Businesses can use various strategies and methods to decide on their investments. One of the most common methods is the use of financial analysis tools such as Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period. These tools help businesses evaluate the profitability and feasibility of potential investments. Another strategy is the use of strategic frameworks like the Boston Consulting Group (BCG) Matrix or the Ansoff Matrix, which help businesses evaluate their product portfolio and market growth opportunities. Businesses can also use risk assessment methods to understand the potential risks associated with an investment. Lastly, businesses can use market research to understand customer needs and market trends, which can guide investment decisions.
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When it comes to investments, businesses are faced with the challenge of limited resources but also many possibilities. For diversified businesses, deciding which products to invest in is even more difficult. This issue was addressed by the GE/McKinsey matrix. At that time, General Electric had many unrelated products and didn't have the desired returns from its investments. They consulted McKinsey, and the resulting directional policy matrix was created. It evaluates opportunities based on industry attractiveness and competitive capability.