06 Apr 2016 20:53 IST

Understanding the twos and threes of business

Mindless application of matrices and acronyms in business can be disastrous

Management literature is filled with two by two matrices and three letter acronyms. The Boston Consulting Group (BCG) and Ansoff models are famous examples of the former, while just in time (JIT), economic value added (EVA), theory of constraints (TOC) are instances of the latter.

I often exhort my students to master all such jargon, which makes common people look at business schools with awe, though and many academicians may scoff at their use.

These matrices, acronyms and other jargon effectively capture a phenomenon in a crisp way, which would otherwise take pages of explanation. Let’s take the term ‘synergy’, for example. The scope of this word is so wide that people have written books on this term alone.

Similarly, a BCG matrix captures, in simple and elegant fashion, the complexities of managing a multi-business corporation, enabling the Fortune 500 companies and MNCs to make sense of the complexities of a diversified portfolio. This was manna from heaven for the firms in the late 1960s and early 1970s, to get out of the ‘profitless growth’ phase of the late 1950s and 1960s.

Trade tools

These are, in a sense, tools of the trade, if you will, for MBAs. You expect them to know these and use them, just as you would expect a carpenter or plumber to carry his trade toolbox and pull out the appropriate tool at the right time to fix a problem.

But while I exhort my students to use these terms, which seem very impressive in front of bosses and non-MBA colleagues, I tell them it more important to know what they actually mean. Many fumble at this stage, getting rightfully derided for throwing around buzzwords without understanding them.

Now, having shared my outlook on matrices, acronyms and jargon, let me get to the main point. While these terms are simple, yet profound tools, effective in solving serious management challenges, they can cause havoc if used inappropriately.

One needs to understand that these paradigms have certain set assumptions, contexts and pre-conditions that need to be understood before they are applied and interpreted.

When a matrix fails

For example, the BCG matrix, which is still part of the standard MBA curriculum, led to many a companies going down the tube in the 1990s. The famous ‘conglomerate discount’ that happened to many highly diversified firms, led to their dismemberment and demise (remember Westinghouse, ITT, and Hanson Trust?) at the hands of corporate raiders, abetted and supported by shareholders.

It took a Jack Welch to weather this storm (remember, GE was the biggest among the conglomerates). He understood that the heart of the BCG matrix was all about allocation of resources (read: cash). Cash being at the centre of BCG made sense because, at that time, cash had to be generated from within, as specialised and sophisticated financial institutions that lend money to corporates did not exist.

Knowledge and people

Later, the scenario changed, with the evolution of specialised institutions that lent money to businesses on a long-term basis. Today, with the emergence of private equity (PE), and venture capital (VC) firms, a company can have all stars (a business that is in rapid growth phase, and consumes far more cash than it generates) in the portfolio, without any ‘cash cows’ to generate extra cash to fund the deficit.

Jack Welch recognised that cash has ceased to be the constraint resource and that this had shifted to ‘knowledge and people’. Remember his statement to his business heads — ‘I own people, you rent them’. GE not only survived the ‘conglomerate discount’ phase but has thrived.

In summary, while many of these frameworks are very useful, the context, purpose and the underpinning assumptions have to be carefully evaluated before they are applied in any given situation.