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]
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]
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 2
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 3
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 4
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.
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 5
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)
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 6
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 7
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)
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 8
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 9
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 10
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%
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 11
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®
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 12
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 13
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."
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 14
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 15
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 16
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 17
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)
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 18
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?
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 19
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 20
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 21
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 22
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.
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 23
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 24
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 25
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 26
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 27
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
CIMA E3 – Enterprise Strategy These notes are not intended to cover the whole of the E3 syllabus © Darren Sparkes, 2010 28
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