cima e3 revision notes

CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 1

CIMA PAPER E3 – STRATEGIC LEVEL

Enterprise Strategy

SMART Notes

Prepared by Darren Sparkes

Email: [email protected]


Contents Page No. An important message from Darren………………………..3 Dealing with the pre-seen case-study material……………4 A message from the Examiners…………………………….5 Examiners comments November 2009…………………….6 The scope for numbers in the examination………………..7 Examination Technique……………………………….…..…8 Background to Paper………………………………………...9 Syllabus Overview………………………………………......11 Strategic Planning…………………………………..…….…12 Mission and Objectives…………………………………......13 Internal Analysis……………………………………………..14 External Analysis…………………………………………….15 Filling the Gap……………………………………………….16 Strategic Options……………………………………………17 Method of Growth…………………………………………...18 Strategic Choice and Implementation……………………..19 Change Management and other Implementation Issues..20 Developing an IT Strategy………………………………….22 Organisational Structure…………………………………….23 Marketing……………………………………………………..24 Profitable customers or products?....................................25 Business and Professional Ethics………………………….26 The International Market Place……………………………..27 Review and Control………………………………………….28


Thank you for requesting a copy of my ‘SMART Notes’. The notes act as a learning and memory aid for the core models, theories and academic tools included in the syllabus. However, in order to pass your examination the academic knowledge must be combined with extensive question practice leading up to the examination. Your examiner is not interested in the regurgitation of your knowledge but how you APPLY that knowledge to the scenarios provided in order to answer the requirement set. The examiner feedback from every exam sitting confirms this. I suggest that you should practice as many exam standard questions as possible before the examination. Your practice answers can be a mixture of answer plans and full written answers to get through as many questions as possible. In particular, you must practice the new pilot paper for the new E3 examination. However, I would also suggest that it is essential for you to practice at least one full examination to time before entering the exam room. It is only by replicating the time pressure in the exam that you can appreciate the importance of time planning on the day. Keep a look out for relevant articles appearing in your professional magazine or on the Institute’s website prior to the examination, particularly if they are written by the examiner. I would welcome feedback on the notes. And remember…. ‘Whether you believe you can or you can’t, you’re right.’ (Henry Ford) Regards, Darren Sparkes


Dealing with the pre-seen material The most significant change in the new E3 paper is the addition of ‘pre-seen’ case study material for Section A (scenario common to all three strategic papers). This will be available for students to download from www.CIMAglobal.com around 6 weeks prior to the examination. The pilot paper pre-seen material has five pages. Once in the examination there will be additional ‘un-seen’ case study material and the requirements. The pilot paper contains two pages of ‘un-seen’ material. Once the real examination pre-seen material has been released by CIMA you should do the following in preparation for the exam: Complete a thorough analysis of the pre-seen material. As a start point you could conduct a corporate appraisal

(SWOT) of the organisation in question, that is, a full internal and external analysis (see pages 14 and 15 of these notes). This should help you to recognise the major issues affecting the organisation. Pay particular attention to any numbers and what they may tell you about the organisations performance and position.

You should avoid too much emphasis on the research of industry information. Leave that for your T4 TOPCIMA examination!

From your analysis, identify the related syllabus areas and learn/review them in light of the position and problems of the organisation.

You can now conduct some scenario planning. Think of the different scenarios that could appear in the un-seen material and the requirements that could be asked by the examiner. Remember that there is likely to be at least four separate requirements.

Practice your approaches to answering the scenarios that you have identified. Be warned, identifying likely requirements is a dangerous occupation. It is done here for you to start thinking more

widely about the pre-seen material. Once in the exam room you must FOCUS ON THE ACTUAL REQUIREMENT IN THE QUESTION and avoid replicating an answer to a different requirement that you had prepared for.

Purchase a revision kit from one of the big tuition providers that contain a number of mock exams (probably around 6 different un-seen scenario’s) based upon the actual pre-seen material and practise as many as you can to time.

It is essential that you familiarise yourself well with the pre-seen material before entering the exam room. However, this must not be to the detriment of your wider studies. Remember, the Section A of the exam only accounts for 50% of the marks. You will still have to complete two Section B questions that will be completely un-seen.


Approach Required

‘Overall this paper is a balanced test of the key syllabus areas and covers a number of well used strategic tools and models. Candidates should not find any surprises in this paper and a well prepared candidate should have no difficulty in both demonstration of syllabus knowledge and in the application of this to the various examination scenarios.’ ‘It’s easy to get carried away with all the models covered in the (P6) syllabus and forget why it’s there in the first place. The syllabus is at the top of the business management pillar, but its title is very clear. It isn’t a business strategy exam; it’s an exam in business strategy in the context of management accounting.’ ‘…candidates should recognise that depth of argument is desirable in answers to this paper, and a series of brief points will never be rewarded highly.’ (Co-examiners for CIMA P6)


Extracts from the Examiners comments November 2009 Section A - Question 1 Knowledge Management question very poorly answered as candidates had no clear understanding of

Knowledge Management ‘… with no reference to the scenario information.’ Only generic benefits of knowledge management given with no reference to the scenario Insufficient depth of discussion – use of short form answers such as bullet points Provision of calculations good but limited critical analysis or discussion plus poor use of the scenario

information Basic description of the Five Forces model with limited application to the scenario

Section B Limited application General discussion of the process of competitor analysis Unjustified recommendations in terms of why they were appropriate to the short or long term Not answering the question set Insufficient application Description rather than evaluation of the proposed strategies Limited/no application Recommendations with no/limited justification Including a range of stakeholders not included in the scenario information Some repetition of points made between each suggestion Imbalanced discussions of suggestions Limited/no justification of recommended course of action Part c a repeat of answer to part b


Enterprise Strategy

The scope for numbers/calculations in

the examination

Company Valuations

Expected Values

Variances including planning variances

Costing (DPP / CVP / CAP /

Absorption / marginal)

Pricing / transfer pricing

Discounted Cash flow (NPV / IRR / ARR)

Ratio Analysis

Cost of Capital (debt / equity / WACC)


Examination Technique to give the Examiners what they want PADI – Plan, Analyse, Design, Implement

PLAN 1. USE 20 MINUTES READING TIME WISELY

• Examine section B questions and choose the two on which you can MAXIMISE MARKS (not necessarily those on your ‘favourite’ topics)

• If you have some time left then analyse Question 1 requirements and skim read the Q1 un-seen material to get a feel for the relevant issues and identify where the information is for each part of the requirements.

2. WORK OUT TIMINGS

• Q1 = 90 minutes. Planning = 20-25 minutes, Writing answer = 65-70 minutes • Section B Questions = 45 minutes each. Planning up to 10 minutes, Writing answer 35 minutes. • Break down the time required for each part of the requirements using the marks as a guide. 1.8 minutes per

mark in total, 1.4 minutes per mark after planning. • I suggest you start with Question 1 as you know you have 90 minutes to complete it.

START PLANNING IN YOUR ANSWER BOOK

3. ANALYSE THE REQUIREMENTS • Identify the verb, or verbs, and make it stand out. The verb tells you what the examiner wants you to do, e.g.

evaluate, recommend, analyse, calculate. Be sure to identify all the verbs in the requirement just in case there is more than one thing to do, e.g. analyse and discuss, evaluate and recommend.

• Identify key words. These tell you what to do it on or about, e.g. evaluate what?, recommend what?

4. ALLOCATE MARKS TO EACH VERB IN THE REQUIREMENT • This can now determine how much to write for each verb in the requirement

5. IDENTIFY RELEVANT MODELS, TOOLS, THEORIES FROM YOUR KNOWLEDGE BANK


6. DEVELOP HEADINGS AND NUMBERS LAYOUT • Put key elements of model in plan as headings, e.g. Porters 5 Forces analysis = 5 headings. Headings will

give your answer a framework and structure. • Use requirements to develop headings to show marker that you are answering the question asked

7. DISTRIBUTE MARKS ACROSS HEADINGS • This can now determine how much you write under each heading

ANALYSE 8. ANALYSE THE SCENARIO

• Make brief notes in your plan under relevant headings from models/tools/theories and requirement • Find relevant numbers for calculations

DESIGN

9. THINK BEFORE YOU WRITE • Decide which points you are going to put in your answer (trying to put in everything usually leads to going

over time) and start with your strongest points • Decide how you are going to layout your answer to make life easy for the marker and maximise marks

IMPLEMENT

10. WRITE UP YOUR ANSWER TO MAXIMISE MARKS • Layout calculations in a logical and easy to mark format - Add value to calculations by asking ‘SO WHAT?’ • Use as many headings as possible to give the answer structure • Short sentences in short paragraphs - Paragraphs of 3/4 sentences maximum - Looking for 2 marks for each

paragraph • PEE for 2 marks – Point, Evidence, Explain (So what?) • Leave a blank line between paragraphs to make your answer ‘easy on the eye’ • Be strict with timings. When time is up on a question, or part of a question, move on. • Stick to answering the requirement – use your plan to keep you on track

REMEMBER THE THREE GOLDEN RULES – 1)APPLICATION 2) APPLICATION and 3)APPLICATION


Background

Candidate Requirements

Apply knowledge and skills

Determine appropriate techniques

Select relevant data

Exercise professional judgement

Aims of the paper

• Evaluate the Key external factors affecting an organisation’s strategy • Evaluate the impact of information systems on an organisation • Advise on important elements in the change process • Evaluate tools and methods for successfully implementing a change

programme • Recommend change management processes in support of strategic

information • Evaluate the process of strategy development • Evaluate tools and techniques used in strategy formulation • Evaluate tools and process of strategy implementation

Format of paper

Section A 50% • Compulsory • Major case study, pre-seen and

un-seen • Usually four parts • Case will include numbers

Section B 50% • Choice of two from three • Each question up to three parts • Will include short scenario

Study Weighting

• Interacting with the Competitive Environment 20% • Change Management 20% • Evaluation of Strategic Position and Strategic Options 30% • Implementation of strategic plans and performance evaluation 30%


Syllabus Overview

Mission and objectives

Stakeholder Analysis

External Analysis Internal Analysis

Corporate Appraisal

SWOT

Strategic Options

Strategic Choice

Implementation

Review and Control

CSF’s SMART

Resource audit M’s

Mendelow power-interest matrix

Core competences (SARI)

Value Chain

PLC / BCG

Benchmarking

PEST

Porters 5 Forces

Porter’s Generic Strategies

Resource Based vs Positioning

Ansoff’s product-market matrix

Acquisition vs organic vs joint development Suitability, Acceptability, Feasibility

Game theory, Real options

Change Management Culture

Quality

HRM / IT Structure

Marketing Ethics

International Trading

Financial Measures ROI / RI

Balanced Scorecard

Withdraw

Purpose,Strategy,Standards,Values

3 E’s – Efficiency, Economy, Effectiveness

Cost/Benefit

Risk

Non-financial Measures

CSF’s

KPI’s

Competitor Analysis

(PROSAC)

SVA / EVA®


Alternative Strategic Planning

Strategy ‘Strategy is the direction and scope of an

organisation over the long term: which achieves advantage for the

organisation through it’s configuration of resources within a changing

environment, to meet the needs of markets and to fulfil stakeholder

expectations.’

Long-term

Whole organisation

Integrates activities

All stakeholders

Competitive advantage

Relationship with environment Corporate = Strategic level

Business = Tactical level

Functional = Operational level

(Johnson & Scholes)

Purpose

• Respond and fit to environment • Utilise scarce resources • Provide direction • Ensure consistent objectives • Monitor progress

Advantages √ Identification of

strategic issues √ Consistency of goals √ Improve

performance/survival √ Pro-active √ Recognises

environment √ Optimum use of

resources

Disadvantages × Expensive (time

and money) × Bureaucracy × Stifles creativity × Less relevant in

a crisis

Rational ‘Top Down’ Approach

Mission & Objectives

Corporate appraisal

Strategic options

Strategic choice

Implementation

Review

Emergent Strategy - ‘Bottom up’ (Mintzberg)

Intended Strategy

Unrealised Strategy

Deliberate Strategy

Realised Strategy

Emergent strategy

E.G. Honda’s entry into the USA, 3M

Incrementalism (Lindblom) • Building block approach • Build strategy through incremental steps not radical

shifts √ Accepts uncertainty of future √ Builds commitment × May be too slow × Ideas often compromised

Freewheeling Opportunism • Market Driven – reactive • Hands on management • Exploit complacent players • Relies on leaders vision • No formula for success √ Take advantage of market

opportunities × Stock market problems

Position Analysis

Strategic Choice

Strategy Implementation

JSW


Mission and Objectives

Mission Statement ‘… the most generalised type

of objective which can be thought of as its raison d’etre.’

Purpose

Strategy

Policies and standards

Values

Advantages • Resolve stakeholder conflict • Set direction • Help formulate strategy • Communicates values to

employees • Marketing to customers

Criticisms • Meaningless terms used • Written retrospectively? • Not communicated to

employees • Ignored by managers

Objectives

S Specific M Measurable A Attainable R Relevant T Timebound

Results: Financial performance Competitiveness (Brignall et al)

Determinants: Flexibility Innovation Resource utilisation Excellence (Quality of service) Stakeholders

Mendelow’s Power – Interest Matrix

Interest Low High

Power

Low

High

A Minimal Effort

Give Direction

B Keep Informed

Education /

Communication

C Keep Satisfied

Intervention

D Key Players – Keep Close

Participation

Not for Profit Organisations

Features of objective setting • Multiple and contradictory objectives • Participation in objective setting • Providers of funding different to beneficiaries of service • Priorities may change frequently • Value for money a requirement not an objective • Increased role of personal objectives

Economy (Inputs)

Efficiency (Process)

Effectiveness (Outputs)

F I R E

F C Critical Success

Factors

"The limited number of areas in which results, if they are

satisfactory, will ensure successful competitive

performance for the organization.

They are the few key areas

where things must go right for the business to flourish.

If results in these areas are

not adequate, the organization's efforts for the

period will be less than desired."


Internal Analysis (Strengths & Weaknesses)

Resource Audit/ Position Audit

9 M’s

• Manpower • Management • Money • Make-up • Machinery • Methods • Materials • Markets • Management

information McKinsey 7 S Model

• Strategy • Structure • Systems • Staff • Style • Shared values • Skills

Core Competences ‘…the activities or processes that

critically underpin competitive advantage.’

Strategic Assets

Architecture

Reputation

Innovation

• Valuable • Rare • Can’t be copied • Not substitutable • Give access to wide

range of markets

…identify activities within the firm which contribute to competitive advantage and those which do not. Primary Activities • Inbound Logistics • Operations • Outbound logistics • Marketing and sales • Service Support/secondary activities • Procurement • HRM • Technology development • Firm infrastructure Uses • Streamline linkages • Eliminate non-value added activities • Business Process Re-engineering • Benchmark key processes

Portfolio Analysis

Product Life-cycle Stages: • Introduction: high risk, little

competition, low volume, high advertising = losses + negative cash

• Growth: increased competition, growing volumes, EOS, high advertising = losses to profits + negative to positive cash

• Maturity: steady repeat sales, high volumes, EOS, low level advertising = profits + positive cash

• Decline: falling volumes, falling prices = profits to losses + positive to negative cash, divest

Balance the portfolio

Problems: • No common shape • Unpredictable • Self-fulfilling prophecy • Product orientated – ignores market

BCG Matrix

High

Low

High Low Relative market

share

STAR Build then Hold

Losses to profits, negative to positive cash

PROBLEM CHILD Build or Divest

Losses, negative cash

CASH COW Hold then Harvest

Profits and positive cash

DOG Harvest then Divest

Profits to losses, positive to negative cash

Problems: • Definition of axes • Definition of market • No account of complimentary goods • Assumes high market share =

advantage

Benchmarking

1. Determine processes to be benchmark

2. Choose type of benchmarking 3. Choose partner 4. Determine measures 5. Collect data 6. Learn and improve 7. Implement changes

Competitive

Process/Activity

Internal

BEST IN PRACTICE

Porter’s Value Chain

Resources Basic OR Unique?

Competences Threshold OR Core?

S A R I

Balance the portfolio

Value Networks


Internal + External Analysis = Corporate Appraisal = Position

Appraisal= SWOT Analysis

Market growth

External Analysis (Opportunities and Threats)

PEST analysis (External, Environmental analysis)

Political and Legal • Taxation • Government policy • Foreign trade

regulations • Monopoly legislation • Environmental

legislation • Employment legislation • Consumer protection • Protectionism

Economic • Globalisation • Economic cycle • Interest rates • Inflation • Employment levels • Exchange rates

Social & Demographic • Income distribution • Education levels • Population size • Age profile • Lifestyle changes • Fashions and tastes • Consumerism

Technological • Internet • Government spending on RnD • Communications • Speed/rate of change • Processes and methods of

production • Transportation

Porter’s 5 Forces (Competitive,

Industry analysis)

Competitive Rivalry Greatest where: • Competitors of similar size • Slow market growth rate • High fixed cost industry • Lack of differentiation

Threat from New Market Entrants Barriers to Entry: • Economies of Scale • Other cost advantages • Capital requirements • Access to distribution channels • Patents, Government policy • Reaction of existing firms

Power of Buyers Power greatest where: • Few buyers • High number of suppliers available • Cost is high proportion of buyers total cost • Low switching costs • Buyers have low profits • Buyers have full information • Little product differentiation

Threat from Substitute Technologies

• Can same features be produced cheaper?

• Can new features be provided for same cost?

• Level of danger may be influenced by barriers to entry and/or power of buyers

Power of Suppliers Power greatest where: • Few suppliers • Few substitutes • High switching costs • Threat from forward integration • Customer not significant to supplier • Supplier has differentiated product

Strengths Weaknesses

Threats

INTERNAL

EXTERNAL Opportunities

Competitor Analysis

P Prediction of Reaction R Resources O Objectives S Strategy A Assumptions C Competences


Filling The Gap

Gap Analysis

Current operations

Future Plans

Target

GAP

Scenario Planning

Efficiency

Diversification

New products or new markets

Penetration

Time

Objective e.g. ROI

1. Define the scope of the scenario 2. Identify the major stakeholders 3. Identify basic trends 4. Identify key uncertainties 5. Construct initial scenario themes 6. Check for consistency and

plausibility 7. Develop learning scenarios 8. Identify research needs 9. Develop quantitative models 10. Evolve towards decision scenarios

Costly Often inaccurate Uses resources on scenarios that will not

materialise Tendency for managers to get carried

away Risk of self-fulfilling prophecy

Focuses management on future possibilities

Encourages creative thinking Encourages communication and

participation Identifies sources of uncertainty Identifies most important variables


Strategic Options

What Basis?

Resource Based Strategy (Inside-out)

Harness core competences to give sustainable competitive

advantage

• Strategic Assets • Architecture • Reputation • Innovative ability

Positioning view (outside-in)

Strategically develop organisation in line with environment

challenges

PEST Porters Five

Forces To beat the five

forces

Porter’s Generic Strategies • Overall Cost Leadership

(better margin, potential price cuts, entry barrier, reduce supplier power)

• Differentiation (Premium price, better margin, barrier, reduce buyer power)

• Focus (Niche) (Cost or Differentiation, focus on market needs, develop core competencies)

Beware of ‘Stuck in the Middle’ Uses • Analyse rivals • Suggest own strategy • SBU level strategy Limitations • Unclear definition of industry • Defines advantage in terms of position not

resources • Lack of empirical evidence • Ignores middle ground • Restricts firm to position in present

industry • Requires perfect information

What Direction?

Ansoff’s Matrix Products, existing and new (PEN) Markets, existing and new (MEN) • Market Penetration (cost reductions,

price reductions, advertising, minor product modifications)

• Product Development (exploit existing customers, RnD, buy-in and badge, JV’s, Licensing)

• Market Development (new markets such as foreign markets, new segments such as adult to child or industrial to consumer)

• Diversification (related = vertical integration or unrelated = conglomerate)

Do nothing / Withdraw

Risks • Product • Market • Operations and

management • Financial

Vertical Integration Advantages • Economies of combined

ops • Economies of control and

coordination • Avoiding the market • Tap into technology Conglomerates Advantages • Flexibility • Quick growth • Access to capital • Portfolio effect • Avoidance of anti-

monopoly legislation

Disadvantages • Increased operational

gearing • Reduced flexibility to

change partners • Capital investment needs Disadvantages • No additional benefit to

shareholders through synergies

• No operating advantages

Horizontal diversification – competitive products, complementary products, by-products

Limitations • Definition of market • Ignores factors such as competitors • Suggests strategies in isolation

Method of Growth? (See next page)


Method of Growth?

Acquisition versus Organic growth

Acquisition

Advantages • Quick • Lower risk • Overcomes barriers to entry • Same number of competitors • Possible synergies • Possible under-valuation of

target

Disadvantages • Purchase premium • Integration issues

o Systems o People o Culture

• Synergies do not materialise

• Reputation of target

Organic Growth

Advantages • No premium for assets • People development • Staged investment • Established culture • Introduction of new

technology and systems easier

• Possibility of grants

Disadvantages • Slow • Increases number of

competitors • Overcoming barriers to

entry • No opportunity for

synergies • Higher risk

Porter’s 3 Tests for Acquisitions

• The attractiveness test • The cost of entry test • The better off test

Possible synergies • Market • Economies of scale • Shared activities • Surplus assets • Vertical integration • Skills transfer • Dilution of risk • Reduced power of

buyers/suppliers • Tax advantages

Joint Development Methods

Joint Venture Separate business entity with equity form two or more businesses

Strategic Alliance Long-term agreement to share knowledge, competences, technology for mutual benefit

Licensing Giving the right to exploit brand, recipe, process etc for a share of the profits

Franchising Giving the right to exploit a business method/model in return for a capital sum plus a share of the profits. Franchisor usually provides support e.g. marketing, training, technical

√ Quick growth √ Access to competences √ Less financial risk/outlay √ Overcome product, market,

operational risk × May lose competences × Train future competitors × Brand infection × Operational and contractual

disputes × Ownership of assets × Sharing of profits

Withdrawal

Divestment √ Quick √ Higher price due to

strategic value

Demerger √ Gives shareholders

an exit route √ Management can

focus on core areas √ Two companies can

develop separate identities

Management Buyout (MBO)

Consider • On-going involvement of

holding company • Why is holding company

selling? • Loss of Holding company

help, e.g. technical support, finance services

• Quality of management team • Price • Personal risk, e.g. home at

risk?


Strategic Evaluation &

Choice

Suitability Is the proposed strategy suitable for the present situation and circumstances of the organisation? i.e. Is it suitable given the SWOT analysis?

Acceptability Will the proposed strategy meet the objectives of the organisation and, therefore, be acceptable to the major stakeholders?

Feasibility Has the organisation got, or can it get, the necessary resources to carry out the strategy?

Risk Cost/Benefit

Game Theory • Concerned with the interrelationships between the competitive

moves of a set of competitors • Can be a useful tool to analyse and understand different

scenarios • Relies on two key principles:

- Strategists take a rational, informed view of potential competitor actions - If a competitors strategy allows them to dominate us then the priority is to eliminate that strategy For example, taking competitor reaction into account, a company may not be any better off by making a particular strategic move as it may be cancelled out by the competitor. This may leave both companies worse off than they were before.

Real Options •‘…the net present value rule is not sufficient. To make intelligent

investment choices, managers need to consider the value of keeping their options open.’ (Dixit and Pindyck, 1995)

•…all business decisions are real options…they confer the right but not

the obligation to take some initiative in the future. (Lewent, 1994)

Real options capture the value of managerial flexibility to adapt decisions in response to unexpected market developments.

McKinsey’s 4 stage process for Real Options

1. Use standard NPV approach to produce valuation of investment

2. Use scenario planning to determine the potential futures • Model the uncertainties in the project with event trees

3. Identify the decision options at key stages of the project

• Convert event tree into decision tree

4. Value the portfolio of options using the Black & Scholes portfolio approach


Kanter’s prescription for creativity: A Acceptance of change N New Ideas I Interaction T Tolerance of failure A Acknowledge creative behaviour

Culture ‘The way we do things around here’

Change Management

Lewin’s Force Field Analysis

Driving Forces Restraining Forces (resistance)

Job Factors

Personal Factors

Social Factors

Strengthen Weaken

Unfreeze Change Refreeze

Handy’s cultural types

Power

Role Task

Person Cultural Web

• Stories • Rituals • Symbols • Power structure • Organisation

structure • Control systems

Implementation Issues

Context of Change

Organisational Development To increase: • Level of trust • Likelihood of solving problems • Openness of communication • Level of individual and group

responsibility for problem solving

Methods • Survey research and feedback • Therapy groups (T-Groups) • Team Building • Change Agents

Excellence Culture – Peters and Waterman P Productivity through people A A bias for action S Stick to the knitting S Simple structure C Close to the customer A Autonomy and entrepreneurship S Simultaneous loose-tight properties H Hands on, value driven Quality

‘Fitness for use’

Quality control = reactive

Quality Assurance =

proactive

TQM ‘Get it right first time’

Commitment

Communication

Continuous improvement

Competence

Four costs of Quality: • Appraisal • Preventative • Internal failure • External failure

Continued on next page

Customers

Costs

The change process

Triggers • Internal • External

Types of change • Planned • Emergent • Incremental • Step • Transformational

6 C’s

Organisational Factors

• Participation • Education & communication • Facilitation & support • Negotiation • Manipulation • Coercion


Implementation Issues (cont’d)

HRM

Guest model of HRM

HRM HRM HRM Behavioural Performance Financial Strategy Practices Outcomes Outcomes Outcomes Outcomes

• Recruitment • Appraisals • Training • Reward • Job design • Involvement • Status and security

• Commitment • Quality • Flexibility

Motivation: • Maslow – Hierarchy of needs • Herzberg – Hygiene factors and motivators

Information Systems

Technology

Implementation Issues (cont’d)

Organisational Knowledge

Management

Benefits Motivated workforce

Staff understand org’n goals & values Increased ability to

compete & add value

People encouraged to generate & use knowledge

Knowledge = closest we can get to ultimate

‘competitive advantage’

Issues / Problems

Technological barriers

Incompatible systems & processes

Social barriers Format of

information

Organisational Structure

Errors in data transfer

Politics

De-motivation

Systems

Networks Groupware

Intranet

Extranet

Data Warehousing Large relational

database

Reports

Improve quality of data

Data Mining - Turning data into

information

Support strategic

decision making

Support integrated value

chain

Speed up response times

to queries Descriptive

models Predictive

models

Classification

Clustering

Forecasting

Sequences Associations

Turn tacit into explicit


Developing an IT Strategy

1. Identify business needs 2. Identify IT gap 3. Identify potential

opportunities

Strategic Weapon

Generic strategies

Beat the five forces Value

chain

Considerations (PICK)

Key business areas

Cost

Implications

Performance

Earls 3 Levels of IT Strategy IS Strategy -

Organisation of systems

IT Strategy – Technology

infrastructure

IM Strategy – Supporting

management processes (COPT)

Technology

Planning Organisation

Control

McFarlan & McKenney’s Strategic Grid

Support – No strategic value

Factory – See strategic value of info system now but expect value to

decrease in the future

Turnaround – Expect info system

to become strategically

important in the future

Strategic – Depend on info

system for competitive advantage

Strategic impact of future systems

High Low

L ow

Strategic impact of current

systems H i g h

Support – Improve

management effectiveness but not

critical to the business

High Potential – Innovative with high

future potential

Key Operational– Critical to sustain existing business

Strategic – Critical to future

business success

Strategic importance in predicted competitive environment

Low High

L ow

H i g h

Strategic importance in current competitive environment

Peppard – Applications Portfolio Business Process

Re-engineering

1. Work backwards from outcomes not tasks

2. Empower the end user 3. Increase access to

databases 4. Link parallel activities 5. Capture information only

once 6. 4. Identify IT gap 5. Identify potential

opportunities

Radical & fundamental change for quantum leaps in performance

Process Innovation

Completely new and radical processes.


Checklist

Organisational Structure

Features of Organisation

Decisions

Speed Quality Flexibility

Congruence

Employee motivation

Career path

Motivation of managers

Autonomy Centralised vs Decentralised

S Strategy T Technology O Ownership P People T Tasks I Ideology E Environment S Size

Entrepreneurial √ Fast decisions √ Responsive to market √ Congruence × No career structure × No autonomy × Single product & market

Functional √ Economies of scale √ Specialists with some autonomy √ Career structures √ Frees up entrepreneur × Slow decisions (bureaucratic) × Functional silo’s × Few products & markets

Divisional √ Multiple products &

markets √ Autonomy for SBU

managers √ Training of SBU managers √ Frees up senior managers √ Focus on specific

products/markets × Loss of congruence? × Duplication of effort × Isolation of SBU

managers

Implementation Issues cont’d

Matrix √ Breakdown of silo’s √ Shared knowledge √ Skill development √ Innovation and creativity × Dual command × Dilution of functional

authority × Time consuming meetings

Decentralisation

Advantages: • Frees senior

management • Better local decisions • Better motivation • Flexibility • Training/career path

Disadvantages: • Loss of control • Loss of congruence • Duplication of effort • Extra costs of control

Span of control

Tall/Narrow √ Promotional opportunities √ Smooth progression

between levels √ More personal contact

Flat/Wide √ Encourages delegation √ Quicker, more informed

decisions √ Encourages participation

of lower levels √ Lower management costs √ Promotions real and

meaningful √ Closer contact between

senior management and lower levels

Mintzberg’s Structural Configurations

Strategic Apex

Middle Line

Operating core

Techno-structure

Support Staff

• Simple structure = entrepreneurial

• Machine bureaucracy = functional

• Professional bureaucracy = decentralised

• Divisional form • Adhocracy = matrix Greiner’s

Growth Model

Growth through Creativity Direction

Delegation Coordination Collaboration

Revolutionary Crisis Leadership Autonomy

Control Red Tape

Psychological saturation


Marketing

Firm’s orientation

Product to meet needs

Production Sales

Marketing …identify, anticipate and satisfy

customer requirements

Marketing Strategy

Six Markets Model (Payne) Customer

Markets

Referral Markets

Supplier Markets Recruitment Markets

Analyse environment and competitors – PEST

/ Porter’s five forces / PROSAC / 4P’s

Market Segmentation and Target Market

…division of the market into homogenous groups of potential customers who may be treated similarly for marketing purposes

• Geographic • Demographic

o Age o Gender o Income o Family life-cycle

• Social class • Psychological • Education • Hobbies

Undifferentiated

Differentiated

Concentrated

Marketing Research …systematic gathering,

recording and analysing of data about problems relating to the

marketing of goods and services

Desk research (secondary data)

Internal Accounts, Sales reports, Customer complaints

External CSO reports, Business monitors, Trade journals, newspapers

Field Research (Primary data)

Interviews, focus groups,

questionnaires, experiments, Test

marketing

Marketing Mix – 4P’s …set of controllable

marketing variables used to produce desired response in

the target market

Product

Product mix

Product Life Cycle

Product qualities Features, options, range, warranty, packaging, branding

Place

Use of intermediaries: • Economic criteria • Control criteria

Promotion

Communications Mix: Advertising Sales promotion Public relations Personal selling

Price

• Cost based • Target pricing • Discriminatory pricing • Psychological pricing • Promotional pricing • Product line pricing • Captive product pricing • Market skimming • Market penetration

A Awareness I Interest D Desire A Action

Product

Competitive Strategies

Market Leader - largest market share

Market Challenger - runner-up, fighting to increase share

Market Follower - runner-up, aiming to hold share

Market nicher - serve small segment, not pursued by larger firms

Brand Strategies Existing Product New Product Existing Brand Line Extension Brand Extension New Brand Multi-branding New Brand

Influence Markets

Internal Markets


Profitable Products or Customers?

Product View

DPP – Direct Product

Profitability

Profits from sales of individual products

Calculating DPP Sales (price x number of units – returns) LESS: Costs (unit cost + ordering + inventory + storage + transport + shelf stacking + wastage + breakage)

Typical cost drivers: • Product size • Demand uncertainty • Delivery cycle • Ordering method

Improving DPP: • Increase sales price • Increase sales volume • Reduce costs of

stocking • Offer incentives

Evaluation of DPP: • Too product focussed • Easier and cheaper to cut price

than conduct DPP exercise • Ignores relationships between

products

Customer View

CAP – Customer Account

Profitability

1. Analyse customer base and divide into segments

2. Calculate annual revenues earned from customer segments

3. Calculate annual costs of serving the segment including the ‘hassle’ factor

4. Identify and retain ‘quality’ customers 5. Eliminate or re-engineer unprofitable

customers

Single period view of value of customer

• Minimum order size • Install telesales / EDI • Charge service fees • Impose flat order

charge • Discriminatory pricing

Evaluation of CAP: Includes non-production costs Identifies customer groups of

value to the firm Enables assessment of value of

marketing expenditure × Leads to ill-judged product

changes × Calculation difficulties × Single period view

Life-Cycle customer value

Consider: • Present value of existing & future

purchases • Probability of customer retention • Probability of customer

purchasing new products • Costs of initial attraction

Drawbacks: • Hard to predict future behaviour • Hard to factor in competitors • Difficult to pinpoint life-cycle

stage • Uncertainty of environmental

factors

Customer Relationship Marketing /

Management

Focus marketing resources on maintaining &

enhancing existing customer base

Developing Customer Relationships: • Develop customer retention schemes

for staff • Reduce staff turnover • Elevate customer retention in corporate

thinking • Analyse detailed information on

customers and their buying habits • Monitor customer relationships • Engage with customer • Develop ideas to increase loyalty

DREAMED


Business and Professional

Ethics

Professional Ethics ‘Self control, not self interest’

C Confidentiality O Objectivity P Professional due care P Professional Competence I Integrity T Threats

Corporate Social Responsibility

Issues

Environment

Sustainability

Safety in the workplace

Consumer health and safety

Equal opportunities

Fair Trade

Honesty in Advertising

Views on Business Ethics

‘The business of business is business’

(Friedman) Management to concentrate on maximising profits and shareholder wealth. Businesses have no duty to society. Societal benefits will arise as a result of commercial success.

Conflict of CSR with shareholder wealth • Reduced revenues • Increased costs • Diverts funds from shareholders • Distracts management

Enlightened Self-Interest

Firms should acknowledge their social responsibilities.

Benefits to Business

Avoid future Government policy

Attract ethical investor funds

Relieve stress on management

Competitive advantage

Recruitment

Innovation & ideas from

close links to community

Reputation and branding Small company

advantage in the supply chain

Potential problems Competitive disadvantage

Deciding what is ethical

Bad publicity from monitoring and enforcement

Disclosure of business information

No universal acceptance of morals & ethics

Corporate Governance • Divorce of ownership and control • Separate roles of CEO and Chairperson • Audit Committee / Remuneration Committee • Directors re-election at least every 3 years • Non-exec Directors

o Independent o Role on audit / remuneration

committees o Corporate conscience o Mentors to inexperienced execs o Strategic value through expertise


P

The International Market Place

Reasons for growth in international business

(POST)

Opportunities for lower costs

Saturated home market

Trade barriers reduced

Pressure on ROCE

Benefits of international growth

(COPPER)

Cultural Diversity

Opportunities for management

Reduced risk

General risks

PEST Market Knowledge

Financial

PROSAC

Porter’s Diamond

‘National Competitive Advantage’

Exporting √ Low capital outlay √ Low risk √ Can learn about market × May not meet customer needs × Perceived lack of commitment × High distribution costs

Joint Venture & Franchising

√ Access to local resources √ Reduced national sentiment √ Shared capital input √ Access to competences and

knowledge × Shared profits × Lose competences × Train competitor × Operational disputes

Foreign Direct Investment √ Closer to market √ Retain profits √ More control √ Reduced operational conflicts × High financial risk × Staffing decision × Integration difficulties

Methods of International Expansion

Ethnocentric Multinational - Polycentric Global - Geocentric

• Perceives foreign markets as similar to domestic market

• Products & marketing mix constant

• Standardisation to save time and money

• Supply-driven policy

• See overseas market as distinctive

• Customised products and marketing mix

• Increased overseas sales volumes

BUT • Fewer EOS giving higher costs,

so volumes not turned into profits

• Standardise wherever possible, e.g. RnD, Branding

• Market convergence may allow standardised product

• BUT • Demand-driven • Customised marketing mix where

necessary = GLOCAL

Exporting Joint venture, Franchising, Foreign Direct Investment

STAFFING

√ Overcomes lack of host skills, unified culture, Transfers competencies

× Resentment by host, cultural myopia

√ Alleviates cultural myopia, inexpensive

× Limits career mobility, isolates HQ from subsidiaries

√ Efficient use of HR, builds strong culture and management network

× Subject to National immigration policies, expensive

Demand Conditions

Related & supporting industries

Strategy, structure, & rivalry

Factor Conditions

5 Forces

Political sponsorship

Political power

Economies of scale


Review and Control

Profit Related Measures

Examples • Gross margin • Net margin • Cost % sales • Profit

Problem: no account taken of invested capital used to generate profits

Return On Investment

(ROI)

Residual Income (RI)

PBIT X 100 = % CE

Relative Measure %

PBIT (CE x imputed interest rate)

RI

Absolute Measure £’s

Problems: • Sub-optimal

investment decisions

• Deplete capital assets too early

Problems: • Absolute measure

poor for performance comparisons

Joint issues when used in isolation • Backwards looking measures • Short-termist decisions • Open to easy manipulation of discretionary costs and

capital employed

Conclusion Financial measures should not be used in isolation to measure performance but should be combined with

non-financial measures.

The Balanced Scorecard

Financial Perspective

Internal Business Perspective

Innovation and Learning Perspective

Customer Perspective

1. Identify CSF’s 2. Identify competences required for CSF’s 3. Develop KPI’s for competences 4. Measure competence 5. Take action – continuous improvement

Benefits √ Longer-term

measures √ More difficult to

manipulate √ Measures

determinants and results

√ Promotes goal congruence

√ Includes stakeholders

Potential Drawbacks

× Measures conflict with each other

× Requires cultural change

× Overload – ‘paralysis by analysis’

× Time and cost × No obvious

relationship with shareholder wealth

Shareholder Value Analysis

The business should be managed to increase

shareholder wealth – i.e. all activities and processes

Economic Value Added (EVA®)

Adjusted NOPAT (Adjusted CE x imputed interest rate)

EVA

Aims of performance measures: • Motivation • Congruence • Accurate reflection of performance • Accountability/Controllability • Reconcile long and short-term

Transfer Prices: • Marginal Cost – no incentive for

seller & inflated profit for buyer • Full Cost (Cost Plus) – may be no

incentive for the buyer & no incentive for seller to control costs

• Market price – no buyer incentive • Opportunity Cost – usually best • Centrally set – uncontrollable • Negotiated – powerful divisions

cima e3 revision notes

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