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There is a range of tools that can be applied during the auditing process that are capable of providing useful insights into the company’s situation.
Value chain
The value chain is an obvious analytical tool tousle in the internal audit. This tool looks specifically at the primary and support activities of an organization and therefore directly relates to identifying organizational capabilities.
Portfolio analysis
There are a number of portfolio models that are used to identify the current position of business units or products. This position will be the result of the organization’s current resources and can beseem as a symptom of the competencies and assets of the organization. They reflect the organization’s current performance and identify strengths on which the marketing strategy can be built, or weaknesses that the strategy is required to overcome.
The Boston Consultancy Group (BCG)growth share matrix
This is one of the most well-known portfolio models. The growth share matrix is concerned about the generation and use of cash within a business and can be used to analyse either strategic business units(SBUs) or products. The two axes on the model represent relative market share and market growth . Relative market share is seen as a predictor of the product’s capacity to generate cash. The proposition is that products with a dominant position in the market will achieve high sales, but will need relatively less investment as they are already an established brand and should have lower costs through economies-of scale advantages. Market growth, on the other hand, is seen as a predictor of the product’s need for cash. Products in high growth sectors require investment to keep up with the increased demand.
The model uses market share relative to competitors as an indication of the product’s relative strength in the market. To do this the axis uses a log High Low scale. At the mid-point of the axis, represented by 1.0 (or 1X) on the scale, the product’s market share is equal to its largest competitor’s market share. At the extreme left-hand side of the axis, represented by 10.0 (or 10X) a product has ten times the market share of the largest competitor. At the other extreme of 0.1, on the axis, the product would only have a tenth or 10 per cent of the largest competitor’s market share. Products or SBUs are represented on the model by circles and fall into one of the four cells into which the matrix is divided. The area of the circle represents the product’s sales relative to the sales of the organization’s other products. The four cells in the matrix represent:
The Boston Consultancy Group’s growth share matrix (BCG)
The overall aim of an organization should be to maintain a balanced portfolio. This means investments should flow from Cash Cows into Stars and Question Marks in an effort to make products move round the matrix from Question Marks into Stars and from Stars into Cash Cows. This movement of cash and products round the matrix thus ensures the future cash flows of the business.
There have been a number of revisions and adaptations to this basic model in order to accommodate different factors. Figure below highlights the fact that products in the research and development stage also need investment which cash generation provides, an issue the standard BCG overlooks. Figure below applies the basic portfolio analysis technique but in the context of the public sector. On one axis of this matrix is the organization’s ability to deliver a service effectively within the constraints of current resources,on the other is the level of the political requirement to offer the service.This allows a key consideration of the public sector bodies, the need to provide services to satisfy political objectives, to be accommodated within portfolio analysis approach. The BCG model is criticized for having a number of limitations.
Amongst these are:
Matrix to accommodate research and development
Public sector portfolio matrix
There are a number of models that use a range of weighted criteria in place of relative market share and growth in order to overcome some of the limitations of the growth share matrix.
The General Electric multifactor portfolio matrix:
This model has two axes: market attractiveness on one axis and competitive strength on the other. Industry/market attractiveness is assessed on a range of weighted criteria including:
Competitive strength is also assessed on a range of weighted criteria such as:
On the basis of these criteria and on an agreed weighting scheme, the SBU or product is then positioned on the matrix, which is divided into nine separate cells, three on each axis (see Figure below). The SBU or product is represented on the matrix by a circle. The circle’s area represents the sales volume of the business/product as a percentage of the overall business. On occasion the circle represents the size of the market and a slice of the circle is shaded to represent the business’s share of that market.
The Shell directional policy matrix:
This takes a similar approach to the General Electric multi factor matrix (see Figure 5. below). In both models the cells contain policy recommendations for businesses/products that fall within their boundaries. For instance, for products that fall in the cell that represents high industry attractiveness and strong business strength, on the GEmultifactor model the policy recommendation is to invest for growth. In both these models the number of factors, considered as important on either axis, and their relative weighting, are based on managers’ subjective judgments. This is a major criticism of these more sophisticated portfolio models. However, this ability to use judgment, based on their knowledge of their markets and industry, does allow managers to adapt each model to an organization’s specific situation. The models are also criticized as being more difficult for managers to use and more time-consuming than the BCG matrix.
There are also wider criticisms of portfolio models in general:
The General Electricmultifactor matrix Prospects for sector profitability
The reality is also that all models have weaknesses– their very role is to try and simplify relationships in order to foster understanding . Managers should be using a range of portfolio models along with other analytical tools in order to establish a rounded and comprehensive view of their organization’s performance.
SWOT analysis :
The SWOT (strengths, weaknesses, opportunities and threats) analysis is another tool that is commonly used during the auditing process. The SWOT draws together the key strengths, weaknesses, opportunities and threats from the audit. This tool should be used to distil the critical factors that have been identified during the auditing process. It is a summary of the audit not a replacement. The strengths and weaknesses of the organization have to be judged in relation to the opportunities and threats identified in the external environment. The list should therefore be limited rather than extensive. The aim of the SWOT is to highlight the critical issues in order to focus attention on them during the strategy development.
The Shell directional policy matrix (DPM)
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