P6

Chapter 1 – Strategic Ideas

Strategic planning

Strategic decisions relate to the scope of a firm’s activities, the long-term direction of the organisation and allocation of resources.

Planning is the establishment of objectives and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve them. Planning comprises long-term/strategic planning and short-term/operational planning.

A strategy is a course of action, including the specification of resources required, to achieve a specific objective.

A strategic plan is a statement of long-term goals along with a definition of the strategies and policies which will ensure achievement of these goals.

A strategic thinker should have a vision of: What the business is now What it could be in an ideal world What the ideal world would be like

Strategic Planning: the rational model

The rational model is a comprehensive approach to strategy. It suggests a logical sequence which involves analysing the current situation, generating choices (relating to competitors, products and markets) strategies and implementing the chosen strategies.

The real test of a good strategy is whether it enables the business to use its capabilities successfully in circumstances it cannot confidently predict.

Strategic AnalysisStep Stage Comment Tools, models, techniques

1 Mission and/or vision Mission denotes values, the business’ rationale for existing; vision refers to where the company intends to be n a few years time

Mission statement

2 Goals Interpret the mission to different stakeholders

Stakeholder analysis

3 Objectives Quantified embodiments of mission Measures such as profitability, time scale, deadlines

4 Environmental analysis Identify opportunities and threats PEST analysis Porter’s 5 force analysis;

diamond (competitive advantage of nations

Scenario building5 Position audit or

situation analysisIdentify strengths and weaknesses. Resource audit

Distinctive competence

Firm’s current resources, products, customers, systems, structure, results, efficiency, effectiveness

Value chain Product life cycle BCG matrix Marketing audit

6 Corporate appraisal Combines steps 4 and 5 SWOT analysis charts7 Gap analysis Compares outcomes of step 6 with

step 3 Gap analysis

Strategic choice

Stage Comment Key tools, models and techniquesStrategic options generation Come up with new ideas:

How to compete Where to compete Method of growth

Value chain analysis Scenario building Porter’s generic strategic

choices Ansoff’s growth vector

matrix Acquisition vs organic

growthStrategic options evaluation Normally, each strategy has to be

evaluated on the basis of: Acceptability Suitability Feasability

Stakeholder analysis Risk analysis Decision-making tools such

as decision trees, matrices, ranking and scoring methods

Financial measures (eg ROCE, DCF)

Corporate strategy is the most general level of strategy in an organisation, identifying the strategy for the business as a whole.

Business strategy relates to how an organisation approaches a particular market, or the activity of a particular business unit.

Operational and functional strategies involve decisions which are made at operation level. These decisions include product pricing, investment in plant, personnel policy and so forth. The contributions of these different functions determine the success of the strategy.

Less formal strategic planning

Advantages of formal planning: Identifies risks Forces managers to think Forces decision-making Better control Enforces consistency at all levels Public knowledge Time horizon Co-ordinates Clarifies objectives

Allocates responsibility

Disadvantages of formal planning (Mintzberg): Practical failure Routine and regular Reduces initiative Internal politics Exaggerates power

An opportunistic strategy can seize fleeting opportunities, but may also fail to identify them.

Advantages of an opportunistic strategy: Good opportunities are not lost A freewheeling opportunistic approach would adapt to change more quickly It might encourage a more flexible, creative attitude

Disadvantages of an opportunistic strategy: No co-ordinating framework for the organisation, so that some opportunities get

missed anyway It emphasises the profit motive to the exclusion of all other considerations The firm ends up reacting rather than acting purposively

Simon suggested that managers are limited by time, by the information they have and by their own skills, habits and reflexes so small scale extensions to past policy – incrementalism – rather than radical shifts.

Incrementalism is an approach to strategy and decision making highlighting small and slow changes rather than one-off changes in direction. The danger is that such small scale adjustments may not be enough to move with customers and their needs.

Henry Mintzberg suggests a credible alternative to their rather clumsy rational model in the form of emergent strategy.

An emergent strategy is one developed out of a pattern of behaviour not consciously imposed by senior management.

These activities are involved: Manage stability Detect discontinuity Know the business Manage patterns Reconcile change and continuity

While the rational approach may mean that there is no room for learning in the strategy formulation process, the emergent approach could mean that there is no overall control over the strategy.

Stacey argues that organisations that are capable of learning and adapting do so because they are operating in the chaotic region between stability and instability known as bounded instability.

The resource-based approach to strategy starts from a consideration of strengths and weaknesses and, in particular, of distinctive competences.

Johnson, Scholes and Whittington’s terminology:Strategic capability is the adequacy and suitability of the resources and competences of an organisation for it to survive and prosper.

Tangible resources are the physical assets of an organisation, such as plant, labour and finance.

Intangible resources are non-physical assets such as information, reputation and knowledge.

Competences are the activities and processes through which an organisation deploys its resources effectively.

Threshold capabilities are essential for the organisation to be able to compete in a given market.

Threshold resources and threshold competences are needed to meet customers’ minimum requirements and therefore for the organisation to continue to exist.

Unique resources and core competences underpin competitive advantage and are difficult for competitors to imitate or obtain.

Whittington’s analysis of approaches to strategy making: The Classical school – lays down rules on the basis that both environment

and firm are rational structures that can be analysed and a route to profit maximisation established

The Evolutionary school – proposes a more organic approach based on survival because neither organisation nor environment can be completely analysed, nor can their behaviour be completely predicted

The Processual school – emphasises internal processes of bargaining and learning and the gradual emergence of objectives

The Systematic school – emphasises the need for awareness of the cultural and social environment

Flexibility in strategic planning

Planning must have the following characteristics: It must be flexible It must establish controls for measuring performance

Management accounting and business strategy

Management accounting is the application of the principles of accounting and financial management to create, protect, preserve and increase value for the stakeholders of for profit and not-for-profit enterprises in the public and private sectors.

Management account is an integral part of the management. It requires the identification, generation, presentation, interpretation and use of information relevant to:

Inform strategic decisions and formulate business strategy Plan long, medium and short run operations Determine capital structure and fund that structure Design reward strategies for executives and shareholders Inform operational decisions Control operations and ensure the efficient use of resources Measure and report financial and non-financial performances to management and

other stakeholders Safeguard tangible and intangible assets Implement corporate governance procedures, risk management and internal

controls

What is strategy?

A strategy is a course of action, including the specification of resources required, to achieve a specific objective.

Johnson, Scholes and Whittington state “strategy is the direction and scope of an organisation over the long term which achieves advantage in a changing environment, through its configuration of resources and competences with the aims of fulfilling stakeholder expectations.

Strategic management accounting is a form of management accounting in which emphasis is place on information which relates to factors external to the entity, as well as non-financial information and internally generated information.

Relevant costs and revenues are costs and revenues appropriate to a specific management decision. These are represented by future cash flows whose magnitude will vary depending upon the outcome of the management decision made.

Goal congruence in a control system, the state which leads individuals or groups to take actions which are in their self-interest and also in the best interest of the entity. Goal

incongruence exists when the interests of individuals or of groups associated with an entity are not in harmony.

Information that a management accountant could provide includes: Competitors’ costs Financial effect of competitor response Product profitability Customer profitability Pricing decisions The value of market share Capacity expansion Brand valuation Shareholder wealth Cash-flow Effect of acquisitions and mergers Decisions to enter or leave a business area Introduction of new technology

Some cost classifications are particularly relevant: Differential/incremental cost - this is the difference in total cost between

alternatives. For strategic decision making this can be considered as the extra cost that would be incurred by a decision.

Avoidable cost – this is the specific cost of an activity or sector of a business which would be avoided if the activity or sector did not exist

Committed cost – a cost arising from prior decisions, which cannot, in the short run, be changed

Controllable cost – a cost that can be controlled, typically by a cost, profit or investment centre manager

Opportunity cost – is the value of the benefit sacrificed when one course of action is chosen in preference to an alternative

The success factors of a strategic management accounting system (Ward) should: Aid strategic decisions Close the communication gap between accountants and managers Identify the type of decision Offer appropriate financial performance indicators Distinguish between economic and managerial performance Provide relevant information Separate committed from discretionary costs Distinguish discretionary from engineered costs Use standard costs strategically Allow for changes over time

Management accounting information can be use to support strategic decision making

Strategic plan is a statement of long-term goals along with a definition of the strategies and policies which will ensure achievement of these goals.

Management control. All of the processes used by managers to ensure that organisational goals are achieved and procedures adhered to, and that the organisation responds appropriately to changes in its environment.

Closed loop system – control system that includes provision for corrective action, taken on either a feedforward or a feedback basis.

Feedback control – measurement of differences between planned outputs and actual outputs achieved, and the modification of subsequent action and/or plans to achieve future required results.

Feedforward control – forecasting of differences between actual and planned outcomes, and the implementation of action, before the event, to avoid such differences.

Open loop system – control system that includes no provision for corrective action to be applied to the sequence of activities.

Chapter 2 – Information Strategy

Data is the raw material for data processing. Data consists of numbers, letters and symbols and relates to facts, events and transactions.

Information is data that has been processed in such a way as to be meaningful to the person who receives it.

Strategic information is used to plan the objectives of the organisation, and to assess whether the objectives are being met in practice.

An Executive Information System (EIS) pools data from internal and external sources and makes information available to senior managers in an easy-to-use form. EIS help senior managers make strategic, unstructured decisions. It will have:

Flexibility Quick response time Sophisticated data analysis and modelling tools

Management Information Systems (MIS) convert data from mainly internal sources into information (eg summary reports, exception reports). This information enables managers to make timely and effective decisions for planning, directing and controlling the activities for which they are responsible. It will:

Support structured decisions at operational and management control levels Designed to report on existing operations Have little analytical capability Relatively inflexible Have an internal focus

Decision Support Systems (DSS) combine data and analytical models or data analysis tools to support semi-structured and unstructured decision making.

Be aware of extranets, also known as Value Added Networks, an example is Galileo flight booking system.

Information Strategy

Earl’s IT strategy levels:The Information systems strategy is the long-term plan for systems to exploit information in order to support business strategies or create new strategic options.

The Information technology strategy is concerned with selecting, operating and managing the technological element of the IS strategy.

The Information management strategy deals with the roles of the people involved in the use of IT assets, the relationships between them and design of the management processes needed to exploit IT.

Strategic Information Systems are systems at any level of an organisation that change goals, processes, products, services or environmental relationships with the aim of gaining competitive advantage.

A strategic approach is necessary because: IS/IT is a high cost activity IS/IT is critical to the success of many organisations It can provide information and competitive advantage IT can impact significantly on the business context IT affects all levels of management

Porter and Millar say that IT changes corporate strategy since products and business activities have both physical and informational aspects. The rapid rate of change in IT is having drastic effects on the informational aspects of products and activities. IT has the potential to transform competition in three ways, it effects the 5 competitive forces, it has potential for implementing the generic strategies and its makes a contribution to the emergence of completely new businesses.

They redrew the value chain and highlighted the computer systems used in each one eg planning models, automated personnel scheduling, computer aided design, online procurement etc.

IT changes the structure of industry through its effect on the five forces eg supermarket loyalty cards, CAD, better service through better IT. IT can reduce costs and make it easier to differentiate products.

Porter and Millar suggested a 5 step process to take advantage of new IT based opportunities:

Assess information intensity Determine the role of IT in industry structure Identify and rank the ways in which IT might create competitive advantage Investigate how IT might spawn new businesses Develop a plan to exploit IT

Earl suggests that IT strategy could be top down/business objective led, bottom up/business system led or inside out/innovative/exploitative. Other approaches include enterprise analysis and the use of critical success factors.

Earl’s three leg analysis:

Leg or approach Commenttop down/business objective led

The overall objectives of an organisation are identified and then IS systems are implemented to enable these objectives to be met. This approach relies on the ability to break down the organisation and its objectives to a series of business objectives and processes and to be able to identify the information needs of these. This is an analytical approach and the people usually involved are senior management and specialist teams.

Bottom up/ business system led

Computer based transaction systems are critical to business operations. The organisation focuses on systems that facilitate transactions and other basic operations. This is an evaluative approach. The people usually involved are system users and specialists.

inside out/ innovative/ exploitative

The organisation encourages idea that will exploit existing IT and IS resources. Innovations may come from entrepreneurial managers or individuals outside the formal planning process. This is an innovative/creative approach. The people involved are entrepreneurs and/or visionaries.

Enterprise analysis involves examining the entire organisation in terms of structure, processes, functions and data elements to identify the key elements and attributes of organisational data and information.

It involves the following steps:1) ask a large sample of managers how they use information, where they get it from, what their objectives are, what data they want, how they make decisions and the influence of their environment.

2) Aggregate the findings from step 1 into subunits, functions, processes and data matrices. Make a matrix which shows what data classes are required to support particular organisational processes and which process are the creators and users of the data.

3) use the matrix to identify areas that information systems should focus on

Critical success factors are the small number of key operational goals that are vital to the success of the organisation. Rockart says there are four general sources:

The industry the business is in The company itself and its situation within the industry The environment, eg consumer trends, the economy Temporal organisational factors, which are areas of corporate activity which are

currency unacceptable eg high stock levels

CSF approach strengths: Takes into account environmental changes Focuses on information Facilitates top management participation in system development

CSF approach weaknesses:

Aggregation of individual CSFs to a coherent plan is hard Bias towards top management CSFs change too often

An information audit aims to establish the needs of users and how these needs could be met:

Identify information needs Identify information provided by current systems Analyse the gap

Earl devised a grid to identify suitability of systems in terms of business value and technical quality.

Technical Quality

Business Value

Low HighLow DIVEST

This is a costly and unused system

REASSESSWhy do users not value the system

High RENEWThis will enhance its technical quality

MAINTAIN AND ENHANCEUpgrade system to maintain position

McFarlan and McKenney’s strategic grid shows levels of dependence on IT:

Strategic importance of current info systems

Strategic importance of planned info systems

Low HighLow Support FactoryHigh Turnaround Strategic

Organisations in: The strategic quadrant depend on IS for competitive advantage and expect to

continue to do so The turnaround quadrant to not currently view it has having strategic importance

but expect it to be in the future The support quadrant see no strategic value in IT The factory quadrant see IT as strategically important but predict this will not be

the case in the future

Peppard developed McFarlan and McKenney’s strategic grid into the applications portfolio:

Strategic importance of individual applications in the current competitive environment

Strategic importance of individual applications in the predicted future competitive environment

Low HighLow Support Key operationalHigh High potential Strategic

Support applications eg accounting or payroll software. Key to business efficiency

Key operational applications eg inventory control, support established core business processes

Strategic applications will be industry unique, seek to gain competitive advantage through innovation through support of business strategies

High potential applications eg supermarket online ordering, could make or break the future but white elephants are costly

Information sources and management

An information system should be designed to obtain information from all relevant sources – both internal and external. Data will be collected formally and informally.

The phrase environmental scanning is often used to describe the process of gathering external information, which is available from a wide range of sources.

Information for planning and control

Strategic planning is the process of deciding on objectives of the organisation, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources.

Operational control is the process of assuring that specific tasks are carried out effectively and efficiently.

The decision making process:1. problem recognition2. problem definition and structuring3. identifying alternative courses of action4. making and communicating the decision5. implementation of the decision6. monitoring the effects of the decision

Risk is a condition in which there exists a quantifiable dispersion in the possible outcomes from any activity.

Uncertainty means that you do not know the possible outcomes and/or the chances of each outcome occurring.

Perfect information is information that predicts the future with perfect accuracy.

Imperfect information is information which cannot be guaranteed to be completely accurate. Almost all information is therefore imperfect – but may still be very useful.

Knowledge management

Knowledge management is the systematic process of finding, selecting, organising, distilling and presenting information so as to improve comprehension of a specific area of interest. Specific activities help focus the organisation on acquiring, storing and utilising knowledge for such things as problem solving, dynamic learning, strategic planning and decision making.

Organisational knowledge is the collective and shared experience accumulated through systems, routines and activities of sharing across the organisation as defined by Johnson, Scholes and Whittington

Nonaka and Takeuchi, four ways in which knowledge moves within and between the tacit and explicit categories:

1. Socialisation – is the informal process by which individuals share and transmit their tacit knowledge

2. Externalisation – converts tacit knowledge into explicit knowledge; this is a very difficult process to organise and control

3. Internalisation – is the learning process by which individuals acquire explicit knowledge and turn it into their own tacit knowledge

4. Combination – brings together separate elements of explicit knowledge into larger, more coherent systems; this is the arena for meetings, reports and computerised knowledge management systems

A learning organisation is capable of continual regeneration from the variety of knowledge, experience and skills of individuals within a culture that encourages mutual questioning and challenge around a shared purpose or vision. Johnson, Scholes and Whittington

Databases and Models

A database is a collection of data organised to service many applications. The database provides convenient access to data for a wide variety of users and user needs. Advantages of a database system include the avoidance of data duplication, management is encouraged to manage data as a valuable resource, data consistency across the organisation and the flexibility for answering ad-hoc queries. Disadvantages of a database system include initial development costs and the potential problems of data security.

A data warehouse consists of a database containing data from various operational systems and reporting and query tools.

Datamining software looks for hidden patterns and relationships in large pools of data.

Chapter 3 – Strategic Objectives

Mission, Goals and Strategy

Mission guides strategic decisions and provides values and a sense of direction.

The Ashridge College model of mission links business strategy to culture and ethics by including four separate elements in an expanded definition of mission:

1. Purpose – why does the company exist, who does it exist four2. Values are the beliefs and moral principles that underlie the organisation’s culture3. Strategy provides the commercial logic for the company – what is out business,

what should it be4. Policies and standards of behaviour provide guidance on how the organisation’s

business should be conducted.

A mission statement is a published statement, apparently of the entity’s fundamental objective(s). This may or may not summarise the true mission of the entity.

The mission statement can play an important role in the strategic planning process: By inspiring and informing planning By screening – providing a yardstick by which plans are judged By establishing an ethics framework of how things should be implemented

A goal is often a longer term overall aspiration: Mintzberg defines goals as “the intentions behind decisions or actions, the states of mind that drive individuals or collectives of individuals called organisations to do what they do.”

Objectives are often quite specific and well-defined, though they can embody comprehensive purposes.

Targets are generally expressed in concrete numerical terms and are therefore easily used to measure progress and performance.

Peter Drucker, Management by Objectives:SmartMeasurableAchievableRealisticTime-related

Functions of objectives: Planning Responsibility Integration Motivation Evaluation

Solutions to conflicts between goals: Rational evaluation according to financial criteria Bargaining managers with different goals will compete and form alliances to

achieve their individual goals Satisficing balancing goals so one is not achieved at the expense of another Sequential attention – goals are dealt with one by one in sequence Priority setting – certain goals get priority over others Exercise of power

Critical Success Factors are those product features that are particularly valued by a group of customers and, therefore, where the organisation must excel to outperform competitors. Johnson, Scholes and Whittington

Stakeholder goals and objectives

Stakeholders are those persons and organisation that have an interest in the strategy of an organisation. Stakeholders normally include shareholders, customers, staff and the local community.

Mendelow suggested mapping stakeholders on a matrix of Power and Level of Interest so that the organisation prioritises satisfying the right ones.

The short term and the long term

Short-termism is bias towards paying particular attention to short-term performance with a corresponding relative disregard to the long run. There may need to be a trade off between short term and long term objectives.

Corporate social responsibility and sustainability

Social costs are tangible and intangible costs and losses sustained by third parties or the general public as a result of economic activity, for example pollution by industrial effluent.

Social responsibility accounting is identification, measurement and reporting of the social costs and benefits resulting from economic activities.

Social responsibility and ethical behaviour are not the same thing although they are related. Business ethics is concerned with the standards of behaviour in the conduct of business. Corporate social responsibility is an organisation’s obligation to maximise positive stakeholder benefits while minimising the negative effects of its actions.

Milton Friedman argued against CSR saying people, not businesses, have responsibilities. Manager’s should not spend the owners money for purposes other than those that have been authorised. There is also the argument that the maximisation of wealth is the business way that society can benefit from a business’ activities.

A business may carry out a social audit.

Strategies for social responsibility:

Proactive strategy A strategy which a business follows where it is prepared to take full responsibility for its actions. A company which discovers a fault in a product and recalls the product without being forced to, before any injury or damage is caused, acts in a proactive way.

Reactive strategy This involves allowing a situation to continue unresolved until the public, government or consumer groups find our about it.

Defence strategy This involves minimising or attempting to avoid additional obligations arising from a particular problem

Accommodation strategy

This approach involves taking responsibility for actions, probably when on of the following happens:

Encouragement from special interest groups Perception that a failure to act will result in government intervention

Sustainability involves developing strategies so that the company only uses resources at a rate that allows them to be replenished. At the same time, emissions of waste are confined to levels that do not exceed the capacity of the environment to absorb them.

Elkington argues that business must help to deliver: Economic prosperity Environmental quality Social equity

The three main forms of capital that they need to value therefore are: Economic capital (physical, financial and human skills and knowledge) Natural capital (replaceable and irreplaceable) Social capital (the ability of people to work together

Not for Profit Organisations

Not for Profit Organisations have their own objectives, generally concerned with efficient use of resources in the light of specified targets.

Bois proposes that a not-for-profit organisation be defined as “an organisation whose attainment of its prime goal is not assessed by economic measures. However, in pursuit of that goal it may undertake profit making activities. This may involve a number of different kinds of organisation with, for example, differing legal status – charities, statutory bodies offering public transport or the provision of services such as leisure, health or public utilities such as water or road maintenance.

The Public Sector

In the public sector, resources (not sales) are the limiting factor. The rationing of health care typifies the problems safe.

Chapter 4 – The Changing Environment

Relating the organisation to its enviroment

The general environment covers all the political/legal, economic, social/cultural and technological (PEST) influences in the countries an organisation operates in.

The task environment relates to factors of particular relevance to a firm, such as its competitors, customers and suppliers of resources.

Framework for assessing environmental influences:DemographicEnvironmentEconomicsPoliticsLawInformationSocietyTechnology

Johnson and Scholes contrast the concepts of environmental complexity (how many influences and the inter-relationships between them) and environmental dynamism (the rate of change). Together complexity and dynamism create uncertainty.

Environmental issues can be of: Long-term impact, which can be dealt with in advance Short-term impact, which require crisis management

The political and legal environment

The political environment affects the firm in a number of ways: A basic legal framework generally exists The government can take a particular stance on an issue of direct relevance to an

business or industry The government’s overall conduct of its economic policy is relevant to business

All companies are impacted by tax law and health and safety legislation but some also have to deal with extra regulations eg utility companies, train companies.

Porter notes several ways the government can directly affect the economic structure of an industry:

Capacity expansion Government policy can encourage firms to increase or cut their capacity: The UK tax system offers capital allowances to encourage investment

in equipment A variety of incentives, funded by the EU and national governments,

exist for locating capacity in a particular area Incentives are used to encourage investment by overseas firms.

Different countries in the EU have competed for investment from Japan, for example

Demand The government is a major customer Government can also influence demand by legislation, tax reliefs or

subsidiesDivestment and rationalisation

In some European counties, the state takes many decisions regarding the selling off or closure of businesses, especially in sensitive areas such as defence

Emerging industries Can be promoted by the government or damaged by itEntry barriers Government policy can discourage firms from entering an industry, by

restricting investment or competition or by making it harder, by use of quotas and tariffs, for overseas firms to compete in the domestic market

Competition The government’s purchasing decisions will have a strong influence on the strength of one firm relative to another in the market eg armaments

Regulations and controls in an industry will affect the growth and profits of the industry – eg minimum product quality standards

As a supplier of infrastructure eg roads, the government is also in a position to influence competition in an industry

Governments and supra-national institutions such as the EU might impose policies which keep an industry fragmented, and prevent the concentration of too much market share in the hands of one or two producers

The economic environment

Economic factors include the overall level of growth, the business cycle, official monetary and fiscal policy, exchange rates and inflation.

Services are value creating activities which in themselves do not involve the supply of physical product. Service provision may be subdivided into:

Pure services, where there is no physical product, such as consultancy Service with a product attached, such as the design and installation of a computer

network Products with services attached, such as the purchase of a computer with a

maintenance contract

The social and cultural environment

Demography is the study of populations and communities. It provides analysis of statistics on birth and death rates, age structures of populations, ethnic groups within communities and so on. It is important because:

Labour is a factor of production

People create demand for goods, services and resources It has a long-term impact on government policies There is a relationship between population growth and living standards

Culture is used by sociologists and anthropologists to encompass the sum total of the beliefs, knowledge, attitudes of mind and customs to which people are exposed in their social conditioning. It has the following characteristics:

Beliefs and values Customs Artefacts – physical tools. Art Rituals

It is particularly important for marketing and human resource managers.

Society can be divided into subcultures: Class Ethnic background Religion Geography or region Age Sex Work

The technological environment

Technological factors have implications for economic growth overall, and offer opportunities and threats to many businesses. Meta-technologies are technologies that are applicable to many applications eg lasers.

Futurology is the science and study of sociological and technological developments, values and trends with a view to planning for the future.

The Delphi model involves a panel of experts providing view on various events to be forecast such as inventions and breakthroughs, or even regulations or changes over a time period in to the future.

Interest and pressure groups

The members of pressure groups come together to promote an issue or cause. They come together either because political representatives fail to air important concerns or different groups in society have different interests. They may pressure government or lobby a company or industry.

Aside from public pressure groups there are also employers’ organisations, professional associations, trade unions and consumer’s associations.

Companies can deal with pressure groups by assessing which might target them and providing information to correct misapprehensions and using public relations in crisis management.

Environmental information and Analysis

A company’s response to the environment is influenced by its complexity and its dynamism. The value of forecasts varies according to these factors.

Johnson and Scholes suggest that a firm should conduct an audit of environmental influences although a firm can never be sure because of the complexity and dynamism of the environment.

The impact of uncertainty is: The planning horizon may be shortened Strategies may be more conservative Emergent strategies may be encouraged Increased information requirements Firms may follow multiple strategies

A forecast is a prediction of future events and their quantification for planning purposes.

In simple/static conditions the past is a relatively good guide to the future: Time series analysis Regression analysis Leading indicators

In dynamic/complex conditions: Scenario building The past is not a reliable guide

Strategic intelligence, according to Donald Marchand, is defined as what a company needs to know about its business environment to enable it to anticipate change and design appropriate strategies that will create business value for customers and be profitable in new markets and new industries in the future.

The process is: Sensing – identify appropriate external indicators of change Collecting – gather information in ways that ensure it is relevant and meaningful Organising – structure the information in the right format Processing – analyse information for implications Communicating – package and simplify information for users Using – apply strategic intelligence

Key dimensions of strategic intelligence:Information culture What is the role of information in the organisation? Is it only distributed on a

need to know basis or do people have to five specific reasons for secrecy?

Future orientation Is the focus on specific decisions and trade-offs or a general attitude of enquiry

The structure of information flows

Is communication vertical, up and down the hierarchy, or lateral

Processing strategic intelligence

Are professional strategists delegated to this task or is it everybody’s concern?

Scope Is strategic intelligence dealt with by senior management only, or is intelligence built throughout the organisation

Time horizon Short termist or orientated towards the long termThe role of IT Some firms are developing sophisticated knowledge management systems to

capture the data they gatherOrganisational “memory” Do managers keep in mind the lessons of past successes or failures

CACI is a company providing market analysis and other data products to clients its products include:

Paycheck – income data for 1.6 million postcodes People UK – geodemographic, life stage and lifestyle data InSite – geographic information system Acorn – A classification of residential neighbourhoods Lifestyles UK – 300 defined lifestyle segments Monica – helps people identify the age of people on its database by popularity of

their first name through time

Chapter 5 – The global competitive environment

The competitive environment – the 5 forces

A market comprises the customers or potential customers who have needs which are satisfied by a product or service.

An industry comprises those firms which use a particular competence, technology, product or service to satisfy customer needs.

Competitive forces/Five forces are the external influences upon the extent of actual and potential competition within any industry which in aggregate determine the ability of firms within that industry to earn a profit. Porter argues that a firm must adopt a strategy that combats these forces better than its rivals’ strategies if it is to enhance shareholder value.

The are factors which characterise the nature of competition in one industry to another (why selling chemicals is more profitable than selling clothes) and within a particular industry (individual company’s strategies).

There are five forces:1. The threat of new entrants to the industry2. the threat of substitute products or services3. the bargaining power of customers4. the bargaining power of suppliers5. the rivalry amongst current competitors

Barriers to entry for new entrants: Scale economies Product differentiation – brand loyalty Capital requirements Switching costs for the consumer Access to distribution channels Cost advantages of existing producers, independent of scale economies (eg

patents, experience, favoured access to raw materials)

Entry barriers might be lowered by: Changes in the environment Technological changes Novel distribution channels for products or services

The bargaining power of customers: How much the customer buys How critical the product is to the customer Switching costs Whether the products are standard items The customer’s own profitability Customer’s ability to bypass or take over the supplier The skills of the customer’s purchasing staff The importance of product quality

The bargaining power of suppliers: Is there a monopoly or oligopoly The threat of new entrants or substitute products to the supplier’s industry Whether the suppliers have other customers outside the industry The importance of the supplier’s product to the customer’s business Whether the supplier has a differentiated product which the customer needs Whether switching costs for the customer would be high

The intensity of competition within the industry would depend on: Market growth Cost structure Ease with which customers will switch, brand loyalty Capacity Uncertainty Exit barriers

Remember that products’ profitability may depend on complementary products eg a CD player is useless without CDs and vice versa.

When thinking about the competitive forces think about the impact of IT. Also government can be considered to be a “sixth force”.

Trading relationships have strategic impact and, while mutual benefit may be desirable, they must be firmly managed.

Industries may display a lifecycle, this will affect and interact with the five forces.

The impact of globalisation on competition

Globalisation of markets (Levitt, 1983), is an expression which relates first to demand: taste, preferences and price-mindedness are becoming increasingly universal. Second, it relates to the supply side: profits and services tend to become more standardised and competition within industries reaches a world-wide scale. Third, it relates to the way firms, mainly multination corporations, try to design their marketing policies and control systems appropriately so as to remain winners in the global competition of global products for global consumers.

Bear in mind that protectionist measures are not the only barriers, also: Tax regimes Wage levels Infrastructure Language and culture Skills levels Prosperity

But for some niche products the domestic market may saturate too quickly so global sales are essential for success.

The EU is the most integrated of the regional trading organisations, aspiring to a single market in goods, services and factors of production. It aims to harmonise as much as possible.

The World Trade Organisation was set up to promote free trade and resolve disputes between trading partners and reduce protectionist measures.

The competitive advantage of a nation’s industries

Four factors support competitive success in a nation’s industries: factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry.

Porter, in The Competitive Advantage of Nations, suggested that some nations’ industries succeed more than others in terms of international competition.

Porter argues that countries should focus on what they are based at in relation to other countries. Industries that require high technology and highly skilled employees are less affected than low technology industries by the relative costs of their inputs of raw materials and basic labour as determined by the national endowment of factors.

Comparative advantage is too general a concept to explain the success of individual companies and industries.

Factor conditions are a country’s endowment of inputs to production: Human resources (skills, motivation, industrial relations) Physical resources (land, minerals, climate, location to other nations) Knowledge (scientific and technical know-how, educational institutions) Capital (amounts available for investment, how it is deployed) Infrastructure (transport, communications, housing)

There are basic factors (land, unskilled labour) which are inherited, or their creation involves little investment. Advanced factors are required to create high order competitive advantage and require investment eg universities, broadband infrastructure.

An abundance of factors is not enough, it is the efficiency with which they are deployed, inappropriate economic policy can erode competitive advantage.

The home market determines how firms perceive, interpret and respond to buyer needs and puts pressure on firms to innovate and provides a launch for global ambitions.

Competitive success in one industry is linked to success in related industry, eg good local produce = good restaurants.

National culture can encourage certain tendencies eg Germany has a lot of technological manufacturing companies.

Porter says that a nation’s competitive industries are clustered. Porter believes clustering to be a key to national competitive advantage. A cluster is a linking of industries through relationships which are either vertical (buyer-supplier) or horizontal (common customers, technology, skills). An individual firm is more likely to succeed if there is a supporting cluster eg Italian suits.

Overcoming lack of advantage: Compete in the most challenging market to emulate domestic rivalry and obtain

information Spread research and development activities to countries to where there is already

a cluster Invest heavily in innovation Invest in human resources Look out for new technologies Collaborate with foreign companies Supply overseas companies Source components from overseas Exert pressure on politicians

Competitor Analysis

Competitive position is the market share, costs, prices, quality and accumulated experience of an entity or a product relative to the competition.

Kotler lists four kinds of competition:1. Brand competitors – similar firms offering similar products eg McDonalds and

Burger King2. Industry competitors – similar products but different in other ways such as range

of products or geographic locations, eg British Airways and American Airways3. Generic competitors – compete for the same disposable income with different

products eg home improvements vs foreign vacations4. Form competitors – offer products which are technically significantly different

but which satisfy the same needs, eg matches and cigarette lighters

Competitor analysis is the identification and quantification of the relative strengths and weaknesses (compared with competitors or potential competitors), which could be of significance in the development of a successful competitive strategy, eg

Competitor’s goals Competitor’s assumptions Competitor’s current and potential situation and strategy Competitor’s capabilities

Kotler’s competitor response profiles: Laid back – does not respond Tiger – responds aggressively to all opposing moves Selective – reacts to some threats in some markets but not to all Stochastic – unpredictable

Accounting for competitors

The management accountant’s techniques are useful in competitor analysis and by modelling the impact of different strategies.

Look at impact of various competitor moves. Look at debt structure of rival, what if interest rates change etc. Look at cost structures and barriers to entry.

E-Commerce and the Internet

Electronic commerce can be defined as using a computer network to speed up all stages of the business process, from design to buying, selling and delivery.

Chapter 6 – Customers and Suppliers

The supply chain

Supply chain management is about optimising the activities of companies working together to produce goods and services, to be responsive to customers demands and reliable in the delivery of them.

The aim is to co-ordinate the whole chain, form raw material suppliers to end customers. The chain should be considered as a network rather than a pipeline. A network of vendors support a network of customers, with third parties such as transport firms helping to link the companies.

A lean supply chain:Advantages Counter - arguments

Reduced cost Leanness focuses on reducing cost rather than improving quality.

Improved qualityReduced inventories There may be insufficient slack in the system to

deal with fluctuations in demandShorter lead times Preferred supplier relationships may become akin to

monopolies, which damages the consumer

Partnering across the supply chain may damage a company because: Reduces flexibility Arguments about profit sharing Relative bargaining power may make partnership unnecessary Dependence on another firm Could reduce competitiveness overall

Marketing

Marketing is the management process responsible for identifying, anticipating and satisfying customer requirements profitably.

Kotler identifies four key components in marketing:1. identifying target markets2. determining the needs and wants of those markets3. delivering a product offering which meets the needs and wants of those markets4. meeting the needs of the market profitability

Marketing activities can be grouped in to four broad roles: sales support marketing communications operational marketing strategic marketing

A marketing audit is a systematic assessment of the organisation’s marketing objectives, strategies, organisation and performance. It involves a review of an organisation’s products and markets, the marketing environment, and its marketing system and operations. The profitability of each product and each market should be assessed, and the costs of different marketing activities established.

Marketing: products, customers and segmentation

A product (goods or services) is anything that satisfies a need or want. It is not a thing with features but a package of benefits.

The decision to make a purchase can be very simple, very complex or somewhere between the two. Buyers do not always proceed rationally though the motivation of industrial buyers may be more logical than that of consumers.

Market segmentation is the subdividing of a market into distinct and increasingly homogenous subgroups of customers, where any subgroup can conceivably be selected as a target market to be met with a distinct marketing mix.

Reasons for segmenting markets: better satisfaction of customer needs growth in profits revenue growth customer retention targeted communications innovation segment share

Segments should be identified and then their attractiveness analysed as well as their ability to be practically differentiated and targeted.

Undifferentiated marketing: this policy s to produce a single product and hope to get as many customers as possible to buy it eg strawberry jam

Concentrated marketing: the company attempts to produce the ideal product for a single segment of the market eg Rolls Royce

Differentiated marketing: the company attempts to introduce several product versions, each aimed at a different market segment eg clothes soap powder/liquid/concentrate

The major disadvantage of differentiated marketing is the additional costs of marketing and production and the loss of economies of scale.

Review the customer portfolio

The customer base is an asset to be invested in, as future benefits will come from existing customers, but not all customers are as important as others. It will help you in evaluating the customers portfolio if you consider the customer base as an asset worth investing in.

Key customer analysis calls for six main areas of investigation in to customers, in order to identify which customers offer most profit.

Key customer identity – name, location, size Customer history – first purchase date, who make purchase decision, motives,

order trend, Relationship of customer to product – what do they use if for, is it essential to

them Relationship of customer to potential market – size of customer in relation to total

end market, is the customer likely to expand, diversify or integrate? Customer attitudes and behaviour – do they buy competitor products, closeness of

relationship The financial performance of the customer – are they successful, overleveraged,

credit rating

Customer profitability analysis is the analysis of the revenue streams and service costs associated with specific customers or customer groups. In practice it is very difficult to do precise calculations. It can be made easier if it was considered when the accounting system was designed.

Customer profitability is the total sales revenue generated from a customer or customer group less all the costs that are incurred in servicing that customer or customer group.

Customer revenues and costs should be looked at over more than one period, most customers have a lifecycle.

Chapter 7 – Resource Analysis

The position audit

Position audit is part of the planning process which examines the current state of the entity in respect of:

Resources of tangible and intangible assets and finance Products, brands and markets Operating systems such as production and distribution Internal organisation Current results Returns to stockholders

Resources and limiting factors

Limiting factors are normally: Machinery – age, condition, up-to-date?, value Make-up – culture and structure, patents, good will Management – size, skills, loyalty Management information – innovation, information systems Markets – products and customers Materials – source, suppliers and partnering, cost, new materials Men and women – number, skills, wage costs, efficiency Methods – capital or labour intensive, outsourcing, JIT Money – credit and turnover periods, cash surplus/deficit

A limiting factor or key factor is anything which limits the activity of an entity. An entity seeks to optimise the benefit it obtains from the limiting factor. Examples are a shortage of supply of a resource or a restriction on sales demand at a particular price.

Efficiency is how well resources have been utilised irrespective of the purpose for which they have been employed.

Effectiveness is whether the resources have been deployed in the best possible way.

Converting resources: the value chain

The value chain models all the activities of a business and the linkages between them. It shows how value is created, how costs are caused and how competitive advantage can be gained.

Activities are the means by which a firm creates value in its products.

Porter’s value chain:

The margin is the excess the customer is prepared to pay over the cost to the firm of obtaining resource inputs and providing value activities.

The value chain is the sequence of business activities by which, in the perspective of the end-user, value is added to the products or services produced by an entity.

There is a clear link between the concept of value activities that cut across departments and the principles of activity based costing. Porter stresses the importance of using IT to increase the linkages.

The value chain is not designed for service business or network organisations.

Outputs: the product portfolio

The product life cycle concept holds that products have a life cycle, and that a product demonstrates different characteristics of profit and investment at each stage of its life cycle. The life cycle concept is a model, not a prediction. It enables a firm to examine its portfolio of goods and services as a whole:

Introduction Growth Shake out (number of producers reduces as market saturates) Maturity Decline

Portfolio analysis examines the current status of the organisation’s products and their markets. Portfolio analysis is the first stage of portfolio planning, which aims to create a balance among the organisation’s market offerings in order to maximise competitive advantage. The same approach is equally applicable to products, market segments and even SBUs. The Boston matrix is one approach.

There are four major strategies:1. build2. hold3. harvest4. divest

Shell and GE developed the approach by adding an intermediate level in to each axis.

Market share is one entity’s sale of a product or service in a specified market expressed as a percentage of total sales by all entities offering that product or service.

Direct product profitability is a measure used primarily in the retail sector and involves the attribution of both the purchase price and other indirect costs (eg distribution and retailing) to each product line. Thus a new profit, as opposed to a gross profit can be identified for each product. The cost attribution process utilises a variety of measures (eg transport time) to reflect the resource consumption of individual products.

New products and innovation

Innovation can be a major source of competitive advantage but brings a burden of cost and uncertainty. To avoid waste there should be a programme of assessment for major product development. Being the second one in to a market can be more profitable because you can learn from other’s mistakes.

Managers must choose between a leader strategy or a follower strategy.

A product may be totally new, or new to a certain market or segment it may be repositioned, a replacement for a technologically inferior version, a diversified or improved product.

Pure research is original research to obtain new scientific or technical knowledge or understanding. There is no obvious commercial or practical end in view.

Applied research is also original research work but has a specific practical aim or application.

Development is the use of existing scientific and technical knowledge to produce new (or substantially improved) products or systems, prior to starting commercial production operations.

Product research is based on creating new products and developing existing ones, in other words the organisation’s “offer” to the market.

Process research is based on improving the way in which those products or services are made or delivered, or the efficiency with which they are made or delivered.

Cooper describes a product screening process called Stage-Gate:1. preliminary investigation2. business case3. physical development4. testing and validation5. full production and market launch

External to this process are idea-generation and strategy formulation.

Intrapreneurship is entrepreunership carried on within the organisation at a level below the strategic apex.

Benchmarking

Benchmarking is the establishment, through data gathering, of targets and comparators, that permit relative levels of performance and particularly areas of underperformance to be identified. Adoption of identified best practices should improve performance.

Internal benchmarking – comparing one operating unit or function with another in the same industry

Functional benchmarking – comparing internal functions with those of the best external practitioners, regardless of their industry

Competitive benchmarking – in which information is gathered about competitors through techniques such as reverse engineering

Strategic benchmarking – type of competitive benchmarking aimed at strategic action and organisational change

Benchmarking:1. obtain management support2. determine areas to benchmark and set objectives3. understand processes and identify key performance measures4. choose organisations to benchmark against5. measure performance6. compare performance and discuss results7. improvement programmes8. monitor improcements

Advantages DisadvantagesBenchmarking can assess a firm’s existing position and provide a basis for establishing standards of performance

It concentrates on doing things right rather than doing the right thing, the difference between efficiency and effectiveness

The comparisons are carried out by the managers who have to live with the changes made as a result

The benchmark may be yesterday’s solution to tomorrow’s problem

Benchmarking focuses on improvement in key areas and sets targets which are challenging but achievable

It is a catching-up exercise rather than the development of anything distinctive

The sharing of information can spur innovation It depends on accurate information about comparator companies

The result should be improved performance It is not cost-free and can divert management attentionSharing information with other companies can be a burden and a security riskIt may reduce motivation if a manager’s area is compared unfavourably with another organisation

Chapter 8 – SWOT analysis and Gap Analysis

Corporate Appraisal: SWOT analysis

Corporate appraisal is a critical assessment of the strengths, weaknesses, opportunities and threats in relation to the internal and environmental factors affecting an entity in order to establish its condition prior to the preparation of the long term plan

Strengths and weaknesses are internal matters such as product portfolio, cash and financial structure, cost structure and managerial ability.

Opportunities and threats are external and can be summarise as PEST with the addition of competitors.

SWOT analysis can be the basis for developing strategy. It is important to match strengths and opportunities and remedy weaknesses.

Gap analysis is a comparison between an entity’s ultimate objectives (often expressed a profit or ROCE) and the expected performance of projects both planned and underway. Differences are classified in a way which aids understanding of performance and which facilitates improvement.

The planning gap is not the gap between the current position of the organisation and the desired future position. Rather it is the gap between the position forecast from continuing with current activities and the desired future position.

A forecast is a prediction of future events and their quantification for planning purposes.

A projection is expected future trend pattern obtained by extrapolation. It is principally concerned with quantitative factors, whereas a forecast includes judgements.

Extrapolation is the technique of determining a projection by statistical means.

A model is anything used to represent something else. It is a simplified representation of reality, which enables complex data to be classified and analysed, they can be descriptive or predictive.

Market forecast. This is a forecast for the market as a whole. It is mainly involved in the assessment of environmental factors, outside of the organisation’s control, which will affect the demand for its products/services.

Sales potential is an estimate of the part of the market that is within possible reach of a product.

Scenario planning

A scenario is an internally consistent view of what the future might turn out to be.

Macro scenarios use macro economic or political factors to create alternative view of the future environment.

Porter believes that scenario analysis is most appropriate if restricted to an industry.

The scenarios constructed are unlikely to be wholly accurate but they force management to think about how the environment could change and how they can prepare for that.

Chapter 9 – Competition, products and markets

Strategic options and marketing issues

An organisation, having identified its strengths and weaknesses and opportunities and threats, must make choices about what strategies to pursue in order to achieve its targets and objectives.

There are three categories of strategic choice: how to compete where to compete method of growth

A firm’s horizontal boundaries define the variety of products and services that it produces, the optimum boundary for a firm depends on economies of scale.

The vertical boundaries of a firm define which activities the firm performs itself and which is purchases from third parties.

Services are any activity of benefit that one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product. There are 5 characteristics:

intangibility inseparability variability perishability lack of ownership

Strategic marketing issues include market share, which has implications for ROI. Low market share does not necessarily mean poor returns, eg watches and Patek Philippe.

Generic competitive strategy

Porter suggests that there are three generic strategies:1. cost leadership2. differentiation3. focus

Competitive strategy means taking offensive and defensive actions to create a dependable position in an industry, to cope successfully with competitive forces and thereby yield a superior return on investment for the firm. Firms have discovered many different approaches to this end, and the best strategy for a given firm is ultimately a unique construction reflecting its particular circumstances.

Cost leadership means being the lowest cost producer in the industry as a whole.

Differentiation is the exploitation of a product or service which the industry as a whole believes to be unique.

Focus (niche) involves a restriction of activities to only part of the market (a segment) through:

providing goods/services at lower cost to that segment (cost focus) providing a differentiated product or service to that segment (differentiation-

focus)

But Porter’s model depends on clear notions of what the industry and firm in questions are but these are not often easy to define.

Pricing and competition

Pricing strategy is an important component, both as part of the marketing mix and as a company’s competitive weapon.

Pricing is the determination of a selling price for the product or service produced. A number of methodologies may be used.

Competitive pricing is setting a price by reference to the prices of competitive products.

Cost plus pricing is the determination of price by adding a mark-up, which may incorporate a desired return on investment, to a measure of the cost of the product/service.

Dual pricing is a form of transfer pricing in which the two parties to a common transaction use different prices.

Historical pricing is basing current prices on prior period prices, perhaps uplifted by a factor such as inflation.

Market-based pricing is setting a price based on the value of the product in the perception of the customer; also known as perceived value pricing.

Penetration pricing is setting a low selling price in order to gain market share.

Predatory pricing is setting a low selling price in order to damage competitors. May involve dumping, ie selling a product in a foreign market below cost, or below the domestic market price (subject to, for example, adjustments for tax differences, transportation costs, specification differences).

Price skimming involves setting a high price in order to maximise short-term profitability, often on the introduction of a novel product.

Range pricing involves the pricing of individual products such that their prices fit logically within a range of connected products offered by one supplier, and differentiated by a factor such as weight of pack or number of product attributes offered.

Selective pricing involves setting different prices for the same product or service in different markets. Can be broken down as follows:

Category pricing involves cosmetically modifying the product such that the variations allow it to sell in a number of price categories, as where a range of brands are based on a common product

Customer group pricing involves modifying the price of a product or service so that different groups of consumers pay different prices

Peak pricing involves setting a prices which varies according to the level of demand

Service level pricing involves setting a price based on the particular service level chosen from a range

Time material pricing is a form of cost plus pricing in which price is determined by reference to the cost of the labour and material inputs to the product/service.

Price elasticity of demand: % change in sales demand% change in sales price

Products with >1 are elastic and <1 are inelastic.

Price sensitivity will vary amongst purchasers and will partly depend on whether the cost can be passed on. For example, a family holiday will be price sensitive but a worker buying petrol for a company van won’t be.

Product-market strategy: direction of growth

Product-market mix is a short hand term for the products/services a firm sells and the markets it sells them to.

Lynch suggested the following additions: As well as market penetration the company could withdraw, demerge or privatise To diversify it could do related diversification or unrelated diversification

(financial reasons, spread risk, other)

Related diversification is development beyond the present product market, but still within the broad confines of the industry, it therefore build on the assets or activities which the firm has developed. It takes the form of vertical and horizontal integration.

Unrelated or conglomerate diversification is development beyond the present industry into products/markets which, at face value, may bear no close relation to the present product/market.

The Strategic Role of Directors

Corporate governance is the system by which organisations are directed and controlled.

The board should be responsible for taking major policy and strategic decisions.Directors should have a mix of skills and their performance should be assessed regularly.Appointments should be conducted by formal procedures administered by a nomination committee.

Chapt. 10 – Growth and Divestment

Methods of growth

Companies can expand domestically or internationally, they can grow organically or through acquisition/merger etc.

Organic growth is the expansion of a firm’s size, profits, activities achieved without taking over other firms.

International expansion is a big undertaking and firms must know their reasons for it, and be sure that they have the resources to manage it both strategically and operationally. The decision about which overseas market to enter should be based upon assessment of market attractiveness, competitive advantage and risk.

Companies may begin by casual or accidental exporting, then actively exporting and then develop a committed international business.

A merger is the joining of two separate companies to form a single company.An acquisition is the purchase of a controlling interest in another company.

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control.

A firm may also enter a strategic alliance or franchise.

Divestment is disposal of part of its activities by an entity.

A management buy-out is the purchase of a business from its existing owners by members of the management team, generally in association with a financing institution. Where a large proportion of the new finance required to purchase the business is raised by external borrowing, the buy-out is described as leveraged.

The public and not-for-profit sectors

The public sector and not-for-profit organisations will find some commercial strategic management techniques useful, particularly in the fields of marketing and innovation.

Chapt. 11 – Strategic Decisions

Evaluating strategic choices

Strategic choices are evaluated according to their suitability to the organisation and its current situation, their feasibility in terms of usefulness or competences and their acceptability to relevant stakeholder groups.

Strategic Management Accounting

Decisions about investment can be illuminated by the use of relevant costs and discounting.

Cost of Capital is the minimum acceptable return on an investment, generally computed as a discount rate for use in investment appraisal exercises. The computation of the optimal cost of capital can be complex, and many ways of determining this opportunity cost have been suggested.

Strategic investment appraisal is the method of investment appraisal which allows the inclusion of both financial and non-financial factors. Project benefits are appraised in terms of their contribution to the strategies of the organisation either by their financial contribution, for non-financial benefits, by the use of index numbers or other means.

Strategic investment decisions must be assessed with regard to their: Immediate financial viability Effect on competitive advantage in the light of environmental uncertainties

Risk and cost behaviour

Risk is taken to mean both general unquantifiable uncertainty and volatility, often measured by standard deviation.

Cost-volume-profit analysis is the study of the effects on future profits of changes in fixed cost, variable cost, sales price and mix.

Decision techniques

Decision trees are a pictorial method of showing a sequence of interrelated decisions and their expected outcomes. Decision trees can incorporate both probabilities of, and values of, expected outcomes and are used in decision making.

Cost/benefit analysis involves a comparison between the cost of the resources used, plus any other costs imposed by an activity and the value of the financial and non-financial benefits derived.

Ranking and scoring methods are less precise than decision trees.

Scenario building is the process of identifying alternative futures.

Sensitivity analysis is a modelling and risk assessment procedure in which changes are made to significant variables in order to determine the effect of these changes on the planned outcome. Particular attention is thereafter paid to variables identified as being of special significance.

Chapt. 12 – Issues in Strategic Management

Managing projects

The hierarchy of project management extends upwards beyond the project manager. More senior managers must provide strategic control. The main instrument for such control is the project board. PRINCE2 project management proceeds on the basis that a project is driven by its business case.

Lean systems

A flexible manufacturing system is an integrated, computer controlled production system which is capable of producing any of a range of parts and of switching quicly and economically between them.

Just in Time aims for zero inventory and perfect quality and operates by demand-pull. It consists of JIT purchasing and JIT production and results in lower investment requirements, space savings, greater customer satisfaction and increased flexibility. JIT aims to remove all non-value-adding costs.

World class manufacturing aims for high quality, fast production and the flexibility to respond to customer needs.

Change Management

Change is inevitable in most organisations and must be managed. It can be incremental or transformational and management may be proactive or reactive.

Johnson and Scholes’s model of strategic change:

Man

age

men

t R

ole

Nature of ChangeIncremental Transformational

Proactive Tuning PlannedReactive Adaptation Forced

Reactions to change: Acceptance Indifference Passive resistance Active resistance

Gemini 4Rs approach: reframing, restructuring, revitalising and renewal.

John Hunt’s model: Unfreeze – change – refreeze

Systems intervention strategy has the following steps: Diagnosis Design

Implementation

There is a theory that a champion of change (a senior manager) has to win support from functional and operational managers and galvanise them in to action.

Lewin’s Force Field Analysis

When dealing with change managers must consider: Pace Manner Scope

Johnson, Scholes and Wittington’s five styles of change management:1. education and communication2. collaboration/participation3. intervention4. direction5. coercion/edict

Introducing change can often lead to a need to manage conflict effectively.

Marketing and Strategy

Marketing mix: the set of controllable variables and their levels that the firm uses to influence the target market. These are product, price, place and promotion.

A brand is a name, term, sign, symbol or design or combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors.

Customer Relationships

Retention is cheaper then getting new customers.

Relationship marketing is defined as the management of a firm’s market relationships.

Loyalty should be promoted, key customers identified and looked after, avoidance of an adversarial sales approach helps.

Re-engineering and innovation

Business automation is the use of computerised working methods to speed up the performance of existing tasks.

Business rationalisation is the streamlining of operating procedures to eliminate obvious inefficiencies. Rationalisation usually involves automation.

Business process re-engineering is the selection of areas of business activity in which repeatable and repeated sets of activities are undertaken; and the development of improved understanding of how they operate and of the scope for radical redesign with a view to creating and delivering better customer value.

Davenport and Short’s BPR approach:1. develop the business vision and process objectives2. identify the processes to be redesigned3. understand and measure the existing processes4. identify change levers5. design and build a prototype of the new process

Process innovation combines the adoption of a process view of the business with the application of innovation to key processes. What is new and distinctive about this combination is its enormous potential for helping any organisation achieve major reductions in process cost or time, or major improvements in flexibility, service levels or other business objectives.

IT is often a change trigger for PI it is usually an implementation tool for BPR.

Organisation structure

Buchanan and Huczynski suggest that there are three essential aspects that define an organisation:

Social arrangements Collective goals Controlled performance

Chapt 13- Measuring Performance I

Control Systems

All systems can be analysed using the cybernetic model. The essence of this is the feedback of control action to the controlled process: the control action itself being generated from the comparison of actual results with what was planned.

Ouchi identified market, bureaucratic and clan control strategies, their application is dependent on the control contingencies encountered.

Performance measurement aims to establish how well something or somebody is doing in relation to previous or expected activity or in comparison with another thing or body. It aims to:

Communicate the objectives of the company Concentrate efforts towards those objectivews Produce feedback for comparison with the plan

Strategic Control and CSFs

Strategic control is bound up with measurement of performance, which often tends to be based on financial criteria. Techniques for strategic control suggest that companies develop strategic milestones to monitor the achievement of strategic objectives as a counterweight to purely financial issues.

Critical success factors are the few key areas where things must go right for the organisation to flourish. Incorrect selection leads to gaps and false alarms.

Budgetary control systems

Budgetary control is the process whereby the master budget, devolved to responsibility centres, allows continuous monitoring of actual results versus budget, either to secure by individual action the budget objectives or to provide a basis for budget revision.

A budget is a plan expressed in monetary terms.

Activity based budgeting is a method of budgeting based on an activity framework and utilising cost driver data in the budget setting and variance feedback processes.

Rolling/continuous budget is a budget continuously updated by adding a further accounting period when the earliest accounting period has expired. Its use is particularly beneficial where future costs or activities cannot be forecast accurately.

Zero based budgeting is a method of budgeting that requires all costs to be specifically justified by the benefits expected.

Financial and non financial performance measures

Performance measures must be relevant to both a clear objective and to operational methods and their production must be cost-effective.

Types of measurement are: Profit Ratios Percentages Qualitative

Non financial performance measures may give more timely indication of the levels of performance achieved than financial measures and may be less susceptible to distortion either deliberate or environmental.

The Balanced Scorecard

An approach that tries to integrate the different measures of performance is the balanced scorecard, where key linkages between operating and financial performance are brought to light. There are four perspectives:

1. financial2. customer3. innovation and learning4. internal business

The scorecard emphasises process rather than departments.

Problems with this method include conflicting measures, not choosing appropriate measures, interpretation and doing something useful about the results.

Service departments are harder to measure but can look at efficiency gains and lower costs eg Corporate Finance. Must be a measurable output to be able to judge by though.

One way of tracking performance is to use an index with a base of 100. These are easy to under stand and clearly show trends over time. The use a common figure for different categories.

To measure performance: define boundaries define formal objectives identify appropriate measures select suitable bases for comparison

A results and determinants framework can be created:

Results: competitive performance eg market share growth financial performance eg liquidity, profitability

Determinants (of those results): quality of service flexibility resource utilisation innovation

The key measures for manufacturing businesses are: cost quality time (bottlenecks) innovation

Total Quality Management (TQM) is an integrated and comprehensive system of planning and controlling all business functions so that products or services are produced which meet or exceed customer expectations. TQM is a philosophy of business behaviour, embracing principles such as employee involvement, continuous improvement at all levels and customer focus, as well as being a collection of related techniques aimed at improving quality such as full documentation of activities, clear goal-setting and performance measurement from the customer perspective.

Target costing is a process of establishing what the cost of the product should be over the entire product life cycle. To begin with costs will exceed price because of development costs and learning time, later costs should come down because of the experience curve but the price remains the same.

Companies must comply with legal and voluntary regulation and from pressure from stakeholders.

In can be a good idea to introduce a code of ethics or corporate code to help create the “right” culture in the organisation.

Corporate social accounting is the reporting of the social and environmental impact of an entity’s activities upon those who are directly associated with the entity (eg employees, customers) or those who are in any way affected by the activities of the entity, as well as an assessment of the cost of compliance with relevant regulations in this area.

It is possible to have a compliance based approach or an integrity based approach.

Chapt 14 Measuring Performance II

Inflation makes it harder to compare performance over time, as it affects accounting values, and hence measures of performance. It affects the base line and comparative figures. Discounted cash flows help here.

Capital projects involve any long term commitments of funds undertaken now in anticipation of a potential inflow of funds at some time in the future.

Contribution margin can be defined as the difference between sales volume and the variable cost of those sales, expressed either in absolute terms or as a contribution per unit.

Residual Income (RI) deducts from profit an imputed interest charge for the use of the assets.

Earnings before interest and tax – (invested capital x imputed rate)

Must look at controllable profit (minus fixed costs/recharges) to keep managers motivated and be fair.

Chapt. 15 – Strategic Control

Shareholder value may be increased through a merger or divestment.

Shareholder value is the total return to the shareholders in terms of both dividends and share price growth, calculated as the present value of future free cash flows of the business discounted at the weighted average cost of capital of the business less the market value of its debt.

Rappaport proposes that a single value be calculated by reference to seven value drivers which drive the generation of cash:

1. sales growth rate2. operating profit margin3. cash tax rate4. fixed capital investment rate (capital investment ties up free cash)5. working capital investment rate6. the planning period7. cost of capital

Economic Value Added is a measure which approximated a company’s profit. Traditional financial statements are translated in to EVA statements by reversing distortions in operating performance created by accounting rules and by charging operating profit for all the capital employed. For example, written off goodwill is capitalised, as are extraordinary losses and the present value of operating leases. Extraordinary gains reduce capital

EVA = adjusted profits (NOPAT) after tax – (adjusted invested capital x WACC)

The principles of EVA are: investment leads to assets regardless of accounting treatments assets once created cannot be diminished by accounting action

Market Value Added is the difference between the market value of a company and the economic book value of capital employed.

Transfer pricing is used to encourage optimal performance by keeping track of costs incurred through a business. Ideally, prices should be set by reference to the external market, but where this is not possible transfer prices will have to be negotiated, or head office might impose a transfer price.

There are three major approaches to running divisionalised companies:1. strategic planning (centre establishes extensive planning processes, emphasis on

longer term strategic objectives, aiming for unified strategic approach)2. strategic control (low degree of planning influence but firm targets for selected

performance indicators)3. financial control (cautious, tight budget control of profits, little focus on strategy)