Neel Ltd., is a business organized as three divisions and head office. The divisions are based on market groupings, which are Retail, Wholesale and Government. The divisions do not trade with each other. The main method

Answer 1(a)(i) Evaluation of the use of the concept of ROI by Neel Ltd. ROI is an accounting measure that estimates the level of profits as a proportion of the capital employed over the year. Neel Ltd. uses ROI to check how well its divisions perform, which is a common practice. ROI shows profits compared to the capital used, but results can differ. A division that buys new assets may show lower ROI, while one with older, written-off assets may look better. Risk levels also vary between divisions. ROI and cross subsidization: Cross-subsidization makes ROI more complicated. If the head office controls investments, one division's profits may be used to fund another. This can seem unfair, but it also helps the company overall. Divisions with different business cycles can support each other, ensuring shareholders get steady returns. Use of ROI at each division will help in identification of financial health of each division. Answer 1(a)(ii) Application of Boston Product Market Portfolio Matrix (BPMPM) by Neel Ltd. in its divestment decision: BPMPM aims to link the overall growth of the market for a product, the growth in the market share of a product, with the product's cash-generative activities. BPMPM classifies a company's products in terms of potential cash generation and cash expenditure requirements into cash cows, dogs, stars and question marks. Stars: High market share in a growing market. They need heavy investment now but can deliver big returns later. Over time, they often turn into cash cows. Cash cows: High market share but low growth. They need little investment and generate strong cash flow, which can fund stars. Question marks: Low market share in a growing market. The firm must decide whether to invest heavily to grow them or let them fade. Dogs: Low share in a stagnant market. They usually drain resources and should be phased out. Appropriateness of use of BPMPM BPMPM is conventionally assumed to apply to products and it is perhaps unusual to see it applied to businesses and divisions. The problem is that we do not know enough about the firm's product range to suggest how the matrix could be applied. Rather than assuming that a whole division is a dog and divesting it, it is possible that a thorough review of the product range of each division could be examined to see whether certain products can be pruned from the range. BPMPM should not be used in isolation. Further it needs to be modified from time to time. Answer 1(a)(iii) Models for making a divestment decision: Many models are available, which could be used by the company in making a divestment decision. Two such models could be: Porter's five forces model The product life cycle model (a) Porter's Five Forces Model: This model can be used to place each division in the competitive context. The five forces model suggests that the competitive environment is determined by five factors viz., Threat of new entrants, Threat of substitute products, Bargaining power of customers, Bargaining power of suppliers and State of competitive rivalry within the industry. The value of this model is that it examines each division's strengths in a competitive context. If the trend is for entry barriers to get lower, or if a major new entrant is on the horizon, this must influence the divestment decision, if the business is a marginal player in the market or if the resources required to fight off such a challenge are too expensive. Similarly, if the customers are powerful or suppliers are powerful, then the margins would get eroded steadily and firm's business would become less attractive. Further, if the threat of substitute products becomes serious, then divestment might become a sensible choice. (b) The Product Life Cycle: This model bears similarities to the BCG matrix and suggests that a firm's products have a natural life cycle that can be analysed into the phases of introduction/ Embryonic, growth, maturity and decline/aging. In the introduction/embryonic phase, the product is introduced in the market. There is no or little competition. In the growth phase, market is strengthening as the sales increases. At maturity stage the market is completely stable with well-established base of customers and market shares are also stable. Customers are making repeated orders, but, with a lot of competitors, the company has to make efforts in differentiating their product from competitors. In the decline/aging phase, market volume shrinks as the demand declines. Thus Neel Ltd. can use this model to examine the condition of the products in each of the divisions.