issues shares or convertible securities, to a selected group of persons in terms of provisions by a regulatory body, it is called a preferential allotment. The issuer is needed to adhere with diversified provisions which include disclosures, pricing, lock-in, etc. 

— Qualified Institutional Placement (QIP)

When a listed issuer issues equity shares or, securities convertible into equity shares to Qualified Institutions Buyers only in terms of provisions of the regulatory body, it is known as Qualified Institutions Placement.

2. Secondary Market

The secondary market allows participants who clasp securities to acclimatize their holdings according to the changes in their evaluation of risks and returns. Once the new securities are issued in the primary market, they are traded in the stock ( secondary ) market up and onwards from the listing day. The listing of stock enables liquidity and earning of reputation.

The secondary market operates through two channels and they are Over-The-Counter (OTC) Market and the Exchange-Traded market.

OTC markets are informal in nature where the execution of trades has a negotiable option. Most of the government securities are in the OTC Market. In addition, all the spot trades where securities are traded for immediate delivery and payment also take place in the OTC market.

The other option is to trade using the infrastructure provided by the Stock Exchanges where financial instruments are dealt with in money transactions. The four important participants of the securities market are the investors, issuers, intermediaries, and regulators. 

  1. Investors can be broadly classified into retail investors (HNI, minuscule investors) and institutional investors (banks, insurance, mutual funds, FII, etc).
  2. Issuers include governments,corporate,financial institutions, etcetera.
  3. Intermediaries include stock exchanges, stockbrokers, depository, custodians, merchant bankers, FII, mutual fund houses, debenture trustees, etc.
  4. Regulators include Central Banks.

The top two stock exchanges of India are Bombay Stock Exchange and National Stock Exchange.

Components of the Secondary Market:

The securities market is classified into the following markets and further different types of instruments are traded in these markets.

1. Cash /Equity Markets:

The equity segment allows dealing in shares, debentures, warrants, mutual funds, ETFs. 

2. Equity Derivatives Market:

The derivatives segment allows trading in derivative instruments. It is a product whose value is derived from the value of one or more basic variables and is called bases ( underlying asset, index). The underlying asset can be equity, forex, commodity or, any other asset. There are two types of derivatives instruments (futures & options).

3. Debt Market:

The debt market consists of bond markets that provide financing through the issuance of bonds.

4. Corporate Bond Market:

Bonds issued by firms are Corporate bonds and are issued to meet needs for expansion, modernization, restructuring operations, mergers, and acquisitions.

5. Forex Market:

The foreign exchange market( currency, forex, or FX) is where currency trading takes place. Currently, the Forex market is one of the largest and most liquid financial markets in the world and includes trading between large banks, central banks, currency, speculators, corporations, governments, and other financial institutions.

6. Commodity Derivatives Market:

Commodity markets enable the exchange of raw or, primary products. Raw commodities are traded on standardized commodities exchange in which they are purchased and sold in well –defined contracts. The trading in gold, silver and agricultural goods are also facilitated under this market.

Bottom line:

By now you must have got the idea of the primary market and secondary market. Let’s conclude what we discussed in this article.

The primary market, also known as New Issue Market (NIM), is the market place where new shares are issued and the public buys shares directly from the company, usually through an IPO or FPO.

On the other hand, the Secondary Market is the place where formerly issued securities are traded. The second market involves indirect purchasing and selling of shares among investors. Brokers are Intermediary and the investors/traders get the amount on the sale of shares.

That’s all for this post. I hope it was useful for you. Happy Investing.

September 28, 2019 Investment Basics No comments yet
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10 Largest Stock Exchanges in the World

People who invest in stock must be familiar with the New York Stock Exchange which is top of the list of Largest Stock Exchanges in the world. Before we start this post, let us brief a bit about what the stock exchange is.

A Stock Exchange is an organization that anchor formulated market for dealing in securities, derivatives, commodities, and other financial equipment. It is one of the powerful ingredients of the financial market. Here, buyers and sellers club together to carry out transactions. And, securities are bought and sold out according to clear-cut rules and regulations.

Stock exchange furnishes the required edifice and framework to the brokers and members who deal with asset classes. It also governs the transaction activities to certify free and fair trade. The most engaging aspect is that the Stock exchanges are also deemed as the financial measures of an economy where the industrial development and firmness is mirrored in the index. Here is the list of the ten largest Stock Exchange in the world.

10 Largest Stock Exchanges in the World

1) New York Stock Exchange:

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The New York Stock Exchange (NYSE) is first on the list of the largest stock exchange in the world and is a highly esteemed stock exchange in the USA which is situated at 11, Wall Street, New York City. It was established on May 17, 1792, and consists of 2,400 listed companies. It is the world’s largest stock exchange and has a market capitalization of US$ 30.1 trillion.

Back to the back of mergers has aided the New York Stock Exchange to gain its colossal size and global footprint. The blue-chip companies which are listed under NYSE are Berkshire Hathaway Inc, Coca-Cola, Walt Disney Company, Mc Donald’s Corporation, etc.

 2) NASDAQ:

nasdaq exchange

Second on the list of largest stock exchange in the world is NASDAQ which was primarily an abbreviation and stage for the National Association of Securities Dealers Automated Quotations. It is an American stock exchange and is headquartered at 151 W, 42nd Street, New York City.

The NASDAQ commenced its business on February 8, 1971, and is sighted as the world’s first electronically traded stock market. NASDAQ has a combined market capitalization of $10.8 trillion and is ranked second in the list of largest stock exchanges.  It consists of more than 3,000 stocks listed under it and comprises of the world’s humongous tech giants such as Apple, Microsoft, Google, Facebook, Amazon, Tesla, and Intel. 

Also Read: 31 Hand-Picked Best Quotes on Investing: Buffett, Munger, Graham & More.

3 )Tokyo Stock Exchange:

The Tokyo Stock Exchange (TSE) which is also known as Tōshō is located in Tokyo, Japan. It was validated on May 15, 1878, and is also the third-largest stock exchange in the world.

TSE  has close to 3,500 listed companies with a syndicated market capitalization surpassing the US$ 5.67 trillion. The TSE’s metric indicator is Nikkei 225 and it is home to some of the voluminous  Japanese giants with international exposure, including Toyota, Suzuki, Honda, and Mitsubishi and Sony. 

4) Shanghai Stock Exchange:

The Shanghai Stock Exchange (SSE) is located in the city of Shanghai, China and is one of the two stock exchanges plying autonomously in the People’s Republic of China. Although its foundation traces back to 1866, it was adjourned after the Chinese Revolution in 1949. However, The Shanghai Exchange in its contemporary outlook was laid down in 1990.

Currently, Shanghai SSE is the world’s fourth-largest stock exchange with a combined market capitalization f  US$ 5.01 trillion. The most interesting fact is that the absolute market cap of the SSE is constructed out of formerly state-run insurance companies  & commercial banks. 

5)Honk Kong Stock Exchange:

The  Hong Kong Stock Exchange (SEHK)  is located in Hong Kong and is the world’s fifth-largest stock exchange on the basis of market capitalization.  It consists of 2,315 listed companies with a wholesome market capitalization of HK$29.9 trillion.

Its origin can be traced back to the mid-1800s and since then it has gone through a series of mergers and agglomeration with other exchanges. Some of the gigantic and eminent companies listed under the Hong Kong Stock Exchange are China Mobile, and HSBC Holdings & Petro China.

Also Read: Top 10 Stock Market Movies to Watch for Finance Geeks

6)London Stock Exchange:

london stock exchange image

The London Stock Exchange (LSE) is based in London and is the sixth-largest stock exchange in the world. It was established in 1571 and is the oldest stock exchange in the world.  It has more than 3,000 listed companies with a combined market capitalization of $4.59 trillion.

LSE is also the maiden source of benchmark prices, equity-market liquidity and market data in Europe. Some of the massive companies listed under the LSE are Barclays, British Petroleum and GlaxoSmithKline.

7)EURONEXT:

The Word EURONEXT is an acronym for European New Exchange Technology and has its corporate address at La Défense in Greater Paris. EURONEXT was established in 2000 by the consolidation of the exchanges in Amsterdam, Paris, and Brussels.

Over the years, it amalgamated with multiple exchanges, most particularly the New York Stock Exchange. It steers financial markets in Amsterdam, London, Brussels, Lisbon, Oslo, Dublin,  and Paris. It has around 1,500 listed companies leading to a market capitalization worth €4.1 trillion. EURONEXT provided the segments which are equities, warrants, exchange-traded, bonds, commodities, funds and certificates, derivatives, indices, and foreign exchange trading platform.

8)Shenzen Stock Exchange:

The Shenzhen Stock Exchange (SZSE) is oriented in the city of Shenzhen, China and was founded on  December 1, 1990. It is the 8th largest stock exchange in the world and has approximately 1,300 listed companies with a combined market capitalization of $3.92 trillion.

Most of the companies under this SZSE are corporate firms of companies in which the Government Of China has a controlling interest. The Shenzhen Stock Exchange had introduced the “ChiNext Board” in 2009 comprising of high-tech & high-growth startups, quite similar to NASDAQ.

9) TORONTO STOCK EXCHANGE:

The Toronto Stock Exchange (TSX) is situated in Toronto, Canada. It was introduced in 1852 and is held and wielded as a subsidiary of the TMX Group. It is the ninth-largest exchange in the world and has 2,207 listed companies with a combined market capitalization of $2.3 trillion.

The financial instruments include equities, investment trusts, exchange-traded funds, bonds, commodities, futures, options, and other products. It is also to be noted that mining and oil and gas companies are listed in more numbers under the Toronto Stock Exchange compared to other stock exchanges around the world.

10) BOMBAY STOCK EXCHANGE:

The Bombay Stock Exchange  (BSE) is an Indian stock exchange located at the high-wheeled Dalal Street in  Mumbai. It was established in 1875 and is Asia’s first-ever stock exchange. It is also the world’s 10th largest stock exchange with a total market capitalization of more than $2.2 trillion.

The BSE has approximately 5,000 listed companies and has assisted in the growth of the country’s corporate sector and financial markets. Securities listed under BSE comprises of stocks,  futures, options, index futures, index options, and weekly options. However, the BSE’s benchmark is measured by the Sensex which nearly covers all the sectors of the Indian economy.

Also read: A Complete List of Stock Exchanges in India

September 26, 2019 Market, Stocks 2 comments
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