Month: March 2020

Portfolio analysis is an examination of the components included in a mix of products with the purpose of making decisions that are expected to improve overall return. The term applies to the process that allows a manager to recognize better ways to allocate resources with the goal of increasing profits. It might also refer to an investment portfolio composed by securities.

When a company markets a range of different product or services it is required to conduct portfolio analysis periodically. This means to analyze each product separately in terms of profitability, contribution to the company’s income and growth potential. This analysis facilitates the identification of products that are not profitable at all or play poorly within the group.

The products are categorized by pre-defined criteria such as sales value, market share, gross profitability, contribution margin and life cycle. The results could clearly point to products that should be taken out of the market or simply receive fewer resources. It might also indicate that the company must increase its investments and efforts to some star products that have a higher potential. The analysis is made to improve the global portfolio’s performance since the ultimate objective is maximizing profit for shareholders.

Importance of Portfolio Analyze

1. The analysis is done in large multinationals with multiple product portfolios. A company should be aware of the financial health of the portfolios and their wellbeing. To know the top performers and strategies to maintain them the profit makers is the primary objective of Portfolio analysis.
2. No company will have all products in profit. There will be few products or product lines which may be loss makers. These are the cash consuming portfolios and the company should be aware of them so that they can either be discontinued or revamped. The idea is to make them less costly and more profit making.
3. Portfolio analysis helps the company to stay in sync with the vision, mission, and objectives. At times it may happen that a certain portfolio may be loss-making and the company may have been unknowingly being financing the dead weight for a long time. In these cases, the analysis will give a clear picture of the scenarios.

Portfolio Analysis Tools:

There are several tools for portfolio analysis but here are two which are majorly used:

BCG Matrix for Portfolio Analyze

Also known as Product-Portfolio Matrix, Boston Box, Boston Consulting-Group Analysis, Portfolio Diagram. It was crafted in the 70s for the analysis of the business lines or product units. The chart is plotted as Market Share on the X-axis vs the growth on the Y-axis. Before one understands the tool, one must know the terms associated with it such as:

1. Relative Market Share: The market shares relative to the market leader or the product which is considered as a benchmark is called relative market share.
2. Market Growth Rate: The rate of growth of the specific product or portfolio is called Market Growth rate. Higher growth rate means higher profits.

The BCG Matrix is a graph which has four quadrants plotted on Market Share vs the Market growth or Relative Market Share vs Relative Market Growth. There are four components of BCG Graph as follows:

Cash Cows

Cash cows are the ones which generate the excess cash necessary for the survival of other portfolios as well along with itself. Cash cows are generally mature with relatively low market growth but higher market share. Cash cows have low market share compared to competitors but yield much higher returns as cash hence the term Cash Cow. A company will always try to push Cash cows to Star in terms of market growth. Cash cows require low investment and are usually do not cost much. The cash returns generated by cash cows are much higher than their expenses.

Stars

Like their names, Star is the portfolio which has a higher market share and highest growth compared to all other product portfolios. They are fast growing products with the highest market share close to monopoly but they also require high funding compared to others since they have to maintain their market share and growth, which can be generated from cash cows. If a star declines in market share, it becomes a Cash Cow and if it declines in growth, it becomes a question mark. Star products are very tricky to maintain their position and company has to invest a lot to keep that position. A company’s brand image and brand recognition is enhanced because of the Star products.

Question Mark:

These are also known as Problem Child or Wildcat. They operate with a lower market share compared to others in a high growth market. They have the potential to become Star as their market share increases and they already have a high growth rate as much as Star. When they increase their market share, they become Star and if they lose their share, they turn into Dog.

Dogs

Dog is a category which has a low market share and low market growth. They take a long time simply to break even and generate a nominal business barely necessary for survival in the market. They have a low return on investments and they are usually sold off or traded or closed down since eventually they become cash eating centers only. In very few cases it may be possible to increase their market share and convert them into cash cows or increase their growth rate and push them to Question Mark which eventually is converted to Star.

An example of Portfolio analysis by BCG Matrix would be of Google. Gmail, YouTube and Google Search Engine is the Cash Cow for the company while AdWords and Google Cloud are Star. The newly launched Google’s flagship phones Pixel 3 XL, Pixel 3 and other Pixel series is a Question, Mark, while Google Pay is a Dog. Shareholders use this matrix as one of the tools for Portfolio Analysis of the company to determine the financial stability and predict the future for the company.

Product Life Cycle Analysis for Portfolio Analyze:

It is also known as the Product Life Cycle Analysis, determines the various stages at which the product is and will eventually go through. It imitates the biological life cycle and starts with Introduction, proceeds to growth, maturity and ends with decline.

Introduction: Introduction is the initial inception of the product in the market or the introduction. The market share is low and the growth rate is also low since the product is in its early stages. Here profit is not an objective but promotion is.

Growth: This is the prime phase of the product wherein the growth rate is higher and the market share goes on increasing equally faster. Companies earn maximum profit in this phase of the product and investors invest a lot. The promotion levels are kept down and the product earns an excellent profit for the company.

Maturity: In this phase, the market growth rate stops and the share continues to remain the same or increases marginally. The promotion levels have no effect on the growth or share. This is where the competition enters the picture and price wars start. The margins over the product are severely affected and this causes a lot of resellers to leave the market.

Decline: Here there is a decline in market share and the consumer’s change or divert from the product making the producers divest in the product by introducing new variants of the same product. Many products may be discontinued from the market in this phase since there is little or no profit. The company, in order to increase the profit levels, may undergo cost cutting or cut down on the marketing budget.

Advantages of Portfolio Analyze:

1. Determines the financial stability of the company along with product performance
2. Acts as trend analysis for the product to predict they are possible future in the market
3. Guide for investors and shareholders for financial assessment of the portfolios
4. The tool in decision making for the company to take product-related decisions whether to continue, change or discontinue products.

Disadvantages of Portfolio Analyze:

1. Doesn’t consider market influencers and political factors in the analysis which may cause sudden changes in the nature of the portfolio
2. It is difficult to perform Portfolio Analysis for a startup company or small-scale industries with limited product lines
3. Any of the major portfolio analysis tools do not consider internal factors of the company like a sudden change in management which may affect sales of the product.

1. Stability Strategy:

When an enterprise is satisfied by its present position, it will not like to change from here and it will be a stability strategy. Stability strategy will be successful when the environment is stable. This strategy is exercised most often and is less risky as a course of action. A stability strategy of a concern for example will be followed when the organization is satisfied with the same product, serving the same consumer groups and maintaining the same market share.

The organization may not be adventurous to try new strategies to change the status quo. This strategy may be possible in a mature industry with static technology. Stability strategy may create complacency among managers. The managers of such an organization may find it difficult to cope with the changes when they come.

Stability strategies can be of the following types:

(i) No-Change Strategy:

Stability strategy is a conscious decision to do nothing new, that is to continue with the present work. It does not mean an absence of strategy, rather taking no decision in itself is a strategy. When external environment is predictable and organizational environment is stable then a businessman may like to continue with the present situation. There may be major opportunities or threats operating in the environment.

There may be no new threat from competitors or no new competing product may be coming into the market, under these circumstances it will be prudent to continue the present strategies. The small and medium firms generally operate in a limited market and supply products and services with the use of time tested technology, such firms will prefer to continue with their present work. Unless otherwise there is a major threat in the environment or occurrence of some major upset in the market, the present strategy will serve the firms well.

(ii) Profit Strategy:

Sometimes things change in such a way that the firm has to adopt changes in its working. There may be unfavorable external factors such as increase in competition, recession in the industry, government attitude, industry down turn etc. Under these situations it becomes difficult to sustain profitability.

A supposition is that the changed situation will be a temporary phase and old situation will again return. The firm will try to sustain profitability by controlling expenses, reducing investments, raise prices, cut costs, increase productivity etc. These measures will help the firm in sustaining current profitability in the short run.

With the opening of markets, Indian industry is facing lot of problems with the presence of multinationals and reduction in tariff on imports. The firms will have to adjust their policies to the changing environment otherwise they will find it difficult to stay in the market.

Profit strategy will be successful for a short period only. In case things do not improve to the advantage of the firms then this strategy will only deteriorate their position. This strategy can work only if problems are temporary.

(iii) Proceed-With Caution Strategy:

Proceed with caution strategy is employed by firms that wish to test the ground before moving ahead with full-fledged grand strategy or by those firms which had a rapid pace of expansion and now wish to rest for a while before moving ahead. The pause is sometimes essential because intervening period will allow consolidation before embracing on further expansion strategies. The main object is to let the strategic changes seep down the organizational levels, allow structural changes to take place and let the system adopt to new strategies.

2. Growth Strategy:

Growth may mean expansion and diversification of operations of the enterprise. The management is not satisfied with their present status, the environment is changing, favourable opportunities are available, in such cases growth strategy will be helpful in expansion as well as diversification. The growth strategy may be implemented through product development, market development, diversification, vertical integration or merger. In product development, new products are added to the existing ones or new products replace the old ones when they are obsolete.

In market development strategy, new customers are approached or those markets are explored which were not covered earlier. In diversification both new products and new markets are added. The enterprise may also enter entirely new lines. In vertificial integration, the backward or forward lines may also be taken up.

A company may start producing its own raw materials or it may start processing its own output before marketing. For example, a weaving unit may start making thread and ginning of cotton (backward integration) or it may start producing readymade garments (forward integration).

In merger, two or more concerns may join their resources to take advantage of financial or marketing factors. Growth should be properly planned and controlled otherwise it may bring adverse results. Since growth is an indication of effective management it is not only essential but desirable too.

Growth strategies may be described as follows:

(i) Growth through Concentration:

Growth involves converging resources in one or more of enterprise’s businesses in terms of their respective customer needs, customer functions or alternative technologies in such a way that it results in growth. This strategy involves the investment of resources in a product line for an identified market with the help of proven technology. It may be done in a number of ways.

The enterprise may focus on existing markets with present products by using market penetration or it may attract new users for existing products or it may introduce newer products in existing markets by concentrating on product development. The concentration strategy will apply when industry possesses high growth potential and the firm should be strong enough to sustain the growth.

(ii) Growth through Integration:

Under integration strategy the firm continues serving the same customers but increases the scope of its business definition. Integration involves taking up more activities than taken up earlier. There can be backward integration as well as forward integration.

There are activities ranging from procurement of raw materials to marketing of finished products. The firm may move up or down of the value chain for increasing its scope of work. Several process based industries such as petrochemicals, steel, textiles etc. have integrated firms. These firms deal with products with a value chain extending from the basic raw materials to ultimate consumer. The firms operating at one end of the value chain attempt to move up or down in the process while integrating activities adjacent to their present activities.

While adopting integration strategy the firm must take into account the alternative cost of make or buy. If the cost of manufacturing one’s product is less than the cost of procuring it from the market only then this activity should be integrated. Similarly, if the cost of selling the finished product is lesser than the price paid to the sellers to do the same thing then it will be profitable to move down on the value chain.

(iii) Growth through Diversification:

Diversification strategy involves a substantial change in the business definition, singly or jointly, in terms of customer functions, customer groups or alternative technologies of one or more of a firm’s business. When an organization takes up an activity in such a manner that it is related to the existing business it is called concentric diversification.

The firm may market more products to the same customers, a new product or service may be offered to the same customers, these are the cases of diversification of business activities. Growth may also be undertaken by taking up those activities which are unrelated to the existing business, a cigarette company may diversify into hotel industry, it will be a case of conglomerate diversification. Diversification strategies are helpful in spreading risk over several businesses. If environmental and regulatory factors block growth then diversification may be a proper way.

(iv) Growth through co-operation:

There is a view that firms operate in a competing market. When one firm gains in its market share then one or more firms lose this share. It is a win-lose situation where if one wins then one or several others have to lose. But thinkers like James Moore, Ray Noorda, Barry J. Nalebuff are of the view that competition could co-exist with co-operation.

The strategies could take into account the possibility of mutual co-operation with competitors while competing with them at the same time so that market potential could expand. The co-operative strategies can take the form of mergers, acquisitions, joint ventures and strategic alliances. All these strategies taken separately or jointly can help the growth of a firm.

(v) Growth through Internationalization:

International strategies are a type of growth strategies that require firms to market their products or services beyond the national or domestic market. A firm would have to assess the international environment and evaluate its own capabilities and to form strategies to enter foreign markets. The firm may start exporting products or services to foreign countries or it may set up a subsidiary in other countries for producing and marketing the products or services there. In such situations the firm would have to implement the strategies and monitor and control its foreign operations. International strategies require a different strategic perspective than the strategies implemented in national context.

3. Retrenchment or Retreat Strategy:

An enterprise may retreat or retrench from its present position in order to survive or improve its performance. Such a strategy may be adopted during a period of recession, tough competition, scarcity of resources and re-organization of company in order to reduce waste. This strategy, though reflecting failure of the company to some degree becomes highly necessary for the survival of the company.

When an organization chooses to focus on ways and means to reverse the process of decline, it adopts a turnaround strategy. If it cuts off the loss-making units, divisions, curtails product line or reduces the functions performed, it adopts a disinvestment strategy. If these actions do not work then the activities may be totally abandoned and the unit may be liquidated.

(i) Turnaround Strategies:

Retrenchment may be done either internally or externally. Internal retrenchment is done to improve internal working. This usually takes the form of an operating turnaround strategy. In contrast, a strategic turn­around is a more serious form of external retrenchment and leads to disinvestment or liquidation.

Turnaround strategies may be adopted in different ways. One way may be that the existing chief executive and management team handles the turnaround strategy with the help of specialist or external consultant. The success of this approach will depend upon the type of credibility the chief executive has with banks and other financing institutions.

In another situation, the present chief executive withdraws from the scene temporarily and the work is done by the outside specialist employed for this job. The third approach to execute the turnaround strategy involves the replacement of the existing team or merging the sick organization with a healthy one.

(ii) Disinvestment Strategies:

It involves the sale or liquidation of a portion of business or major division or profit center etc. Disinvestment is usually a part of rehabilitation or restructuring plan. This strategy is adopted when turnaround strategy has failed. A firm may disinvest in two ways. A part of the company is divested by spinning it off as a financially and managerially independent company, with the parent company retaining or not retaining partial ownership. Alternatively, the firm may sell a unit outright.

(iii) Liquidation Strategies:

It involves the closing down of a firm and selling its assets. It is considered to be the last resort because it leads to serious consequences such as loss of employment for workers and other employees, termination of opportunities where the firm could pursue any future activities and also the stigma of failure which will be attached with this action.

4. Combination Strategy:

A large firm, active in a number of industries may adopt a combined strategy. It represents mix of the three strategies mentioned above. A large concern may adopt growth strategy’ on one side and retreat strategy in the other area. In order to make this strategy effective there should be right people who can take objective and intelligent decisions by considering various factors.

There may not be a concern which has adopted only one strategy throughout. The complexity of doing business demands that different strategies be adopted to suit the situational demands made upon the organization. A company which has adopted a stability strategy for long may like to use expansion strategy later. Similarly a firm which has seen expansion for quite some time may like to consolidate its working. Multi-business companies have to follow multiple strategies.

The word company is derived from a Latin word `companies` it means a group of persons who took their need together. In India law relating to companies are contained in The companies Act 1956.

A company is a voluntary association of persons formed for some common purpose with capital divisible into parts known as shares.

Justice Lindlay defines company “as an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profits arising there from”

According to companies act a company means a company formed and registered under companies act.

Features of a Registered company

1. Voluntary Association

A company is voluntary association of persons who have come together for a common object which generally is to earn profit.

The activities of this association are governed by the law and are limited by its memorandum of association

2. Incorporated association

A company comes into existence on incorporation or registration under the companies act. Minimum number of persons required for the purpose of incorporation is seven in case of a public company and two in case of a private company.

3. Separate legal entity

 On incorporation company gets personality which is separate and distinct from those of its members. Company is an artificial person created by law. 

4. Separate property

The company can own , enjoy  and dispose off its property in its own name.

5. Legal restrictions

The formation, working and winding up of a company are strictly governed by laws, rules and regulations

6. Perpetual succession

 unlike a person a company never dies. Its existence is not affected in any way by the death or insolvency of any shareholder. Members may come and members may go , but the company continues its operations until it is wound up.

7. Common seal

As a company is an artificial person it cannot sign its name on a contract. So it function with the help of seal. All contract entered into by the members will be under the common seal of the company.

8. Share capital

A company mobilizes its capital by selling its shares. Those persons who buy these shares become its share holders and thereby become members in it

9. Limited Liability

In case of limited companies liability of members will be limited to the amount unpaid on the shares.

10. Transferability of shares

Members can freely transfer and sell their shares .The right to transfer share is a statutory right of members.

11. Ownership and management

The owners of a company are its share holders.

The affairs of the company are managed by their representatives known as Directors

A promoter stands in a fiduciary position with the company which he promotes. But he is neither an agent nor a trustee to the future com­pany. The reason is obvious, there cannot be an agent of a person not in existence, nor there can be a trustee for a non-existent beneficiary.

Even then, the principles of agency and trusteeship are returned to the care of a promoter. A promoter, even though he may act only as agent or trustee, is personally liable where the contract is made on behalf of an intended company.

Duties of Promoters:

Promoters have some duties, the violation of which makes them li­able for punishment.

The duties are:

(i) To prepare and submit documents Memorandum, Articles and Prospectus.

(ii) To see that all property and assets are taken over by the proposed company at reasonable prices and on justifiable terms.

(iii) To disclose to the company or to the independent Board of Direc­tors after the company has been formed secret profits, if any, en­joyed by them as vendors.

Liabilities of Promoters:

A promoter may be made liable in a suit by an aggrieved share­holder or debenture holder for damages for deceit, besides, being liable for compensation. A promoter, even though he may only act as agent or trustee, is personally liable for the contract on behalf of the com­pany.

A promoter is liable to pay compensation for misstatements in prospectus, for non-disclosure of any matter in the prospectus and for non-compliance of the provisions under Sec. 56. There is a liability of the promoter under the general law enforceable by suit for recovery of damages on the ground of fraud etc. For untrue statements in the pro­spectus, a promoter has criminal liability.

Rights of Promoters:

Since promoters have duties, it implies that they have rights too.

Rights are:

(i) They are entitled to take assistance of the experts in preparing the documents.

(ii) They can enter into preliminary or pre-incorporation contracts on behalf of the proposed company.

(iii) They may claim reasonable remuneration for their services.

Company Promotion in India:

The industrial history of India is the history of company promotion by managing agents during the British regime. Directors and partners of old firms did also promote business enterprises. In India, we do not have generally any professional or specialized agencies for promotion of companies.

The National Industrial Development Corporation was started in 1954 as a specialist promoting institution. It prepared project reports for a number of industrial units.

In company promotion in India, promoters usually follow the stan­dard stages. But, if necessary, they also undertake the task of incorpo­ration and formation, underwriting of shares, substantial share contri­bution and, above all, direct charge of routine management of busi­ness.

Promoters in India, therefore, perform various functions in the formational stage of a company. They act as manager and controller of new companies. A controlling interest in the affairs of the company is generally retained by the Indian promoters. Promoters are generally the first directors of a company.

Companies can be classified on the basis of:

1. Incorporation
2. Liability of members
3. Number of members
4. Ownership

1. Incorporation

• Chartered company
• Statutory company
• Registered company

1. Chartered company

 The company which have formed and incorporated under a special charter granted by the king or queen.

Eg East India company. Bank of England.

2. Statutory company

These are companies which are created by means of a special Act of Parliament or any state legislature. Eg RBI, Railway

3. Registered company

Company formed and registered under companies Act 1956 is called Registered companies.

2. Liability of members

1. Limited company
2. Company limited by guarantee
3. Unlimited company

1. Limited company or company limited by share

Majority of registered companies will be company limited by shares. In case of limited companies liability of members will be limited to the amount unpaid on the shares.

2. Company limited by guarantee

Here liability of each member is limited by the memorandum to such amount as he may guarantee by the memorandum to contribute to the assets of the company in the event of its winding up.

Such  companies are formed for the promotion of art science, culture, sports etc.

3. Unlimited company

A company not having any limit on the liability of its members is termed as unlimited company.

The members are liable for the debts of the company at the time of winding up.

3. Number of members

1. Private company
2. Public company
3. Private company

1. A private company is a company

• Which restricts the right to transfer its shares.
• Limits the number of its members to 50.
• Prohibits any invitation to public to subscribe its shares.

2. Public company

A public company means a company which is not a private company

4. Ownership

1. Government Company
2. Foreign company
3. Holding and subsidiary company

1. Government company

A company is said to be Government Company when 51% of the paid up capital is held by the central government or by any state government or partly by central govt or partly by one or more state govt.

2. Foreign company

A foreign company is a company incorporated outside India and having a place of business in India.

3. Holding and subsidiary company

A Company which controls another company is known as the holding company and the so controlled company is known as subsidiary company.

One Man Company

This is a company in which one man holds practically the whole of the share capital of the company, and in order to meet the statutory requirement of minimum number of members some dummy members like his wife and son holds one or two shares each.

Distinction between public company & private company.