Auditing tools - Marketing Strategy

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)

• Cash Cows :These products have high profitability and require low investment, due to market leadership in low-growth market. These products are generating a high level of cash. They should be defended to maintain sales and market share. Surplus cash should be channeled into Stars and Question Marks in order to create the Cash Cows of the future. Current Cash Cows will inevitably lose their position over time as their market changes.
• Stars :These are market leaders and so are generating high levels of cash, but are in areas of rapid growth which require equally high levels of cash (investment) to keep up with the growth in sales. Cash generated by the Cash Cows should be channeled to support these products.
• Question Marks :These are also sometimes referred to as Problem Children or Wildcats. Question Marks are not market leaders and will have relatively high costs. At the same time these products require large amounts of cash as they are in high-growth areas. An organization has to judge whether to use cash generated by the Cash Cow to try and develop this product into a Star by gaining market share in a high-growth market or to invest in other areas of the business.
• Dogs :These are products with low levels of market share in low growth markets. Products that are in a secondary position to the market leader may still be able to produce cash (Cash Dogs).For others the organization’s decision is likely to be a choice between moving the product into a defendable niche, harvesting it for cash in the short term,or divestment.

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:

• Market growth is seen as an inadequate measure of market or of an industry’s overall attractiveness. This measure does not consider such issues as barriers to entry, strength of buyers or suppliers or investment levels.
• Market share is an inadequate measure of product’s relative ability to generate cash. Other factors such as product positioning, brand image and access to distribution channels may allow an organization to gain higher margins and strong cash flows as a result.
• The focus on market share and growth ignores fundamental issues such as developing sustainable competitive advantage.
• Not all products face the same life cycle .Therefore for some stars facing a short life cycle it may be better for the organization to harvest them, rather than committing further investment.
• Cash flow is only one factor on which to base investment decisions. There are others to consider, such as return on investment, market size, and competitors.

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:

• market growth rate
• strength of competition
• profit potential
• social, political and legal factors

Competitive strength is also assessed on a range of weighted criteria such as:

• market share
• potential to develop differential advantage.
• opportunities to develop cost advantages
• channel relationships
• brand image and reputation

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:

• They are based on an analysis of current areas of business and are therefore an inappropriate tool to employ in tackling the issue of new business development.
• They place too much emphasis on growth, either through entering high growth markets, or through gaining high market share, whereas there are virtues in entering stable markets that have lower growth rates.
• These models require information that can be difficult to obtain and are complex and time-consuming to execute successfully.In response to these criticisms, it should be pointed out that organizations should already be collecting much of the information required for portfolio analysis,in order to support strategic decisions.

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)