psa - business strategy

The Institute of Chartered Accountants of Bangladesh

BUSINESS STRATEGYProfessional Stage Application level

www.icab.org.bd

Study Manual

AdministratorText BoxCA in Bangladeshwww.facebook.com/CAinBD

ii The Institute of Chartered Accountants in England and Wales, March 2009

Business StrategyThe Institute of Chartered Accountants of Bangladesh Professional Stage

These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales

ISBN: 978-1-84152-839-7First edition 2009

All rights reserved. No part of this publication may be reproduced in any formor by any means or stored in any retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording or otherwisewithout prior permission of the publisher.

The Institute of Chartered Accountants in England and Wales, March 2009 iii

Welcome

iv The Institute of Chartered Accountants in England and Wales, March 2009

The Institute of Chartered Accountants in England and Wales, March 2009 v

Contents

Introduction vii

Business strategy viii

The learning materials ix

Study guide x

Study cycle xi

Detailed study guide xii

Getting help xv

Syllabus and learning outcomes xv

Skills assessment guide xvii

1. Strategy and business 1

2. The purpose of a business 37

3. The macro environment 75

4. The industry and market environment 113

5. Strategic capability 151

6. Strategic options 203

7. Strategies for products and markets 259

8. Strategy and structure 327

9. Risk management 389

10. Methods of development 443

11. Evaluation of strategies and performance measurement 483

12. Business planning and functional strategies 523

13. Strategies for information 589

14. Strategies for change 629

vi The Institute of Chartered Accountants in England and Wales, March 2009

INTRODUCTION

The Institute of Chartered Accountants in England and Wales, March 2009 vii

1 Introduction

1.1 What is Business Strategy and how does it fit within theProfessional Stage?Structure

The syllabus has been designed to develop core technical, commercial, and ethical skills and knowledge in astructured and rigorous manner.

The diagram below shows the fourteen modules at the Professional Stage, where the focus is on theacquisition and application of technical skills and knowledge, and the Advanced Stage which comprises threetechnical modules and the Case Study.

The knowledge base

Some of the issues in this exam were introduced at knowledge level in Business and Finance and, to a lesserextent, in Management Information. These two areas are the foundations of Business Strategy.

Progression to application level

The knowledge base that is put into place is taken further in this application level exam Business Strategy.Here the aim is to ensure students can utilise and combine theoretical frameworks to provide advice tomanagement on the strategic management of their businesses. The exam questions are practical scenariosand it is for the candidate to decide which framework or model will provide the most useful analysis of thesituation.

Progression to advanced stage

The advanced level paper Business Analysis takes things further again. The aim is to ensure that studentscan expand on the purely strategic considerations and provide also technical advice in respect of financial,reporting and taxation issues arising in business transformations, e.g. from mergers and acquisitions.

The above illustrates how the knowledge and application of business strategy principles gives a platformfrom which an advanced application of business skills and expertise can be developed.

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viii The Institute of Chartered Accountants in England and Wales, March 2009

1.2 Services provided by professional accountantsProfessional accountants should be able to:

Identify and analyse the consequences of a businesss current objectives, market position, and direction

Evaluate the likely consequences of strategic choices and recommend strategies to meet the objectivesof the business

Develop a business plan to achieve the businesss strategic objectives, recommend an appropriateorganisational structure and explain the process of effective change management.

2 Business strategy

2.1 Module aimTo provide students with an understanding of how businesses develop and implement strategy.

2.2 Specification gridThis grid shows the relative weightings of subjects within this module and should guide the relative studytime spent on each. Over time the marks available in the assessment will equate to the weightings below,while slight variations may occur in individual assessments to enable suitably rigorous questions to be set.

Weighting (%)Strategic analysis 35Strategic choice 35Implementation of strategy 30

100

Your exam will consist of 3 questions, usually of between 20 and 45 marks each.

Time available: 2.5 hours

INTRODUCTION

The Institute of Chartered Accountants in England and Wales, March 2009 ix

3 The learning materialsYou will find the learning materials are structured as follows:

Title page Contents page Introduction. This includes

A review of the subject to set the context

A list of the top level learning outcomes for this subject area entitled 'Services provided byprofessional accountants' (set with reference to what a newly qualified accountant would beexpected to do as part of their job)

The specification grid for Business Strategy

A brief note about the learning materials

Study Guide. This includes

Hints and tips on how to approach studying for your CA exams

Guidance on how to approach studying with this study manual

A detailed study guide suggesting how you should study each chapter of this study manual andidentifying the essential points in each chapter

Information on how to obtain help with your studies

The detailed syllabus and learning outcomes

Each chapter has the following components where relevant:

Introduction

Learning objectives Practical significance Stop and think Working context Syllabus links

Examination context

Chapter topics

Summary and Self-test

Answers to Self-test

Answers to Interactive questions

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4 Study guide

4.1 Help yourself study for your CA examsExams for professional bodies such as the ICAB are very different from those you have taken at college oruniversity. You will be under greater time pressure before the exam as you may be combining yourstudy with work. Here are some hints and tips.

The right approach1 Develop the right attitude

Believe in yourself Yes, there is a lot to learn. But thousands have succeededbefore and you can too.

Remember why you're doing it You are studying for a good reason: to advance your career.

2 Focus on the exam

Read through the Syllabus andStudy Guide

These tell you what you are expected to know and aresupplemented by Examination context sections in thetext.

3 The right method

See the whole picture Keeping in mind how all the detail you need to know fits intothe whole picture will help you understand it better.

The Introduction of each chapter puts the material incontext.

The Learning objectives, Section overviews andExamination context sections show you what youneed to grasp.

Use your own words To absorb the information (and to practise your writtencommunication skills), you need to put it into your ownwords.

Take notes. Answer the questions in each chapter. Draw mindmaps. Try 'teaching' a subject to a colleague or friend.

Give yourself cues to jog yourmemory

The Study Manual uses bold to highlight key points.

Try colour coding with a highlighter pen. Write key points on cards.

4 The right recap

Review, review, review Regularly reviewing a topic in summary form can fix it in yourmemory. The Study Manual helps you review in many ways.

Each Chapter summary will help you to recall thatstudy session.

The Self-test actively tests your grasp of the essentials.

Go through the Examples in each chapter a second orthird time.

INTRODUCTION

The Institute of Chartered Accountants in England and Wales, March 2009 xi

4.2 Study cycleThe best way to approach this Study Manual is to tackle the chapters in order. We will look in detail at howto approach each chapter below but as a general guide, taking into account your individual learning style,you could follow this sequence for each chapter.

Key study steps Activity

Step 1Topic list

This topic list is shown in the contents for each chapter and helps you navigateeach part of the book; each numbered topic is a numbered section in the chapter.

Step 2Introduction

This sets your objectives for study by giving you the big picture in terms of thecontext of the chapter. The content is referenced by the Study guide, andExamination context guidance shows what the examiners are looking for. TheIntroduction tells you why the topics covered in the chapter need to be studied.

Step 3Section

overviews

Section overviews give you a quick summary of the content of each of the mainchapter sections. They can also be used at the end of each chapter to help youreview each chapter quickly.

Step 4Explanations

Proceed methodically through each chapter, particularly focusing on areashighlighted as significant in the chapter introduction or Study guide.

Step 5Note taking

Take brief notes, if you wish. Don't copy out too much. Remember that beingable to record something yourself is a sign of being able to understand it. Yournotes can be in whatever format you find most helpful; lists, diagrams, mindmaps.

Step 6Examples

Work through the examples very carefully as they illustrate key knowledge andtechniques.

Step 7Answers

Check yours against the suggested solutions, and make sure you understand anydiscrepancies.

Step 8Chapter summary

Review it carefully, to make sure you have grasped the significance of all theimportant points in the chapter.

Step 9Self-test

Use the Self-test to check how much you have remembered of the topicscovered.

Step 10Learning objectives

Ensure you have ticked off the Learning objectives.

Moving on...When you are ready to start revising, you should still refer back to this Study Manual.

As a source of reference.

As a way to review (the Section overviews, Examination context, Chapter summaries and Self-testquestions help you here).

Remember to keep careful hold of this Study Manual you will find it invaluable in your work.

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xii The Institute of Chartered Accountants in England and Wales, March 2009

4.3 Detailed study guideUse this schedule and your exam timetable to plan the dates on which you will complete each study periodbelow:

StudyPeriod

Approach Essential Points DueDate

1 Read through Chapter 1 of the StudyManual to understand the differentapproaches management may take to thedevelopment of business strategy. These,and ethical issues, will be reinforced in laterchapters.

Work through the Self-test questionscarefully to ensure that you have graspedthe main points in the chapter.

The distinctions between:

Rational and emergentapproaches to strategyformulation; and between

Positioning and resource-basedapproaches to gainingcompetitive advantage.

2 Chapter 2 considers the goals ofbusinesses. Ensure you understand whysimplistic notions of profit maximisationare inadequate explanations of theeconomic goals of commercialorganisations. Note the power ofstakeholders.

Question practice is vital for to reinforcechapter, so attempt the Interactivequestions as you go along and the Self-testat the end.

Role and nature of mission

Distinction between profit andshareholder wealth as objectivesfor a firm

Stakeholder mapping

3 Chapter 3 introduces the wider businessenvironment. There is no need tomemorise all the examples but rather tryto appreciate the range of issues containedin the frameworks of PESTEL, PortersDiamond and so on. Pay attention tofactors encouraging and limitingglobalisation of business as the risks fromthese are returned to in several laterchapters.

Work through the Interactive questionsand the Self-test questions to practiseapplying your knowledge.

PESTEL analysis

Ohmaes 5 Cs

Porters Diamond

4 Chapter 4 is a short chapter with three keymodels in it. Ensure you memorise theelements of the models and also theirsignificance for the financial outlook of anindustry or business.

Attempting the Interactive and Self-testquestions is of particular importance toensuring you understand how to use thesemodels in the exam.

Industry life cycle

Porters 5 forces

International product life cycle

5 Chapter 5 returns to the discussion,started in Chapter 1, of the sources ofcompetitive advantage. The key modelsmust be memorised and their applicationpracticed by working through the

Kays core competences

Strategic architectures

Value chain analysis

INTRODUCTION

The Institute of Chartered Accountants in England and Wales, March 2009 xiii

StudyPeriod


Interactive questions and examples in thechapter and completing the Self-testquestions at the end of the chapter.

Network organisations

BCG matrix

6 Chapter 6 is possibly the pivotal chapter inthe text because the generation of optionsforms a watershed between analysis of thepresent situation of the business and thedevelopment of strategies to improve it.There are only three major models tolearn but all are very important indeed toyour exam.

It is essential that you attempt the Self-testquestions to understand how these modelsmay be used in exam.

Conducting as SWOT analysis

Porter's 3 generic strategies(modified by Bowmans Clock)

Ansoff matrix

7 Chapter 7 provides comprehensivecoverage of marketing strategy. Marketingis one element of strategy implementation.The examples and illustrations are there tohelp you understand the principles. Dontmemorise them.

Application of knowledge to the Interactiveexamples and Self-test questions isessential.

The elements of the marketingmix

The purpose and bases ofsegmentation

Marketing research

Pricing approaches

8 Chapter 8 deals with the traditionally drysubject of strategy and structure. Readingthe worked example in paragraph 1.2 mayhelp put it in context. Note in particularthe types of divisionalisation and themethods and problems of managing andcontrolling divisionalised organisations. Thetopics in the section on corporategovernance will be familiar but make closenotes on corporate governance in not forprofit organisations.

Work through the Self-test questionscarefully to ensure that you have graspedthe main points in the chapter.

Bases of divisionalisation

Network organisations

Corporate governance

9 Chapter 9 covers risk. You will havecovered aspects of this in your earlierstudies of auditing and of finance, but thischapter goes further and will need closeattention. Risk has rapidly become a majorconcern of strategic management. Note thetypes of risk from IT/IS and globaloperations but pay most attention to thepolicies management can adopt to treatrisk.

It is essential that you attempt the Self-testquestions to understand how risk mayappear in the exam.

Risk management strategies

Sources of risk

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xiv The Institute of Chartered Accountants in England and Wales, March 2009

StudyPeriod


10 Read through Chapter 10 carefully workingthrough all the examples and interactivequestions. This chapter covers an area ofimportant overlap with your studies infinance, and it is therefore of importancefor your exam.

Implementing a strategy by organic orexternal growth will figure in many examquestions. Prepare by trying the Self-testquestions at the end of the chapter.

Benefits and drawbacks ofdifferent growth methods

Methods of internationalexpansion

Methods of merger andacquisition

11 Chapter 11 combines two topics.Evaluation of strategic options, thoughcovered briefly, is an essential topic thatwill figure in exam questions. Learn thecriteria.

Control and performance measurementenable you to use some of your financestudies in a different context. Focus onwhat is being controlled as you read thesesections rather than on the numbersthemselves.


The suitability, acceptability,feasibility criteria

CSFs in control

The perspectives of the balancedscorecard

12 Several of the topics in Chapter 12 dealwith the detailed planned implementationof aspects of business strategy. Note thestages of the plans and also relate back toearlier chapters in this text. Read thesections on HR, R&D, Operations, andquality closely as these are new technicalareas for you.

Ensure you follow through the examples,the Interactive questions and the Self-testquestions.

Elements of a business plan

Human resources planning

Operations planning andmanagement

Purchasing and procurement

Role of the finance department

13 Information strategy is a new area for youand will need close attention. Note thepurposes and qualities of good informationand learn the basic characteristics of thesystems you read about.

Completing the Self-test questions will helpreinforce your understanding of thiscomplex area.

Types of system

Knowledge management

Risks from IT/IS systems

14 Strategy changes organisations and thisneeds management. Chapter 14 coverssome of the issues and techniques. Youmay find this an abstract area so read theillustrations to see how it works inpractice. Memorise the approaches tochange and use them as a framework for

Types of change

Frameworks for change

Stages in project management

INTRODUCTION

The Institute of Chartered Accountants in England and Wales, March 2009 xv

StudyPeriod


answers.

Memorise the stages in projectmanagement.


Revision phaseYour revision will be centred around using the questions in the ICAB Revision Question Bank.

5 Getting helpFirstly, if you are receiving structured tuition, make sure you know how and when you can contact yourtutors for extra help.

Identify a work colleague who is qualified, or has at least passed the paper you are studying for, who iswilling to help if you have questions.

Form a group with a small number of other students. You can help each other and study together,providing informal support.

Call +88 (02) 9112672, or +88 (02)9115340 or email [email protected] with non-technical queries.

Watch the ICAB website for future support initiatives.

6 Syllabus and learning outcomesCoveredin chapter

1 Strategic analysis

Candidates will be able to analyse and identify the consequences of a businessscurrent objectives, market position and direction.

In the assessment, candidates may be required to:

(a) Evaluate a businesss purpose, in terms of its stated mission, objectives and critical successfactors, highlighting omissions, inconsistencies and weaknesses in its strategic managementsystems 1,2

(b) Analyse for a given situation the external factors which may impact upon a businesssperformance and identify significant issues in the following areas:

Sustainable development issues Global macroeconomic forces International trade and financial systems Government policies Industry developments Cultural environment Stakeholder impact Current markets Markets for finance, labour and other resources 3,4

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xvi The Institute of Chartered Accountants in England and Wales, March 2009

(c) Analyse a businesss current markets and competitive strategy in sufficient detail fordecisions to be made, drawing conclusions consistent with the data and results andhighlighting relevant issues in terms of their likely impact on the strategy of the business 6

(d) Identify the effect of the internal factors in a given situation which affect or may affect abusinesss ability to achieve its chosen strategy, including its:

Financial resources

Current product/service portfolio

Organisational and operational capabilities (including existing business processes,human resource capabilities and information systems capabilities) 5

(e) Analyse for a given situation, the resources required to produce a product or service andidentify their availability, associated costs and significant limiting factors 11

(f) Analyse the governance and management structures of businesses and identify weaknesses 8

(g) Identify the steps needed for a given business to enable it to meet the appropriateregulations, codes of conduct and disclosure requirements in respect of its governance 8

(h) Identify the risk attached to a businesss present position, considering all relevant factors(including attitudes to risk) and stating all assumptions made. 9

2 Strategic choice

Candidates will be able to evaluate the likely consequences of strategic choices andrecommend strategies to meet the objectives of a business.


(a) Advise on the non-complex aspects of strategy formulation as part of the strategicmanagement process for businesses 1

(b) Identify and describe in a given scenario the alternative strategies available to a business 6,10

(c) Show, in a given scenario, how a business chooses from competing strategies in order tomaximise the achievement of its key objectives 11

(d) Explain, in a given scenario, how products and services must evolve in the face of changingconsumer demand 7

(e) Analyse financial and other data in order to provide information for pricing decisions 7

(f) Explain, using information provided, how to position particular products and services in themarket place to maximise competitive advantage 7

(g) Identify the risk attached to proposed courses of action in a given situation, considering allrelevant factors (including attitudes to risk) and stating all assumptions made 9

(h) Choose, for a given scenario, a strategy or combination of strategies which will achieve thebusinesss objectives and takes account of known constraints, including stakeholder riskpreferences and ethical stance 11

(i) Identify the implications for stakeholders, including shareholder value, of choice betweenstrategies 2,11

(j) Assess a businesss current position from a financial perspective. 11

3 Implementation of strategy

Candidates will be able to develop a business plan to achieve an businesss strategicobjectives, recommend an appropriate organisational structure and explain theprocess of effective change management.


INTRODUCTION

The Institute of Chartered Accountants in England and Wales, March 2009 xvii

(a) Describe, in a given scenario, the relationship between a businesss overall strategy and itsfunctional strategies 12

(b) Draft a simple business plan, or extracts therefrom, which will achieve given or impliedobjectives 12

(c) Critically assess an entitys business plan 12

(d) Describe, in a given scenario, the advantages and disadvantages of alternative businessstructures 8

(e) Evaluate the different types of organisational structure and recommend an appropriatestructure for a given strategy 8

(f) Identify methods of further developing a specific business which take account of positionalanalysis and risk and would be most likely to achieve the businesss strategic objectives, andjustify the methods selected 10

(g) Explain and demonstrate how a business collects and distributes information in order tomanage its strategy 3,13

(h) Explain the levels of change in a business and the approaches used at each level, usingappropriate examples 14

(i) Explain and demonstrate how an information system can be used to create competitiveadvantage 13

(j) Identify key changes needed in an information system in order to meet changes in the needsand resources of a business 13

(k) Describe the key stages in a change management project 14

(l) Identify in a given situation the key issues which should be addressed by the management ofa business during the planning and implementation of a change project, including projectmanagement. 14

7 Skills assessment guide

7.1 IntroductionAs a Chartered Accountant in the business world, you will require the knowledge and skills to interpretfinancial and other numerical and business data, and communicate the underlying issues to your clients. In asimilar way to the required knowledge, the CA syllabus has been designed to develop your professionalskills in a progressive manner. These skills are broadly categorised as:

Assimilating and using information

Structuring problems and solutions

Applying judgement

Drawing conclusions and making recommendations

7.2 Assessing your professional skillsSet out below is a pictorial representation of the different mix of knowledge and skills that will be assessedin the examinations that comprise the CA qualification.

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xviii The Institute of Chartered Accountants in England and Wales, March 2009

Skills

Case Study

Initial ProfessionalDevelopment

F&CR

AA&A

ETHICSBA

TAX

ITA

FA CL&P A&A

FM

BSPS - K

In the six Knowledge Modules of the Professional Stage, you will have experienced a limited amount of skillsassessment, generally Assimilating and using information. Most of the questions were set in a context thatrequired you to identify the piece of knowledge that was being assessed. In the Application Modules of theProfessional Stage, the context of the examination will be business situations, from which you will berequired to determine the relevant information to answer the questions.

To be successful in the Business Strategy examination, you will need to be confident in identifying andextracting data in a variety of scenarios, applying the appropriate analytical tools and using the output tosupport your conclusions and recommendations. You will be expected to apply your judgement todetermine the relevance and importance of the different information provided and to provide appropriateadvice.

7.3 Assessment gridsThe following pages set out the learning outcomes for Business Strategy that are addressed under each ofthe four skills areas. In addition, for each skills area, there is a description of:

The specific skills that are assessed

How these skills are assessed

Using these grids will enable you to determine how the examination paper will be structured and toconsider whether your knowledge of Business Strategy is sufficiently strong to enable you to apply it in therequired manner.

Tech

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INTRODUCTION

The Institute of Chartered Accountants in England and Wales, March 2009 xix

Learning outcomes Assessed skills How skills are assessed

Assimilating and using information

2d Explain how products andservices must evolve

2f Explain how to positionproducts and services tomaximise competitiveadvantage

3a Describe the relationshipbetween overall strategyand functional strategies

3d Describe advantages anddisadvantages of alternativebusiness structures

3h Explain the levels of changein a business

3k Describe the key stages ina change managementproject

Reading and understandingsubject matter

Accessing, evaluating andmanaging information provided ina few defined sources

Operating to a brief in structuredsituations

Explaining the nature of ethicsand its significance in the businessenvironment

Understanding the public interestand social responsibility

Understanding of the pressureson professional ethical behaviour,including the interaction betweenprofessional ethics and the lawand other value systems

The majority of written testquestions will requirecandidates to absorb andunderstand both structuredand unstructured material.

Candidates will be required to:

Understand key informationfrom the scenario provided.

Understand the context ofthe scenario in terms oftype of business, industryand wider context.

Understand the ethicalenvironment in which anorganisation operates.

Select appropriate tools foranalysis.

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Structuring problems and solutions

1b Analyse the externalfactors which may impacton performance andidentify significant issues

1c Analyse a businessscurrent markets andcompetitive strategy

1d Identify the effect ofinternal factors affecting abusinesss ability to achievea chosen strategy

1e Analyse and identify theavailability of resourcesrequired

1f Analyse and identifyweaknesses in governanceand managementstructures

1g Identify how to meetappropriate regulations etcin respect of governance

1h Identify the risk attached toa businesss presentposition

2b Identify and describealternative strategies

2c Show how a businesschooses from competingstrategies

2e Analyse financial data toprovide information forpricing decisions

2g Identify the risk attached toproposed courses of action

2i Identify the implications ofchoice between strategies

3g Explain and demonstratehow a business collects anddistributes information tomanage its strategy

3i Explain and demonstratehow an information systemcan be used to createcompetitive advantage

3j Identify key changesneeded in an informationsystem to meet changes

Understanding data andinformation given: identifying andunderstanding issues arising instraight-forward scenarios

Using the data and informationgiven: understanding requirements,analysing data and information tosupport requirement

Drawing upon technical andprofessional knowledge learnt toanalyse issues

Understanding the workings of,and controls within, anorganisational framework

Applying knowledge from differenttechnical areas

Using new concepts

Appreciating the ethicaldimensions of situations, problemsand proposals

Identifying and selectingappropriate courses of actionusing an ethical framework

Financial data analysis: performingthe required calculations;explaining or stating the issues

Questions will be scenario-based (on occasions based onactual situations in the realworld). These will requirecandidates to apply technicalknowledge to practicalsituations and analyseinformation (includingquantitative analysis) tosupport sound decisionmaking.

Candidates will be requiredto:

Identify and useinformation to define keybusiness issues.

Demonstrateunderstanding of thebusiness, its strategy,industry and widercontext.

Demonstrate the impactof ethics on the objectivesand methods of anorganisation.

Identify the ethicalimplications of strategicproposals.

Demonstrate relevanttechnical knowledge.

Perform appropriateanalysis of numerical dataand demonstrate anunderstanding of what isrelevant.

Use data analysis todevelop and illustrate ananswer.

INTRODUCTION

The Institute of Chartered Accountants in England and Wales, March 2009 xxi


Applying judgement

1a Evaluate a businessspurpose

2j Assess a businesss currentposition from a financialperspective

3c Assess a business plan

3l Identify the key issues to beaddressed by managementduring the planning andimplementation of a changeproject

Applying discrimination:identifying therelevant/reasonable in data andevidence; recognising varyingquality in data or evidence

Relating parts and wholes:discerning particular issues aspart of wholes

Sensitivity analysis: demonstratingan understanding of sensitivitiesto change: calculating a range ofoutputs for given inputs

Demonstrating an understandingof different perspectives (e.g.social, political, economic):analysing and interpretingproblems and situations from agiven stance

Change management(appreciating the impacts/effectsof change): considering andevaluating the effects of a givenfuture scenario

Applying a sceptical and criticalapproach in a given straight-forward situation

Exercising ethical judgement

Developing arguments, havingfirst appreciated the perspectiveof all other parties

Conducting critiques: criticallyreviewing a statement, argumentor position

Questions will requirecandidates to use theirunderstanding andinterpretation of theinformation, together with theresults of any analysis, toprovide a reasoned argumentand as a means of developingconclusions andrecommendations.


Evaluate the impact of abusiness proposal on anentity.

Assess the reliability,accuracy and limitations ofany analysis performed.

Be able to producearguments integratingnumerical and linguisticarguments.

Prioritise the issues facingan entity.

Identify links andrelationships betweendifferent issues affecting anentity and use these toestablish priorities.

Evaluate options for anorganisation, taking intoaccount its stakeholders,objectives, priorities,available resources andethical obligations.

Provide reasons for therejection of alternatives.

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xxii The Institute of Chartered Accountants in England and Wales, March 2009


Drawing conclusions and making recommendations

2a Advise on strategy formulation

2h Choose a strategy to achieveobjectives

3b Draft a plan to achieveobjectives

3e Evaluate different types oforganisational structure andrecommend an appropriatestructure

3f Identify and justify methods ofdeveloping a specific business

Using technical knowledge tosupport reasoning andconclusions

Decision making: usingrelevant quantitativeapproaches in decisionanalysis

Identifying the bestexplanation, solution orsteps against defined criteriain a given straight-forwardsituation

Formulating opinions,reservations, advice,recommendations, plans,solutions, options and risksincluding businessimplications in a givenstraight-forward situation

Preparing, describing,outlining the advice, report,notes required in a givenstraight-forward situation

Presenting a basic or routinememorandum or briefingnote in writing in a clear andconcise style

Combining cognitive andbehavioural skills tocommunicate to specialistsand non-specialists

The provision of advice tomanagers and others will becentral to most questions.


Draw realistic conclusionsfrom data and theinformation provided.

Prepare a report ormemorandum structuredaccording to therequirements of thescenario, with appropriatecontext.

Provide reasoned advicebased on an understandingof the business and therelevant scenario, includingan assessment of possiblealternatives.

Recommend suitable coursesof action in a given situation.

Identify risks and outlinereservations about theadvice.

Cc

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Ahapter 1 The Institute of Chartered Accountants in England and Wales, March 2009 1

ontents

trategy and business

ntroduction

xamination context

opic List1 Approaches to strategy

2 Strategic planning versus strategic management

3 The role of the leader in strategic management

4 Doing without overarching visions:incrementalism

5 Deliberate and emergent strategies

6 Positioning versus resource-based views ofstrategic advantage

7 Planning horizon

8 Strategy and ethics

ummary and Self-test

nswers to Self-test

nswers to Interactive questions

AdministratorText BoxCA in Bangladeshwww.facebook.com/CAinBD

Business strategy

2 The Institute of Chartered Accountants in England and Wales, March 2009

Introduction

Learning objectives Tick off

Explain strategic management systems

Evaluate omission, inconsistencies and weaknesses in strategic management systems

Evaluate potential ethical stances of an organisation

Specific syllabus references for this chapter are: 1a, 2a.

Practical significanceStrategies are the courses of action a firm follows through time. A business that survives is one that hasfollowed a successful strategy. One that fails or that loses-out in a takeover did not have a successfulstrategy. Strategies affect earnings, jobs, ability to pay suppliers and whether and what terms customers getproducts and services. Only in retrospect can we say with any certainty whether it has worked or not.

Management needs a way to ensure its strategies are good ones from the start. This chapter contrastsstrategies that are planned in advance with strategies made up 'on the run'.

Strategy pervades most areas of management. It influences how the business is viewed by investors andsignificant business partners such as a supplier or the customer who has a major contract to award.

But strategy theory is also subject to fashions and fads. In your career you will learn to speak the jargon ofstrategy and of the latest fad being pushed by consultants, academics and journalists. This chapter will showyou that strategy matters. It will also show you that it is an art and not a science and that, even as art,management needs to be aware of just what it is buying into.

Stop and thinkWhat businesses can you think of that have done well? Do you think it was plain luck or was it goodmanagement?

How about the firm that employs you? Does it have a clear idea of what it will be doing in five or ten yearstime that is more than just 'we'll still be here doing the same old thing'?

Working contextTrainee accountants are not routinely invited to advise major corporations on business strategyformulation. However you may still see the impact of strategy formulation in a number of ways.

Is your client getting involved in new lines of business and markets and have they considered thebenefits and risks. This could affect your assessment of their risk and ability to stay as a going concern.

Are adequate financial controls in place or are things getting out of control. A good strategic plan willensure controls and risks are dealt with, whereas more ad hoc strategies often lead to overtrading andpoor financial control. You may be required to give an initial assessment of this in an audit.

You may advise a client on raising money. A small sum for a small client's business idea or asset. Alarge sum for a large client to buy a rival. Both are risky. Have they thought through their plan? Whereis the evidence to justify this investment?

Investment advice is about picking winning companies. The winners are the ones who have successfulstrategies. How can you tell in advance if it is a good strategy?

STRATEGY AND BUSINESS

The Institute of Chartered Accountants in England and Wales, March 2009 3

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Syllabus linksIn the Business and Finance paper you will have covered the basic objectives and processes of strategicmanagement. You will also have covered the polices that can be used to help ensure a business actsethically.

This chapter revises these topics and provides a range of alternative perspectives on the role ofmanagement in the strategic process. The following topics, revised and expanded here, were introduced inyour Business and Finance paper:

General objectives of strategic management, the strategic management processes

Nature and purpose of strategic plans, business plans and operational plans

The policies and procedures a business should implement to promote an ethical culture

In addition the section on professional ethics draws upon material from section 4 of the Assurancepaper syllabus

The framework of the rational planning model will be employed in subsequent chapters.

Business strategy


Examination context

Exam requirementsThis chapter deals with a number of different views and models of strategic management. Whilst anappreciation of the underlying models is important, in the exam this topic will be tested in the context of ascenario and the knowledge from this chapter will need to be applied. The interactive questions are usefulin demonstrating how this may form the subject of one part of the requirement of a question.

This chapter also provides an overview of the nature, purposes and limitations of strategy which will assistin understanding all the subsequent chapters, even where some of these concepts may not be directlyexamined in detail.



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1 Approaches to strategy

Section overview Strategies are about the long term development and survival of the business.

Strategy takes place at several levels ranging from the corporate centre down to strategies forfunctions such as marketing, human resources and finance.

Therefore strategy can mean different things to different people. Mintzberg calls these Plans, PatternsPerspective, Ploys and Positions.

1.1 What is 'strategy'?There are probably as many different definitions of 'strategy' (or 'corporate strategy') as there aretextbooks on the subject.

Definitions'Strategy is the direction and scope of an organisation over the long term, which achieves advantage forthe organisation through its configuration of resources within a changing environment, to meet the needs ofmarkets and to fulfil stakeholder expectations.' (Johnson, Scholes and Whittington).

'Corporate strategy is concerned with an organisation's basic direction for the future, its purpose, itsambitions, its resources and how it interacts with the world in which it operates' (Lynch).

From these we can say that strategy is therefore concerned with:

The long-term direction (objectives) of the organisation The environment in which it operates The resources at its disposal The return it makes to stakeholders.

About your studies

This chapter reviews some of the leading theories of strategy formulation and provides the names of manyauthorities on strategy. The remaining chapters of this text also provide coverage of names and theories.

The focus of your examination is a practical one. You will be required to interpret business scenarios andto provide professional advice to clients and management on what to do. You will not be required to writeout pages of names and theories for the sake of it.

The models and theories you will cover are to be used in three ways in the examination:

1 To analyse and interpret: Applying the appropriate models and perspectives to the situation andissues in the scenario will help you see underlying causes better.

2 To generate solutions: Many of the theories include recommendations or approaches to resolvingproblems. You may wish to pass this advice on to management.

3 To substantiate your comments: The theorists and models are recognised by management whomay have studied them too. You would be expected to refer to them in a real business report. Youwill get some marks for doing the same in your Business Strategy exam.

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Theories of strategy and of strategic management must be used with caution. They don't apply in allsituations and the evidence for them is not always clear cut. Therefore this text draws attention to thelimitations of some to help you decide how far you can apply them in the exam.

This chapter reviews two broad approaches to strategy: the strategic planning approach and thestrategic management approach.

Types

Competitivestrategy

Financialstrategy

Investment andresource strategyA

PPROACHES

Corporatestrategy

LEVELS

Corporate

Business

Functional

Traditional

Emergent

1.2 Levels of strategyStrategy can exist at several levels in an organisation as shown in the diagram below:

Corporate

Business

Functional

1.2.1 Corporate strategy

Corporate strategy is generally determined at head office/main board level. The types of matters dealt withinclude:

Determining the overall corporate mission and objectives

Overall product/market decisions, e.g. expand, close down, enter new market, develop new productetc via methods such as organic growth, merger and acquisition, joint venture etc

Other major investment decisions besides those for products/markets, e.g. information systems, ITdevelopment

Overall financing decisions - obtaining sufficient funds at lowest cost to meet the needs of the business

Relations with external stakeholders, e.g. shareholders, bondholders, government, etc.



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1.2.2 Business strategy

This normally takes place in strategic business units (SBUs).

An SBU is 'a section, within a larger organisation, which is responsible for planning, developing, producingand marketing its own products or services'.

Competitive strategy is normally determined at this level covering such matters as:

How advantage over competitors can be achieved

Marketing issues, such as the 4Ps (product, price, promotion, place).

1.2.3 Functional (operational) strategies

This refers to the main functions within each SBU, such as production, purchasing, finance, human resourcesand marketing, and how they deliver effectively the strategies determined at the corporate and businesslevels.

1.3 Mintzberg's 5PsMintzberg (The Strategy Process) looked at how the word 'strategy' has been used by people who havewritten about the subject.

Plan

Ploy

Pattern

Position

Perspective

Strategy asplan

A strategic plan is a document, produced at the end of a planning process. It isexplicit, written down and contains targets and instructions for people to follow.

Strategy asploy

A ploy is a manoeuvre in a competitive game with the intention of winning a victoryover, or disadvantaging somehow, a competitor.

Strategy aspattern

Strategy may become apparent by a stream of actions or as a pattern ofbehaviour or a consistency in what the organisation does. This arises from theculture of the management team.

Strategy asposition

Strategy as 'position' involves how the firm fits with its environment. It includes:

'Matching' the internal resources and competences (strengths and weaknesses)of the organisation with environmental conditions (opportunities and threats).

A market position in relation to other firms: e.g. offering a product/service to aparticular segment or satisfying customer needs in a particular way (e.g. highprice and high quality vs low price and lower quality).

Strategy asperspective

Strategy as a unique way of looking at the world and interpreting it such as AppleInc. which believes ICT is a lifestyle accessory whereas Dell seems to see it as amore functional business tool.

Business strategy


2 Strategic planning versus strategic management

Section overview There is a contrast between strategic planning and strategic management as approaches to strategy

formulation.

The rational planning model, originated by Ansoff starts from fixed objectives as a 'top down cascade'of defined steps.

This yields benefits for the business such as integration of business units and increased strategicthinking.

Mintzberg criticises it as a failure in practical and of dubious validity as an explanation of what doesand should happen.

2.1 Contrast between planning and management approach

Strategic planning also called

Top down approach

Rational approach

Formal approach

Traditional approach

Strategy involves setting goals first and thendesigning strategies to reach them

Some prediction of the future is possible

Outcomes of strategic choices can bepredicted and controlled

Possible to separate the planning and selectionof strategies from the implementation ofstrategies

Strategic management also called

Emergent approach

Bottom up approach

Builds management team with right strategicskills

Managers of divisions granted significantautonomy

Empowerment of mangers to develop andadapt strategies as circumstance change andopportunities and threats arise



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2.2 A rational (prescriptive) approach to strategy formulation

EXTERNALANALYSIS

INTERNALANALYSIS

CORPORATEAPPRAISAL

MISSION ANDOBJECTIVES

GAP

STRATEGICCHOICE

STRATEGYIMPLEMENTATION

REVIEW ANDCONTROL

STRATEGICANALYSIS

STRATEGICCHOICE


The main stages in the rational approach are:

1. Conduct a corporate appraisal: This involves assessing the present business environment andassessing how it may develop over the timescale of the plan horizon (typically five + years). It will alsoconsider the internal position of the business, including such things as its present staffing, quality ofproducts and financial condition.

2. Set mission and objectives: Management will assess whether the long-term interests of thebusiness are best met in its present industry and competing in its present way or whether the businessneeds to strike out in a new direction. This is called its mission. Objectives will be set for the comingyears. The job of strategy is to attain them.

3. Gap analysis: Involves forecasting performance forward and comparing it with the strategicobjectives set by management. If forecast performance is below the objectives set then this exposes agap which must be filled by new and better strategy.

4. Strategic choice: Management must generate new business options for the firm such as newproducts or markets, and evaluate these to arrive at a set of potentially successful and affordablestrategies to help the firm reach the objectives set.

5. Strategy implementation: Management carries out the strategy at corporate, business andfunctional levels by the development of organisational structures, policies and programmes to carry itout.

Business strategy


2.3 Benefits claimed for strategic planningStrategic planning can achieve several purposes:

Creates a management process to detect and respond to changes in market and environmental forcesand so improve performance

Provides a framework for all SBUs of the organisation to produce plans with clear, long term goalsthus avoiding short-termism

Enables derivation of milestones for achievement of goals and monitoring progress by stages

Mechanism to ensure harmony of objectives, both between different SBUs and over time (oftenreferred to as 'goal congruence')

Improves stakeholder perceptions of the business, for example a clear strategy may improve the shareprice

Investment in planning process develops future management potential and can aid continuity whensenior management retire or move on.

2.4 Mintzberg's criticisms of strategic planningStrategic planning has fallen from popularity and has been criticised. Mintzberg's critique below is amongstthe most insightful.

Mintzberg argues that planning doesn't work out in practice.

Problem Comments

Practical failure Empirical studies have not proved that formal planning processes contribute tosuccess.

Routine andregular

Strategic planning often occurs as an annual cycle, but a firm cannot allow itselfto wait every year for the month of February to address its problems.

Reducesinitiative

Formal planning discourages strategic thinking. Once a plan is locked in place,people are unwilling to question it. Obsession with particular performanceindicators means that managers focus on fulfilling the plan rather thanconcentrating on developments in the environment.

Internal politics The assumption of 'objectivity' in evaluation ignores political battles betweendifferent managers and departments. The model doesn't describe reality therefore.

Exaggeratespower

Managers face limits to the extent to which they can control the behaviour of theorganisation. The plans may be ignored by subordinates.

Impractical The hierarchy of objectives, budgets, strategies and programmes does not reflectthe reality of most organisations who prefer simple, more easy to applyprogrammes such as capital budgeting.



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Secondly Mintzberg claims the concept is flawed in principle.

Criticism Comment

Formalisation We have no evidence that any of the strategic planning systems no matter howelaborate succeeded in capturing (let alone improving on) the messy informalprocesses by which strategies really do get developed.

Detachment:divorcingplanning fromoperations

This implies that the managers not involved in planning do not really need day-to-day knowledge of the product or market to do their jobs. But strategic thinking isnecessary to detect the strategic messages within the nitty-gritty of operations.

Formulationprecedesimplementation

A strategy is planned then it is implemented. But defining strengths andweaknesses is actually very difficult in advance of testing them. Discoveringstrengths and weaknesses is a learning process. Implementing a strategy isnecessary for learning to see if it works.

Predetermination Planning assumes that the environment can be forecast, and that its futurebehaviours can be controlled, by a strategy planned in advanced and delivered onschedule. In conditions of stability, forecasting and extrapolation make sense.However, forecasting cannot cope with high uncertainty and discontinuities (e.g.,publishers and other media owners find it hard at present because they cannotpredict the form and platforms we will be using to access media in five years'time. Permanent on line through wi-fi enabled readers? Hand-held page screens?Modified spectacles? In ear via text-to-voice converters?

3 The role of the leader in strategic management

Section overview The rational planning approach sought to identify a process by which successful strategy can be

formulated.

Many businesses succeed through the actions of its CEO or entrepreneurial individuals within it.

To some writers like Ohmae strategy comes from managers with a strategic mode of thinking.

This brings us to a discussion of whether strategy may be more to do with the leadership of peoplethan the management of processes a view advanced by Barlett and Ghoshal.

3.1 The entrepreneur in strategyMany businesses have been successful through the actions of their founders or chief executives rather thanthrough formal strategic planning.

Interactive question 1: Famous business leaders [Difficulty level: Easy]Name some corporations which have been made successful by the business leadership given by a famousindividual.

See Answer at the end of this chapter.

Business strategy


Entrepreneurs are individuals who build new businesses. An entrepreneur is not just the owner/manager ofa small business but is best regarded as a manager who pursues opportunity and drives change tocreate value.

Entrepreneurship is a style of management, with a particular mix of innovation and risk.

3.2 Ohmae's strategic thinking as an intuitive processOhmae (The Mind of the Strategist 1982) blames formal strategic planning processes for having witheredstrategic thinking.

Ohmae says strategy is essentially a creative process in which the strategist must pay attention to astrategic triangle of 3 Cs.

1. Corporate-based strategies build competitive strength by focusing on the superior competenceswhich the corporations has in comparison to rivals. He cites Sony's skills in miniaturisation ofelectronic circuitry and Coca Cola's control over distribution channels as examples of this.

2. Customer-based strategies gain superior market position by segmenting markets closely andensuring products and service are closely tailored to requirements of each segment. The ability ofMercedes-Benz or BMW to cornering a particularly valuable segment of the car industry might be anexample of this.

3. Competitor-based strategies. Close identification of the methods of rivals and exploitation of anyweaknesses in them, such as absolute cost differences or flexibility of supply. Ohmae cites the exampleof Toyota utilising its superior R&D and quality assurance systems to launch Lexus to exploit theexecutive limousine market at prices unattainable to Jaguar and Mercedes-Benz who relied on moretraditionally engineered cars and car plants.

The development of such strategies requires management to engage in strategic thinking.

Observe the problems: The manager must be actively engaged in the business and see the issuesfirst-hand (e.g. quality issues, bad customer experiences, loss of sales contracts etc.)

Ask the right question: Focus on finding a solution to a problem rather than just a remedy to asymptom. E.g. a software developer faced with late-running and excessively complex and resource-hungry final products could decide to put in extra resources to solve the symptom. In fact the problemmay be that the R&D function is divorced from the Sales function and so not concerned with time tomarket or ultimate value-in-use of its developments.

Customers

Corporation Competitors



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Group problems together: Use processes of abstraction (e.g. brainstorming sessions) to see whatproblems have in common (the key factors) and hence to deal with these. For example, an officeequipment supplier grouped the problems of excessive costs of development, limited productknowledge amongst service staff, poor sales performance and burgeoning inventories of parts andaccessories. The underlying key factor was the width of the product range. Reducing the number ofmodels available solved all the problems at one stroke.

Interactive question 2: Impact of strategic style on financial management[Difficulty level: Intermediate]

Assuming the existence of financial controls is at the heart of many accountants' jobs, what should be theimplications of a firm moving from strategic planning to strategic management for:

(a) Budgetary control and performance management

(b) Control over capital expenditure?


4 Doing without overarching visions: incrementalism

Section overview Strategic plans cannot be expected to work out as intended because management does not know

what will happen in the future: bounded rationality.

Therefore to some extent management must always be in a position to 'make it up as it goes along'.

Incrementalism describes how strategies emerge from the adjustments and bargaining of themanagement process.

Logical incrementalism suggests it is a learning process by management which discards bad ideas andadopts good ones.

4.1 Bounded rationalityStrategies are made in conditions of partial ignorance. In practice, managers are limited by time, by theinformation they have and by their own skills, habits and reflexes.

It can be argued that managers do not optimise (i.e. get the best possible solution). Instead the managersatisfices. In other words, the manager carries on searching until he or she finds an option which appearstolerably satisfactory, and adopts it, even though it may be less than perfect. This approach is known asbounded rationality.

4.2 IncrementalismIncrementalism refers to 'strategy in small steps' rather than radical shifts following the prolonged andcomprehensive search suggested by the rational planning approach.

The main reasons cited (by Lindblom) for organisations (particularly those in public administration)exhibiting this approach are:

The need to gain wide consent for changes means more radical options are rejected, or simply notsuggested

The personal career security of managers is not served by suggesting or being associated withunpopular or unsuccessful radical departures from tradition

Business strategy


A lack of external motivation for changes e.g.. lack of competition or external scrutiny

The inability to afford the costs associated with radical changes of direction (e.g. redundancy, training,capital expenditure)

The necessity to seek accommodation or compromise with interest groups makes policy-making aprocess of political bargaining.

4.3 Logical incrementalismIdentified by Quinn, logical incrementalism is a half-way house between the planning approach and theincrementalist approach.

It describes both the analytical and behavioural aspects.

Strategy is described as a learning process, by which managers have to deal with major internal orexternal events. For this reason managers deliberately keep their decisions small scale, so that thesedecisions can be tested.

Managers have a 'vague notion' as to where the organisation should be.

Strategies will be tested in small steps, simply because there is too much uncertainty about actualoutcomes.

Because precise objectives discourage experimentation by business units, these objectives arereformulated.

Managers as individuals avoid 'going out on a limb' with radical ideas in case their careers fail becausetheir ideas failed. They seek to get a consensus of support for ideas first.

5 Deliberate and emergent strategies (Mintzberg)

Section overview Mintzberg provides a framework that describes how strategic plans and incrementalism combine in

practice to form strategies.

The key point is to allow managers to 'craft' strategies from events as time progresses.

The conclusion is that a mixture of a strategic plan and management initiative will provide control butalso organisational learning.

5.1 Deliberate and emergent strategies

DefinitionsIntended strategies (which, if implemented, are referred to as deliberate strategies) are consciousplans imposed by management.

Emergent strategies are behaviours which are adopted and which have a strategic impact.



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EXTERNALANALYSIS

INTERNALANALYSIS

CORPORATEAPPRAISAL

MISSION ANDOBJECTIVES

GAP

STRATEGICCHOICE


REVIEW ANDCONTROL

STRATEGICANALYSIS

STRATEGICCHOICE

ANDSTRATEGY

IMPLEMENTATION

The diagram above shows that under an emergent approach to strategy the processes of choice andimplementation take place together. This is for two reasons:

1. Identity of decision and action. The managers thinking up and choosing the strategies are alsoresponsible for carrying them out.

2. Learning process. The choice of strategies interacts with implementation. Rather than having agrand scheme for the next five years management tries something out this year, learns lessons fromwhere it succeeds and fails, and develops new initiatives for next year.

5.2 Five types of strategiesMintzberg (The Strategy Process) identified the following.

Intended: The result of a deliberate planning process.

Deliberate: Where the intended plans have been put into action.

Unrealised: Not all planned strategies are implemented.

Emergent: Sometimes strategies are created by force of circumstances.

Realised: It can be seen that the final realised strategy results from a balance of forces of the othertypes of strategies.

These strategies are illustrated in the following diagram.

Business strategy


Strategies must still have purpose and this will be set by senior management. No actual strategy will bewholly deliberate or wholly emergent.

The task of strategic management is to control and shape these emergent strategies as theydevelop.

5.3 Crafting strategiesMintzberg uses the metaphor of crafting strategy to help understand his approach to strategicmanagement.

He uses the analogy of a potter's wheel. The clay is thrown, and through shaping the clay on the wheel, thepotter gives shape to they clay lump through a gradual process.

His thinking can be illustrated by contrasting the situation of a potter with that of a sales representativeoperating in a more commercial environment



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AU

Interactive question 3: Six Continents hotels [Difficulty level: Intermediate]To what extent does the example of Six Continents and the global hotel industry (below) illustrate themodels of strategy-making described in this chapter?


Global hotel chains

The hotel industry is embracing globalisation. International chains are encircling the world, swallowing localoperations on an almost daily basis.

Tom Oliver, chief executive of the UK group, Six Continents Ltd (formerly Bass Hotels and Resorts), says:'Brands are everything as travel becomes increasingly trans-border, hotels which aren't carryinginternational brands simply don't deliver the same rate of revenue per room'. The company was unwittinglypushed into the hotel trade by [the then] UK Trade Secretary Margaret Beckett, who thwarted the group'sambitions to become a global brewer by blocking the purchase of Carlsberg-Tetley.

The market is changing. In the US, 75% of hotels have a well-known brand, compared with just 35% inEurope. Lesley Ashplant, a hotels expert at PricewaterhouseCoopers, says: 'Europe is the single largesttourist destination in the world. It has 6m hotel rooms under fragmented ownership. There are clearopportunities in scale, in taking advantage of branding and advanced technology.'

Scale

Size is becoming important as expectations rise international business travellers want internetconnections, widescreen televisions, faxes delivered and push-button blinds in every room. All of thisrequired investment. Servicing the demands of business customers requires employing more staff than mostindependent operators can afford.

Technology

Hi-tech reservation systems are also emerging as a crucial factor. In an industry where 75% of costs are staffwages, any savings elsewhere are precious. Between a third and half of hotels' revenue comes from foodand drink, but these only contribute 20% to 30% of profit. Attempts to make hotel restaurants moreattractive have generally failed.

Yes

Business strategy


Much more profitable are the rooms themselves. The main thrust, therefore, for most operators, is onimproving occupancy. Loyalty card schemes are becoming increasingly elaborate.

Branding

There will be limits to the creeping internationalisation of European hotels. One CEO says: 'The US is awide-open country if you want a hotel, you can just build it. In Europe, there's much less opportunity fornew-builds so you get a lot of conversions, They're harder to fit into the specific model of the US chain'.

It is difficult to turn a 17th century Provenal chteau into a Holiday Inn, so some independent operators stillprosper. This is bad news for the ideal guest of a multinational chain, who likes to wake up anywhere in theworld in the knowledge that the bathroom is on the left, the blinds are blue and the phone is on the wall,six and a half inches above the bedside table.

Interactive question 4: Superware products [Difficulty level: Exam standard]Superware Products Ltd (hereafter Superware) was formed in 20X9 by three colleagues who had left amajor software house to work on the development of accounting software for small businesses. Superwarecurrently (20Y4) employs 18 staff at the company's head office in Chittagong, and a further eight regionally-based salespeople in various parts of Bangladesh.

Company structure

The three directors of Superware are Paul Smith (Managing), Karl Lagerfeld (Sales) and Christian Dior(Development). They each have a small team reporting directly to them and they meet on a daily basis ifthey are in the office, to discuss the business and to brainstorm a little over coffee. All three directors comefrom a background of software sales to small and medium-sized organisations. Chris is responsible for sixproduct development staff and two administrators. His staff work full time on developing and upgrading theSuperware product, and meet regularly with the sales staff to get feedback from customers and users. Inaddition to the eight salespeople, Karl has two sales administrators and a secretary working for him. Thesales staff meet at head office on a weekly basis and the administrators work closely with the financialaccountant. Paul takes responsibility for the remaining staff who perform general administration, receptionand clerical tasks. His only specialist staff member is Zandra who, with her assistant, maintains a high level ofcontrol over the company's financial reporting and accounts.

Planning and control

Once a year the directors, under the guidance of Paul and with assistance from Zandra, agree a full budgetfor the next twelve months. The budget is always based on the previous year's performance, withadjustments for known changes such as inflation, costs and forecasts of demand from sales staff feedback.During the discussion of the budget Zandra calculates various ratios to illustrate trends in the company'sprofitability and liquidity, and the budget is normally adjusted to ensure that trends are as desired. Whenthe budget is agreed, a copy is sent to the bank for its records. 18

Each month throughout the year Zandra produces a management report which shows performance againstbudget for every cost and revenue heading. This report, together with a commentary written by Paul, issent to each director and they pass copies to their key staff after removing any sensitive information. Fourtimes each year the remaining periods are reforecast and the adjusted end-of-year position (or out-turn) isalso compared with the budgeted position. Paul writes an additional commentary in these months whichidentifies key actions to bring performance back to budget.

The current position

The directors are presently involved in finalising the budget for 20Y4 and are concerned that the process ofbudgeting is becoming increasingly meaningless. The results for 20Y3 show a significant shortfall in bothturnover and profitability against both the budget and third quarter out-turn for the year, yet Paul is stillinsisting that the 20Y4 budget should be the 20Y3 budget uplifted for inflation and known changes. Duringthe 20Y4 audit Zandra mentioned the directors' concerns to the audit manager who suggested that you, asa recently qualified member of the audit team with an interest in strategic planning, might be able to advisethe company on how to proceed. The directors have agreed that this would be useful, and have arranged ameeting at which you can meet them and discuss the role of planning within Superware.



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Requirement

Prepare briefing notes to present at a meeting with the directors of Superware at which you will beexpected to discuss the following.

(i) The current planning process.

(ii) Weaknesses of the current planning process.

(iii) Recommendations for improvement of the planning process. Recommendations should be clearlyjustified.


6 Positioning versus resource-based views of strategicadvantage

Section overview Early prescriptions for strategy emphasised that success lay in 'fitting' the organisation to its

environment better (e.g. satisfying shareholders and customers and staying on the right side of theauthorities).

Modern resource-based views emphasise that long-term success lies in organisations, 'playing to theirstrengths' or 'competences'.

For competences to be capable of leading to superior competitive performance they must fit thepresent environment, stretch the firm to innovate and able to admit leverage to gain extra value innew lines of business.

6.1 Positioning view of strategic advantageA firm or industry faced with the imminent obsolescence of one of its core products, must decide whetherto orientate strategy around external customer needs or rather orientate strategy around its internalresources and competences. Choosing the first is an example of a positioning approach. Choosing thesecond applies the resource-based approach.

Characteristics of the positioning approach are:

A focus on customer needs and adapting products, and the process of making them, to any changesin these needs

The gaining of a superior position against rivals through analysis of the industry and marking andadopting strategies to gain relative market share or reduce relative costs

The assessment of relations with stakeholders such as government, shareholders, suppliers anddistributors to use better relationships as a source of advantage

Seeking to gain preferential access to resources such as materials, low cost labour and scarceskills.

The significant feature is the belief that successful strategy involves the business adapting to its environment.

The positioning view will be seen in this text in the work of Michael Porter (notably his five forces model ofindustries and his three generic competitive strategies) and in the sections dealing with marketing.

No writer will seriously question the need for successful products and good relations in assisting in makinga firm successful from one year to the next. However, the positioning approach has been criticised asinadequate as an approach to sustainable success over decades with particular regard to the following.

Business strategy


Product life-cycle means particular products will become obsolete so today's successful marketposition will become a liability in the future. For example, Levi Strauss jeans and apparel have declinedin popularity since they were immensely successful in the 1960's and 1970's.

Stakeholder groups, such as political parties, will decline in influence so relations with them will notsustain the firm.

Long-term technological changes will eliminate cost advantages or technical superiority of a givenproduct.

Perpetual change of the organisation's skills base and products will be disruptive and eventually leads thefirm into fields in which it has little expertise.

Worked example: Typewriters and PCsConsider the following two examples relating to former typewriter manufacturers whose products weremade obsolete by the PC. Olivetti tried, and failed, to build up a position in PCs. Remington, on the otherhand, moved into products using similar technical and manufacturing skills as were used in manufacturingtypewriters.

Although PCs and typewriters (even electronic typewriters) are used for similar word processing tasks, andboth have a similarly configured keyboard, the underlying technology producing them is fundamentallydifferent. (A PC is also more versatile than a typewriter.)

The point to grasp is that the market need the ability to type letters and reports was the same but thecompanies lacked the competences to manufacture and market PCs successfully. Olivetti tried and failed toaddress the same market need. Remington looked for different markets with which to use its competences.

You might want to consider a further development. Will the PC be used to watch television? Will televisionbecome the Internet's way into most homes? The mergers between content owners and communicationsproviders may be intended to build crucial resource competences (for example, AOL TIME Warnercombines an Internet service provider with an owner of magazines and a film company other examplesinclude Virgin/NTL and the various elements of News Corporation).

6.2 Resource-based view of strategyTechnological changes can destroy industries:

Downloads may damage the businesses engaged in the manufacture, distribution and retailing of CDsand DVDs

Mobile phones threaten the fixed telephone line industry

Genetic modification of organisms can compromise the pesticide and pharmaceutical industries.

The resource-based view is an inside-out view of strategy. Firms do not look for strategies external tothem. They develop or acquire resources and competences, create new markets, not just reacting to thosealready there, and exploit them.

Johnson, Scholes and Whittington say successful strategies require strategic capability.

Resources and competences are needed for the successful execution of defined strategies.

Fit Resources must be available to fit with the current product-market demands andcurrent needs.

Stretch This means being at the leading/shaping edge of new strategic developments in theindustry. This suggests that the organisation's ambitions cannot be met with currentresources and competences. Ambition should outpace resources.

Leverage Existing resources are used in many different ways, so that extra value is extractedfrom them.



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Creation of new markets

A fundamental point made by Prahalad and Hamel (Competing for the Future) is that markets are not 'given'. Theycan be created by corporate action. Companies do not merely 'satisfy' customer needs: they 'create' them.

For example, mobile phone ringtones drew on the mobile phone as fashion accessory, not just acommunication device. Prior to the launch of ringtones there was no ringtone market in existence.

Interactive question 5: Sony and the chicken and egg question[Difficulty level: Easy]

Sony Corporation is often cited as an example of a firm that creates industries through leverage of corecompetences in miniaturisation of electronic circuitry. This has created markets such as:

Personal audio: Initially through the transistor radio but later the famous Walkman cassette player

Home gaming: Via the PlayStation which revolutionised the graphic and interactive quality of gamesthough use of PC technology

Compact home Sony were joint copyright holder of CD technology and have produced the mainaudio/video: contender for high density DVD technology to support HD and other applications

Was it these technologies that built a whole new industry or was the industry already there?


According to the resource-based view of strategy the role of resources is more than simply toexecute strategies determined by desired positions in product markets. Rather, the focus of the strategistshould be on resources and competences. These are assets for the long term. Such a combination ofresources and competences takes years to develop and can be hard to copy.

Some of the implications are explained in the table below.

Factor Environment/ industry-based view Resource-based view

Profitability Industry profitability determined by thefive competitive forces. Position of acompany in the industry determines itsprofitability.

Corporate profitability based onsustainable competitive advantageachieved from the exploitation of uniqueresources.

Approach Outside-in, i.e. consider outsideenvironment and markets then thecompany's ability to trade in theseconditions.

Inside-out: consider key resources first,then how to exploit competitiveadvantage in available markets.

Diversity Maintain diversified portfolio of products(see BCG matrix) to spread risk andgenerate cash in changing marketconditions.

Focus only on products where companyhas a sustainable competitive advantage.'Stick to the knitting'.

Key focus Industry orientation and positioning in themarket.

Focus on core competences whichcompetitors do not possess and will finddifficult to copy.

Business strategy


7 Planning horizon

Section overview Strategic management and strategic planning are often distinguished from operational issues by the

length of time concerned: the horizon.

Most managers have the need to deliver short-term results which can take priority over longer termstrategic development of the business.

The pressure for shorter term results and shorter planning horizons can come from the ownership ofthe organisation, its capital structure, the industry it is in, its environment and the nature of itsmanagement.

7.1 Short, medium and long term planningThere terms are often used but remain ill-defined. A rule of thumb is:

Short term: Horizon of 1 3 years

Medium term: Horizon of 3 10 years

Long term: 10 + years

7.2 Short run/long run trade offManagers and businesses are frequently evaluated on short term successes such as profits. Strategic thinkingrequires that managers consider the long term growth and survival of the business.

Therefore management is required to balance short and long term considerations.

7.3 Influences on planning horizons Nature of ownership

Firms with shareholders are obliged to ensure some financial return each year to their shareholders.Making sufficient profits each year will normally be needed in order to promote shareholder value.State-owned organisations do not have this obligation (but they will have different ownership issues tocontend with, e.g. the changing nature of political agendas, different governments' attitudes to funding,state control etc).

Capital structure

Some investors, such as banks or private equity investors (sometimes called venture capitalists) do notrequire short term profits. Banks will continue to lend providing assets cover the loans and interest ispaid. Private equity investors require profits and share values to grow over a 5 10 year period togive them a substantial capital gain when they sell their holding.

Nature of industry

Industries such as aircraft development, satellite communications and oil pipelines require large capitalinvestments that take a long time to build and to pay back. Long-term plans are essential to justifythese.

Nature of business environment

In rapidly changing environments it is likely that long-term planning may be futile. For example,industries such as bio-technology, home entertainment and mobile communications where effects oftechnology and legislation are hard to predict, will tend to avoid plans and instead adopt a strategicmanagement approach within a series of short-term plans.



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Nature of management

Long-term planning is a skill and it is time consuming. Some entrepreneurial managers will avoid it , forexample because they lack the time or skill, or because they are unwilling to become 'tied down byred tape'. Others, for example the management of family firms, are reluctant to consider changing the'way it has always been done'.

Interactive question 6: McDonnell Douglas [Difficulty level: Intermediate]Consider the following:

With $14bn in sales, McDonnell Douglas was one of the US's largest defence companies. It had done a goodjob of turning around the C-17 transport plane program, which a few years earlier was nearly cancelled bythe Air Force over technical flaws and delays. However, its commercial aircraft arm, Douglas Aircraft, was adisaster, caught in the tailwinds of Boeing and Airbus. In 1994, McDonnell Douglas's board shockedinvestors by bringing in an outsider a brash, controversial former GE executive, Harry Stonecipher asCEO.

At first Stonecipher insisted that the firm was committed to building passenger airplanes. At one point hesaid the business was so good that if Douglas wasn't already in it, 'we would be looking for a way to get in'.Unfortunately, years of under-investment had resulted in planes with little imagination, and Douglas wouldneed to spend billions to catch up. Ultimately Stonecipher wasn't willing to make that investment, preferringto focus on short-term stock performance. This involved the reduction of discretionary spending on thingssuch as research and development, training and better production equipment. There was also a closercontrol of costs.

During his tenure as CEO, McDonnell Douglas's stock quadrupled (Stonecipher carries a laminated copy ofthe stock chart in his briefcase), but critics say the failure to invest in R&D would have been disastrouseventually. 'This is a company that would have gone out of business in five years', says Richard Aboulafia, ananalyst at Teal Group, an aviation research firm. 'It was headed to oblivion.'

Eventually, McDonnell Douglas merged with Boeing.

What planning horizon would you expect a firm in this industry to follow?

What factors in the competitive environment, pressure from investors or his personal incentivepackage could explain the incoming CEO's short-term approach to strategy?


8 Strategy and ethics

Section overview Morals and ethics involve doing the 'right' thing. This may not always be the same as 'best for the

individual manager or for the organisation as a whole'.

Some ethical imperatives may be enshrined in laws but ethics and law are not the same thing.

Ethical issues exist at the level of the individual, the business or, at its widest, corporate socialresponsibilities.

The desire by management to act ethically affects the scope of strategies adopted but als

psa - business strategy

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