Search for notes by fellow students, in your own course and all over the country.

Browse our notes for titles which look like what you need, you can preview any of the notes via a sample of the contents. After you're happy these are the notes you're after simply pop them into your shopping cart.

My Basket

Buy These Notes

You have nothing in your shopping cart yet.

Title: ACCA BPP P3(Study Text- September 2016)
Description: PDF Format.
Buy These NotesPreview

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

ial
ter
ym
a

as

tud

http://freeaccastudymaterial
...
com/freeaccastudymaterial

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
co
m
ial
ter
ym
a

tud

as

Study Text

Look inside

ea

cc

Paper P3
Business Analysis
Study Text for exams from
1 September 2015 to 31 August 2016

Free access
to our Exam
Success site

fre

April 2015
£32
...
com
To download more visit http://freeaccastudymaterial
...
com
bpp
...
This review guarantees appropriate
depth and breadth of content and comprehensive
syllabus coverage
...
BPP Learning Media’s commitment
to student success is shown by our record of quality, innovation and market
leadership in paper-based and e-learning materials
...


ACCA P3

ACCA approved content provider

ACCA APPROVED
CONTENT PROVIDER

join us on facebook @ fb
...
indd 1-3

31/03/2015 12:00

To download more visit http://freeaccastudymaterial
...
co
m

As the first accredited publisher of ACCA materials, BPP Learning Media has set the benchmark for
producing exceptional study materials for students and tutors alike
...


ial

ter

To help maximise your chances of succeeding in your exams, we’ve put together a suite of exclusive ACCA
resources
...


ym
a

To access the Exam Success site, please email learningmedia@bpp
...
Once you have received your code, please follow the instructions
below:

To access the BPP ACCA Exam Success site for this material
please go to:

tud

www
...
com/ExamSuccessSite

n Create a user account if you don’t already have one
...


as

n Log in using your registered username and password
...


n Enter the code you received when prompted
...


join us on facebook @ fb
...
com
To download more visit http://freeaccastudymaterial
...
This means we work
closely with ACCA to ensure this Study Text contains the information you need to pass
your exam
...

'

FOR EXAMS FROM 1 SEPTEMBER 2015 TO 31 AUGUST 2016

join us on facebook @ fb
...
com


...
com

First edition 2007
Eighth edition April 2015


...
com

All rights reserved
...


A catalogue record for this book
is available from the British Library
Published by


...
bpp
...


©
BPP Learning Media Ltd
2015

ii

join us on facebook @ fb
...
com

British Library Cataloguing-in-Publication Data

We are grateful to the Association of Chartered Certified
Accountants for permission to reproduce past
examination questions
...


ial

eISBN 9781 4727 2759 6

ter

ISBN 9781 4727 2681 0
(Previous ISBN 9781 4727 1087 1)

To download more visit http://freeaccastudymaterial
...
com


...
com/freeaccastudymaterial

iii

To download more visit http://freeaccastudymaterial
...
co
m

Your market-leading BPP books, course materials and elearning materials do not write and update
themselves
...
Copyright law protects their livelihoods
...

Breach of copyright is a form of theft – as well being a criminal offence in some jurisdictions, it is
potentially a serious breach of professional ethics
...
(Is this fair to your fellow students? We update for a reason
...


fre

ea

cc

as

tud

ym
a

And what about outside the UK? BPP Learning Media strives to make our materials available at prices
students can afford by local printing arrangements, pricing policies and partnerships which are clearly
listed on our website
...
If they act illegally and unethically in one area, can you
really trust them?

iv

join us on facebook @ fb
...
com

With current technology, things might seem a bit hazy but, basically, without the express permission of
BPP Learning Media:
 Photocopying our materials is a breach of copyright
 Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them
to Facebook or emailing them to your friends is a breach of copyright

To download more visit http://freeaccastudymaterial
...
co
m

As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use study
materials reviewed by the ACCA examination team
...


The PER alert

ial

To download more visit http://freeaccastudymaterial
...
To help you to recognise areas of the syllabus that you
might be able to apply in the workplace to achieve different performance objectives, we have introduced
the 'PER alert' feature
...


ter

Your achievement of the PER should now be recorded in your on-line My Experience record
...
The different
features of the text, the purposes of which are explained fully on the Chapter features page, will help you
whilst studying and improve your chances of exam success
...

Our advice on Studying P3 outlines the content of the paper, the necessary skills you are expected to be
able to demonstrate and any brought forward knowledge you are expected to have
...


cc

Using the Syllabus and Study Guide
You can find the Syllabus and Study Guide on page xvii–xxxii of this Study Text
...


fre

We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as
Quick Quizzes at the end of each chapter to test your knowledge of the chapter content
...
com/freeaccastudymaterial

v

To download more visit http://freeaccastudymaterial
...

Topic list
Syllabus reference

What you will be studying in this chapter and the relevant
section numbers, together with ACCA syllabus references
...
co
m

Topic list

Puts the chapter content in the context of the syllabus as
a whole
...


Exam Guide

Highlights how examinable the chapter content is likely to
be and the ways in which it could be examined
...


FAST FORWARD

Summarises the content of main chapter headings,
allowing you to preview and review each section easily
...


Key terms

Definitions of important concepts that can often earn you
easy marks in exams
...


Exam focus points

Formulae that are not given in the exam but which have to
be learnt
...


cc

Case Study

ea

Chapter Roundup

fre

Quick Quiz

Practice Question Bank

vi

Gives you essential practice of techniques covered in the
chapter
...


A full list of the Fast Forwards included in the chapter,
providing an easy source of review
...

Found at the back of the Study Text with more
comprehensive chapter questions
...


Introduction

join us on facebook @ fb
...
com

Introduction

To download more visit http://freeaccastudymaterial
...
As a Chartered Certified Accountant you are
likely to find yourself dealing with matters that are of strategic importance to your organisation
...



...
Business Analysis is wider than
simply strategy and this paper will also draw from your financial and business skills gained during your
studies so far
...


1 What P3 is about

ial

To download more visit http://freeaccastudymaterial
...


ter

This is an advanced level paper which builds on a number of the topics covered in Paper F1 Accountant in
Business as well as topics you will have seen in Paper F5 Performance Management
...
You must be able
to evaluate data, assess the strategic consequences of decisions and advise on alternative courses of
action
...

Strategic position

tud

The syllabus begins by considering the impact of the external environment on an organisation,
and looks at the competitive forces organisations face
...

However, an organisation also needs to consider its responsibilities to differing stakeholder
groups, and how the expectations of stakeholders, alongside ethics and culture, help shape
organisational purpose
...
This section looks at the decisions which have to be made
about an organisation's future and the way an organisation can respond to the influences and
pressures which it identified while assessing its strategic position
...
This action takes place in a context of operational processes and
relationships, which need to be managed in line with the intended strategy, and involves the
effective coordination of business processes, information technology, people and finance
...


(d)

Business and process change

This section is the first considering how organisational elements support business strategy, and it
highlights that business process redesign can lead to significant organisational improvements
...


Introduction

join us on facebook @ fb
...
com
(e)

Information technology
The application of information technology is often one of the ways that business processes can be
redesigned
...


(f)

Project management

(g)


...
This coordination can be facilitated through effective project management
...

Financial analysis explicitly recognises this, reminding you of the importance of focusing on key
ratios and measures that can be used to assess the viability of a strategy and to monitor or
measure its success
...
Successful strategic
planning and implementation require the effective recruitment, training, and organisation of people,
coupled with strong leadership
...


ym
a

2 Skills you have to demonstrate

An ability to integrate knowledge and understanding from across the syllabus

•

Application of your knowledge to the specific circumstances described by the question

•

An ability to make reasoned judgements and give practical, commercial advice based on the
facts presented in the question scenario

•

Careful reading and analysis of the question scenarios, and the question requirements

•

If you read the main capabilities listed by ACCA that students are expected to have on completion
of P3, you will find continued reference to the verbs 'evaluate', 'assess', 'advise' and 'explain' –
make sure you can do all of these in relation to the different aspects of the syllabus
...
This is the best way of developing
good exam technique
...
The Kit contains numerous exam standard questions
(many of them taken from past exam papers) as well as three mock exams for you to try
...
Make sure you relate your answers to the scenario rather than letting them
become generic
...


fre



cc





viii

Present your answers in a professional manner – there are marks available for coherent, well
structured arguments and for making recommendations when required
...


Introduction

join us on facebook @ fb
...
com

(h)

To download more visit http://freeaccastudymaterial
...
Answer plans will help you to focus on the
requirements of the question and enable you to manage your time effectively
...

Make your answers complete, but brief
...




Answer all parts of the question – leaving out a five mark discursive element for example may
mean the difference between a pass and a fail
...
The examination team is specifically looking for evidence of wider reading
...



...
Instead you should use the real life examples to help inform your
answers to the questions set
...
com

4 Answering questions
4
...


ter



ym
a

It's particularly important to consider the question requirements carefully to make sure you understand
exactly what the question is asking, and whether each question part has to be answered in the context of
the scenario or is more general
...

Remember that every word will be important
...


4
...
The
examination team will use question verbs very deliberately to signal what is required
...
com/freeaccastudymaterial

ix

To download more visit http://freeaccastudymaterial
...

Intellectual level
Give the meaning of

1

Explain

Make clear

1

Identify

Recognise or select

1

Describe

Give the key features

2

Distinguish

2
2

Compare and
contrast
Contrast

2

Analyse

3

Assess

3

Examine

Define two different terms, viewpoints or concepts on the
basis of the differences between them
Explain the similarities and differences between two
different terms, viewpoints or concepts
Explain the differences between two different terms,
viewpoints or concepts
Give reasons for the current situation or what has
happened
Determine the strengths/weaknesses/ importance/
significance/ability to contribute
Critically review in detail

3

Discuss

Examine by using arguments for and against

3

Explore

Examine or discuss in a wide-ranging manner

3

Criticise

3

Evaluate/critically
evaluate

3

Construct the case

3

Recommend

Present the weaknesses of/problems with the actions
taken or viewpoint expressed, supported by evidence
Determine the value of in the light of the arguments for
and against (critically evaluate means weighting the
answer towards criticisms/arguments against)
...
co
m

Define

as

A lower level verb such as define will require a more descriptive answer
...
The examination team has stressed that higherlevel requirements and verbs will be most significant in this paper, for example critically evaluating a
statement and arguing for or against a given idea or position
...

Certain verbs have given students particular problems
...
You have to go into more depth if you are asked to explain than if you are asked to identify
...
If you were asked to:
Identify the main problem with the same person acting as chief executive and chairman
– you would briefly say excessive power is exercised by one person
...
As the board is meant
to monitor the chief executive, it can’t do this effectively if the chief executive is running the
board
...


fre

(i)

x

Introduction

join us on facebook @ fb
...
com

1

To download more visit http://freeaccastudymaterial
...
Its meaning may be different from the
way that you have seen it used in other exams
...

Thus for example if a question asked you to:
‘Evaluate the contribution made by non-executive directors to good corporate governance in
companies’


...
You would also
have to discuss the factors that limit or undermine the contribution non-executive directors make
(lack of time, putting pressure on board unity)
...
com

If the examination team asks you to critically evaluate, you will have to consider both viewpoints
...


4
...

Control systems

(c)

tud

With control systems questions, you are most likely to be interested in the design and
appropriateness of the control systems, whether there are obvious shortcomings with them, and
also details of the control environment
...

You should also look for evidence of how the ethos is being established further down the
organisation, in particular how the organisation’s culture, systems, procedures, reward
mechanisms, human resource policies, training are used to embed the tone of the organisation
...
It’s no use for example suggesting that
the organisation sets up a large risk management function if it is not big enough to warrant one
...
If these are not highlighted, you should
look for the risks that are connected with the organisation’s strategy or which relate to
significant changes that the organisation and its business environment are going through, or are
about to go though
...


Introduction

join us on facebook @ fb
...
com
(f)

Ethics
With ethical issues you are not just looking to determine not only the ethical issues at stake
...
These will be significant when you think about solutions to the
ethical problems
...
4 Consider the moral and ethical frameworks

ial

The examination team has stressed that these will affect the judgements you make when answering
questions as they do in real-life
...


ter

Remember the exam is designed to make you take a questioning approach to wide issues, and this may
mean having to argue in favour of a viewpoint with which you don’t agree
...
5 Content of answers

Important!

ym
a

Well-judged, clear recommendations grounded in the scenario will always score well as markers for this
paper have a wide remit to reward good answers
...
As we’ve said, lists of points
memorised from texts and reproduced without any thought won't score well
...

What constitutes good application will vary question by question but is likely to include:



Explaining why the factors you’re discussing are significant



Taking a top-down strategic approach – remember that at Professional level you’re meant to be
adopting the viewpoint of a partner or finance director
...
For example, although the
SPAMSOAP mnemonic can be a useful memory aid, you shouldn’t quote it in full just because the
question requirements contain the word ‘control’
Only including scenario details that support the points you are making, for example quoting from
the scenario to explain why you’re making a particular recommendation
Tackling the problems highlighted in the scenario and the question requirements



ea

5 Gaining professional marks

Important!

xii

fre

As P3 is a Professional level paper, 4 or 5 professional level marks will be awarded in the compulsory
question
...
You may also be able to obtain marks for the layout, logical flow and presentation of your
answer
...

Whatever the form of communication requested, you will not gain professional marks if you fail to follow
the basics of good communication
...
Also think carefully, am I
saying things that are appropriate in a business communication?

Introduction

join us on facebook @ fb
...
com


...
If you’re basing your answer on content
from corporate governance or ethical codes, will you have to criticise the principles or rules on
which they are founded
...


To download more visit http://freeaccastudymaterial
...
If you have not studied F1 or F5, or were exempt, you should
spend some time considering the syllabus and study guide to identify any gaps in your knowledge
...


fre

ea

cc

as

tud

ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m

The syllabus information is available on the ACCA website, www
...
com
...
com/freeaccastudymaterial

xiii

To download more visit http://freeaccastudymaterial
...
Further details can be found in the Exam
Focus Points in the relevant chapters
...
com/freeaccastudymaterial

O

O
O

To download more visit http://freeaccastudymaterial
...
co
m

STRATEGIC
POSITION

June Dec June
2009 2008 2008

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

xv

To download more visit http://freeaccastudymaterial
...
co
m

BUSINESS AND
PROCESS
CHANGE

To download more visit http://freeaccastudymaterial
...
The question will usually assess and link several subject areas from across the
syllabus, and will require you to demonstrate high-level capabilities to evaluate, relate and apply the
information in the scenario to the question requirements
...


ter

The compulsory Section A question can draw on ALL areas of the syllabus, making it imperative that
you cover all areas of the syllabus in your studies
...
They will be based on short
scenarios, and you will be expected to apply information from the scenarios to the question requirements
...


tud

P3 is designed to be a global paper, meaning that the case studies and the scenarios will focus on an
industry of global significance, which should be known to candidates wherever they live or work
...
The exam will not focus specifically on UK industries, nor the UK
business environment
...
However, an awareness of current business issues overall will be
useful in providing real-life examples to support your answers – hence the examination team's instruction
that candidates should read the financial sections of a good quality newspaper or other business material
regularly
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Section A:
Section B:

Number of
marks
550
50
100

To download more visit http://freeaccastudymaterial
...
com


...


Introduction

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Introduction

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Introduction

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Introduction

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Introduction

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Introduction

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Introduction

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Introduction

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com

ial

R
T
A

ym
a

ter

A

To download more visit http://freeaccastudymaterial
...
co
m

P

fre

ea

cc

as

tud

Strategic position

1

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Topic list

Syllabus reference

1 What is strategy?

A1(a), (f) A6(g)
A1(b)

ym
a

2 Levels of strategy in an organisation
3 Elements of strategic management

A1(c)

4 The importance of context

A1(d)
A1(e)

tud

5 The strategy lenses

as

Introduction

cc

This Study Text concerns the ACCA examination called Business Analysis
...
Despite its name, your syllabus deals with the full
scope of strategic management and we will provide you with complete
coverage in this Text
...
This exploration
of strategic management covers the material specified in the first element of
syllabus Section A
...

We shall make frequent reference to this book using the abbreviation, JS&W
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

The need for, and purpose of, strategic and business analysis

The expectations of stakeholders and the influence of ethics and culture

(g)

Advise on how organisations can communicate their core values and
mission

3

ym
a

A6

Exam guide

tud

This chapter covers fundamental concepts that are likely to be relevant to any exam question
...
If a strategy is to be successful, it
must be appropriate to the organisation or situation described in the scenario
...




JS&W's model of the three strategy lenses
...


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 aim of fulfilling
stakeholder expectations
...


fre

FAST FORWARD

ea

1 What is strategy?

Strategy is difficult to define; it is a topic with several different aspects and the word is used to mean
several different things
...
This is a complex process, but examining some of its features will help us to develop an
understanding of what is meant by strategy and strategic management
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Exam focus
point

Business strategy is as much an art as it is a science
...

Moreover, there is still vigorous debate, not only about how organisations should make their strategies but
also about how they actually do make them
...



...

To be successful in the P3 exam, it is very important that you realise that models and theories are only
useful to you if you apply them appropriately
...
com

It is worth reviewing at this point the view of the relationship between strategy and accountancy taken by a
former member of the examining team under the old P3 syllabus, who commented that '… accountants,
with their ability to subject proposals to robust analysis (have) an active and positive role to play in
resource allocation…
...
'

1
...

The scope of an organisation's activities: this will include both the overall roles and purposes the
organisation accepts for itself and the activities it undertakes in pursuit of them
...

For commercial organisations and for many not-for-profit organisations too, strategy will be about
gaining some kind of advantage in competition
...
They
discern six general areas for decision-making that will normally be regarded as strategic
...
In its simplest form, this will involve adapting products and services to
gradually changing customer requirements
...
This approach sees the business environment as something that can
be changed by the organisations' own actions
...
Stakeholders are people who have a legitimate interest in what the organisation
does
...

If you look at this definition alongside the top layer of the relational diagram describing the P3 syllabus,
you should get some idea of the context of strategic decisions:

fre

Key term

cc

These six considerations lead JS&W to suggest the definition of strategy given below
...
com/freeaccastudymaterial

5

To download more visit http://freeaccastudymaterial
...
2 Characteristics of strategic decisions
Having defined the matters that require decisions of a strategic nature, JS&W go on to describe some
important characteristics of the strategic decisions themselves
...
Changes with implications for organisational culture are
particularly complex and difficult to manage
...
3 Mission, goals and objectives

Strategies are developed in order to achieve desired outcomes
...
Mission guides strategic decisions and provides values and a sense of
direction
...

Purpose
...


(c)

Strategy provides the commercial logic for the company, and so addresses the following question:
'What is our business? What should it be?' Strategy in this sense is referred to by JS&W as a
'business model'
...
For example, a service company that wishes to be the best in its market must aim
for standards of service, in all its operations, which are at least as good as those found at its
competitors
...
3
...
Customers ask not
only 'What do you sell?' but 'What do you stand for?'
Studies into organisational behaviour show that people are motivated by many things other than
money: employees are likely to be both more productive and more satisfied with their work when
they feel that what they are doing has significance beyond the mere pursuit of a living
...


fre

(a)

ea

There are several reasons why a business should give serious consideration to establishing a clear
concept of its corporate mission and values
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(b)

Decisions about strategy are likely to be complex since there are likely to be a number of
significant factors to take into consideration and a variety of possible outcomes to balance against
one another
...

Strategic decisions have extensive impact on operational decision-making; that is, decisions at
lower levels in the organisation
...
An integrated approach is therefore required
...
com
1
...
2 Mission statements
Mission statements are formal documents that state the organisation's mission
...

Some are suspicious of mission statements for the following reasons
...

They can often be full of generalisations which are impossible to tie down to specific strategic
implications
...



...
3
...


An article entitled 'Communicating core values and mission' is available in the technical articles section for
P3 on the ACCA website
...


ym
a

Exam focus
point

Mission also affects the implementation of a planned strategy in terms of the ways in which the
firm carries out its business and the culture of the organisation
...
Plans should further the organisation's goals and be consistent
with its core values
...
Mission acts as a yardstick by which plans are judged
...
com

(a)

Requirement (b) from question 1 in the June 2012 exam asked students to advise the owners of a shoe
manufacturer on the importance of mission, values and objectives in communicating the company's
strategy
...
3
...
All the parts of this structure
should be mutually supportive
...
However, an organisation can operate reasonably effectively even if
most of the people within it have only a vague understanding of its purpose
...


ea

cc

Loosely speaking, these 'things to be achieved' are the goals, objectives and targets of the various
departments, offices, and individuals that make up the organisation
...

Goals can be related in several ways:



Hierarchically, as in the pyramid structure outlined below
Functionally, as when colleagues collaborate on a project

fre

FAST FORWARD



Logistically, as when resources must be shared or used in sequence



In wider organisational senses, as when senior executives make decisions about their operational
priorities
...
com/freeaccastudymaterial

7

To download more visit http://freeaccastudymaterial
...
3
...
At the top is the overall mission; this is supported
by a small number of wide ranging goals, which may correspond to overall departmental or functional
responsibilities
...
There may be other primary objectives and there will certainly be supporting
objectives for costs, innovation, markets, products and so on
...
MbO is still in use as a management tool, though no longer promoted as a universal
solution
...


(b)

The current pursuit of innovation as a route to competitive advantage makes it very important that
managerial attention is directed towards achieving results rather than just administering
established processes
...


ym
a

(a)

Functions of objectives

tud

There are other variants: achievable may be replaced with attainable, which has an almost identical
meaning, and relevant (meaning appropriate to the group or individual concerned) has been proposed as
a third option for R
...


(b)

Responsibility: objectives define the responsibilities of managers and departments
...


(d)

Motivation: the first step in motivation is knowing what is to be done
...


(e)

Evaluation: performance is assessed against objectives and control exercised
...


1
...
JS&W provide a very useful list
...
Unfortunately,
there is no generally accepted list of definitions and you may encounter a variety of usages
...


8

1: Business strategy  Part A Strategic position

join us on facebook @ fb
...
com


...
These may
correspond, perhaps, to the responsibilities of the senior managers in the function concerned
...
We will return to this topic later in
this Study Text
...


To download more visit http://freeaccastudymaterial
...

Vision or strategic intent is the future state desired by the organisation's strategists: they aim to guide the
organisation's collective aspiration towards it
...
It may be qualitative in nature
...



...
Unique resources and core competences
create competitive advantage
...
)
A business model describes the structure of product, service and information flows between the parties
involved
...


ial

To download more visit http://freeaccastudymaterial
...
5 The business analysis syllabus

Information
technology
(E)

tud

Business
and process
change
(D)

Strategic choices (B)

Strategic action (C)

ym
a

Strategic position (A)

ter

RELATIONAL DIAGRAM OF MAIN CAPABILITIES

Project
management
(F)

Financial
analysis
(G)

People (H)

as

Section A1(f) of the Study Guide for your syllabus calls explicitly for an understanding of the nature and
scope of business strategy, as envisioned by the syllabus and summarised in the relational diagram
shown above
...
These two elements are
reflected in the two main strategic issues dealt with by the syllabus: the external forces that influence the
organisation's strategy and the internal forces and activities that sustain it
...

The top layer is concerned with the overall strategic perspective, moving from the analysis of strategic
position through strategic choices to strategic action
...
The focus is on two linked
aspects of business process management
...
com/freeaccastudymaterial

9

To download more visit http://freeaccastudymaterial
...

The middle layer is also a reminder that strategy may emerge from within the day-to-day activities of the
organisation
...

This indicates that as well as strategy being translated into action through a top-down approach, the
actions and processes within an organisation can also help shape its strategy (a middle-up approach)
...


Corporate: the general direction of the whole organisation
Business: how the organisation or its SBUs tackle particular markets
Operational/functional: specific strategies for different departments of the business

(i)
(ii)
(iii)

Corporate
Business
Functional or operational

ym
a

Hofer and Schendel refer to three levels of strategy:

ter

Any level of the organisation can have objectives and devise strategies to achieve them
...


tud

The distinction between corporate and business strategy arises because of the development of the
divisionalised business organisation, which typically has a corporate centre and a number of strategic
business units (SBUs) dealing with particular markets
...
Operational strategies are then developed for component parts of SBUs
...
1 Corporate strategies

Corporate strategy is concerned with the overall purpose and scope of the organisation and how value will
be added to the different parts (business units) of the organisation
...


Expectations of
stakeholders

There may be a mission statement, but in any case, stakeholder expectations
must be prioritised and managed
...


fre

ea

Scope of activities

10

1: Business strategy  Part A Strategic position

join us on facebook @ fb
...
com





ial

FAST FORWARD


...


To download more visit http://freeaccastudymaterial
...
2 Business-level strategy
Key term

Business strategy is about how to compete successfully in particular markets
...
co
m

Business-level strategy is about the particular and distinct combination of products and markets dealt with
by one business unit
...

In the first case, business and corporate strategy merge with one another; in the second, SBU level
strategies must be co-ordinated with corporate strategy and with each other
...
3 Operational strategies

Operational strategies are concerned with how the component parts of an organisation deliver effectively
the corporate- and business-level strategies in terms of resources, processes and people
...
Marketing and corporate strategies
are interrelated
...


Finance

Ensuring that the firm has enough financial resources to fund its other strategies
by identifying sources of finance and using them effectively
...


Information systems

A firm's information systems are becoming increasingly important, as an item of
expenditure, as administrative support and as a tool for competitive strength
...


R&D

New products and techniques
...
com

Much operational strategy is created by individual business functions and delivered by them
...
The finance director says: 'We plan to issue more shares to
raise money for new plant capacity – we don't want loan finance – which will enable us to compete better
in the vital and growing widget markets of Latin America
...
'
Identify the corporate, business and functional strategies in the above statement
...
The corporate strategy is the decision that this will be achieved by
entering new markets, rather than producing new products
...
The operational or functional strategy involves the decision to invest in
new plant (the production function) which is to be financed by shares rather than loans (the finance
function)
...
com/freeaccastudymaterial

11

To download more visit http://freeaccastudymaterial
...





Strategic position
Strategic choices
Strategy into action

JS&W analyse strategic management into three main elements
...
co
m

FAST FORWARD

If you refer back to the diagram of the syllabus relational model shown at Section 1
...


ter

ial

Two articles titled 'The Strategic Planning Process, Part 1 & 2' written by Sean Purcell are available in the
technical articles section for P3 on the ACCA website
...


3
...
It would be worth taking the time to
study these articles
...
1
...
There are three
main groups of influences to consider: the environment; strategic capability and the expectations of
stakeholders
...
It is both
complex and subject to constant change, to an extent that probably precludes complete understanding
...
We will look at the environment in more detail in Chapter 2
...
1
...
This may be analysed
into strengths and weaknesses; these influence, enable or constrain possible future strategic choices
...
1
...
This may have a formal, even legal,
definition and corporate governance may be a relevant issue
...

Stakeholder power and interest influence the direction in which strategy evolves, as do ethical issues
...


3
...
At the level of the business unit,
these choices are about how to achieve competitive advantage and are based on an understanding of

12

1: Business strategy  Part A Strategic position

join us on facebook @ fb
...
com

Exam focus
point

To download more visit http://freeaccastudymaterial
...
At the corporate level, strategy is primarily about scope: this is concerned with
the overall product/business portfolio, the spread of markets and the relationship between business units
and the corporate centre
...


3
...
Major issues here include structuring, enabling and change
...
com

ter

ial

An article titled 'The seven deadly sins of strategy implementation' (2007) written by Martin Corboy and
Diarmid Corrbui is available in the technical articles section for P3 on the ACCA website
...
It would be worth taking the time to
study this article
...
3
...


Position
audit

Mission &
objectives

Strategic
control

Strategic
options

Strategic
choice

Implementing
strategy

as

Corporate
appraisal

Action

ea

cc

Environmental
analysis

tud

Rational model of the strategic planning process

Position

Choice

However, whereas the rational model is usually presented as a linear model, JS&W also recognise the
interdependencies between analysis, choice and implementation
...

Enabling is the complex two-way process by which the organisation's resources are managed to
both support and to create strategies
...



...
com/freeaccastudymaterial

13

To download more visit http://freeaccastudymaterial
...
You must always consider the question
context and make your answer clearly relevant to it
...


as

Exam focus
point

The context of strategy is the organisational setting in which it is developed
...
Public sector and not-for-profit organisations are influenced
by ideology, politics, and the influence of a range of stakeholders
...


tud

FAST FORWARD

ym
a

4 The importance of context

ter

ial

Strategic
choice

Organisation structure
Processes
Resourcing
Strategy development
Strategic change

ea

cc

Strategic management has many aspects and the relative importance of each of these aspects for
individual organisations may vary considerably
...
Even within a single company, differences of industry and market are
likely to require different business units to take different approaches to strategy
...
1 Small businesses
Characteristic
Limited range of products in a limited
market

Few problems of scope

Limited planning resources; ownership
interest among managers

14

Effect on strategic processes

Strategy based on values and experience

1: Business strategy  Part A Strategic position

join us on facebook @ fb
...
com

Business level
Corporate level
International
Evaluation


...
com
Characteristic

Effect on strategic processes

Significant pressure from competitors

Exploitation of competences and resources, choice of
competitive strategy and knowledge of market and
competition all very important

Limited financial resources

Constant attention to building relationship with providers of
funds, especially bankers


...
2 Multinationals
Characteristic

Effect on strategic processes

Diverse products, processes and markets

Problems of relationships, structure and control

Significant resources of all kinds

Allocation and co-ordination of resources

Multiple markets, operations and facilities

Great importance of logistics of manufacturing and supply

ial

To download more visit http://freeaccastudymaterial
...
3 The public sector
The public sector has distinct strategic characteristics
...
4 Not-for-profit organisations

Not-for-profit organisations also have their particular features
...
The compulsory question in June 2010, and
a Section B question in December 2009 both centred around charitable organisations
...


4
...
While the nature of the physical product is
still strategically important for the manufacturer, it has become common for competitive advantage to
depend as much on the customer's perception of the intangibles that are included in the complete market
offering
...
com/freeaccastudymaterial

15

To download more visit http://freeaccastudymaterial
...


5 The strategy lenses
The study of business strategy is fairly new and opinion as to its nature and content is only just beginning
to settle
...
These lenses are strategy as design, strategy as experience and strategy
as ideas
...
co
m

FAST FORWARD

5
...
At the same time, writers such
as Quinn and Mintzberg argued that the sheer complexity of the world severely limited the usefulness of
the analytic approach
...
This is strategy as
experience
...


tud

More recent ideas have focussed on the concept of the organisation as an organism, adapting to
environmental forces through processes of social interaction that promote innovation and change
...
2 The strategy lenses

6/13, 6/09

cc

Strategy as design
Strategy as experience
Strategy as ideas

fre

ea





as

Each of the approaches briefly outlined above has something to offer in understanding of what strategy is
and what it is for
...


16

1: Business strategy  Part A Strategic position

join us on facebook @ fb
...
com

In the 1960s and extending into the 1970s, the highly rational corporate planning approach was popular
...
At the same time, writers such as Simon and Lindblom were challenging
rational decision models as unrealistic because of the impossibility of carrying out the full analysis of
relevant factors that such models demanded
...
In JS&W's terms, this approach sees strategy
as design
...
com
The strategy lenses
New ideas/
innovation
Ideas


...

This model had been tested in earlier examinations but students appeared to have not spent sufficient time
learning it
...


5
...
1 Strategy as design

ym
a

There is a widely held view of strategy as a rational, top-down process by which senior managers analyse
and evaluate strategic constraints and forces in order to establish a clear and rational course of strategic
action
...
It also appeals to stakeholders such as shareholders, banks, many employees
and public servants
...
Some of
these are given below
...


(b)

There are clear and explicit objectives
...


(d)

The organisation is also a rational, almost engineered, system that is capable of putting
management's plans into effect
...
However, it does not describe the whole of strategic management
...
2
...
It is firmly based
in the experience and assumptions of influential figures in the organisation and the ways of doing things
approved by the organisation's cultural norms
...


fre

Exam focus
point

To download more visit http://freeaccastudymaterial
...
This process is
related to the habit of exemplifying complex forces in the form of their most important elements
...
The problem here is that this may blind managers to emerging competitors that have the potential
to dislocate the existing market structure
...
com/freeaccastudymaterial

17

To download more visit http://freeaccastudymaterial
...
The result is decisions that satisfice rather than optimise and strategies that develop in an
incremental and adaptive way
...

Mintzberg described an emergent strategy as one 'where patterns developed in the absence of intentions,
or despite them'
...
2
...
An important feature of this role is to avoid relying on either the design
approach or the experience approach
...
In either case, innovation is unlikely and the
result is strategic drift
...

Not all of the factors that encourage innovation are under the control of managers, or even easily
influenced by them
...

Network organisations and those that co-operate widely with others are the model here
...

Attention should be paid to their intuitions
...

Culturally, questioning and challenge are more valuable than consensus
...


(e)

A degree of ambiguity in direction sanctions freedom of thought and effort
...
The aim is to achieve an 'adaptive tension' that
will keep the organisation functioning without either resorting to machine-like procedure or descending
into unproductive disarray
...
These rules should focus on important basic principles, such as the
criteria to be used when ranking potential opportunities
...


Answer

fre

You may have come up with other ideas, but we suggest the following are relevant:
Strategy as design







18

Prices
Method of travel, distance, cost
Quality of accommodation
Availability of activities/things to do
Weather
Language

1: Business strategy  Part A Strategic position

join us on facebook @ fb
...
com


...
Supporters of this view argue partly by
analogy with evolutionary theory, suggesting that where there is diversity of approach, a change in
environmental conditions is likely to be accommodated by one of the various methods, products or
systems already in existence
...
com
Strategy as experience
I've been to that area before, so I know it quite well and I like it there
...
com


...
We've never been to xxx before, and it looks a very interesting place
...
com/freeaccastudymaterial

19

To download more visit http://freeaccastudymaterial
...
Strategic decisions are made under conditions of complexity and uncertainty;
they have wide impact on the organisation and often lead to major change
...
These are inherent in the organisation's
mission or defining purpose
...




A structure of goals and objectives derives from mission and supports it
...




Strategy has its own vocabulary, though usage varies
...




There are many levels of strategy in an organisation
...


ter



Corporate: the general direction of the whole organisation
Business: how the organisation or its SBUs tackle particular markets
Operational/functional: specific strategies for different departments of the business

Strategic position
Strategic choices
Strategy into action

The context of strategy is the organisational setting in which it is developed
...
Public sector and not-for-profit organisations are influenced
by ideology, politics, and the influence of a range of stakeholders
...




The study of business strategy is fairly new and opinion as to its nature and content is only just beginning
to settle
...
These lenses are strategy as design, strategy as experience and strategy
as ideas
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m



To download more visit http://freeaccastudymaterial
...
com


...
Essential elements are long-term
direction and scope; advantage; changing environment; resources and competences; and stakeholder
expectations
...

Specific, measurable, achievable, realistic (relevant, results-focused), time-related
...

The design lens shows strategy as a rational, top-down process under careful controls
...
The
ideas lens suggests that strategy is formed by diversity of ideas, which leads to innovation
...


ial

1

Part A Strategic position  1: Business strategy

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Syllabus reference

1 The organisation in its environment

A2

A2(a)

ym
a

2 The macro-environment
3 Key drivers of environmental change

A2(b)

4 The competitive advantage of nations

A2(c)

5 The environment in the future

A2(d), (e)

6 Industry and sector

A3(a)

A3(b)

tud

7 Competitive forces

as

Introduction

fre

ea

cc

The changing environment is one of the essential elements of JS&W's
definition of strategy and analysis of the environment is a fundamental part of
the process of developing strategy
...
Other views of strategy
have emerged that place less emphasis on adaptation, but even when a firm
sets out to dominate its environment, it must have a full knowledge of the
nature of that environment
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Environmental issues affecting the strategic position of, and future
outlook for, an organisation

ym
a

Exam guide

3

tud

This chapter, like the previous one, deals with wide topics that may be relevant to almost any exam
question
...
Environmental analysis is a well-established aspect of the theory of business strategy
and the examining team find it an easy topic to introduce into questions
...
Make sure you read question scenarios carefully and
note the potential implications of the environmental background
...
Eva highlights that often the key
to using such models lies in the flexibility of their application to different scenarios
...


fre

Exam focus
point

PESTEL
Porter's Diamond
Porter's five forces framework

ea





24

2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com

A2

To download more visit http://freeaccastudymaterial
...

Organisations try to control the nature of their outputs, but very few of them can control more than a few
of the inputs they receive
...


The environment may be divided for convenience into three concentric layers: the macro-environment; the
industry or sector; and competitors and markets
...


ial

To download more visit http://freeaccastudymaterial
...
However, you should be
aware that the environmental influences affecting an organisation do not come in neatly labelled packages;
there are complex interactions between the elements we will discuss and you must always try to
understand the broader picture when you are thinking about the environment
...

Basis of analysis

Macro-environment

PESTEL
Key drivers of change
Scenarios

ym
a

Environmental element

Industry or sector

Five forces
Cycles of competition
Strategic groups
Market segments
Critical success factors

tud

Competitors and markets

ea

cc

as

Macro-environment
Industry or sector

Competitors and markets

The organisation

fre

FAST FORWARD


...
1 Analysing the environment

Part A Strategic position  2: Environmental issues

join us on facebook @ fb
...
com

1
...

A large part of business strategy consists of making the organisation's interaction with its environment as
efficient as possible
...
The greater the uncertainty, the greater the strategic challenge
...
co
m

Uncertainty depends on complexity and stability: the more complex or dynamic the environment is, the
more uncertain it is
...
Scenario planning, intuition and a learning approach are all valid features of such a
response
...
Diversity of operations and technological
advances contribute to complexity
...
It may be that it is best dealt
with by a combination of experience and extensive decentralisation
...
The security and
efficiency of a mechanistic or bureaucratic approach to management can be exploited
...


2 The macro-environment

The macro-environment may be analysed into six segments using the PESTEL framework
...
Your syllabus requires you to be familiar with the PESTEL framework, which is based on six
segments
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Exam focus
point

PESTEL is a useful checklist for general environmental factors, but remember, in the real world, these
factors are often interlinked
...
In particular, political, social and economic affairs tend to be closely related
...
The important thing is that you recognise the relevant factors, not whether you get them in the right
category
...
co
m

Note
...

An exam question may not refer to the PESTEL framework directly
...
However, you should understand from
these instructions that a PESTEL analysis is required
...


To download more visit http://freeaccastudymaterial
...
1 The political environment

ym
a

Government is responsible for providing a stable framework for economic activity and, in particular, for
maintaining and improving the physical, social and market infrastructure
...


2
...
1 Government policy





tud

Government policy affects the whole economy, and governments are responsible for enforcing and
creating a stable framework in which business can be done
...

Physical infrastructure (eg transport)
Social infrastructure (education, a welfare safety net, law enforcement, equal opportunities)
Market infrastructure (enforceable contracts, policing corruption)

as

However, it is political change which complicates the planning activities of many firms
...
It shows a sequence of considerations
...
These are not relevant to a
macro-environmental analysis, and so mentioning these issues would earn no marks
...
An article titled 'India's
strongman' published in the Economist (2014) reported, GDP per citizen has risen from $300 to $6,750
over 30 years
...
In
the mid-1980s India's GDP per head was the same as China's, however today it is now less than a quarter
...
com/freeaccastudymaterial

27

To download more visit http://freeaccastudymaterial
...



...
However, some commentators are optimistic about India's future
...

The challenges Mr Modi faces are vast and include, among other issues, dealing with India's debtburdened banks, improving the tax system, reducing inflation and investing in the country's transport
infrastructure
...
1
...
The definition of a
monopoly in practice is wider than this, because governments seeking to control the growth of monopoly
firms will probably choose to regard any firm that acquires a major share of the market as a potential
monopolist
...
The effect is to cause the whole
structure of short-run costs to fall
...
Oliver
Williamson suggested that monopolies might be inefficient if 'market power provides the firm with
the opportunity to pursue a variety of other-than-profit objectives'
...


cc

Key term

A beneficial monopoly achieves economies of scale in an industry where the minimum efficient
scale is at a level of production that would mean having to achieve a large share of the total market
supply
...
Many utilities, such as railways, telecommunications and power
generation fall into this category
...


Consumer protection policies may be required
...
This could
be done in a variety of ways – for example, by exchanging information, by setting common prices
or by splitting up the market into geographical areas and operating only within allocated
boundaries
...
For
example, in 2007, British Airways was fined heavily by the US Department of Justice and the UK's
Office of Fair Trading for colluding with its rival, Virgin Atlantic, in fixing how much extra to charge
on passenger and cargo flights, to cover fuel costs
...
When a single firm controls a big
enough share of the market, it can begin to behave as a monopolist, even though its market share
is below 100%
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
This move required Vodafone to pay
tax on companies it had previously acquired, with subsidiaries of Nokia also being accused of having
'unpaid' tax liabilities
...
com

Case Study

The Competition and Markets Authority in the UK


...
The Competition and Markets Authority (CMA) has the power to
investigate if it appears that competition is being prevented, distorted or restricted in a particular market
...
The Authority will then investigate the proposed merger or takeover
and recommend whether or not it should be allowed to proceed
...
1
...
com

The governing party's election manifesto should be a guide to its political priorities, even if these
are not implemented immediately
...




2
...
4 Political risk

ter

The political risk in a decision is the risk that political factors will invalidate the strategy and perhaps
severely damage the firm
...

A political risk checklist was outlined by Jeannet and Hennessey
...

How stable is the host country's political system?

2

How strong is the host government's commitment to specific rules of the game, such as ownership
or contractual rights, given its ideology and power position?

3

How long is the government likely to remain in power?

4

If the present government is succeeded, how would the specific rules of the game change?

5

What would be the effects of any expected changes in the specific rules of the game?

6

In light of those effects, what decisions and actions should be taken now?

tud

ym
a

1

The economic environment affects firms at national and international level, both at the general level of
economic activity and in terms of particular variables, such as exchange rates, interest rates and inflation
...

Factor

Impact

Increased/decreased demand for goods (eg dishwashers) and services (eg
holidays)
...
Office/factory rents
...
House
prices
...


Interest rates

How much it costs to borrow money affects cash flow
...
How much customers can afford to spend is
also affected as rises in interest rates affect people's mortgage payments
...
Income tax and sales tax (eg VAT) affect how much
consumers have to spend, hence demand
...
2 The economic environment

Part A Strategic position  2: Environmental issues

join us on facebook @ fb
...
com
Impact

Government spending

Suppliers to the government (eg construction firms) are affected by
spending
...
The UK economy has been
characterised by periods of boom and bust
...

(Industries which prosper when others are declining are called countercyclical industries
...
co
m

Factor

The forecast state of the economy will influence the planning process for organisations which operate
within it
...
Conversely, in times of recession, the emphasis will be on cost-effectiveness,
continuing profitability, survival and competition
...


Government policy on trade/protection

ter

ym
a

Large multinational companies
(MNCs)

ial

Impact

MNCs have huge turnovers and significant political influence
because of governments' desire to attract capital investment
...


2
...


as

FAST FORWARD

Demography is the study of human population and population trends
...


ea

Growth

cc

Factors of importance to organisational planners

Changes in the age distribution of the population
...
In others there
are very large numbers of young people
...


Ethnicity

A population might contain groups with different ethnic origins from the majority
...
In the UK, there has been an
increase in single-person households and lone parent families
...


fre

Geography

30

2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com

Factor

To download more visit http://freeaccastudymaterial
...
Many people believe that there is a
move to a casual flexible workforce; factories will have a group of core employees,
supplemented by a group of insecure peripheral employees, on part time or
temporary contracts, working as and when required
...

However, despite some claims, most employees are in permanent, full-time
employment
...
This is why developing countries are attractive as markets
...
co
m

Factor

Implications of demographic change

Changes in patterns of demand: an ageing population suggests increased demand for health care
services: a young growing population has a growing demand for schools, housing and work
...


(c)

Recruitment policies: there may be relatively fewer young people so firms will have to recruit from
less familiar sources of labour (and the retirement age may need to be increased)
...
The tax
base may alter
...
com

(a)

2
...
1 Culture

ym
a

Through contact with a particular culture, individuals learn a language, acquire values and learn habits of
behaviour and thought
...
Values are beliefs which are
relatively enduring, relatively general and fairly widely accepted as a guide to culturally appropriate
behaviour
...


(c)

Artefacts: all the physical tools designed by human beings for their physical and psychological
well-being: works of art, technology, products
...


as

tud

(a)

cc

The learning and sharing of culture is made possible by language (both written and spoken, verbal and
non-verbal)
...


(b)

Marketers can adapt their products accordingly, and be fairly sure of a sizeable market
...

Human resource managers may need to tackle cultural differences in recruitment
...


fre

(c)

Culture influences tastes and lifestyles and therefore influences the sorts of products and
services a business should offer
...
Most people participate in
several of them
...
com/freeaccastudymaterial

31

To download more visit http://freeaccastudymaterial
...


Ethnic background

Some ethnic groups can still be considered a distinct cultural group
...


Geography or region

Distinct regional differences might be brought about by the past effects of
physical geography (socio-economic differences etc)
...


Age

Age subcultures vary according to the period in which individuals were socialised
to an extent, because of the great shifts in social values and customs in this
century
...


Work

Different organisations have different corporate cultures, in that the shared
values of one workplace may be different from another
...
co
m

Comment

ter

Cultural change might have to be planned for
...


Question

Club Fun

ym
a

Club Fun is a UK company that sells packaged holidays
...
It is
particularly successful at providing holidays for the 18–30 age group
...
There is an absolute fall in the number of school leavers
...
That said, a higher disposable income in the population at
large might compensate for this trend
...


FAST FORWARD

ea

2
...


fre

The word 'technology' is used to mean three rather different things
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Technology contributes to overall economic growth
...
There are three ways in which technology can increase total output
...


(b)

The way in which products are made (eg process automation, new raw materials)
...
The growth of direct selling via the internet has
had a significant impact on the implementation of business strategy

(d)

The way in which markets are identified
...


(e)

The way in which firms are managed
...
Technology has also enabled greater integration between
buyers and suppliers via the use of extranets
...
The financial sector is rapidly
becoming electronic – call centres are now essential to stay in business, online banking is
becoming increasingly common, and the internet and interactive TV are featuring in business plans
...
com


...


ym
a

The impact of recent technological change also has potentially important social consequences, which in
turn, can have an impact on business
...
Whereas people were once collected together to work in factories, home working
will become more important
...
Certain sorts of skill, related to interpretation of data and information processes,
are likely to become more valued than manual or physical skills
...
Technology increases manufacturing productivity, releasing human resources for service
jobs
...


tud

(a)

as

PESTEL analysis is normally something an organisation carries out to help it understand its environment
...
You can use your understanding of PESTEL analysis to help with this
...

The importance of physical environmental conditions
(a)

Resource inputs
...


fre

FAST FORWARD

cc

2
...
The physical environment presents logistical problems or opportunities to organisations
...


(c)

Government
...

(i)

Local authority town planning departments can influence where a building and necessary
infrastructure can be sited
...
com/freeaccastudymaterial

33

To download more visit http://freeaccastudymaterial
...
In some countries, the physical environment can pose a major threat to organisations
...


The impact of business activity on the physical environment is now a major concern
...
This presents both
challenges and opportunities, since some measures will impose costs, but others will allow significant
savings
...


2
...
1 Environmental protection policy

ial

Environmental protection is now a key aspect of corporate social responsibility
...


(b)

Employees are increasing pressure on the businesses in which they work for a number of reasons
– partly for their own safety, partly in order to improve the public image of the company
...
Growing pressure from the green or green-influenced
vote has led to mainstream political parties taking these issues into their programmes, and most
countries now have laws to cover land use planning, smoke emission, water pollution and the
destruction of animals and natural habitats
...
Companies in the future will
become responsible for the environmental impact of their activities
...
The 'natural' environment has become an important part of the overall
business 'environment'
...
'Green' issues should be considered as one part of the wider business environment
...


ter

(a)

2
...
2 How green issues impinge on business

as

Possible issues to consider are these
...

(a)

(b)

34

Short-term savings through waste minimisation and energy efficiency schemes can be substantial
...


2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com


...


To download more visit http://freeaccastudymaterial
...


(d)

There are a growing number of energy and environmental taxes, such as landfill tax
...


(f)

Pressure group campaigns can cause damage to reputation and/or additional costs
...


(h)

The cost of processing input which becomes waste is equivalent to 5–10% of some organisation's
turnover
...
co
m

(c)

They go on to suggest six main ways in which business and environmental benefits can be achieved
...

Understanding and managing environmental costs
...


(c)

Introducing waste minimisation schemes

(d)

Understanding and managing life cycle costs
...
This has led to producers being made responsible for dealing with
the disposal of products such as cars, and government and third party measures to influence raw
material choices
...


(e)

Measuring environmental performance
...


(f)

Involving management accountants in a strategic approach to environment-related management
accounting and performance evaluation
...
com

(a)

tud

Such analysis and action should help organisations to better understand present and future environmental
costs and benefits
...
5
...
At the same time, emissions of waste are confined to levels that do not
exceed the capacity of the environment to absorb them
...
Some car manufacturers are building cars with recyclable components
...
When oil becomes too expensive, solar power will
become economic
...
Some resources, however, are inherently non-renewable
...


fre

Key term

John Elkington, chairman of the think-tank SustainAbility Ltd, has said that sustainability now embraces
not only environmental and economic questions, but also social and ethical dimensions
...
com/freeaccastudymaterial

35

To download more visit http://freeaccastudymaterial
...
An environmental report compiled by the company listed the
following
...
co
m

A 20% cut in insurance premiums would be worth $15 million
A 1% reduction in absence due to sick leave is worth $30 million
A 1% reduction in material and energy consumption is worth $60 million

2
...


ial

Example

General legal framework:
contract, tort, agency

Basic ways of doing business; negligence proceedings; ownership; rights
and responsibilities; property

Criminal law

Theft; insider dealing; bribery; deception; industrial espionage

Company law

Directors and their duties; reporting requirements; takeover proceedings;
shareholders' rights; insolvency

Employment law

Trade Union recognition; Social Chapter provisions; possible minimum
wage; unfair dismissal; redundancy; maternity; Equal Opportunities

Health and Safety

Fire precautions; safety procedures

Data protection

Use of information about employees and customers

Marketing and sales

Laws to protect consumers (eg refunds and replacement, 'cooling off'
period after credit agreements); what is or isn't allowed in advertising

Environment

Pollution control; waste disposal

Tax law

Corporation tax payment; Collection of income tax (PAYE) and National
Insurance contributions; sales tax (VAT)

Competition law

General illegality of cartels

as

tud

ym
a

ter

Factor

cc

Some legal and regulatory factors affect particular industries, if the public interest is served
...

This is for either of two reasons
...

Large sums of public money are involved (eg in subsidies to rail companies following the
privatisation of the rail network in the UK)
...
Gas used to be a state monopoly in the UK
...
Slowly, the UK gas market was opened to competition: eventually, about 20
suppliers competed with British Gas
...
Ofgas regulates the gas industry
...


36

2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com

Legal factors affecting all companies

To download more visit http://freeaccastudymaterial
...
When British Gas was privatised, it inherited 'take or pay contracts' requiring it to buy gas at a
specific price from gas producers
...


3 Key drivers of environmental change
Four aspects of globalisation are key drivers of change
...

Cost globalisation spreads as trade barriers fall and economies of scale and experience grow
...

International competition promotes further trade and interaction
...
com






ter

In the previous section, we looked at environmental factors which can have an impact on an organisation's
strategy
...
In this section, we will look at some of the key drivers of environmental change
...
1 Market globalisation

ym
a

JS&W, following Yip, identify four aspects of globalisation as key drivers of change in the macroenvironment
...
It is
impossible to isolate a simple chain of causation here
...


(b)

As markets globalise, firms supplying them become global customers for their own inputs and
seek global suppliers
...
The latter feeds back to the homogenisation of taste
...

Experience effects can continue to drive down costs in the same way
...
This increased efficiency reduces unit costs
...

Country-specific cost advantages, such as low labour costs or a favourable exchange rate,
encourage purchasers to search globally for suppliers
...


ea

(a)

cc

3
...
co
m

New markets
...


(e)

Part A Strategic position  2: Environmental issues

join us on facebook @ fb
...
com

3
...
Technical standardisation in both
manufacturing and services has also encouraged increased trade, while some governments have been
active in seeking foreign direct investment
...
4 Global competition
(a)
(b)


...

The existence of global competitors and global customers in an industry prompts purely national
firms to start trading globally so as to be able to compete on an even footing
...


ter

FAST FORWARD

12/13, 6/10

Porter's diamond is a very important model
...
The examining team noted that although most
students appeared to be aware of the diamond and its constituent parts, many were not clear on their
meaning
...
The examining team noted that many
candidates commented that the absence of competition in the foreign country was a 'good thing' for the
featured organisation
...
However, in the context of the diamond this could be
interpreted as a weakness, because a strong, vigorous rivalry is required to produce and retain a nation's
competitive advantage in an industry
...


cc

Michael Porter's The Competitive Advantage Of Nations, suggests that some nations' industries are more
internationally competitive than others
...


ea

Porter does not believe that countries or nations as such are competitive, but rather that the conditions
within a country may help firms to compete
...
This held that
relative opportunity costs determined the appropriateness of particular economic activities in relation to
other countries
...
)

Porter argues that comparative advantage is too general a concept to explain the success of individual
companies and industries
...

We must therefore look elsewhere for the determinants of national competitive advantage
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Porter identifies four principal factors, which are outlined in the diagram below
...

Firm strategy,
structure, rivalry

Factor
conditions

Related and
supporting industries

ial

Porter's Diamond

To download more visit http://freeaccastudymaterial
...
co
m

Demand
conditions

4
...
1
...


Human resources (skills, price, motivation, industrial relations)
Physical resources (land, minerals, climate, location relative to other nations)
Knowledge (scientific and technical know-how, educational institutions)
Capital (amounts available for investment, how it is deployed)
Infrastructure (transport, communications, housing)

ym
a







Porter distinguishes between basic and advanced factors
...
They are inherent, or
at best their creation involves little investment
...
For example, the wages of unskilled workers
in industrial countries are undermined by even lower wages elsewhere
...
They are necessary to achieve high order
competitive advantages such as differentiated products and proprietary production technology
...
It is the efficiency with which they are deployed that matters
...


ea

Porter also notes that generalised factors, such as transport infrastructure do not provide as decisive and
sustainable bases for competitive advantage as do specialised factors
...
Such factors are integral to innovation and very difficult
to move to other countries
...
1
...
This
information puts pressure on firms to innovate and provides a launch pad for global ambitions
...


(b)

The segmentation of the home market shapes a firm's priorities: companies will be successful
globally in segments which are similar to the home market
...
com/freeaccastudymaterial

39

To download more visit http://freeaccastudymaterial
...
If the home market sets high standards,
achieving these high standards will put a firm in a strong position to be competitive on the
international market
...


(e)

The rate of growth
...


(f)

Early saturation of the home market will encourage a firm to export
...
1
...
Domestic suppliers are
preferable to foreign suppliers, as they offer continuing close co-operation and co-ordination
...


4
...
4 Firm strategy, structure and rivalry

ter

Management style and industrial structure
...
For
example, German managers tend to have a strong bias towards engineering and are best at products
demanding careful development and complex manufacturing processes
...


ym
a

Strategy
...

National capital markets set different goals for performance
...
Short-term fluctuations in share prices are
not regarded as of great importance as funds are invested for the long term
...


(b)

National attitudes to wealth are important
...


(c)

National culture affects industrial priorities through the relative prestige it allots to various
industries and their leaders
...


as

tud

(a)

Domestic rivalry is important for several reasons
...

With little domestic rivalry, firms are happy to rely on the home market
...

Domestic rivalry forces firms to compete on grounds other than basic factors
...


cc







ea

The promotion by government of one or two 'national champions' who can reap major economies of
scale in the domestic market is undermined by the vigorous domestic competition among high-performing
global companies
...


fre

4
...
Porter believes clustering to be a key to national
competitive advantage
...
For example, the UK financial
services industry is clustered in London, the US hi-tech electronics industry is clustered in Silicon Valley
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(c)

To download more visit http://freeaccastudymaterial
...

Generating 18 per cent of the region's gross domestic product, the sector and its associated companies
employ more than 76,000 people globally, and account for almost 40 per cent of all car parts exported
from Spain
...
co
m

The Basque car sector has grown over several decades to such an extent that a region of less than 7,800
square kilometres is home to every part of the car production process, from steel factories to engineering
companies and technical universities
...
They include Michelin, the tyre manufacturer, Valeo, the components manufacturer, and
Daimler, which has a production plant in Vitoria
...
com

Other companies involved in different stages of the car production chain include ArcelorMittal, the
steelmaker, which has six production sites and a research centre in the Basque country, and Saint-Gobain,
the French construction materials company
...
The wavy-roofed steel and glass building opened just over three
years ago and contains numerous companies, both Basque and foreign, that have operations in the region
...

“We felt the industry was very vertically oriented, from the final clients downwards,” says Inés Anitua,
managing director of the AIC and of ACICAE, the Basque country's automotive industry cluster
...
In Europe we have a strong knowledge
[base] and the car industry was born here, so it is important we can sustain that knowledge
...

The industry in the region is very close-knit, with an interesting mix of companies, says Ms Anitua
...


as

Mondragon Automoción, part of the Mondragon co-operative group, supplies parts to Honda, Ford and
Renault-Nissan, among others, and is one example of a local company with a wide international footprint,
with production plants in Brazil, Mexico and China
...


ea

“We have many [opportunities] to work with other companies in our sector on different projects,” says
Iñigo Loizaga, a technical operator with CIE Automotive at the AIC
...
There are many synergies,” he says
...

“People receive a lot of information
...

This collection of companies, a mix of foreign multinationals and indigenous manufacturers, allows the
different parts of the production process to be in proximity to each other, and reduces the risk of one part
suffering if a large component maker were to close down
...
com/freeaccastudymaterial

41

To download more visit http://freeaccastudymaterial
...
Other regions may have a vehicle manufacturer, then foreign parts
manufacturers
...
We are not as dependent,
as we export 80 per cent of production,” says Mr Saperas
...

Now, 80 per cent of total sales are to outside Spain, with a rising proportion derived from countries
beyond Europe, and this is expected to result in record total sales for this year
...
co
m

Sales outside the EU more than doubled between 2006 and 2009 from 14
...
5
per cent, while sales within the EU, excluding Spain, fell over the same period from 56
...
2
per cent
...
Now, you have to prove you
can sell parts to many parts of the world to be able to survive
...


ial

ter

“This structure has enabled us to grow together at all levels,” says Ms Anitua
...
”
(Financial Times, 27 March 2012)

ym
a

How does a country create a diamond of competitive advantage? Governments cannot compete; only
firms can do that
...

Factors of production provide the seed corn
...


(b)

Related and supporting industries can also be a foundation, if the competences within them can be
configured in a new way
...
Although, government is not one of the four
primary factors on the diamond, governments can play a crucial role in developing national
competitive advantage
...


(d)

Extraordinary demand in the home market based on national peculiarities and conditions can set
the demand conditions determinant in the diamond
...


ea

However, while Porter's theory suggests that clustering will help international competitiveness, the cluster
approach is not guaranteed to be successful
...

Compete in the most challenging market, to emulate domestic rivalry and to obtain information
...


fre

(a)

(b)
(c)

42

Spread research and development activities to countries where there is an established research
base or industry cluster already
...


2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com

During the economic crisis, sales fell in 2010 to €10bn, compared with the €11bn generated in 2009, but
the AIC expects an increase in international sales to help total revenues for 2011 come in above, or at least
match, the 2009 figure once final numbers are calculated
...
com
(d)
(e)

Invest in human resources, both in the firm and the industry as a whole
...

Look out for new technologies which will change the rules of the industry
...


(g)

Supply overseas companies
...
Inward investment provides important learning opportunities for domestic
companies
...
In the UK crystal glass industry, many firms buy crystal glass
from the Czech Republic, and do the cutting and design work themselves
...


(i)

Exert pressure on politicians and opinion formers to create better conditions for the diamond to
develop (eg in education)
...
com

The examining team frequently stress the importance of ensuring that any models used must be relevant
in answering the question
...
This is not the case
though: marks will only be awarded for referring to theories or models which are relevant to the question
set
...


ym
a

ter

Exam focus
point

Collaborate with foreign companies
...



...
It would
be worth taking the time to study this article
...
It may be so in simple static conditions, but more
complex or dynamic environments require sophisticated techniques such as the use of leading indicators
and scenarios
...
1 Scenario building

6/13

cc

Macro scenarios are used to consider possible future environmental conditions overall
...


A scenario is a detailed and consistent view of how the business environment of an organisation might
develop in the future
...
Firms
therefore try to model the future and this technique is called scenario building
...
They inevitably
deal with conditions of high uncertainty, so they are not forecasts; they are, rather, internally consistent
views of potential future conditions
...
com/freeaccastudymaterial

43

To download more visit http://freeaccastudymaterial
...
1
...


5
...
2 Building scenarios
Keeping the scenario process simple is the way to get the most out of scenario building
...

The team should include 'dissidents' who challenge the consensus and some reference outsiders
to offer different perspectives
...


Steps in scenario planning (Mercer)
...




Step 2

Environmental analysis helps determine key factors
...


ter



Bring drivers together into a viable framework

This relies almost on an intuitive ability to make patterns out of 'soft' data, so is the
hardest part of the process
...




There might be many trends, but these can be grouped together
...
The underlying logic of the connections between
the items can be explored
...


tud

Step 3



The scenarios should be complementary, not opposite
...

There is no 'good' or 'bad' scenario
...
If not, go back to Step 1
...

More than three scenarios will confuse people
...


ea




Step 6

Most scenarios are qualitative rather than quantitative in nature
...




Role play can be used to test what the scenarios mean to key actors in the future of
the business
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(a)

To download more visit http://freeaccastudymaterial
...
1
...
An
industry scenario is an internally consistent view of an industry's future structure
...
A set of scenarios would reflect the possible future implications of current uncertainties
...

Using scenarios to formulate competitive strategy
A strategy built in response to only one scenario is risky, whereas one supposed to cope with them
all might be expensive
...



...
A less
probable scenario may be one whose failure to occur would have the worst
consequences for the firm
...


Hedge

The firm chooses the strategy that produces satisfactory results under all scenarios
...
The low risk is paid for by a low reward
...
It is safer, but sacrifices
first-mover advantages
...


ym
a

ter

ial

Assume the most
probable

as

Case Study

tud

A question in the June 2013 exam required students to discuss the potential use of scenarios by a
company's management team when considering whether to enter an overseas market
...


Leading through uncertainty

In December 2008, The McKinsey Quarterly published an online article called 'Leading through
uncertainty'
...
'They need greater flexibility to create strategic
and tactical options they can use defensively or offensively as conditions change
...
'
The article argued that instead of focusing on quarterly performance, companies should take a more
flexible approach to planning, and should develop several coherent, multipronged strategic action plans
...
Executives must be ready to pursue them as the future
unfolds
...
com

Approach

The problems in the global credit markets in 2008 created volatility and destroyed existing business
models
...
This information will

Part A Strategic position  2: Environmental issues

join us on facebook @ fb
...
com
help executives plan for the future
...
Such knowledge is critical in a crisis, when
lead times disappear quickly, and organisations can only seize the initiative if they act before everyone else
understands the probable outcome
...
mckinseyquarterly
...
2 Forecasts

ym
a

Forecasting attempts to reduce the uncertainty managers face, by predicting what is likely to happen
...
In simple and static conditions, the past is a relatively good guide to the future, but
the past is not such a good guide when conditions are dynamic, volatile and going through substantial
change
...
Quantitative techniques
use historical data as a basis for predicting the future
...


5
...
1 Qualitative forecasting methods

Qualitative techniques include the Delphi technique, sales force opinions, executive opinions and market
research
...
These forecasts are shared, and each then goes on to produce a revised
forecast
...


(b)

Sales force opinions involve a sales manager gathering input from the sales team and collating
their opinions into an aggregate forecast
...


cc

ea

(d)

as

(a)

Market research involves the use of customer surveys to evaluate potential demand
...


5
...
2 Quantitative forecasting techniques: linear regression analysis

12/13, 12/11

Quantitative techniques are based on the use of historical data to predict the future
...

A commonly-used forecasting method is the linear regression method, also known as the least squares
technique
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Business intelligence is also vital, because it promotes faster, more effective decision making
...
They can also gather information by talking
to customers and suppliers
...
In difficult economic conditions, it can
make the difference between missing opportunities to buy distressed assets and leaping in to catch them
...


To download more visit http://freeaccastudymaterial
...
Changes in the value of y are predicted from changes in the value
of x, based on the linear relationship that is calculated
...
co
m

a is the intercept of the line on the y axis: this is the value of y when x = 0

ib the gradient of the line: this is the amount of the predicted change in the value of y for each
change in the value of x by 1
...
com

When linear regression analysis is used to predict the value of y in a future time period, the independent
variable x is time, and successive time periods are converted into numerical values 1, 2, 3, 4 and so on
...


ym
a

In the exam, you may be required to analyse and comment on forecasts that are made using linear
regression analysis
...
The examining team noted that a significant number of students
missed obvious points, such as explaining the meaning of the correlation coefficient, and thereby failed to
achieve the easy marks on offer
...
This is a skill which often lets students down
...
For example, if you calculate the correlation
coefficient between two variables and this generates a low figure, you should go on to highlight what this
means
...


fre

Exam focus
point

ter

Linear regression analysis is called the least squares method because the 'line of best fit' that is calculated
from the historical data is a straight line that minimises the total of the differences squared between the
actual values of y in the historical data, and the predicted values of y that would be calculated using the
line of best fit
...
com/freeaccastudymaterial

47

To download more visit http://freeaccastudymaterial
...
2
...
co
m

500

ial

1

y = 488 + 18 x
Required
Calculate the forecast sales for 2012 and 2013
...


tud

5
...
4 Correlation

It is important to assess the extent to which forecasts based on a line of best fit can be relied upon
...
In other words, to
what extent are changes in the value of y correlated to changes in the value of x?

cc

as

Correlation does not necessarily mean a cause-and-effect relationship
...
On the other hand, changes in the value of y may be related to
changes in the value of x without changes in x being the cause of changes in y
...

Having said this, it is of course possible that where two variables are correlated, there is a direct causal
link to be found
...
A value of - 1 indicates that there
is perfect negative correlation between y and x
...
A value of + 1 indicates that
there is perfect positive correlation between y and x
...
When r is 0 there is
no observable correlation at all
...


fre

(a)

ea

The correlation between changes on the value of y and x can be measured statistically, by a coefficient of
correlation r and a coefficient of determination r2
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
(b)

The coefficient of determination r2 is the square of the coefficient of correlation
...
For example, if r is –0
...
984
...


5
...
5 Problems with least squares regression analysis


...
986, and r2 is 0
...


There are several major problems with using linear regression analysis for forecasting:

It assumes a linear relationship between changes in the value of y and changes in the value of x,
which may also be an incorrect assumption
...
For example, if r
= + 0
...


(d)

It assumes that the value of one variable, y, can be predicted or estimated from the value of one
other variable, x
...


(e)

As with any forecasting process, the amount of data available is very important
...


ym
a

ter

ial

(b)

tud

The December 2011 exam included a Section B question which asked candidates to evaluate linear
regression and correlation data for use in the pricing decision for an e-learning product, particularly
highlighting any limitations in using such data
...


as

5
...
6 Least squares regression analysis for other dependent relationships
The example of least squares regression analysis for forecasting is an example of time series analysis, and
forecasting future values of y from a trend line over time
...


ea

cc

For example, it may be possible to predict the amount of a household's monthly spending (dependent
variable) from the amount of monthly income that members of the household earn
...

The only requirements for estimating dependent relationships and values are that:
(a)
(b)

An independent and a dependent variable should be identified
Each of them should be measurable quantitatively, in pairs of data (values for x and corresponding
values for y)
...
In the previous example, there was a fall in sales between Year 7 and Year 8,
which might indicate that sales of Product Z may be going into decline and the historical growth
pattern of the past may not continue into the future
...
com

(a)

Part A Strategic position  2: Environmental issues

join us on facebook @ fb
...
com
5
...
7 Time series analysis with seasonal or cyclical variations
Forecasting future values over time (time series analysis) from historical data can be complicated by the
existence of seasonal variations or cyclical variations in the value of in the dependent variable y
...

Moving averages can be used to:

(b)

Estimate the amount of seasonal variation for each 'season' (day of the week, or month or quarter
of the year)

(c)

Combine forecasts using the line of best fit and the estimated seasonal variation to forecast future
seasonal sales in the future
...
2
...
co
m

Calculate a historical trend line, from which it is possible to establish a trend line of best fit, using
linear regression analysis (or another forecasting method), and measure the correlation between
time and the dependent variable (using r or r2)

Quarter 2

Quarter 3

Quarter 4

2008

94

111

124

106

2009

102

117

135

118

2010

109

127

142

122

2011

110

135

152

128

ym
a

Quarter 1

ter

Sales of Product x (in units) in each quarter for the years 2008 – 2011 were as follows
...

Required

What is a suitable estimate of seasonal variations in sales each quarter?

(b)

If the trend line estimate for sales in the four quarters of 2012 is 136, 138, 140 and 142 in quarters
1, 2, 3 and 4 respectively, what will the forecast of sales be in each quarter of 2012?

The first step is to calculate a trend line and seasonal variations from the trend in each quarter
...
Since there are four quarters in each year, a moving
average would be calculated as the average of sales over a cycle of four quarters
...
5, and the average of quarters 2, 3, 4 and 5 is quarter
3
...
To obtain a moving average for quarter 3, we must therefore calculate the moving average of
quarters 1 – 4 and quarters 2 – 5, and then calculate the average of these
...
Similarly the moving total for 2008 Quarter 4 is the sum of sales in time
periods (2 – 5) + (3 – 6) , and so on
...


50

2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...
75

+ 14
...
9

– 1
...
50

–5
...
0

– 1
...
63

– 11
...
6

+ 2
...
50

+ 0
...
7

– 2
...
88

+ 16
...
9

+ 0
...
00

– 3
...
0

+ 1
...
13

– 14
...
6

+ 0
...
50

+ 2
...
7

– 0
...
13

+ 16
...
9

+ 0
...
25

– 4
...
0

– 0
...
50

– 18
...
6

– 3
...
7

+ 1
...
50

+ 4
...
com

Seasonal
variation

3

2011

Variation

2

2010

Trend

1

2009

Moving
total


...
Adjustments are made so that the total of seasonal variations from the trend line
each year add up to 0, and there is some rounding of the figures to limit the seasonal variations to
one decimal place
...
25

Total

– 5
...
63

+ 0
...
12

– 3
...
13

+ 2
...
87

– 4
...
50

+ 4
...
26

+ 7
...
24

– 12
...
75

+ 2
...
75

– 4
...
75

+ 0
...
19

+0
...
19

+ 0
...
56

+ 2
...
94

– 4
...
6

+ 2
...
9

– 4
...


fre

When the residual is large, the accuracy of either the trend line or the seasonal variation estimates
would be called into question
...
com/freeaccastudymaterial

51

To download more visit http://freeaccastudymaterial
...

Trend line

Seasonal variation

Sales forecast

Q1

136

– 14
...
4

Q2

138

+ 2
...
7

Q3

140

+ 15
...
9

Q4

142

– 4
...
0


...


5
...
9 Limitations of moving averages and seasonal variations

Forecasting with moving averages and seasonal variations has several limitations
...


ial

The use of a trend line assumes that future sales growth (or decline) will follow the same trend as
in the past, and that there have been no changes in the trend
...


ter

5
...
10 Exponential smoothing

ym
a

Linear regression analysis assumes that the trend line is rising or falling in a straight line
...

Exponential smoothing is a technique that can be applied to time series data in order to develop a
forecast
...

With exponential smoothing, the forecast for the next time period st+1 is:

tud

αxt + (1 – α)st
Where α is any value between 0 and 1

xt is the actual result (say, actual sales) in time period t
st is the forecast that was made for time period t
...
The closer that α is to 1, the less the reliance that is
placed on previous forecasts and so on actual results in previous periods
...
2
...


Exam focus
point

52

The ability to predict the span of time between a change in the indicator and a change in market
demand is important
...


fre

(b)

Leading indicators are indicators which change before market demand changes
...


ea

(a)

The Pilot Paper included a 25 mark question which required candidates to explain and evaluate a forecast
spreadsheet, and to then go on to analyse the performance of the organisation
...


2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...
Sector may
be used in a similar way in public and not-for-profit services
...
co
m

The macro environment provides a general background of influences on the organisation
...
Taken together, these factors are sometimes called the task environment
...


To download more visit http://freeaccastudymaterial
...
The terminology is a little vague in that, for example,
'the public sector' is also used to mean all public services of whatever kind
...


ter

Industries tend not to be stable: such features as location, products, customers and rate of growth all tend
to be more or less variable
...
Previously distinct industries can converge: their technologies; activities and
products start to mingle or become complementary; and their member firms start to compete or
collaborate
...


ym
a

Supply-led convergence occurs where suppliers discover links with suppliers in other industries and
move together to co-operate in building new markets
...
Government can also promote
supply-led convergence in the private sector, especially by deregulation, as has happened in the UK
financial services industry
...


tud

Demand-led convergence occurs when customers treat the products of different industries as
substitutable, as in the case of mobile and fixed line telephones, or complementary, as in the case of air
travel and car hire
...

The five forces is one of the three or four most important models in the field of strategy and is explicitly
referenced in the Study Guide for P3, so could be specifically required to answer an exam question
...
In particular, you need to be able to decide
which of the five categories properly describes a given strategic problem which may be discussed in a
scenario
...


ea

Exam focus
point

6/13, 12/11, 6/11, 6/10, 12/09

In discussing competition, Porter (Competitive Strategy) distinguishes between factors that characterise
the nature of competition
...


(b)

Factors within a particular industry lead to the competitive strategies that individual firms might
select
...
com/freeaccastudymaterial

53

To download more visit http://freeaccastudymaterial
...
(You must learn these five factors)
...

The June 2008 exam asked candidates to use an appropriate model to analyse the competitive
environment of a mobile telephone company
...
This should have indicated to candidates that the Five Forces
model was an appropriate model to use
...
1 The threat of new entrants (and barriers to entry to keep them out)
A new entrant into an industry will bring extra capacity and more competition (and so could, in turn, drive
down profits)
...

The strength of the barriers to entry
...

The likely response of existing competitors to the new entrant
...
Existing firms in an industry may have built up a good brand image and
strong customer loyalty over a long period of time
...

Capital requirements
...

Knowledge requirements
...
It is much more difficult to enter an industry which requires significant specialist
knowledge and skills, than an industry where no specialist skills are required
...
High fixed costs often imply a high breakeven point, and a high breakeven point
depends on a large volume of sales
...
This is expensive (although Japanese
companies have done this in some cases)
...
Switching costs refer to the costs (time, money, convenience) that a customer
would have to incur by switching from one supplier's products to another's
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

The threat of new entrants to the industry
The threat of substitute products or services
The bargaining power of customers
The bargaining power of suppliers
The rivalry amongst current competitors in the industry

ial







To download more visit http://freeaccastudymaterial
...

(f)

Access to distribution channels
...
New distribution channels are difficult to establish; and existing distribution channels, hard
to gain access to
...
co
m

(i)
(ii)
(iii)
(iv)

Case Study

Japanese firms

ial

To download more visit http://freeaccastudymaterial
...
Kao (household goods), Suntory (drinks), Nomura
(banking and securities) were seen as successors to firms such as Procter and Gamble and Heineken
...
For example, Japanese pharmaceutical firms, such as Green Cross, have
not achieved the world domination they were expected to in the 1980's
...


ym
a

Perhaps cars and consumer electronics are the exception rather than the rule
...
Normally, outsiders do not find it easy to break into established distribution patterns
...

(a)

The car industry is vertically integrated, with a network of exclusive dealerships
...
This barrier to entry was not inherently complex
...
This lowered entry barriers
...
Newcomers to a market are the natural allies of such new outlets: existing
suppliers prefer to shun 'discount' retailers to protect margins in their current distribution
networks
...


When considering the impact of change nowadays it is impossible not to mention the impact of ecommerce and the internet, because they have enabled new business models to be established
...


Part A Strategic position  2: Environmental issues

join us on facebook @ fb
...
com

7
...
Substitutes are always present, but they can be easy to overlook because they may be
very different from the industry's product
...

It is very easy to misunderstand the nature of substitute products in Porter's model: while they provide
competition, they are not goods or services produced by competitors in the same industry
...
co
m

Exam focus
point

Case Study

The Channel Tunnel

Passengers have several ways of getting from London to Paris, and the pricing policies of the various
industries transporting them there reflects this
...
Its main competitors come from the ferry

Eurostar is the rail service from London to Paris/Brussels
...
Prices on the London-Paris air routes fell with the commencement of
Eurostar services, and some airlines have curtailed the number of flights they offer
...
Therefore, you will find that Le Shuttle sets its prices with
reference to ferry company prices, and vice versa
...
Substitute products or services limit
an industry's profit potential by placing a ceiling on prices (because buyers will switch to the substitute if
it offers a better value alternative)
...

The buyer's cost of switching to the substitute is low
...
3 The bargaining power of customers

as

Customers want better quality products and services at a lower price
...
Just how strong the position of customers will be
depends on a number of factors
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

7
...
The ability of suppliers to get higher prices depends on
several factors
...
co
m



ial

To download more visit http://freeaccastudymaterial
...
5 The rivalry amongst current competitors in the industry

ym
a

Factors determining the intensity of competition

ter

The intensity of competitive rivalry within an industry will affect the profitability of the industry as a
whole
...
Competition can stimulate demand, expanding the market, or it can leave
demand unchanged, in which case, individual competitors will make less money, unless they are able to
cut costs
...
Rivalry is intensified when firms are competing for a greater market share in a total
market where growth is slow or stagnant
...


(b)

Cost structure
...
A perishable product produces the same effect
...
Suppliers will compete if buyers can, and do, switch easily (eg Coke vs Pepsi)
...
A supplier might need to achieve a substantial increase in output capacity, in order to
obtain reductions in unit costs
...
When one firm is not sure what another is up to, there is a tendency to respond to the
uncertainty by formulating a more competitive strategy
...
If success is a prime strategic objective, firms will be likely to act very
competitively to meet their targets
...
These can take many
forms
...
com/freeaccastudymaterial

57

To download more visit http://freeaccastudymaterial
...

Between the 1970s and the early 2000s, the tea industry was characterised by oversupply, with a surplus
of about 80,000 tonnes a year
...
Some reports suggest that global tea consumption has increased by nearly 60% since the early
1990s
...



...


The rising price of tea around the world is being driven in part by the impact of adverse weather patterns
as a result of climate change which has been damaging crops
...
Tea estates
swallow capital, and the return is not as attractive as in industries such as technology or services
...
Experts predict that both countries
will lead a boom in the growth of the global population over the next 100 years, which in turn will put
increasing strain on demand for food and drink
...

Carry out a five forces analysis of the tea growing industry
...
Barriers to entry are high (eg the increasing cost of hiring skilled workers to work
on tea estates coupled to the need to find areas of the world which are less susceptible to the impact of
climate change)
...
Competitive rivalry is high
because of the difficulty of stockpiling fresh tea
...


as

Customer bargaining power is lowering as the shortage of available tea around the world means that teabag manufacturers have to accept the growers higher prices
...


7
...
These characteristics generally amount to
communication improvements but IT can also be a substantial product in its own right
...

IT can surmount entry barriers
...
An example is the use of internet banking, which
sometimes eliminates the need to establish a branch network
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
In
recent times, there has been an increase in the number of well known manufacturers working more closely
together in a bid to make tea growing more sustainable
...
com
Bargaining power of suppliers and IT
Increasing the number of accessible suppliers
...
IT enhances supplier information available to customers
...
Suppliers' power can be shared
...
Such relationships might be developed with a few key
suppliers
...


(c)

Switching costs
...


Bargaining power of customers
...



...


(c)

Customers also have access to improved information; this can increase their bargaining power
...


ter

ial

IT can raise switching costs by locking customers into networks
...
com

(a)

Substitutes
...
Here are some examples
...


(b)

IT is the basis for new leisure activities (eg computer games) which substitute for TV or other
pursuits
...


ym
a

(a)

tud

IT and the state of competitive rivalry
...
The effect of the internet may be to
expand the size of the market
...
These are discussed later in this Text
...
Some
competitors in the financial services industry share the same ATM network
...
7 Using the five forces model: a caution

cc

The five forces model provides a comprehensive framework for analysing the competitive environment
...
Because it is comprehensive, it can encourage a feeling of that all
factors have been duly considered and dealt with
...
If there is too much subjectivity, unfounded complacency will result
...
It is
necessary to define with great care just what market or market segment you are dealing with
...


fre

BPP's UK provision of classroom training in accountancy is a good example
...

The market for training for potential ICAEW accountants is subject to considerable customer bargaining
power, since there are a few large firms that predominate
...
com/freeaccastudymaterial

59

To download more visit http://freeaccastudymaterial
...

The need for careful analysis is, perhaps, most demanding in the area of substitute products or services
...


7
...
co
m

It is possible to view the influence of government as so great as to justify viewing it as a sixth force
...
There is also the consideration that competition itself is often
the target of specific government policies, either to encourage it or, quite often, to restrict it
...


fre

ea

cc

as

tud

ym
a

ter

ial

The examining team has commented that candidates often do not appear to understand how the five
forces interrelate, or how the importance of a particular force varies over time
...


60

2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com

Exam focus
point

To download more visit http://freeaccastudymaterial
...
The layers and the elements within them all interact with
one another
...




The macro-environment may be analysed into six segments using the PESTEL framework
...
Public policy on competition
and consumer protection is particularly relevant to business strategy
...




The social and cultural environment features long-term social trends and people's beliefs and attitudes
...




The physical environment is important for logistical reasons, as a source of resources, and because of
increasing regulation
...
Companies are under
pressure to incorporate measures to protect the environment into their plans
...
There is also a new range of markets for goods and services designed to protect or have
minimum impact on the environment
...


ial

ter

ym
a

Market globalisation grows as tastes converge and communications improve
...

Governments promote free trade and international standards
...


tud

–
–
–
–

Porter identifies four principal determinants of national competitive advantage
...
com


...
It may be so in simple static conditions, but more
complex or dynamic environments require sophisticated techniques such as the use of leading indicators
and scenarios
...
Sector may
be used in a similar way in public and not-for-profit services
...




IT has characteristics that can affect all five competitive forces
...


fre

ea

cc



Part A Strategic position  2: Environmental issues

join us on facebook @ fb
...
com

Quick Quiz
What are the three concentric layers that make up the business environment?

2

What does PESTEL stand for?

3

Which four aspects of globalisation may be regarded as key drivers of change?

4

What are the four elements of Porter's diamond?

5

What are the steps in scenario planning?

6

What are the five forces?

7

Fill in the gaps
...
, and
collectively determine the
...
as a whole
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

1

To download more visit http://freeaccastudymaterial
...
com









...
(Note: substitutes are not goods or services produced by competitors in the same industry; they
are produced by another industry
...
com/freeaccastudymaterial

63

ial
ter
ym
a
tud
as
cc
ea
fre
64

2: Environmental issues  Part A Strategic position

join us on facebook @ fb
...
com


...
com

ter

ial

Competitors and
customers

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
A
detailed knowledge of both is essential for the development of effective
strategy
...


fre

ea

In this chapter, we start to deal with specific topics that may form the basis of
exam questions
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
Much of the material, such as
the discussion of the nature of marketing, is still background, but the more specific topics, such as market
segmentation, critical success factors and customer analysis, may have direct relevance to future
examination questions
...
The marketing mix is defined later in
this Study Text
...

Hyper-competition is an unstable state of constantly shifting short-term advantage
...


The industry life cycle has four phases: inception, growth, maturity/shakeout and decline
...

Strategic group analysis examines the strategic space occupied by groups of close competitors in
order to identify potential competitive advantage
...
The nature of
competition is that future developments are not controllable by a single firm; each competitor will exercise
its own influence on what happens
...

Strategic managers must attempt to forecast what form this change is likely to take, since it is their
responsibility to make plans that will be appropriate under future conditions
...


66

3: Competitors and customers  Part A Strategic position

join us on facebook @ fb
...
com

Exam guide


...
com

1
...
1
...
co
m

An incumbent firm already operating successfully in an industry improves existing barriers to entry and
erects new ones
...
This does not necessarily mean attacking the market leader head-on
...
Instead, the
challenger may attack smaller regional firms or companies of similar size to itself that are vulnerable
through lack of resources or poor management
...


The head-on attack matches the target's marketing mix in detail, product for product and so on
...

The flank attack is mounted upon a market segment, geographic region or area of technology that
the target has neglected
...


(d)

The bypass attack is indirect and unaggressive
...


(e)

Guerrilla attack consists of a series of aggressive, short-term moves to demoralise, unbalance and
destabilise the opponent
...


ym
a

ter

ial

(b)

To download more visit http://freeaccastudymaterial
...
1
...
On the other hand,
the incumbent may respond; this will often be by means that amount to reinforcing the barriers to entry,
such as increasing promotional spending
...

Position defence relies upon not changing anything
...


(b)

Mobile defence uses market broadening and diversification
...


(d)

Contraction defence involves withdrawal from vulnerable markets and those with low potential
...


(e)

Pre-emptive defence gathers information on potential attacks and then uses competitive
advantage to strike first
...


cc

as

(a)

ea

A challenger faced with such moves may decide to start a price war
...


1
...
3 Fighting back

fre

An incumbent faced with a vigorous and resourceful challenger may decide in turn to attack the entrant's
own base, perhaps by cutting prices in its strongest market
...


1
...
4 Resource implications
Both attacking and defending require the deployment of cash and strategic skill
...


Part A Strategic position  3: Competitors and customers

join us on facebook @ fb
...
com
1
...
5 Hypercompetition


...
This
allows the careful building of competitive advantages that are difficult to imitate
...
It is created by frequent, boldly aggressive
competitive moves
...
Under these conditions, continuing success depends on effective exploitation of a series
of short-term moves
...
2 The industry life cycle
FAST FORWARD

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

Competition may
be on price

More customers
attracted and aware

Mass market,
brand switching
common

Enthusiasts,
traditionalists,
sophisticates

Good, possibly
starting to decline

Eroding under
pressure of
competition

Variable

No standards
established

Technologies
become more
standardised

Technology is
understood across
the industry

Technology is
understood across
the industry

Small scale batch
production
...

Distribution
networks expanded

Long production
runs
...

Production is
reduced

ter

Growth

cc

as

tud

ym
a

Inception

ea

Each phase has different implications for competitive behaviour and corporate strategy eg if an industry is
growing, the organisations in that industry can grow as the market develops
...


fre

Costs faced by organisations will also vary at different stages in the industry lifecycle
...
Production costs may be low
during the maturity stage as processes have been refined and contracts negotiated, but marketing
expenditure may be high in order to protect market share
...


68

3: Competitors and customers  Part A Strategic position

join us on facebook @ fb
...
com

Later in this Study Text, we will discuss the concept of the product life cycle: this is a well established
strategic and marketing tool
...
This cycle reflects changes in
demand and the spread of technical knowledge among producers
...
Later, innovation shifts to processes in order to
maintain margins
...


To download more visit http://freeaccastudymaterial
...
com

Industry lifecycle

Decline


...

Growth

Shakeout

Maturity

Decline

Experimenters,
innovators

Early adopters

Growing
selectivity of
purchase

Mass market,

Price
competition
Commodity
product

R&D

High

Extend product
before
competition

Seek lower cost
methods of
supply to access
new markets

Low

Company

Early mover

React to more
competitors
with increased
marketing
mass
production

Potential
consolidation
through takingover rivals
...


Many
competitors,
price cutting but
weeding out of
weaker players

Depending on
industry, a few
large
competitors

Levelling off

Stable, high or
under pressure

Competitors

A few

as

Production
focused

tud

Customers

ym
a

Inception

ea

cc

No major
barriers to
entry

More entrants
to the market

fre

Profitability

Low or
negative, as an
investment

Growing

Products well
known

Cost control or
exit

Seek cost
reduction
...
Management
must pursue different strategies at each stage
...
com/freeaccastudymaterial

69

To download more visit http://freeaccastudymaterial
...
co
m





Penetrate market, possibly by reducing price



Maintain barriers to entry (eg fight patent infringements, keep price competitive)



High promotion of benefits to attract early majority of potential buyers



Build brand awareness to resist impact from new entrants



Ensure investors are aware of potential of new products to ensure support for financial strategy



Search for additional markets and product refinements (ie market penetration)



Consider methods of expanding and reducing costs of production (eg contract manufacturing
overseas, building own factory in a low cost location)



Product development

ter

ym
a

Shakeout phase





ial

Ensure capacity expands sufficiently to meet firm's target market share objectives

Monitor industry for potential mergers and rationalisation behaviour
Periodic review of production and financial forecasts in light of sales growth rates
Shift business model from customer acquisition to extracting revenue from existing customers
Seek to extend growth by finding new markets or technologies

tud

Maturity phase

Maximise current financial returns from product



Defend market position by matching pricing and promotion of rivals



Modify markets by positioning product to gain acceptance from non-buyers (eg new outlets or
suggested new uses)



Modify the product to make it cheaper or of greater benefit



Intensify distribution



Leverage the existing customer database to gain additional incomes



Engage in integration activities with rivals (eg mergers, mutual agreements on competition)



Ensure successor industries are ready for launch to pick up market

cc

as





Harvest cash flows by minimising spending on promotion or product refinement
Simplify range by weeding out variations

fre



ea

Decline phase




Evaluate exit barriers and identify the optimum time to leave the industry (eg leases ending, need
for renewal investment)



Seek potential exit strategy (eg buyer for business, firms willing to buy licences etc)



70

Narrow distribution to target loyal customers and reduce stocking costs

The response of competitors is particularly important – there may be threats as they attempt to
defend their position, or opportunities, eg when a competitor leaves the market
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Inception

Maturity

Decline



Correct any
problems in
product design





Product
efficiency





Cost control



Improve
features to
develop
competitive
advantage



Quality control
(minimise
defective
products)



Only the most
productive/
efficient firms
will survive



Marketing
aimed at
maintaining
customer
loyalty



Establish market
niche for
product



Establish brand
loyalty: heavy
media use,
product samples
and other
promotions


...
com



Establish
product
position and
target markets

Look at ways to
improve quality
and design to
sustain
competitive
advantage

Assess if it is
possible to
modify product
so that life
cycle is started
again

ial



Marketing



Ensure product
quality is
maintained
despite volume
growth

ter

Product

Growth



Recruiting staff



as



Training and
development of
staff to deal with
competitive
pressures as
competition gets
tougher



Personnel
incentives to
improve
productivity
and efficiency

Arrange
funding for
product
development
and marketing

ea

cc

Finance

Establish staff
requirements



HR

Establish
distribution
capabilities to
support
increased
production

tud



fre



Assess capital
requirements
for production
facilities which
may be needed
for increased
capacity in
growth phase

The industry life cycle model is an important concept that may illuminate some aspects of strategic
thought
...
com/freeaccastudymaterial

71

To download more visit http://freeaccastudymaterial
...

Proper attention must always be paid to current circumstances and options
...


ial

The decline in sales of The Scotsman newspaper have left it classed as being a 'regional' title
...
com has increased though
...
The failure to convert
the increase in online readers into increased advertising revenue had led to a decline in the value of the
titles owned by Johnston Press, the Edinburgh-based company which includes The Scotsman among
more than 200 mainly local titles
...


ter

John McLellan, of the Scottish Newspaper Society said, "some titles have been responding to changing
market conditions for 20 years of the digital revolution
...


ym
a

Professor Raymond Boyle, a communications expert at Glasgow University, commented on the state of
the industry: "Traditionally, Scottish newspapers have been a very important part of Scottish national
identity
...
Certain sectors remain very strong; sport, for
example, and football remains an important part of Scottish newspapers and their identity
...

Adapted from an article:

When considering an organisation's strategy, it is important to consider where its industry (or its
products) are in their lifecycles
...
If there is a mismatch between strategy and the
position in a lifecycle, the strategy will not be successful
...
By the mature
phase, products will be fairly standardised and there is likely to be intense price competition in the
industry
...

Instead the company should be looking to make production as efficient and cost-effective as possible to
preserve its margins by reducing its costs
...
bbc
...
uk

ea

The lifecycle model is explicitly referenced in the Study Guide so it may be specifically required in a
question
...


1
...
It is possible to
refine this by considering strategic groups
...
Such groups arise for a variety
of reasons, such as barriers to entry or the attractiveness of particular market segments
...
Here are some examples of such characteristics
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

In August 2013, the BBC reported on the continued decline of the Scottish newspaper industry
...
Several newspapers have seen their sales fall by more than half in the past decade
...
com








Product diversity
Geographical coverage
Extent of branding
Pricing policy
Product quality
Distribution method
Target market segment


...
(A similar technique is used for
specific products and is illustrated later in this chapter: this is product positioning
...
It
improves knowledge of competitors and shows gaps in the organisation's current segments of operations
...
Strategic problems may also
be revealed
...
com

2 The marketing mix

12/13

The marketing function aims to satisfy customer needs profitably through an appropriate marketing mix
...
These are product, price, place and promotion and are sometimes known as the four Ps
...
For services, this is extended to
include people, processes and physical evidence
...
This
is so the product can be positioned in the market to appeal to the customer
...

The marketing mix can be useful when answering questions that require you to advise on courses of
action
...


tud

Exam focus
point

ea

A product (goods or services) is anything that satisfies a need or want
...

From the firm's point of view, the product element of the marketing mix is what is being sold
...
Many products
might satisfy the same customer need
...
1 Product

as

A question in the December 2013 exam required students to use their understanding of the marketing mix
to recommend appropriate marketing strategies for use at a visitor attraction which was experiencing
financial difficulties
...
The examining team highlighted that students should have used the model as a framework to
help come up with ideas on future marketing strategies
...
com/freeaccastudymaterial

73

To download more visit http://freeaccastudymaterial
...
2 Place
Place deals with how the product is distributed, and how it reaches its customers
...
Where are products sold?

(b)

Logistics
...


A firm can distribute the product itself (direct distribution) or through intermediary organisations such as
retailers
...
co
m

2
...
Promotion is the
element of the mix over which the marketing department generally has most control
...


ial

Advertising (newspapers, billboards, TV, radio, direct mail, internet)
Sales promotion (discounts, coupons, special displays in particular stores)
Direct selling by sales personnel
Public relations

ter

2
...
Price is influenced by
many factors including economic factors (supply and demand), competitor's prices and payment terms
...


2
...
The intangible nature of services makes these extra three Ps
particularly important
...
5
...
Front-line staff must be selected, trained and
motivated with particular attention to customer care and public relations
...
5
...
The staff involved are performing or producing a service, selling the service and also liaising
with the customer to promote the service, gather information and respond to customer needs
...
If an airline, for example,
develops a sophisticated ticketing system, it can offer shorter waits at check-in or a wider choice of flights
through allied airlines
...


2
...
3 Physical evidence

fre

Services are intangible: they have no physical substance
...

This could be addressed through physical representation such as tickets and programs relating to
entertainment, or by incorporating evidence into the design and specification of the service environment
such as decor, colour scheme, noise levels, background music, fragrance and general ambience
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

3 Customers and segmentation
3
...

Buyers do not always proceed rationally, though the motivation of industrial buyers may be more logical
than that of consumers
...
co
m

In marketing, a market is defined in terms of its buyers or potential buyers
...
com

3
...
1 Consumer goods

Convenience goods
Shopping goods
Speciality goods

ym
a





ter

Consumer goods are in such a form that they can be used by the consumer without the need for any
further commercial processing
...


If an article has close substitutes, is purchased regularly in small amounts of low unit value, and the
customer insists on buying it with the minimum of inconvenience, the article is called a convenience
good
...
Promoting a unique image for the product, for example by branding, is therefore
important
...
They usually have a higher unit
value than convenience goods and are bought less frequently, usually from a specialist outlet with a wider
range on offer
...


as

When a manufacturer, either by product design or advertising, has become associated in the public mind
with a particular product (eg Rolls Royce cars, Wedgwood pottery) the article produced is no longer a
shopping good, but a speciality good, possessing a unique character which will make a customer go out
of their way to ask for it by name and find a dealer who sells it
...
1
...
The industrial market, more than the consumer market, is influenced by the general state of the
economy and the government's economic policy
...
For example, the demand for aluminium is in part derived from the demand for
cans, which might itself be derived from demand for the beer with which the cans will be filled
...
Sales
policy decisions by a supplier are therefore more important than sales promotion activities in an industrial
market
...


Part A Strategic position  3: Competitors and customers

join us on facebook @ fb
...
com
3
...
3 Organisational buying behaviour
The organisational buying behaviour process has some similarities with consumer buyer behaviour, but is
supposedly more rational
...
1
...
The marketing manager needs to know who in each
organisation makes the effective buying decisions and how decisions are made: the DMU might act with
formal authority, or as an informal group reaching a joint decision
...


3
...
5 Factors in the motivation mix of business or government buyers
Business or government buyers are motivated as follows
...


(b)

Price
...

Budgetary control may encourage the buying department to look further afield for potential
suppliers to obtain a better price or quality of goods
...
Where a customer has a highly organised and costly production system, they
will clearly want to avoid a breakdown in the system, due to a faulty machine or running out of
stocks of materials
...
The importance of credit could vary with the financial size of the buyer
...
Both consumer and industrial markets can usefully be segmented and several
bases exist for the process
...


cc

FAST FORWARD

as

3
...
The
purpose of segmentation is to identify target markets in which the firm can take a position
...
Every market consists of
potential buyers with different needs and different buying behaviour
...
A different marketing approach will be taken by an organisation for each market
segment
...
Therefore, the ideas we are discussing here will also link into the
chapters of e-business and e-marketing later in this Study Text
...

Kotler

3: Competitors and customers  Part A Strategic position

join us on facebook @ fb
...
com


...


To download more visit http://freeaccastudymaterial
...

(a)

Although the total market consists of widely different groups of consumers, each group consists of
people (or organisations) with common needs and preferences, who perhaps react to 'market
stimuli' in much the same way
...



...
com

Reason

3
...

One basis or segmentation variable might be superior to another in a hierarchy of variables
...


tud

(b)

ym
a

An important initial marketing task is the identification of segments within the market
...


3
...


as

3
...
1 Geographical segmentation

Geographical segmentation is very simple, but useful, especially in business-to-business marketing, which
relies heavily on personal selling
...


cc

3
...
2 Psychographic or lifestyle segmentation

ea

Psychographic segmentation is not based on objective data so much as how people see themselves and
their subjective feelings and attitudes towards a particular product or service, or towards life in general
...
This is very useful for many
consumer goods, since they can be designed and promoted to appeal on the basis of such variables
...
4
...
It uses such variables as usage rate, impulse purchase, brand
loyalty and sensitivity to marketing mix variables such as price, quality and promotion
...


Part A Strategic position  3: Competitors and customers

join us on facebook @ fb
...
com
Benefit segmentation of the toothpaste market
Principal
benefit
sought

Segment
name

Demographic
strengths

Special
behavioural
characteristics

Brands disproportionately
favoured

Personality
characteristics

Lifestyle
characteristics

Children

Users of
spearmint
flavoured
toothpaste

Colgate, Stripe

High selfinvolvement

Hedonistic

The
Sociables

Brightness
of teeth

Teens, young
people

Smokers

Macleans,
Ultra-Brite

High
sociability

Active

The
Worriers

Decay
prevention

Large families

Heavy users

Crest

High
hypochondriasis

Conservative

The
Independent
Segment

Price

Men

Heavy users

Brands on sale

High
autonomy

Value oriented

ial


...
4
...


3
...
Additional, more traditional bases include customer type,
product/technology, customer size and purchasing procedures
...
Some industries and related industries are clustered in particular areas
...


(b)

Type of business (eg service, manufacturing)
...
Large organisations may have elaborate purchasing procedures, and may do
many things in-house
...


fre

(d)

Use of the product
...
Although this
practice is changing with the viability of a 'cash alternative' to a company car, the varying levels of
specification are developed with the business buyer in mind (eg junior salesperson gets a Ford
Fiesta, Regional Manager gets a Ford Mondeo)
...
Organisations in an industry as a whole may have certain needs in
common
...
Suitable
temporary staff offered to legal firms can be more effective if used to legal jargon
...

Components manufacturers specialise in the industries of the firms to which they supply
components
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

3
...
The following questions are commonly asked to decide whether or not the segment
can be used for developing marketing plans
...
For example, for a segment based on
people with a conservative outlook to life, can conservatism of outlook
be measured by market research?

Is the segment big enough?

There has to be a large enough potential market to be profitable
...


Do segments respond
differently?

If two or more segments are identified by marketing planners but each
segment responds in the same way to a marketing mix, the segments
are effectively one and the same and there is no point in distinguishing
them from each other
...
The firm
does not want the segment to 'disappear' next year
...


3
...
com


...
8 Target markets

Companies select particularly attractive segments and approach them with a carefully designed marketing
mix
...


as

FAST FORWARD

tud

A segment might be valid and potentially profitable, but is it potentially attractive? For example, a segment
that has high barriers to entry might cost more to enter but will be less vulnerable to competitors
...


Undifferentiated marketing: this policy is to produce a single product and hope to get as many customers
as possible to buy it; that is, ignore segmentation entirely
...


fre

Key terms

ea

cc

Because of limited resources, competition and large markets, organisations are not usually able to sell
with equal efficiency and success to every market segment
...
A
target market is a particularly attractive segment that will be served with a distinct marketing mix
...


Differentiated marketing: the company attempts to introduce several product versions, each aimed at a
different market segment
...

It is important to assess company strengths when evaluating attractiveness and targeting a market
...
com/freeaccastudymaterial

79

To download more visit http://freeaccastudymaterial
...
In this way, preferred segments can be targeted
...
When the costs of further differentiation of the
market exceed the benefits from further segmentation and target marketing, a firm is said to have
over-differentiated
...
co
m

The major disadvantage of concentrated marketing is the business risk of relying on a single segment of
a single market
...

The choice between undifferentiated, differentiated or concentrated marketing as a marketing strategy will
depend on the following factors
...
Small firms may
succeed better by concentrating on one segment only
...


ter

ial

The extent to which the product and/or the market may be considered homogeneous
...


FAST FORWARD

ym
a

3
...


tud

It is not always possible to identify a market segment where there is no direct competitor, and a marketing
problem for the firm will be the creation of some form of product differentiation (real or imagined) in the
marketing mix of the product
...


as

A perceptual map of product positioning can be used to identify gaps in the market
...
A company that
carries out such an analysis might decide to conduct further research to find out whether there is scope in
the market for a new product which would be targeted at a market position where there are few or no rivals
...
)
High price

ea

cc

Cowboy brands

Premium brands












Low quality

High quality
Economy brands

Bargain brands



fre





Low price

Perceptual map of product positioning

80

3: Competitors and customers  Part A Strategic position

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...


4 Understanding the customer
4
...



...
Where this pattern applies, the supplier has to take
account of the influence of the intermediary; indeed, the intermediary is the strategic customer, not the
end user, and it is the intermediary's requirements that are of primary strategic importance
...


ial

12/11

Critical success factors are product features that are particularly valued by customers
...
com

4
...
This may be a relatively simple satisfaction, as when motorists buy petrol, or it may
include a wide range of both tangible and intangible benefits
...
The intangibles among these
features are often collectively referred to as brand values
...
It would be a mistake to imagine that most wristwatches are bought
because they tell the time
...


tud

There is likely to be a wide range of opinion among customers as to the features of a product that provide
them with the greatest satisfaction, but, equally, it is also likely that some features will be widely
regarded as particularly important
...


cc

An article titled 'Defining manager's information requirements' (2006) written by Jim Stone provides an
in-depth look at the role of critical success factors in business strategy
...
It would be worth taking the time to study this article
...

JS&W

There are important messages connected with this concept
...
Second, resources should be
deployed so as to achieve high performance in critical success factors
...


This also illustrates the importance of aligning external forces (customer desires) with internal factors
(resources)
...
CSFs represent 'what' an organisation needs to do in order to be
successful
...


Part A Strategic position  3: Competitors and customers

join us on facebook @ fb
...
com
Key term

Key performance indicators (KPIs) are quantifiable measurements that management can use to monitor
and control progress towards achieving its critical success factors
...

However, in order to be useful they should clearly identify the information needs required to demonstrate
how well the organisation is doing in achieving its overall strategy
...
co
m



For example, an organisation may have a critical success factor of providing the highest level of customer
service
...


FAST FORWARD

ym
a

4
...

This was the first time that CSFs and KPIs had been specifically examined and this was problematic for
some students
...


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
...


tud

Case Study

Customer portfolio

Coca-Cola paid $200m to Pernod of France, which, under contract, had effectively built a customer
base for Coca-Cola, as well as building up a distribution network
...


(b)

Supermarket loyalty cards reward customers with bonus points, saving them money, or allowing
them to redeem points for products according to how much they spend
...


cc

as

(a)

ea

As already mentioned, a marketing audit involves a review of an organisation's products and markets, the
marketing environment, and its marketing system and operations
...


fre

Information obtained about markets
(a)

(b)

Size of individual orders
...
Delivery costs can be compared with order sizes
...
Does the organisation sell to a large number of small customers or a
small number of big customers?

Sales revenue and profitability
...
An
imbalance between sales and profits over various product ranges can be potentially dangerous
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Segments
...


(e)

Market share
...


(f)

Growth
...


(g)

Whether the demand for certain products is growing, stable or likely to decline
...


(i)

Whether there is a growing tendency for the market to become fragmented, with more specialist
and 'custom-made' products
...
com







...
4 Customer analysis

ter

Key customer analysis calls for six main areas of investigation into customers
...

Detail

Key customer identity







Name of each key customer
Location
Status in market
Products they make and sell
Size of firm (capital employed, turnover, number of employees)

Customer history












First purchase date
...
Some of this
information can then be used to help build up a relationship with the customer
...
com/freeaccastudymaterial

83

To download more visit http://freeaccastudymaterial
...


4
...



...

'An immediate impact of introducing any level of strategic management accounting into virtually every

organisation is to destroy totally any illusion that the same level of profit is derived from all customers'
...


(b)

Different rates charged by power companies to domestic as opposed to business users
...
In practice, many
domestic consumers benefit from cross-subsidy
...
'

as

Remember

Volume discounts
...


tud

(a)

cc

It is possible to analyse customer profitability over a single period but more useful to look at a longer time
scale
...





It enables a company to focus resources on the most profitable areas

It identifies unexpected differences in profitability between customers
It helps quantify the financial impact of proposed changes

fre



ea

Customer profitability analysis focuses on profits generated by customers and suggests that profit does
not automatically increase with sales revenue
...






It helps to highlight whether product development or market development is to be preferred



84

It helps highlight the cost of obtaining new customers and the benefit of retaining existing
customers

An appreciation of the costs of servicing clients assists in negotiations with customers

3: Competitors and customers  Part A Strategic position

join us on facebook @ fb
...
com

Different customer costs can arise out of the following
...
com

4
...

Promotional expense relating to a single customer is likely to be heavily front-loaded: it is much
cheaper to retain a customer than to attract one
...


(c)

A customer who purchases a basic or commodity product initially may move on to more
differentiated products later
...



...


ym
a

It is important to remember the purpose of all environmental analysis ideas is to provide input into the
process of designing a practical business strategy
...


5
...
2 Opportunities

tud

For a commercial organisation, the most urgent threats are likely to emerge from within the immediate
industry arena
...
Recognising threats in the wider PESTEL environment is,
perhaps, more difficult, since it covers such an enormous range of factors
...
This is largely a technology-based
opportunity, but an important route to the development of substitutes is the imaginative
development of new uses for existing products and methods
...

It may be possible to target different strategic customers
...

There may be potential to market complementary products
...

New market segments may have potential, though there may be a need to adapt the product
...
JS&W give several examples of how these
might arise
...
com

Any attempt to estimate lifecycle costs and revenues should also consider existing and potential
environmental impacts, including, in particular, the likely actions of competitors and the potential for
product and process innovation
...
com/freeaccastudymaterial

85

To download more visit http://freeaccastudymaterial
...
The diagram below illustrates this
...


fre

ea

cc

We will now move on to look at the internal resources of organisations in the next chapter of this Study
Text
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

- Political
- Economic
- Social
- Technological
- Environmental
- Legal

Lifecycles

ial

The environment

To download more visit http://freeaccastudymaterial
...

The cycle of competition describes the typical development of the relationship between an
established firm and a new challenger
...


–

The industry life cycle has four phases: inception, growth, maturity/shakeout and decline
...


–

Strategic group analysis examines the strategic space occupied by groups of close competitors in
order to identify potential competitive advantage
...
co
m

–

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




The marketing mix comprises product, price, place and promotion
...




The decision to make a purchase can be very simple, very complex or somewhere in between the two
...




Segments are groups of customers with similar needs that can be targeted with a distinctively
positioned marketing mix
...
The aim is to identify a coherent segment that is both valid and attractive
...
This concentrated marketing approach is more effective than the undifferentiated, mass marketing
method when customers are likely to exercise careful choice
...




The strategic customer is the entity that decides to make the purchase, not the end user
...




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
...




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


fre

ea

cc

as

tud

ym
a

ter

ial



To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

87

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

1

To download more visit http://freeaccastudymaterial
...


2

Inception; growth; maturity/shakeout; and decline
...


4

Product, place, price, promotion, people, processes and physical evidence
...


6

Geography, business type, product usage, organisation size
...


8

Product features that are particularly valued by a group of customers and where the organisation must
excel to outperform competitors
...
com

Now try the question below from the Practice Question Bank

Number


...
com/freeaccastudymaterial

89

ial
ter
ym
a
tud
as
cc
ea
fre
90

3: Competitors and customers  Part A Strategic position

join us on facebook @ fb
...
com


...
com

ter

ial

Strategic
capability

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
It is a long
chapter and contains a number of very important ideas and models
...
When you reach the last section, do not be tempted
to dismiss the content as a simple mnemonic: both SWOT and TOWS have
important things to say about potential strategic choices
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


ial

ter

ym
a

3

2

tud

Exam guide

3

as

In this chapter, we introduce some specific models that you must become very familiar with
...
The most important, by far, is the value
chain: you must have this model at your fingertips
...


92

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com


...
com

1 The organisation's resources
FAST FORWARD

A position audit is undertaken in order to give strategic managers a clear understanding of the
organisation's strategic capability; that is, its resources, competences and the constraints that limit their
use
...
co
m

1
...


Key term

An organisation's ability to survive and prosper depends on its strategic capability; this is defined by the
adequacy and suitability of its resources and competences
...


ter

Key term

To download more visit http://freeaccastudymaterial
...


Exam focus
point

ym
a

Much of the rest of this chapter is concerned with the tools and methods that can be used to carry out the
task of position audit
...

An article titled 'Position based and resource based strategies' (October 2010) written by Ken Garrett was
published in Student Accountant, and is available in the Technical Articles section for P3 on the ACCA
website
...


Resource audits identify human, financial and material resources and how they are deployed
...
The Ms model
categorises the factors as follows
...
Condition
...
Value
...


Make-up

Culture and structure
...
Goodwill
...


Management

Size
...
Loyalty
...
Structure
...
Innovation
...


ea

Management
information

cc

Resource

Markets

Products and customers
...
Regional, national, international
...
Suppliers and partnering
...
New materials
...
Availability
...


Men and
women

Number
...
Efficiency
...
Adaptability
...
Wage
costs
...


Methods

How are activities carried out? Outsourcing, quality
...
Cash surpluses/deficits
...

Gearing levels
...


fre

FAST FORWARD

tud

1
...
com/freeaccastudymaterial

93

To download more visit http://freeaccastudymaterial
...


Key term

A unique resource is one which is both better than its equivalent employed by competitors and difficult to
imitate
...
co
m

Resources are of no value unless they are organised into systems, and so a resource audit should go on
to consider how well or how badly resources have been utilised, and whether the organisation's systems
are effective and efficient
...
3 Limiting factors
Every organisation operates under resource constraints
...
'

ial

ter

A shortage of production capacity
A limited number of key personnel, such as salespeople with technical knowledge
A restricted distribution network
Too few managers with knowledge about finance, or overseas markets
Inadequate research design resources to develop new products or services
A poor system of strategic intelligence
Lack of money
A lack of adequately trained staff

ym
a










Once the limiting factor has been identified, the planners should do two things
...
4 Resource-based strategy

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


cc

Position-based strategy seeks to develop competitive advantage in a way that responds to the nature of
the competitive environment: the firm positions its offering in response to the external opportunities or
threats it discerns, and develops the appropriate competences and resources it needs to compete
...


Once an opportunity is discerned and an offering made, it is very easy for competitors to make
similar offerings, thus rapidly eroding competitive advantage
...


94

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com

1
...
1 Examples

To download more visit http://freeaccastudymaterial
...

This case study focuses on the problems that Blackberry encountered by failing to understand changes
that occurred in the mobile phone market
...
co
m

By the mid 2000s Blackberry had established itself as the mobile phone of choice among users, finding
popularity among business professionals
...
At its peak the company even developed a celebrity following
with many celebrities claiming to own a Blackberry
...
com

However, in 2007 Blackberry's dominance came under threat when Apple unveiled its first iPhone device
...
The
iPhone's advanced iOS (operating system) meant users could experience high quality graphics and a new
range of applications available for download through the Apple App store
...
Senior management at Blackberry
were convinced that the popularity among business professionals would be sufficient to help reduce the
threat posed by the iPhone
...
The iPhone had become the number one
selling mobile device
...
In response Blackberry switched its focus towards people using their phones for social and
private use, rather than business use and unveiled its own touchscreen smartphone, producing the
Blackberry Z10
...
The development of the Z10 took a number of years and resulted in significant
expenditure on developing the technology to produce a functioning touchscreen mobile device, as
Blackberry struggled to make-up the ground lost to Apple
...
The launch of the Z10 was hit with reports that stockists were unable to obtain sufficient
inventory of the device
...
In September 2013, Blackberry reported a
significant fall in sales which triggered a drop in the company's share price and left the company's shares
trading at a fraction of their 2007 value
...


cc

The resource-based view is that sustainable competitive advantage is only attained as a result of the
possession of distinctive resources
...
So resource-based strategy focuses internally, rather than externally
...


fre

1
...
JS&W use their own very clear and specific set of terms when discussing resources and
competences and your syllabus requires that you should understand and use these terms also
...
com/freeaccastudymaterial

95

To download more visit http://freeaccastudymaterial
...

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

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

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

Unique resources and core competences underpin competitive advantage and are difficult for
competitors to imitate or obtain
...
These are not the tangible
and intangible assets you are familiar with as an accountant: the inclusion of labour and finance
under tangible resources, for example, demonstrates this
...
We might say that the relationship between
the two is that a competence might well create, use or exploit an intangible resource (or a tangible
one, for that matter)
...


(d)

We have said that capabilities consist of resources and competences
...
Each has its own specific definition, but since each qualifies as a threshold
capability, we could, presumably, also use that definition
...


ter

ym
a

tud

To some extent, the resource-based approach is the opposite to the marketing concept since, instead of
approaching strategy on the basis of giving customers what they want, it concentrates on exploiting what
the business already has to offer
...


ial

(a)

fre

(b)

Where the marketing concept is adopted, it will still be necessary to deploy threshold capabilities in
all critical areas and the possession of unique resources and core competences will enhance the
market offering
...


ea

(a)

cc

In fact, this distinction is largely theoretical, but it leads to some important ideas that you could use in the
exam
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


To download more visit http://freeaccastudymaterial
...
Cost efficiency is
achieved in four main ways
...
co
m






2
...
com

Cost efficiency is a fundamental aspect of strategic capability
...
The requirement for cost efficiency applies equally in the public and private sectors
...


(b)

For a commercial organisation, cost efficiency permits the firm to offer extended benefits at the
same price, the same benefits at a lower price, or a combination of the two
...
Nevertheless, for many firms, cost efficiency is
merely a threshold competence: it is required for mere survival and does not form the basis of advantage
...

Customers are sensitive to price: when making their buying decision, they will seek a balance
between the desirability of the product's features and the sacrifice involved in paying for it
...
Failure to do this is an invitation to the customer to go elsewhere
...


tud

(a)

2
...


2
...
1 Economies of scale

ea

cc

The effect of economies of scale is to reduce costs per unit as the scale of operations increases
...
Some industries possess
more of the features that lead to their occurrence than do others
...
In other
industries, such as textiles, economies of scale have been less important
...
2
...
Two important
influences are transport costs and, therefore, proximity to sources of supply; and relationships with
suppliers, including the ability to negotiate good prices
...


Supply costs are particularly important for firms that have little opportunity to add value
...
For many

Part A Strategic position  4: Strategic capability

join us on facebook @ fb
...
com
intermediaries, market intelligence is a key resource; knowledge of who needs to buy what, when and at
which price, enables profitable trading
...


2
...
3 Design of products and processes


...
Examples include obvious matters such as labour productivity, materials yield and the
careful control of working capital
...
This problem is
typical of service sectors such as transport or live entertainment, where there is no possibility of storing
unfilled seats
...

We will look at business processes and aspects of improving processes in more detail later in this Study
Text
...
2
...
(The learning curve illustrates that as
workers become more familiar with their jobs, they learn to do them more efficiently
...
)

(b)

as

(c)

There should be an advantage in being the first mover in a new market, in that it should give an
opportunity to create an experience-based cost advantage lead over later-entering rivals
...
Outsourcing is
discussed in more detail later in this Study Text
...
This will be particularly apparent during the growth phase of the industry lifecycle
...
This can be seen in the experience curve: as output increases, the
cost per unit of output falls
...

There are other important considerations
...

Value to buyers
Rarity
Robustness (difficult for competitors to imitate)
Non-substitutability

fre






ea

FAST FORWARD

cc

3 Strategic capability and sustainable competitive
advantage

Under conditions of hyper-competition, organisations must possess dynamic capabilities: the ability to
develop and adjust competences to cope with rapidly changing environmental pressures
...
JS&W

98

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com

Product design also affects the cost base and can have impact on costs beyond those of supplies and the
production process
...


To download more visit http://freeaccastudymaterial
...
co
m

The first of these points is almost self-evident, but it must not be overlooked
...

We must now consider these aspects of strategic capability more closely
...
1 The importance of customer needs

ial

To download more visit http://freeaccastudymaterial
...
No matter how rare a resource or how well developed a competence is, it cannot create
competitive advantage if customers do not value it or the things it enables the organisation to do
...
2 Rarity

ter

A single unique resource may have the potential to create competitive advantage by itself
...

A unique tangible resource in the form of ownership of extraction rights to an easily worked
deposit of a scarce and valuable mineral

(b)

A unique intangible resource in the form of ownership of the copyright of a best-selling novel

(c)

A core competence in a dangerous and demanding process such as extinguishing oil well fires

ym
a

(a)

tud

The importance of rarity is that if a resource or competence is generally available (ie not rare) then an
organisation's competitions will have access to it in the same way as the organisation does
...


3
...
They
point out that, generally, it is difficult to base competitive advantage simply on possession of tangible
resources, since they can often be imitated or simply bought in
...


cc

There are three main aspects of a competence that tend to make it robust
...
It also appears when organisations develop complex links with their customers
...

Causal ambiguity occurs when the processes and linkages that produce the organisation's
competences are difficult to discern and so competitors are uncertain about how to imitate them
...
4 Non-substitutability
Substitutability of strategic capability has two forms and managers must be alert to the emergence of
either, since both are a threat to even a competence that possesses the other three vital qualities
...
com/freeaccastudymaterial

99

To download more visit http://freeaccastudymaterial
...


3
...
co
m

The nature of the strategic capabilities, as we have discussed them so far, is that they are long-term
phenomena: tangible and intangible resources will be more valuable if they can be counted on to last a
long time, while the development of core competences might well be expected to be a fairly protracted
process
...
In order to deal with the rapid market changes seen under conditions of hypercompetition,
firms must possess dynamic capabilities
...

JS&W

ter

ial

FAST FORWARD

ym
a

4 Knowledge

The aim of knowledge management is to capture, organise and make widely available all the knowledge
the organisation possesses, whether explicit (in recorded form) or tacit (in people's heads)
...
It is connected with the theory of
the learning organisation and founded on the idea that knowledge is a major source of competitive
advantage in business
...
Lew Platt, Ex-Chief Executive of Hewlett Packard, has
articulated this, saying 'If only HP knew what HP knows, we would be three times as profitable'
...

JS&W

cc

Key term

as

Knowledge is thus seen as an important resource and may in itself constitute a competence: it can
certainly underpin many competences
...
1 Organisational learning

fre

ea

Organisational learning is particularly important in the increasing number of task environments that are
both complex and dynamic
...
A willingness to back ideas
that are not guaranteed to succeed is another aspect of this culture: there must be freedom to make
mistakes
...
This is not easy
...
It is often locked up inside the memories of people who do not realise
the value of what they know
...
Even when it is made explicit, by
being recorded in some way, it may be difficult and time consuming to get at, as is the case with most
paper archives
...


100

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com

Such capabilities demand the ability to change, to innovate and to learn
...
Indeed, we might regard
the ability to 'develop and change competences' as a competence in its own right a higher-order
competence, perhaps
...
com
Another important consideration is that tacit knowledge is inherently more robust (in the sense explained
in Section 3
...


Exam focus
point

An article titled 'The learning organisation' written by Fearghal McHugh is available in the technical articles
section for P3 on the ACCA website
...


4
...
Knowledge is patterns of
information that are strategically useful and context independent
...
com

There is an important conceptual hierarchy underpinning knowledge management
...
The distinctions are not clear-cut and, to some extent, are
differences of degree rather than kind
...

Data

ter

Data typically consists of individual facts, but in a business context may include more complex items such
as opinions, reactions and beliefs
...

Information

ym
a

Information is data that is organised in some useful way
...

These things are data: their usefulness does not extend beyond the purpose of the invoice, which is to
collect the sum due
...


tud

However, if we process that data we start to create information
...
These are pieces of information:
they are useful for the management of the business, rather than just inputs into its administrative
systems
...
Information may be said to consist of the
relationships between items of data, as when we combine turnover with customer details to discover
which accounts are currently important and which are not
...


cc

Difference between information and knowledge

ea

The conceptual difference between data and information is fairly easy to grasp: it lies chiefly in the
processes that produce the one from the other
...
This is not surprising, since knowledge itself is more
complex than the information it derives from
...
To return to our
invoicing example, suppose we found that certain combinations of goods purchased were typical of
certain customers
...


fre

FAST FORWARD


...
2
...
Our sales invoice is meaningless outside its context; if you, as a marketing person, found an
invoice in the office corridor, it would be little more than waste paper to you, though no doubt, the

Part A Strategic position  4: Strategic capability

join us on facebook @ fb
...
com
accounts people would like it back
...
The information is useful outside of
its original context of the accounts office
...
co
m

This idea also applies to the difference between information and knowledge
...
Its value outside its context would be small
...

Here are a table and a diagram that summarise the progression from data to knowledge
...
The scale is moveable and depends on the general complexity of the
setting
...
Something similar may be knowledge in a
different context
...


ea

cc

Take the example of a customer going into insolvent liquidation with $200,000 outstanding on its account
...
Advance notice of the
possibility would be valuable knowledge
...


4
...
2 Other ideas about knowledge

fre

Individuals acquire knowledge in a variety of ways including those listed below:





102

Education and training
Experience of work
Observation of others
Informal exchanges such as coaching and brain storming

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com

Data

To download more visit http://freeaccastudymaterial
...
It would be worth taking the time to study this article
...
This involves:




Distributing knowledge
Using knowledge
Maintaining knowledge

ial

Discovering or identifying knowledge
Capturing knowledge
Sharing knowledge

To download more visit http://freeaccastudymaterial
...


ter

Knowledge management is becoming increasingly important in helping organisations sustain competitive
advantage
...
Moreover, the importance
of capturing and sharing it is increased as job mobility increases
...

Also organisations' external environments – technology, competitors, markets – are changing rapidly so
organisations need to ensure they have up-to-date knowledge about these external factors to take account
of the opportunities and threats they represent
...
To combat the perils of data overload many companies actively attempt to
manage knowledge throughout the organisation
...
World class
companies are innovatively implementing best practice sharing to shake them out of the rut of 'the way it's
always been done
...


fre

Exam focus
point


...
2
...
Equally, Wal-Mart's famous Saturday meetings help employees challenge conventions
and suggest creative new ideas that drive process improvement, increased efficiency, and overall, a
stronger bottom line
...
com/freeaccastudymaterial

103

To download more visit http://freeaccastudymaterial
...


Stimulates cultural change and innovation

ial

Positive management of knowledge may help organisations to stimulate innovation through the free flow
of ideas
...
The study provides recommendations on how to create a culture which shares best
practice through all levels of the organisation, how to use both external and internal sources to find best
practices and how to capture that knowledge and communicate it to all employees
...
Some of the vital issues these thought leaders addressed include measurement and
management of intellectual assets, best practice identification and recognition systems, best practice
prioritisation systems, communication of best practices, and knowledge sharing through technology
...

Fortune notes that 'Fortune 500 companies lose roughly $31
...
'

tud

Source: Adapted from 'Why knowledge management is important to the success of your company',
written by Lisa Quast, August 2012, Forbes [online]

4
...
4 Knowledge management (KM) systems
Knowledge must be managed in a way that makes it easily available
...


as

FAST FORWARD

Groupware, such as Lotus Notes provides functions for collaborative work groups
...
These items could be updated by anyone who had
contact with a customer and would then be available to all sales people
...
These include
word processing and voice messaging systems
...
Such systems deal, by definition
with explicit knowledge: that is, knowledge that is widely distributed
...

Tacit knowledge only becomes available to the KM System when conscious decisions are taken to share it
...


(c)

104

An intranet is an internal network used to share information using internet technology and
protocols
...
Each employee has a browser, used to access a server computer that holds corporate

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com


...
'The US Army's After Action Reviews (AAR's) are an example of a knowledge management
system that has helped build the Army into a learning organisation by making learning routine…After
every important activity or event, Army teams review assignments, identify successes and failures, and
seek ways to perform better the next time
...
com
information on a wide variety of topics, and in some cases also offers access to the internet
...

Savings accrue from the elimination of storage, printing and distribution of documents
that can be made available to employees online
...
This means that
there are improvements in productivity and efficiency
...



...
Security is a major issue for extranets and may require
firewalls, server management, encryption and the issue of digital certificates
...
com

An expert system is a computer program that captures human expertise in a limited domain of
knowledge
...
For example,
many financial institutions now use expert systems to process straightforward loan applications
...
The system will
then:

ter

ial

(d)

Check the facts given against its database to see whether the applicant has a good previous
credit record
...


(iii)

Make a judgement as to what extent the loan applicant fits the lender's profile of a good risk
(based on the lender's previous experience)
...


ym
a

(i)

IT systems can be used to store vast amounts of data in accessible form
...
Analytical and query
software is provided so that reports can be produced at any level of summarisation and
incorporating any comparisons or relationships desired
...
True data mining
software discovers previously unknown relationships and provides insights that cannot be
obtained through ordinary summary reports
...
Data mining is thus a contribution to organisational learning
...
However, do not forget organisations also use IT applications to
enhance the service they provide their customers
...


Case Study

Wal-Mart

fre

The American retailer Wal-Mart discovered an unexpected relationship between the sale of nappies and
beer! Wal-Mart found that both tended to sell at the same time, just after working hours, and concluded
that men with small children stopped off to buy nappies on their way home, and bought beer at the same
time
...
Wal-Mart tried this and it worked
...
com/freeaccastudymaterial

105

To download more visit http://freeaccastudymaterial
...
This one includes the relevant IT systems
...
co
m

Data

Data mining
Intranet
Expert systems

ial

ter

5 Converting resources: the value chain

The value chain describes those activities of the organisation that add value to purchased inputs
...
Support activities provide necessary
assistance
...


ym
a

FAST FORWARD

5
...

Competitive advantage arises out of the way in which firms organise and perform activities to add value
...


5
...


Customers purchase value, which they measure by comparing a firm's products and services with
similar offerings by competitors
...
A restaurant's activities can be divided into
buying food, cooking it, and serving it (to customers)
...
The customer however, is not only prepared to pay for
someone else to do all this but also pays more than the cost of the resources (food, wages and so on)
...
A firm is profitable if the realised value to
customers exceeds the collective cost of performing the activities
...


4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com

Note that knowledge management is also important to you as an accountant
...
'

To download more visit http://freeaccastudymaterial
...


Answer


...
Each of these options is a way of organising the activities of buying, cooking and
serving food in a way that customers will value
...


(c)

The chef can specialise in a particular type of cuisine (eg Nepalese, Korean)
...


(e)

The restaurant can serve a particular type of customer (eg students)
...


6/12, 12/09

ter

5
...
com

(a)

as

tud

ym
a

Porter (in Competitive Advantage) grouped the various activities of an organisation into a value chain
...


Porter's value chain model

ea

The Value Chain is explicitly referenced in the Study Guide and so could be specifically examined in your
exam
...

The value chain diagram is also worth committing to memory since it is an excellent basic description of
how an organisation works
...
Work your way
through the various activities asking yourself what the organisation could do about each one, if anything
...
It represents the value created by the value activities themselves
and by the management of the linkages between them
...
In part (a), worth 10 marks, candidates were required to analyse the
primary activities of the value chain of the products in question
...


Part A Strategic position  4: Strategic capability

join us on facebook @ fb
...
com
The Value Chain was also examined in December 2010 as part of a Section B question
...
Candidates were required to use this analysis to highlight
areas of weakness at the company
...

Comment

Operations

Converting resource inputs into a final product: resource inputs are not only
materials
...


Outbound logistics

Storing the product and its distribution to customers: packaging, testing,
delivery and so on; for service industries, this activity may be more concerned
with bringing customers to the place where the service is available; an example
would be front of house management in a theatre
...


After sales service

Installing products, repairing them, upgrading them, providing spare parts and
so forth
...
co
m

Receiving, handling and storing inputs to the production system: warehousing,
transport, inventory control and so on
...
It may seem an obvious point that support activities need to support the
primary activities, but do not overlook it
...

Comment

Procurement

All of the processes involved in acquiring the resource inputs to the
primary activities (eg purchase of materials, subcomponents
equipment)
...


tud

Activity

Recruiting, training, managing, developing and rewarding people; this
activity takes place in all parts of the organisation, not just in the HRM
department
...


as

Human resource management

Linkages connect the activities of the value chain:

cc

(b)

Activities in the value chain affect one another
...

Linkages require co-ordination
...


ea

(a)

The value chain concept is an important tool in analysing the organisation's strategic capability, since it
focuses on the overall means by which value is created, rather than on structural functions or
departments
...
A further possible consequence would be decisions about outsourcing
...


fre

(a)

(b)

108

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com

Inbound logistics

To download more visit http://freeaccastudymaterial
...
4 The value chain, core competencies and outsourcing
FAST FORWARD

Core competences are the basis for the creation of value; activities from which the organisation does not
derive significant value may be outsourced
...
co
m

The purpose of value chain analysis is to understand how the company creates value
...
There is a clear link
here with the idea of core competences: a core competence will enable the company to create value in a
way that its competitors cannot imitate
...

There is a strong case for examining the possibilities of outsourcing non-core activities so that
management can concentrate on what the company does best
...
5 The value network

To download more visit http://freeaccastudymaterial
...


ial

FAST FORWARD

ter

Activities and linkages that add value do not stop at the organisation's boundaries
...
The grower has added value, and the grower's success in growing produce of
good quality is as important to the customer's ultimate satisfaction as the skills of the chef
...

JS&W

The diagram illustrates the similarities between the value network and a supply chain
...


fre

Key term

ym
a

Similarly, the value received by a person buying a new car has been created by a complex system that
includes several organisations' value chains
...
A firm's value chain is connected to other
value chains in what JS&W call a value network
...
)

In this respect, understanding value networks can be helpful when looking at supply chain management
...
An obvious way to do this is by vertical integration through the acquisition of
suppliers and customers
...


Part A Strategic position  4: Strategic capability

join us on facebook @ fb
...
com
It is possible for large and powerful companies to exercise less formal power over suppliers and
customers by using their bargaining power to achieve purchase and selling prices that are biased in their
favour
...


Case Study

Toyota

ial

Li & Fung aim for more equal relationships with the large number of clothing manufacturers they deal
with
...
But it also tries to limit its purchases to no more than 70% of a
supplier's output in order to avoid creating a dependent organisation whose managers are influenced
more by fear than by trust
...
A firm can secure competitive advantage in several ways:

Question

Value chain

tud

Sana Sounds is a small record company
...
Once a band has signed a contract (with Sana Sounds) it makes a recording
...
(At the moment, Sana Sounds is not large enough to invest in its own equipment and studios
...
Sana
Sounds then distributes the disks to selected stores, and engages in any promotional activities required
...
Although recording and CD
manufacture are contracted out to external suppliers, this makes no difference to the fact that these
activities are part of Sana Sounds' own value chain
...
If the company grows, then perhaps it will acquire its own recording studios
...
6 Section summary
The value chain models how activities can be deployed to add value for the customer
Value chains are part of a value network
Firms can benefit by performing activities in a unique way and/or exploiting linkages

fre





110

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com


...
The company works with suppliers to
improve their methods and the quality of their output; and to develop new, improved materials and
components for input into its own operations
...


To download more visit http://freeaccastudymaterial
...
The article focuses on the role of
the value chain in creating value for customers and considers different types of supply chain models
...


6 Outputs: the product portfolio


...
Each product or service has its own
financial, marketing and risk characteristics
...


6
...
com

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 in its life cycle
...
(Not all products pass through each stage of the life cycle
...


ter

The profitability and sales of a product can be expected to change over time
...
Marketing managers distinguish between
different aspects of the product
...


(b)

Product form: within a product class there are different forms that the product can take, for
example, five-door hatchback cars or two-seater sports cars; twin tub or front loading automatic
washing machines; national daily newspapers or weekly local papers and so on
...


ym
a

(a)

Inception

Growth

Shakeout

Maturity

Decline

ea

cc

as

Sales
volume

tud

The product life cycle applies in differing degrees to each of the three cases
...
Product forms, however, tend to conform to the classic life cycle pattern
...
com/freeaccastudymaterial

111

To download more visit http://freeaccastudymaterial
...
1
...
Unit costs are high because of low output and expensive sales promotion
...




There may be early teething troubles with production technology
...




The product has few competitors (because they are not willing to take similar risks)
...
co
m



6
...
2 Growth



Capital investments are needed to fulfil the level of demand, meaning cash flow remains lower than
profit
...




Competitors are attracted
...




Need to add additional features to differentiate from competitors, so product complexity likely to
rise
...
Alternatively, could chose to lower price and
compete on price grounds
...




Growth is sustained by attracting new types of customers
...


ym
a

6
...
3 Maturity

The market is no longer growing
...




The rate of sales growth slows down and the product reaches a period of maturity, which is
probably the longest period of a successful product's life
...




Profits remain good, and levels of investment are low, meaning cash flow is also positive
...




Firms try to capitalise on a brand name by launching spin off products under the same name
...


cc

6
...
4 Decline

as

tud



ea

Eventually, sales will begin to decline so that there is over-capacity of production in the industry
...
The remaining producers seek
means of prolonging the product life by modifying it and searching for new market segments
...


6
...
5 The relevance of the product life cycle to strategic planning

fre

In reviewing outputs, planners should assess products in three ways:
(a)
(b)
(c)

112

The stage of its life cycle that any product has reached
...

How urgent is the need to innovate, to develop new and improved products?

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com



To download more visit http://freeaccastudymaterial
...
In March 2014, a report in the Wall Street Journal highlighted that
the company had taken to hiring engineers from competing technology companies, including HTC
...



...
To date, Apple has
taken to releasing a new iPhone nearly every year to replace older models which are nearing the end of
their lifecycle
...
com

Television

ter

Over time, the design and specification of television sets has changed
...


ym
a

However, the switch to online distribution methods of video content has also had a significant impact on
the television set industry
...

To prevent decline, the TV industry has had to adapt to cope with these changes, and internet-enabled
television has emerged
...


tud

6
...
6 Difficulties of the product life cycle concept

Recognition
...
The theoretical curve of a product life cycle does not always occur in practice
...
Some never
decline if they are marketed competitively
...
Strategic decisions can change or extend a product's life cycle
...
The financial markets are an example of markets where
there is a tendency for competitors to copy the leader very quickly, so that competition has built up
well ahead of demand
...
You will learn about such models in a later chapter
...


fre

Exam focus
point

ea

6
...
Nevertheless, there may be advantages in then considering the use
of techniques such as the BCG matrix, but if you do so, you must also indicate that you know of JS&W's
opinion
...
com/freeaccastudymaterial

113

To download more visit http://freeaccastudymaterial
...
1 Innovation
Innovation can be a major source of competitive advantage but brings a burden of cost and uncertainty
...
The firm
must decide whether to be a leader or a follower
...
co
m

FAST FORWARD

7
...
1 Innovation and competitive advantage

For many organisations, product innovation and being the first mover may be a major source of
competitive advantage
...


(c)

The learning (or experience) curve effect may bring cost advantages
...


(e)

A price skimming strategy can bring early profits that will be denied to later entrants
...
This is particularly important in the pharmaceutical industry
...


However, the first mover also has particular problems:

Key term

Gaining regulatory approval where required
Uncertain demand
High levels of R&D costs
Lower cost imitators
Costs of introduction such as training sales staff and educating customers

tud







PIMS stands for Profit Impact of Marketing Strategy
...
An extensive PIMS database of strategic actions and
results is now administered by the American Strategic Planning Institute
...


cc

7
...
2 Technology and the value chain

ea

Porter points out in Competitive Advantage that 'every value activity uses some technology to combine
purchased inputs and human resources to produce some output
...
The significance of this for strategy lies in the area of core competences
...


fre

7
...

(a)

114

New and innovative products can lower entry barriers to existing industries and markets, if new
technology is involved
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
(b)

The interests of the company are best met with a balanced product portfolio
...


A strategic issue managers must consider is their approach to new product development
...
Do they intend to gain competitive advantage by operating at the leading edge of
new developments? There are significant implications for the R&D activity and the likely length of
product life cycles within the portfolio if this strategy is adopted
...

Follower strategy
...
It sacrifices early rewards of
innovation, but avoids its risks
...
However, research indicates that this
can be a more profitable strategy than being an innovator, especially when the follower is able to
learn from the leader's mistakes
...
co
m

(a)

Remerchandising
The product is sold in a
new way – eg by repackaging

Improved product
Sales growth to existing
customers sought on the
strength of product
improvements

Product line extension
The new product is
added to the existing
product line to increase
total demand

New use
By finding a new use for
the existing product, new
customers are found

Market extension
New customers sought on
the strength of product
improvements

ym
a

–

ter

Replacement
The new technology
replaces the old

tud

New market

New technology

Reformulation
A new balance between
price/quality has to be
formulated

Market
unchanged

Market
strengthened (ie
new demand from
same customers)

ial

No technological change

Product
Improved technology

To download more visit http://freeaccastudymaterial
...


Diversification

7
...
4 Research and development
Research may be pure, applied or development
...
New
product development should be controlled by requiring strategic approval at key points of development
...
There are
distinct problems to managing R&D
...
com/freeaccastudymaterial

115

To download more visit http://freeaccastudymaterial
...
There
is no obvious commercial or practical end in view
...

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
...
5 Product and process research
There are two categories of R&D
...


ial

Key terms

Product research – new product development

ter

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
...
A screening process is
necessary to ensure that resources are concentrated on projects with a high probability of success and not
wasted on those that have poor prospects
...
This
emphasises a cross-functional, prioritised, quality managed, project management approach consisting,
typically, of five stages
...

In Cooper's model, each stage begins with a gate; that is, a review meeting of managers who have the
power either to kill the project or to allocate the resources necessary for it to progress to the next gate
...
6 Process research

as

Process research involves attention to how the goods/services are produced
...

Processes are crucial in service industries (eg fast food), where processes are part of the services
sold
...
Efficient processes save money and time
...
If you know how long certain stages in a project are likely to take, you can plan the most
efficient sequence
...


ea

cc

(a)

We will have a lot more to say about process development later in this Study Text, but these early
references should alert you to the fact that they are important considerations in business strategy
...
Competitors can purchase and reverse engineer new products
...

The strategic role of R&D
...
To take a simple
example, if a strategy based on high quality and luxury has been adopted, it would be inappropriate to
expend much effort on researching ways of minimising costs
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Many organisations employ specialist staff to conduct research and development (R&D)
...
In an organisation run on a product division
basis, R&D staff may be employed by each division
...
com
this may form the basis for a strategy of product innovation
...


7
...
Problems of authority relationships and integration arise with the management of
R&D
...


(b)

Financial
...
Budgeting for long-term, complex development projects with uncertain returns can
be a nightmare for management accountants
...
Pure research or even applied research may not have an obvious pay off in
the short term
...


(d)

Staff problems
...


(e)

Cultural problems
...
If this is merely a subculture in an
essentially bureaucratic organisation, it will not only be difficult to sustain, but will become a
source of immense 'political' conflict
...


ial

ter

ym
a

7
...


(b)

The R&D department might identify possible changes to product specifications so that a variety of
marketing mixes can be tried out and screened
...
8
...

The encouragement of intrapreneurship is an important way of promoting innovation
...


(b)

A culture of risk-taking and tolerance of mistakes
...


(d)

Willingness and ability to devote resources to trying out new ideas
...


ea

cc

as

(a)

7
...
2 Market pull and technology push
Marketers would have us believe that the best way to competitive advantage is to find out what the market
wants and give it to them
...

Unfortunately, it tends merely to produce better versions of products that already exist
...
This
approach we might call technology push
...
com


...
com/freeaccastudymaterial

117

To download more visit http://freeaccastudymaterial
...
Many
new developments are, in fact, the result of collaboration between suppliers and customers
...
co
m

A company's policy on innovation will be linked to its assessment of how the product lifecycle concept
applies to its portfolio
...
The launch of the Xbox
One followed the introduction of Sony's Playstation 4 earlier that year
...


ial

ter

In recent years, there has been an interesting evolution in the relationship between gaming console
manufacturers and their customers
...


ym
a

Recognising this, Microsoft announced its intention that in the future, every standard Xbox One will work
as a development kit, allowing developers to develop and self-publish games digitally on the Xbox One
...


tud

Microsoft's decision to introduce the Xbox One was made having acknowledged that its earlier console,
the Xbox 360 (which had been introduced in 2005) was nearing the end of its lifecycle
...
com highlighted comments made by Microsoft Vice president Chris Lewis who stated
that 'Xbox 360 was halfway through its lifecycle'
...
bbc
...
uk

as

2) 'Xbox 360: about halfway through its lifecycle' (June 2011) published by
Computer and Video Games
...
computer andvideogames
...
Adoption of identified best practices
should improve performance
...
JS&W propose the following categories:
Historical benchmarking is an internal comparison of current against past performance
...


118

12/12

Benchmarking enables a firm to meet industry standards by copying others, but it is perhaps less valuable
as a source of innovation
...


ea

FAST FORWARD

cc

8 Benchmarking

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com

Gaming expert Brian Crecente told the BBC 'Where Sony's PlayStation 4 delivers an intensely focused
gaming machine, Microsoft's Xbox One promises an entertainment hub, a system just as capable of
controlling your cable box as it is delivering a new game for you to play'
...
com
Industry/sector benchmarking compares like with like across the industry or similar providers in the
public service
...
The
limitation of this method is that the whole industry may be under-performing and in danger from
substitute products provided by other industries
...
This involves making
comparisons with similar features or processes in other industries
...



...
1 The benchmarking process
Benchmarking can be divided into stages
...
This will only be genuinely available when the senior managers have a full
appreciation of what is involved: senior people are quite capable of changing their minds
when it becomes apparent that they did not anticipate the actual levels of cost or
inconvenience, for example
...
Note
that here, the objectives will not be in the form of targets for improvement to specific
processes and practices, but more in the nature of stating the extent and depth of the
enquiry
...


Stage 3

Key performance measures must be established
...
This, in turn, will require discussion with key stakeholders and
observation of the way work is carried out
...


Stage 4

Select organisations to benchmark against
...
Where internal departments
have little in common, comparisons must be made against other organisations or equivalent
parts of other organisations
...


Stage 5

Measure own and others' performance
...


Stage 6

Compare performance
...
It will be appropriate to discuss initial findings with the stakeholders
concerned: they are likely both to have useful comments to offer and to be anxious about
the possibility of adverse reflection upon them
...


ea

cc

as

tud

ym
a

ter

ial

Stage 2

To download more visit http://freeaccastudymaterial
...
It may be possible to import complete
systems; alternatively, it may be appropriate to move towards a synthesis that combines
various elements of best practice
...
In any event, there is likely to be a requirement for
training
...


fre

Stage 7

Stage 8

Monitor improvements
...

At the same time, it must be understood that improvements are not once and for all and
that further adjustments may be beneficial
...
com/freeaccastudymaterial

119

To download more visit http://freeaccastudymaterial
...
2 Using benchmarking
JS&W set out questions that should be asked when carrying out a benchmarking exercise as part of a
wider strategic review:





Why are these products or services provided at all?
Why are they provided in that particular way?
What are the examples of best practice elsewhere?
How should activities be reshaped in the light of these comparisons?


...

Level of benchmarking

Through

Examples of measures

Resources

Resource audit

Quantity of resources

 Revenue/employee
 Capital intensity

Sales calls per salesperson

ter

Analysing activities

Competences in separate
activities

ial

 Qualifications of employees
 Age of machinery
 Uniqueness (eg patents)
Output per employee
Materials wastage

Analysing overall performances

ym
a

Competences in linked
activities

Market share

Profitability
Productivity

When selecting an appropriate benchmark basis, companies should ask themselves the following
questions:
Is it possible and easy to obtain reliable competitor information?

(b)

Is there any wide discrepancy between different internal divisions?

(c)

Can similar processes be identified in non-competing environments and are these non-competing
companies willing to co-operate?

(d)

Is best practice operating in a similar environmental setting?

(e)

What is our timescale?

(f)

Do the chosen companies have similar objectives and strategies?

cc

as

tud

(a)

8
...
Benchmarking can assess a firm's existing position, and provide a basis for
establishing standards of performance
...


fre

(b)

ea

Benchmarking has the following advantages:

(c)

(d)

The sharing of information can be a spur to innovation
...


The result should be improved performance, particularly in cost control and delivering value
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

8
...
A process can be efficient but its output may not
be useful
...
co
m

A linked point is that the benchmark may be yesterday's solution to tomorrow's problem
...


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


(d)

It depends on accurate information about comparator companies
...


(f)

It can become a hindrance and even a threat: sharing information with other companies can be a
burden and a security risk
...

The article explores how benchmarking can be applied at key stages in the rational planning approach to
strategy setting
...


ym
a

Exam focus
point

Benchmarking does not identify the reasons why performance is at a particular level, whether good
or bad
...
com

(b)

tud

In the December 2012 exam, part of a question required students to discuss the advantages and
disadvantages of benchmarking in the context of a company which offered outsourced IT solutions to a
city council
...
However, a policy of gradual extension and
improvement of desirable activities may be useful and may be combined with culling of superfluous ones
...

So far in this chapter we have concentrated on the analysis of strategic capability
...


ea

9
...
Quite often, core competences derive from informal and flexible activities and
processes that are not subject to management from above: they simply exist
...
Where managers recognise such competences, it is very important that they take great care
with attempts to improve or even to formalise them
...


fre

FAST FORWARD

Part A Strategic position  4: Strategic capability

join us on facebook @ fb
...
com

9
...


(b)

Non-essential activities can cease
...


(c)

Best practice can be extended
...


(d)

Activities can be added and existing ones improved in order to better support critical success
factors
...
System overlaps and inconsistencies may require attention,
particularly when there are marked differences between the requirements of the various market
segments served
...
Known weaknesses in resources or activities might have the
potential to create competitive advantage if suitable market opportunities exist
...


(g)

External capability can be introduced by acquisition and through alliances and joint ventures
...
co
m

Competences can be extended
...


ym
a

9
...

Recruitment and selection practice can be designed to emphasise the need for particular
aptitudes, such as leadership or innovation
...


(c)

Individual strategic awareness can be developed so that staff understand how their activities
enhance strategic capability
...
It is
an analysis of the organisation's strengths and weaknesses, and the opportunities and threats offered by
the environment
...


cc

FAST FORWARD

as

10 SWOT analysis

Key term

122

fre

ea

We examined the way in which opportunities and threats in the environment are detected and analysed in
the previous chapters
...
A complete awareness of the organisation's
environment and its internal capacities is necessary for a rational consideration of future strategy, but it is
not sufficient
...
This is done by combining the internal and external analyses into a SWOT analysis or corporate
appraisal
...

JS&W

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...



...
It is important that you understand what the question is asking for, and answer accordingly
...
This was not
required
...

A case study scenario in the June 2011 exam featured a car manufacturer
...
Candidates had to analyse the weaknesses and then
recommend how they could be addressed
...
com

Question 1 in June 2014 asked candidates to undertake a SWOT analysis of the featured company as part
of a report to potential investors
...
As previously highlighted, it is critical that you remember that
opportunities and threats represent external factors, and that strengths and weaknesses are internally
focused
...


10
...

These features are only of relevance if they are perceived to exist by the consumers
...


(b)

In the same vein, threats and opportunities are conditions presented by the external environment
and they should be independent of the firm
...

Strengths

ea

cc

as

Internal
to the
company

Exist
independently
of the
company

M
a
t
c
h
I
n
g

Weaknesses

Conversion

Conversion

Opportunities

Threats

SWOT analysis model

fre

Exam focus
point

(a)

Match strengths with market opportunities
Strengths that do not match any available opportunity are of limited use while opportunities which
do not have any matching strengths are of little immediate value
...

Part A Strategic position  4: Strategic capability

join us on facebook @ fb
...
com
The SWOT technique can also be used for specific areas of strategy such as IT and marketing
...
2 Weirich's TOWS matrix

In the June 2014 exam, the compulsory question required students to recommend strategic options for
each quadrant of a TOWS matrix applied to the company featured in the scenario
...
This requirement was not well answered
...
As a result very few answers focused on strategic options
...
co
m

Exam focus
point

6/14, 6/12

Weirich, one of the earliest writers on corporate appraisal, originally spoke in terms of a TOWS matrix in
order to emphasise the importance of threats and opportunities
...
A further important element of Weirich's discussion was his
categorisation of strategic options :

ial

SO strategies employ strengths to seize opportunities
ST strategies employ strengths to counter or avoid threats
WO strategies address weaknesses so as to be able to exploit opportunities
WT strategies are defensive, aiming to avoid threats and the impact of weaknesses

ter

One useful impact of this analysis is that the four groups of strategies tend to relate well to different
time horizons
...
ST and WT strategies are more probably relevant to the
medium term
...
ST and WT strategies are likely to
be more or less resource-neutral, but care must be taken to achieve an overall balance
...
We will look at these strategic options later in this Study Text
...


fre

ea

cc

as

Exam focus
point

124

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com






To download more visit http://freeaccastudymaterial
...




Resource audits identify human, financial and material resources and how they are deployed
...




Cost efficiency is fundamental to strategic capability: the public sector demands value for money, while in
the private sector, price competition makes cost efficiency fundamental to survival
...


ial

If strategy is to be based on strategic capabilities, those capabilities must have four qualities
...
com

–
–
–
–


...

The aim of knowledge management is to capture, organise and make widely available all the knowledge
the organisation possesses, whether explicit (in recorded form) or tacit (in people's heads)
...
Knowledge is patterns of
information that are strategically useful and context independent
...
Systems include office automation,
groupware, intranets, extranets, expert systems and data mining
...
Primary
activities are involved in the production of goods and services
...
Linkages are the relationships between activities
...




The value network joins the organisation's value chain to those of its suppliers and customers
...
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
...

To avoid waste, there should be a programme of assessment for major product development
...


as

cc

ea

fre



tud



Research may be pure, applied or development
...

New product development should be controlled by requiring strategic approval at key points of
development
...
com/freeaccastudymaterial

125

To download more visit http://freeaccastudymaterial
...




Benchmarking enables a firm to meet industry standards by copying others, but it is perhaps less valuable
as a source of innovation
...




Managers must take great care not to disrupt strategic capability that arises from flexible, informal
practices by trying to systematise and improve them
...

Also, since much strategic capability is traceable to individual skill and ability, good HRM practice can help
to create and improve it
...
It is
an analysis of the organisation's strengths and weaknesses, and the opportunities and threats offered by
the environment
...


ter

ial


...
There are
distinct problems to managing R&D
...


7

What does the value chain illustrate?

8

List the stages of the product life cycle
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

Answers to Quick Quiz
1











2

Competences that underpin competitive advantage and that are difficult to imitate
...


5

A data warehouse receives data from operational systems and stores them in their most fundamental
form, without any summarisation of transactions

ial

To download more visit http://freeaccastudymaterial
...
co
m

Machinery
Make-up
Management
Management information
Markets
Materials
Men and women
Methods
Money

tud

ym
a

ter

6

The value chain illustrates how value is created by value activities and the linkages between them, and that
the customer is prepared to pay for that value
...
)

8

Inception, growth, shakeout, maturity, decline

9

Historical; Industry/Sector; Best-in-class
...

Strategies employ strengths to counter or avoid threats
...

Strategies are defensive, aiming to avoid threats and the impact of weaknesses
...
com/freeaccastudymaterial

127

ial
ter
ym
a
tud
as
cc
ea
fre
128

4: Strategic capability  Part A Strategic position

join us on facebook @ fb
...
com


...
com

ter

ial

Stakeholders,
ethics, culture and
integrated reporting

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
Some of these rules are law and
enforced by legal sanction
...
The
first section of this chapter is concerned with the strategic impact of ethical
ideas on organisations
...
This is a rather poorly defined concept
...


fre

The third section of this chapter is concerned with corporate governance and
the mechanisms that may be installed to promote fair and honest behaviour at
the strategic apex
...
Finally, we conclude the chapter with a discussion of integrated
reporting
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

The expectations of stakeholders and the influence of ethics and culture

ter

Exam guide

The importance of the topics covered in this chapter is indicated by the emphasis laid on them by all
professional bodies
...


ym
a

In particular, there are likely to be stakeholder, ethical or cultural issues in most case studies
...
However, in your P3 exam, you will not be
examined specifically on a single theory or model unless it is explicitly referenced in the Study Guide
...
However, because the Study Guide refers
explicitly to the cultural web you may get a question which specifically requires you to use this model
(which is covered in Section 4
...


as

The role of integrated reporting in communicating strategy is a new addition to the Study Guide
...
Integrated reporting is covered in
Section 5 of this chapter
...
You should already be familiar with many of the basic ideas underpinning this chapter
...
Our coverage here is intended to provide a minimum of essential revision and new
material relevant to the Business Analysis syllabus
...


FAST FORWARD

130

Ethics is about right and wrong but it is not the same thing as law or the rules of religion
...


5: Stakeholders, ethics, culture and integrated reporting  Part A Strategic position

join us on facebook @ fb
...
com

A6

To download more visit http://freeaccastudymaterial
...
1 Ethics and business
Ethics is concerned with right and wrong and how conduct should be judged to be good or bad
...
Business life
is a fruitful source of ethical dilemmas because its whole purpose is material gain, the making of profit
...



...
2 Non-cognitivism, ethical relativism and intuitionism

The approach called non-cognitivism suggests that all moral statements are essentially subjective and
arise from the culture, belief or emotion of the speaker
...
com

Non-cognitivism recognises the differences that exist between the rules of behaviour prevailing in different
cultures
...
This is clearly a matter of significance in the context of international business
...


1
...
There are four important cognitivist theories to consider after we have
looked at law and religion in relation to ethics
...
This problem may be approached by asking how does
God decide what is right and what is wrong? Presumably, it is not mere whim and moral
principles are involved
...


(b)

Cognitivist ethics and law can be seen as parallel and connected systems of rules for regulating
conduct
...
However, ethics
and law are not the same thing
...
However, unlike law, ethics can
quite reasonably be an arena for debate, about both the principles involved and their application in
specific rules
...
Another difference is that many legal rules are only
very remotely connected with ethics, if at all, and some laws in some countries have been of
debateable moral stature, to say the least
...
Natural law is about rights and duties, while virtue ethics is based
on moderation in behaviour and the idea of leading a harmonious life
...
Partly as a result of this, ethical dilemmas can exist at all levels in the
organisation
...
4 Consequentialist ethics: utilitarianism

The consequentialist approach to ethics is to make moral judgements about courses of action by
reference to their outcomes or consequences
...

Utilitarianism is the best-known formulation of this approach and can be summed up in the 'greatest
good' principle
...

There is an immediate problem here, which is how we are to define what is good for people
...
com/freeaccastudymaterial

131

To download more visit http://freeaccastudymaterial
...
A situation in
which a large majority achieved great happiness at the expense of creating misery among a small minority
would satisfy the 'greatest good' principle
...

However, utilitarianism can be a useful guide to conduct
...


1
...
co
m

Deontology is concerned with the application of universal ethical principles in order to arrive at rules of
conduct, the word deontology being derived from the Greek for 'duty'
...
The definitive treatment of deontological ethics is found in the work of Immanuel Kant
...


ial

ter

Kant arrived at two formulations of the categorical imperative with which we should be familiar:
Never act in a way that you would condemn in others
...
(Note that this does not preclude us from using
people as a means to an end as long as we, at the same time, recognise their right to be treated as
autonomous beings
...
)

ym
a

(a)

1
...
In terms of business ethics, the natural law approach
deals mostly with rights and duties
...

Unfortunately, the implications about duties can only be as clear as the rights themselves and there are
wide areas in which disagreement about rights persists
...
7 Duty and consequences

cc

In their pure form, neither the duties of natural law nor Kant's categorical imperative will admit
consideration of the consequences of our actions: we act in a certain way because we are obeying
inflexible moral rules
...
If people have absolute rights that we must
respect whatever the circumstances, we may find that our actions in doing so harm the common good
...
The potential threat to public safety
has to be balanced against the right of the individual to liberty
...


fre

While individual cases are bound to provoke debate, it would be reasonable to suggest that an inflexible
approach to rules of conduct is likely to produce ethical dilemmas
...
However, generally we do not have
the option of doing nothing, and this is particularly true of business
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
A categorical imperative, however, defines
a course of action without reference to outcomes
...


To download more visit http://freeaccastudymaterial
...
8 Virtue ethics
The virtue ethics approach consists of pursuing a harmonious or virtuous life and a rational judgement
about what constitutes good
...
For example,
courage lies between cowardice at one end of the scale and foolhardiness at the other
...
For example, managers
might cultivate a range of virtues such as honesty, courage, fairness and firmness
...
co
m

1
...
When we discussed the concept of mission, we made
passing reference to policies and standards of behaviour
...
com

It is important to understand that if ethics is applicable to corporate behaviour at all, it must therefore be a
fundamental aspect of mission, since everything the organisation does flows from that
...
They should consciously apply ethical rules to all of their decisions in order to filter out
potentially undesirable developments
...
It is worth taking the time to read this carefully as it provides some useful background reading
before attempting the professional ethics module
...
10 Ethical dilemmas

There are a number of areas in which the various approaches to ethics and conflicting views of business
responsibility can create ethical dilemmas for managers
...


tud

Dealing with unpleasantly authoritarian governments can be supported on the grounds that it contributes
to economic growth and prosperity and all the benefits they bring to society in both countries concerned
...
It can also be opposed on consequentialist grounds as contributing to
the continuation of the regime, and on deontological grounds as fundamentally repugnant
...
Many products are promoted exclusively on image
...
It can be defended on the grounds that
the supplier is actually selling a fantasy or dream, rather than a physical article
...
The idea of a job as property to be defended has now disappeared from UK labour relations, but
there is no doubt that corporate decisions that lead to redundancies are still deplored
...
Nevertheless, it is only proper for businesses to consider the cost of
employing labour as well as its productive capacity
...


fre

Another ethical problem concerns payments by companies to officials who have power to help or hinder
the payers' operations
...

(a)

Extortion
...


(b)

Bribery
...
There are some
fine distinctions to be drawn; for example, some managers regard political contributions as bribery
...
com/freeaccastudymaterial

133

To download more visit http://freeaccastudymaterial
...
Multinational companies are sometimes unable to obtain services to which they are
legally entitled because of deliberate stalling by local officials
...


(d)

Gifts
...

Managers operating in such a culture may feel at liberty to adopt the local customs
...
11 The scope of corporate ethics
Corporate ethics has three contexts
...


The organisation's interaction with national and international society
The effects of the organisation's routine operations
The behaviour of individual members of staff

ym
a





ter

If constructed with care, a corporate ethical code can be valuable
...
The organisation operates within and interacts with the political, economic and social
framework of wider society
...
Governments, individual politicians and pressure groups will all make demands on
such matters as employment prospects and executive pay
...
International variation in such matters and in the framework of corporate governance will
affect organisations that operate in more than one country
...

Corporate behaviour
...
Examples of matters that should be covered by policy include health, safety, labelling,
equal opportunities, environmental effects, political activity, bribery and support for cultural activities
...
Policies to guide the behaviour of individuals are likely to flow from the corporate
stance on the matters discussed above
...
Some aspects of such behaviour may be of
strategic importance, especially when managers can be seen as representing or embodying the
organisation's standards
...


It should not be over-prescriptive or over-detailed, since this encourages a legalistic approach to
interpretation and a desire to seek loopholes in order to justify previously chosen courses of action
...
Organisations often publish corporate codes of ethical standards
...
However, care must be taken over such a document
...


Ethical codes and policies on behaviour can, of course, be linked to and summarised in the mission
statement
...
The CEO who sets in motion a takeover bid that will enhance his prestige,

134

5: Stakeholders, ethics, culture and integrated reporting  Part A Strategic position

join us on facebook @ fb
...
com


...
This is because a market can only be free if
competition is, in some basic respects, fair
...


To download more visit http://freeaccastudymaterial
...


Case Study

Bonus culture in the banking industry


...

Former Royal Bank of Scotland (RBS) chief executive Sir Fred Goodwin told MPs on the Treasury
Committee that he 'could not be more sorry' for what happened
...

But he added if bankers felt they were not paid enough, they would leave
...
com

Andy Hornby, former CEO of HBOS, also conceded that the culture of cash bonuses needed looking at
...
Substantial cash bonuses do not reward the right kind of
behaviour,' he said
...
'

ym
a

However, a rather different picture is emerging from HBOS
...
' Paul Moore –
who was head of group regulatory risk – was dismissed for pointing out that the bank was ignoring
checks and balances
...

Mr Moore also insisted that the subsequent banking crisis could have been avoided if there were adequate
systems to hold bank chiefs to account
...


tud

Nonetheless, bonuses and poor internal controls were not the only cause of the bank's problems
...
But
his takeover of Dutch rival ABN Amro late in 2007 is now seen as ill-timed and a deal too far, in the light of
RBS's inability to survive the credit crunch without a massive injection of Government funds
...
'We bought it at the top of the market, and
anything we paid was an error
...

Adapted from an online article:

cc

'Former banking bosses say sorry' (February 2011) published on the BBC website; www
...
co
...


fre

FAST FORWARD

ea

2 Social responsibility



The strong view that a range of goals should be pursued
The weak view that the business organisation is a purely economic force, subject to law

Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com

2
...
co
m

The syllabus for Paper F1 Accountant in Business includes material on stakeholders
...
The coverage here is intended to provide a
minimum of essential revision coupled with new material relevant to the P3 syllabus
...

Stakeholders have an interest in what the organisation does
...
1
...
The greater the power of a stakeholder group, the
greater its influence will be
...
To some extent, the expectations of stakeholders will
influence the organisation's mission
...


cc

(a)

tud

Here is a checklist of stakeholders' objectives
...


Suppliers: regular orders in return for reliable delivery and good service

(d)

Shareholders: long-term wealth

(e)

Providers of loan capital (stock holders): reliable payment of interest due and maintenance of the
value of any security
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
2
...
2 Competitors
Competitors can be stakeholders
...


2
...
3 Stakeholder risks







Internal
Managers
and employees
(eg restructuring,
relocation)

 Pursuit of systems goals rather
than shareholder interests
 Industrial action
 Negative power to impede
implementation
 Refusal to relocate
 Resignation

Jobs/careers
Money
Promotion
Benefits
Satisfaction

 Sell shares (eg to predator) or
replace management

ter

 Increase in shareholder wealth,
measured by profitability, P/E
ratios, market capitalisation,
dividends and yield
 Risk

To download more visit http://freeaccastudymaterial
...
co
m

Interests to defend

ial

Stakeholder

 Security of loan
 Adherence to loan agreements

 Denial of credit
 Higher interest charges
 Receivership

Suppliers (purchase
strategy)

 Profitable sales
 Payment for goods
 Long-term relationship

 Refusal of credit
 Court action
 Wind down relationships

Customers (product
market strategy)

 Goods as promised
 Future benefits

 Buy elsewhere
 Complain
 Sue

 Jobs, training, tax

 Tax increases
 Regulation
 Legal action

 Pollution
 Rights
 Other






tud

ym
a

Bankers (cash flows)

Government

Publicity
Direct action
Sabotage
Pressure on government

ea

cc

Interest/pressure
groups

as

External

fre

How stakeholders relate to the management of the company depends very much on what type of
stakeholder they are – internal, connected or external – and on the level in the management hierarchy at
which they are able to apply pressure
...


2
...
Political processes managed by the strategic apex lead to a compromise on what the
company's goals actually are
...

Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com

2
...

Weak view

Each stakeholder in the business has a legitimate
claim on management attention
...


Satisfying stakeholders such as customers is a
good thing – but only because it enables the
business to satisfy its primary purpose, the longterm growth in owner wealth
...
co
m

Strong view

2
...
1 Problems with the strong stakeholder view

(b)

If managers are required to balance different stakeholders' interests, there is a danger that they will
favour their own interests
...


(d)

People have interests, but this does not give them rights
...
4 Managing stakeholders

12/09

An organisation's stakeholder relationships must be managed in accordance with their bargaining
strength, influence, power and degree of interest
...
Stakeholders have three options: loyalty, exit and voice
...


Weak

Company’s
conduct
of relationship

Consultation
and
consideration
of
stakeholders’
views

Stakeholders’
bargaining strength

Negotiation

Participation
and
acceptance
of
stakeholders’
views

Strong

Democratic
voting by
stakeholders

cc

as

Command/
dictated by
company

tud

The way in which the relationship between company and stakeholders is conducted is a function of the
parties' relative bargaining strength and the philosophy underlying each party's objectives
...


Command/
dictated by
stakeholders

2
...
1 Stakeholder mapping

fre

ea

Mendelow classifies stakeholders on a matrix whose axes are power held and likelihood of showing an
interest in the organisation's activities
...


138

5: Stakeholders, ethics, culture and integrated reporting  Part A Strategic position

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...
co
m

Power

Key players are found in segment D: strategy must be acceptable to them, at least
...

Stakeholders in segment C must be treated with care
...
They should, therefore be kept satisfied
...


(c)

Stakeholders in segment B do not have great ability to influence strategy, but their views
can be important in influencing more powerful stakeholders, perhaps by lobbying
...
Community representatives and charities might fall into
segment B
...


ym
a

ter

ial

(b)

To download more visit http://freeaccastudymaterial
...
This, in turn, has
implications for the organisation
...


(b)

It may be appropriate to seek to reposition certain stakeholders and discourage others from
repositioning themselves, depending on their attitudes
...


as

tud

(a)

Stakeholders and their influence are regular features of business strategy exam questions
...

However, the Study Guide does state that you need to be able to 'Evaluate, through stakeholder mapping,
the relative influence of stakeholders on organisational purpose and strategy'
...


fre

Exam focus
point

cc

Stakeholder mapping can also be used to establish political priorities
...
This will indicate critical shifts that must be
pursued
...
com/freeaccastudymaterial

139

To download more visit http://freeaccastudymaterial
...
4
...
co
m

The external coalition

 Ideology (ie culture)

Each of these groups has three basic choices:

(b)

Exit
...


(c)

Voice
...
Those who choose voice are those who can, to
varying degrees, influence the organisation
...


ter

ial

Loyalty
...


Existing structures and systems can channel stakeholder influence
...


(b)

They are conduits of information, which shape strategic decisions
...
These may be physical or ethical
constraints over what is possible
...


(e)

They determine the successful implementation of strategy
...
A company with a
cash flow crisis will be more beholden to its bankers than one with regular cash surpluses
...
As some stakeholders have negative power,
in other words power to impede or disrupt the decision, their likely response might be considered
...
5 Corporate social responsibility
The extent to which an organisation recognises obligations to society in general is as much subject to
debate as its relationships with stakeholder groups
...
This is an ill-defined concept, but appears to focus on the provision of specific benefits to
society in general, such as charitable donations, the creation or preservation of employment, and
spending on environmental improvement or maintenance
...

The momentum of such arguments is now so great that the notion of social responsibility has become
almost inextricably confused with the matter of ethics
...
Social
responsibility and ethical behaviour are not the same thing
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
responsibility is assumed
...


2
...

Businesses do not have responsibilities, only people have responsibilities
...


(b)

These employers may have charity as their aim, but 'generally [their aim] will be to make as much
money as possible while conforming to the basic rules of the society, both those embodied in law
and those embodied in ethical custom
...
'

(d)

If managers do this, they are, generally speaking, spending the owners' money for purposes other
than those they have authorised; sometimes it is the money of customers or suppliers that is spent
and, on occasion, the money of employees
...

There are two objections to this:

(ii)

ial

Managers have not been democratically elected (or selected in any other way) to exercise
government power
...


ter

(i)

To download more visit http://freeaccastudymaterial
...
co
m

(a)

ym
a

Friedman argues that the social responsibility model is politically collectivist in nature and deplores the
possibility that collectivism should be extended any further than absolutely necessary in a free society
...

Maximising wealth has the effect of increasing the tax revenues available to the state to disburse on
socially desirable objectives
...


(c)

Many company shares are owned by pension funds, whose ultimate beneficiaries may not be the
wealthy anyway
...
7 The stakeholder approach to corporate social responsibility

ea

cc

The stakeholder approach is based on the premise that many groups have a stake in what the
organisation does
...
This is fundamentally an argument derived from natural law theory and is based on
the notion of individual and collective rights
...
For example, they may
blight an entire community by closing a major facility, thus enforcing long-term unemployment on a large
proportion of the local workforce
...
They may use their purchasing power or market share to impose unequal contracts on
suppliers and customers alike
...
Under this approach, the exercise of corporate social responsibility constrains
the corporation to act at all times as a good citizen
...
Some of these resources are obtained by direct contracts with suppliers but others
are not, being provided by government expenditure
...
com/freeaccastudymaterial

141

To download more visit http://freeaccastudymaterial
...
Clearly, corporations contribute to the taxes that pay
for these things, but the relationship is rather tenuous and the tax burden can be minimised by careful
management
...

Henry Mintzberg (in Power In and Around Organisations) suggests that simply viewing organisations as
vehicles for shareholder investment is inadequate
...
Social responsibility, forced or voluntary, is a way of
recognising this
...
The public
pays for roads, infrastructure, education and health, all of which benefits businesses
...


(d)

Strategic decisions by businesses always have wider social consequences
...


ial


...
Most
shareholders are passive investors
...
8 Externalities

There is particular concern over externalities, or the social and environmental costs of corporate
activities
...
An example is given by the environment
...


tud

In practice, of course, while it is relatively easy to identify statistical relationships between pollution levels
and certain illnesses, mapping out the chain of cause and effect from an individual's wheezing cough to
the dust particles emitted by Factory X, as opposed to Factory Y, is quite a different matter
...
Moreover, the tax revenue may be
spent on curing the disease, rather than stopping it at its source
...
Thus advocates of social responsibility in business would argue
that responsibilities of business then do not rest with paying taxes
...
It can be regarded, then, as another form of promotion, which like
advertising, serves to enhance consumer awareness of the business, while not encouraging the
sale of a particular brand
...
A
business only succeeds because it is part of a wider society
...


ea

(a)

cc

Is there any justification for social responsibility outside remedying the effects of a business's direct
activities? For example, should businesses give to charity or sponsor the arts? Several arguments have
been advanced suggesting that they should
...
However, ultimately they can be
traced to different assumptions about society and the relationships between the individuals and
organisations within it
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

2
...
There are four typical stances
...

JS&W illustrate the range of possible ethical stances by giving four illustrations
...
9
...
com






ym
a

An organisation might limit its ethical stance to taking responsibility for short-term shareholder interest
on the grounds that it is for government alone to impose wider constraints on corporate governance
...
This stance can be justified on the grounds that
going beyond it can challenge government authority; this is an important consideration for organisations
operating in developing countries
...
9
...

The organisation's corporate image may be enhanced by an assumption of wider responsibilities
...

The responsible exercise of corporate power may prevent a build-up of social and political
pressure for legal regulation
...


cc

2
...
3 Multiple stakeholder obligations

ea

An organisation might accept the legitimacy of the expectations of stakeholders other than
shareholders and build those expectations into its stated purposes
...

A distinction can be drawn between rights and expectations
...
One is on fairly safe interpretative ground with legal rights, since
their basis is usually clearly established, though subject to development and adjustment
...
There is, for instance, an understandable tendency for those who feel themselves
aggrieved to declare that their rights have been infringed
...
For example, in the UK, there is often talk of a 'right to work' when redundancies occur
...
However,
there is a widespread acceptance that governments should make the prevention of large-scale
unemployment a high priority
...
co
m






as

FAST FORWARD

Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com
Clearly, organisations have a duty to respect the legal rights of stakeholders other than shareholders
...
Where moral
entitlements are concerned, organisations need to be practical: they should take care to establish just
what expectations they are prepared to treat as obligations, bearing in mind their general ethical stance
and degree of concern about bad publicity
...
9
...
The role
of shaper of society is even more demanding and largely the province of public sector organisations and
charities, though some well-funded private organisations might act in this way
...
Where organisations are
clearly set up for such a role, either by government or by private sponsors, they may pursue it
...


Corporate governance is the conduct of the organisation's senior officers
...
Non-executive directors have a particular role to play
...


tud

3
...
This is the province of corporate governance,
which is also concerned with the supervision and accountability of executives
...

JS&W

cc

Key term

3
...
1 The governance chain
Where the management of a business is separated from its ownership by the employment of professional
managers, the managers may be considered to be the agents of the owners
...
In many organisations, corporate governance takes the form of a chain of responsibility and
accountability
...
In the case of larger companies, the
shareholders may be numerous and unlikely to wish to take part in the management of the company,
viewing it simply as a vehicle for investment
...

In most large commercial organisations, the situation is even more complex in that governance is
exercised through many links in a chain
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Acceptance of obligations to stakeholders implies that measurement of the organisation's performance
must give due weight to these extra imperatives
...
Instead, she
wanted performance to be measured in terms of addressing climate change through reducing energy
usage, defending human rights by improving the working conditions in their suppliers' organisations, and
upholding animal rights by ensuring that no animals were used in the testing of toiletries or cosmetics
...
com
up to the board of directors
...
The chain of accountability may then continue, with those
representatives themselves accountable ultimately to the individual savers and investors that provide their
funds
...
co
m

This separation of ownership from control has been a feature of business for over a century and brings
with it a recurring problem: the business should be managed so as to promote the economic interest of
the shareholders as a body, but the power to manage lies in the hands of people who may use it to
promote their own interests
...
com

This problem is not confined to the management of companies: it is the general problem of the agency
relationship and occurs whenever one person (the principal) gives another (the agent) power to deal with
his or her affairs
...
It proceeds on the basis
that principals and agents are rational utility maximisers
...
It occurs perhaps most often because the chooser lacks
the information necessary to make a good choice
...


ym
a

Adverse selection can be exacerbated in the agency relationship when the agent has an incentive to
withhold information from the principal, thus creating information asymmetry
...


(b)

Assessing the agent's performance: the principal desires to reward the agent according to the
standard of their performance, but the agent controls or is able to influence the information the
principal uses to assess that performance
...


as

Moral hazard arises whenever people are protected from the adverse consequences of their actions; they
have no incentive to exercise correct judgement and are free to act in an irresponsible manner
...


cc

Moral hazard is not confined to principal-agent relationships
...


ea

In the agency relationship, we are concerned with the use the agent makes of the authority with which they
have been entrusted
...

Agency theory is clearly relevant to the modern business organisation
...
To do this they are given
considerable power over the resources of the business
...
The directors cannot do everything:
as we have said, they must employ subordinate managers to put their plans into action
...
com/freeaccastudymaterial

145

To download more visit http://freeaccastudymaterial
...
They also depend on both motivating
and empowering these employees
...


3
...
2 The board of directors
There are four models of governance:
1
2
3

ter

4

The Anglo-Saxon model is fast in action but may be short-termist and unresponsive to external
criticism
...

The Japanese model values consensus, takes a very long view and makes decisions slowly
...

The Latin model emphasises the role of the state: investment is likely to be for the very long-term
but governance may suffer from political activity
...
In the private sector, we are used to the
concept of the board of directors; not-for-profit organisations are likely to have a board of trustees and,
possibly, an executive committee of professional managers as well; while public sector organisations will
usually have a similar body in overall charge
...

The first differs from the other two in that shares in such companies tend to be widely held in small
quantities, which tends to permit significant autonomy to a small number of senior managers
...

JS&W discuss a fourth model: this is the Latin, typical of France, Spain and Italy
...
There is a single level of board
membership, which includes both executive and non-executive directors
...
The wide spread of shareholding found
in many large companies tends to limit the power of individual shareholders, though major institutional
shareholders such as pension funds are becoming more assertive
...
This can lead to difficulties, since banks' own commercial considerations may lead
them to withdraw funds
...


fre

This kind of company tends to be very market-oriented, internationalised and able to raise and use large
amounts of capital
...

The Rhine model
The Rhine model is found in such countries as Germany, the Netherlands and Switzerland; and, to some
extent, in France
...


146

5: Stakeholders, ethics, culture and integrated reporting  Part A Strategic position

join us on facebook @ fb
...
com


...
Moral hazard can be reduced by making the rewards paid to the directors and managers
contingent upon their satisfactory performance: the information asymmetry that leads to adverse
selection can be reduced by making proper information about that performance available to the
shareholders (in the case of the directors) and to the directors (in the case of the subordinate managers)
...
com
There are robust procedures for corporate governance
...

Such companies have a long-term strategy with stable capital investment policies
...

The Japanese model


...
Promotion to the board is
decided by the Chairman after consultation, often with interested external parties such as bankers
...
Governance
procedures tend to be secretive and can be corrupt, with weak accountability
...
Decision-making can be very slow
...
In times of difficulty, they are more likely to promote change, rather than
simply withdrawing funds
...
com

The Latin model

ter

The Latin model features heavy state involvement in business and industrial strategy, with consistency
between political, economic and administrative goals
...
However, government
involvement can lead to over-emphasis on political priorities and over-intimate relations between
directors, politicians and civil servants
...
1
...
If it decides on a stewardship
role, it must ensure that the organisation's activity is not directed to management's own ends, rather than
those of legitimate stakeholders
...


tud

Directors' involvement in the making of strategy may be limited to a stewardship role in which the board
delegates the process to full-time executives, retaining only a final approval role
...


as

There are a number of ways in which the board can engage in the strategic process: some of these are
discussed elsewhere in this Study Text
...
They must ensure that they act independently in the interests
of stakeholders and pay proper attention to personal and collective accountability and performance
assessment
...
2 The driving forces of governance development

(a)

(b)

ea

Corporate governance issues came to prominence in the US during the 1970s; and in the UK and Europe,
from the late 1980s
...

Increasing internationalisation and globalisation meant that investors, and institutional investors
in particular, began to invest outside their home countries
...

Issues concerning financial reporting were raised by many investors and were the focus of much
debate and litigation
...


fre

FAST FORWARD

(c)

An increasing number of high profile corporate scandals and collapses including Polly Peck
International, BCCI, and Maxwell Communications Corporation prompted the development of

Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com
governance codes in the early 1990s
...

The speed and severity of the downturn in the global financial system in 2008-09 also suggest that
more stringent controls and regulation over the global banking system are required
...
3 Features of poor corporate governance


...


3
...
1 Domination by a single individual

A feature of many corporate governance scandals has been boards dominated by a single senior executive
with other board members merely acting as a rubber stamp
...
For example, a company director may pay themselves a significant
reward without consulting the other directors
...
3
...


ter

Boards that meet irregularly or fail to consider systematically the organisation's activities and risks are
clearly weak
...


Another important control is lack of adequate technical knowledge in key roles, for example, in the audit
committee or in senior compliance positions
...


3
...
4 Lack of supervision

as

tud

Employees who are not properly supervised can create large losses for the organisation through their own
incompetence, negligence or fraudulent activity
...
Leeson was able to do this because he
was in charge of both dealing and settlement, a systems weakness or lack of segregation of key roles
that featured in other financial frauds
...
3
...
Often corporate collapses are followed by criticisms of external
auditors, such as the Barlow Clowes affair, where poorly planned and focused audit work failed to identify
illegal use of client monies
...
3
...
One possible symptom of this is the payment of remuneration packages that do not appear
to be warranted by results
...
3
...


148

5: Stakeholders, ethics, culture and integrated reporting  Part A Strategic position

join us on facebook @ fb
...
com

3
...
2 Lack of involvement of board

To download more visit http://freeaccastudymaterial
...
3
...
4 Risks of poor corporate governance


...
Giving out misleading information was a major issue in the UK's
Equitable Life scandal where the company gave contradictory information to savers, independent advisers,
media and regulators
...
The organisation may also be closed down as a result of serious regulatory breaches, for
example, misapplying investors' monies
...
com

Culture is important, both in organisations and in the wider world
...
In wider society, it is affected by factors such as age, class, race and
religion, while in organisations it is defined by assumptions, beliefs and artefacts
...
The organisational iceberg concept shows
how culture relates to other aspects of the organisation
...
Combined with the physical manifestations of
culture, it makes up the cultural web
...
'

as

tud

An article titled 'Culture and configuration' written by Ken Garrett is available in the Technical Articles
section for P3 on the ACCA website
...
Consideration is given to the interaction between
organisational configuration and culture
...


cc

The compulsory question in the June 2013 exam focused on how an understanding of organisational
culture would have helped the newly appointed CEO of a hospital manage change
...

Through contact with a particular culture, individuals learn a language, acquire values and learn habits of
behaviour and thought
...
Beliefs are what we feel to be the case on the basis of objective and subjective
information (eg people can believe the world is round or flat)
...


ea

Exam focus
point

6/12

fre

Key term

ym
a

4
...
Customs are modes of behaviour which represent culturally accepted ways of behaving
in response to given situations
...
Artefacts are all the physical tools designed by human beings for their physical and
psychological well-being, including works of art, technology, products
...
A ritual is a type of activity which takes on symbolic meaning; it consists of a fixed
sequence of behaviour repeated over time
...
com/freeaccastudymaterial

149

To download more visit http://freeaccastudymaterial
...

Knowledge of the culture of a society is clearly of value to businesses in a number of ways
...
This is
particularly important in export markets
...
For example,
some ethnic minorities have a different body language from the majority, which may be hard for
some interviewers to interpret
...
co
m

(a)

Culture in a society can be divided into subcultures reflecting social differences
...


Key term

Organisational culture consists of the beliefs, attitudes, practices and customs to which people are
exposed during their interaction with the organisation
...
Schein suggests that three aspects of culture can be distinguished in
organisations
...
These may include customer orientation, or belief in quality, trust in the organisation
to provide rewards, freedom to make decisions, freedom to make mistakes and the value of
innovation and initiative at all levels
...
These beliefs and values may emerge as sayings, slogans and
mottoes, such as IBM's motto, 'Think'
...


(c)

Visible artefacts – the style of the offices or other premises, dress rules, visible structures or
processes, the degree of informality between superiors and subordinates and so on
...
It can reward the right attitudes and punish (or simply not employ) those who are not
prepared to commit themselves to the culture
...

The organisation's founder
...
Or, to put it
another way, an organisation might find it hard to shake off its original culture
...


(b)

The organisation's history
...
Farming, for example, sometimes has a craft element
to it
...
They
legitimise behaviour and promote priorities
...
)

ea

Leadership and management style
...


fre

(c)

cc

(a)

(d)

150

Structure and systems affect culture as well as strategy
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
The culture of an organisation is embedded in
the culture of the wider society
...


To download more visit http://freeaccastudymaterial
...
2 The organisational iceberg
French and Bell described the organisational iceberg in which formal aspects are overt and informal
aspects are covert or hidden, rather as the bulk of an iceberg is underwater
...
Section C2(b) also requires you to be able to determine and diagnose the organisational
context of change using the cultural web
...
ACCA's answer draws on the cultural web model covered in the next
section
...


as

tud

The examining team reported that the cultural web was an area of the syllabus that students appeared to
be familiar with
...
Applying your
knowledge directly to the question scenario is crucial for passing paper P3
...


4
...
1 The paradigm

ea

cc

The word paradigm was first used outside its original context by Kuhn and defined by him as 'an entire
constellation of beliefs, values and techniques, and so on, shared by the members of a given community'
...
Note that this is a slightly different concept from
culture
...


4
...
2 The cultural web

12/11, 12/10

fre

Exam focus
point

ter

4
...
com








...


Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com

Rituals and
routines

Symbols

The
Paradigm

Organisational
structures

The cultural web

ter

The cultural web model may be used to gain an understanding of an organisation's culture and thence the
way its members behave and how its strategy develops
...
Culture tends to be
fairly simple, though manifested in complex ways: different but consistent elements may be discerned by
investigating each constituent of the cultural web
...


4

5

ym
a

fre

ea

6

tud

3

as

2

Stories – The stories concern past events and people talked about inside and outside the company
...

Symbols – The visual representations of an organisation, including logos, premises, and dress can
illustrate the nature of that organisation
...

Power structures – Who has the real power in the organisation? This may be held by one or two
key senior executives, a whole group of executives, or even a department
...

Organisational structures – This includes both the formal structure defined by the organisation
chart, and the unwritten lines of power and influence that indicate whose contributions are most
valued
...

Control systems – These concern the ways the organisation is controlled
...
) Looking at the areas which are controlled most closely can indicate what is seen
as most important to an organisation, and where most attention is focused
...
This determines what is expected to happen in given situations, and
what is valued by management
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Stories

To download more visit http://freeaccastudymaterial
...
3
...
It also gives some examples of the expressions of culture that could be generated by the
web
...

Cultural web

Examples (based on car repair workshop)

Stories
They're always the cheapest on the market; they do
things the cheapest way they can
...
co
m

What stories do people tell about the organisation?
What do these stories say about the values of the
organisation?

They are known for having high numbers of
customer complaints, and for low quality
workmanship
...


ial

What do employees talk about when they think of
the history of the organisation?

To download more visit http://freeaccastudymaterial
...


What do customers expect when they walk in?

Customers expect to hear the radio playing and to
be given a mug of coffee while they wait to collect
cars
...


What are the formal lines of authority?

The mechanics report to the owner (who is also a
mechanic by trade)

Are there any informal lines of authority?

The receptionist is the owner's wife so she
discusses customer complains directly with him

ea

cc

Is the structure formal or informal? Flat or
hierarchical?

Each mechanic looks after himself
...


fre

Do structures encourage cooperation and
collaboration?

Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com
Cultural web

Examples (based on car repair workshop)

Control systems
Costs are very tightly controlled
...


What process has the weakest controls?

Quality is not seen as important
...


Is emphasis on rewarding good work or penalising
poor work?

In their pay review, employees are judged on the
actual costs of their jobs compared to their job
quotes
...


Power structures
The owner

How strongly held are the beliefs of the people
with power?

The owner believes strongly in a low cost model,
and is prepared to lose repeat customers in order to
keep costs down
...


ter

ial

Who has the real power in the organisation?

The owner insists that his low cost model is the best
way to run the business and won't invest in any new
equipment if it will cost lots of money to do so
...
3
...

If an organisation is not delivering the results its management wants, management can use the web to
help diagnose whether the organisation's culture is contributing to the underperformance
...
First, management can look at organisational culture as it is now
...
These differences indicate the changes which will need to be made to achieve the highperformance culture that they are seeking
...


FAST FORWARD

154

The role of integrated reporting in communicating strategy is an important part of the P3 syllabus
...
You may also be required to comment on the
implications of introducing integrated reporting
...
It is
fundamentally concerned with reporting on the value created by the organisation's resources
...
The aim of integrated reporting is to encourage a holistic view when assessing organisational
performance
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

What process has the strongest controls?

To download more visit http://freeaccastudymaterial
...
1 Rise of integrated reporting
In recent years, there has been increasing demand for the senior management in large organisations to
provide greater detail on how they use the resources at their disposal to create value
...



...
It is not
solely centred on profit, or the organisation's financial position, but details how its activities interact to
create value over the short, medium and long term
...
1
...
1
...
com

In 2013, the International Integrated Reporting Council (IIRC) introduced the integrated reporting
framework
...
Capitals are used to assess
value creation
...
Capitals cover various types of resources found in a standard organisation
...


Comment

Financial capital

The pool of funds that is:
Available to an organisation for use in the
production of goods or the provision of services

ym
a

•

ter

Capital

•

cc

as

tud

Manufactured capital

Manufactured physical objects (as distinct from
natural physical objects) that are available to an
organisation for use in the production of goods or
the provision of services, including:
•
•

Buildings
Equipment

Infrastructure (such as roads, ports, bridges and
waste and water treatment plants)
Manufactured capital is often created by other
organisations, but includes assets manufactured by
the reporting organisation for sale or when they are
retained for its own use
...
com/freeaccastudymaterial

155

To download more visit http://freeaccastudymaterial
...
It includes:
•
•

Air, water, land, minerals and forests
Biodiversity and eco-system health

as

Source: The International Integrated Reporting Framework, www
...
org

5
...
3 Interaction of capitals

cc

Capitals continually interact with one another: an increase in one may result in a decrease another
...


5
...
4 Short-term v long-term

fre

ea

Integrated reporting forces management to balance the organisation's short-term objectives against its
longer term plans
...
It is thought that producing a holistic
view of organisational performance will lead to improved management decision making, ensuring that
decisions are not taken in isolation
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


ial

Social and relationship capital

Alignment with, and support for, an
organisation's governance framework, risk
management approach and ethical values


...
com
5
...
5 The Guiding Principles of Integrated Reporting
The International Integrated Reporting Council identified seven Guiding Principles which support the
preparation of an integrated report:
Strategic focus and future orientation
Connectivity of information
Stakeholder relationships
Materiality
Conciseness
Reliability and completeness
Consistency and comparability


...
com

A good integrated report should help users understand the organisation's strategy with particular
emphasis on how value can be created over the short, medium and long term
...


ter

The board of directors can also use the report to communicate how the organisation's current strategy has
been shaped by past experiences
...

Connectivity of information

ym
a

A key part of integrated reporting focuses on the interrelatedness or 'connectivity of information'
throughout the organisation
...


tud

It is important to note that integrated reporting is not aimed at attaching a monetary value to every aspect
of the organisation's operations
...

Key performance indicators are effective in communicating performance
...
Best practice in integrated reporting requires
organisations to report on both positive and negative movements in 'capital' to avoid only providing half
the story
...
An Integrated Report should
highlight how the organisation interacts with key stakeholder groups
...
Proponents of integrated reporting argue that a stronger
emphasis on the importance of stakeholders is central to improving the transparency and accountability of
organisational reporting
...
Internal weaknesses and external threats
regarded as being materially important are evaluated and quantified (where possible)
...

Conciseness

The IIRC recognises that a good Integrated Report should be concise and to the point
...


Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com
Reliability and completeness
As discussed earlier in respect of materiality, an Integrated Report requires a balanced presentation of
both positive and negative information
...
This requires the organisation to have in place a
sound system of internal reporting
...



...
To support user understanding when there have been significant
movements between periods, the Guiding Principles highlight the need for organisations to provide an
explanation for the change and to quantify this if possible
...


5
...
6 Implications of introducing integrated reporting
Comment

ym
a

Implications

tud

IT costs

cc

as

Time/staff costs

ea

Consultancy costs

fre

Disclosure

158

The introduction of integrated reporting will most
likely require significant upgrades to be made to the
organisation's IT and information system
infrastructure
...
Due to the broad range of
business activities reported on using integrated
reporting (customer, supplier relations, finance and
human resources) it is likely the costs of improving
the infrastructure will be significant
...
This may serve to
decrease staff morale if they are expected to
undertake this work in addition to existing duties
...

Organisations producing their first integrated report
may seek external guidance from an organisation
which provides specialist consultancy on integrated
reporting
...

There is a danger that organisations may volunteer
more information about their operational
performance than intended
...


5: Stakeholders, ethics, culture and integrated reporting  Part A Strategic position

join us on facebook @ fb
...
com

The principle of comparability requires integrated reports to be presented to allow for easier comparison
with similar entities
...
The IIRC highlights that comparability in
information can be improved in reporting through the use of benchmarking an entity's performance
against industry metrics (KPIs) and ratios eg the percentage movement in staff training and development
programmes compared to the industry average
...
com

Case Study

The Association of Chartered Certified Accountants (ACCA)

The ACCA produced its first integrated report in 2011/2012, this formed part of the ACCA's annual report
...

Since this time, ACCA has continued to report on performance using the principles of integrated reporting
...



...
Most importantly, we
are using this report to explain how we create value for our stakeholders – primarily our members – and
the place we occupy in society'
...

Key elements from ACCA's 2011-2014 integrated reports

ial

To download more visit http://freeaccastudymaterial
...
ACCA's performance against its
objectives is measured through the use of a number of key performance indicators
...

The following extract has been amended to include ACCA's result's against it's targets since 2011/12
...
03
...


Achieved:
53
...
7%

What was
Targets for
delivered in 2013-2014
2012-13

What was
delivered in
2013-14

Not
achieved:

Not
achieved:

170,650
Members

161,943
members at
31
...
13

Not
achieved:

169,602
members at
31
...
14

44
...
2%

Not
achieved:
43
...
03
...


380,000
ACCA
Qualification
students

Not
achieved:

381,000

Achieved:

ACCA
384,287
Qualification ACCA
students
Qualification
ACCA
students at
Qualification
students at
31
...
14
31
...
13
372,248

Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com
Stakeholders
The ACCA acknowledges its obligations to its key stakeholders
...
The 2013/14
report notes that 'one of the integrated reporting principles we have found particularly helpful is that of
stakeholder engagement
...
'


...
This theme is continued in the 2013/14 report which introduces ACCA's new organisational
strategy up to 2020
...

Value creation

ial

ter

The ACCA regard having the right people with the right skills and capabilities as being critical in being able
to deliver its strategy
...


ym
a

Source: The ACCA's first integrated report and subsequent annual reports can be found at:
www
...
com

5
...
In the next chapter,
we will start looking at the 'Strategic choices' available to an organisation
...
The diagram below summarises these factors which shape strategic position:

Competitive
forces

ea

cc

Environmental
factors

fre

Stakeholders,
ethics and
culture

160

Strategic
position

Internal resources
and capabilities

5: Stakeholders, ethics, culture and integrated reporting  Part A Strategic position

join us on facebook @ fb
...
com

In addition to the traditional reporting of financial performance, the integrated reports also detail those
'capitals' regarded as being important in creating value over the long term
...


To download more visit http://freeaccastudymaterial
...
Cognitive
approaches to ethics assume that objective moral truths can be established
...
Natural law is about rights and duties, while virtue ethics is based
on moderation in behaviour and the idea of leading a harmonious life
...

Interaction with national and international society
Effects of routine operations
Behaviour of individuals

ial

–
–
–

To download more visit http://freeaccastudymaterial
...
co
m

Ethical theory is not integrated: consequentialist, deontological and natural law based rules are capable of
pointing to different conclusions
...


If constructed with care, a corporate ethical code can be valuable
...

–
–

ter



The strong view that a range of goals should be pursued
The weak view that the business organisation is a purely economic force, subject to law

Stakeholders have an interest in what the organisation does
...
Mendelow summarises the possibilities in his
stakeholder map
...




The extent to which an organisation recognises obligations to society in general is as much subject to
debate as its relationships with stakeholder groups
...




An organisation's ethical stance is the extent to which it will exceed its minimum obligations to
stakeholders
...

Short-term shareholder interest
Long-term shareholder interest

–
–

Multiple stakeholder obligations
Shaper of society

as

–
–

tud

ym
a



Corporate governance is the conduct of the organisation's senior officers
...
Non-executive directors have a particular role to play
...
Agency theory is concerned
with adverse selection and moral hazard, the problems that arise as a result of the separation of ownership
and control
...




There are four models of governance
...

The Rhine model has more robust governance and takes a long view of investment
...

Accountability and governance may be poor
...


fre

2
3

ea

cc



4

Part A Strategic position  5: Stakeholders, ethics, culture and integrated reporting

join us on facebook @ fb
...
com

Chapter Roundup (cont'd)



Culture is important, both in organisations and in the wider world
...
In wider society, it is affected by factors such as age, class, race and
religion, while in organisations, it is defined by assumptions, beliefs and artefacts
...
The organisational iceberg concept shows
how culture relates to other aspects of the organisation
...
Combined with the physical manifestations of
culture, it makes up the cultural web
...
It is
fundamentally concerned with reporting on the value created by the organisation's resources
...
The aim of integrated reporting is to encourage a holistic view when assessing organisational
performance
...
co
m

The board must decide the extent of its involvement in the strategic process
...
If it engages in the strategic process, it must act independently of
management and in a competent fashion
...
What are they?

3

A stakeholder group has high interest in, but low powers over, an organisation's activities
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

Answers to Quick Quiz
1

The extent to which it will exceed its minimum obligation to shareholders

2

Internal; connected; external stakeholders
...
com


...
It should
therefore be kept informed
...
com/freeaccastudymaterial

163

ial
ter
ym
a
tud
as
cc
ea
fre
164

5: Stakeholders, ethics, culture and integrated reporting  Part A Strategic position

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
com


...
com/freeaccastudymaterial

ial
ter
ym
a
tud
as
cc
ea
fre
166

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
com


...
The process of selecting from these choices
should, of course, be illuminated by the analyses of environmental and internal
factors that we have already discussed
...
The
second area is equally applicable to smaller organisations that are, effectively,
independent businesses operating on their own account and not subject to any
form of hierarchical supervision
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


ial

ter

(c)


...
In particular, it is very common in
business strategy exams to be confronted with a complex scenario and be required to suggest sensible
courses of action, with reasonable justification
...
It is not sufficient to be able to
describe the options without understanding when they are to be recommended
...

The chapter concludes with a discussion of success criteria: these are the criteria against which possible
courses of action are judged and they draw together the threads of choice we emphasise above
...


168

6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com

B1

To download more visit http://freeaccastudymaterial
...


•
•
•
•
•
•
•

JS&W's three strategic rationales for corporate parents
BCG Matrix
Public sector portfolio matrix
Ashridge portfolio display
The strategy clock
TOWS Matrix
Ansoff's Matrix (product market mix)


...
However, they will not be specifically required by a question
...
The defining characteristic of
the corporate parent is that it has no direct contact with the buyers or competitors, its role being to
manage the overall scope of the organisation in terms of diversity of products, markets and international
operations
...
com

1 Corporate strategy

ym
a

Many organisations consist, essentially, of a number of strategic business units (SBUs) and a corporate
parent
...
In very large organisations,
SBUs may be grouped into divisions, with divisional managers providing an intermediate level of
management between the SBU and the corporate parent
...

Its role is generally to manage the scope of the organisation
...

Diversity of products and markets
International and geographic diversity

cc

ea

Your syllabus is very clear in its separate treatment of the corporate parent and its SBUs, and this is also
apparent in Johnson, Scholes & Whittington's Exploring Corporate Strategy, upon which much of the
syllabus is based
...
The picture will, of course, be
complicated by the examining team possibly by presenting questions about companies that consist of a
single business unit
...


fre

Exam focus
point

as

The processes involved in making and implementing these decisions are complex and the role of the
corporate parent is of very great importance to the success or failure of the organisation
...


Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com

2 Diversity of products and markets
FAST FORWARD

Diversity of products and markets may be advantageous for three reasons
...

Corporate management skills may be extendible
...



...

The corporate parent controls the extent of product and market diversification undertaken by the
organisation as a whole
...

(a)

Marketing synergy is achieved by extending the use of marketing facilities such as
distribution channels; sales staff and administration; and warehousing
...


(ii)

Operating synergy arises from the better use of operational facilities and personnel, bulk
purchasing, and a greater spread of fixed costs whereby the firm's competence can be
transferred to making new products
...


(iii)

Investment synergy comes from the wider use of a common investment in non-current
assets, working capital or research, such as the joint use of plant, common raw material
inventory and transfer of research and development from one product to another
...


tud

ym
a

ter

ial

(i)

Corporate management skills may be extendible across a range of unrelated businesses
...
This kind of approach is commonly seen in consumer goods groups that
deploy brand management skills across a diverse range of products and markets
...


(c)

Diversification can increase market power via cross-subsidisation
...
Eventually, it may achieve a dominant position that enables it to increase its prices
and recoup earlier group losses
...


ea

Response to environmental change can be justified as a reason to diversify if it is undertaken in
order to protect existing shareholder value by, for example, responding to the emergence of new
and threatening technology developments
...


fre

(a)

(b)

(c)

170

Risk spreading can be a valid reason for an owner-managed business to diversify, but modern
financial theory suggests that shareholders in large corporations can manage their risk exposure
better themselves by diversifying their own portfolios
...
JS&W
give the example of Enron, whose strategic managers were under pressure from the stock market
to deliver continuing growth in revenues and responded with ill-considered diversification
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
These benefits are often referred to as synergy and can take several
forms:

To download more visit http://freeaccastudymaterial
...
1 Related diversification
Related diversification is development beyond current products and markets but within the capabilities
or value network of the organisation
...
co
m

The argument of synergy is often used to justify related diversification
...
Simply undertaking more and more value activities is not necessarily a route to improved
performance: each activity undertaken must be managed in a skilful and appropriate manner
...
Also, the management of external
relationships with suppliers, customers and collaborators is emerging as an effective alternative to
expansion
...
com

Horizontal integration makes use of current capabilities by development into activities that are
competitive with, or directly complementary to, a company's present activities
...


ter

ial

Vertical integration occurs when a company expands backwards or forwards within its existing value
network and thus becomes its own supplier or distributor
...
If a cloth manufacturer began to produce shirts instead of selling all of its cloth to
other shirt manufacturers, that would be forward integration
...
If there is potential for improving the satisfaction of the end user by improving the
links in the value network, then an integration strategy may succeed
...


2
...
1 Advantages of vertical integration

A secure supply of components or materials, hence lower supplier bargaining power
Stronger relationships with the final consumer of the product
A share of the profits at all stages of the value network
More effective pursuit of a differentiation strategy
Creation of barriers to entry

tud







Vertical integration in Japan

cc

Case Study

as

Note that vertical integration could have significant benefits for supply chain management
...


ea

Kumio Nakamura, president of Matsushita has said that, 'the vertical integration of Japanese
manufacturers is a huge advantage because it enables us to move from development to production in a
short time
...
1
...
A company places 'more eggs in the same end-market basket' (Ansoff)
...


fre

Key term

(b)

The firm fails to benefit from any economies of scale or technical advances in the industry into
which it has diversified
...


Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com

Case Study

Horizontal and vertical integration

(b)

Vertical integration
...
Privatisation effectively split up these
two businesses, to introduce competition in power generation, so that the regional distribution
companies could buy from a number of suppliers
...


ial


...
The Walt Disney Company is an American entertainment and media
organisation
...
In the 1950's using the financial reserves and film production expertise gained from
producing children's cartoons, the company moved into the 'live-action' movie market, releasing
its first full feature film 'Treasure Island' in 1950
...
2 Unrelated diversification

Unrelated diversification is the development of products or services beyond the current capabilities or
value network
...
Conglomerate
diversification has been a key strategy for companies in Asia, particularly South Korea, where the chaebol,
as they are known, have provided better markets for capital and managerial skills than were available in
the economy generally
...


tud

Potential advantages of conglomerate diversification

Bear in mind our discussion of questionable reasons for diversification when considering these points
...
Entering new products into new markets can compensate for the failure of
current products and markets
...
An improvement of the overall profitability and flexibility of the
firm may arise through acquisition in industries with better prospects than those of the acquiring
firms
...


(d)

Use a company's image and reputation in one market to develop into another where corporate
image and reputation could be vital ingredients for success
...

Lack of a common identity and purpose in a conglomerate organisation
...


fre

(b)

ea

Potential disadvantages of conglomerate diversification

(c)

(d)

172

Failure in one of the businesses will drag down the rest, as it will eat up resources
...
Japanese steel companies have diversified into areas
completely unrelated to steel such as personal computers, with limited success
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Exam focus
point

ACCA's suggested solution to a question in the old Paper 3
...
com


...
He suggests such groups ask themselves what value
does an individual company get through being part of the group and, in particular, what value does
the corporate HQ add to their activities
...

Porter dismisses this, arguing that any risk spreading should be left to the shareholder – having
companies in a group, with little synergy with one another, or even worse, negative synergy,
actually destroys shareholder value
...
Importantly, he argues that cost reduction is not a strategy in itself but must be part of a
strategy designed to achieve competitive advantage – in his terms by either cost leadership or
differentiation
...


2
...
However, as the degree of diversification increases, the rate
of performance improvement is likely to reduce and may then become negative as the organisation
becomes extensively diversified into unrelated fields
...
1 Globalisation

tud

Despite wide-ranging measures to liberalise trade and the resulting major growth in world trade, there has
been little globalisation of services
...


Since 1945, the volume of world trade has increased
...

Import substitution
...
This has had limited success
...
The success of this particular strategy has depended on the existence of open
markets elsewhere
...


(c)

Market convergence
...
Youth culture
is an important influence here
...
The growth in internet usage has resulted in cheaper, faster and easier
means of global communication
...


fre

FAST FORWARD

This has meant a proliferation of suppliers exporting to, or trading in, a wider variety of places
...
However, the existence of global markets should not be taken for granted in terms of all
products and services, or indeed in all territories
...
com/freeaccastudymaterial

173

To download more visit http://freeaccastudymaterial
...
Trade in services has been liberalised under the auspices
of the World Trade Organisation
...
There is unlikely ever to be a global market for labour, given the disparity in skills
between different countries and restrictions on immigration
...


(ii)

Some goods can be sold almost anywhere, but to limited degrees
...


(iii)

Other goods are needed almost everywhere
...


ial


...


3
...

Ethnocentrism is a home country orientation
Polycentrism adapts totally to local environments
Geocentrism adapts only to add value
...
2
...
The company focuses on its domestic market and sees
exports as secondary to domestic marketing
...
Ethnocentric companies will tend
to market the same products with the same marketing programmes in overseas countries as at home
...
There
is no local market research or adaptation of promotion
...


Pepsi

ea

cc

Pepsi experienced customer alienation when it attempted to mechanically import its global younger
challenger to Coke's image into Russia
...


3
...
2 Polycentrism
With polycentrism, objectives are formulated on the assumption that it is necessary to adapt almost
totally the product and the marketing programme to each local environment
...


fre

Key term

The polycentric company believes that each country is unique
...
This can produce major increases in
turnover but the loss of economies of scale can seriously damage profitability
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
think of themselves as multinationals
...
)

3
...
3 Geocentrism and regiocentrism
Geocentrism and regiocentrism are syntheses of the two previous orientations
...



...
Bearing this in mind, we will speak
in terms of geocentrism only, for simplicity
...
com

Geocentrism treats the issues of standardisation and adaptation on their merits so as to formulate
objectives and strategies that exploit markets fully while minimising company costs
...
This has been summed up as: 'think
globally, act locally'
...

Exporting is an extension of home sales, using foreign intermediaries
...




Overseas branches arise when turnover is large enough
...




Overseas production exploits cheap labour and reduces exporting costs
...




Insiderisation is a shift to polycentrism, with fully functional organisations being set up overseas
...
The company is a multinational
...
It integrates learning, skills and competences to achieve global efficiencies while
retaining local responsiveness
...


Following Ohmae, we may describe five stages in the evolution of global business operations
...
3 Developing the global business

ter

Geocentric companies use an integrated approach to marketing management
...
A great deal of experience and commitment
are required to make this approach work
...
Geocentrically oriented companies both promote and benefit from market
convergence
...
The product is saleable in overseas markets and they are exploited by means of foreign
intermediaries such as agents and distributors
...
Little or no adjustment is made to the product in order to reap economies of
scale
...
The management
orientation is ethnocentric
...
com/freeaccastudymaterial

175

To download more visit http://freeaccastudymaterial
...
Export sales are now so high that shipping and other exporting-related costs
represent an opportunity for savings by establishing overseas production
...
The company's management
orientation is still largely ethnocentric
...
Worldwide synergies and economies of scale are sought and decisions on adapting
to local conditions are made at headquarters
...


(d)

Insiderisation
...
The aim is to develop a full
marketing capability and offer products suited to local requirements
...
This approach reduces
exchange rate and political risk but requires financial commitment
...


(e)

The global company
...
It takes a world view while recognising local differences and similarities
...
It is likely to centralise functions such as R&D, finance and HR, though
not necessarily all in the same place
...
The
primary skill of the global company is to integrate learning, skills, competences and technologies
in order to achieve global efficiencies combined with local responsiveness
...
It is subject to a number of problems
...
co
m

Overseas branches
...
Financial
commitment increases with increasing business, as does exchange rate and political risk
...
However, the management orientation is still
ethnocentric
...
He calls
these the five Cs:
Customer
...


(b)

Company
...


(c)

Competition
...
They may also be amenable to cost-reducing strategic alliances
...
Exchange rate risk can be managed most easily when a company has major cash flows
in the countries in which it operates
...
Multiple locations enable a company to exploit both absolute and comparative advantage
...


fre

There are other factors encouraging the globalisation of world trade
...
This can lead to a reduction in local protectionism and a
consequent increase in trade
...


6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com

(b)

To download more visit http://freeaccastudymaterial
...


(d)

Markets trading in international commodities; commodities are not physically exchanged, only the
rights to ownership
...


(e)

The internet: major companies are developing online systems of internal co-ordination and
procurement
...
Government policy towards importers will also reflect their quite proper desire to expand
their economies and hence, employment and improve the local standard of living
...


3
...
The relationship between these pressures
influences both the management orientation and the structure of the company that operates
internationally
...
Efficiency is likely to be a key strategic competency
...


(c)

The multinational environment drives a polycentric orientation, with largely autonomous local
operating companies
...


(d)

The transnational environment is particularly difficult to respond to
...
The structural response may be the global
heterarchy
...
Some
headquarters functions, such as R&D may be diffused across the organisation
...
JS&W call this type of company a transnational: we will discuss it in
more detail later in this Study Text
...
com


...
com/freeaccastudymaterial

177

To download more visit http://freeaccastudymaterial
...
5 Market selection
In making a decision as to which market(s) to enter, the firm must start by establishing its objectives
...

What proportion of total sales will be overseas?

(b)

What are the longer term objectives?

(c)

Will it enter one, a few, or many markets? In most cases, it is better to start by selling in countries
with which there is some familiarity and then expand into other countries gradually as experience
is gained
...

(i)
(ii)
(iii)
(iv)

Market entry and market control costs are high
Product and market communications modification costs are high
There is a large market and potential growth in the initial countries chosen
Dominant competitors can establish high barriers to entry

Market attractiveness
Competitive advantage
Risk

ter

(i)
(ii)
(iii)

ial

What types of country should it enter (in terms of environmental factors, economic development,
language used, cultural similarities and so on)? Three major criteria should be as follows
...


Evaluating which markets to enter

ym
a

Market attractiveness

High

High

Competitive
advantage

Low
High

as

Medium

Low

Low

tud

Medium

Medium

Risk

High

Low

(c)

cc

(b)

Market attractiveness
...

Competitive advantage
...

Risk
...


ea

(a)

Source: Kotler

fre

The best markets to enter are those located at the top left of the diagram
...
Obtaining the information needed to reach this decision requires detailed and often
costly international marketing research and analysis
...

In international business, there are several categories of risk
...


6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com

(d)


...
com
Business risk
...
As
with political risk, it is not unique to international marketing, but firms might be exposed to more
sources of risk arising from failures to understand the market
...
This arises out of the volatility of foreign exchange rates
...


(d)

Profit repatriation risk
...


3
...
com









Direct and indirect exporting
Wholly owned overseas production

ial




3
...
Broadly, three ways of entering foreign markets can be identified: indirect exports, direct
exports and overseas manufacture
...

Comment

as

Consideration

These relate to volume, time scale and coverage of market segments
...


cc

The firm's
marketing
objectives

A small firm is less likely than a large one to possess sufficient resources to set up
and run a production facility overseas
...


ea

The firm's size

Mode quality

fre

FAST FORWARD


...
The lack of suitably qualified distributors or agents would preclude the
export, direct or indirect, of high technology goods needing installation,
maintenance and servicing by personnel with specialist technical skills
...


Market feedback
information

In some cases, a firm can receive feedback information about the market and its
marketing effort from its sales staff or distribution channels
...

Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com
Comment

Learning curve
requirements

Firms which intend a heavy future involvement in an overseas market might need
to gain the experience that close involvement in an overseas market can bring
...


Risks

Firms might prefer the indirect export mode as assets are safer from expropriation
...



...
8 Exporting

Goods are made at home but sold abroad
...


ial

Exporters can concentrate production in a single location, giving economies of scale and
consistency of product quality
...


(c)

Firms can test their international marketing plans and strategies before risking investment in
overseas operations
...


ym
a

ter

(a)

3
...
2 Indirect exports

Indirect exporting is where a firm's goods are sold abroad by other organisations who can offer greater
market knowledge
...
Usually the producer
has little control over the market and the marketing effort
...


(c)

UK buying offices of foreign stores and governments
...


as

tud

(a)

cc

3
...
3 Direct exports

(a)

Sales to final user
...


Strictly speaking an overseas export agent or distributor is an overseas firm hired to effect a sales
contract between the principal (ie the exporter) and a customer
...


fre

(b)

ea

Direct exporting occurs where the producing organisation itself performs the export tasks rather than
using an intermediary
...


(c)

Company branch offices abroad
...


A firm can manufacture its products overseas, either by itself or by using an overseas manufacturer
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
8
...
com

3
...

Economies of scale in large markets
...

Lower storage and transportation costs
...

Manufacture in the overseas market may help win orders from the public sector
...
co
m








3
...
1 Contract manufacture

Licensing is a quite common arrangement as it avoids the cost and problems of setting up overseas
...
9
...
com

In the case of contract manufacture a firm (the contractor) makes a contract with another firm (the
contractee) abroad whereby the contractee manufactures or assembles a product on behalf of the
contractor
...


as

Some governments discourage or even prohibit foreign firms setting up independent operations, so joint
ventures are the only option
...


3
...
3 Wholly owned overseas production
Production capacity can be built from scratch, or, alternatively, an existing firm can be acquired
...


(b)

Creating new capacity can be beneficial if there are no likely candidates for takeover, or if
acquisition is prohibited by the government
...

The firm does not have to share or delegate decision-making
...

The firm is able to operate completely integrated international systems
...


fre

(a)
(b)
(c)
(d)
(e)

ea

Advantages

cc

(a)

Disadvantages
(a)

The investment needed prevents some firms from setting up operations overseas
...


Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com
(c)

Exporting

ial

ter

Market entry strategies

Overseas production

Concentrates production; small start
possible; minimises overheads

Key issues

Exchange rates, protectionism

Involvement

Usually less involved, but an exporter
might depend on the overseas market

Lower distribution costs; overcomes trade
barriers; possibly lower production costs
Political risk; partnership; managing overseas
facilities; more risky

ym
a

Advantages

Usually more involved, but overseas
subsidiaries might act independently: varying
levels of control and risk

FAST FORWARD

tud

4 The corporate parent and value creation
There are three value-creating roles for the corporate parent:



Provision of services, resources and expertise

as



Envisioning corporate intent, communicating the vision to stakeholders and SBU managers, and
acting in accordance with it
Intervention to improve performance



cc

Portfolio managers create value by applying financial discipline
...

Synergy managers pursue economies of scope through the shared use of competences and resources
...

Earlier in this chapter, we mentioned Porter's views on conglomerate diversification and its potential to
destroy value
...
How then, does it create value?

4
...
This is important for three
reasons
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(d)

Some overseas governments discourage, and sometimes prohibit, 100% ownership of an
enterprise by a foreign company
...


To download more visit http://freeaccastudymaterial
...


ial

(i)
(ii)
(iii)
(iv)
(v)
(vi)

To download more visit http://freeaccastudymaterial
...

External stakeholders in general, and existing and potential investors in particular, need a
clear understanding of corporate intent if they are to understand what the organisation does
and to make appropriate decisions about their relationships with it
...
Their
motivation also depends to some extent on having a reasonable belief that the corporate
parent knows what it is doing
...
co
m

(i)

4
...
JS&W suggest that the corporate parent is
likely to produce better results, since it has both access to inside information and the co-operation
of the SBU managers
...
This may be challenging
...

The corporate hierarchy provides an arena for managers' political ambition
...
This is attractive to
many
...


(c)

Corporate processes and hierarchy can slow decision-making, stunt enterprise and absorb the
energies of SBU managers
...


ea

cc

as

(a)

4
...
They call these
approaches strategic rationales
...
3
...
It seeks out
undervalued companies as purchase targets, acquires them, and improves their value and performance
...
Portfolio managers
keep their own costs low and provide few central services
...
com/freeaccastudymaterial

183

To download more visit http://freeaccastudymaterial
...
Typically, this type of corporate parent presides over a widely
diversified conglomerate; our earlier remarks about diversification and strategic success apply here
...
3
...
The central staff must integrate
and control the efforts of the SBUs, which means they must be familiar with all of their operations and
may reduce managerial motivation within the SBUs
...


ter

4
...
3 Parental developers

The parental developer adds value to its SBUs by deploying its own specific competences to aid them in
their operations and development
...

It must have actual, demonstrable competences to deploy, otherwise its efforts will be mere
interference and a distraction to the SBUs
...


(c)

It must have sufficient understanding of its SBUs to discern genuine opportunities for
intervention
...
Despite these being relatively theoretical marks,
the examining team commented on the poor standard of answers given by candidates, with many scoring
three or less of the ten possible marks
...


ea

cc

Exam focus
point

as

tud

The parental developer may encounter a problem in the form of a high-performing SBU that offers no
opportunities for the deployment of its competences
...
Alternatively, it could attempt to change its role in respect of such a SBU and
become a portfolio manager or synergy manager
...


Case Study

Corporate headquarters

fre

'The corporate head office should be fit for purpose, and justify itself in terms of added value,' says
Michael Goold, founding director of the Ashridge strategic management centre in London
...

In the late 1980s and early 1990s, there was a joke about the so-called 'inverse atrium rule' of head
offices: the grander the corporate setting, the more trouble that organisation was likely to be in
...
It is an
ancient human instinct , embodied by Shelley's Ozymandias, 'king of kings', whose resonant challenge to
all-comers was: 'Look on my works, ye mighty, and despair!'

184

6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com


...

We have already discussed potential sources of synergy: here we may simply remark that the synergy
manager aims to achieve high efficiency in the shared use of resources and competences
...
com
In an article in the Strategic Management Journal, Mr Goold, with Harvard's David Collis and Ashridge's
David Young, describes four main roles that an effective head office has to perform
...
While more people are needed for this
than in the past, owing to today's more onerous regulational environment, Mr Goold warns against overengineering
...
'This aspect of head office should be as lean and
mean as possible
...
co
m

A second function of HQ is the 'value-added parenting' of other corporate activity, offering support to the
executives from the centre
...

A third element of head office's work are shared services – HR, call centres, facilities management – many
of which have been outsourced in recent years, or handed back to business units
...


A parent may deploy four policies towards its SBUs:
Build
Hold
Harvest
Divest

tud










Balance
Attractiveness
Strategic fit

as

The SBU portfolio must be managed against three criteria:

cc

Matrix-based models are used to manage portfolios: the Ashridge model is the only one to address
strategic fit and assumes the parental developer approach is used
...


(a)
(b)
(c)

ea

Four major strategies can be pursued with respect to products, market segments and, indeed, SBUs:
Build
...

Hold
...

Harvest
...

Divest
...


fre

FAST FORWARD

ym
a

5 The corporate portfolio

ter

ial

To download more visit http://freeaccastudymaterial
...
As Mr Goold et al argue: 'Simply reducing the size of the headquarters is no
guarantee of improved performance
...
' On the other hand, globalisation may require leadership to be
'distributed' around the world
...

Stephan Stern, Financial Times, 10 April 2007

(d)

A number of strategic tools have been developed to assist the decision process
...
com/freeaccastudymaterial

185

To download more visit http://freeaccastudymaterial
...


5
...


Key term


...
SBUs are
categorised in terms of market growth rate and relative market share
...
'

(b)

Relative market share is assessed as a ratio: it is market share compared with the market share of
the largest competitor
...
BGG settled on market share as a way of estimating costs and thus profit
potential, because both costs and market share are connected with production experience: as
experience in satisfying a particular market demand for value increases, market share can be
expected to increase also, and costs to fall
...


ym
a

ter

ial

Assessing rate of market growth as high or low depends on the conditions in the market
...
High market growth rate can indicate good opportunities for profitable
operations
...


Relative market share

High

Stars

Question marks

Cash cows

Dogs

tud

High

Low

Market growth

Low

as

Boston Consulting Group matrix

The portfolio should be balanced, with cash cows providing finance for stars and question marks; and a
minimum of dogs
...

Strategy: build
...
Cash cows need very little capital expenditure, since
mature markets are likely to be quite stable, and they generate high levels of cash income
...
Strategy: hold or harvest if weak
...


fre

(c)

cc

(a)

(d)

186

Dogs may be ex-cash cows that have now fallen on hard times
...
However, they may have a useful role, either to complete
a product range or to keep competitors out
...

Strategy: divest or hold
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
The BCG matrix must be used with care
...


(b)

The matrix has been used to assess products rather than SBUs, but JS&W say this should not be
done; nor should it be applied to broad markets that include many market segments
...


(c)

The matrix is built around cash flows but innovative capacity may be the critical resource
...
com

You should now think back to our discussion of the product life cycle in this Study Text
...


ial

Exam focus
point

The permitted forms of activity and ownership vary from country to country
...

Shared resources are not considered
...
co
m

(i)
(ii)
(iii)

5
...


tud

Montanari and Bracker proposed a matrix for the analysis of services provided by public sector bodies
...
The axes are an assessment of service efficiency and public attractiveness: naturally, political
support for a service or organisation depends to a great extent on the degree to which the public need and
appreciate it
...
Candidates were required to evaluate the performance and contribution of the three operating
companies
...


Low

The public sector portfolio matrix

Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com
A public sector star is something that the system is doing well and should not change
...


(b)

Political hot boxes are services that the public want, or which are mandated, but for which there
are not adequate resources or competences
...
They may
therefore be perceived to be undesirable uses for limited resources
...


(d)

Back drawer issues are unappreciated and have low priority for funding
...


5
...
Heartland businesses both have CSFs that fit the parent's resources and competences
and provide opportunities for good use of them
...
Ballast
businesses are well-understood by the parent but need little assistance
...


ter

ial

FAST FORWARD

(a)
(b)

ym
a

As mentioned earlier, the Ashridge portfolio display is concerned with strategic fit, that is, the role of the
corporate parent and the suitability of the range of SBUs it manages
...
The
principles embodied in the model can be approached from two directions
...

Corporate parents should seek to build parenting skills that are relevant to their portfolios
...

'Feel': The degree of fit between the parent's skills, resources and other characteristics and the
SBUs' CSFs

(b)

'Benefit': the degree of fit between the opportunities the SBUs present for parenting and the
parent's skills resources and other characteristics

tud

(a)

Benefit (fit between SBU opportunities
and parental skills etc)

as

Low

Feel

Ballast
businesses

Heartland
businesses

cc

High

High

Low

fre

ea

(fit between SBU
CSFs and parental skills etc)

188

Alien
businesses

Value trap businesses
The Ashridge portfolio display

6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com


...
com
Heartland businesses can benefit from the attention of the parent without risk of harm from
unsuitable developments
...
They would do
just as well if they were independent businesses
...


(c)

Value trap businesses provide good opportunities for parenting, but these opportunities do not
relate to the SBU's CSFs
...


(d)

Alien businesses have no place in the portfolio
...



...
This raises two questions
...

If a corporate parent has a justifiably interventionist role, how many SBUs can it parent
effectively?

ial

(b)

To download more visit http://freeaccastudymaterial
...
The Ashridge Portfolio would have provided a useful framework for comparing the
parent's skills with the 'parenting' required by the potential acquisition
...
4 Better off tests

tud

Michael Porter suggests that one of the key issues behind acquisitions should be in realising synergies
between the existing company and the new acquisition
...
However, the point about 'attractiveness' could be applied more generally to
look at target companies, or countries
...
In other words, will the future cash
flows from the acquisition be greater than the amounts paid to acquire it?

ea

cc

as



Porter also identified another key point in relation to successful acquisitions, which could be called the
parenting test
...
A similar trend towards privatisation and
deregulation has been apparent in the public sector
...
com/freeaccastudymaterial

189

To download more visit http://freeaccastudymaterial
...
Porter believes that a firm must choose one of these or be stuck-in-the-middle
...
co
m

Competitive advantage is anything which gives one organisation an edge over its rivals
...


Porter believes there are three generic strategies for competitive advantage
...


ter

Key terms

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

Providing goods and/or services at lower cost (cost-focus)
Providing a differentiated product or service (differentiation-focus)

Porter's generic strategy model is one of a handful of truly vital theories that you absolutely must master
for your exam
...
Understanding this area of theory will not only equip you to make
sensible suggestions in your answers to many questions, it will also enable you to appreciate important
background detail in a wide range of question scenarios
...
Focus involves segmentation but also
the pursuit, within the chosen segment only, of a strategy of cost leadership or differentiation
...
1
...
By producing at the lowest cost, the manufacturer can compete on price with every other producer
in the industry, and earn the higher unit profits, if the manufacturer so chooses
...


Use the latest technology to reduce costs and/or enhance productivity (or use cheap labour if
available)
...


(e)

Minimise overhead costs
...
By producing more items than any other
competitor, a firm can benefit more from the learning curve, and achieve lower average costs
...


6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com

6
...
competitive forces and thereby yield a superior return on investment
for the firm
...
(Porter)

To download more visit http://freeaccastudymaterial
...

Large out-of-town stores specialising in one particular category of product are able to secure cost
leadership by economies of scale over other retailers
...


6
...
2 Differentiation


...
Products may be divided into three categories
...

Improved products are not radically different from their competition but are obviously superior in
terms of better performance at a competitive price (eg microchips)
...

For example, cars are not all sold at rock-bottom prices, nor do they all provide immaculate
comfort and performance
...


ial

(b)

To download more visit http://freeaccastudymaterial
...


(b)

Give the product special features to make it stand out (eg Russell Hobbs' Millennium kettle
incorporated a new kind of element, which boils water faster)
...


ym
a

ter

(a)

Note: We looked at the value chain earlier in this Study Text
...

Generic strategies and the five forces

Advantages

tud

Competitive
force

Cost leadership

Differentiation

Economies of scale
raise entry barriers

Substitutes

Firm is not so
vulnerable as its
less cost-effective
competitors to the
threat of substitutes

Customers have no
comparable
alternative
Brand loyalty should
lower price
sensitivity

Flexibility to deal
with cost increases

Higher margins can
offset vulnerability
to supplier price
rises

Differentiation

Customer loyalty is
a weapon against
substitutes

Customers cannot
drive down prices
further than the next
most efficient
competitor

Cost leadership

cc

fre

ea

Customers

Suppliers

Brand loyalty and
perceived
uniqueness are
entry barriers

as

New
entrants

Disadvantages

Customers may no
longer need the
differentiating factor
Sooner or later
customers become
price sensitive
Increase in input
costs can reduce
price advantages

Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com
Advantages
Cost leadership

Industry
rivalry

Firm remains
profitable when
rivals go under
through excessive
price competition

Disadvantages

Differentiation
Unique features
reduce direct
competition

Cost leadership
Technological
change will require
capital investment,
or make production
cheaper for
competitors
Competitors learn
via imitation
Cost concerns
ignore product
design or marketing
issues

Differentiation
Imitation narrows
differentiation

ial

6
...
3 Focus (or niche) strategy

ter

In a focus strategy, a firm concentrates its attention on one or more particular segments or niches of the
market, and does not try to serve the entire market with a single product
...

Uniformdating
...


tud

Uniformed personnel typically face a number of restrictions as part of their working lives, including
working difficult shift patterns, working away or being on tour
...
Uniformdating
...


as

The site is not, however, restricted to those working in uniform and they welcome and encourage new
members who are not necessarily from these professions, but who are looking to meet someone from the
uniformed or emergency services
...


cc

Since its launch the site has grown hugely and, as of April 2012, claims to have “hundreds of thousands
of uniformed members”
...


A cost focus strategy: aim to be a cost leader for a particular segment
...


fre

(a)

ea

Other, perhaps less well known, examples of online dating services targeting niche markets include
Farmers Only and Geek2Geek
...
Geek2Geek, also US
based, describes itself as 'the safe, friendly, and easy to use site where geeks and their admirers can find
each other'
...


(b)

A differentiation focus strategy: pursue differentiation for a chosen segment
...


Ben and Jerry's ice cream is a good example of a product offering based on differentiation focus
...

192

6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com


...
com
(a)

Underperformance occurs when a product does not fully meet the needs of a segment and offers
the opportunity for a differentiation focus player
...


Advantages
A niche is more secure and a firm can insulate itself from competition
...


(c)

Both cost leadership and differentiation require superior performance – life is easier in a niche,
where there may be little or no competition
...
co
m

(a)

Drawbacks of a focus strategy

The firm sacrifices economies of scale which would be gained by serving a wider market
...


(c)

The segment's needs may eventually become less distinct from the main market
...
com

(a)

ter

6
...
A stuck-in-the-middle strategy is almost certain to make only low profits
...
'
It is also important that both cost leadership and differentiation require superior performance
...


Tesco: Stuck in the middle?

tud

Case Study

A report in the Economist (2013) highlighted the problems facing UK retail giant Tesco
...
5% in the
third quarter', with the company's European and Asian operations falling by 4% and 5
...


cc

as

Spending power among British shoppers had failed to reach the heights that it achieved in 2007 and was
predicted to be 10% lower in 2013 than six years earlier
...

Unlike Tesco, retailers such as Lidl have succeeded in offering a 'no-frills' shopping experience, with most
produce being wheeled out from the warehouse on pallets straight onto the shop floor
...


fre

ea

Tesco's problems had been further compounded as upmarket rival Waitrose reported an increase in sales
of 9% in 2013
...
In a bid to attract more customers in the UK, the then
Tesco CEO Philip Clarke focused efforts on enhancing the retailer's online offering and investing in new
convenience stores
...
In his article 'Tesco, what went wrong', Kamal Ahmed (October 2014) highlighted that under
Clarke's tenure, the retailer had 'bought posh coffee shops, restaurants and digital businesses, as it
expanded the services it thought customers would be interested in'
...
In
September 2014, Dave Lewis took over as Tesco CEO
...
Zoe Wood of the Guardian reported that Tesco was continuing to 'lose shoppers in the face of a
Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com
fierce price war being waged by rivals and fast growing discount chains Aldi and Lidl'
...
5% in the final three months of
the period
...
This was largely caused by falling sales
and lower profit margins, resulting from a round of price cuts launched in the face of a mounting
supermarket price war
...
Relative to the market, we've not been as competitive as I would have liked us to be
...
'


...

Sources:

'Stuck in the middle', (December 2013) published by The Economist;
www
...
com

ial

ter

'Black day for Tesco as profits fall by 92%', (October 2014) by Zoe Wood, published by The Guardian;
www
...
com

Question

ym
a

Hermes Telecommunications plc

tud

The managing director of Hermes Telecommunications plc is interested in corporate strategy
...
Initially Hermes concentrated its efforts on business customers in the South
East of England, especially the City of London, where it offered a lower cost service to that supplied by
Telecom UK
...
Technological developments have resulted in the
possibility of a cheap mobile telecommunication network, using microwave radio links
...


as

What issues of competitive strategy have been raised in the above scenario, particularly in relation to
Hermes Telecommunications plc?

Answer

Arguably, Hermes initially pursued a cost-focus strategy, by targeting the business segment
...


(c)

The barriers to entry to the market have been lowered by the new technology
...


ea

cc

(a)

fre

6
...

(a)

Cost leadership
(i)

194

Internal focus
...
It can be
used to gain market share: but it is the market share which is important, not cost
leadership as such
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
bbc
...
uk

To download more visit http://freeaccastudymaterial
...
If cost leadership applies across the whole industry, only one firm will
pursue this strategy successfully
...

–
–

Firms competing market-wide might have different competences or advantages that
confer cost leadership in different segments
...
Having low costs does not mean you have
to charge lower prices or compete on price
...
Being a cost leader arguably gives producers more freedom
to choose other competitive strategies
...
co
m

(b)

The boundary between cost leadership and cost focus might be blurred
...


Differentiation
...

However, a differentiated product may be sold at the same price as competing products in
order to increase market share
...
Differentiation from whom? Who are the competitors? Do they serve
other market segments? Do they compete on the same basis?

(iii)

Source of differentiation
...
Restaurants aim to create an atmosphere or 'ambience', as well as serving food of
good quality
...
com

(i)

ym
a

Focus probably has fewer conceptual difficulties, as it ties in very neatly with ideas of market segmentation
...

'Stuck-in-the-middle' is therefore what many companies actually pursue quite successfully
...


The strategy clock develops Porter's theory, analysing strategies in terms of price and perceived value
added
...
JS&W, quoting
Bowman, describe the strategic options using the strategy clock
...


ea

Each position on the clock has its own critical success factor, since each strategy is defined in market
terms
...
These are typical approaches in commodity markets
...


fre

FAST FORWARD

tud

6
...
com/freeaccastudymaterial

195

To download more visit http://freeaccastudymaterial
...
co
m

Low
2
price

6

No frills
8

Low
Low

High

ter

Price

The Strategy Clock

6
...
1 Price-based strategies

A no frills strategy is appropriate under several conditions
...
It is also suitable where customers' switching
costs are low and where there is little opportunity for competition on product features
...
This was done by
Japanese car manufacturers in the 1960s, and is now being seen in the airline industry, with
companies such as EasyJet and Ryanair successfully adopting a no-frills approach
...


A low price strategy offers better value than competitors
...


cc

(b)

as

The no-frills airlines sell tickets at low prices but with limited customer services, and with a focus
on keeping costs low at all times
...
They have no reserved
seats to encourage customers to turn up early to prevent delays, and do not offer complimentary
food and drink like premium carriers, but instead generate ancillary revenue through in-flight sales
...
4
...
Each one represents a different trade-off between
market share (with its cost advantages) and margin (with its direct impact on profit)
...
The cost base must be
low enough to permit reduced prices and reinvestment to maintain differentiation
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com



If a low price approach is suited to a particular market segment
Where it is used as a market entry strategy

The basic differentiation strategy comes in two variants, depending on whether a price premium is
charged or a competitive price is accepted in order to build market share
...
The strategic customers and their
preferences must be clearly identified, as must the competitors and their likely responses
...



...
This implies concentration on a well-defined and probably quite restricted market segment
...

Focus is a common start-up strategy: expansion may prompt or require a gradual move to a less
focussed differentiation
...


(c)

In the public sector, stakeholders expecting universal provision will object to focus on particular
segments
...
Alternatively, competitors may
make even more focussed offerings to sub-segments, again eroding the focuser's original
advantage

ym
a

ter

ial

(b)

To download more visit http://freeaccastudymaterial
...
Make sure you are aware of the unique
characteristics of each type of strategy so that you can identify where they might be suitable (or
unsuitable)
...
The use of Bowman' strategy clock was highly appropriate as it
considers perceived added value and price
...
4
...
Swiss brand Omega is
over 150 years old, its watches are largely targeted at business professionals and watch collectors
...
Fellow Swiss brand,
TAG Heuer is classed as a luxury watch brand, targeted again at business professionals but also sports
fans due to its partnership with the McClaren F1 team
...


Combinations 6, 7 and 8 are likely to result in failure
...
5 The TOWS matrix
We have already introduced the TOWS matrix and Weihrich's classification of strategies based upon it, in
the chapter on strategic capability in Section A of this Study Text
...
com/freeaccastudymaterial

197

To download more visit http://freeaccastudymaterial
...
The TOWS matrix is also a relevant tool when developing product-market
strategies, which we look at later in this chapter
...
A company might look to use this strength to expand globally or develop
new products, building on its existing reputation
...

Consider this example: A clothing manufacturing company with an established reputation for good
quality products is now facing competition from cheap overseas competitors
...
However, this strategy may not be successful if the cheap, imported clothes are
also good quality, in which case the established company will need to consider moving its
manufacturing plant abroad to a low cost location, and compete using a low price strategy
...
In this case, the company either needs to reengineer its processes, or collaborate with a company which has the resources it needs
...


WT

A company faced with internal weaknesses and external threats may be in a precarious position
and be forced into defensive strategies, for example, restructuring, or downsizing
...


tud

ym
a

ter

ial

SO

as

An organisation in such a defensive position can only ever use strategy to protect itself
...


ea

cc

Successful companies, even if they temporarily use SO, WO and WT strategies, will attempt to get into a
situation where they can work from strengths to take advantage of opportunities (SO strategy)
...


7 Sustaining competitive advantage
Different policies are required to sustain differentiation or price-based strategies
...


fre

FAST FORWARD

When we discussed competition in Chapter 3, we said that the business environment might be sufficiently
stable to permit a build-up of sustainable competitive advantage
...
In Chapter 4, we
went on to consider the strategic capabilities needed under these varying conditions
...


198

6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com


...
com

7
...


(b)

A cost leader can operate at a price advantage, but to be sustainable, cost leaders must constantly
and aggressively drive down all of their costs
...


(d)

A no-frills strategy can succeed in the long term if it is aimed at a segment that particularly
appreciates low price
...
co
m

(a)

7
...


(b)

Some resources are inherently immobile
...


(c)

Cost advantage can be used to sustain differentiation, rather than price advantage by investing in
innovation, brand management or quality improvement
...
com

Sustaining differentiation is difficult
...
Secondly, a difference that a competitor can easily imitate gives no sustainable
advantage
...
3 Lock-in

as

Factors affecting lock-in

tud

Lock-in is achieved in a market when a company's product becomes the industry standard
...
Microsoft has achieved this position in the market for PC
operating systems and is only challenged by Linux because the latter product is free to use
...
The original Walkman became the industry standard, but the Betamax video
recording standard lost to VHS
...

Perception of dominance: potential competitors and suppliers of complementary products will
only conform to an attempt to set standards if they perceive the standard-setter as dominant in the
market, usually in terms of market share
...


(c)

Self-reinforcement: once dominance is achieved, conforming with the standard becomes
necessary for survival
...
Visa threatened to
impose coercive settlement fees on its top 100 card issuers if they attempted to move their
operations to MasterCard
...


Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com

7
...
These include repositioning on the strategy clock, counter attack, imitation and
attacks on barriers to entry
...
4
...
For example, a firm using a no frills strategy may move towards higher
quality combined with a low price; that is from position 1 on the clock to position 2
...


7
...
2 Counterattacking against market-based moves

ter

Market-based strategies that work under less competitive conditions are often successfully
counterattacked
...


(b)

Product/market moves can be imitated, thus preventing the competitor from achieving
advantage
...
4
...


(b)

Attempts to dominate particular market segments or geographic markets may be overcome in
several ways
...


cc

Small competitors can avoid direct confrontation with resource-heavy dominant players by
concentrating on niches, building trading alliances and by merging with other small companies
...
An example would be
entering a foreign market with an undifferentiated product already established in the home
market
...


as

(i)

7
...
4 Principles of hypercompetitive strategy
Pre-empt imitation and remain unpredictable by competing in new ways
...


fre

(a)
(b)
(c)

A series of small moves disguises the strategy and provides a succession of temporary
advantages
...


Misleading signals of strategic intent can be used to confuse
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

We discussed hypercompetition in Chapter 3
...
This makes it impossible
to create lasting competitive advantage
...
Here are some examples
...
com

7
...

Organisations do not only compete
...

Buyers and sellers may collaborate to ensure high quality, share the cost of research or reduce
inventory levels, for example
...


(b)

Collaboration between members of a fragmented market increases buying power, as when small
retailers co-operate to buy in large quantities
...


(d)

On the other hand, collaboration may be the best way to obtain entry to some foreign markets;
aspiring entrants can obtain local knowledge and access to the local infrastructure
...


(e)

Suppliers may collaborate with consumers for a variety of reasons: examples include selfassembly of furniture and self-assessment of tax liability
...


(f)

Knowledge sharing may be required in the public sector, as a form of best practice
...


ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m

(a)

8 Using the value chain in competitive strategy

tud

The value chain can be used to design a competitive strategy, by deploying the various activities
strategically
...
It can also show where there is potential
for improved value addition (especially in relationship to competitors) and where activities are being
performed that do not add value; the aim here should be to eliminate such activities, or at least to
reconfigure them so that they do contribute some value
...
This may well
involve the use of other strategic concepts, such as differentiation, competences and critical success
factors, focussing the strategist's attention on areas where they might be applied
...
1 Other uses of the value chain






ea

As well as using the value chain to establish where it creates value for the customer, an organisation can
also use the model in other strategically valuable ways:
Identification of critical success factors
Identification of activities suitable for out sourcing
Identification of areas where value activities are not mutually supporting
Identification of opportunities to use information strategically

fre

FAST FORWARD

Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com

9 Product-market strategy: direction of growth

Key term

Product-market strategies involve determining which products should be sold in which markets, by
market penetration, market development, product development and diversification
...

Alliances of various kinds are a possible approach to diversification
...

Product-market mix is a short hand term for the products and services a firm sells (or a service which a
public sector organisation provides) and the markets it sells them to
...
1 The importance of market share

ial

Like some of the portfolio matrix tools we looked at in the last chapter, the PIMS framework regards
competitive strength and market attractiveness as important determinants of profitability
...
You will recall that relative market share was one of the axes of the BCG
matrix
...
This is
probably the result of lower costs resulting from economies of scale
...


9
...
Ansoff's original model was a four cell
matrix based on product and market, shown as the heart of the diagram below
...
This adds the external options shown in the
diagram
...


fre

ea

cc

New

Market
development

Diversification

Product-Market areas:

Related
(vertical or horizontal
integration)

Financial
reasons

Unrelated
(conglomerate
diversification)

Spread
risk

Other

Lynch – Market options matrix

Note the resemblance between the basic Ansoff Matrix and the new product strategy matrix presented in
Chapter 4 earlier in this Study Text
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

FAST FORWARD

6/09

To download more visit http://freeaccastudymaterial
...
2
...
The firm seeks to do four things
...
co
m

(a)

This is a relatively low risk strategy since it requires no capital investment
...


9
...
2 Consolidation

ial

ter

(b)

Consolidation does not mean neglect
...

PIMS data indicates that high product quality is important if a consolidation strategy is to
succeed
...


ym
a

(a)

To download more visit http://freeaccastudymaterial
...
This may be an appropriate strategy when
the firm is already the market leader; if availability of funds is limited; or when an owner-manager is
approaching retirement or wishes to avoid the loss of personal control that is a likely consequence of
growth
...


9
...
3 Present products and new markets: market development
Market development is the process by which the firm seeks new markets for its current products
...
Here are some examples:

(c)
(d)

tud

(b)

New geographical areas and export markets (eg a radio station building a new transmitter to
reach a new audience)
...

New distribution channels to attract new customers (eg organic food sold in supermarkets not
just specialist shops)
...
For example, travel companies have developed a market for cheap long-stay winter
breaks in warmer countries for retired couples
...


9
...
4 New products and present markets: product development
(a)

The company can exploit its existing marketing arrangements such as promotional methods and
distribution channels at low cost
...

Competitors will be forced to respond
...


fre

(b)
(c)
(d)

ea

Product development is the launch of new products to existing markets
...


Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com
9
...
5 New products: new markets (diversification)
Diversification occurs when a company decides to make new products for new markets
...


(b)

Growth
...

Investing surplus funds not required for other expansion needs, bearing in mind that the funds
could be returned to shareholders
...
It is likely to require the deployment of new
competences
...
co
m

(a)

We discuss divisionalisation and the role of the corporate headquarters further later in this Study Text
...
3 Diversification and synergy

ial

9
...
1 Obtaining synergy

ter

Synergy is probably difficult to achieve in practice when one company takes over another
...
Synergy is
probably more discussed in takeover bids than actually implemented
...
This field has become very
competitive and with the recent down-turn in trade, has become only marginally profitable
...


tud

Suggest two activities which might fit into the suggested new strategic structure, explaining each one
briefly
...
State the
advantages and disadvantages of such diversification
...
Existing administration and depot facilities in
the UK could be used
...
However, international road haulage might involve the company
in the purchase of new vehicles (eg road haulage in Europe often involves the carriage of containerised
products on large purpose-built vehicles)
...
In
addition, in the event of breakdowns, a network of overseas garage service arrangements will have to be
created
...

Moving from general haulage to speciality types of haulage, perhaps haulage of large items of
plant and machinery, or computer equipment
...
Existing depot facilities could be used and existing customer contacts might be
developed
...
Business might take some time
to build up and if the initial investment is high, there could be substantial early losses
...
Perhaps you thought of the following
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
Synergy is used to justify diversification
...
com

9
...


(d)

Products may simply disappear when they reach the end of their life cycles
...

Sale of subsidiary businesses for reasons of corporate strategy, such as finance, change of
objectives, lack of strategic fit
...



...


(e)
(f)

To download more visit http://freeaccastudymaterial
...

Managers might fail to grasp the idea of decision-relevant costs ('we've spent all this money, so
we must go on')
...
Defence is an example
...
A product might be a loss-leader for others, or
might contribute to the company's reputation for its breadth of coverage
...
Managers hate to admit failure, and there might be a desire to avoid embarrassment
...


ial

(a)
(b)

(d)
(e)

ym
a

(b)
(c)

To rationalise a business as a result of a strategic appraisal, perhaps as a result of portfolio
analysis
...

To sell off subsidiary companies at a profit, perhaps as an exit route after managing a turnaround
...
Where a low growth, steady
income operation exists alongside a potentially high growth new venture, the joint P/E is likely to
be too high for the cash cow and too low for the star
...

Satisfy investors: diversified conglomerates are unfashionable
...

To raise funds to invest elsewhere or to reduce debt
...
There are several reasons for this:

Case Study

Philips

ea

cc

as

Philips, the Dutch manufacturer of consumer electronics, divested some non-core businesses in order to
concentrate on core businesses as a strategy for improving profitability
...
There was overcapacity in the market
...


Case Study

The Royal Bank of Scotland sells Citizens Bank

fre

The following example illustrates the importance of considering the wider business environment and the
impact it has on organisational investment and divestment decisions
...
RBS purchased Citizens Bank in
1988 and 'turned it into one of the biggest regional banks in the US'
...

RBS's decision to divest its Citizen Bank operations have in part been driven by claims of breaching
regulations for misselling mortgages in the US
...
2bn, operating nearly 1,400 branches
...
75bn
...
com/freeaccastudymaterial

205

To download more visit http://freeaccastudymaterial
...
The achievement of our plan will allow us to focus
fully on the needs of our customers'
...
co
m

www
...
co
...
ICI's demerger of its attractive
pharmaceuticals business led to the shares in the two demerged companies trading at a higher combined
valuation than those of the original single form
...


ter



Companies can grow organically, building up their own products and developing their own market
They may choose to acquire these ready-made by buying other companies
...


The compulsory question in the December 2013 exam paper required students to explain and evaluate
three methods of pursuing growth (internal growth, acquisition and strategic alliance) in relation to the
organisation described in the case study scenario
...
1 Organic growth

tud

FAST FORWARD

12/13

Organic growth (sometimes referred to as internal development) is the primary method of growth for
many organisations, for a number of reasons
...


(c)
(d)
(e)

Organic growth can be planned more meticulously and offers little disruption
...

The same style of management and corporate culture can be maintained
...
The process of developing a new product gives the firm the best understanding of the
market and the product
...
It might be the only sensible way to pursue genuine technological innovations, and
exploit them
...
)
There is no suitable target for acquisition
...
1
...

Economies of scale can be achieved from more efficient use of central head office functions
such as finance, purchasing, personnel and management services
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
10
...
2 Problems with organic growth
(a)

Time – sometimes it takes a long time to descend a learning curve
...

The firm will have to acquire the resources independently
...



...


10
...
2
...
com

An article titled 'Takeovers, mergers and managing business units' (2010) written by Ken Garrett is
available in the technical articles section for P3 on the ACCA website
...


Risk-spreading

(e)

Independence
...


(f)

Overcome barriers to entry

cc

(d)

ea

Many acquisitions do have a logic, and the acquired company can be improved with the extra resources
and better management
...


fre

Exam focus
point

Case Study

Disney – Lucasfilm

In 2012, the American entertainment company Disney announced it was acquiring Lucasfilm, the
production company behind the Star Wars films
...
05bn (£2
...
Following the announcement of the acquisition, Disney's CEO, Robert
Iger, confirmed plans to develop a new Star Wars film ready for release in 2015, owing to substantial
demand from fans for the franchise to continue
...
com/freeaccastudymaterial

207

To download more visit http://freeaccastudymaterial
...
Josh Dickey, film editor at Variety magazine, commented that the
acquisition represents a 'great fit' between both companies, adding that 'they're (Disney) so good at
branding and brands
...
' This is not Disney's first large scale acquisition, having
previously purchased Pixar and Marvel; both of which have led to a number of highly successful films
...
2
...
co
m

Source: 'Disney buys Star Wars maker Lucasfilm from George Lucas', 31 October 2012, BBC

(b)

Customers of the target company might resent a sudden takeover and consider going to other
suppliers for their goods
...
In general, the problems of assimilating new products, customers, suppliers,
markets, employees and different systems of operating might create 'indigestion' and management
overload in the acquiring company
...


(d)

Asymmetric information
...


(ii)

The existing management 'always knows more about what is for sale than the potential
purchaser
...

'At the same time, good buys may be ignored, because there is no potential purchaser
confident that he really is making a good buy
...
They might be too expensive, especially if resisted by the directors of the target company
...


Driven by the personal goals of the acquiring company's managers, as a form of sport, perhaps
...


(g)

Poor success record of acquisitions
...
According to the Economist Intelligence Unit, there is a consensus
that fewer than half all acquisitions are successful
...
A survey by London Business School
examining 40 acquisitions (in the UK and US) revealed some major flaws
...

Some major problems of implementation relate to human resources and personnel issues
such as morale, performance assessment and culture
...
If key managers or personnel leave, the business will suffer
...
3 Joint ventures
Short of mergers and takeovers, there are other ways by which companies can co-operate
...


Joint ventures: Two firms (or more) join forces for manufacturing, financial and marketing
purposes and each has a share in both the equity and the management of the business
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

(iv)

Close control over marketing and other operations
...


(vi)

Synergies
...


(ii)

A licensing agreement is a commercial contract whereby the licenser gives something of value to
the licensee in exchange for certain performances and payments
...
com

(ii)

The licenser may provide rights to produce a patented product or to use a patented process
or trademark as well as advice and assistance on marketing and technical issues
...


ial

(i)

Subcontracting is also a type of alliance
...


10
...
1 Disadvantages of joint ventures

ter

(c)


...
As the capital outlay is shared, joint ventures are especially attractive to
smaller or risk-averse firms, or where very expensive new technologies are being
researched and developed (such as in the civil aerospace or petrochemical industries)
...
A joint venture can reduce the risk of government intervention if a local firm is
involved (eg Club Mediterranée pays much attention to this factor)
...


(i)

Conflicts of interest between the different parties
...

One partner may wish to withdraw from the arrangement
...
Acquisition of competences from
partners may be possible, but alliances are unlikely to create new ones
...
As part of the
agreement, Tata was to provide coffee beans for use in the new outlets
...
The first
Starbucks outlet opened in Mumbai in late 2012
...
Since
this time, the venture has gone from strength to strength
...


cc

Source: The Hindu (http://www
...
com) & Starbucks (http://www
...
co
...


fre

Exam focus
point

12/12, 6/09

ea

10
...
For suitable businesses, it is an alternative business
strategy to raising extra capital for growth
...


Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com
The franchiser and franchisee each provide different inputs to the business
...
co
m

(a)

Capital, personal involvement and local market knowledge
Payment to the franchiser for rights and for support services
Responsibility for the day-to-day running, and the ultimate profitability of the franchise

10
...
1 Advantages of franchising

(b)

Reduces managerial resources required
...
Recruiting and training managers and staff accounts for a significant percentage of the cost
of growth of a firm
...
Firms often franchise because they cannot readily raise the capital
required to set up company-owned stores
...
Brown, the former president of Kentucky Fried
Chicken, maintained that it would have cost KFC $450 million to establish its first 2,700 stores if it
had run them as company-owned stores, and this was a sum that was not available to the
corporation in the early stages of its life
...

Improves return on promotional expenditure through speed of growth
...
Companies often develop their brand through
extensive advertising and promotion, but this only translates into sales if they have a number of
stores that customers can visit after seeing their advertisements
...


Benefits of specialisation
...


cc

(d)

as

Because franchising provides quicker access to capital and managerial resources, a firm can
expand more quickly through franchising than through opening new company-owned stores
...


Low head office costs
...
For example, in
the fast-food business, the franchisees provide the staff who work in the restaurants, and so the
franchisees incur the HR and payroll costs associated with that
...
By contrast, franchisees are more efficient in
performing functions which are more efficient at a smaller scale
...


(f)

210

Reduced supervision costs
...
A company, therefore, has to supervise its
store managers, and this will result in central overhead costs
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
earnings come from the profits of those stores, they are motivated to work hard to maximise the
success of the stores
...

(g)

Risk Management
...
Under a franchising
arrangement, the franchiser can judge the profitability potential of different sites without incurring
a significant business risk
...



...
Franchised stores typically open
more quickly, and become profitable more quickly, than independent company-owned stores
...
In effect, when a franchisee enters a lease agreement with the franchiser, it is leasing
managerial know-how and brand recognition, as well as the physical store it is operating
...
4
...
The franchisee receives the revenue from the customer at the point of sale and
then pays the franchiser a share of the profits
...


(c)

Control over franchisees
...


(d)

Risk to reputation
...


(e)

Potential for conflict
...
These terms need to be clearly set out in a contract when the franchise is granted to
reduce the chances of conflict arising
...


ym
a

ter

ial

(b)

12/12

tud

10
...

Some firms enter long-term strategic alliances with others for a variety of reasons
...


(b)

The regulatory environment prohibits take-overs (eg most major airlines are in strategic alliances
because in most countries – including the US – there are limits to the level of control an 'outsider'
can have over an airline)
...


(d)

Learning
...


(f)

cc

ea

(e)

as

(a)

Technology
...
Such alliances
provide funds for expensive research projects, spreading risk
...


fre

Exam focus
point

To download more visit http://freeaccastudymaterial
...


(h)

Regulation may prevent take over
...


Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com
10
...
1 Choosing alliance partners
Hooley et al suggest the following factors should be considered in choosing alliance partners
...


Market-

Alliance partners are harder to control and may not have the same commitment to the
end-user
...
Each organisation should be able to focus on its core competence
...


(b)

Strategic priorities
...
A core competence may not be enough to provide a comprehensive customer benefit
...


Case Study

ym
a

Peugeot and General Motors

In February 2012 General Motors (GM) and PSA Peugeot Citroen announced a global alliance that the two
companies said would save them $2bn annually within about five years
...


tud

Speaking at the time the alliance was announced, GM's chief executive described the deal as 'a broadscale global strategic alliance that will improve each company's competitiveness and will contribute to
long-term profitability in Europe particularly, but around the world as well'
...


as

The two companies said the alliance was not a merger, and said that it would not change any existing
plans to rationalise their operations in Europe, where both PSA and GM's Opel unit had been losing
money
...

PSA's chief executive said that the alliance grew out of 'a growing realisation of very concrete synergies
that exist between our companies
...
At the time, the two companies said they would even consider developing a
new common platform for low-carbon vehicles
...

Since the alliance was formed, 'the partnership had struggled to meet its original goals, with PSA saying
that savings from the cooperation were estimated to be 40 percent less than originally planned'
...


212

6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com


...
com
Georges Dieng, a Paris based analyst talking to Reuters news in October 2013, commented that, 'Peugeot
thought it had found a long-term partner, but the alliance seems to be disintegrating'
...
The dropped plan to replace the Peugeot 208, Citroen C3 and Opel Corsa with a common small
car was "absolutely key" to the partnership,' added analyst Kristina Church
...



...
Daimler demerged from Chrysler in 2007
after an acrimonious partnership that lasted nine years, and Volkswagen and Suzuki went to arbitration
after an alliance they concluded in 2009 hit the rocks in 2011
...
ft
...
com

2) 'Peugeot Plunges After GM Sells Entire 7% Holding' by Chris Reiter and David Ruth (December 2013)
published on the Bloomberg website; www
...
com

ter

3) 'New blow to Peugeot as GM alliance scaled back' by Laurence Frost (October 2013) published on the
Reuters website; www
...
com

10
...
2 IS based alliances

(c)

cc

(d)

tud

(b)

Single industry partnerships: for example, UK insurance brokers can use a common system
called IVANS to research the products offered by all of the major insurance companies
...
A well-known example is holiday
bookings, where a flight reservation over the internet is likely to lead to a seamless offer of hotel
reservations and car hire
...
Electronic data interchange between customers and
suppliers is one aspect of this improvement, perhaps seen most clearly in the car industry, where
the big-name manufacturers effectively control the flow of inputs from their suppliers
...
The development of these
products requires close co-operation between the hardware and software companies concerned
...
There are four common types
...

So far in this chapter, we have considered the broader aspects of strategy as they affect the overall stance
of the organisation
...
An appreciation of scale is important when
considering strategy
...
On the other hand, they may constitute the essence of corporate strategy for a
smaller company
...


Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com

11
...
A company in this position may
try to do three things
...
These aims
correspond to market penetration and market development
...
The most common way of doing this is by means of continuous
product innovation
...
This may be pursued by enhancing the attractiveness of the product
offering in almost any way, including increased promotion, aggressive pricing and improved
distribution
...
co
m

(a)

Military analogies have been used to describe defensive strategies for market leaders
...


ial

ter

The market challenger seeks to build market share in the hope of eventually overtaking the existing
leader
...
This is a risky
strategy in any case, because of the leader's resources in cash, promotion and innovation
...


ym
a

Military analogies have also been used to describe the challenger's attacking options
...


11
...
Such a me-too strategy is based on the leader's approach
...
However, to be consistently successful, such a strategy must not simply
imitate
...
It should be aware that it
may constitute an attractive target for market challengers
...


11
...

The firm must be able to serve its customers sufficiently well to build up sufficient goodwill to fend
off any attacks
...


ea

(a)

as

Avoiding competition by niching is a profitable strategy for small firms generally and for larger
organisations where competition is intense
...
Multiple
niching can overcome this problem
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
2 Strategies for market challengers

To download more visit http://freeaccastudymaterial
...
The use of the SAF
model outlined in the next section provided a framework which could be applied to the scenario
...

Strategies are evaluated according to their suitability to the firm's strategic situation, their feasibility in
terms of resources and competences and their acceptability to key stakeholders groups (eg
shareholders)
...
co
m

Exam focus
point

12/13, 12/11, 6/10

Organisations must select strategies to pursue in a rational way
...
com





ter

12
...
The strategy should fit the organisation's current
strategic position and should satisfy a range of requirements:

ym
a

Exploit strengths: that is, unique resources and core competences
Rectify an organisation's weaknesses, or deal with problems identified in it
Neutralise or deflect environmental threats
Help the firm to seize opportunities
Satisfy the goals of organisation
Fill the gap identified by gap analysis
Generate/maintain competitive advantage
Involve an acceptable level of risk
Suit the politics and corporate culture

tud











A number of techniques can be used to assess suitability
...


The A D Little lifecycle/portfolio matrix assesses suitability in terms of industry maturity and competitive
position
...


ea

The industry life cycle may be combined with an appraisal of the company's strength in its markets using
a life cycle/portfolio matrix
...


fre

FAST FORWARD

as

12
...
1 Life cycle analysis

Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com

Ageing

Fast grow
Start up

Fast grow
Attain cost
leadership
Renew
Defend position

Defend position
Attain cost
leadership
Renew
Fast grow

Defend position
Focus
Renew
Grow with industry

Strong

Start up
Differentiate
Fast grow

Fast grow
Catch up
Attain cost
leadership
Differentiate

Attain cost
leadership
Renew, Focus
Differentiate
Grow with industry

Find niche
Hold niche
Hang in
Grow with industry
Harvest

Favourable

Start up
Differentiate
Focus
Fast grow

Differentiate, focus
Catch up
Grow with industry

Harvest, hang in
Find niche, hold
niche
Renew, turnaround
Differentiate, Focus
Grow with industry

Retrench
Turnaround

Tenable

Start up
Grow with industry
Focus

Harvest, catch up
Hold niche, hang in
Find niche
Turnaround
Focus
Grow with industry

Harvest
Turnaround
Find niche
Retrench

Divest
Retrench

Weak

Find niche
Catch up
Grow with industry

Turnaround
Retrench

Withdraw
Divest

Withdraw

ym
a

ial


...
Each stage has
its own strategic implications
...

Competitive position

(c)
(d)

A favourable position arises in a fragmented market, often when the company has strengths to
exploit
...

A weak position arises from inability to compete effectively
...


ea

(e)

as

(b)

A dominant position allows the company to exert influence over the behaviour of competitors
...

A strong position gives considerable freedom of choice over strategy
...
1
...
A
business profile is then created by scoring the forecast state against the favourable parameters
established by the empirical findings of PIMS research
...
The forecast profile may be
compared with the current profile in order to assess the proposed strategy for suitability
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
12
...
3 Strategy screening
It is not enough merely to assess strategies for suitability
...
Such
choices may be assisted by strategy screening methods, which include ranking, decision trees and
scenario planning
...
Scenarios have
already been described
...
This leads not so much to a choice as to the establishment of a series of contingency
plans
...
co
m

12
...
4 Consistency

Strategies must be internally consistent: generic strategy, market options choice and method of
development must all work together satisfactorily
...


12
...
5 The TOWS matrix

To download more visit http://freeaccastudymaterial
...
We noted that Weirich categorised strategies
into four groups that linked strengths, weaknesses, opportunities and threats in a logical fashion
...


ym
a

JS&W (and your syllabus) discern a logical link between the Ansoff Matrix and the TOWS matrix, since
detailed strategic options based on the former may be validated and even generated by considering the
latter
...


12
...
The Ms model we looked at earlier in this Study Text can provide a
framework to use here
...


fre

Strategies which do not make use of the existing competences and which therefore call for new
competences to be acquired, might not be feasible, since gaining competences takes time and can be
costly
...
The principles of both should be familiar to you from your earlier
studies in financial and management accounting
...
com/freeaccastudymaterial

217

To download more visit http://freeaccastudymaterial
...
The resources and competences required for each potential strategy are assessed and
compared with those of the firm
...

(a)
(b)

Does the firm have the necessary resources and competences to achieve the threshold
requirements for each strategy?
Does the firm have the core competences and unique resources to maintain competitive
advantage?


...
Such innovation is likely to be difficult to imitate
...
3 Acceptability

The acceptability of a strategy depends on expected performance outcomes and the extent to which
these are acceptable to stakeholders
...
Strategies will be evaluated by considering how far they contribute to
meeting the dominant objective of increasing shareholder wealth
...


Profitability analysis techniques include forecast ROCE, payback period and NPV, all of which
you should be familiar with
...

They are developed for assessing projects where cash flows are predictable
...


(ii)

There may be intangible costs and benefits associated with a strategy, such as an
enhanced product range or image or a loss of market share
...
See below
...
This is because its
emphasis on value management and understanding the organisation's system of value drivers
requires managers to take an integrated view of current and potential future strategies and their
overall effects
...


(c)

Banks are interested in the implications for cash resources, debt levels and so on
...
A strategy involving a takeover may be prohibited under competition legislation
...
The environmental impact may cause key stakeholders to protest
...

Risk
...
A strategy which changes the
risk/return profile, for whatever reason, may not be acceptable
...


fre

(f)

ea

(e)

cc

(b)

Cost-benefit analysis may be an appropriate approach to acceptability where intangible effects are
important, which is particularly the case in the public sector
...


218

6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...
4 Strategy selection
12
...
1 Planning and enforced choice


...
They also have a role when strategic developments are
imposed from outside the organisation
...

Formal evaluation of imposed strategy
(a)

(b)

The first role of formal evaluation is to assess the degree of risk inherent in the imposed strategy
...

Secondly, techniques such as scenario planning can be used to establish contingency plans in
case the imposed strategy leads to unacceptably low performance
...
com

12
...
However, the
option concept is very useful in the context of selecting strategies
...
The availability of such an option should be
considered when evaluating strategies
...
This is equivalent to a call option in financial strategy
...
If the NPV of the basic outlet strategy is assessed as
negative, this negative sum represents the price of the option to expand the range at a future date
...
In particular, the
option to abandon a chosen strategy at low cost will make that strategy more attractive than one with a
high cost of abandonment
...

Purchase of high efficiency, highly specialised machinery
Purchase of lower efficiency, general purpose machinery

fre

ea

cc

as

Option (a) may offer lower costs if the venture succeeds, but the ability to use option (b)'s machinery for
another purpose reduces its cost of abandonment, should the venture fail
...
com/freeaccastudymaterial

219

To download more visit http://freeaccastudymaterial
...
The defining characteristic of
the corporate parent is that it has no direct contact with the buyers or competitors, its role being to
manage the overall scope of the organisation in terms of diversity of products, markets and international
operations
...

–
–
–

Economics of scope may arise in several forms of synergy
...

Cross-subsidy may enhance market power
...
co
m



Related diversification, whether horizontal or vertical usually works better than conglomerate, or
unrelated, diversification
...




Ethnocentrism is a home country orientation
Polycentrism adapts totally to local environments
Geocentrism adapts only to add value
...

Regiocentrism recognises regional differences

ter

–
–
–
–

ial

Despite wide-ranging measures to liberalise trade and the resulting major growth in world trade, there has
been little globalisation of services
...


Ohmae describes five stages in the evolution of a global business
...
It requires greater investment and is still
ethnocentric
...
The orientation is still
ethnocentric and the business is still largely run from its HQ
...

This reduces exchange rate and political risk but economies of scale may be lost and there may be
problems of co-ordination
...


–

The global company takes a world view while recognising total differences: it has a geocentric
orientation
...


tud

Customer: market convergence
Company: economies of scale
Competition: keeping up
Currency: exchange rate risk
Country: absolute and comparative advantage; local orientation

cc

–
–
–
–
–


as

Ohmae offers five reasons for globalisation
...
It is low risk and
ethnocentric
...

Global environment; (geocentric); global product divisions
International environment; (ethnocentric); international division
Transnational environment; (polycentric); integrated systems and structures
Multinational environment; (polycentric); national or regional divisions

fre

–
–
–
–

220

6: Strategic choices  Part B Strategic choices

join us on facebook @ fb
...
com



To download more visit http://freeaccastudymaterial
...
co
m

The most suitable mode of entry depends on

There are three value-creating roles for the corporate parent
...

Intervention to improve performance
...
com

–

A parent may deploy four policies towards its SBUs
–
–

Build
Hold

–
–

Harvest
Divest

–

Strategic fit

ym
a



ter

Portfolio managers create value by applying financial discipline
...

Synergy managers peruse economies of scope through the shared use of competences and resources
...


The SBU portfolio must be managed against three criteria
–
–

Balance
Attractiveness

tud

Matrix-based models are used to manage portfolios: the Ashridge model is the only one to address
strategic fit and assumes the parental developer approach is used
...




The public sector portfolio matrix classifies activities in terms of their popularity and the resources
available for them
...
Heartland businesses both have CSFs that fit the present's resources and competences
and provide opportunities for good use of them
...
Ballast
businesses are well-understood by the parent but need little assistance
...




Business unit strategy involves a choice between being the lowest cost producer (cost leadership)
making the product different from competitors' products in some way (differentiation) or specialising on
a segment of the market (focus, by addressing that segment via a strategy of cost leadership or
differentiation)
...




The strategy clock develops Porter's theory, analysing strategies in terms of price and perceived value
added
...
Lock-in is achieved
when a product becomes the industry standard
...
com/freeaccastudymaterial

221

To download more visit http://freeaccastudymaterial
...




The value chain can be used to design a competitive strategy, by deploying the various activities
strategically
...
Diversification is
assumed to be risky, especially diversification that is entirely unrelated to current products and markets
...
Withdrawal may be a valid option
...


ial


...
These include repositioning on the strategy clock, counter attack, imitation and
attacks on barriers to entry
...


–

They may choose to acquire these ready-made by buying other companies
...


–

Many firms grow by other means, such as joint ventures, franchising and alliances
...




Strategies are evaluated according to their suitability to the firm's strategic situation, their feasibility in
terms of resources and competences and their acceptability to key stakeholders groups (eg
shareholders)
...


tud

ym
a



Quick Quiz

What is related diversification?

2

What are JS&W's three strategic rationales for corporate parents?

3

What are the axes of the BCG matrix?

4

What are the axes of the Ashridge portfolio display?

5

What are Porter's three generic strategies?

6

What are the axes against which the strategy clock is constructed?

7

What is lock-in?

8

What are the four product-market options which are illustrated in Ansoff's matrix?

9

List three advantages of franchising
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

Answers to Quick Quiz
Development beyond current products and markets but within the capabilities or value network of the
organisation
...


3

Market growth rate and relative market share
...


5

Cost leadership, differentiation, focus
...


7

The product becomes the industry standard
...


ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m

1

tud

Now try the questions below from the Practice Question Bank

Number

Level

15 mins

n/a

36 mins

fre

ea

cc

as

8

Preparation

Q7

Time

Exam

Q3

Marks

Part B Strategic choices  6: Strategic choices

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com

ial

R
T
C

ym
a

ter

A

To download more visit http://freeaccastudymaterial
...
co
m

P

fre

ea

cc

as

tud

Organising and enabling
success

225

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Syllabus reference

1 Challenges and concepts

C1

C1 (a)

ym
a

2 Types of structure
3 Processes

C1 (b)

4 Relationships

C1 (c), (d)

5 Stereotypical configurations

C1 (f)
C1

tud

6 Configuration and strategy

as

Introduction

fre

ea

cc

The static pyramidal hierarchy has formed the basis of ideas about
organisational structure for many years
...
However, the challenges of the modern business environment
have led not only to new structural designs, but also to a complete reevaluation of basic assumptions about organisation structure
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


ial

3

ter

Explore (through Mintzberg's organisational configurations) the design of
structure, processes and relationships

2

Exam guide

ym
a

Questions on structure were fairly uncommon under the old syllabus
...
You cannot afford to neglect this chapter
...

The structure of the organisation will be important in the context of scenario-based questions, and
ensuring harmony between structure, process and relationships will be important throughout
...


Globalisation, other aspects of rapid environmental change and, above all, the need to exploit knowledge
make the structures, processes and relationships that make up configurations vital for strategic success
...


Effective systems
...


fre

(b)

Flexibility of organisational design
...


ea

(a)

(c)

Globalisation
...


Of these three sets of issues, the need to capture, organise and exploit knowledge is probably the most
pressing for most organisations
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

C1

To download more visit http://freeaccastudymaterial
...
JS&W
use the term configuration to encompass these three elements
...
1 Organisational configuration
Key term

An organisation's configuration consists of the structures, processes, and relationships through which it
operates
...


(b)

Processes drive and support people: they define how strategies are made and controlled; and how
the organisation's people interact and implement strategy
...



...
com

Effective processes and relationships can have varying degrees of formality and informality and it is
important that formal relationships and processes are aligned with the relevant informal ones
...


ter

2 Types of structure

An organisation's formal structure reveals much about it
...


(b)

It shows who communicates with whom, both in procedural practice and, to great extent, in less
formal ways
...


ym
a

(a)

tud

Self contained organisations

Historically, organisational structures have tended to be 'self contained' as they are distinct from external
groups such as customers, competitors and suppliers
...
We shall explore the boundary-less organisation later in this chapter
...
1 The functional structure
In a functional structure, people are organised according to the type of work that they do
...
It is a traditional, common sense approach and many organisations are structured like this
...
Sub departments of marketing might be selling, advertising, distribution and warehousing
...
com/freeaccastudymaterial

229

To download more visit http://freeaccastudymaterial
...
1
...
1
...
2 The multi-divisional and holding company structures
The multi-divisional structure divides the organisation into semi-autonomous divisions that may be
differentiated by territory, product, or market
...


as

FAST FORWARD

Divisionalisation is the division of a business into autonomous regions or product businesses,
each with its own revenues, expenditures and profits
...
Influence is maintained by headquarters' power to hire and fire the managers who are
supposed to run each division
...


Mintzberg believes there are inherent problems in divisionalisation
...


fre

(a)
(b)

(c)

230

The economic advantages it offers over independent organisations 'reflect fundamental
inefficiencies in capital markets'
...
)
The divisions are more bureaucratic than they would be as independent corporations, owing to the
performance measures imposed by the strategic apex
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Engineering
director

To download more visit http://freeaccastudymaterial
...


(e)

In some businesses, it is impossible to identify completely independent products or markets for
which divisions would be appropriate
...


(g)

It is a halfway house, relying on personal control over performance by senior managers and
enforcing cross-subsidisation
...
Each
business might be better run independently than with the others
...



...

Simple divisionalisation

To download more visit http://freeaccastudymaterial
...
Problems arise with the power of the head office, and control of the
resources
...

The holding company (group) structure is a radical form of divisionalisation
...
The holding company can be a firm with a permanent investment or one
that buys and sells businesses or interests in businesses: the subsidiaries may have other
shareholders
...


(b)

Management by objectives is the natural control default
...


fre

(c)

It focuses the attention of subordinate management on business performance and results
...
The top
executives in each division should be able to report direct to the chief executive of the holding
company
...
com/freeaccastudymaterial

231

To download more visit http://freeaccastudymaterial
...
3 The matrix structure
Exam focus
point

In the June 2011 P3 exam, 10 marks were available for discussing the principles, benefits and problems of
introducing a matrix management structure at a given organisation
...
This highlights the importance of ensuring you
are familiar with the entire P3 syllabus as part of your preparation for this exam
...



...
It can be a mixture of a functional, product and
territorial organisation
...
4 Matrix organisation

ym
a

Case Study

Matrix management

tud

Matrix management first developed in the 1950s in the USA in the aerospace industry
...
Customers were unable to find a manager
in Lockheed to whom they could take their problems and queries about their particular orders, and
Lockheed found it necessary to employ 'project expediters' as customer liaison officials
...
Up to this point, these new officials had no functional responsibilities
...
These managers therefore had
functional authority and responsibilities, thus a matrix management organisation was created
...
For example, it is
possible to have a product management structure superimposed on top of a functional departmental
structure in a matrix; product or brand managers may be responsible for the sales budget, production
budget, pricing, marketing, distribution, quality and costs of their product or product line, but may have to
co-ordinate with the R&D, production, finance, distribution, and sales departments in order to bring the
product on to the market and achieve sales targets
...
com/freeaccastudymaterial

R&D
Dept

Marketing
Dept

To download more visit http://freeaccastudymaterial
...

(Thus, staff management can only act in an advisory capacity, leaving authority in the province of line
management alone
...


To download more visit http://freeaccastudymaterial
...

The authority of product managers may vary from organisation to organisation
...
com

Either:


...

Matrix management thus challenges classical ideas about organisation by rejecting the idea of one
person, one boss
...

A subordinate takes orders from one boss (the functional manager) and the second boss (the
project manager) has to ask the first boss to give certain instructions to the subordinate
...
The authority of each boss would have to be carefully
defined
...


as

(a)

(b)

It should improve communication within the organisation
...


fre

(c)

It offers greater flexibility
...
Flexibility should facilitate efficient operations in the face of change
...
4
...
A product
manager is responsible for product profitability, and a project leader is responsible for ensuring
that the task is completed
...


Part C Organising and enabling success  7: Organising for success

join us on facebook @ fb
...
com
A matrix organisation is most suitable in the following situations
...


(b)

There could be communications problems between functional management in different functions
(eg marketing, production, R&D, personnel, finance)
...


(c)

(e)

There is a need to achieve common functional tasks so as to achieve savings in the use of
resources – ie product divisions would be too wasteful, because they would duplicate costly
functional tasks
...



...
Work can be structured so as to be
task centred, with task managers appointed to look after each task, and provide the
communications (and co-operation) between different functions
...
4
...
Where matrix structure exists, it is
important that the authority of superiors should not overlap and areas of authority must be clearly
defined
...


(b)

One individual with two or more bosses is more likely to suffer role stress at work
...


(d)

It may be difficult for the management to accept a matrix structure
...


(e)

It requires consensus and agreement which may slow down decision-making
...
5 The transnational structure

The transnational structure attempts to reconcile global scope and scale with local responsiveness
...
We now return to that topic
...
The essence of the extreme case
of the problem is an enforced choice between a low-cost product originally specified for a single market
(typically the USA), which is potentially uninteresting or even actively shunned in other markets, and a
range of low volume, and therefore high-cost, products, each specified for and produced in a single
national market
...
The global approach leads to
global divisions, each responsible for the worldwide production and marketing of a related group of
standardised products
...


fre

The transnational structure attempts to combine the best features of these contrasting approaches in
order to create competences of global relevance, responsiveness to local conditions and innovation
and learning on an organisation-wide scale
...

(a)
(b)

234

It responds specifically to the challenges of globalisation
...


7: Organising for success  Part C Organising and enabling success

join us on facebook @ fb
...
com

(d)

To download more visit http://freeaccastudymaterial
...

Such shared capabilities allow national units to achieve global, or at least regional, economies of
scale
...



...


Functional managers nurture innovation and spread best practice
...
They
must also be talent spotters within the organisation
...
5
...
com

(b)

Managers of global products or businesses have responsibilities for strategies, innovation,
resources and transactions that transcend both national and functional boundaries
...


(a)

ym
a

The transnational structure makes great demands on its managers, both in their immediate responsibilities
and in the complexity of their relationships within the organisation
...


2
...
The
difference is that projects naturally come to an end and so project teams disperse
...
Business processes are often used as the basis of
organisation, with each team being responsible for the processes relating to an aspect of the business
...


2
...
This approach is very flexible and is
easy to use as an adjunct to more traditional organisational forms
...
It requires clear project definition, if control is to be
effective; and a comprehensive project review, if longer-term learning is to take place
...


2
...


fre

FAST FORWARD

JS&W summarise the seven basic types in a table
...


Part C Organising and enabling success  7: Organising for success

join us on facebook @ fb
...
com
Control
Functional

Change

Knowledge

Globalisation

***

*

**

*

**

**

*

**

Holding

*

***

*

**

Matrix

*

***

***

***

Multi-divisional

**

***

***

***

Team

*

**

***

*

Project

**

***

**


...
The first four
relate to the organisation's objectives and the restraints under which it operates
...
For example, a portfolio manager would need only a small, low cost corporate centre
...
For example, skilled professionals used to a team-working approach might be
frustrated by a move to a functional hierarchy
...


ter

ial

Market advantage: where processes must be closely co-ordinated in order to achieve market
advantage, they should be in the same structural element
...


Specialised cultures: specialists should be able to collaborate closely
...
A good example would be the link between sales and production when there are frequent
problems over quality and delivery
...


(c)

Redundant hierarchy: the structure should be as flat as is reasonably attainable
...


(e)

Flexibility: the structure must allow for requirements to change in the future, so that unexpected
opportunities can be seized, for example
...
They may be analysed according to whether
they deal with inputs or outputs and whether they involve direct management action or more indirect
effects
...


cc

FAST FORWARD

as

3 Processes

ea

Processes are an important part of how organisations work
...
You should note that all of the processes discussed here are control
processes
...
1 Types of control process
Output

Direct

Supervision
Planning processes

Performance targets
Balanced scorecard

Indirect

236

Input

Self-control
Cultural processes

Internal markets

7: Organising for success  Part C Organising and enabling success

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...
2 Input controls
3
...
1 Supervision
Direct supervision can be used for strategic control in addition to its traditional lower-level role
...
This
technique requires that the managers thoroughly understand all aspects of the business
...



...
2
...
They also regard schemes for
the standardisation of work processes, such as ISO 9000:2000 certification, and IT-based enterprise
resource planning systems as falling into this category
...
If different business units are faced by markedly different strategic imperatives,
standardised planning systems are less applicable
...
com

3
...
3 Self-control

ter

Control can be exercised indirectly by promoting a high degree of employee motivation
...
The role of management is then not to supervise but to
provide appropriate channels for interaction, and for knowledge creation and information use
...
2
...


tud

Cultural control processes are indirect and internalised by employees as they absorb the prevailing
culture and its norms of behaviour and performance
...
Training and
development systems are an important aspect of the cultural control system
...


as

There is also a negative aspect to cultural processes, in that they can create rigidities of thought and
behaviour, fossilising what was successful once, but may come to form an obstacle to progress
...
3 Output controls

3
...
1 Performance targets

ea

Performance can be judged against pre-set targets or key performance indicators (KPIs)
...
Managers are then free to organise their work and staff as they think
best, so long as they achieve the targets set for them
...
It is also useful in regulated markets, such as
privatised utilities
...

In the public sector, control of inputs has been traditional, but there has been a move towards targets for
outputs in order to improve services
...
High-level
financial KPIs, such as Return on Investment (ROI), are well-established and present no difficulty
...
com/freeaccastudymaterial

237

To download more visit http://freeaccastudymaterial
...
The problem is even greater with aspects of performance that are largely
qualitative, such as customer satisfaction
...



...
The ACCA
recognise that one approach to improving performance is through the establishment and close monitoring
of performance measures
...
3
...


ial

ea

Vision and strategy

tud

cc

as

Customer
perspective
To achieve our vision,
how should we appear to
our customers? What do
new and existing customers
value from us? (cost, quality,
reliability, delivery etc)

ym
a

ter

Financial perspective
How should we create value
for our shareholders to
succeed financially?
(includes traditional measures
such as growth, profitability
and shareholder value, with
measures set through talking
directly to the shareholders)

Internal business process
What business processes
must we excel at to achieve
financial and customer
objectives? Aim to improve
internal processes
and decision making

Innovation and learning
perspective
How will we sustain our
ability to change and
improve to achieve our visions?
How can we continue to
create value and maintain
the company's competitive
position?

The balanced scorecard

fre

Performance targets are set once the key areas for improvement have been identified, and the balanced
scorecard is the main monthly report
...


238

7: Organising for success  Part C Organising and enabling success

join us on facebook @ fb
...
com

The balanced scorecard seeks to translate mission and strategy into objectives and measures, and focuses
on four different perspectives, as follows
...
com
An article titled 'Performance measures to support competitive advantage’ (2005) written by Graham
Morgan is available in the technical articles section for P3 on the ACCA website
...
It
would be worth taking the time to study this article
...
3
...



...


Conflicting measures

Some measures in the scorecard, such as research funding and cost
reduction, may naturally conflict
...


Selecting measures

Not only do appropriate measures have to be devised but the number of
measures used must be agreed
...
The innovation and learning
perspective is, perhaps, the most difficult to measure directly, since much
development of human capital will not feed directly into such crude measures
as rate of new product launches or even training hours undertaken
...


Expertise

Measurement is only useful if it initiates appropriate action
...
With more
measures to consider, this problem will be compounded
...


ym
a

ter

ial

Explanation

To download more visit http://freeaccastudymaterial
...
3
...
The process of deciding what to measure forces a business to
clarify its strategy
...
These could include payment terms, lead times, or quality considerations
...
For example,
increasing productivity means that fewer employees are needed for a given level of output
...
However, these improvements have to be exploited (eg
by increasing sales)
...

The vertical vector

Kaplan and Norton's original perspectives may be viewed as hierarchical in nature, with a vertical vector
running through the measures adopted
...
com/freeaccastudymaterial

239

To download more visit http://freeaccastudymaterial
...
3
...
Attempts have been made to bring the responsiveness, self-regulating discipline and
efficiency of the market inside those boundaries
...
Market solutions are particularly
useful in complex or dynamic environments
...


3
...
6 Problems with market control processes

Excessive management time spent bargaining
Tendency for the creation of new bureaucracy to monitor effects
Dysfunctional competition and legalistic contracting
Destruction of cultures of collaboration

ym
a






4 Relationships

tud

Organisational relationships may be analysed into two categories: internal and external
...


4
...

The degree of centralisation
The way the centre relates to the business units

as




Key terms

Centralisation offers control and standardisation; decentralisation utilises talent and local knowledge
...
1
...


fre

Decentralisation means a greater degree of delegated authority to regions or sub-units
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Perspective

To download more visit http://freeaccastudymaterial
...
1
...


Standardisation

Procedures can be standardised throughout the organisation
...


Balance of power

Centralised control enables an organisation to maintain a balance between
different functions or departments
...


Lower overheads

When authority is delegated, there is often a duplication of management effort
(and a corresponding increase in staff numbers) at lower levels of hierarchy
...


ial

To download more visit http://freeaccastudymaterial
...
co
m

Advantage

ter

4
...
3 Advantages of decentralisation
Comment

Workload

It reduces the stress and burdens of senior management
...


Local knowledge

Subordinates may have a better knowledge than senior management of 'local'
conditions affecting their area of work
...
If problems do not have to be referred up a scalar chain of command
to senior managers for a decision, decision-making will be quicker
...


Control

By establishing appropriate sub-units or profit centres to which authority is
delegated, the system of control within the organisation might be improved
...
2 Contingency approach

Centralisation suits some functions more than others
...

Sales departments might be decentralised on a territorial basis
...


fre

FAST FORWARD

ea

4
...
1 Strategic management relationships

A vital feature of the relationship between the corporate centre and its business units is how responsibility
for strategic decisions is divided between them
...
com/freeaccastudymaterial

241

To download more visit http://freeaccastudymaterial
...

Centralised determination of strategy has been challenged as inappropriate in a diversified conglomerate
...

Controlling divisional performance is subject to all the arguments for and against decentralisation already
discussed
...


4
...
2 Research

ial

Goold and Campbell researched the role of the centre in 16 British-based conglomerates
...
The variation in these roles allowed the identification of eight distinct strategic
management styles
...


ym
a

Control influence was exercised by the agreement of objectives, the monitoring of results and the
deployment of pressures and incentives
...

Of the eight strategic management styles they defined, Goold and Campbell found that three of them were
particularly common; each was associated with one of the three control influence categories mentioned
above and with a different degree of planning influence
...


tud

Exam focus
point

4
...
3
...
The centre establishes extensive planning processes through
which it works with business unit managers to make substantial contributions to strategic thinking, often
with a unifying overall corporate strategy
...
Such organisations build linked international businesses in core
areas
...


4
...
2 Strategic control

fre

The strategic control style involves a fairly low degree of planning influence but uses tight strategic
control
...
Firm targets are set for a range of performance indicators and
performance is judged against them
...
Such
companies achieve good profits but are less successful at achieving growth
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Centralised provision of certain services, such as legal and HR departments, is promoted as enhancing
efficiency through the attainment of economies of scope
...


To download more visit http://freeaccastudymaterial
...
3
...
It takes little interest in
business unit strategy and controls through profit targets
...

Strategies are cautious and rarely global
...
As a result, these companies produce excellent profits, but growth comes mainly
from acquisitions
...
co
m

Head office

XYZ has over 500 profit centres (ranging from baggage handling equipment to stockings) and revenues of
£7bn
...
Each profit centre must provide the following
...
com

(b)

The annual profit plan
...
It is regarded as
a commitment to a preordained level of performance
...
Working capital is outlined
in detail
...


ial

(a)

Is XYZ a strategic planner, a strategic controller or a financial controller?

ter

Answer

4
...


External relationships are increasingly co-operative, rather than adversarial
...


tud

Traditionally, external commercial relationships have been, to a greater or lesser extent, adversarial, in
that each organisation has attempted to obtain for itself as much as possible of the value created overall in
the value network
...
These new structures are known as boundaryless organisations
...
Hollow and modular organisation structures are
underpinned by the use of outsourcing
...
Modular organisations outsource a particular part of a production
process, which is subsequently assembled in-house to create a completed product
...
Building relationships with suppliers, competitors and customers should increase
the organisations flexibility to respond to change
...
Each is discussed in more
detail in this section
...
4
...


Part C Organising and enabling success  7: Organising for success

join us on facebook @ fb
...
com
4
...
2 Hollow organisation structure
The hollow structure shares some similarities with the network organisation (see later)
...


Steps involved in creating a hollow organisation structure
Comment

1

Identify those non-value adding activities which do not underpin the entity's
competitive performance
...
Once all relevant activities have been assessed, the most
appropriate strategy to manage them can be implemented
...
This we shall discuss
in greater detail later in the text
...


3

Establish a working relationship with each outsource provider to ensure that the
entity's operations are not hindered by the arrangement
...
For example if outsourcers can reduce costs and pass savings on then
this may result in a longer term agreement being established between the parties
...
Nike has been accused of allowing subcontractors to get away with paying workers less than the
recognised minimum wage in some developing countries
...


cc

In part, Nike has been able to overcome some previous hostility by using the money saved through its
outsourcing operations to undertake aggressive marketing campaigns to rebuild the company's tattered
image
...
As part of Nike's ongoing re-branding exercise, the company became the first
in the industry to publish a list of the factories it has agreements with
...

Adapted from an article:

'How Nike solved it's sweatshop problem' by Max Nisen (May 2013) published on the Business Insider
website; www
...
com

244

7: Organising for success  Part C Organising and enabling success

join us on facebook @ fb
...
com


...
Value adding activities often
relate to R&D, marketing and manufacturing
...
The remaining staff are
then free to manage the relationships created with the third party outsourcer
...
com
4
...
3 Modular organisation structure

4
...
4 Outsourcing, offshoring and shared servicing

ial

To download more visit http://freeaccastudymaterial
...

Offshoring involves using external providers in different countries
...

Cost savings are often highlighted as being the main motivator for all three types of arrangement
...
4
...
Outsourcing involves an organisation contracting out certain internal business functions to a
third party
...
As
previously mentioned, Harmon’s process-strategy matrix, which we shall discuss in more detail in a later
chapter, recommends outsourcing those business processes which are of a high to low level of
complexity with a low level of strategic importance
...
This would remove the need for the organisation to retain its existing in-house
cleaners
...
The role of outsourcing is explored in more detail later in the Study Text
...
4
...

Offshoring became particularly popular in the late 1990s when a number of well-known UK financial
institutions (banks and insurance companies) decided to set up customer call centre operations in
countries such as India
...

Advantages and disadvantages of offshoring
Disadvantages of offshoring

Cost savings are often cited as the main motivation
behind the decision to offshore
...
Allowing third party providers to act as the
interface between the organisation and its
customers (eg through operating a call centre)
increases the scope for quality issues to arise
...
Managing non-core
functions is often regarded as a distraction which
can be alleviated by offshoring
...
Organisations may receive bad
press if consumers in the home market perceive
moves to offshore operations as leading to
domestic jobs losses
...
Offshoring can help organisations
which lack expertise in delivering a particular
process
...
Offshoring increases the scope for
third parties not to meet agreed service levels
...

The danger here is that more management time is
spent managing the relationship with the offshore
partner
...
co
m

A modular organisation shares some of the same features as the hollow organisation structure
...
The core company will then assemble the outsourced components in-house to produce a final
product
...
One
argument in favour of outsourcing component production to third parties is that it should lower
production costs and improve the efficiency of the organisation’s internal operations
...
For example, an outsource partner will provide the engines which the aircraft
manufacturer can then bolt onto the finished plane
...
com/freeaccastudymaterial

245

To download more visit http://freeaccastudymaterial
...
Some countries lend themselves to
offshoring due to local conditions
...



...
Offshoring may increase the flexibility
of an organisation’s operations as agreements with
third parties to supply a service can be established
for the short and long term
...
But for a company trying to go from good to great service, we need
consistency and excellence
...
There are parts of the market that don't feel reassured dealing with
somebody overseas, wherever it is'
...
telegraph
...
uk

4
...
7 Shared servicing

as

tud

An alternative to outsourcing is shared servicing, where shared service centres consolidate the
transaction-processing activities of many operations within a company
...
Many large organisations have moved to centralise their IT support functions
...

Advantages to using this approach include:
Reduced headcount due to economies of scale, resulting from bringing operations to a single
location
...


(c)

Knowledge sharing should lead to an improvement in quality of the service provided
...


fre

4
...
8 Alliances

The very great cost advantages available from economies of scale are a major driver of expansion
...
Such a degree of expansion
requires huge amounts of capital; various forms of complex organisation result from the pressure to pool
resources
...


246

7: Organising for success  Part C Organising and enabling success

join us on facebook @ fb
...
com

In October 2013, RSA (formerly Royal & Sun Alliance) which owns the More Than insurance brand,
announced that it was creating 350 jobs in the UK
...


To download more visit http://freeaccastudymaterial
...

Structures such as franchises and joint ventures inevitably depend on the management of relationships,
though the legal form can vary from loose co-operation on more or less market terms, to joint ownership
...
Co-operation may be possible
in any of the activities in the value chain
...
A good example is airline code sharing
...
com


...
The airlines can then
sell tickets for journeys that involve two or more flights without operating all the flights themselves
...
Customers fly on a US Airways aircraft between the US and Munich; and on
Deutsche BA aircraft, from Munich to Berlin, Cologne/Bonn, Dusseldorf and Hamburg, still using the US
Airways ticket designator
...


ter

The main problem of such structural relationships is the integration of knowledge to create a successful
product
...


4
...
9 Network organisations

ym
a

The idea of a network structure is applied both within and between organisations
...
Such a loose, fluid approach is often used to achieve innovative response to changing
circumstances
...
Complex
relationships can be developed between firms, who may both buy from and sell to each other, as well as
the simpler, more traditional practice of buying in services such as cleaning
...
Virtual teams are interconnected groups of people who may not be in the same office (or even the
same organisation) but who:
Share information and tasks
Make joint decisions
Fulfil the collaborative function of a team

as





(b)

fre

(c)

Staffing
...
Charles Handy's shamrock organisation (see below) is gaining ground as a workable
model for a leaner and more flexible workforce, within a controlled framework
...
(This,
and the preceding point, of course beg the question: which assets and activities do companies
retain, and which ones do they 'buy-in'?)

ea

(a)

cc

Organisations are now able to structure their activities very differently:

Interdependence of organisations is emphasised by the sharing of functions and services
...

JS&W give four examples of network organisation structures:
(a)

Teleworking, which combines independent work with connection to corporate resources
...
com/freeaccastudymaterial

247

To download more visit http://freeaccastudymaterial
...
This is common in the entertainment industry
...
The point of access to such a conglomerate might be a website
...


(d)

Network structures are also discerned between competitors, where co-operation on non-core
competence matters can lead to several benefits:
Cost reduction
Increased market penetration
Experience curve effects


...
The spread of
the Toyota system of manufacturing, with its emphasis on JIT, quality and the elimination of waste, has
led to a high degree of integration between the operations of industrial customers and their suppliers
...
This form is
popular during recessions
...
This structure permits the buying-in of services as needed, with
consequent reductions in overhead costs
...


tud

Key term

ym
a

Largely driven by pressure to reduce personnel costs and to adapt to new market imperatives, there has
been an increase in the use of part-time and temporary contracts of employment
...
The growth in the proportion of the workforce employed on such lessfavourable contracts has attracted political attention but continues
...


as

The first leaf of the shamrock is the professional core
...
This core group defines what the
company does and what business it is in
...
Their pay is tied to organisational performance and their relations will be more like those
among the partners in a professional firm than those among superiors and subordinates in today's large
corporation
...
They are paid in fees for results,
rather than in salary for time
...
No benefits are paid by the core organisation,
and the worker carries the risk of insecurity
...
There is no career track for these people and they perform routine jobs
...
They are paid by the hour or day or week for the time they work
...

Examples are shoppers who bag their own groceries and purchasers of assemble-it-yourself furniture
...


(b)

Personnel costs can respond to market conditions of supply and demand for different types of
labour and to the employer's financial position
...


(c)

The skills available can be modified fairly rapidly and multi-skilling can be encouraged
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
4
...
com
There are other implications for employment patterns
...

Staff must accept varying patterns of working hours, perhaps working on annual hours contracts
which require extended shifts in busy times balanced with shorter ones in slack times
...


FAST FORWARD


...
4
...

The idea of a virtual organisation or cybernetic corporation has attracted considerable attention as the
usefulness of IT for communication and control has been exploited
...


To download more visit http://freeaccastudymaterial
...
Many also agree that the virtual organisation has a temporary character
...

However, an organisation is not a virtual organisation merely because it uses IT extensively and has
multiple locations
...

A virtual organisation is a temporary or permanent collection of geographically dispersed individuals,
groups, organisational units (which may or may not belong to the same organisation), or entire
organisations that depend on electronic linking in order to complete the production process
...


4
...
12 Collaborative organisational structures
Collaboration with customers

as

cc

Understanding what customers want from companies is a major issue
...
However, advances in internet technologies have led to the development of user
contribution systems
...

Crowdsourcing involves obtaining information from a large group of people often external to the
organisation for the purpose of helping to generate ideas and suggestions which can be implemented to
improve organisational performance
...
An
understanding of user contribution systems and crowdsourcing are key terms that you need to learn
...
In recent times, many large organisations have created
user contribution systems as a means of extracting and collating customer contributions
...
0 have enabled the widespread use of user contribution systems
...
Interaction
between the individual and the company may be of a behavioural nature, as an individuals purchasing
behaviour can be tracked
...
com/freeaccastudymaterial

249

To download more visit http://freeaccastudymaterial
...
Such data
is gathered as a by-product of the underlying
interaction, ie the purchase
...


Practical solutions

Websites such as Delicious
...
This enables
other users to access a list of useful websites
...


Reputation

Some users choose to interact in order to enhance
their own reputation
...


Self-expression

Contribution systems provide individuals with the
scope to express their opinions and give feedback
...


Altruism

Some individuals interact in order to help others or
bring certain issues to the attention of a greater
range of people
...
co
m

Comment

4
...
13 Crowdsourcing

tud

User contribution systems provide organisations with the opportunity to better understand customers and
their needs
...
This customer
acquisition can be achieved through the use of tailored marketing messages, offering discounts on certain
purchases and providing purchase recommendations
...
News agencies often ask
individuals to phone in when they are aware of breaking news stories or even traffic jams on the road
...


cc

In a commercial context, large companies are able to use internet technologies to ask online users for
creative ideas on a particular matter or to provide information which the organisation can then use to solve
particular problems
...
This exercise is
known as an online 'jam' session
...
Since 2001, IBM has used jams to involve its more than 400,000
employees around the world in far-reaching exploration and problem-solving
...

During IBM's 2006 innovation jam, IBM brought together more than 150,000 people from 104 countries

250

7: Organising for success  Part C Organising and enabling success

join us on facebook @ fb
...
com

Reasons

To download more visit http://freeaccastudymaterial
...
As a result, ten new IBM businesses were launched with seed investment totalling
$100 million'
...
collaborationjam
...
co
m

Crowdsourcing can be considered to be distinct from user contribution systems as an organisation
decides which contributions it will use
...

Drawbacks of crowdsourcing

To download more visit http://freeaccastudymaterial
...
Crowdsourcing may not be
appropriate when higher risk issues are debated
...
Collaborators engage of their own free will, meaning that they have no obligation to
continue providing contributions in the future
...
This means, among other things, that the basic assumptions and
characteristics of the three components must be more or less compatible, since they have to integrate so
closely
...


Henry Mintzberg's theory of organisational configuration is a way of expressing the main features by
which both formal structure and power relationships are expressed in organisations
...
Each component of the organisation has its own dynamic, which leads to a
distinct type of organisation
...


ea

In June 2013 the compulsory question required students to discuss how an understanding of
organisational configurations would have helped a newly appointed CEO at a hospital introduce a strategic
planning system
...
This is an important area that students should not avoid when preparing to
sit paper P3
...

Mintzberg identifies only six ideal types
...


(a)

The strategic apex wishes to retain control over decision-making
...
The force this most relates to is the force for
direction (in other words, the need for people to be told what to do)
...
For
example, the preparation of accounts is highly regulated
...


Part C Organising and enabling success  7: Organising for success

join us on facebook @ fb
...
com
The members of the operating core seek to minimise the control of administrators over what they
do
...
As professionals, they rely on outside training (such as medical training) to
standardise skills
...


(d)

The managers of the middle line seek to increase their autonomy from the strategic apex, and to
increase their control over the operating core, so that they can concentrate on their own segment
of the market or with their own products
...


(e)

Support staff only gain influence when their expertise is vital
...
This corresponds to the force for learning
...
co
m

(c)

The forces for co-operation and competition largely describe how these elements relate to each other
...
1 The simple structure (or entrepreneurial) structure

ial

The simple structure is characteristic of small, young organisations
...

If it grows, the organisation might need more managerial skills than the apex can provide
...


(c)

Centralisation is advantageous as it reflects management's full knowledge of the operating core
and its processes
...


(d)

It is risky as it depends on the expertise of one person
...
Who takes over if the boss dies? This problem is often encountered in family
businesses
...


(f)

Co-ordination is achieved by direct supervision, with few formal devices
...


(g)

This structure has its own particular characteristics: wide span of control; no middle line and
hence, minimal hierarchy; and no technostructure, implying little formalisation or standardisation
of behaviour
...
2 The machine bureaucracy

The technostructure exerts a pull for standardisation of work processes
...

This is the classic bureaucracy, working on a sophisticated and well-tuned set of rules and
procedures
...
The bureaucracy can function if people leave, as jobs are designed precisely
...
Power rests with analysts who standardise other people's
work
...

The work of the operating core is highly standardised
...


There is a strong emphasis on the division of labour, and in particular on control
...
The elaborate middle line monitors and directs the operating core
...
(For example,
many big firms have a central legal department
...
Authority is hierarchical
...


7: Organising for success  Part C Organising and enabling success

join us on facebook @ fb
...
com

The strategic apex wishes to retain control over decision-making, and so exercises what Mintzberg
describes as a pull to centralise
...


To download more visit http://freeaccastudymaterial
...


(h)

The machine bureaucracy is the most efficient structure for integrating sets of simple and repetitive
tasks
...
They are designed for specialised purposes
...


5
...
co
m

The operating core has a pull for standardisation, not of work processes but of individual skills
...
A professional bureaucracy would employ accountants who should know what
is involved
...
Examples are hospitals and accountancy firms
...
A school is
an example
...

Co-ordination is achieved by standardisation of skills, which originate outside its structure
...
)

(c)

Power is often based on expertise, not formal position in the organisation hierarchy
...


(e)

The operating core is the key part
...
A
technostructure might exist for budgeting, but not for designing work processes
...
Professionals control their own work, and seek collective control over the
administrative decisions which affect them
...
com

(a)

There might be two organisation hierarchies: one, relatively informal, for the operating core doing
the work; another, more formal for the support staff
...

Barristers are co-ordinated by their head clerk, but they retain collective authority over the clerk
...


(h)

Professional administrators also manage much of the organisation's boundary
...


(j)

The professional bureaucracy cannot always cope with any variations of standards, as control is
exercised through training
...


fre

The professional bureaucracy would employ trained and perhaps qualified accounts staff, whose
professional training would give them the expertise to make the right decision
...
4 The divisional (or diversified) form

The middle line seeks as much autonomy for itself as possible
...
The result is the divisional form, by which autonomy is given to managers

Part C Organising and enabling success  7: Organising for success

join us on facebook @ fb
...
com
lower down the line
...

Divisionalisation is the division of a business into autonomous regions or product businesses,
each with its own revenues, expenditures and profits
...


(c)

Communication between divisions and head office is restricted, formal and related to performance
standards
...


(d)

Divisionalisation is a function of organisation size, in numbers and in product-market activities
...
5 The adhocracy

ial

The support staff exert a pull of their own, towards collaboration
...

The adhocracy is complex and disorderly
...
Specialists are
deployed in market-based project teams which group together and disperse as and when a project
arises and ends
...


(b)

The adhocracy relies on the expertise of its members, but not through standardised skills
...
For example, a film is made by a director, actors, camera people, set
designers and so on
...
Managers do not plan or supervise, but co-ordinate
...
'No-one
...


(e)

Strategy is hard to determine in the adhocracy
...
The strategic apex does not formulate strategies, but is engaged in battles over
strategic choices (eg which films shall we make?) and liaisons with the outside parties
...


(g)

The adhocracy is driven to bureaucratise itself as it ages
...


as

tud

ym
a

ter

(a)

The adhocracy is concerned with innovation
...
(Mintzberg uses an analogy of a theatre company
...
A professional bureaucratic one would seek to produce ever
more perfect renditions of Shakespeare
...


ea

(a)

The administrative adhocracy innovates to serve its own convenience
...
The
support staff are important, a central pool of expert talent from which project teams are drawn
...

(a)

(b)

The adhocracy is not suitable for standardised work; it is better at dealing with unique projects
...
This elicits complex human responses, as
many people dislike ambiguity
...


7: Organising for success  Part C Organising and enabling success

join us on facebook @ fb
...
com


...
com


...
This question specifically referenced Henry Mintzberg’s
configuration stereotypes to help student’s identify what they were being asked to do
...
They also mentioned that students without this knowledge failed to
use a logical approach of focusing on the key words 'structure’ 'control’ and 'processes’ to see that the
proposed structure would clash with the existing culture
...

This demonstrates the importance of ensuring you are familiar with all areas of the syllabus before
attempting the P3 exam
...


ial

To download more visit http://freeaccastudymaterial
...
6 Concluding thoughts

The usefulness of Mintzberg's theory of structural configuration is that it covers many issues, over and
above formal organisation structure
...

Key part

Environment

Possible characteristics

Simple

Direct
supervision

Strategic apex

Simple/dynamic
(even hostile)

Standardised
work processes

Technostructure

Simple/stable

Small, young, centralised,
personality-driven
...
6
...
A missionary organisation is one welded
together by ideology or culture
...
This relates to ideology, the force for co-operation
...
It works well in a
simple and static environment

fre

Exam focus
point

Part C Organising and enabling success  7: Organising for success

join us on facebook @ fb
...
com

Question

Organisation configurations

Which organisation configurations are suggested in the following cases?
Creation Co provides public relations services to clients
...
Clients contact one
of the partners who assembles a team to solve the client's problem, though the partner does not
direct the solution
...
It recruits trained
physiotherapists, each of whom is allocated a patient
...


Answer

6 Configuration and strategy

Chandler concluded that structure is determined by strategy
...
Strategy and
structure thus tend to support and preserve one another
...
Chandler concluded that structure was determined by strategy, but it has been suggested that
once a large organisation has settled into a particular structural form, the hierarchical, communication and
cultural practices associated with that form will predispose it towards a particular strategic stance
...


6
...
They do not offer a menu of independent choices; only certain combinations work
...


ea

cc

This tendency is explained by the dynamic interaction between the various elements of configuration,
environment and strategy
...
Thus, for example, a machine bureaucracy will seek out stable environmental conditions
in which to compete with a standardised, cost effective product; this will make good use of its
standardised processes and tight management and reinforce its defensive culture – which will predispose
it to seek out stable environmental conditions
...
The circle of reinforcement is broken and the organisation may
decline until a new reinforcing cycle is developed
...
Change tends to lead to a fall in performance that continues until a set of reinforcing factors is
assembled; only then can performance improve past its original level
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(a)

To download more visit http://freeaccastudymaterial
...
co
m

Performance

There is an important lesson here for the management of change, which is that attention must be paid
simultaneously to all three of structure, process and relationships if the change is to be carried through
successfully
...
com

6
...
Some of these problems can be
resolved into simple choices, but most require a balance to be struck between opposed extreme positions
...
Similarly, vertical lines of accountability may push
subordinates to greater efforts, but this may be at the expense of horizontal relationships
...
Similar considerations apply to centralisation, as discussed earlier in this chapter
...
For example, the
accounting and HRM departments may function best if organised in a standardised, bureaucratic
way, while the adhocracy may provide a more effective model for such activities as marketing and
R&D
...


(b)

A combination of features may be possible, if difficult to achieve
...


(c)

Frequent reorganisation may be used to prevent any particular approach from becoming dominant
in the longer term
...
com/freeaccastudymaterial

257

To download more visit http://freeaccastudymaterial
...




The multi-divisional structure divides the organisation into semi-autonomous divisions that may be
differentiated by territory, product, or market
...




Matrix structures attempt to ensure co-ordination across functional lines by the embodiment of dual
authority in the organisation structure
...




Both team and project based structures extend the matrix approach by using cross-functional teams
...




Control processes determine how organisations function
...
Balanced scorecards are direct output-based processes
...




Goold and Campbell identified three major approaches to running divisionalised conglomerates: strategic
planning, strategic control and financial control
...
Various forms of partnership,
alliance, consortium may lead to the development of a network organisation
...
Hollow and modular organisation structures are
underpinned by the use of outsourcing
...
Modular organisations outsource a particular part of a production
process, which is subsequently assembled in-house to create a completed product
...

Offshoring involves using external providers in different countries
...
Cost savings are often highlighted as being the main motivator for all three types of
arrangement
...
This form is
popular during recessions
...




Understanding what customers want from companies is a major issue
...
However, advances in internet technologies have led to the development of user
contribution systems
...

Crowdsourcing involves obtaining information from a large group of people, often external to the
organisation for the purpose of helping to generate ideas and suggestions which can be implemented to
improve organisational performance
...
co
m

Globalisation, other aspects of rapid environmental change and, above all, the need to exploit knowledge
make the structures, processes and relationships that make up configurations vital for strategic success
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

Chapter roundup (cont'd)
Henry Mintzberg's theory of organisational configuration is a way of expressing the main features by
which both formal structure and power relationships are expressed in organisations
...
Each component of the organisation has its own dynamic, which leads to a
distinct type of organisation
...




Chandler concluded that structure is determined by strategy
...
Strategy and
structure thus tend to support and preserve one another
...
com


...
com/freeaccastudymaterial

259

To download more visit http://freeaccastudymaterial
...


3

The innovation perspective's measures of skills and processes should support the internal business
perspective's measures of quality, efficiency and timeliness, which support the customer perspective's
measures of relationships and loyalty, which support the overall financial perspective measure, ROCE
...


5

Strategic apex, middle line, operating core, technostructure, support services
...
com/freeaccastudymaterial

Time

36 mins

To download more visit http://freeaccastudymaterial
...
co
m

1

ter

ial

Managing strategic
change

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
The influence of environmental developments is such that strategies will inevitably
change and evolve; the only question is how rapid the change will be
...
Following JS&W, we will start by
considering the diagnosis of change requirements
...


fre

ea

We will then examine the impact of management style and the roles played by
managers and other agents of change
...
Finally, we consider the common pitfalls
that have hampered change programmes in the past
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
You must be able to recognise the factors that drive change and
constrain the ways in which it may be effected
...


We have already looked at the cultural web in Chapter 5 so it is not repeated here
...


There are three main change management considerations
...

Consideration of the broader contexts of the environment and the organisation's strategic capability may
show that large scale developments are necessary; the need to put strategy into action may call for more
detailed but no less far-reaching adjustment of processes, relationships, technologies and so on
...
1 Types of change
JS&W, quoting Balogun and Hope Hailey, analyse change on two axes: these are its scope and its nature
...


262

8: Managing strategic change  Part C Organising and enabling success

join us on facebook @ fb
...
com


...
com
The nature of change may be incremental and built on existing methods and approaches, or it may require
a 'big bang' approach if rapid response is required, as in times of crisis
...
com

ter

(d)

Adaptation is the most common type of change
...

Reconstruction can also be undertaken within an existing paradigm but requires rapid and
extensive action
...

Evolution is an incremental process that leads to a new paradigm
...
Its transformational nature may
not be obvious while it is taking place
...
A long period of
strategic drift may lead to a crisis that can only be dealt with in this way
...


ial

(a)


...
The scenario focused on the purchase by a parent company of a
smaller, struggling entity
...
There were 13 marks available
for applying and justifying an appropriate model (such as the contextual features model) to use in the
scenario
...
This
requirement was worth 14 marks
...
As a result, candidates were not required to recall the model, but were
expected to apply their knowledge to the scenario
...
'They were forced to guess what each of
the contextual factors is and many answers made little reference to the scenario
...


ea

The context of change is provided by the organisational setting; this has many aspects and can therefore
be very complex
...
One of the eight headings is scope:
this has already been discussed
...

The headings represent a wide range of influences and the specific considerations affecting the impact of
each may vary from organisation to organisation
...


fre

Exam focus
point

ym
a

1
...
2
...

The preservation of some organisational characteristics and resources may be required
...
com/freeaccastudymaterial

263

To download more visit http://freeaccastudymaterial
...
The examining team also noted that, despite the question being
clearly built around Balogun and Hope Hailey's matrix of the nature and scope of change and the
contextual features model, many candidates' answers suggested they were unfamiliar with this area of the
syllabus
...


1
...
2 Questions

An examination of context leads to four questions
...
3 Culture and change

as

If you think about the elements of context outlined above, you will quickly realise that they are all affected
to some extent by cultural considerations
...


ea

cc

The cultural web (which we have looked at earlier in this Study Text) may be used as a tool to establish
specific implications of the desired overall strategic change by facilitating comparison between the current
position and the desired future outcome
...
Similarly, it might be decided that dress is a powerful
symbol and that a corporate livery should be provided for customer-facing staff
...
4 Forcefield analysis

fre

Forcefield analysis consists of the identification of the factors that promote and hinder change
...

It is traditional to represent these forces by arrows whose individual dimensions correspond to their
perceived strengths
...
This representation is useful for purposes such as brainstorming and staff
briefings, but two lists in order of magnitude are just as useful for purposes of analysis
...


264

8: Managing strategic change  Part C Organising and enabling success

join us on facebook @ fb
...
com

Exam focus
point

Diversity of general experience, opinion and practice is likely to ease the change process:
homogeneity in these factors is unlikely to do so
...
To a great extent, this
depends on past experience of change projects, both among managers and among lower-level
staff
...
We have looked at IS/IT earlier in this Study Text, but it is
important to note that unrealisable or out-dated systems could become a blockage in the change
process
...
Readiness may be contrasted
with resistance to change, which can exist at varying levels of intensity and may be widespread or
confined to pockets
...
This can apply even at the strategic apex, where, for example, major
shareholders, trustees or government ministers may constrain managers' freedom of action
...
co
m

(c)

To download more visit http://freeaccastudymaterial
...
Be
aware that change management and project management are intimately linked: any project is quite likely to
result in change, while change is often implemented through projects
...
co
m

A requirement of
new legislation

Existing systems are
sufficient
Professional commitment
to controlling the
organisation

ial

To download more visit http://freeaccastudymaterial
...

List the forces supporting and opposing the desired change and assess both the strength and the
importance of each one
...

Decide how to strengthen or weaken the more important forces as appropriate and agree with
those concerned
...

Identify the resources needed
...


cc

(a)
(b)

tud

Senior (drawing on the advice of Carnall and Huczyuski and Buchanan) suggests a practical route to
applying the force field analysis idea
...
The web can thus be used alongside forcefield analysis as a diagnostic tool
...





Education and communication
Collaboration/participation
Intervention




Direction
Coercion/edict

Progression down the list of styles corresponds to progression through the four types of change noted above
...
com/freeaccastudymaterial

265

To download more visit http://freeaccastudymaterial
...
1 Five management styles
We have looked at leadership earlier in this Study Text and one of the aspects of a leader's role will be to
implement strategic change
...

JS&W identify five styles of change management:
Education and communication
Collaboration/participation
Intervention




Direction
Coercion/edict

2
...
1 Education and communication

ial

Education and communication is an approach based on persuasion: the reasons for change and the
means by which it will be achieved are explained in detail to those affected by it
...
This style is time-consuming, but can be useful if there has been misinformation
in the past
...
This may not, in fact, be present
...
1
...
It may improve decision quality by bringing wider
experience and knowledge to bear
...
This approach
is both ethical, in basic deontological terms, and advantageous in practice, since it can nurture a positive
attitude, thus building both readiness and capability for change
...


2
...
3 Intervention

as

2
...
4 Direction

tud

Intervention is undertaken by a change agent (see below) who delegates some aspects of the change
process to teams or individuals, while providing guidance and retaining overall control
...
Final responsibility for achieving the necessary
change remains with the change agent, but this kind of participation can build commitment and a sense of
ownership
...


cc

Direction is a top-down style in which managerial authority is used to establish and implement a change
programme based on a clear future strategy
...
It has the
potential advantages of speed and clarity, but may lead to resistance
...


ea

2
...
5 Coercion

Coercion is an extreme form of direction, being based on the use of power to impose change
...


fre

2
...


266

8: Managing strategic change  Part C Organising and enabling success

join us on facebook @ fb
...
com


...
com
2
...
1 Context
Specific aspects of the organisational context already discussed will influence the use that can be made of
the five styles
...


2
...
2 Scope and nature

ial

2
...
3 Power structures

To download more visit http://freeaccastudymaterial
...
co
m

Using Balogun and Hope Hailey's matrix of the scope and nature of change (shown in Section 1
...
In adaptation, where time is not critical and the extent of the
change required is small, styles from the collaborative-communicative end of the spectrum may be
appropriate
...

The intermediate cases are likely to require a combination of participation and direction, with the
emphasis on the former in evolution and on the latter in reconstruction
...
Direction or intervention is likely to be more suitable in a firmly hierarchical organisation than
these would be in a network or learning organisation, except in time of crisis, for example
...
2
...
Good managers will be capable of using a style appropriate to the conditions
they have to work in
...
This effect is likely to interact with the effect of power structure mentioned
above
...
2
...
Providers of capital are likely to respond better to education and
communication than to direction, for example, while something approaching coercion may be necessary
in some internal areas simply because of the pressure of time
...


Strategy
Human assets
Expertise




Control
Change

ea





cc

Strategic leaders act as change agents in one of five styles:

Middle managers implement and control top-down change; translate overall change strategy for local
contexts; and advise strategic managers
...
New middle
managers can enhance change capability; consultants can fill planning and facilitating roles
...

JS&W (amended)

Part C Organising and enabling success  8: Managing strategic change

join us on facebook @ fb
...
com
Change agency is an activity that might be concentrated in one person, but which is just as likely to be
spread among the members of a group, such as a project team or management staff generally
...

JS&W examine change agency by considering the roles played by three distinct groups
...
1 Strategic leadership
Key term


...

JS&W
JS&W, quoting Farkas and Wetlaufer, identify five approaches to strategic leadership
...
1
...

Other managers take responsibility for routine operations and for the management of change
...
1
...
Such leaders are concerned to
recruit the right people and to develop an appropriate culture
...


tud

3
...
3 The expertise approach

The expertise approach focuses on some form of technical expertise as a source of competitive
advantage and concentrates on building expertise through systems and procedures
...
Other managers also concentrate on their areas of expertise
...
1
...
The strategic leader following this approach
concentrates on setting procedures and control measures and monitoring performance so as to achieve
uniform, predictable performance
...


ea

3
...
5 The change approach
The leader using the change approach focuses on continual change and expends much effort on
communication and motivation
...


fre

3
...
6 Charismatic and transactional leadership
We discussed leadership in general terms earlier in this Study Text
...

(a)

268

Transactional leaders focus on systems and controls and generally seek improvement rather than
change
...


8: Managing strategic change  Part C Organising and enabling success

join us on facebook @ fb
...
com





To download more visit http://freeaccastudymaterial
...
Change management is a
natural part of what they do
...


Using this analysis, we may say that the control approach is a form of transactional leadership, while the
other four approaches fall into the charismatic category
...
2 Middle management


...
Their commitment to change is important and they have significant roles to play in
change management
...

Provision of advice to higher management on requirements for change and potential obstacles

(c)

ial

(b)

To download more visit http://freeaccastudymaterial
...
3 Outsiders

(c)

(d)

ym
a

(b)

A new chief executive may be appointed to bring a fresh point of view and break down the
constraints of the existing paradigm
...

New managers in other positions can enhance the capability to change and increase diversity of
opinion and practice
...

Consultants may be employed to fill a number of planning and facilitating roles
...

This enables them to challenge things that are taken for granted
...

Other external stakeholders are capable of influencing change and may have a part to play
...


4 Change management levers

cc

Challenging the paradigm
Changing routines
Use of symbolic processes
Political activity and use of power structures
Communication and monitoring
Tactics, including careful timing, care over job losses and exploration of quick successes

ea








as

A turnaround strategy is required when a business is in terminal decline
...
More widely applicable change management levers are often related to
aspects of the cultural web
...
We
will consider these in this section, but first we will consider the special case of turnaround
...
1 Turnaround
When a business is in terminal decline and faces closure or takeover, there is a need for rapid and
extensive change in order to achieve cost reduction and revenue generation
...

JS&W identify seven elements of such a strategy
...
com/freeaccastudymaterial

269

To download more visit http://freeaccastudymaterial
...
1
...
An emphasis on reducing direct costs and
improving productivity is more likely to be effective than efforts to reduce overheads
...
The wider
causes of decline must be addressed
...
1
...
There are four reasons for
this
...

Experience of turnaround management may be required
...


(d)

A directive approach to change management will probably be required
...
1
...
A stakeholder analysis (discussed earlier in this Study Text) should be carried out
so that the various stakeholder groups can be informed and managed appropriately
...
1
...
The organisation must become customer-oriented and ensure that it has good
flows of marketing information
...
1
...
It will almost certainly be
appropriate to review products and the market segments currently served, and to eliminate any
distractions and poor performers
...


270

8: Managing strategic change  Part C Organising and enabling success

join us on facebook @ fb
...
com

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)


...
com
4
...
6 Financial restructuring
Some form of financial restructuring is likely to be required
...
Even where the business is more or less solvent, capital restructuring may be required,
both to provide cash for investment and to reduce cash outflows in the shorter term
...
1
...
co
m

The eventual success of a turnaround strategy depends in part on management's ability to prioritise
necessary activities, such as those noted above
...
2 Challenging the paradigm

The entrenched assumptions and habits of mind that JS&W refer to as the paradigm constitutes an
important obstacle to strategic change
...
There are several approaches to this process of challenge; JS&W give four examples
...
Unfortunately, evidence is rarely overwhelming, or even complete, and there is a
natural tendency to reinterpret, discount or even deny it
...

A careful analysis of just what is taken for granted, possibly through workshop sessions, may
enhance an objective assessment of new ideas
...

Scenario construction can be used to bring managers to a better understanding of changing
conditions by presenting a range of possible futures and their implications for the organisation
...


4
...
com

(a)

tud

Routines are the habitual behaviours that members of the organisation display, both internally and
externally
...
They are closely linked to the paradigm
...
For example, it is unlikely that simply explaining required new processes and procedures
will lead to their effective adoption: existing routines will mould the way they are put into operation
...


cc

When change is to be introduced in a less directed way, change agents may focus on routines, extending
existing ways of doing things toward what is required and then 'bending the rules of the game' when
sufficient stakeholder support has been created
...
4 Symbolic processes

fre

Symbols were mentioned earlier in this Study Text during our discussion of culture and the cultural web
...
However, it is
important to understand that the significance of a given symbol may vary from person to person; this
makes their use as a tool of management difficult
...
For example, the replacement of a strictly hierarchical approach to management with a
culture of coaching and empowerment can be signalled and reinforced by the introduction of social
occasions such as office parties that will allow staff to meet relatively informally
...
com/freeaccastudymaterial

271

To download more visit http://freeaccastudymaterial
...

Changes to physical aspects of the workplace can have strong symbolic effect, as, for instance,
when open-plan offices or hot-desking are introduced
...

Language can have symbolic significance beyond the bald meaning of the words used
...

Stories have an important symbolic role, but are not easy to exploit since much corporate
communication is automatically dismissed as mere marketing puff
...
5 Power and politics

ter

ial

Politics is about the exercise of power and the use of influence
...
The implementation of strategy
is inevitably influenced by the operation of these structures and networks
...

JS&W suggest three objectives of political activity that may be sought by change managers
...

Manipulation of resources
Relationships with powerful groups and individuals (elites)
Exploitation of subsystems
Symbolic activity

tud






4
...
1 Resources

4
...
2 Elites

cc

as

The ability to control the allocation of resources (or even merely to influence their allocation) is recognised
as a distinct and important form of power within the organisation
...


ea

Association with respected and influential stakeholders can enhance the personal status and thus the
power base of the change agent
...


fre

Sometimes it is necessary to eliminate centres of resistance by removing people from the organisation in
order to ensure compliance with change requirements
...
5
...
It may then be possible to outmanoeuvre and marginalise the resistance
...
It will be useful to
analyse power and influence using the stakeholder mapping model explained earlier in this Study Text
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(b)

To download more visit http://freeaccastudymaterial
...
5
...


4
...
co
m

It is obvious that change management must include effective communication and explanation of the need
for change, what the plan is intended to achieve and what it involves
...
Strategic
complexity may make this difficult, but a clear vision must be provided
...
com

A wide range of communication media is available and it is important that appropriate selections are
made
...
It is important for change agents to be aware that what seems simple and routine to them may have
significantly greater importance for ordinary members of the organisation
...
These people form an important route through which
information can flow into the organisation
...


ym
a

Care must be taken with emotional aspects of communication so that appropriate media, language and
symbols are used
...


4
...


tud

4
...
1 Timing

The time at which actions are taken can be selected for tactical effectiveness
...

Fear and anxiety about change as such may be reduced if unpleasant consequences can be
decoupled in time from the main change programme: an example would be a programme of
redundancy that does not commence until other change objectives such as the outcomes of
product and market reviews have been implemented
...

Windows of opportunity may occur, as, for example, when a takeover occurs
...
7
...

Redundancy programmes must be managed with care
...


(b)

Where delayering is required, it may be possible to concentrate the job losses among managers
identified as being opposed to change: these are likely to be more senior figures
...


(c)

Part C Organising and enabling success  8: Managing strategic change

join us on facebook @ fb
...
com
4
...
3 Quick success
Momentum for change can be created by putting simple but highly visible improvements into successful
operation
...


5 Pitfalls of change management

Change programmes may be subverted and lead to unintended consequences
...

Monitoring and control are vital
The existing culture must be understood
The organisation's people should be involved in the change process
The extent of the challenge must be recognised

(e)
(f)

(g)
(h)

ym
a

(d)

tud

(c)

as

(b)

Ritualisation of change
...

Hijacked process of change
...

Erosion
...

Reinvention
...
This is a failure of monitoring and
control
...
When change is imposed from the top-down, its proponents may be seen as
inhabiting an ivory tower, out of touch with operational reality and lacking in credibility as a result
...
Change managers who pay insufficient attention to symbols can
both fail to make the change relevant to day to day reality and succeed in sending the wrong
messages
...
If practical adjustments, to systems, for example, do not fit well with the
overall intent of the change programme, staff are likely to become confused and demotivated
...
Apparent behavioural compliance may disguise lack of commitment
...


cc

(a)

ter

JS&W quote Harris and Ogbonna, who identify eight unintended outcomes of change programmes
...

It is essential to understand the existing culture and its effects, since they are highly likely to
hinder planned change
...


fre

(b)

ea

These problems underline the complexity of the change management task
...


(c)

(d)

274

Change represents a major challenge and may be more difficult to implement than it seems at
first
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Even where there are no obvious easy options, it may be possible to create some by concentrating the
available resources on specific problems, rather than spreading them thinly
...
com

Chapter Roundup


There are three main change management considerations
...

–
–
–
–
–

Education and communication
Collaboration/participation
Intervention
Direction
Coercion/edict

To download more visit http://freeaccastudymaterial
...
co
m

–



ial

Progression down the list of styles corresponds to progression through the four types of change noted above
...


Strategy
Human assets
Expertise
Control
Change

ym
a

–
–
–
–
–

ter

Strategic leaders act as change agents in one of five styles

Middle managers implement and control top-down change; translate overall change strategy for local
contexts; and advise strategic managers
...
New middle
managers can enhance change capability; consultants can fill planning and facilitating roles
...
This has four implications
for change management
...
Such a strategy uses its own
change management techniques
...


ea



Part C Organising and enabling success  8: Managing strategic change

join us on facebook @ fb
...
com

Quick Quiz
What is meant by the scope of change?

2

Which styles of management are required to effect revolution?

3

What is a change agent?

4

What is the difference between charismatic leadership and transactional leadership?

5

What are the objectives of political activity that may be sought by change managers?

6

How can change managers create opportunities for early success?

ial
ter
ym
a
tud
as
cc
ea
fre
276

8: Managing strategic change  Part C Organising and enabling success

join us on facebook @ fb
...
com


...
com

Answers to Quick quiz
The scope of change is the degree of change required – whether it can be transformational or whether a
more fundamental realignment is required
...


5

Building a powerbase; overcoming resistance; achieving compliance

6

By concentrating resources on potentially solvable problems rather than spreading them thinly
...
com

Number

ial

Now try the question below from the Practice Question Bank


...
com/freeaccastudymaterial

277

ial
ter
ym
a
tud
as
cc
ea
fre
278

8: Managing strategic change  Part C Organising and enabling success

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
com


...
com/freeaccastudymaterial

ial
ter
ym
a
tud
as
cc
ea
fre
280

join us on facebook @ fb
...
com


...
com

ter

ial

Business
process change

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...


ea

cc

Strategies are, to some extent at least, delivered by means of processes
...
In this
chapter, and the next, we go on to examine processes in the wider sense, the
contribution they make to organisations and strategy and, overall, how
processes may be improved and made more effective
...


281

join us on facebook @ fb
...
com

Study guide
Intellectual level
Business change

(a)

Explain that business change projects are initiated to address strategic
alignment

2

(b)

Apply the stages of the business change lifecycle (alignment, definition,
design, implementation, realisation)

3

(c)

Assess the value of the four view (POPIT – people, organisation, processes
and information technology) model to the successful implementation of
business change

D2

The role of process and process change initiatives

(a)

Advise on how an organisation can reconsider the design of its processes to
deliver a selected strategy

(b)

Appraise business process change initiatives previously adopted by
organisations

3

(c)

Establish an appropriate scope and focus for business process change
using Harmon's process-strategy matrix

3

(d)

Explore the commoditisation of business processes

3

(e)

Advice on the implications of business process outsourcing

3

(f)

Recommend a business process redesign methodology for an organisation

2

D3

Improving the processes of the organisation

(a)

Evaluate the effectiveness of current organisational processes

ial

ter

ym
a

Exam guide

3

3

3

tud

The syllabus places considerable emphasis on processes
...
An obvious route
would be to ask you to use the process-strategy matrix to select processes for improvement and the
process redesign methodology discussed in Section 3 to show how to proceed
...
The diagram below illustrates some of the key linkages
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

D1

To download more visit http://freeaccastudymaterial
...


1 The background to process change


...
This chapter contains a lot of very examinable
material around business process change and redesign, and outsourcing
...
The article outlines the importance of business processes in
delivering strategy and explores how organisations can analyse existing processes with a view to
improving organisational performance
...


ym
a

Exam focus
point

To download more visit http://freeaccastudymaterial
...

The industrial revolution brought new techniques for manufacturing and also for administration
...
Other
important figures in the history of management innovation include the experts known to us as the
Scientific Management School and figures such as Henry Ford, Alfred Sloan and Peter Drucker
...
In this section (which is largely based
on Chapter 1 of Business Process Change by Paul Harmon) we will revise some of the important steps
along the way
...
1 Organisations as systems
FAST FORWARD

General system theory would see the organisation as an open system, interacting with its environment
...


as

(a)
(b)

An organisation is a type of system
...
3 Open and closed systems
General systems theory makes a distinction between open, closed and semi-closed systems
...

An open system is connected to, and interacts with, its environment
...
An open system is a stable
system which is nevertheless continually changing or evolving
Few systems are entirely closed
...
An example of a semi-closed system might be a pocket
calculator
...
The calculator is
restricted in what it will do
...
2 Systems theory

(c)

Part D Business process change  9: Business process change

join us on facebook @ fb
...
com

Predicted/controlled
inputs from the
environment

Semi-closed
Relating to its
environment in a controlled
prescribed manner

Predictable/
controllable
outputs

Social organisations, such as businesses and government departments, are by definition open
systems
...
The ways
in which the system and its sub-systems function constitute the organisation's processes and
relationships
...
The groundwork for the current emphasis on understanding
business processes was laid by Michael Porter in his value chain model
...
4 The business change lifecycle

The examining team has indicated that the lifecycle model should enable students to gain a greater
understanding of the business change concept
...


cc

Exam focus
point

The business change lifecycle provides a framework for assessing the key stages involved in undertaking
a business change project
...
To reflect this fact, the business change
lifecycle model has been included in the P3 syllabus
...
These will be explored later in the Study
Text
...
The model provides a step by step framework for
considering a proposed business change project
...
Each aspect of the framework is considered in turn throughout the next section
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Organisations have a variety of interchanges with the environment, obtaining inputs from it, and
generating outputs to it
...
com
Business change lifecycle
Alignment

Benefits
Management

Implementation

Definition

Design


...
4
...
com

The external environment

ter

A common theme in modern business concerns the need to constantly assess the external environment
...


ym
a

From time to time, businesses may be required to align (or re-align) their goals with the environment
...
In recent years, there have been a number of high
profile cases involving companies which have failed to react to external pressures and have gone out of
business as a result
...
Proposed action is often implemented through a business change project
...

UK supermarket sector

as

Competition in the UK supermarket sector is fierce
...
2 billion in 2012 and is forecast to rise to £196
...
Price wars and
innovation in retailing among the big four supermarkets (Tesco, Sainsbury's, Asda and Morrisons) are
common
...
com business in response to increasing customer demand for online
shopping
...
Tesco
...
Since this time, revenue has grown from £25m to £1
...


ea

Both Asda and Sainsbury's have followed suit in recent years, unveiling their own online shopping
websites
...
The Guardian highlighted that former Morrisons CEO, Sir Ken Morrison, who stepped down in
2008, was keen to shun 'new fangled fancies', in favour of 'keeping it simple: shops the same size selling
the same stuff so that costs were low and profit margins high'
...
In 2013, Morrisons announced worse
than expected like-for-like sales, the Yorkshire Post reporting a decline of 5
...


Part D Business process change  9: Business process change

join us on facebook @ fb
...
com
In response to these external pressures, Morrison's CEO, Dalton Philips, announced plans for the
company to offer its own online service
...
Customers will be able to purchase fresh bread from the
bakery and specify the thickness of the cuts of meat purchased from the supermarket's online butchery
...
tescoplc
...
com?' published on the Tesco website; http://dotcom
...
com


...
guardian
...
yorkshirepost
...
uk

ial

ter

It should, however, be noted that not all proposals for business change come directly from the external
environment
...
However, short-term change initiatives
implemented in a haphazard fashion can prove detrimental to the organisation's overall performance
...


ym
a

1
...
2 Definition
Forming the business case

tud

Once the need for change has been established, the practicalities of defining the improvement begin
...
This evaluation will often involve a 'gap analysis' where the project
team assess the organisation's current position and processes
...
The gap analysis should help to provide the project team with an idea
of the work required to implement a successful change
...
For example, a process
change upgrading a company's existing website is likely to result in a relatively basic change, whereas
changes of a more complex nature will require a fundamental rethinking of existing processes
...


cc

Gap analysis gives particular consideration to the organisation's core resources, including its people and
IT infrastructure
...


ea

Need for a holistic view

fre

Taking a holistic view of any proposed business change is particularly important in helping the project
team gain an understanding of how different activities and resources interact
...

For example, the decision to introduce a new corporate website is likely to require a focus on both the
human and technical elements
...
These could include:



Will customers want to use it?


286

Are those affected by the change likely to need training to use the website effectively?

Will it affect what our customers purchase from us?

9: Business process change  Part D Business process change

join us on facebook @ fb
...
com

Bottom-up change

To download more visit http://freeaccastudymaterial
...
co
m

On 10 January 2014, Morrisons launched its own online grocery store
...

Supporting infrastructure

ial

To download more visit http://freeaccastudymaterial
...
In May
2013, it was reported that Morrisons had agreed to pay £170m to buy Ocado's distribution centre in
Dordon
...
Interestingly, Ocado will provide the staff and vehicles as part of the arrangement while
operating under the Morrison's brand name
...


ter

Customers

Morrison's online offering let customers access its site through Facebook and allowed users to import
their favourite purchases from other shops
...
com offering with many thousands registering their interest'
...

Adapted from two articles:

1) 'Morrisons signs deal with Ocado to launch online service' by Graham Ruddick (May 2013) published
on The Telegraph website; www
...
co
...
morrisons-corporate
...
This sets out supporting
recommendations to help management decide the most appropriate change project to undertake
...


cc

Benefits of change

ea

The project team will set out the improvement objectives that the desired change will achieve
...


fre

Most organisations will appoint a benefit owner to assess whether the project delivers the anticipated
benefits
...
The role of the benefit owner is
explored in more detail later in the Study Text
...
com/freeaccastudymaterial

287

To download more visit http://freeaccastudymaterial
...
4
...
Some analysts argue that project teams focus too much on the
process and technological aspects of business change and ignore the impact change has on people and
the organisation
...
4
...
For example, a case study could illustrate a scenario
where elements of the model have been neglected, and candidates could then be asked to assess the
impact of this on the implementation of a change project
...
A useful framework to consider at this stage is the POPIT model, sometimes referred to as the
four view model
...


fre

ea

cc

In recent years, concern has started to grow among business analysts that too many business change
projects have failed to adequately consider the four perspectives of the POPIT model
...
The application of the
POPIT model forces project teams to take a far more holistic view of business change, identifying those
issues may hinder the project's success
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

The POPIT (four view model)

To download more visit http://freeaccastudymaterial
...

POPIT heading

Areas for consideration

Organisational context

Management support

Cross-functional working


...
As illustrated above in the case study, historically Sir
Ken Morrison was not an advocate of introducing online shopping
systems at Morrisons
...

In order for processes to work effectively, it is critical that departments
co-operate beyond functional boundaries
...


ial

Jobs and responsibilities

To download more visit http://freeaccastudymaterial
...

Functional departments such as the accounts and human resources
teams do not operate in isolation
...
Business change projects should ensure that all
staff affected have clear, well-defined job roles and associated
responsibilities
...

The level of IT support within an organisation should be assessed
...

Manual processes & system workarounds

tud

Existing processes which require physical documents and paperwork to
be passed around the organisation should be identified as part of the
design stage of process change, as there may be scope to eliminate
these
...
A significant proportion of the process design stage
may be designated to enhancing staff skill levels through the use of
training
...

Staff motivation
Most business change will only be successful if consideration is given to
staff morale
...


Part D Business process change  9: Business process change

join us on facebook @ fb
...
com
POPIT heading

Areas for consideration

Information Technology

Information systems
Business processes need to be configured so that they help facilitate the
flow of critical information
...
For
example, daily sales data
...
4
...
This is due to the
influence of certain stakeholder groups
...


ym
a

As highlighted earlier in the Study Text, the use of a force field analysis can prove particularly useful in
identifying those forces driving and restraining change
...

Communication

tud

The use of a communication plan which highlights the benefits of the change is likely to prove central to
overcoming resistance
...


Case Study

NHS National Programme for IT – Part One

cc

as

In 2002, the UK government unveiled an ambitious IT project to overhaul the National Health Service's
(NHS) IT infrastructure
...
It included an “electronic care record”, a process
intended to allow hospitals and surgeries to share patient's medical information'
...
7bn on it to date
...
The MPA report concluded 'there can be no
confidence that the programme has delivered or can be delivered as originally conceived'
...
The National Programme for IT had been dogged by the concerns of key stakeholders about
the project's aims
...
Doctors raised concerns over the accessibility of the system, and the British Medical Association
expressed unease over the increased risk to patient privacy amid concerns of losing patient data
...


290

9: Business process change  Part D Business process change

join us on facebook @ fb
...
com


...
Middle management will require information about key aspects
of performance which affect the ability of their department to achieve the
overarching strategy
...


To download more visit http://freeaccastudymaterial
...
dailymail
...
uk
2) 'Six reasons why the NHS National Programme for IT failed', by Alistair Maughan on the Computer
Weekly website; www
...
com


...
Longer-term incentives such as the redesigning existing performance appraisal schemes and introducing performance-related pay, may also
help to embed a new process
...
com

This may take the form of group or one-to-one sessions where training on how to use a new process is
provided
...

Systems

ter

As a significant number of modern business change projects involve the use of IT, the project team should
ensure that the technology undergoes sufficient systems testing
...


ym
a

Data migration is concerned with transferring existing data from one system to another
...


Case Study

NHS National Programme for IT – Part Two

tud

The Major Projects Authority, which reviewed the failings of the 'National Programme for IT', highlighted
that 'the project had not been delivered in line with the original intent, as targets on dates, functionality,
usage and levels of benefit had been delayed and reduced'
...
In essence, this involves an 'I've started, so I'll finish'
approach whereby project managers do not step back and review whether the project is on course to
achieve its intended objectives
...
dailymail
...
uk

ea

2) 'Six reasons why the NHS National Programme for IT failed', by Alistair Maughan published on the
Computer Weekly website; www
...
com

1
...
6 Realisation of the benefits of change

fre

The final stage in the lifecycle is designated to assessing whether the intended benefits of undertaking a
change process have been realised
...

Benefits can be assessed by benchmarking performance to the original business case while asking: 'Did
we achieve what we wanted to achieve?'

Part D Business process change  9: Business process change

join us on facebook @ fb
...
com
The adoption of key performance indicators and a balanced scorecard approach may help management
assess whether a particular area of business performance has been enhanced as a result of implementing
the change project
...
co
m

A business change project may result in financial and non-financial benefits
...

Often when assessing the financial benefits derived from a business change project, management will use
a range of techniques including ROI, pay back period calculations and NPV workings
...

Holistic approach

ial

ter

ym
a

A good benefits realisation review should identify which intended benefits have not materialised, as well as
those which have
...
In some cases, unanticipated benefits may
emerge which did not form part of the original business plan
...
A review of the project work undertaken
should be conducted at each stage of the change lifecycle to help ensure that the intended end benefits
will be achieved
...
5 Business process re-engineering

Business process re-engineering is a useful approach based on challenging basic assumptions about
business methods and even the objectives they are designed to achieve
...


as

Business process re-engineering involves fundamental changes in the way an organisation functions
...


cc

Why focus on processes?

(a)
(b)

It is unclear how value is achieved or can continue to be achieved
...

There is no basis to achieve consistent business improvement
...
To properly harness the resources within a business, a clear agreement of the
management and implementation of processes is needed
...


(f)

292

Knowledge is lost as people move around or out of the business
...


9: Business process change  Part D Business process change

join us on facebook @ fb
...
com

Organisations need to review the benefits realised to ensure that process change does not result in
undesired side effects
...
However, their
introduction has also resulted in increased instances of theft
...


To download more visit http://freeaccastudymaterial
...

Business process re-engineering is the fundamental rethinking and radical redesign of business
processes to achieve dramatic improvements in critical contemporary measures of performance, such as
cost, quality, service and speed
...

Fundamental and radical indicate that BPR assumes nothing: it starts by asking basic questions
such as, 'Why do we do what we do?', without making any assumptions or looking back to what
has always been done in the past
...


(c)

'Process' is explained in the following paragraphs
...
com


...
5
...
Automation is the use of computerised working methods to
speed up the performance of existing tasks
...
Rationalisation usually involves automation
...
The whole process should be market-driven
...
For example, a
company could set up a database of approved suppliers; this would allow personnel who actually
require supplies to order them themselves, perhaps using online technology, thereby eliminating
the need for a separate purchasing function
...
This
eliminates the differentiation between information gathering and information processing
...
This allows the
benefits of centralisation to be obtained, for example, economies of scale through central
negotiation of supply contracts, without losing the benefits of decentralisation, such as flexibility
and responsiveness
...
This would involve, for example, coordination between teams working on different aspects of a single process
...
The traditional
distinction between workers and managers can be abolished: decision aids such as expert systems
can be provided where they are required
...
Electronic distribution of information makes this
possible
...
5
...
BPR is driven by a business vision
which implies specific business objectives such as cost reduction, time reduction, output
quality improvement, Total Quality Management and empowerment
...
Most firms use the 'high impact' approach, which
focuses on the most important processes or those that conflict most with the business

Part D Business process change  9: Business process change

join us on facebook @ fb
...
com
vision
...

Understand and measure the existing processes – to ensure previous mistakes are not
repeated and to provide a baseline for future improvements
...
Awareness of IT capabilities could prove useful when designing
processes
...
The actual design should not be viewed
as the end of the BPR process − it should be viewed as a prototype, with successive
alterations
...



...
6 IT and BPR

IT is not the solution in itself, it is an enabler
...
'

ter

1
...
1 Problems with BPR

ym
a

There are concerns that BPR has become misunderstood
...

In addition to this perception about headcount, several other criticisms have been levelled at the way the
idea has been implemented:
Any successful BPR programme is likely to result in significant changes that will affect staff widely
...

It neglects the direct link to effectiveness originally envisaged and may, by reducing the number of
managers in an organisation, reduce innovation and creativity at the same time
...


(c)

While BPR practice generally seeks to empower workers, it assumes they will work within
structures and systems imposed by others
...


(d)

Established systems often have valuable but unrecognised features, particularly in the area of
control
...


cc

as

tud

(a)

FAST FORWARD

ea

1
...
The software
engineering approach improves on this and can substitute software for some human interventions
...
They were essentially systems for
the automation of document flows and were based on electronic copies of scanned original documents
...

Subsequently, enterprise resource planning (ERP) systems were developed to provide a menu of
communication and control links between software application packages
...
We discuss the adoption of
software packages later in this Study Text, but it is important to recognise the linkage between software
and business processes
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
For example, teleconferencing reduces the cost of travelling to meetings − a reengineering approach takes the view that teleconferencing allows more frequent meetings
...
com
Like the original workflow systems, ERP systems are essentially a form of automation of existing
processes and therefore qualitatively different from BPR, as discussed above
...
8 Software engineering


...
The software engineering approach emphasises system efficiency and consistency; there is also
a focus on refining business analysts' inputs into software development
...
9 The Rummler-Brache methodology
FAST FORWARD

The Rummler-Brache methodology sees processes as cross-functional wholes and considers them from
three structural levels and three design perspectives
...
com

In 1990, Rummler and Brache published Improving Performance: how to Manage the White Space on the
Organisation Chart
...
The authors suggested that organisational process change must be
considered at three different structural levels and at the same time from three separate perspectives: there
are thus nine areas of concern, all of which must be addressed satisfactorily if a programme of process
change is to be successful
...
For example, process goals and measures must not only relate accurately to both overall
organisational and detailed job goals and measures; they must also form part of a well-designed and
implemented process that is managed to operate efficiently
...
10 Quality improvement methods
There has been a series of quality improvement initiatives including Total Quality, Six Sigma and ISO
9000 certification
...
Statistical process control, total quality management and all the implications of the Toyota
system of manufacturing fall under this general heading, as do Six Sigma, which used a statistical
approach to measurement, and ISO 9000:2000
...
At the
same time, there has been significant cross-fertilisation between these various initiatives
...
11 The internet

FAST FORWARD

The influence of the internet has moved beyond unwieldy and expensive EDI, enabling extensive and cheap
communication
...
com/freeaccastudymaterial

295

To download more visit http://freeaccastudymaterial
...
It was rather unwieldy and expensive to operate and so was only used by
larger companies and their more important suppliers
...
Despite
the setback caused by the bursting of the dotcom bubble, the internet has had a major effect on business
processes
...


1
...
co
m

We will return to look at the internet and e-business more comprehensively later in this Study Text
...


ial

ter

At the same time, large scale manufacturing operations have become much more dispersed as work is
transferred to low-wage economies in order to control costs
...


FAST FORWARD

ym
a

1
...
Change management must be to a
high standard
...

Harmon makes several comments about the current state of the art business process change
...

Second, he remarks on the difficulty of installing new processes when the operational staff and managers
do not support the changes involved
...


cc

as

The role of IT specialists is a third concern
...
At the same time it is necessary for those
line managers to understand the difficulties and concerns of the IT specialists
...
13
...

Process re-engineering is a strategic level rethinking of core processes
...


fre





ea

FAST FORWARD

Harmon suggests a specific terminology for process change efforts that emphasises the scale of what is
contemplated
...


9: Business process change  Part D Business process change

join us on facebook @ fb
...
com

Extensive redesign of processes often takes place as a result of mergers and acquisitions
...
The
acquisition of foreign subsidiaries, in particular, usually leads to extensive work to integrate systems or to
redesign and replace them where they are incompatible
...
com
(b)

(c)

Process reengineering is used at the strategic level when major environmental threats or
opportunities mandate fundamental re-thinking of large scale, core processes that are critical to the
operation of the value chain
...


2 Harmon's process-strategy matrix


...


To download more visit http://freeaccastudymaterial
...
Harmon describes a tool intended to aid consideration of these options
by categorising the organisation's identified processes into four groups
...


ea

cc

as

tud

ym
a

ter

ial

The degree of process complexity and dynamics is plotted on the vertical axis; the horizontal axis shows
the degree of strategic importance of the process
...
The effect of this analysis is to create four
classes of processes, each of which is amenable to a particular improvement strategy
...
Students were
required to suggest how each process (payroll, legal advice and a website upgrade) should be sourced
and implemented
...


fre

Exam focus
point

Part D Business process change  9: Business process change

join us on facebook @ fb
...
com
Exam focus
point

Harmon's matrix could also be useful if the scenario describes an organisation which has a number of
processes but which is not performing as well as it should
...


Case Study

Make-It


...
Make-It holds a standardised set of materials for 85% of the items it makes
...


ial

Logistics
...
Make-It's managers feel that they are spending too much time and effort
on this area
...
These include payroll, invoicing, HR, and marketing
...


ym
a

New product design
...

The management at Make-It have carried out a process review, to decide whether any of the processes
should be redesigned
...


tud

Inventory management
...
Therefore it should be automated as far as possible to maximise efficiency
...


as

Manufacturing
...
The computer controlled production is
likely to be relatively simple, and so little change is likely to be required for this automated process
...
Therefore, Make-It's management should focus considerable effort on analysing and redesigning
this process
...
Logistics and product delivery is of lower strategic importance than manufacturing because it is
not part of the product itself
...
All the same, 'logistics' is not a core competence of Make-It's business, and so they should
consider outsourcing this process, buying in the expertise they need
...


fre

Support functions
...
Therefore,
Make-It should consider either outsourcing them or automating them
...

New product design
...
It will be important that
Make-It not only makes innovative use of technology, but also recruits the best designers possible given
the increasing demand for bespoke products
...


298

9: Business process change  Part D Business process change

join us on facebook @ fb
...
com

Manufacturing
...
The
only major exception to this rule is that Make-It has a 'hand-made' range of products where the finishing
is done by hand
...
com

3 A process redesign methodology


...
If you cannot recall exactly how Harmon's
methodology proceeds, you could base your answer on the business change lifecycle model
...

Harmon proposes a business process redesign methodology
...
13
...
That is to say, it seems appropriate for
'middle sized processes that require extensive improvement or change'
...
com

The methodology is over-complex for process improvement (an 'incremental technique … for developing
smaller, stable existing processes'): indeed, Harmon covers process improvement in an earlier part of his
book
...


3
...


(b)

Successful implementation depends on acceptance by staff and managers who will have to
operate the new process: the methodology emphasise the need for obtaining support at all
appropriate stages
...
2 The methodology in outline

tud

The methodology has five phases
...


Phase 2

Analysis
Current workflow is documented, problems identified and a general approach to a redesign
plan is established
...


Phase 4

Development
All functional implications are followed through, aspects are improved, including
management and information systems
...
This methodology has much in common with the
business change lifecycle and project management techniques dealt with later in this Study Text
...


Phase 5

Transition
The redesigned process is implemented; modifications are undertaken as required
...
3 Initiating a redesign
Major process redesign can be very expensive in terms of managers' and specialists' time and it is,
therefore, likely that redesign projects will only be undertaken when called for by managers at the
strategic apex
...
He also suggests that there may
be a process architecture committee responsible for the organisation's responses to perceived threats
and opportunities; this committee takes specific responsibility for the effectiveness of business processes
Part D Business process change  9: Business process change

join us on facebook @ fb
...
com
overall
...

Harmon recommends that the organisation be structured around its systems and processes, rather than
functionally
...
More traditionally
structured organisations will have to appoint a project sponsor
...


ial

A project facilitator must be appointed to act as project manager
...
In any case, it is important that the facilitator remains neutral
and is not committed to any functional or departmental group
...
4 Planning

ter

The facilitator and the redesign team need a project charter or overall plan to define the scope of their
work; this should include an account of how the process they design supports the organisation's overall
strategy and goals and how it relates to other processes and stakeholders
...
If this has not been done, it will be for the project
sponsor, facilitator and the steering committee, once appointed, to develop this plan themselves
...


tud

The planning phase ends with the agreement of a detailed project plan, including time and cost budgets,
at the executive committee level
...
This will state the project's assumptions, goals, constraints,
scope and success measures
...
It is particularly important that resource and systems constraints are considered in
detail
...


as

3
...

Some organisations may already have full analysis documentation
...

It may be decided to omit this phase if radical change is envisaged
...
This involves the use of process flow diagrams and organisation charts
...
Known problems with the system are
noted, as are descriptions of past attempts to improve them
...
In particular, performance measures and incentives should be
examined
...
A coherent and robust redesign plan may then be created and presented to higher
management
...


300

9: Business process change  Part D Business process change

join us on facebook @ fb
...
com


...
This body has high level representation of all the
departments involved in the process
...
The first is to be responsible for
approving the work of the redesign team
...


To download more visit http://freeaccastudymaterial
...
6 Designing the new process
Design of the new process itself is only part of this phase: there are other important aspects
...

Rationalisation of reporting responsibilities may be possible and desirable
...

Where very complex processes are concerned, it may be appropriate to run simulations and
prepare cost estimates on two or more possible new designs
...

The new design must be fully documented
...
co
m

(a)

The final essential output from this phase is, once again, approval from senior management
...


ial

To download more visit http://freeaccastudymaterial
...
7 Development

ter

This phase of the process follows the design through into all of its functional and resource implications
...
The project sponsor has the role of coordinating the provision of the resources needed
...
The
new process is more likely to be effective if it, and the staff and resources committed to it, are managed by
a process manager rather than by a group of separate functional managers
...

The development phase ends when all the new arrangements have been tested and found satisfactory and
the new process is ready for installation
...
8 Transition

as

tud

The success of the transition phase depends on successful change management: it can be harmed or
even prevented by opposition or passive resistance
...
This may lead to revisions to the process
...


4 Process commoditisation and outsourcing 6/11, 6/10
Outsourcing enables organisations to benefit from their suppliers' scale economies
...
It would be worth taking the time to study this article
...


fre

Exam focus
point

ea

The establishment of standards for processes will make them easier to outsource
...


Generally speaking, outsourcing is appropriate for peripheral activities: to attempt to outsource core
competences could lead to the collapse of the whole organisation
...
Certainly, the motor manufacturing
industry seems to be moving in this direction
...
com/freeaccastudymaterial

301

To download more visit http://freeaccastudymaterial
...


Case Study

The London Fire Brigade


...

The deal will see Capita run the call centre on behalf of the brigade and also supply the new 999 control
system
...


ial

Other fire brigades in the UK, also under pressure to make savings, are said to be monitoring the LFB
initiative to consider whether a similar approach could be taken in their areas
...

Adapted from an article:

ym
a

'London fire brigade to outsource 999 control centre' (March 2012) published on
The Guardian website; www
...
com

Getting the best out of outsourcing depends on successful relationship management, rather than
through the use of formal control systems
...

It can save on costs by making use of a suppliers' economies of scale
It can increase effectiveness where the supplier deploys higher levels of expertise
It can lead to loss of control, particularly over quality
It means giving up an area of threshold competence that may be difficult to reacquire

cc






ea

FAST FORWARD

The ability to specify with precision what is to be supplied: this involves both educating suppliers
about the strategic significance of their role and motivating them to high standards of performance
...


as

(a)

tud

Successful outsourcing depends on three things
...

However, research carried out by totaljobs
...
More than 100 senior managers from local and central
government were involved in the research and over one third of those consulted admitted a lack of skills
was the key reason for cancelling outsourcing contracts in 2011
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


To download more visit http://freeaccastudymaterial
...
It suggests this is addressed via the establishment of a centralised panel to help
spread best practice in looking beyond top-line costs and higlighting the benefits that might accrue from
delivering services in different ways
...
co
m

As the report highlights, blurring the distinction between the public and private sectors requires a new
approach to exchanging knowledge and developing skills
...
The public sector is crying out for new ideas with two-fifths of public
sector decision-makers keen to improve their own in-house consultancy skills
...
A one-size-fits-all approach is no longer the
answer
...
Establishing an advisory
group to bring such ideas together is the best path to securing a strongly performing public service
outsourcing for the future
...
com

Adapted from an article:

ial

'Outsourcing requires the right in-house skills' by Mike Booker (March 2012) published on

ter

The Guardian website; www
...
com




ym
a

Outsourcing of non-core activities is widely acknowledged as having the potential to achieve important
cost savings
...
Cost should be fairly clear, but the
quality of what is purchased is extremely difficult to assess in advance
...

A key problem has been a lack of process standards
...


cc

as

The success of the CMM in improving software development processes appears to have prompted other
business domains to adopt a similar model (the CMMI model)
...
These standards will also make it easier to compare service providers and
evaluate the costs versus benefits of outsourcing
...


fre



The level of outsourcing will increase
Prices of outsourced processes will fall, as the market matures and the number of providers
increases
The quality of process performance will improve, because companies will only focus on processes
that are truly core to their organisation
The flow of jobs offshore will accelerate
The basis of competition will change, because, as processes become standardised, they will no
longer act as a basis of competitive advantage

ea







Process standardisation may also mean it is possible for companies to combine certain processes with
competition
...
com/freeaccastudymaterial

303

To download more visit http://freeaccastudymaterial
...
So process standards could actually lead to
more collaboration among competitors
...
1 Advantages and disadvantages of outsourcing
Although we have suggested (above) that process standardisation will increase the level of business
process outsourcing, ultimately organisations will only choose to outsource if they are convinced of the
advantages of doing so
...
co
m

Advantages
(2)

Can increase effectiveness where the supplier deploys higher levels of expertise (eg in software
development)
Allows the organisation to focus on its own core activities/competencies
Can deliver benefits and change more quickly than business process reorganisation in-house
Service level agreements mean that the company knows the level of service they can expect
Cost control
...
If
more than one supplier has to be used for a single process then the economies of scale are likely to
be reduced
Firms may be unwilling to outsource whole processes due to the significance of those processes
or the confidentiality of certain aspects of them
...
) Again, if processes are fragmented in this
way, the economies of scale may be reduced
Outsourcing can lead to loss of control, particularly in relation to quality issues
...
The firm which is outsourcing activities now has to develop
competences in relationship management (with the outsourced suppliers) in place of its
competences in the processes it has outsourced
Firms may be tied to inflexible, long term contracts
If there are specialist skills involved in the work, it may be difficult to switch to a new supplier if
there are problems, or at the end of a contract period
...
If they lose the competence, they will become dependent on suppliers; again, giving the
supplier significant bargaining power

as

(1)

ea

When evaluating whether or not a process should be outsourced, take care to apply your answer directly
to the scenario, rather than simply churning out the list of pros and cons above
...
Many candidates failed to use the information in the scenario, falling back on
lists such as the above and therefore missed many of the marks available
...
The advantages it delivers will largely be seen in
the short term, but the disadvantages could affect an organisation in the longer term
...


304

9: Business process change  Part D Business process change

join us on facebook @ fb
...
com

(1)

To download more visit http://freeaccastudymaterial
...




The business change lifecycle provides a framework for assessing the key stages involved in
undertaking a business change project
...
Some analysts argue that project teams focus too much on the
process and technological aspects of business change and ignore the impact that change has on people
and the organisation
...
IT can be very useful here, but
simply to automate a process is not the same as re-engineering it
...
The software
engineering approach improves on this and can substitute software for some human interventions
...




There has been a series of quality improvement initiatives including Total Quality, Six Sigma and ISO
9000 certification
...




Business considerations and the dispersal of manufacturing bring new demands for the software
integration and operations control and co-ordination
...
Change management must be to a
high standard
...




Harmon suggests three terms:

Process improvement is a tactical, incremental technique
...

Process redesign is for intermediate scale processes that need significant change
...
com


...




Harmon proposes a methodology for process redesign
...
It has five phases: planning, analysis,
redesign, development and transition
...


cc

as



There are also practical considerations relating to outsourcing
...

It can increase effectiveness where the supplier deploys higher levels of expertise
...

It means giving up an area of threshold competence that may be difficult to reacquire
...
Some processes may
thus be commoditised
...
com/freeaccastudymaterial

305

To download more visit http://freeaccastudymaterial
...


2

What are the structural levels specified in the Rummler-Brache methodology?

3

What are the perspectives specified in the Rummler-Brache methodology?

4

Arrange Harmon's three specified approaches to process change in ascending order of scale
...


ial
ter
ym
a
tud
as
cc
ea
fre
306

9: Business process change  Part D Business process change

join us on facebook @ fb
...
com


...
com

Answers to Quick Quiz
BPR is the fundamental rethinking and radical redesign of business processes to achieve dramatic
improvements in performance

2

The organisation as a whole; the process; the job or performance level

3

Goals and measures; design and implementation; management

4

Process improvement, process redesign, process re-engineering

5

Process complexity and dynamics; and strategic significance

6

Such processes are difficult to automate: they should be outsourced

7

Planning, analysis, redesign, development, transition

8

Possible answers:

Reduce costs by making use of specialist providers' economies of scale
Increase effectiveness where outsourced supplier has specialist expertise
Focus on core competencies
Can deliver benefits and changes more quickly
Certainty over service levels
Improved control over costs

Now try the question below from the Practice Question Bank

Q10

Preparation

Marks

Time

n/a

15 mins

ym
a

Level

fre

ea

cc

as

tud

Number

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m

1

Part D Business process change  9: Business process change

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Topic list

Syllabus reference

1 Managing and measuring processes

D3(a)

D3(b)-(e)

ym
a

2 Process redesign patterns
3 Standard software packages

D4(b), (d)

4 Establishing software requirements

D4(a)

5 Choosing research techniques

D4(a)

6 Assessing software packages

D4(c)

D4(c)

tud

7 Selecting software packages

as

Introduction

fre

ea

cc

Having established a framework for the consideration of process change, we
may now proceed further into the practical detail of how to go about it
...


309

join us on facebook @ fb
...
com

Study guide
Intellectual level
Improving the processes of the organisation

(a)

Evaluate the effectiveness of current organisational processes

3

(b)

Describe a range of process redesign patterns

2

(c)

Establish possible redesign options for improving current processes of an
organisation

2

(d)

Assess the feasibility of possible redesign options

3

(e)

Assess the relationship between process redesign and strategy

D4

Software solutions

(a)

Establish information system requirements required by business users

2

(b)

Assess the advantages and disadvantages of using a generic software
solution to fulfil those requirements

2

(c)

Establish a process for evaluating, selecting and implementing a generic
software solution

2

(d)

Explore the relationship between generic software solutions and business
process redesign

ial

ter

2

ym
a

Exam guide

3

The examining team is known to be interested in software approaches to process change, so we
confidently await regular demonstrations of this interest in the form of questions that address the material
in this chapter
...
Nonetheless, no specific models will be explicitly
required in a question on process improvement
...
This means that the hierarchy
of management objectives and performance measures will be similarly structured
...


cc

FAST FORWARD

as

1 Managing and measuring processes

ea

As we noted earlier, Harmon recommends a management structure based on processes rather than
functions, since it is the efficiency of the organisation's processes that determine its success
...


fre

This approach implies that the hierarchy of objectives should also be structured on process lines, as
should the organisation's measures of performance (we mentioned this approach early in Chapter 1)
...
The roles of managers at all levels are thus built
around process performance: they plan, set targets, provide training, measure performance and take
control action in terms of the processes for which they are responsible
...


310

10: Improving processes  Part D Business process change

join us on facebook @ fb
...
com


...
com
Harmon says:
“If an organisation establishes process measures that extend from the process to the activity, and
if managers continuously check these measures and take actions when there are deviations, then
process improvement becomes part of every manager's job
...
” (Emphasis added by BPP)
...
co
m

This has a vital implication for process improvement: any changes made at a lower level must be followed
through into the detail of management responsibility at higher levels
...
The supervisor's manager needs
to know about these changes in the supervisor's role and so on, up the hierarchy
...

Simplification eliminates redundant process elements
...

Gaps and disconnects target problems at departmental boundaries
...


The feasibility of any proposed redesign must be considered
...
1 Re-engineering

tud

We introduced BPR in the previous chapter, using these words: 'business process re-engineering is the
fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in
critical contemporary measures of performance, such as cost, quality, service and speed
...
The aim is to achieve major
efficiency improvements
...
Re-engineering can achieve very large-scale improvements, but it is
inevitably highly disruptive and has a high risk of dramatic failure
...
2 Simplification

Simplification is a far less radical pattern of redesign
...
This assumption
is probably most valid in relation to large-scale processes that cut across departmental or functional
boundaries and it is, therefore, in such instances that simplification is most likely to be fruitful approach
...


ea

FAST FORWARD

A process redesign pattern is a general approach to redesigning processes for their improvement
...
Each element is then subject to
challenge: it may not actually be necessary; it may provide information that is available elsewhere; it may
be a bottleneck; it may repeat something done in another place
...
This pattern is
likely to produce improvements, though their scale can vary widely, from the relatively minor to the
impressive
...
com

In the previous chapter, we considered a proposed general approach to the project management of the
activities involved with the redesign of a process
...
Harmon calls these techniques redesign
patterns
...
com/freeaccastudymaterial

311

To download more visit http://freeaccastudymaterial
...
An
element of redesign may be required in addition to simple cuts: for example, it may be possible to achieve
a net saving by designing a single process to replace two existing ones
...
3 Value-added analysis





The customer is willing to pay for the output
The process changes the output in some way
The process is performed correctly at the first attempt

Preparation and set-up activities
Control and inspection activities
Movement of a product
Activities that result from delay or failure of any kind

ter






ym
a

There is a third category: value-enabling activities
...
If you think about this for a moment, you will see that, just as with the simplification approach,
judgement is required here: an obvious instance lies in the area of preparation and set-up
...


Case Study

Toyota

as

tud

When Toyota restarted production cars in the late 1940s, the prevailing western technology for producing
body panels was based on extremely careful set-up of presses and very long production runs
...
The problem was the alignment of the press dies
...
In these circumstances,
very long production runs were required to make the whole process economic
...


ea

cc

Toyota was not able to use this system: it had only a few presses and could only sell a few thousand cars
each year
...
This made it possible for ordinary production
workers to change dies in a tiny fraction of the time previously thought necessary
...


fre

How does this example help us? It is clear that Ohno's system of changing dies is an essential, minimal,
value-enabling preliminary to the value activity of pressing body panels; the traditional way is extremely
expensive and, with its natural consequences of over-stocking and high wastage, adds little if any value
...

The Toyota example illustrates another aspect of the importance of processes and process redesign
...
The standard process was created in the context of the

312

10: Improving processes  Part D Business process change

join us on facebook @ fb
...
com

Four categories of activity are defined as non-value-adding
...



...
Value-added analysis
approaches processes from the point of view of the customer
...


To download more visit http://freeaccastudymaterial
...
Toyota could not
pursue this strategy: it was forced to minimise costs and maximise its utilisation of its resources
...



...
Each
element is then categorised according to the criteria discussed above
...
When all of the clearly value-adding and value-enabling
activities have been identified, the remainder may be examined in detail
...

It may be possible to minimise control and inspection activities by processes of empowerment
...
Workflow systems eliminate transit time for documents by scanning all
documents to produce electronic copies which are transferred at the click of a mouse
...
Again, empowerment may offer some potential
for making improvements
...


ter

(c)

ial

(b)

To download more visit http://freeaccastudymaterial
...
4 Gaps and disconnects

ym
a

This improvement pattern is capable of producing results on a scale similar to that achieved by the
simplification approach; that is to say, varying between extensive and fairly small
...
In this book, the authors suggest that a major
problem with many processes is likely to be failures of communication between business departments and
functions
...

This approach commences in the usual way, with identification and modelling of the selected process,
but its focus is on occasions when information or materials pass from one department or function to
another, since this is where gaps and disconnects are to be found
...
These are
fairly evenly divided between the three levels we mentioned when discussing the book in the previous
chapter
...
At the organisational level, they are entirely concerned with the design of processes and the
monitoring and control of process outcomes
...


2
...
Given sufficient resources,
most proposals that lie outside the realms of fantasy can be implemented, but not all are worth
undertaking
...
The assessment of
feasibility can be broken down into a number of areas
...
com/freeaccastudymaterial

313

To download more visit http://freeaccastudymaterial
...
5
...

(a)
(b)
(c)

Does all the necessary technology exist or is significant innovation required?
Is the technology mature enough to use or is further development likely to be required?
How specialised is the required technology and is the expertise to make use of it available?

2
...
2 Social feasibility

ial

Any change is likely to have effects upon people, both those in the organisation concerned and those
outside it
...
There are
obvious human resource management implications to most projects, in the area of forming, leading and
motivating the project team
...


ter

2
...
3 Environmental concerns

2
...
4 Financial feasibility

ym
a

Consideration of a project in environmental terms is usually not so much about feasibility as about
acceptability
...


tud

It is appropriate to submit proposed changes to cost-benefit analysis, though this can be very difficult
when the benefits are largely in intangible form
...
Dealing with intangible or qualitative benefits is likely to be
particularly important in the public and voluntary sectors, where objectives such as improved road safety
or education are common
...


2
...
It is much more likely to be a scenario describing the current processes and asking you
to suggest potential improvements, as was the case in the June 2011 paper in which candidates were
required to identify a range of re-design options that an examining body could consider for improving its
question handling process
...


cc

as

Exam focus
point

6/10, 6/09

Note that process redesign is also linked to issues of project management, and possibly IT, which also
feature in the middle layer of the relational model of syllabus capabilities for P3
...
The case study that
follows illustrates the application of the process redesign patterns
...
Imagine that one of the items Make-It makes is a
wooden chair, with a cushioned seat
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Technical feasibility also includes technical matters that do not relate to technology; that is to say,
matters of technical expertise, such as marketing, financial strategy and human resource management
...


To download more visit http://freeaccastudymaterial
...
It starts with requisitioning materials from
inventory, and then preparing them
...

We can show the construction process as a process diagram:
Wood to carpenter
Fabric to upholsterer

Get raw materials

Carpenter

Reject

Receive raw materials

Receive raw materials

Upholsterer

Accept

Inspect

Make chair frame

Accept

Inspect

Make seat

Send to upholsterer

Receive chair frame

Reject

Quality inspector

Assemble chair

Polish and finish


...
For example:

ial

Are there any elements of duplication or redundancy?
Are there any gaps or disconnects?
Are there any activities which do not add value?

To download more visit http://freeaccastudymaterial
...
Therefore, there is no duplication as a result of
having both a carpenter and an upholsterer involved in the process
...
If the storeroom manager inspected
the materials before giving them to the carpenter and the upholsterer, then they could concentrate on their
core activities of using the materials to make a chair
...
If the upholsterer makes the
seat cushion before receiving the chair frame from the carpenter, there is a risk that the size may not be
right
...
Therefore, there is potentially a disconnection
between the two processes, and we suggest this could be resolved by the upholsterer waiting until the
carpenter has finished the chair frame before making the seat cushion
...
The
customer will only want to pay for the chair if it is well-built, and the quality inspection ensures this
...


Business process diagrams provide a useful way of summarising the activities in a business process, and
in this way can also identify potential areas of improvement in the process
...


Part D Business process change 10: Improving processes

join us on facebook @ fb
...
com

3 Standard software packages
FAST FORWARD

6/11

ERP systems are based on limited, standardised modules
...
However, the
alternative, adapting a standard package to local requirements, destroys the advantages of purchasing the
standard package and introduces further complications
...


ym
a

3
...
The result of this
process was the widespread acquisition of standardised software packages by large companies from the
1990s onward
...
By extension from the MRP acronym,
these integrated systems became known as enterprise resource planning (ERP) systems
...
They are, however, based on standardised modules and are not
necessarily optimised for any given commercial application
...
The best that can
be said is that an ERP system should provide an effective way of doing things
...
There is a debate between
those who think that packages represent best practice (eg Davenport) and those (like Harmon) who see
them as merely average practice
...


cc

as

Exam focus
point

tud

The standardised, one size fits all nature of ERP software also means that attempting to improve business
processes by installing it reverses the normal method
...
Rather than analysing what happens currently and then developing an improved system, ERP
forces the organisation to adjust itself to the requirements of the software
...
This is generally a mistake
...
This destroys the advantages
of purchasing a standard package and adds its own disadvantages
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

The use of computers to automate business processes began over half a century ago in the UK
...
The result was the LEO 1 computer: LEO stands for
Lyons Electronic Office
...
The LEO system was the archetypal
tailored, or bespoke, IS; not only was the software created specifically for the company's purposes, the
hardware was too
...
com
Generally, it is cheaper and more effective to redesign the organisation's processes to fit a standard
package than to do the opposite
...
2 Advantages of software packages over in-house development

(c)
(d)
(e)

Property rights over the software usually reside with the supplier
...

(i)
(ii)
(iii)

The supplier controls future development of the software
...

The supplier may sell the product rights to another supplier, perhaps to the prejudice of the
customer
...
3 Disadvantages of software packages

The financial stability and survival of the supplier is not guaranteed
...


(d)

Inadequate performance is quite likely: the customer may have to accept restricted functionality or
pay for tailored amendments, with the accompanying disadvantages already discussed
...


(e)

Legal redress for lack of functionality will almost certainly not be available
...
Potential purchasers evaluate a
package against their current requirements
...
In either case, the package fails to provide full
satisfaction
...
The examining
team stressed that too many students provided answers which were too long and simply provided general
disadvantages of using off-the-shelf software packages, rather than bespoke solutions
...


fre

Exam focus
point

To download more visit http://freeaccastudymaterial
...
co
m

(b)

Cost savings should be available because the vendor can spread the cost of systems development
over a large number of installations
...

Quality should be guaranteed both by the vendor and, except for launch customers, by earlier
installation by other customers
...

Maintenance support should be good and would normally include help desk service and routine
software amendments to correct faults as they become apparent
...
This might include use for a trial period
and visits to existing installations
...
com/freeaccastudymaterial

317

To download more visit http://freeaccastudymaterial
...
There are seven techniques:









Interviews
Questionnaires
Written questions
Observation

Protocol analysis
Workshops
Prototyping


...

When an organisation contemplates the acquisition or development of a new IS, whether a component or
a complete system, the first stage of the project is the collection of information so that system
requirements may be firmly established
...
Also, it may be necessary to
revisit work that has already been done in order to extend or confirm the data
...


ym
a

4
...
Interviews are used to collect information and promote understanding of a range
of topics
...

It is important not to rush to conclusions at this early stage
...


(b)

Projects to introduce new systems can be unsettling for staff since they often lead to job losses
and other unwelcome changes
...


(c)

Interviewers should make comprehensive notes during interviews and write them up promptly
...
This allows for the establishment of
an overview that is gradually supplemented with more detailed information
...
This enhances interviewee
confidence, ensures that current documents are available and allows for the initial observation of
working conditions and practices
...
The agenda should be sent to the interviewee in sufficient time to allow
for suitable preparation
...
A rambling conversation is unlikely to
produce the required information
...


10: Improving processes  Part D Business process change

join us on facebook @ fb
...
com

It is important that analysts have adequate face-to-face communication skills, since much of their work
will involve close contact with the staff whose work they investigate
...
An important
aspect of this process is initial research undertaken in order to become familiar with the basics of the
business systems in use
...
com
(h)

During the context phase, interviewees describe their current roles and tasks
...


(iii)

Finally, a wish list of requirements for the new system can be considered
...


(iii)

(v)

(vi)

To download more visit http://freeaccastudymaterial
...
co
m

(ii)

Closed questions use words such as 'when', 'who' and 'how many' and require short,
simple, positive answers
...

Open questions invite discursive answers and use words such as 'tell me about'
...
They are also useful for encouraging interviewees who are reluctant to speak
...

Probing questions are used to obtain more details about an earlier answer
...

Verification questions are a kind of probing question: they ask for specific confirmation of
the interviewer's impression on a topic and use such phrases as, 'Would it be correct to say
that …'
...


ial

(i)

ter

(i)

Further detail of procedures, documents and records is then elicited
...
2 Questionnaires

Questionnaires do not permit the use of question types other than closed, nor do they permit the
interpretation of body language
...
Also, they are not affected by distortions and errors introduced by the interviewer
...


(d)
(e)

tud

(b)
(c)

The questionnaire should be as short as possible and the questions should be both concise and
precise
...

Leading questions, which are those that suggest a particular response, must not be used
...

The method of response, such as box ticking or number circling, must be made clear
...
This
trial should include an analysis of responses
...
3 Written questions

ea

Written questions may be used when a person is not available for interview, or as a supplement to an
earlier interview
...


fre

4
...
It can be carried out informally, such as when visiting the workplace for
other purposes, or formally, in which case the prior agreement of managers and staff is required
...
com/freeaccastudymaterial

319

To download more visit http://freeaccastudymaterial
...


4
...
6 Document analysis

ial

Document analysis is very important, since all formal transactions are likely to be recorded on a document
of some kind
...
The documents
themselves must be assessed for usability and relevance to current procedure and analysed to establish
the size and format of the data fields they contain
...

This will include such matters as volumes and frequencies of use, the purpose of each, where the data
comes from, who is responsible for completing it, where, how and for how long it is filed and so on
...
7 Workshops

ym
a

Workshops are particularly useful when there are too many stakeholders to interview individually; when
project scope is unclear, as may be the case with new systems; and when there is disagreement about
system requirements
...
Workshops also allow for creative interaction and can achieve more than other
methods
...
This stage may be followed by workshops for users to deal with more
detailed matters
...
8 Prototyping

tud

Ideally, workshops will take place off-site in order to avoid disruption
...
Users can then comment
...
Another approach is to demonstrate an existing package that
offers some of the required functionality, though it must be made clear that this is not being proposed as a
solution
...
9 Investigations when computers are already in use
The techniques discussed above may need some modification or change of emphasis when computers are
already in use
...

Observation is likely to be screen and keyboard based and will require attention to seating for
observer and operator
...
Storage will probably be in database form
and investigation will require interviews with technical staff
...
Skidmore and Eva provide an assessment based on six specific
problems that may occur
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Protocol analysis starts with a person performing a task and describing what is happening
...
It also ensures that nothing is taken for granted by the person providing the information, since the
demonstration includes all aspects of what has to be done
...
com
(a)

Staff may be averse to change and find it difficult to contribute ideas about future requirements
and possible developments
...


(b)

Staff may be vague in their responses
...

Much knowledge is tacit and is difficult to elicit in words
...

The analyst may be inexperienced in the work context under investigation and misunderstand or
misinterpret raw information
...
co
m

(d)

Using these criteria, we may analyse the techniques discussed as good (G), very good (VG), or not good
(NG) as shown in the table below
...
Not all high-level categories will receive the same weighting
...


cc

Functional requirements
Non-functional requirements
Technical requirements
Design requirements
Supplier stability requirements
Supplier citizenship requirements
Initial implementation requirements
Operability requirements
Cost constraints
Time constraints

ea












as

Skidmore and Eva suggest that software packages may be assessed against ten high-level categories of
requirement
...
com

Change
aversion

These high-level categories will not all be equally significant and it is an important early task to allocate
relative weights to them, according to their individual importance to the customer
...
A convenient way to represent this is
with a score out of a total of 100
...


Part D Business process change 10: Improving processes

join us on facebook @ fb
...
com
Each high-level requirement is essentially a category of more detailed requirements, each of which must
be specified very carefully and given its own weighting: these weightings will also be used in the detailed
evaluation of packages
...
Imperatives are non-negotiable,
absolute requirements that candidate packages must satisfy
...
Imperatives are likely to arise in technical, supplier and cost requirements
...
co
m

6
...
These requirements are established using the investigative techniques already discussed
...
Both current and anticipated future requirements must
be considered
...
Their point of distinction is that they do not
relate directly to business functionality
...

Non-functional requirements are also established using the investigative techniques already discussed
...
3 Technical requirements

6
...
Some technical requirements might well be imperatives
...
Problems of
compatibility can limit future development, but the Open Applications Group of suppliers work to
open architecture standards that allow their products to be linked to one another without difficulty
...

A high degree of configurability will allow a package to be tailored to user requirements without
expensive code modifications
...


as

(a)

tud

Flexibility is an important feature for a package, since current requirements may develop into rather
different ones in the future
...
5 Supplier stability requirements

fre

Purchasers will need support throughout the future, so they will be concerned that their chosen supplier is
financially stable and unlikely to go out of business
...
A wide range of factors and considerations will
influence a decision here:
(a)

(b)

322

Size and location may be important: a small local supplier, or at least one with a local office, may
provide a more personal service; a much larger one may have more experience and be more stable
...
Similar considerations may apply to the supplier's legal status,
ownership and structure
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
2 Non-functional requirements

To download more visit http://freeaccastudymaterial
...


(d)

(f)

Accreditation as a provider of certain hardware and software products may be required, as may
wider industry accreditations
...

The use of automated software tools may be an indicator of the supplier's technical maturity
...


(h)

Dispute resolution should be the subject of a robust and equitable procedure
...


(e)


...
6 Supplier citizenship requirements

ial

Diversity
Health and safety
Trade unions
Charities and donations
Sustainability and the environment

ter







To download more visit http://freeaccastudymaterial
...
Purchasers might wish to take account of policy and practice on a range of issues
...
7 Initial implementation requirements

It is vital that the installation stage of a new package is carried out successfully
...

Typical weighting for initial implementation requirements overall: 10

tud

6
...
1 Data migration and file creation

as

The creation of new files and possibly the conversion of old ones will be required
...
Before a new application can start
processing, the basic file structures must therefore be created
...


cc

Data migration involves the conversion of existing data, whether manual or computerised, into data for
use by the new system
...

When converting existing data there is a risk of error so conversion programs will have to be written and
tested
...
It may not be possible to migrate all the existing data to the new system so some may have
to be manually entered into the new system
...
For example, where figures are manually keyed in, there is an
increased risk of transposition errors which would reduce the quality of the input data
...


Part D Business process change 10: Improving processes

join us on facebook @ fb
...
com
6
...
2 Software installation
Installation might be required of the supplier; this might include initial loading, testing and
troubleshooting
...


6
...
3 System implementation

ial

Nonetheless, parallel running highlights the importance of testing the solution
...


ter

As an alternative to either direct changeover or parallel running, an organisation may opt for a phased
approach
...
The new system is installed on a branch by branch, or location by location, basis
...

Restricted data running
...
Again, the benefit of this approach is that it limits the impact any errors could have on the
overall data quality
...
7
...


Training in the new system will be required: its nature, content, cost and location must all be considered
...
8 Operability requirements
Implementation requirements continue beyond the initial phase and into the productive life of the system
...

Upgrade policy includes such matters as cost, frequency, documentation and method of
distribution
...
The
source code should be lodged in escrow
...


ea

(a)

(d)

Typical weighting for operability requirements overall: 2

324

10: Improving processes  Part D Business process change

join us on facebook @ fb
...
com


...
It may be achieved by simply changing
from the old to the new at a given point in time, such as the start of work on a particular day (direct
changeover), or there may be a period of parallel running
...
Parallel running requires extra staff,
which the vendor may be able to supply
...
An upper time limit for parallel
running should be set though, because although parallel running is a low risk approach compared to a
direct changeover, it is costly to operate because it uses double resources
...
com

6
...
However,
it may also be appropriate to consider time and cost trade-offs against other issues in the overall
requirement
...
co
m

7 Selecting software packages

Skidmore and Eva suggest that once the evaluation requirements have been set, the process of selecting a
package may be thought of as falling into five phases:

ial

ter

Question 3 in June 2014 focused on a construction company which had purchased a new CRM software
package
...
The first requirement for 15 marks asked candidates to suggest a process for evaluating,
selecting and implementing software packages and to explain how this process would have prevented the
problems experienced by the company
...
Too many answers identified a problem in the scenario and then suggested
how this might have been avoided
...


tud

7
...
One way to do this is to advertise the general system requirement
in the trade press and ask for responses from suppliers
...
Some less appropriate suppliers may be weeded out by making a small
charge for the issue of the ITT
...

In either case, the aim should be to identify a reasonable number of potential suppliers for further

ea

consideration
...


7
...
The ITT is
a fairly complex document and will include a number of sections
...


fre

Exam focus
point

Obtaining tenders
First pass selection
Second pass selection
Implementation
The long-term relationship

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

325

To download more visit http://freeaccastudymaterial
...
co
m

The response format may be specified, especially if it is intended to make comparisons using
standardised numerical scores

ial

The ITT is likely to be accompanied by a request for detailed information about the tendering organisation,
including such items as legal, financial, employment and trading status and policies
...
3 First pass selection

ym
a

The object of the first pass selection is to produce a short list of, say, three candidate tenders that can be
subjected to further evaluation
...
This must be assessed against each component of those ten
categories
...


7
...
1 Functional and non-functional requirements

tud

Functional and non-functional requirements are considered separately but using the same quantitative
method
...
The rating is carried out by estimating the effort required to modify the package to fit the
various components of each high-level requirement
...

Score

No modification required

3

Up to one day's work required

2

Two to five days' work required

1

Six to ten days' work required

0

More than ten days' work required

cc

as

4

ea

The suppliers' scores are multiplied by the requirement ratings and the results summed up to provide a
total assessment for each of the two high-level requirements
...
3
...

Assessment will be based on the tenders or on supplementary information obtained from suppliers
...


7
...
3 Supplier and implementation requirements
There are four high-level requirements in this group: supplier stability and citizenship; and initial
implementation and operability
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
require subjective assessment in a facilitated workshop attended by suitable members of staff
...


7
...
4 Cost
If all the tenders satisfy the cost imperative, they may be graded relative to the cheapest
...



...
4 Second pass selection
There are two elements to the second pass selection
...


ial

To download more visit http://freeaccastudymaterial
...
It is carried out by running each package through a series of specific
test scenarios; a user panel then awards scores for each function
...
The second
method tends to be more convenient
...


ter

(b)

Reference sites are places where the packages are already installed and in operation
...
Reference sites should be visited and
assessed in detail
...


ym
a

(a)

Either of these aspects of assessment may lead to significant adjustment to earlier scores and even reveal
that one or more imperatives have not been satisfied
...
5 Implementation

tud

Because packages, by their very nature, may be expected to be fully functional and because of the work
done during the assessment, it should not be necessary to include much testing in the initial
implementation
...


as

Similarly, standard package documentation is unlikely to require much adjustment, though there may be
some work required to integrate it with existing process documentation
...


cc

File creation and conversion are likely to be more involved, as already discussed
...
Vendors may quote a low price for this service as an
inducement to buy
...
6 Managing the long-term relationship

12/12

Key terms

fre

Buying a package tends to make the user organisation dependent on the supplier, bringing an inevitable
element of risk
...

Risk avoidance involves choosing not to do something that may bring about risk
...

Risk mitigation involves taking steps to either reduce the level of risk, or reduce the impact, should the
risk occur
...
com/freeaccastudymaterial

327

To download more visit http://freeaccastudymaterial
...
Reducing the risk by changing the way that a particular activity is carried
out
...



...
Some risks cannot be eliminated or reduced to an acceptable level
...
For example, an organisation may issue procedures for quarentining and diabling a systems
virus before it spreads throughout the system
...

(a)
(b)
(c)
(d)

Maintain a good relationship, avoiding conflict
Make supplier evaluation a continuing process to obtain early warning of potential problems
Have a contingency plan to migrate to another supplier
Maintain an escrow agreement

ial

ter

An escrow agreement involves placing the source code of a computer programme into secure storage with
a third party agent
...
In effect, an escrow agreement can form an important part of the risk
mitigation strategies in relation to information technology contracts and software licenses
...

An escrow agreement provides the licensee with a contingency plan, meaning that they can continue to
operate the software, should anything happen to the developers
...


fre

ea

cc

as

tud

However, before entering into an escrow agreement, the licensee must ensure that the escrow provider is
capable of transferring the software and all customer data to its backup system
...
For example, the materials placed in escrow
should include not only the source code itself, but also any supporting documentation and any associated
software development tools
...


328

10: Improving processes  Part D Business process change

join us on facebook @ fb
...
com

7
...
1 Escrow agreements

To download more visit http://freeaccastudymaterial
...
This means that the hierarchy
of management objectives and performance measures will be similarly structured
...




Harmon describes four basic redesign patterns:
Re-engineering starts with a clean sheet of paper
...

Value-added analysis eliminates activities that do not add value
...


The feasibility of any proposed redesign must be considered
...
co
m

(a)
(b)
(c)
(d)

ERP systems are based on limited, standardised modules
...
However, the
alternative, adapting a standard package to local requirements, destroys the advantages of purchasing the
standard package and introduces further complications
...

The first phase of any IS project is likely to be the collection of information
...

Interviews
Questionnaires
Written questions
Observation
Protocol analysis
Workshops
Prototyping

ym
a

–
–
–
–
–
–
–

ter

ial



To download more visit http://freeaccastudymaterial
...

Software packages may be assessed against ten high-level requirement categories, each of which is made
up of more detailed specific requirements
...


tud



Imperatives are non-negotiable, absolute requirements and must be established very early on in the
project
...


fre



Part D Business process change 10: Improving processes

join us on facebook @ fb
...
com

Quick Quiz
What are the three conditions that value adding activities satisfy?

2

What are the four basic redesign patterns Harmon describes?

3

List three disadvantages of using bought software packages rather than developing in-house software

4

What are the seven techniques for information gathering to establish software requirements?

5

In the context of assessing software packages, what are imperatives?

ial
ter
ym
a
tud
as
cc
ea
fre
330

10: Improving processes  Part D Business process change

join us on facebook @ fb
...
com


...
com

Answers to Quick Quiz
1

The customer is willing to pay for the output; the process changes the output in some way; the process is
performed correctly at the first attempt

2

Re-engineering; simplification; value-added analysis; gaps and disconnects

3

Possible answers:
Property rights over the software reside with the supplier, so the supplier controls any future
developments and the support available to maintain the software

–

The financial stability and survival of the supplier is not guaranteed

–

Competitive advantage cannot be obtained by an organisation if standard software packages are
also available to, and used by, its competitors

–

Inadequate performance due to restricted functionality or a lack of tutoring

–

Changing user requirements can erode a package's functionality

ial

To download more visit http://freeaccastudymaterial
...
co
m

–

Interviews; questionnaires; written questions; observations; protocol analysis; workshops; prototyping

5

Imperatives are non-negotiable, absolute requirements that software packages must satisfy
...
com/freeaccastudymaterial

331

ial
ter
ym
a
tud
as
cc
ea
fre
332

10: Improving processes  Part D Business process change

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
com


...
com/freeaccastudymaterial

ial
ter
ym
a
tud
as
cc
ea
fre
334

join us on facebook @ fb
...
com


...
com

ter

ial

E-business

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
This is a relatively new, rapidly expanding and fundamentally
important aspect of strategic implementation
...
In this chapter and the next, we will consider this vital new
area of business
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
Think back to the relational diagram of the main syllabus capabilities: information
technology is in the middle tier, and so you should be asking yourself how it affects business strategy (the
top tier)
...

We would expect that from time to time, there might be complete questions linked directly to e-business
and e-marketing
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

C1

To download more visit http://freeaccastudymaterial
...
Therefore, a good general understanding of these models
could be required in a question
...
This may be restricted to email or may extend to a fully-featured website or an e-marketplace
...
E-business is radically different
from ordinary business and brings six categories of benefit
...

Capability is increased
...

Control is enhanced
...

Competitive advantage may be achieved, depending on competitors' reactions
...
com








ter

FAST FORWARD


...
1 E-business – meaning and scope

E-business has been defined by IBM as 'the transformation of key business processes through the use of
internet technologies'
...
Essentially, e-business technologies empower customers,
employees, suppliers, distributors, vendors and partners by giving them powerful tools for information
management and communications
...
Other businesses have a website
that helps them sell their products all around the world
...

E-business is often confused with e-commerce
...


(b)

If there is a financial transaction involved with the electronic process using internet technologies,
it is e-commerce
...
com is both e-commerce and ebusiness
...
com is ebusiness (no e-commerce is involved)
...

(a)

Electronic ordering of goods and services that are delivered using traditional channels such as post
or couriers (indirect electronic commerce)
Online ordering, payment and delivery of intangible goods and services such as software,
electronic magazines, entertainment services and information services (direct electronic
commerce)
Electronic fund transfers (EFT)
Electronic share trading
Commercial auctions

fre

Key term

ym
a

Adoption of e-business methods may be hindered by a range of obstacles, including lack of skills; lack of
internet use and awareness among businesses and the wider population; and fears about privacy,
effectiveness, cost, security and so on
...
com/freeaccastudymaterial

337

To download more visit http://freeaccastudymaterial
...


(f)

(g)
(h)

(i)

The nature of work is changing, since increased quantities of available data and more powerful
methods of accessing and analysing it mean that greater attention can be paid to customising
product offerings to more precisely defined target segments
...
2 Adopting e-business

Driven by competitive pressures, companies are employing e-business for a variety of purposes
...


(b)

Reduce costs through automated sales, administration and service activities
...

Gain visibility
...


cc

as

(a)

fre

ea

The e-business adoption pyramid illustrates the order in which e-business facilities tend to be adopted
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(d)

It offers a new economics of information because, with the internet, much information is free of
charge to the user
...

It supplies an almost incredible level of speed of communication, giving virtually instant access to
organisations, plus the capacity to complete purchasing transactions within seconds
...

It stimulates the appearance of new intermediaries and the disappearance of some existing ones
...

It has led to new business partnerships through which small enterprises can gain access to
customers on a scale which would have been viewed as impossible a few years ago
...
Clerical, administrative and knowledge work can be
done at any location
...


ial

(c)

ter

(b)

It challenges traditional business models because, for example, it enables suppliers to interact
directly with their customers, instead of using intermediaries such as retail shops, travel agents,
insurance brokers, and conventional banks
...
Small companies can move instantly into a global market place, either on their own
initiative or as part of a consumer portal
...
com
Most businesses start with the key e-business facilities of email, internet and company websites and in
addition, many also have remote working facilities
...

Benefits of e-business

(d)

Control – the website can be used to monitor interest in product or service from customers
...

Opening times (for stores or offices) and special offers can be promoted
...
Business customers can use the e-commerce system to track delivery
and manage inventory better through reducing time for ordering
...


(b)

ial

ym
a

ter

A Section B question in the December 2010 exam focused on a professional body, the Institute of
Administrative Accountants (IAA) which ran paper based examinations
...
The
question asked students to evaluate the benefits and costs of adopting e-assessment
...
There was no need to refer to any specific model,
students who kept their answers practical and related the benefits and costs of the proposal back to the
scenario were able to score well
...
3 Barriers to e-business and e-commerce adoption

tud

Barriers (also referred to as obstacles, impediments or hindrances) to e-business adoption work
differently according to perception, country, economic issues, technology, culture, law and ethics, and
organisational type
...
They use three
arguments:
E-business is not relevant to them
...

Their customers do not use e-business
...
Also, the combination of connection and usage charges tends to inhibit
the uptake of the internet in many countries and, by extension, reduces e-commerce activity
...


ea

(a)

cc

1
...
1 Other barriers

Economic issues – much of the consumer world still pays cash, rather than taking credit
...
Also, the issue of
transaction security over the internet is of concern to many consumers
...
com

(f)


...
Cost of sales and promotion may be reduced and lower prices passed on to customers
...

Communication – to customers can be improved with updates of product or service information
...
Cultural features such as risk aversion, attitudes to privacy and lifestyle differences may
affect internet usage
...
For example, cultures rating high on uncertainty avoidance and
low on individualism are likely to be difficult markets for introducing consumer e-business
...
com/freeaccastudymaterial

339

To download more visit http://freeaccastudymaterial
...
For small and medium-sized
enterprises, there is a wide range of barriers:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Cost of implementation
Need for immediate return on investment
Complexity of technologies like electronic data interchange (EDI) which could require new
skills
Lack of organisational readiness, with many small and medium-sized enterprises having
limited existing IT resources
Lack of perceived benefits
Lack of assertiveness by the owner/manager
Security, including confidentiality and fraud

2 Organisations and their customers

ter

ial

Both businesses and customers can originate e-commerce activity; thus there are four main categories:
B2B, B2C, C2B and C2C
...
Disintermediation removes intermediaries from supply channels while reintermediation
establishes new ones
...


Exam focus
point

ym
a

2
...
It would be worth taking the time to study this article
...
Pricing is based on quantity of order
and is often negotiable
...
According
to the company's website, its mission is to 'make it easy to do business anywhere'
...
As Linda Yueh, the BBC's chief business correspondent explains, Alibaba is effectively a
'combination of eBay and Amazon
...
Alibaba
...
It links
up businesses around the world looking for suppliers
...
Businesses can trade almost anything from olive oil to
computer components
...
alibabagroup
...
bbc
...
uk

11: E-business  Part E Information technology

join us on facebook @ fb
...
com

FAST FORWARD


...
com
B2C (Business-to-Consumer) – involves businesses selling to the general public, typically through
catalogues with shopping cart software
...
The consumer reviews the bids
and selects the company that will complete the project
...
co
m

C2C (Consumer-to-Consumer) – an excellent example of this is found at eBay, where consumers sell their
goods and services to other consumers
...
Instead of purchasing items directly from an unknown, untrusted
seller, the buyer can instead send the money to PayPal, who forward it to the vendor's account
...
com

B2C Business models
eg Amazon
...
com

C2C Business models
eg eBay
...
com

Exchange initiated by

Business

ym
a

Varieties of e-commerce

Companies using internal networks to offer their employees products and services online (but not
necessarily via the internet) are engaging in B2E (Business-to-Employee) e-commerce
...
The general idea is that
companies can link to remote machines via the internet
...
In this manner, companies can
monitor their machines remotely to determine if they need repairing or restocking
...


ea

2
...
The simplest channel structure is direct: the business deals directly with the
customer without the assistance of any intermediaries
...
Intermediaries offer a
wide range of services and facilities: they include agents, traders, brokers, dealers,
wholesalers/distributors and providers of specialised information
...


Part E Information technology  11: E-business

join us on facebook @ fb
...
com
2
...
1 Disintermediation
Disintermediation is the removal of intermediaries in a supply chain that formerly linked a company to its
customers
...
Dell computers have taken this option and removed any intermediaries from their downstream
supply chain (between them and their customers)
...
co
m

2
...
2 Examples
You can already bypass publishers to get a book printed at tiny cost through self-publishing sites such as
Lulu
...
Gambling is being changed by online sites arranging bets directly between individuals, not
through bookmakers, with Betfair being a market leader in this respect
...
Even benevolent intermediaries such as libraries may be under threat if all reference books are
scanned by Google and made available to everyone
...

Traditional value chain in publishing
Publisher

E-market value chain – Amazon

Author

Publisher

Wholesaler

ym
a

Author

Wholesaler

Retailer

Customer

Retailer
Retailer

Customer

Retailer

Customer

tud

E-market value chain – the print on-demand paradigm

Publisher

Wholesaler

as

Author

2
...
3 Reintermediation

fre

(b)

Provide customers with new, important value-added services not provided in the new direct
customer-supplier relationship
...

Provide customers with more efficient means of transacting business
...
In some cases, a new element of a supply chain simply replaces a single displaced
element, such as Amazon
...
In other cases, a reintermediating entity replaces
multiple supply chain elements
...


The ever-increasing number of 'hubs', 'portals', 'aggregators', 'clearing houses' and 'exchanges' shows
that entirely new ways of doing business are being created
...


342

11: E-business  Part E Information technology

join us on facebook @ fb
...
com

Disintermediation may be initiated by consumers because they are aware of supply prices direct from the
manufacturer or wholesaler
...
There are also third party aggregators or buyer's
clubs that link consumers with producers to obtain lower prices
...
com
2
...
4 New types of intermediary
Search engines and directories
...
Directories such as Yahoo provide a general index of a
large variety of different sites
...
For example, Shopbot searches across
online shops
...
co
m

Portals provide a gateway to the web and may also offer signposting, selected links and other services to
attract users
...
aol
...
Variations on the portal as a
gateway are: a horizontal portal or user customised gateway (eg my Yahoo); a vertical portal or special
interest portal, eg CNET – a portal for users interested in developments in IT; and an enterprise
information portal, which is an organisation's home page for employees, including corporate info and
selected links
...
com

'E-tailers' or consumer shopping sites such as Amazon
...
By contrast, Tesco is an offline retailer which
is offering web-based order and delivery services
...


ter

Malls are sites that group together different online stores as tenants
...
scottish-retailer
...
Malls provide cyber-infrastructure, but do not own inventory or sell
products directly
...

Virtual resellers are intermediaries that exist to sell to consumers
...

Website evaluators direct consumers to a producer's site via a new type of site that offers some form of
evaluation, which may help to reduce some of the risk
...

Financial intermediaries
...


as

2
...
5 Countermediation

ea

cc

Countermediation is the creation of a new intermediary by an established company in order to compete
via e-business with established intermediaries
...
com to help people
who want to do their own DIY, and Opodo
...
Tescodiets
...
Countermediation also refers to possible partnerships with another
independent intermediary, eg mortgage broker Charcol and Orange, which was Freeserve
...
2
...
The impact of the internet is seen clearly in the transportation industry
...
EasyJet was the first airline to have over half of its
bookings made online
...
The internet has also produced a new set of online travel agents who have lower costs
because of their ability to operate without a high street branch network
...


Part E Information technology  11: E-business

join us on facebook @ fb
...
com
In 2004, British Airways stopped paying commission to travel agents for flight bookings, intending to
move to an entirely internet-based system for bookings
...
com
...
In 2000,
it formally launched its Tesco
...
In addition to its online grocery business, Tesco has also
established Tesco Direct as its online marketplace for electrical appliances, home furnishings and other
non-grocery products
...
E-commerce business models may also be categorised by
characteristics such as value proposition, revenue model and market opportunity
...
3 Business models for e-commerce

Those that bring buyers and sellers together and facilitate transactions (often
fee based)

2 Advertising model

Supported by advertising revenue, a website will provide content and services
together with advertising (eg banner ads)

3 Infomediary model

Collecting data about consumers and their purchasing habits and selling this
information to other businesses

4 Merchant model

Selling of goods and services on the traditional retail model

5 Manufacturer model

Direct selling by the creator of a product or service to consumers, cutting out
intermediaries

6 Affiliate model

Offering financial incentives to affiliated partner sites

7 Community model

Where users themselves invest in a site, eg by the contribution of content,
money or time
...


(b)

Revenue model describes how the firm will earn revenue, produce profits, and produce a superior
return on invested capital
...

Market opportunity refers to the company's intended market space and the overall potential
financial opportunities available to the firm in that market space
...

Competitive advantage is achieved by the firm when it can produce a superior product and/or
bring the product to market at a lower price than most, or all, of its competitors
...


(c)

fre

(d)

ea

(a)

(e)
(f)

344

11: E-business  Part E Information technology

join us on facebook @ fb
...
com


...
The impact of the internet is especially profound in the field of financial services
...
This means that the delivering
companies are losing control of the marketing of their services, and there is a downward pressure on
prices, especially for services which can legitimately be seen as mere commodities (eg house and
contents insurance)
...
com
(g)
(h)

Organisational development describes how the company will organise the work to be
accomplished
...


3 Hardware and software infrastructure and controls
System architecture is the arrangement of software, machinery and tasks in an information system
needed to achieve a specific functionality
...
co
m

FAST FORWARD

The internet enables computers across the world to communicate via telecommunications links
...
It is based on a technology called
hypertext which allows documents stored on host computers on the internet to be linked to one another
...


To download more visit http://freeaccastudymaterial
...


ial

In general, all of the machines on the internet can be categorised into two types: servers and clients
...


ter

Each machine on the internet is assigned a unique address called an IP address
...
The International Standards
Organisation (ISO) has defined seven levels in a standard called Open Systems Interconnection (ISO)
...
The TCP/IP protocol stack is a good example
...

Alternatives to PC-based internet access include interactive digital television and wireless or mobile
access
...
You will not
be examined specifically on this, so you do not need a detailed knowledge of it
...


Also, remember that information systems and information technology can play an important role in
allowing organisations to achieve their strategic objectives overall
...
As ACCA
highlight, this may include 'using technology to gather and present information, calculate and interpret
data and to communicate with others'
...


3
...
com/freeaccastudymaterial

345

To download more visit http://freeaccastudymaterial
...

The table below shows how the different components of the e-business infrastructure relate to each other
...

Infrastructure

Players

E-business
services –
application layer

E-commerce software systems

Microsoft, IBM, Ariba,
BroadVision
Peoplesoft, Siebel
Akamai

Customer Relationship Management system
Performance enhancement
Supply chain management, data mining and
content management systems

Microsoft, Sun, Linux
Oracle, Sybase, IBM, Microsoft
...
Physical network – routers and
transport standards (TCP/IP)

Storage/physical
layer

Permanent magnetic storage on web servers
...
Temporary storage in RAM

Content and data
layer

Web content for internet, intranet and extranet
sites
...
Transactions data
...

The data layer retrieves basic price and product description information from a company-wide database
...
2 The internet

cc

as

The internet enables computers across the world to communicate via telecommunications links
...


fre

ea

The World Wide Web is a navigation system within the internet
...

When you view a document that contains hypertext links, you can view any of the connected documents
or pages simply by clicking on a link
...
In order to 'surf' or navigate the web, users need a web
browser that interprets and displays hypertext documents and locates documents pointed to by links
...

Access to the internet will become easier and easier
...

Developments in telecom networks are already rendering modems unnecessary
...


346

11: E-business  Part E Information technology

join us on facebook @ fb
...
com

Systems software
layer


...
com
While we tend to use the terms internet and World Wide Web interchangeably, the internet describes the
entire system of networked computers and the World Wide Web describes the method used to access
information contained on computers connected to the internet
...
It has created an open
community that is easy to join and easy to use
...
com

Leased line or phone line

Home PC (client)

ym
a

ter

Conventional phone,
Digital subscriber or
Cable modem line


...
In each region, the company has a Point of Presence (POP)
...
There is no
overall controlling network
...


Business (clients)

Physical and network infrastructure components of the internet
...
3 Intranets and extranets

tud

'Inter' means 'between': 'intra' means 'within'; ''extra' means 'outside'
...

The internet is used to disseminate and exchange information among the public at large
...

Only employees are able to access this information
...


(c)

3
...
1 Intranets

as

(a)

cc

An intranet is an internal network used to share information
...
The firewall surrounding an intranet fends off unauthorised access
...
Each employee
has a browser, used to access a server computer that holds corporate information on a wide variety of
topics, and in some cases, also offers access to the internet
...

Intranets are used for many purposes:
(a)

(b)

Performance data: linked to sales, inventory, job progress and other database and reporting
systems, enabling employees to process and analyse data to fulfil their work objectives
...


Part E Information technology  11: E-business

join us on facebook @ fb
...
com

(h)

Upward communication: suggestion schemes, feedback, questionnaires
...
co
m

(g)

Employee support/information: advice on first aid, healthy working at computer terminals, training
courses offered and resources held in the corporate library and so on
...

Departmental home pages: information and news about each department's personnel and
activities to aid identification and cross-functional understanding
...

Email facilities for the exchange of messages between employees in different locations
...
It examines all requests and messages entering and exiting the
intranet and blocks any not conforming to specified criteria
...
Whereas an intranet resides behind a firewall
and is accessible only to people who are members of the same company or organisation, an extranet
provides various levels of accessibility to outsiders
...
Extranets are becoming a very popular means for
business partners to exchange information
...
An extranet may be used for a variety of
purposes:
To provide a pooled service which a number of business partners can access and exchange news
which is of use to partner companies and clients
To share training or development resources
To publicise loyalty schemes, sponsorships, exhibition attendance information and other
promotional tools
To exchange potentially large volumes of transaction data efficiently

(e)

To provide online presentations to business partners and prospects

tud

(d)

fre

ea

cc

as

The basic components of an extranet are an internet connection which goes via a router, an HTTP server,
a firewall and the essential data and files
...
An organisation could connect its browser
based purchase order system to the product catalogue database on a supplier's intranet (see diagram
below)
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
3
...
com
Vendor Intranet
Firewall

Catalogue
database

Wiring hub

Internet


...
com

ial

Firewall

Customer Intranet

ter

Customer
purchase order
service

ym
a

3
...
Email has replaced letters, memos, faxes,
documents and even telephone calls, combining many of the possibilities of each medium with new
advantages of speed, cost and convenience
...
This software has convenient features such as: message copying (to
multiple recipients); integration with an address book (database of contacts); automatic alert messages
sent when the target recipient is unable to access his or her email immediately, with alternative contact
details; stationery and template features, allowing corporate identity to be applied; facilities for mail
organisation and filing
...


3
...
The
machines that provide services to other machines are servers; and the machines that are used to connect
to those services are clients
...


fre

A server machine may provide one or more services on the internet
...
Clients that come to a server machine do so with a specific intent, so clients direct
their requests to a specific software application running on the overall server machine
...


Part E Information technology  11: E-business

join us on facebook @ fb
...
com
3
...
1 Internet protocol (IP)
To keep all of these machines straight, each machine on the internet is assigned a unique address called
an IP address
...
A home machine that is
dialling up through a modem often has an IP address that is assigned by the ISP when the machine dials
in
...
This
way, an ISP only needs one IP address for each modem it supports, rather than one for each customer
...
amazon
...
html)

ter

The browser communicates with a name server to translate the server name, 'www
...
com', into an
IP address, which it uses to connect to that server machine
...


ym
a

Following the HTTP protocol, the browser sends a GET request to the server, asking for the file,
http://www
...
com/gp/homepage
...

The server sends the HTML text for the web page to the browser
...


3
...
2 Open Systems Interconnection (OSI) standard

as

tud

There are several levels to the interaction between a client and a server, from the physical pieces of wire
making the connection, through the transfer and checking of data, security problems of access and
logging on, to the final presentation to, and interaction with, the user
...
In an attempt to bring some order to this, the International
Standards Organisation (ISO) has defined seven levels in a standard called Open Systems Interconnection
(OSI)
...
The seven layers
are:

Presentation

Layer 6 takes the data provided by the Application layer and converts it into a standard
format that the other layers can understand
Layer 5 establishes, maintains and ends communication with the receiving device

ea

Session

Layer 7 actually interacts with the operating system or application whenever the user
chooses to transfer files, read messages or perform other network-related activities

cc

Application

This layer maintains flow control of data and provides for error checking and recovery of
data between the devices
...
It determines the
way that the data will be sent to the recipient device
...
It defines the physical characteristics of the
network such as connections, voltage levels and timing

11: E-business  Part E Information technology

join us on facebook @ fb
...
com

The browser breaks the URL into three parts:

ial

When you type a URL into a browser, the following steps occur
...
co
m

As far as the internet's machines are concerned, an IP address is all you need to talk to a server but
because most people have trouble remembering the strings of numbers that make up an IP addresses,
and because IP addresses sometimes need to change, all servers on the internet also have humanreadable names, called domain names
...
amazon
...
It is easier for most of us to remember than it is to remember 72
...
203
...
21
...
1 and arrive at the machine that contains the web server for Amazon's home page
...
com
3
...
3 Protocol stacks
A protocol stack is a group of protocols that all work together to allow software or hardware to perform a
function
...
It uses four layers that map to the OSI model as
follows:
Combines the Physical and Data layers and routes the data between devices on the same
network
...


Internet

Corresponds to the Network layer
...


Transport

Corresponding to the OSI Transport layer, this is the part of the protocol stack where the
Transport Control Protocol (TCP) can be found
...
Protocols
for specific functions such as email (Simple Mail Transfer Protocol, SMTP) and file
transfer (File Transfer Protocol, FTP) reside at this level
...
com


...
But developers are able to ensure that a certain level of compatibility is maintained
by following the general guidelines provided by the model
...
6 Alternative internet access technologies

ym
a

Alternatives to PC-based internet access include interactive digital television and wireless or mobile
access
...
6
...
Consumer interactions are provided by a remote control which enables users to
select different viewing options through signals sent to a set top box
...
This is required to provide interactions which
involve exchange of information such as a consumer completing an online offer form in response to an
interactive TV ad or a purchase transaction
...
This
currently acts as a barrier in comparison with cable which is an always-on, two-way connection
...
6
...


ea

As well as offering voice calls, mobile phones are used for email and short message service (SMS)
(otherwise known as 'texting') that lets users receive and send short text messages to other mobile
phones
...
WAP pages are accessed using wireless techniques
from a WAP gateway that is connected to a traditional web server where the WAP pages are hosted
...
com/freeaccastudymaterial

351

To download more visit http://freeaccastudymaterial
...
This is approximately
five times faster than GSM (Global System for Mobile Communications) and is an always-on service
charged according to usage
...


ial

Many facilities available from a desktop PC are offered on a handheld unit
...
These allow yet more advanced applications to be installed and run and they operate in much
the same way as a regular computer, allowing the user instant access to facilities such as the internet,
email, and mobile banking
...


3
...
3 Wi-Fi internet access

ter

Wireless Fidelity (Wi-Fi) is a technology that facilitates the mobile use of laptop computers and personal
handheld devices away from the home or office
...


ym
a

Hotspots can now be found in most major airports, hotels, bookstores, coffee houses, shopping centres,
and even car dealerships
...
Numerous cities across the
country are partnering with ISPs such as EarthLink to build wireless networks that blanket every inch of
their city
...


3
...
To help prevent theft, fraud and human error, four types of control are needed to protect IT assets
...
These can be classified in one of four ways:

3
...
1 Controls over physical access
Controls over physical access are predominantly directed toward preventing unauthorised individuals
gaining access to an organisation's IT and IS assets
...


352

11: E-business  Part E Information technology

join us on facebook @ fb
...
com


...
UMTS is a realisation of a new generation of broadband multimedia
mobile telecommunications technology with high speed data transfer enabling video calling
...
Following the success of 3G, in
2012 4G was launched in the UK
...


To download more visit http://freeaccastudymaterial
...
The practicality of such a
control may be undermined if the door remains in regular use
...
co
m

Other controls may focus on the use of personnel
...
This can be supplemented by the use of
intruder alarms
...
com

The best form of access control would be one which recognised individuals immediately, without the need
for personnel or cards
...


BBC

ter

In 2013, BiometricsUpdate
...
BBC's Head of
Capital Development stated, 'Access ID is currently used – not biometrics yet, but we are looking at it
...
'

ym
a

The BBC often have freelance workers and non employees working on the premises, and one of the issues
the Head of Capital Development highlighted was how to manage a public thoroughfare which might go
through a news room
...
com

3
...
2 Controls over logical access

as

Logical access controls are aimed at ensuring that only authorised users of IT systems are provided with
access to those systems
...
A common mechanism in protecting computerised data is through the use of passwords
...

One password may be required to read a file, but another to write a new data to it
...


ea

cc

(a)

If the password entered matches a password issued to an authorised user, or is valid for that particular
terminal, the system permits access
...
Attempted unauthorised access should be recorded
...
In these
cases, the culprits might be caught, particularly if there is an apparent pattern to their efforts
...
This is often in addition to the use of a
password prior to the system permitting user access
...
com/freeaccastudymaterial

353

To download more visit http://freeaccastudymaterial
...
7
...
Most
organisations establish operational controls aimed at influencing an individual's behaviour
...
Audit trails are useful, both for maintaining
security and for recovering lost transactions
...


ym
a

The original concept of an audit trail is to enable a manager or auditor to follow transactions stage by
stage through a system to ensure that they have been processed correctly
...

Modern integrated computer systems have cut out much of the time-consuming stage-by-stage working
of older systems, but there should still be some means of identifying individual records; and input and
output documents associated with the processing of any individual transaction
...
An audit trail should be provided so that every transaction on a file contains
a unique reference (eg a sales system transaction record should hold a reference to the customer order,
delivery note and invoice)
...
7
...
Such controls are integrated into the software used
...

Check digits
...
For example, it is common to set up individual supplier accounts using
accounting software
...


fre

(i)

(ii)

(iii)

354

Control totals
...

Range checks
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


ial

Exam focus
point


...
This is often achieved through ensuring a segregation of duties
...
For example, the person dealing with processing the monthly payroll should
not have responsibility for adding new employees to the payroll or authorising the monthly payment of
salaries from the organisation's bank
...


To download more visit http://freeaccastudymaterial
...

Limit checks
...
For example
must be less than $999,999
...
The aim is that the software should identify unreasonable
input values
...
3m to the
accounts software should be rejected
...
Ensure that two entries to the system are compatible
...


(vi)

Format check
...
For example, dates must be posted in a particular format, 21/11/14
...
co
m

(iv)

ial

To download more visit http://freeaccastudymaterial
...
The focus of such mechanisms is to ensure
that only valid data is accepted by the system
...


ym
a

The examining team has highlighted that those students attempting paper P3 need to understand the
control implications that arise when using a computerised accounting system
...
A question may
ask you to suggest ways in which internal system controls can be improved
...


cc

as

In many ways, the use of computerised accounting systems has helped to reduce the scope for human
error in the processing of data
...
For example, a good system should ensure that entries posted
to the program are sent to the correct accounts, making it impossible to post a one-sided entry, ie only
posting the debits and failing to post the credits
...
8
...
When the
software is first installed, a chart of accounts should be set up to define how each accounting transaction
will be treated
...
The
chart of accounts will list the different account names which will feed through to the financial statements
...
When entries

ea

Exam focus
point

To ensure that computerised accounting systems are working effectively, it is critical that the input data is
treated correctly
...
Controls can be reviewed through the use of 'test data'
...
When the chart of accounts is set up it is important that consideration is given to the business's
information and reporting requirements from the accounting system
...
8 Manual accounting process and computerised processes

3
...
2 Controlling the chart of accounts
Once established, ensuring that there are adequate controls over the chart of accounts is critical
...
com/freeaccastudymaterial

355

To download more visit http://freeaccastudymaterial
...
Management
should conduct regular reviews of the chart (on an annual basis) to ensure that it still covers the
organisation's needs
...
8
...
You should be familiar with the use of test data as a test of control from your earlier auditing
studies
...


ym
a

Exam focus
point

Continuity planning is an umbrella term used to explain the plans and processes an organisation will
follow in the event of its business operations being disrupted
...

When a disaster occurs, safeguarding the organisation's IT assets is likely to be of critical importance for
most modern businesses
...
It is possible that an exam question may focus on an evaluation of an entity's disaster
recovery process
...
9 Continuity planning and disaster recovery

3
...
1 Continuity planning
What is continuity planning?

as

Continuity planning focuses on ensuring the survival of an organisation and its operations in the short
term
...
Events such as natural disasters and
computer network failures are likely to be highly detrimental to an organisation's operations
...
This plan sets out
procedures to recover and restore partially or completely interrupted critical functions within a set amount
of time after a disaster has occurred
...
For a small
organisation, this manual could consist of a printed document stored safely away from the organisation's
main location, containing the contact details for crisis management staff, general staff, customers,
suppliers, the location of offsite data back-up storage media and other vital materials
...


3
...
2 Disaster recovery
Disaster recovery is part of continuity planning
...
Disaster recovery is predominantly concerned with the processes and procedures that an
organisation uses to allow its IT systems to continue in operation in the event of a disaster occurring
...


356

11: E-business  Part E Information technology

join us on facebook @ fb
...
com






...
Test transactions are selected from
previously processed transactions or are created to test specific processing characteristics of a computer
system
...
com
Why it matters
Disaster recovery is a highly important issue for most organisations, given the extensive use of computers
in modern business
...

A disaster can occur where the system for some reason breaks down, leading to potential losses of
equipment, data or funds
...
co
m



In the event of a computer system breakdown, a good disaster recovery plan should provide for:

Standby procedures so that some operations can be performed while normal services are disrupted
Recovery procedures once the cause of the breakdown has been discovered or corrected
Personnel management policies to ensure that (a) and (b) are implemented properly

To download more visit http://freeaccastudymaterial
...
This person can
then delegate specific tasks or responsibilities to other
designated personnel
...
Some
tasks are more important than others
...
Similarly, the recovery programme
may indicate that certain areas must be tackled first
...


If the disaster has a public impact, the recovery team may
come under pressure from the public or from the media
...


tud

Back-up and standby arrangements

ym
a

ter

Section

Some way must be found of assessing the requirements of
the problem, if it is contained, with the continued operation
of the organisation as a whole
...


ea

The plan must cover all activities, from the initial response to a disaster, through to damage limitation and
full recovery
...

Ideally, the plan should be tested
...


fre

Hardware duplication

Hardware duplication may be required to permit a system to function in case of breakdown
...

Many organisations will use several similar computer systems and find that a significant level of protection
against system faults can be provided by shifting operations to one of the systems still functioning
...
com/freeaccastudymaterial

357

To download more visit http://freeaccastudymaterial
...
In
these instances one response would be to negotiate a maintenance contract which provides for back-up
facilities
...
co
m

In 2005, Hurricane Katrina battered the Gulf Coast of the US, causing $200bn worth of damage
...
Essential utilities, including hospitals and TV broadcasters, were forced to shut
...
The company relocated the majority its clients to its own
SunGard 'hotsites'
...
As a result of the hotsites, SunGard's clients were able to keep their systems online in
the aftermath of Hurricane Katrina
...
com

FAST FORWARD

ym
a

4 Big data

Big data is the term used to describe the growth of structured and unstructured data
...

Laney suggests that big data can be defined by considering the three V's:
Volume
Velocity
Variety

tud





Big data analytics refers to the analysis and identification of insights in vast quantities of data
...


Creating transparency
Performance improvement
Market segmentation and customisation
Decision making
New products and services

cc







as

McKinsey's 2011 report, 'Big data: The next frontier for innovation, competition and productivity' suggests
five ways in which big data can create value for organisations:

ea

Critics, however, argue that big data is simply the latest buzzword which has become an obsession of
business leaders and the media alike
...


fre

In this section, we shall explore the role of big data in helping companies design and implement their
strategies
...
)
However, due to its heavy dependence on IT systems and links with e-business, it is explored here in
Chapter 11
...

Organisations today have more transactional data than they have ever had before – about their customers,
suppliers and about their operations
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


To download more visit http://freeaccastudymaterial
...
In the so-called 'Internet of
Things,' sensors embedded in physical objects such as mobile phones, motor vehicles, smart energy
meters, RFID tags, tracking devices and traffic flow monitors all create and communicate data which is
shared across wired and wireless networks that function in a similar way to the internet
...



...
Similarly,
internet search indexes (such as Google Trends) can be sources of data for big data analytics
...
1 What is big data?

'Big data is a popular term used to describe the exponential growth and availability of data, both structured
and unstructured
...
'
(SAS, big data – What it is and why it matters
...
www
...
com)

To download more visit http://freeaccastudymaterial
...


ter

4
...
1 Three Vs of big data

Laney suggests that big data can be defined by considering the three Vs: volume, velocity and variety
...
The main benefit of big data
analytics comes from the ability to process very large amounts of information
...
For example, as more customers use the internet, smart
phones and social media in their everyday lives, these can now also be sources of data for organisations
alongside any data they may capture internally – for example, from customer loyalty cards or the
transactions recorded in EPOS tills
...


as

Velocity – refers to the speed at which 'real time' data is being streamed into the organisation, and with
which it is processed within the organisation
...
Moreover, retailers who are able to utilise information about customer
clicks and interactions quickly – for example, by recommending additional purchases – can use this speed
to generate competitive advantage
...


ea

Variety (or variability) – A common theme in relation to big data is the diversity of source data, with a lot
of the data being unstructured (ie not in a database)
...


fre

This variety presents a challenge to organisations as they need to find ways of capturing, storing and
processing the data
...

In this respect, big data analytics is likely to be crucial to making use of the potential value of big data
...
com/freeaccastudymaterial

359

To download more visit http://freeaccastudymaterial
...
1
...

The aim of big data analytics is to extract insights from unstructured data or from large volumes of data
...
co
m

Being able to extract insights from the data available is crucial for organisations to benefit from the
availability of big data – for example, to help them understand the complexity of the environment in which
they are operating, and to respond swiftly to the opportunities and threats presented by it; or to develop
new insights and understanding into what customers need or want
...


ial

ym
a

ter

Laurie Miles, Head of Analytics for big data specialist SAS, explains that 'the term big data has been
around for decades, and we've been doing analytics all this time
...
Miles
highlights that, for many years, organisations held traditional structured data, which could be neatly stored
and organised in databases
...
This has resulted in
increasingly large and complex data sets, which have become harder to analyse
...

The big challenge

The challenge for big business has been to capture and analyse these vast quantities of data, which may
be of use in a commercial context
...


tud

Wall reports that a significant number of large entities have already turned to big data analytics with the
aim of gaining a competitive advantage over their rivals
...


as

'Practically, anyone who makes, grows and sells anything can use big data analytics to make their
manufacturing and production processes more efficient and their marketing more targeted and costeffective
...
Big data is not just about understanding historic business intelligence, but instead combines
several 'real time' data sets, which make it increasingly useful to big businesses
...
Organisations looking to exploit the
opportunities presented have encountered a significant shortage of individuals with the required skills in
the job market to analyse the data
...
The job of the data scientist
didn't exist five years or 10 years ago'
...
Does it belong to the individual or customer, the
company, the service provider hosting the data or the national jurisdiction where the data is held? Such
questions are unlikely to go away in the short term, as Miles highlights, it is a 'legal minefield'
...
bbc
...
uk

360

11: E-business  Part E Information technology

join us on facebook @ fb
...
com

It's not big, it's just bigger

To download more visit http://freeaccastudymaterial
...
2 The strategic importance of big data
Historically, only the largest corporations have had sufficient resources to be able to process big data
...



...
Like other essential factors of production such as [physical] assets and human capital, much of
modern economic activity simply couldn't take place without it'
...
Making effective use of big data could
confer competitive advantage on an organisation
...


To download more visit http://freeaccastudymaterial
...


4
...
This is likely to be
essential for most organisations during the implementation of its strategy
...


4
...
1 Creating transparency

as

Making data more easily accessible to relevant stakeholders, in a timely manner, can create value in its
own right – for example, by revealing insights from data which had previously been too costly or complex
to process
...
Furthermore,
improved transparency in data should help organisations during the process of strategic implementation
and the achievement of corporate objectives
...
The company has a
corporate objective 'to deliver products the customer demands at the time they are required', and as a
result, the company is pursuing a strategy of ongoing product development
...

However, in many cases, the increased transparency resulting from big data is likely to relate to external
data
...


fre

Exam focus
point

ter

Similarly, analysing data from as many sources as possible when making decisions, can also increase the
amount of useful information available to managers when they are making decisions
...
3
...
By analysing

Part E Information technology  11: E-business

join us on facebook @ fb
...
com
the variability in performance – and the causes of that variability – organisations then manage
performance to higher levels
...

The use of big data analytics can help organisations monitor strategies aimed at improving profitability by
allowing management to identify why certain product lines sell more slowly than expected
...



...


Case Study

Big data in action

ial

ter

As Goodwin highlights, 'without realising it, many Tesco stores in Ireland were running their refrigerators
at a lower temperature than necessary'
...
That came as a surprise to us'
...
The sensors then process 'the data in real time, and display the results on a Google
map that shows the performance of refrigerators in more than 120 Irish stores', says Goodwin
...
Previously, engineers
would turn up to the store, diagnose the problem and have to return to the depot to collect the equipment
they needed'
...
com
...
computerweekly
...
3
...


ea

The idea of market segmentation is already a key concept within strategic marketing, (the concept of emarketing is covered in greater detail in Chapter 12)
...


fre

McKinsey also highlights that big data could also be valuable in segmenting public sector markets
...
However, big data could
enable public sector organisations to pursue strategies which build upon the effective tailoring of products
and services
...
3
...
For example, trends identified in in-store and online sales
for a retailer – in real time – could be used to determine inventory and pricing strategies
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
A report by Computerweekly
...
The project used highly
sophisticated computer systems to analyse Tesco's refrigeration data
...
com
decisions themselves could even become automated
...


4
...
5 New products and services


...
For example, the emergence of real-time location data, from traffic light
sensors and satellite navigation systems, could enable insurance companies to refine the pricing of their
insurance policies according to where, and how, people drive their cars
...
For example,
Facebook's advertising business incorporates analysis of a user's actions as well as their friends' actions
...


ial

To download more visit http://freeaccastudymaterial
...
4 Data and customers

ter

So far in this section, we have looked at the way organisations can use big data to understand more about
what their customers want
...
0 technologies (which we discuss in a later chapter) mean
that data is increasingly available to customers as well as organisations
...
This increased availability of data creates a
new market transparency which can give customers a greater insight into what they are buying and who
they are buying from
...


Case Study

tud

Big data: Helping to shape strategy

The following case study outlines how companies are now using data about their customers to analyse
their competitors in order to shape their own competitive strategy
...

The use of in-store loyalty cards as a means of capturing data about customers and their shopping habits
to enable the effective targeting of shoppers with promotions, is not a new occurrence
...


ea

cc

Today, retailers have started to exploit data about their shoppers by tracking purchases made by individual
debit and credit cards
...


fre

Retailers that operate online shops are now able to use data about a shoppers' previous purchasing
behaviour to target individuals with particular products when they log on
...
Ferguson notes that
'Sainsbury's discovered that a cereal brand called Grape-Nuts was worth stocking – despite weak sales –
because the shoppers who bought it were extremely loyal to Sainsbury's, and were often big spenders'
...


Part E Information technology  11: E-business

join us on facebook @ fb
...
com
Competitor analysis
Establishing new stores


...
This data has been
used to help the company decide where to locate new stores
...

Trends in shopping patterns

Rival supermarket Morrisons has historically shunned loyalty card schemes
...
Clearly, if Morrisons' rivals are aware of the data that the
company is buying in, then they will be able to target existing customers with their own promotional offers
in a bid to undermine competing moves
...
'A brand of say, coffee will approach
Sainsbury's, Morrisons or Tesco and ask to buy access to customers purchasing rival brands, so it can
put an offer to these customers
...
5 Criticisms of big data

ym
a

Adapted from: Ferguson, D (June 2013) 'How supermarkets get your data – and what they do with it
...
www
...
com

An article in The Financial Times entitled 'Big data: are we making a big mistake', raised a number of
criticisms over the ability of big data to deliver the anticipated benefits
...
Very few examples exist where analysing vast amounts of data have
resulted in significant new discoveries
...

Critics suggest that it is easier to identify correlations between two variables than to determine
what is actually causing the correlation
...


cc

as

(a)

Google Flu Trends

ea

Case Study

Google Flu Trends was presented as a means of tracking and predicting the spread of influenza across the
US
...
However, after providing a swift and accurate account of flu outbreaks for
several winters, in the 2012-3 season, Flu Trends overstated the spread of flu-like illnesses across the US
by almost a factor of two
...
They were simply
finding statistical patterns in the data; and as such, focused on correlation rather than causation
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
One explanation of the Flu Trends failure in 2012-3 is that there were a number of news stories in
December about the dangers of flu, and those provoked internet searches by people who were healthy
...
The Financial Times suggests that, if an organisation wishing to understand
the public mood solely used the social networking site Twitter to analyse all of the tweets made,
this would not represent the views of all members of society
...


(e)

The costs and upheaval involved in enhancing data architectures and IT applications in order to
store and analyse big data sets may prove prohibitive for smaller organisations
...
Entities which lack the right mix of people with appropriate skills and capabilities
to analyse and interpret captured data are unlikely to realise the full potential offered by the hidden
relationships contained in big data
...


ym
a

A strategy for e-commerce should be considered at the highest level of management and it is particularly
necessary that it should conform to the standard criteria for strategic choice: suitability, acceptability and
feasibility
...
For most companies, e-commerce will be a supplement to more traditional operations, with
the website forming a supplementary medium for communication and sales
...
The e-commerce strategy must be acceptable to important stakeholders
...


tud

Feasibility
...
The fundamental resource is cash, but the availability of
the skilled labour needed to establish and administer a website will be crucial to the e-commerce strategy
...
1 Strategy for e-commerce

as

The internet has the capacity to transform many businesses via the introduction of new technology and
skills and, eventually, the repositioning of the offering to fit the new market conditions
...

New distribution channels, revolutionising sales and brand management

(b)

The continued shift of power towards the consumer

(c)

Growing competition locally, nationally, internationally and globally

(d)

An acceleration in the pace of business

(e)

The transformation of companies into extended enterprises involving virtual teams of business,
customer and supplier working in collaborative partnerships
A re-evaluation of how companies, their partners and competitors add value, not only to
themselves, but in the wider environmental and social setting
Recognition of knowledge as a strategic asset

(g)

ea

(f)

cc

(a)

fre

FAST FORWARD

ial

5 IT and strategy

To download more visit http://freeaccastudymaterial
...
co
m

(d)

Most experts agree that a successful strategy for e-commerce cannot simply be bolted on to existing
processes, systems, delivery routes and business models
...





What do customers want to buy from us?
What business should we be in?

Part E Information technology  11: E-business

join us on facebook @ fb
...
com



What kind of partners might we need?
What categories of customer do we want to attract and retain?

In turn, organisations can visualise the necessary changes at three interconnected levels
...

Level 2 – Re-organisation of the workforce, processes, systems and strategy in order to make best use of
the new technology
...
co
m

Level 3 – Repositioning of the organisation to fit it into the emerging e-economy
...
Instead, pure internet businesses such as
Amazon and AOL have emerged from these new rules: unburdened by physical assets, their competitive
advantage lies in knowledge management and customer relationships
...
2 Building an e-commerce strategy

ial

ter

ym
a

5
...
1 Suitability

as

tud

There are a few large organisations, such as Amazon, whose overall strategy is based on e-commerce
...
It is important that the ecommerce strategy supports the overall strategy generally
...
A very simple example would consider the question of whether to confine the website to an
essentially communications role, or to incorporate a fully featured online shopping facility
...
On the other hand, a manufacturer of specialist luxury goods, such as the
most expensive fountain pens, would probably have a policy of distributing through carefully selected
retailers
...


5
...
2 Acceptability

ea

cc

The e-commerce strategy must be acceptable to important stakeholders
...
Pursuing our luxury goods example, we would expect that retailers chosen for their
attractive premises, skilled and attentive staff and air of luxury would be unhappy to find their position
usurped by a website
...
2
...
The fundamental resource is cash, but the availability of the skilled
labour needed to establish and administer a website will be crucial to the e-commerce strategy
...

Under this heading, we might identify the following points for consideration:
(a)

366

The first thing to do is to try to establish precise objectives for the new strategy element
...


11: E-business  Part E Information technology

join us on facebook @ fb
...
com

A strategy for e-commerce, while not necessarily constituting the organisation's overall strategy, is likely
to have wide implications and to involve and affect more than one function or department within the
organisation
...
It should work well with any existing operations; be acceptable (to distributors in particular) and
not make impractical demands for cash and skilled labour
...
com

(c)

An estimate and analysis of costs and benefits should be undertaken
...

A detailed budget should be prepared, probably using estimates from the cost and benefit analysis
...


5
...
Corporate and e-business strategies thus become
complementary, each supporting and influencing the other
...


(b)

The context of transaction is different: an electronic screen replaces the face-to-face transaction
...


ter

ial

(a)

To download more visit http://freeaccastudymaterial
...

The impact of this is evident in the following changes:

ym
a

The significant issue faced by managers today is one of transformation: 'How do I transform the bricks
and mortar company of yesterday to the click and mortar company of today in order to be competitive in
the inevitable digital economy of tomorrow?'
Until the emergence of e-business, IS had largely played a facilitative (and relatively peripheral) role in
business, focusing on improving operational efficiencies, cost structures, and effectiveness
...
The role of IS has become central to e-business
...
There is a two-way relationship between
corporate and e-business strategies, with e-business strategy not only supporting corporate strategy, but
influencing or impacting it
...
co
m

(b)

According to Kalakota and Robinson, continuous planning with feedback has evolved as the strategy of
choice for the fluid and volatile e-environment
...


Part E Information technology  11: E-business

join us on facebook @ fb
...
com
Knowledge building and capability evaluation: identify and acquire a comprehensive
understanding/vision of customer needs
...
Communicate this
understanding of customer needs to all employees of the organisation
...
If the customer wants self-service, then the business design must
provide and facilitate it
...
If a self-service business model is to be implemented, then the
e-business blueprint helps determine the required application framework
...


Step 4

Application development and deployment: translate the key milestones and projects into
integrated applications
...
Such models can also be
used as guides to future development
...
4 Stage models

Rayport and Jaworski suggest a four-stage model of the evolution of internet-based B2B e-commerce,
believing that, in general, an organisation goes through these stages in utilising the internet for its
business-to-business activities:
1 Emission – Broadcast

tud

2 Interaction
3 Transaction

The use of the internet to take, manage and support transactions with
customers such as online ordering systems
The use of the internet to provide inter-organisational activities, that can be
accessed and utilised by the company and its trading partners

as

4 Collaboration

The company begins by creating an informational website for its clients
Using the internet for interaction with customers such as emails, customer
survey and feedbacks

cc

The model of Rao et al suggests the following stages of e-commerce development and their
characteristics:
Stage 2

Stage 3

Stage 4

Presence

Portals

Transaction integration

Company integration

Content

Profiles

B2B/B2C

B2B

Window to the web

Communities

Full integration

No integration

Two-way
communications

E-marketplaces

E-business

Email

Email

Auctions

Order placing

3rd party emarketplaces

Cookies

Low-level collaboration

Uses e-commerce
systems to manage
CRM and supply chain

No online financial
transactions

Online financial
transactions

fre

ea

Stage 1

368

11: E-business  Part E Information technology

join us on facebook @ fb
...
com

(b)

At the micro level, employees know how their individual job performance impacts
corporate objectives
...
This
facilitates an understanding about what is working and what is not, so that
refinements/remedial actions may be undertaken
...
co
m

Step 1

To download more visit http://freeaccastudymaterial
...
The
management principles will differ from one stage to another, and different technologies, and perhaps
different areas of the organisation, are in differing stages at any one time
...

The stages approach is useful for several purposes:

(e)

(g)

Make sure you understand how e-business affects an organisation's relationships with its customers, and
therefore the implications it can have for restructuring the organisation's downstream supply chain
...


ym
a

Exam focus
point

To download more visit http://freeaccastudymaterial
...
co
m

(c)
(d)

ial

(b)

A small or medium sized enterprise may use it for comparison with its major competitors; it may
indicate gaps and lead to strategic actions
...

It can explain past, current and future involvement in e-business
...

It can help an organisation reduce the complexity of its e-business initiatives by breaking them into
smaller, more flexible and manageable portions
...

It can assist in identifying phases of development required and provide milestones that can be
understood by management
...


ter

(a)

6 Supply chain management

A supply chain encompasses all activities and information flows necessary for the transformation of
goods from the origin of the raw material to when the product is finally consumed or discarded
...
The pull based element is particularly relevant on
IS for feedback and control, since it aims to eliminate buffer inventory by increasing responsiveness
...
It would be worth taking the time to study this article
...
This is available in the Technical Articles section for P3 on the ACCA website
...
You are strongly advised to read this article
...
1 Supply chain basics
Key supply chain activities include production planning, purchasing, materials management, distribution,
customer service, and sales forecasting
...


fre

Exam focus
point

Electronic commerce and the internet are fundamentally changing the nature of supply chains, and
redefining how consumers learn about, select, purchase, and use products and services
...
They also provide customised products and services
...
com/freeaccastudymaterial

369

To download more visit http://freeaccastudymaterial
...
2 Push and pull models of the supply chain
6
...
1 Traditional supply chain – push model
In a supply chain based on the push model, an organisation produces goods according to schedules
based on historical sales patterns
...
2
...
The consumer requests the product
and 'pulls' it through the delivery channel
...


Features of a pull system

Demand drives production and replenishment
Centralisation of demand information and of replenishment decision-making
Reduced product obsolescence
Expanded ability to meet changing demand patterns
Lower inventories and higher service levels
Reduced bull whip effect

as








tud

This new business model is less product-centric and more directly focused on the individual consumer
...


ea

cc

In the pull model, customers use electronic connections to pull whatever they need out of the system
...
With the new customer-driven pull model, it is no longer a linear process
...
The
result is that electronic supply-chain connectivity gives end customers the opportunity to become better
informed through the ability to research and give direction to suppliers
...


fre

E-commerce creates a much more efficient supply chain that benefits both customers and manufacturers
...


6
...
3 IS implications
Push-based systems rely less on sophisticated IS support, since high inventory levels are used to cope
with variations in customer demand
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

A push-based supply chain is slow to respond to changes in demand, which can result in overstocking,
bottlenecks and delays, unacceptable service levels and product obsolescence
...
Poor co-ordination can lead to large
fluctuations in the levels buffer inventory, even where actual consumption patterns vary only marginally
...


To download more visit http://freeaccastudymaterial
...



...
An example of this
would be Dell's build-to-order supply chain
...
The pushpull boundary would then be at the beginning of the assembly line
...


6
...
One important consequence of this is that improved communication with
customers results, making it easier for them to purchase
...
com

Knowledge brought forward from earlier studies

as

tud

ym
a

ter

The value chain concept has already been described in detail earlier in this Study Text
...


6
...
1 Using the value chain with IS

(b)

Efficiency is the measure of how well the resources are being used and measures could include
profitability, capacity use and yield gained from that capacity
...


ea

(a)

cc

Management can use this model to assess the degree of effectiveness and efficiency of resource use
...
This stage should include an assignment of costs and added value
and an identification of the critical activities
...

Identify the cost or value drivers
...
For example, e-commerce allows transportation companies of all sizes to
exchange cargo documents electronically over the internet
...
By using e-commerce, companies can

fre

FAST FORWARD

(b)

Part E Information technology  11: E-business

join us on facebook @ fb
...
com

6
...
2 Value network
Knowledge brought forward from earlier studies

A value network can be defined as the links between an organisation and its strategic and non-strategic
partners that form its external value chain
...


ym
a

ter

ial

Key term

tud

Value network

The impact of e-business on the value network

as

E-business is a vital element in the value network
...


fre

ea

cc

Using the internet for e-business will allow customers to access price information, place delivery orders
and track shipments
...
For
example, anything that simplifies the process of arranging transportation services will help build
companies' business and enhance shareholder value
...
By making more information available about the
commercial side of companies, businesses will make their website a place where customers will not only
get detailed information about the services the company offers, but also where they can actually conduct
business with the company
...
E-commerce functions are taking companies a substantial step forward by providing
customers with a faster and easier way to do business with them
...
4 Impact of IT on the value chain

Exam focus
point

6/12

A Section B question in the June 2012 exam required candidates to evaluate how technology could be
used to support the supply chain operations of the organisation featured in the scenario
...


372

11: E-business  Part E Information technology

join us on facebook @ fb
...
com


...

Identify the linkages
...
There may be important links between the primary activities
...
Competitors can often imitate the
separate activities of an organisation but it is more difficult to copy the linkages within and between
value chains
...
com

(b)

(c)
(d)
(e)

Inbound logistics covers receiving, storing and handling raw material inputs
...

Operations are concerned with the transformation of the raw material inputs into finished goods or
services
...

Outbound logistics is concerned with the storing, distributing and delivering the finished goods to
the customers
...

Marketing and sales are responsible for communication with the customers
...

Service covers all of the activities that occur after the point of sale, eg installation, repair and
maintenance
...



...

Technology development includes Computer Aided Design (CAD) aiding operations to produce
engineer's drawings and component design
...


ter

(a)

To download more visit http://freeaccastudymaterial
...


(b)

(c)

as

(d)

Can linkages between the different activities be improved by the use of IT? For example,
information from support activities may be made available to primary activities on a more timely
basis
...

Can more effective links be formed with external entities? For example, can inbound logistics be
improved by using EDI?
Can IS/IT be used to decrease the cost of any activity? For example, is there room for more
automation or transformation of activities, or even re-engineering using currently available IT tools
and techniques?

tud

(a)

ym
a

Having identified areas that could be more efficient or effective from the value chain analysis, the IS/IT
strategy can be used to try and determine how those activities, and in particular, the competitively
significant activities, can be improved
...
5 Taking advantage of IT

cc

Porter and Millar advocate five steps that senior executives may follow to take advantage of opportunities
that the information revolution has created
...


Step 1

Assess information intensity
...


Step 2

Determine the role of IT in industry structure
...


Step 3

Identify and rank the ways in which IT might create competitive advantage
...
There may also be
opportunities to enter new market segments and to introduce new products
...
com/freeaccastudymaterial

373

To download more visit http://freeaccastudymaterial
...
These might be based on the exploitation
of new categories of information and the sale of information-processing capacity
...
Effectively, this is the creation of a comprehensive strategy
and has implications for most parts of the organisation
...
co
m

For any organisation, it is possible to assess the information content (the information intensity), of the
value chain activities and linkages
...
The matrix evaluates the information
intensity of the value chain (how product value is transformed through activities and linkages in the value
chain) against that of the product (what the buyer needs to know to obtain the product and to use it to
obtain the desired result)
...

The degree of information in the value chain also varies
...


ial

Oil refining

Low

Cement

ym
a

High

High

Banking, Airlines

ter

Information intensity of
the value chain

Low

Fashion

Information intensity matrix

tud

If the information content of the product is high, IT can be used to enhance product delivery as, for
example, with internet sites for newspapers
...


as

The segment where the information content of both the product and the value chain are high includes
banking and financial services
...
There are
banks in the UK such as First Direct that have no branches and retail online, through ATMs and 24 hour
telephone phone links
...
The fact that information content is low does not mean that there is no scope
for exploiting IT to achieve a business advantage
...
For example, there could
be a niche market for specialist bricks in garden design, where expertise is in short supply
...
The production process offers little scope for IT but, since the
process is presumably well known and closely controlled, information could be used to provide a more
efficient operation
...


374

11: E-business  Part E Information technology

join us on facebook @ fb
...
com

Information content of the product

To download more visit http://freeaccastudymaterial
...
6 Restructuring the supply chain
Supply chain management options can be portrayed as a continuum, from vertical integration to virtual
integration
...



...
Virtually integrated companies are so tightly organised that it is often
difficult to determine where one legal entity ends and another starts
...


ter

6
...
1 Vertical integration

Virtual
integration

ial

Vertical
disintegration

To download more visit http://freeaccastudymaterial
...
6
...
It has been extensively discussed elsewhere in this Study Text
...
As opposed to integration, in which
production occurs within a single organisation, vertical disintegration means that various diseconomies of
scale or scope have broken a production process into separate companies, each performing a limited
subset of activities required to create a finished product
...
6
...
Also, in some cases, smaller firms can be
more responsive to changes in market conditions
...
Stability and standardised products more typically engender integration, as it
provides the benefits of scale economies
...
After the Second World War, the industry was
broken into small fragments, becoming highly vertically disintegrated, with specialised firms that only
performed certain tasks such as editing, special effects, trailers and so on
...
6
...
Virtually integrated companies are so tightly organised that it is often
difficult to determine where one legal entity ends and another starts
...


fre

FAST FORWARD

6
...
5 Example

An example of this restructuring is what has happened in the car industry
...
He managed a truly vertically integrated supply chain
...
com/freeaccastudymaterial

375

To download more visit http://freeaccastudymaterial
...
The design, system development, product sourcing, logistics, and even final assembly can all
be outsourced to supply chain partners
...
This forces the move
from an environment of hard wired integration, where relationships are at arms-length and adversarial,
even across functional boundaries within the organisation, to an environment based on negotiated
sourcing, where non-core activities are outsourced and collaborative partnerships are the norm
...
co
m

6
...
6 Two kinds of integration

In most industries today, it is not enough simply to optimise internal structures and infrastructures based
on business strategy
...
Upstream and
downstream integration with suppliers and customers has emerged as an important element of
manufacturing strategy
...


Suppliers

ial

ter

Delivery integration
Manufacturers

Customers

1

2

ym
a

Information integration

Co-ordinating and integrating the forward physical flow of deliveries between suppliers,
manufacturers and customers, using just-in-time, mass customisation in the supply chain or by
exploiting third party logistics
Backward co-ordination of information technologies and the flow of data for customers to suppliers

tud

Information technologies allow multiple organisations to co-ordinate their activities in an effort to truly
manage a supply chain
...

According to Hayes and Wheelwright, if this need to develop shared operational activities is accepted, then
the strategic issues become direction, degree and balance
...


fre

The challenges for manufacturing firms are shifting from internal efficiency to supply chain efficiency
...
The information can be integrated through
ordinary means of communications such as telephone, fax and email; it can also be integrated through
dedicated supply chain planning software
...
They are developing into looser affiliations of companies,
organised as a supply network, where direct ownership is changing dramatically
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


To download more visit http://freeaccastudymaterial
...

(a)

Increased competition
...


(b)

Increased volumes and speed of data
...


(c)

More demanding customer requirements
...


6/11

ial

7 E-procurement

To download more visit http://freeaccastudymaterial
...
co
m

Additionally, what is not well recognised is the increased capability of customers to bypass their traditional
supplier and cut out the middle man
...
To remain in the
chain, companies do not just have to demonstrate the value they add, but also demonstrate their ability to
manage their own suppliers
...
1 The methods, benefits and risks of e-procurement

ter

E-procurement is the purchase of supplies and services through the internet and other information and
networking systems, such as Electronic Data Interchange (EDI)
...
It brings time and efficiency improvements but it also brings threats to control and security
...

An important part of many B2B sites, e-procurement is also referred to by other terms, such as supplier
exchange
...
Today the transactional process is considered to be only part of the e-procurement
function
...
A properly implemented system can connect companies and their business processes directly with
suppliers while managing all interactions between them
...


At the right time
In the right quantity
In the right quality

cc





as

It focuses on the complete purchasing mix, or the five rights of purchasing, which are that goods and
services must be delivered:



At the right price
From the right vendor

ea

7
...
1 Methods

Typically, e-procurement websites allow authorised and registered users to log in using a password
...
This saves searching for the items required and
also avoids the need to key in name, address and delivery details
...
Transactions can be initiated and completed
...
Ongoing purchases may qualify
customers for volume discounts or special offers
...
Buyers identify themselves with their card number when placing an order; the supplier

Part E Information technology  11: E-business

join us on facebook @ fb
...
com
checks the purchase card number and, if correct, authorises it with the bank
...


7
...
2 Benefits of e-procurement

Reduced
inventory levels

Knowing product numbers, bid prices and contact points can help businesses close
a deal while other suppliers are struggling to gather their relevant data
...


Wider choice of
supplier

In theory, resources can be sourced from suppliers anywhere in the world, perhaps
at much lower prices than could be obtained if the organisation only considered
local suppliers
...


Intangible
benefits

Staff are able to concentrate on their prime function and there is financial
transparency and accountability
...


(d)

Nine marks were available as part of an optional question in the June 2011 P3 exam
...
This was, on the whole, answered very well by candidates with many scoring full
marks
...
Moving to e-sourcing speeds up the sourcing process dramatically but
the increased efficiency and speed can also destabilise the rest of a supply chain if it is not able to
step up its performance to meet the increased speed in the purchasing link of the chain
...
If anyone can order goods from anywhere, there is a major risk that unauthorised
purchases will be made
...

Organisational risk
...
Users may not adapt to it well
...
Technical issues may stall the implementation
...

Data security
...
This brings up questions like: Who has access to our
data? Where is it stored? How is it protected? What happens if we change providers? Do we get
our data back? Do they sell spending data to our competitors?
Management loses spending control
...


cc

(a)

ym
a

7
...
3 Risks of e-procurement

ter

ial


...


378

11: E-business  Part E Information technology

join us on facebook @ fb
...
com

Cost reduction

To download more visit http://freeaccastudymaterial
...
2 Options and models for implementing e-procurement
How it works

Examples

Public Web

Individual buyers find individual suppliers on the web and
make a purchase
...


Webshops like
www
...
com

Exchange

Suppliers and buyers trade through a third party open
marketplace
...


www
...
com

Supplier
centric

An individual supplier gives access to buying organisations
for a pre-negotiated product range
...


www
...
com
www
...
com

Buyer centric

Individual companies have contracts with a number of
different suppliers
...
The system is fully
integrated into corporate financial control and reporting
systems
...


www
...
com

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m

Model

Buyers and suppliers deal with each other through a
marketplace
...


ym
a

In terms of the options available to organisations, historically, it has been easier to implement systems
that only cover part of the procurement cycle
...
Some
networked accounting systems allow staff in the buying department to enter an order, which can then be
used by accounting staff to make payment when the invoice arrives
...
Such integrated business
software systems power a corporate information structure, thus helping companies to control their
inventory, purchasing, manufacturing, finance and personnel operations
...
ERP may also
incorporate transactions with an organisation's suppliers
...
For example, an
organisation's UK sales office may be responsible for marketing, selling and servicing a product
assembled in the US using parts manufactured in France and Hong Kong
...


Part E Information technology  11: E-business

join us on facebook @ fb
...
com

Chapter Roundup
Electronic business, or e-business, is the automation of business processes of all types through
electronic means
...

E-business that includes a financial transaction is known as e-commerce
...

–
–
–
–
–
–

Costs are reduced
...

Communications are improved
...

Customer service is improved
...


ial

Adoption of e-business methods may be hindered by a range of obstacles including lack of skills; lack of
internet use and awareness among businesses and the wider population; and feats about privacy,
effectiveness, cost, security and so on
...
Channel structures are the means by which products and services are delivered
to customers
...
Countermediation is the creation of a new intermediary by an established company
to compete via a business with established intermediaries
...
E-commerce business models may also be categorised by
characteristics such as value proposition, revenue model and market opportunity
...


ym
a

ter



The internet enables computers across the world to communicate via telecommunications links
...
It is based on a technology called
hypertext which allows documents stored on host computers on the internet to be linked to one another
...

An extranet is used to communicate with selected people outside the organisation
...
The
machines that provide services to other machines are servers
...

Each machine on the internet is assigned a unique address called an IP address
...
The International Standards
Organisation (ISO) has defined seven levels in a standard called Open Systems Interconnection
...
The TCP/IP protocol stack is a good example
...

Alternatives to PC-based internet access include interactive digital television and wireless or mobile
access
...
To help prevent theft, fraud and human error four types of control are needed to protect IT assets
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m



To download more visit http://freeaccastudymaterial
...
This requires the consideration of two key issues: firstly, establishing the rules to ensure
that all data input is processed in the same way; and secondly, to ensure that there is a way of assessing
whether the controls are working
...





...
Disaster recovery is devoted to ensuring
the continuation of an organisation's IT systems in the event of some form of disaster
...
Some experts argue
that big data may be as important to business as the internet
...
com

–
–
–

ter

Big data analytics refers to the analysis and identification of insights in vast quantities of data
...

McKinsey's 2011 report, 'Big data: The next frontier for innovation, competition and productivity,'
suggests five ways in which big data can create value for organisations:
Creating transparency
Performance improvement
Market segmentation and customisation
Decision making
New products and services

ym
a

–
–
–
–
–



tud

Critics however argue that big data is simply the latest buzzword which has become an obsession of
business leaders and the media alike
...

The internet has the capacity to transform many businesses via the introduction of new technology and
skills and, eventually, the re-positioning of the offering to fit the new market conditions
...

Suitability
...


cc

Acceptability
...
Distributors are
particularly important here
...
Feasibility is a matter of resources
...

IT has the capacity to transform businesses
...




Several stage models have been proposed for assessing maturity of capability
...




fre



A supply chain encompasses all activities and information flows necessary for the transformation of
goods from the origin of the raw material to when the product is finally consumed or discarded
...
The pull based element is particularly relevant on
IS for feedback and control, since it aims to eliminate buffer inventory by increasing responsiveness
...
com/freeaccastudymaterial

381

To download more visit http://freeaccastudymaterial
...
One important consequence of this is that improved communication with
customers results, making it easier for them to purchase
...




Supply chain management options can be portrayed as a continuum from vertical integration to virtual
integration
...
co
m

Vertical disintegration means that various diseconomies of scale or scope have broken a production
process into separate companies, each performing a limited subset of activities required to create a
finished product
...
Virtually integrated companies are so tightly organised that it is often
difficult to determine where one legal entity ends and another starts
...


fre

ea

cc

as

tud

ym
a

ter

It is typically operated through a secure website, possibly using a paperless system based on a purchasing
card
...

Implementation may proceed according to a variety of models, but initially it is easiest to introduce IS to
only part of the improvement cycle
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

Quick Quiz
What distinguishes e-commerce from e-business?

2

What is disintermediation?

3

How does the infomediary model of e-business work?

4

What is system architecture?

5

Is the bull whip effect associated with the push model or the pull model of the supply chain?

6

What are the axes of Porter and Millar's information intensity matrix?

7

What are the models available for implementing e-procurement?

fre

ea

cc

as

tud

ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m

1

Part E Information technology  11: E-business

join us on facebook @ fb
...
com

Answers to Quick Quiz
E-business involves transactions over the internet
...
com/freeaccastudymaterial

Time

45 mins

To download more visit http://freeaccastudymaterial
...
co
m

1

Topic list

ter

ial

E-marketing

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...


385

join us on facebook @ fb
...
com

Study guide
Intellectual level
E4

E-business application: downstream supply chain management

(a)

Define the scope and media of e-marketing

2

(b)

Highlight how the media of e-marketing can be used when developing an
effective e-marketing plan

2

(f)

Evaluate the effect of the media of e-marketing on the traditional marketing
mix of product, promotion, price, place, people, processes and physical
evidence

3

Describe a process for establishing a pricing strategy for products and
services that recognises both economic and non-economic factors
...
As such, it could well be examined in a dedicated question requiring in-depth knowledge, probably
in Section B
...


Models and frameworks

fre

ea

The '6I' characteristics of e-marketing are explicitly referenced in the Study Guide, along with the '7Ps' of
the extended marketing mix, so these could be specifically referred to in an exam question
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(d)

Explore the characteristics of the media of e-marketing using the '6I's of
Interactivity, Intelligence, Individualisation, Integration, Industry structure
and Independence of location

ial

(c)

To download more visit http://freeaccastudymaterial
...

Most marketing activities can be enhanced by the use of such techniques, including branding, customer
service and sales
...

Marketing objectives include identifying, anticipating and satisfying customer requirements profitably
...
com



ym
a

ter

Essentially, e-marketing means using digital technologies to help sell goods or services
...
What
has changed is the number of options available
...

Though businesses will continue to make use of traditional marketing methods, such as advertising, direct
mail and PR, e-marketing adds a whole new element to the marketing mix and is a valuable complement
...


1
...
1 Key marketing functions the internet can perform
Creating company and product awareness – communicating essential information about the
company and its brands
...


(b)

Branding – is a marketing communications activity
...
With the amount of advertising being devoted to the internet increasing
each year, the frequency of visits to a site will also increase
...
Online communications should therefore be similar
in appearance and style to communications in the traditional media so as to present a consistent
brand image
...
Electronic coupons, bonus
offers, and contests are now quite common
...


ea

(d)

cc

as

tud

(a)

Lead generation – the internet is an interactive medium
...
A site may also ask for demographic information that can be added to the
company's database
...


fre

Key term


...
1 E-marketing – scope and media

(e)

Customer service – in any form of marketing, customer service is important
...
Right now,
customer service is perceived as a weak link in internet marketing
...
Some customer service tactics commonly used include frequently asked questions

Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
(FAQs) and return email systems
...

Email databases – organisations retain visitor information in a database
...
An
organisation must be careful that it does not distribute spam on the internet
...


(g)

Online transaction – organisations are capable of selling online if the website is user friendly
...
Presently, the business-to-business
market is booming with business transactions
...



...
1
...


(c)

The ability to track and measure results – marketing by email or banner advertising makes it
easier to establish how effective your campaign has been
...


(d)

24-hour marketing – with a website your customers can find out about your products even if your
office is closed
...
The more they buy from the organisation, the
more the organisation can refine the customer profile and market effectively to them
...
For example, many people take their mobile phones or tablet computers
with them wherever they go
...


(g)

More interesting campaigns – e-marketing helps to create interactive campaigns using music,
graphics and videos
...


(h)

Better conversion rate – customers are only ever a few clicks away from completing a purchase
...


as

tud

ym
a

ter

ial

Global reach – a website can reach anyone in the world who has internet access
...


cc

Together, all of these aspects of e-marketing have the potential to add up to more sales
...


ea

1
...
Any online
e-communication must be consistent with the overall marketing goals and current marketing efforts of
the organisation
...

They involve selecting target customer groups and specifying how to deliver value to these groups
...


388

12: E-marketing  Part E Information technology

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...
It can be used by managers in the private, public and non-profit sectors
...
com


...

Scanning competitor internet sites
Competitor benchmarking to compare e-commerce services within a market

ea

Competitive intelligence systems give a structured approach to monitoring and
disseminating information on competitor activities

fre

Intermediary
analysis

Identify and compare intermediaries for a marketplace
Search portals and look for new approaches for traffic building
Research whether competitors are using disintermediation or reintermediation

Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
Focus on e-market measurement:

Internal
marketing
audit

Channel
promotion
Acquisition costs
Referrers

Channel
behaviour

Channel
satisfaction

Channel
outcomes

Channel
profitability

Who?
How?

Opinions?
Attitudes?
Brand impact?

Leads?
Sales?

ROI?
Profitability?


...

Independence of location
Industry structure
Integration
Interactivity
Individualisation
Intelligence

cc








as

FAST FORWARD

12/13, 6/11

tud

1
...


fre

Independence of location

6 Is of marketing

Interactivity

Industry structure

Integration
Individualisation

Intelligence

By considering and questioning each of these aspects of new media marketing, managers can develop
plans to accommodate the characteristics of new media
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Independence of
location

Do you exploit any opportunities to deliver information-based products and services
electronically?
Electronic media gives the possibility of communicating globally – giving
opportunities of selling into markets that may not have been previously accessible
...
co
m

Redrawing the market map in form of new market segments or increasing the
marketing boundaries
Adopting IT enabled services (ITeS)
Integration

Do you have detailed knowledge of individual customers, influencers or consumers?
Do you share this knowledge across all customer-facing parts of the business?

ial

To download more visit http://freeaccastudymaterial
...
It is more difficult, but absolutely
crucial to gather vital customer information, obtain customer feedback, use existing
knowledge about the customer and exploit the web's interactive nature to add value
through product configuration, online pricing and so on
...
On the internet, it is usually a
customer who seeks information on a website – it is a 'pull' mechanism
...
As we saw in the previous chapter, the
increasing use of big data has enabled companies like Amazon to tailor their
marketing message and purchase recommendations to customers based on
purchases made by other customers with similar interests
...
The website also records
information every time a user clicks on a link
...


Example

fre

The best-known example of electronic commerce – book-selling, exemplifies how the internet can be used
for an interactive dialogue with a known customer
...
com exploit the web's interactive nature to allow the customer to search for
books on particular topics, track the status of an order placed earlier, and ask for recommendations of
books similar to their favourites, read reviews placed by other customers, and so on
...


Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
Exam focus
point

The June 2008 exam included a Section B question which asked candidates to identify how electronic
media could provide a training college with different marketing opportunities to traditional media (such as
advertising and direct mail)
...


1
...

Pricing can be made transparent; dynamic pricing may be used
...

Promotion can be previously targeted via customer databases
...

Processes may be automated
...


ym
a

FAST FORWARD

12/10

Marketing on the internet brings many new opportunities not readily available or affordable using
conventional marketing methods
...
Because of changes in the market and the behaviour of the
customers, future marketing should focus more on delivering value to the customer and become better at
placing the customer – and not the product – in the centre
...


fre

ea

cc

Another change proposed because marketing has expanded into service delivery, means that the original
4Ps of the marketing mix have been joined by three more Ps (Dibb & Simkin, 1994) (see diagram below):

392

12: E-marketing  Part E Information technology

join us on facebook @ fb
...
com


...
Remember when answering questions such as this, to apply your answer
specifically to the scenario given and not simply churn out generic lists
...
com
In this section, we can show how e-commerce provides the opportunities for the marketer to vary the
seven elements of the marketing mix
...
4
...
co
m

This is the element of the marketing mix that involves researching customers' needs and developing
appropriate products
...
He suggested that a product should be viewed in three levels
...
com

Augmented or extended product

ter

After sales guarantee

Core product – what is the core benefit the product offers? Customers who purchase a camera are buying
more than just a camera − they are purchasing memories
...
The strategy at this level involves organisations branding,
adding features and benefits to ensure that their product offers a differential advantage from their
competitors
...


tud

What does buying products online offer over one-to-one sales?

The ability to deliver interactivity and more detailed information through the internet is the key to
enhancing the augmented or extended product offering online
...

The buying process is customised for returning visitors, making repeat purchases easier
...
EasyJet,
for example, can readily bundle its flights, hotels and car hire through suitable design of its
website
...
nike
...
Users can design and see their trainers online before they order
...
4
...
Many costs, such as store rental and staff costs, have
disappeared for completely online stores, placing price pressures on traditional retailers
...

Even more significant is the use of price comparison sites by consumers
...
com give a single location that empowers the consumer to quickly find out the best price
from a variety of suppliers for a range of products, from books and CDs to white goods
...


fre

(a)

Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
Dynamic pricing gives the ability to test prices or to offer differential pricing for different segments
or in response to variations in demand
...
Tickets
...

(c)
Different types of pricing may be possible on the internet, particularly for digital, downloadable
products
...
The internet
offers new options, such as payment per use; rental at a fixed cost per month or a lease
arrangement
...

(d)
The growth of online auctions also helps consumers to dictate price
...

(e)
E-pricing can also easily reward loyal customers
...

(f)
Payment is also easy; PayPal or online credit cards allow for easy payments
...

Price is a crucial part of the marketing mix
...
5 of this chapter
...
4
...

E-Business Models
Set up by

Main aim

Controlled by sellers

Single vendor seeking many buyers

To retain value and power in any
transaction

Controlled by buyers

One or more buyers

To shift value and power in
marketplace onto the buyer's side

tud

ym
a

Types of marketplaces

Neutral marketplaces

Third party intermediaries to match
many buyers to many sellers

Buyer intermediaries can also be
there to act as agents
To match buyers to sellers at an
auction
Commission based

Are there transactions or benefits to be realised?
Is the electronic market for the product developing quickly?
Does the company have substantial market share or buying power?
Would a neutral intermediary be beneficial?

cc






as

Choosing a marketplace depends on four factors:

Types of e-commerce marketplace

ea

B2C and B2B ( eg, Dell and Alibaba)
C2C (eBay)
Auctions, (eBay, QXL)
Consumer reviews (Bizrate)
Games (There
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(b)

To download more visit http://freeaccastudymaterial
...


(b)

(c)

Disintermediation – is there an option for selling direct? When assessing this option, there will be
a number of barriers and facilitators to this change
...

Reintermediation – new intermediaries created through re-intermediation, for example
Lastminute
...
These intermediaries receive a commission on each sale resulting from a referral
from their site
...

Countermediation – should the organisation partner with another independent intermediary, or set
up its own independent intermediary? For example, a group of European airlines have joined forces
to form Opodo, which is intended to counter independent companies such as Lastminute
...


To download more visit http://freeaccastudymaterial
...
co
m

(a)

(b)

ym
a

(c)

Reach – this is the potential audience of the e-commerce site
...

Richness – this is the depth or detail of information which is both collected about the customer
and provided to the customer
...

Affiliation – this refers to whose interest the selling organisation represents – consumers or
suppliers
...
It suggests that customers will favour retailers who
provide them with the richest information on comparing competitive products
...


Localisation – providing a local site, usually a language specific version, is referred to as localisation
...


1
...
4 Promotion (or customer communication)

tud

Marketing communications are used to inform customers and other stakeholders about an organisation
and its products
...
Most
organisations today have some form of webpage used in most, if not all, advertisements
...
Website public
relations (WPR) is another approach to promoting online
...


(b)

The internet can be used at different stages of the buying process
...
Think of a car
purchase
...


ea

Promotional tools may be used to assist in different stages of customer relationship management
from customer acquisition to retention
...


fre

(c)

cc

as

(a)

(d)

The internet can be integrated into campaigns
...


Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
These general technological trends impact across the promotional mix
...
4
...

Email notification may be automatically generated by a company's systems to update customers
on the progress of their orders
...

Call-back facility requires that customers fill in their phone number on a form and specify a
convenient time to be contacted
...

Frequently Asked Questions (FAQ) can pre-empt enquires
...

On-site search engines help customers find what they are looking for quickly
...

Virtual assistants come in varying degrees of sophistication and usually help to guide the
customer through a maze of choices
...
Smith and Chaffey (2001) suggest that online, part
of the consideration for the people element of the mix is the consideration of the tactics by which people
can be replaced or automated
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Promotion activity

To download more visit http://freeaccastudymaterial
...
4
...
The restructuring of the organisation and channel structures described for product, price, place
and promotion all require new processes
...



...
4
...
com

The physical evidence element of the marketing mix is the tangible expression of a product and how it is
purchased and used
...
It includes issues such as ease of use, navigation, availability
and performance
...
The process must be
right to enable an acceptable response within the notified service standards such as 24 hours
...
4
...
com
...
Everyone benefits except the
traditional bookshop
...

It facilitates personalised attention – even if such attention is actually administered through impersonal,
yet highly sophisticated IT systems and customer database manipulation
...
Approaching such segments may be one of
the few ways in which e-commerce entrepreneurs can create competitive advantage
...


as

A new phenomenon is emerging called dynamic pricing
...

These new trends are creating pressure for companies
...






ea

One of the most complex decisions involved in the marketing mix is deciding on the price of the product
or service
...
5 Price and pricing strategies



Analyse demand, cost and profit relationships



Evaluate competitor's prices



Determine the basis for pricing



Select a primary strategy



Determine the final price

Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
Key term
Exam focus
point

Price is the value placed on what is exchanged
...
It would be worth taking the time to study this
article
...
It is important that you devote sufficient time to both elements when answering questions
...


ter

One of the most complex decisions involved in the marketing mix is deciding on the price of the product
or service
...
In order to do this, they consider the usefulness of the product, or the benefits they expect to
derive from it, and compare this to the cost to determine if the exchange will be worthwhile
...


ym
a

Price directly affects how well an organisation performs competitively, and is also closely linked to
the perceptions of value for money held by the customers
...

If the price is too low, then one of two things could happen:

The product sells well, however, the revenue per item is lower than it could be if the price were
higher, less revenue is earned which, in turn, means less profit than may be possible with a higher
price
...
The customer does not buy the product at all
...
An eight stage process can be used:

Exam focus
point

398

fre

We will consider each of these eight steps to illustrate the price setting process
...
This
question was an unpopular choice and a general lack of knowledge in this area was evident in many of
those who did attempt it
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Question 2 in June 2014 required candidates to suggest a pricing strategy for an IT training company
...
The scenario set out an initial price of $750 per delegate attending a training
course
...
The examining team noted that the question was not well
answered, 'financial analysis was often limited, with little use of expected values
...


To download more visit http://freeaccastudymaterial
...
5
...
This pricing objective must be consistent
with the:



Overall objectives of the organisation
Marketing objectives


...

Pricing objectives form the basis of decisions made at later stages of the price setting process
...

Organisations should have one or more pricing objectives for each product
...


ial

To download more visit http://freeaccastudymaterial
...


1
...
2 Assessing the target market's evaluation of price and its ability to buy

ter

The second stage involves understanding the amount that an individual will pay for something
...

Type of product – people will be more sensitive to changes in the price of food than they are to
changes in the price of new cars
...
Firstly, food is a necessity, whereas
a car is a luxury
...


(b)

Target market – business travellers are less concerned about train prices than those travelling for
leisure purposes
...


ym
a

(a)

tud

The key to this stage is to understand the buying power of the customers, and also how important one
product is to them over another
...


1
...
3 Determining demand

as

The next stage is to determine the demand for the product by considering its relationship with price
...


ea

cc

Price

D3

D1

D2

Quantity

fre

This relationship will hold true so long as all other factors remain constant
...
If one of those other factors changes, this may cause the demand
curve to shift, as illustrated by D2 and D3 in the diagram above
...


The steepness of the demand curve will be determined by the price elasticity of demand
...
For example, demand for
basic food items and utilities might be relatively inelastic
...
They are essential

Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
items that will still be demanded, even when prices rise
...
Demand for more luxury products, such as exotic holidays on the other hand, is more
elastic
...
This demand curve will be much
flatter
...
co
m

Price

D2

D1

Quantity

ym
a

ter

ial

However, not all products conform to this model
...
This is because the price is associated by the customer with high quality and
exclusivity
...
The demand curve for products such as this is shown
below
...
5
...
There are
two approaches for doing this
Marginal analysis
Break-even analysis

Marginal analysis

as




fre

ea

cc

Marginal analysis is concerned with how a change in production (or sales volume) by one unit affects an
organisation's costs and revenues
...


The marginal cost curve is typically U-shaped
...
However, at some point diseconomies of scale (eg more supervision
and larger workforce) appear and marginal costs begin to rise
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Marginal revenue is the change in total revenue that occurs when one more unit is sold
...
com


...
Therefore, each additional product sold provides less
revenue than the previous one
...


ial

Profit is maximised where marginal cost equals marginal revenue
...
After this point, the additional cost exceeds
the additional revenue
...
However, it
is still beneficial to organisations to have an understanding of the relationship between the marginal cost
and marginal revenues when setting prices of existing products
...


The break-even point is the point at which the costs of producing a product equal the revenue made from
selling it
...


fixed costs
price  variable costs

tud

Break-even point =

as

To use break-even analysis effectively, the break-even point for a range of different prices should be
established
...
Although it may not indicate the correct price to charge, it will identify
any price alternatives that should definitely be avoided
...


fre

ea

cc

Money ($)

Revenue
Profits
Break-even Point

Total Cost

Total variable Costs
Fixed Costs

Losses
Quantity

The problem with break-even analysis is that it focuses on recovering costs and breaking even, rather than
on how to achieve a pricing objective, eg a return on investment or percentage of market share
...
com/freeaccastudymaterial

401

To download more visit http://freeaccastudymaterial
...
5
...
Evaluating these is step five of the price
setting process
...
However, this is not
always an easy task, particularly in producer and reseller markets
...


1
...
6 Determine a basis for pricing

Stage six involves selecting a basis for pricing
...

Features

Limitations

Suitable uses

Cost-based
pricing

A monetary amount or percentage is
added to the product cost
...


Does not relate to
a specific pricing
approach, nor
does it ensure the
attainment of
pricing objectives

Appropriate when
production costs are hard
to predict, or production
takes a long time, eg
custom-made equipment
or commercial
construction projects
...


Some costs are
difficult to
determine
...


Popular in periods of
rapid inflation as raw
materials used may
fluctuate in price
...
In industries where
this approach is common and sellers
have similar costs, price competition
may be relatively low
...
The same percentage is
often used for the prices of items
within a single product category and
similar mark-ups may be used across
an industry at the retail level
...


fre

ea

Compared to cost-based pricing, this
method allows higher profits to be
achieved
...


12: E-marketing  Part E Information technology

join us on facebook @ fb
...


To download more visit http://freeaccastudymaterial
...
co
m

Competitor prices are important to organisations as they can help them to ensure that their own prices are
in line
...
Others may choose to use price as a competitive tool by selecting prices that undercut the
competition
...
com
Features

Limitations

Suitable uses

Competitionbased pricing

Prices are set in relation to
competitors
...


True amounts
charged by
competitors can
be difficult to
determine
...


This method should help attain a
pricing objective to increase sales or
market share
...


ter

ym
a

Marketing strategy
Competition
Costs
Product line pricing
Value to the customer
Negotiating margins
Price-quality relationships
Political factors
Explicability
Effect of distributors/retailers

This approach takes
account of many different
factors that influence
price
...


To download more visit http://freeaccastudymaterial
...
It is a
detailed and time
consuming
process
...
co
m

Price basis

tud

The price set must reflect the product's
marketing strategy, ie target market
profile, brand positioning and sales
targets
...


1
...
7 Selection of pricing strategy

as

A pricing strategy is an approach designed to influence and determine pricing decisions
...

There are five main types of pricing strategies

cc

Differential pricing
New product pricing
Product-line pricing
Psychological pricing
Professional pricing
Promotional pricing

ea








Differential pricing

fre

This involves charging different prices to different customers for the same quality and quantity of product
...


Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
The final price is established through bargaining between the seller and buyer
...


Secondary
market pricing

One price is set for the primary market and another (usually lower) price is set for
another market
...


Periodic
discounting

Temporarily reducing prices on a systematic basis, for example many retailers hold
January and summer sales
...


Random
discounting

Temporary reductions are made as above but on an unsystematic basis
...


New product pricing

ial

When a new product is launched, a base price will have to be set for it
...

The price is set at the highest possible price that customers who most desire the
product will pay
...
For example, when flat
screen TVs were first introduced they were extremely expensive compared to regular
TVs
...
By
setting the price at the highest level possible, a lot of profit can be made from sales
of only a few units to customers who desperately want to be the first to own a new
product
...


Penetration
pricing

A price is set below the prices of competing brands in order to penetrate a market
and produce a larger unit sales volume
...
Often a penetration price may
be used for a product after first skimming the market with a higher price
...


as

Product-line pricing

Product-line pricing means establishing and adjusting prices of multiple products within a product line
...

The basic product is priced low, but related products are priced high
...


Premium pricing

The highest quality, or most versatile, products are given the highest price and the
rest of the products in the range are priced to appeal to price-sensitive customers or
those that desire specific features
...
It may advertise its cheaply priced most basic model in the hope the
customer will actually purchase a more expensive version
...
If price lining is used, the demand curve looks like a series of steps
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Negotiated
pricing

To download more visit http://freeaccastudymaterial
...
There are seven key techniques for doing this
...


Bundle pricing

Packaging two or more complementary products and selling them for a single price,
which is usually lower than they would cost if both items were purchased separately
...
This
kind of pricing is also common in travel services, banking and car sales
...
Examples are
tins of baked beans and bars of soap
...
The benefits of using EDLP are that the organisation incurs
less promotional expenditure and has greater stability in sales
...


Odd/even pricing

Some customers prefer odd number pricing, ie would be more likely to buy a
product costing $99
...
Some customers are not fooled by
the 'saving' and prefer to pay an even price $20, rather than $19
...
Fewer
organisations adopt the even pricing approach
...
This was dealt with by BT by altering the number of units
but keeping the price the same, so although your money ran out quicker, you still
perceived it to cost the same as it always had
...
Holidays, cars,
electrical and beauty products are often priced in this way
...
com


...
Rather than setting their fees based on their time and involvement, they may set a standard
fee, regardless of the problems involved in carrying out the work
...
Professionals have an ethical responsibility not to overcharge unknowing customers
...
Price leaders get people in the shop, and they then make other purchases on
which greater profits are made
...


ea

Price leaders

cc

The pricing is related to a short-term promotion of a particular product
...


These are pricing policies which intentionally mislead customers
...


Special event
pricing

Advertised 'sales' or price cutting that is linked to a holiday, season or event to
increase sales volume
...
This higher price
could be the previous price of the product, the recommended retail price
...
If overused, customers stop believing that the higher
price is the normal price
...
com/freeaccastudymaterial

405

To download more visit http://freeaccastudymaterial
...
5
...
In
practice, rather than follow this systematic approach, many prices are set by trial and error or after only
limited planning
...

In the absence of government price controls, pricing is a flexible and convenient way of adjusting the
marketing mix
...



...
However, the
organisation must not lose sight of the longer-term implications for the brand, or the fundamental
relationship between demand, costs and profits
...
6 Comparison of traditional and online branding

The domain name is a vital element of the brand
Brand values are communicated within seconds via the experience of using the brand website
Online brands may be created in four ways:

Key term

Migrate the traditional brand
Extend the traditional brand
Partner with an existing digital brand
Create a new digital brand

ym
a

–
–
–
–

ial





A brand is a name, symbol, term, mark or design that enables customers to identify and distinguish the
products of one supplier from those offered by competitors
...
For example,
what is the value of a pair of Nike trainers without the brand or the logo?

tud

The value of brands in today's environment is phenomenal
...

Aspects of a well-formed brand in traditional delivery channels

as

Brand name awareness – achieved through marketing communications to promote the brand identity and
the other qualities of the brand
Perceived quality – awareness counts for nothing if the consumer has had a bad experience of a product
or associated customer service

cc

Positive brand associations – include imagery, the situation in which a product is used, its personality
and symbols

ea

Brand loyalty – the commitment of a segment to a brand

fre

These customer touch-points combine to build a good brand presence
...
For the first time, customers are interacting in machinemediated experiences, as opposed to human-mediated
...
A
successful brand, online or off, represents an entire customer experience
...

These elements can be translated to the online shopping experience to include the e-tailer's home or
welcome page website design and page navigation and online support
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


ter

FAST FORWARD

To download more visit http://freeaccastudymaterial
...
6
...
co
m

An effective visual identity is important online, as is a memorable domain name
...
For
example, the domain name www
...
com is fast becoming the brand first seen by the consumer,
rather than the distinctive red and white label on the can
...
The World Intellectual Property
Organisation has now taken up this issue, at least in terms of the worst exploitative excesses
...
com name who operate in very different sectors, and the
new extensions (such as
...
TV) do not totally resolve the problem
...
com
since this is where the customers look first
...
A company's entire character, identity, products, and services, can be
communicated in seconds on the web and customers make judgments just as fast
...
com

1
...
2 Online brand options

ial

Migrate traditional brand online – this can make sense if the brand is well known and has a strong
reputation eg, Marks & Spencer, Orange and Disney
...


ym
a

ter

Extend traditional brand – a variant
...
Management felt it did not hold true for a meaningful web presence,
because you can't get instant pain relief on the web
...


tud

Partner with existing digital brands – co-branding occurs when two businesses put their brand name on
the same product as a joint initiative
...
A successful example of co-branding is the Senseo coffeemaker, which carries both
the Philips and the Douwe Egberts brands
...

Create a new digital brand – because a good name is extremely important, some factors to consider
when selecting a new brand name are that it should suggest something about the product, be short and
memorable, be easy to spell, translate well into other languages and have an available domain name
...


as

FAST FORWARD

6/13, 6/10

A question requirement in the June 2013 exam asked students to evaluate how the organisation described
in the case study scenario could use a CRM system to acquire and retain customers
...


ea

Exam focus
point

cc

It has three phases: acquisition, retention and extension
...


Key term

fre

2
...


Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
What CRM involves

Company benefits realised as a result

 Organisations must become 'customer centric'

 Improved customer retention

 Organisations must be prepared to adapt so that
they take customer needs into account and then
deliver them

 Improved cross selling
 Improved profitability (per customer and in
general)

 Market research must be used to assess
customer needs and satisfaction

Incentives



Services



Profiles



Customer service



Direct e-mail

Extranets



Personalization



Community



Promotions



Loyalty schemes





Direct e-mail
Learning
On-site
promotions

ial





ter

Promotion

Add value

Chaffey's three phases of customer relationship management

ym
a

Customer acquisition is the process of attracting customers for their first purchases
...
The organisation keeps
them as customers
...


tud

Customer extension introduces products and services to loyal customers that may not wholly relate to
their original purchases
...

In recent times, emphasis has increased on building and maintaining good long-term relationships with
customers
...


as

2
...
1 The nature of the customer

ea

cc

Not all customers are the same
...

Others make frequent, regular purchases in large volumes, using credit facilities and building up a major
relationship
...
This variation will exist to a greater or lesser extent in all industries, though
each will have a smaller typical range of behaviour
...

Segmentation of the customer base can have a major impact on profitability, perhaps by simply tailoring
promotion to suit the most attractive group of customers
...
The supplier-customer relationship extends beyond
the basic transaction
...
Any lesser degree of satisfaction is
likely to result in the loss of the customer
...
They will simply depart
...


408

12: E-marketing  Part E Information technology

join us on facebook @ fb
...
com



Extension

Customer selection

Add value
Customer selection

Retention

Add value
Customer selection

Acquisition


...
com
Research indicates that the single largest reason why customers abandon a supplier is poor
performance by front-line staff
...
It is also a vital factor in relationship marketing
...
1
...
2 Relationship marketing

To download more visit http://freeaccastudymaterial
...
co
m

Many businesses sell to intermediaries rather than to the end consumer
...
We
have discussed the impact of the strategic customer elsewhere in this Study Text
...
Examples are manufacturers who maintain their
own sales organisation but appoint agents in geographically remote areas and companies who combine
autonomous operations with franchising
...
For instance, a
selling agent who has invested heavily in inventory after being given exclusive rights in an area should be
consulted before further investment demands are made by the launch of a new product
...


ym
a

Kotler says 'marketing can make promises but only the whole organisation can deliver satisfaction'
...


tud

Relationship marketing is thus as much about attitudes and assumptions as it is about techniques
...
It must be remembered, however, that the effort involved in longterm relationship building is more appropriate in some markets than in others
...
This tends to
be the pattern in commodity markets
...
A relationship marketing approach is more appropriate where switching
costs are high and a lost customer is thus probably lost for a long time
...


as

2
...
1 Differences between transactional and relationship marketing
Transactional

Relationship
Importance of customer relation

Importance of product features

Importance of customer benefits

Short time scale

Longer time scale

Less emphasis on service

High customer service

Quality is concern of production

Quality is concern of all

Competitive commitment

High customer commitment

Persuasive communication

Regular communication

fre

ea

cc

Importance of single sale

2
...
2 Implementing relationship marketing
The conceptual or philosophic nature of relationship marketing leads to a simple principle, that of
enhancing satisfaction by precision in meeting the needs of individual customers
...
com/freeaccastudymaterial

409

To download more visit http://freeaccastudymaterial
...
Adcock mentions three important practical methods which contribute
to this end
...
2
...
This depends on three things:

ym
a

Building relationships makes most sense for customers whose lifetime value to the company is the
highest
...


tud

Relationship marketing is grounded in the idea of establishing a learning relationship with customers
...
For example, some retail banks have tried selling credit cards to less profitable
customers
...
In banking, these high-end relationships are often managed through
private bankers, whose goals are not only to increase customer satisfaction and retention, but also to
cross-sell and bring in investment
...
2
...

By engaging in 'smarter' relationships, a company can learn customers' preferences and develop trust
...
Complaints and errors must be recorded, not just fixed and forgotten
...


ea

Many companies are beginning to achieve this goal by using customer relationship management (CRM)
software
...
In addition, the database
can be analysed to detect patterns that can suggest better ways to serve customers in general
...


fre

Case Study

The Ritz

The Ritz Carlton Hotel makes a point of observing the choices that guests make and recording them
...
At upmarket
retailers, personal shoppers will record customers' preferences in sizes, styles, brands, colours and price
ranges and notify them when new merchandise appears or help them choose accessories
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Modern computer database systems enable the rapid acquisition and retrieval of the individual
customer's details, needs and preferences
...
It enables new products to be
developed that are precisely tailored to the customer's needs and new procedures to be established that
enhance satisfaction
...
The end result of a relationship marketing approach is
a mutually satisfactory relationship that continues indefinitely
...
com

2
...
These vary from
analogues of traditional mass-communications methods such as advertising and newsletters, through
specialised online forms such as search engine registration, to previously targeted means such as
personalised emails and website messages to logged in return customers
...
co
m

Techniques to achieve acquisition include traditional online mass media techniques and specialised online
techniques
...
Skilled website design can put a supplier high up among search results
...


(c)

Newsletters allow an organisation to send news about the company, new products or services and
any new information that has been posted on the website
...
Reciprocal links are an exchange of links between two site owners
...

Affiliate networks are based on paying commission on sales referred from other sites
...
Viral marketing relies on word
of mouth or, in the online sense, getting people to share the online application with others
...
For
businesses, viral marketing can emphasise the value of their goods or services, promote special
offers and generate interest in the business or their products and services through word of mouth
...
They are the
graphical strips commonly seen across the top of website pages
...
Depending on what medium is
chosen to place the banner, the organisation could pay by impression, mile, click or action
...


tud

ym
a

ter

ial

(b)

To download more visit http://freeaccastudymaterial
...

The greatest contrast lies between business and consumer purchases
...


ea

Segmentation of online consumer purchasers may be based on general online activity and the degree of
confidence and competence displayed
...
4 Differences in buyer behaviour

Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
An important part of the marketing process is to understand why a customer or buyer makes a purchase
...

Research suggests that customers go through a five-stage decision-making process in any purchase
...
co
m

Need
recognition

Purchase
evaluation

Information
search

ial

Evaluation of
alternatives

ter

Five-stage decision-making process

The model implies that customers pass through all stages in every purchase
...

The buying process starts with need recognition: for example, I am hungry, we need a new
sofa, I have a headache, or responds to a marketing stimulus, as, for example, when
passing a restaurant and being attracted by the smell
...
If the need is
strong and there is a product or service that meets the need close to hand, then a purchase
decision is likely to be made there and then
...
A customer can obtain information from personal, commercial, public and
experiential sources
...
Where a purchase is 'highly involving' the customer is likely to carry
out extensive evaluation
...


as

tud

ym
a

Step 1

ea

cc

The final stage is the post-purchase evaluation of the decision
...
This arises from the
phenomenon known as cognitive dissonance
...
The customer, having bought a product, may feel that an alternative would have
been preferable
...


2
...
1 Types of buying behaviour

fre

Types of buying behaviour – there are four typical types of buying behaviour based on the type of product
that is to be purchased
...

Habitual buying behaviour occurs when the individual buys a product out of habit, such as a
newspaper
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
(c)

Variety seeking buying behaviour occurs when the individual likes to shop around and experiment
with different products
...
There is little difference between
existing brands
...



...
4
...

B2B

B2C

Market structure

Fewer buyers but larger purchases

Many buyers with smaller purchases

Buying unit differs – more rational
approach, more people involved

Type of purchase

Purchase products to meet specific
business needs – want a customised
product package

ym
a

Emphasise economic benefits

Individuals or families

Purchase products to meet individual or
family needs

ter

Nature of the
buying unit

To download more visit http://freeaccastudymaterial
...


Buy on impulse or with minimal
processes

Communication
differences

Existing customers can be contacted
directly
...
4
...

One study identified six different groups of active internet users and their motivations

ea

Simplifiers – easier than the real world
Surfers – new experiences
Bargainers – good deals
Connectors – chatroom users
Routiners – news, stock prices, finance
Sportsters – sports news

fre








Netpoll has established a different user typology:
(a)

Gameboy – still at school and living at home
...
Into playing
online games
...


(b)

CyberLad – accesses the internet at work and at home
...

Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
Net Sophisticate – straddles the border between cool and nerd
...


(d)

CyberSec – works as a PA to the boss of a small organisation
...
Accesses the internet only at the office
...
Successful professional or high-flying marketing
exec
...
Very impatient if finding information
is difficult or if the site is slow to download
...
Possibly a middle-rank civil servant or a partner at a small firm
of solicitors
...
Given
that he/she gets side-tracked, this is very debatable
...
Her husband thought it would
be a good idea if they got online when he started spending one week in four at company HQ in
Holland, so that they could exchange email messages
...


ial

Retention of online customers may be based on careful use of customer databases and by offering wider
benefits
...
Wider benefits may be
offered by access to extranets and online communities
...
This factor has been called stickiness
...


tud

Customer retention marketing is a tactically-driven approach based on customer behaviour
...
They like to feel they are in control and smart about choices they make, and they like to feel good
about their behaviour
...
These promotions range from
discounts and sweepstakes to loyalty programs and higher concept approaches such as thank-you notes
and birthday cards
...


fre

Other techniques for retaining customers include personalisation, the use of extranets, online
communities, online sales promotions and opt-in email marketing
...
5
...
Here are some examples
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
5 Retaining customers using electronic media


...
com
(b)

Making individually-targeted product offers and recommendations based on browsing/buying
behaviour

(c)

Sending personally addressed and targeted-content messages to customers

(d)

Encouraging users/customers to form virtual communities (for example, using chat rooms,
discussion boards and newsgroups)

2
...
2 Extranets


...
HTTP-based
extranets allow companies to deliver information through a browser interface but offer very limited ability
to interact with core business systems and applications
...
com

On the customer side, extranets offer secure tunnels to remote databases, which let users access
inventory data, examine special discounts, view delivery status, research products, place and fulfills
orders, and collaborate via a secure internet connection
...


ter

2
...
3 Online communities

A community is a multi-way online environment where members encourage each other to contribute
content and interact
...

Interactivity benefits

Within commercial sites, community members account for one-third of all users, but two thirds of
all transactions
...


tud

(a)

(c)
Active members are twice as loyal to a site as all other users
...
These will generate their own news regularly and will be visited frequently by both
dedicated and lukewarm adherents without special stimulus
...
Revenue there comes from direct sales or commission on
transactions, or even from advertisers based on the number of visitors
...
com/freeaccastudymaterial

415

To download more visit http://freeaccastudymaterial
...
5
...
Unlike
promotional emails that get sent out to large lists of recipients without regard to whether or not they want
the information, opt-in emails are only sent to people who specifically request them
...
co
m

Opt-in emails are targeted and often personalised and carry information about specific topics or
promotions that users are interested in learning about
...
For example, if a user frequented a website that sold books and
music online, that user could opt in to receive announcements when his or her favourite author or
musician released new material
...


2
...


ial

tud

(b)

'In a traditional market approach, people have all sorts of ideas about the target group, or they
think up some obvious target group for a certain product
...
In the new approach…we
no longer calculate the market from within the company, but instead communicate, listen and
record
...
This information is by far the most trustworthy when
forecasting future behaviour
...
6
...


cc

A database, in marketing terms, is a collection of data that can be organised to give marketing information
...

Allen et al suggest the following projects which can be conducted using database marketing techniques
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


To download more visit http://freeaccastudymaterial
...
(For example, don't
keep sending 'dear first-time customer' messages to long-standing
customers!) Remember the Integrated Marketing Communications
approach


...


2
...
2 Data mining

To download more visit http://freeaccastudymaterial
...
Data mining is closely linked to Big Data, which we explored in Chapter 11
...
Most data mining models are one of
two types:
Predictive: using known observations to predict future events (for example, predicting the
probability that a recipient will opt out of an email list)

(b)

Descriptive: interrogating the database to identify patterns and relationships (for example, profiling
the audience of a particular advertising campaign)
...
The company collects data on individual customers,
their past web-browsing and purchase habits, demographic and even psychographic characteristics
...


as

2
...
3 Cookies

cc

Cookies are a technology that allows a website to remember individual visitors' surfing and/or purchase
history and preferences
...


12/12

ea

2
...
0 technologies

fre

Technologies known collectively as Web 2
...
As
the popularity of Web 2
...

The phrase 'Web 2
...


Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
2
...
1 User experience and participation
Web 2
...
In other words, users
can actively take part in 'many-to-many' communications
...
0 is that it focuses on
user experience and participation
...
co
m

This is also important for businesses, because Web 2
...
In particular, it allows firms to have a more customer-focused approach
to new product development – because customers can actually be involved in the design of the new
products
...
0 has highlighted the significance of dynamic social interactions in the environment, rather than
considering business and business transactions as a set of static business processes
...
0
...
7
...
0

Probably the most popular aspect of Web 2
...


ym
a

Web-based communities are enhanced by:

Social networking – Social Networks (such as Facebook, MySpace and Twitter) allow users to
make contact with other users
...
Blogs are usually text
based
...




Wikis – Wikis allow user groups to collaborate in editing content
...




Instant messaging – This allows real time conversations between two or more participants using
pop-up dialogue boxes (eg instant messaging is now available in Skype)
...


cc

2
...
3 Socialisation of knowledge sharing
Web 2
...
Tagging is a key feature of many Web 2
...
Once a file has been
tagged, the tag allows it to be found again when a relevant search enquiry is made
...
The new
technologies mean that the amount of information on the internet is rising constantly
...
Search Engine Optimisation is therefore increasingly
important for businesses – making sure the information on a business website is findable and
relevant
...
For example, a restaurant review website, could take the location details of all the
local restaurants in an area and map them onto a single Google map page
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
Web 2
...


To download more visit http://freeaccastudymaterial
...
It describes the way people's opinions or behaviours can be
aggregated so that others can learn from their collective decision making
...
Equally, Amazon and a number of online sites include product reviews,
allowing people who have purchased an item to comment on the item and rate its performance
...
co
m

Amazon also uses collective intelligence to make product recommendations based on purchasing
patterns
...

User generated content (UGC): websites can now have sections of content created by their
readers
...
0 technologies is that users can generate the content
of sites themselves, and the technologies allow users to create, capture and share information
across the web
...

Consumer generated content (CGC): websites can now contain shared feedback from consumers;
for example, product reviews
...
If a customer receives
poor customer service, they can now tell everyone else about it, which could damage the business'
reputation, and lead to a decline in sales
...
com



ym
a

The most widely known example of CGC is the user reviews developed by Amazon noted above
...


2
...
4 Applications of Web 2
...
Many are probably
also run by young entrepreneurs for whom technology will play a key role in their business strategy:
The business can find partners, collaborators, customers and suppliers through social networks
and blogs



The business can use blogs, and social networks for publicity and to market itself, and it can
encourage customers to leave feedback on its site (customer generated content)



The business can manage the development, creation and delivery of its products through virtual
workspaces and wikis that support collaboration, innovation and the management of workflow
...
0 enables external third parties to participate in product development



The business can get market intelligence through blogs and online reference sites
...


fre

ea

Marketing – Web 2
...
Teenagers and young
adults can be an important demographic for many businesses, and sites such as Facebook and Twitter
play an important part in their lives
...

However, if companies do engage in social networking or publish blogs, they need to monitor how these
are perceived by the online communities (see the case study later in this Chapter titled 'Social media
risks')
...


Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com

Case Study

Benefits of Social Media Marketing

An article published on the Forbes website highlights the increasing use of social media marketing and
information systems by businesses looking for a 'big return' on their investment in marketing activities
...

Brand recognition


...
'With consistent effort and great content, you can
build a reputation for your brand around your company's values, benefits, and advantages
...
'When your followers become part of your
community, you gain instant access to them
...
You can engage in ongoing dialogue that can be
more valuable than any kind of paid market research
...


ter

Influence

ym
a

By building a social media following, this can create a 'snowball effect'
...
Forbes highlights that effective social media marketing
through sharing posts, videos and other content can lead to an increased 'hit' rate on a company's
websites
...
For example, if someone
from LinkedIn connects your business with a significant government contract, then that would certainly
qualify as a Big Win
...
'

as

Source: Adapted from 'The hidden benefits of social media marketing', by Stephanie Chandler,
December 2013, Forbes [online]

cc

Developing ideas – Also, by allowing web users to provide feedback and share ideas, Web 2
...


ea

In this way, the internet becomes, in effect, a research tool, where companies can find out about
customers' opinions about products and services
...
0 allows businesses to aggregate opinions from
many different individuals to guide idea generation and strategic decision making
...


fre

Case Study

Social media risks

In September 2013, accounting firm Grant Thornton published a report titled 'Social media risks and
rewards'
...
The growing importance of social media among big business is
evident from the report's findings:


420

More than half of (55%) of the executives who responded to the survey feel that social media will
be an important component of corporate marketing efforts going forward
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com


Two thirds (66%) of respondents expected their company's use of social media to increase slightly
or significantly over the next 12 months
...
co
m

'Nearly three quarters (71%) of executives surveyed were concerned about the potential risks involved in
the use of social media, but believe the risks can be mitigated or avoided'
...

Gap

ial

To download more visit http://freeaccastudymaterial
...
com'
...

Netflix

ter

The US Securities and Exchange Commission (SEC) investigated Netflix in 2012 after the company's CEO,
Reed Hastings, posted information on Facebook which boosted its share price
...
As social media starts to play an increasing role in how businesses communicate, careful
consideration needs to be given to ensure that private messages expressing personal opinions are not
perceived as official corporate communications
...


ea

Systems choice is subject to considerations previously dealt with, concerning design, integration, modality
and customisation
...
Each interaction with a customer is generally added to a customer's contact history,
and staff can retrieve information on customers from the database as necessary
...


fre

FAST FORWARD

tud

3 Software and CRM

(b)

Collaborative CRM covers the direct interaction with customers
...


Part E Information technology  12: E-marketing

join us on facebook @ fb
...
com
(c)

Analytical CRM analyses customer data for a variety of purposes, eg risk assessment and fraud
detection, in particular for credit card transactions
...
The CRM system brings
information like customer data, sales patterns, marketing data and future trends together with the aim of
identifying new sales opportunities, delivering improved customer service, or offering personalised
services and deals
...
co
m

In addition to improving sales and profitability, the CRM system is very effective in handling customer
complaints and can have a tremendous effect on a company's reputation
...
CRM software
collects data on consumers and their transactions
...
Organisations will track individuals, and try to market products and services to them based
upon similar buyer behaviour seen in other individuals
...
It attempts to integrate and automate the various customer serving
processes within a company
...


(b)

Service management including basic helpdesk functionality, case management, escalation with
basic workflow, problem ticket tracking and FAQs
...
Further down the line, more
sophisticated campaign management can be brought into play to track the origin and status of
prospects and monitor marketing effectiveness
...


tud

ym
a

(a)

These areas should all be focused around building a single view of the customer
...


CRM applications
Integration with back-office systems
The choice of single-vendor solutions or a more fragmented choice

ea





cc

as

Typical CRM objectives include reducing customer complaints, increasing communication with
customers, increasing customer loyalty, and of course, increasing the variety or volume of products sold
...
Managers selecting CRM systems will be concerned with the following key technical
issues:

3
...
A basic
application for any CRM system would be to send an email to any customer who had previously
purchased certain items which would lead the organisation to believe that they may be interested in
related items
...
A logical extension of this strategy is to send them a way of ordering as well as a
promotional message, as research has shown that this can treble the effectiveness of the
campaign
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
As the interaction progresses to a sale,
service query or quote the information from that interaction is stored and fed through middleware into a
database
...


To download more visit http://freeaccastudymaterial
...
A simple example of this is to send
this season's catalogue to customers who purchased from the last catalogue
...


(c)

Sales analysis is widely used by large sophisticated channel marketing businesses, but this
strategy is basically simple and easy to implement using an integrated CRM system
...
These
could then be targeted by email, direct mail or telephone by asking them if they want to receive the
next catalogue, and offering them some sort of discount to become a customer again
...
A simple gap analysis allows a list to be formed of the details of
anyone who has purchased a printer without toner cartridges, and thus provides a targeted list for
a sales campaign
...


(d)

Order building: another role for the CRM system should be to provide the organisation's order
taker or website with key data about each customer
...
As well as increasing sales, this also helps to build the customer relationship
...
com


...
This is because they deal directly with
the customer, eg applications for sales, marketing and customer service
...
When a customer calls, the
system can be used to retrieve and display information relevant to the customer
...


ym
a

CRM solutions can also be used to allow customers to perform their own service via a variety of
communication channels
...

A CRM solution is characterised by its functionality
...


(b)

Multiple communication channels provide the ability to interface with users via different devices
such as phone, WAP, internet and so on
...


(d)

Databases provide centralised storage (in a data warehouse) of all information relevant to
customer interaction
...


cc

as

tud

(a)

Integration with back-office systems

ea

For CRM to be truly effective, the e-commerce platform must be seamlessly incorporated into the back
office system (finance, payroll and HR applications)
...
When
customers place orders on the web, they should be able review their order history whether placed on the
website or over the telephone
...
These legacy systems will be at the application and database levels within the
organisation and it will not be financially viable to abandon these applications so their integration is a vital
part of the decision to implement a CRM system
...
com/freeaccastudymaterial

423

To download more visit http://freeaccastudymaterial
...
2 The choice of single-vendor solutions or a more fragmented choice
CRM software is available either as a complete purchase from a software vendor or outsourced from an
application service provider, or ASP
...
ASPs are more affordable than standalone software and require little maintenance on the
organisation's part
...


ial

In an ideal world, the organisation would choose to have a single integrated database such that any
employee would have total visibility about a customer and could access all visit, sales and support
histories; the system would be bought from a single vendor for ease of implementation and support
...
E-commerce systems are often
separate from traditional systems
...
The solution that many companies are looking to move to is close to the situation above
...
The company needs to identify
the areas where the return on investment would be highest and adopt CRM technology there
...


fre

ea

cc

as

tud

For either of these options the present customer related information that is going to be integrated with the
CRM system should be carefully analysed, consolidated, structured and cleaned up prior to adoption
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

CRM software is often sold in modules, so checking on modular availability can help trim costs
...
Is retaining existing customers important? Reducing time
in the sales cycle? Or is it more valuable to expand into an online market? The data that is collected,
analysed, and reported on should directly support these objectives
...
But it is far wiser to save
time, effort, and money by deciding in advance what information is most worthwhile to collect, how it will
be measured and what will be done with it
...
com

Chapter roundup


E-marketing is the application of IS and internet techniques to the achievement of marketing objectives
...




The employment of e-marketing may be analysed and planned using the six Is
...
co
m

–
–
–
–
–
–

More specific concepts for the development of e-marketing may be based on the 7Ps
...
com

–

One of the most complex decisions involved in the marketing mix is deciding on the price of the product
or service
...

The domain name is a vital element of the brand
Brand values are communicated within seconds via the experience of using the brand website
Online brands may be created in four ways

Customer Relationship Management (CRM) is the establishment, development, maintenance and
optimisation of long-term mutually valuable relationships between consumers and organisations
...
An accurate and detailed online database is
fundamental to customer relationship management
...
com/freeaccastudymaterial

425

To download more visit http://freeaccastudymaterial
...
These vary from
analogues of traditional mass-communications methods such as advertising and newsletters, through
specialised online forms such as search engine registration, to previously targeted means such as
personalised emails and website messages to logged-in return customers
...



...
Online purchaser behaviour is
complicated by the special conditions of the online environment
...




Customer activity may be enhanced by the use of data mining and cookies
...

Sales – lead management, order tracking, sales support
Service – help desk, FAQs problem resolution
Marketing – prospect database, campaign management
Reporting – presentation of performance data

ter

–
–
–
–

ial

Retention of online customers may be based on careful use of customer databases and by offering wider
benefits
...
Wider benefits may be
offered by access to extranets and online communities
...

Systems choice is subject to considerations previously dealt with, concerning design, integration, modality
and customisation
...
What does SOSTAC stand
for?

2

What are the six Is of marketing?

3

What are the four ways an online brand be created?

4

What are the three phases of CRM identified by Chaffey?

5

What are the five phases of making a purchase?

6

What is scalability?

fre

ea

cc

as

1

426

12: E-marketing  Part E Information technology

join us on facebook @ fb
...
com



To download more visit http://freeaccastudymaterial
...


2

Independence of location, industry structure, interactivity, individualisation, integration and intelligence

3






4

Acquisition, retention, extension

5

Need recognition, information search, evaluation of alternatives, purchase decision, post purchase
evaluation

6

An attribute of software that enables that software to be used reliably on a range of scales as necessary
...
com


...
com/freeaccastudymaterial

427

ial
ter
ym
a
tud
as
cc
ea
fre
428

12: E-marketing  Part E Information technology

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
com


...
com/freeaccastudymaterial

ial
ter
ym
a
tud
as
cc
ea
fre
430

join us on facebook @ fb
...
com


...
com

ter

ial

Project management

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
In
the first place, many organisations' business consists largely of projects: civil
engineering contractors and film studios are two obvious examples
...
Finally, even relatively low-level, oneoff projects must be managed with a view to their potential strategic
implications
...
For example, major changes in technology are
usually implemented through projects and project management
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

ial

ter

ym
a

tud

as

cc

ea

fre

(e)

2

2

2

F5

(a)

Establish mechanisms for successfully concluding a project

2

(b)

Discuss the relative meaning and benefits of a post-implementation and a
post-project review

2

(c)
432

Concluding a project

Discuss the meaning and value of benefits realisation

2

13: Project management  Part F Project management

join us on facebook @ fb
...
com

(d)

2

To download more visit http://freeaccastudymaterial
...
co
m

The examining team has indicated that the importance of project management will be recognised, both by
Section B questions which deal with it explicitly, and also through issues in the Section A scenario
...
1 Information systems, such as
project initiation, project slippage, project completion and risk management, will re-emerge in your exam
in a more complex and substantial form
...
com

You should also remember that project management is also linked very closely to the business process
change and IT issues dealt with by your syllabus
...


Models

ter

The Study Guide for this chapter does not refer to any specific models of project management, and so no
specific models will be explicitly required by a question
...


1 The nature of project management
A project is an undertaking that has a beginning and an end and is carried out to meet established goals
within cost, schedule and quality objectives
...
1 What is a project?

A project is 'an undertaking that has a beginning and an end and is carried out to meet established goals
within cost, schedule and quality objectives'
...

In general, the work which organisations undertake involves either operations or projects
...
So how are projects distinguished from 'ordinary work'?

fre

Key terms

cc

To understand project management, it is necessary to first define what a project is
...
com/freeaccastudymaterial

433

To download more visit http://freeaccastudymaterial
...


1
...
The primary function of a project manager is to manage the
trade-offs between performance, timeliness and cost
...
It will be deemed successful if it is completed at the specified level
of quality, on time and within budget
...


ym
a

FAST FORWARD

ter

The December 2007 exam included a question looking at changes to a downstream supply chain
...


as

The objective of project management is a successful project
...

Constraint

Comment

The end result should conform to the project specification
...
As time is money, proper time management can
help contain costs

fre

Quality, cost and time are regarded as the yardsticks against which project success is measured
...
The scope of a project defines all the work that is to be done and all the deliverables
that constitute project success
...

The process involved in project management can be summarised in the figure below
...
)

434

13: Project management  Part F Project management

join us on facebook @ fb
...
com

Exam focus
point

Producing a new product, service or object
Changing the structure of an organisation
Developing or modifying a new information system
Implementing a new business procedure or process


...
Whether an activity is classified as a project is important, as projects
should be managed using project management techniques
...
com

Plan/replan
project

Take
corrective action

ial

Measure
progress

To download more visit http://freeaccastudymaterial
...
co
m

Perform
tasks

ter

The project management process

1
...
1 Projects present some management challenges
Comment

Teambuilding

The work is carried out by a team of people often from varied work and social
backgrounds
...
The lead-in time to this can
cause a strain on the eventual recipient who is also faced with increasing expenditure
for no immediate benefit

Specialists

Contributions made by specialists are of differing importance at each stage

Potential for
conflict

Projects often involve several parties with different interests
...
2
...
This is partly because large organisations develop their own
methodologies and partly because there are at least two major, widely used methodologies that are taught
as professional disciplines
...
Your syllabus does not mandate the use of any specific scheme of
terminology, so we will use a selection of technical terms as they become appropriate in the discussion
that follows
...


Part F Project management  13: Project management

join us on facebook @ fb
...
com

1
...
Also, strategic management thinking can be a useful input into project management
...



...
3
...


(b)

Strategic thinking is also required at the level of the individual project, in order to avoid the
limitations that may be imposed by a narrow view of what is to be done
...
3
...
This is because very few
organisations are able to do the same things in the same ways year after year
...

Business circumstances change and new conditions must be met with new responses or initiatives
...

Grundy and Brown suggest three reasons for taking a project management view of strategic management
...
Much strategy appears to develop in an incremental or fragmented way;
detailed strategic thinking may be best pursued through the medium of a strategic project or
group of projects
...

Strategic implementation is more complex than strategic analysis and choice; a project
management approach, as outlined above, has an important role to play here, but must become
capable of handling more complex, ambiguous and political issues if it is to play it effectively
...

Even at the smaller, more traditional scale of project management, wider strategic awareness is
vital if project managers are to deliver what the organisation actually needs
...
For example, the
installation of a new, shared printer in an office would probably be regarded as a matter of routine, though
it would no doubt have been authorised by a responsible budget holder and installed and networked by a
suitable technician
...
All these
processes taken together look like a project, if a very small one
...
Project management and
change management are thus intimately linked
...


436

13: Project management  Part F Project management

join us on facebook @ fb
...
com

(c)

Many projects are undertaken as consequences of the overall strategic planning process
...

Some important projects arise on a bottom-up basis
...


ial

(a)

To download more visit http://freeaccastudymaterial
...
3
...

Project management can be a core strategic competence for companies working in such industries as
consulting and construction
...



...
Organisations should aspire to progress to the
highest level, which is a state of continuous improvement
...

Common knowledge
The importance of project management to the organisation is understood and training in the
basic techniques and terminology is provided
...


Level 3

Singular methodology
Project management is placed at the centre of a single corporate methodology, achieving
wide synergy and improving process control in particular
...


Level 4

Benchmarking
Competitive advantage is recognised as being based on process improvement and a
continuing programme of benchmarking is undertaken
...
Organisations such as this strive for project
management excellence
...


tud

ym
a

ter

ial

Level 2

To download more visit http://freeaccastudymaterial
...


cc

The need for continuous improvement is necessary because, despite best efforts, many projects fail
...
Taking the lessons learned forward into future projects helps avoid similar mistakes and
to strengthen and improve both the project management and management processes
...
3
...
This envisages
strategy as a stream of projects
...

Grundy and Brown
The link between strategy and project is most clearly seen in the concept of the breakthrough project
...
com/freeaccastudymaterial

437

To download more visit http://freeaccastudymaterial
...

Grundy and Brown





Resources are concentrated where they will do the most good
Projects of marginal value are avoided
Managerial attention remains focussed


...

Hoshin requires that there should be not more than three concurrent breakthrough projects
...


The link from strategy to project management is a process influenced by both internal and external
change
...
These lead to the establishment of
strategic programmes and these, in turn generate strategic projects
...


ter

Projects may be thought of as having a lifecycle
...


ym
a

2
...


2
...
1 Project definition

tud

Project definition is the first stage
...
This stage may include abstract processes of conceptualisation, more rigorous analysis of
requirements and methods, feasibility studies and, perhaps most important, a definition of scope
...


cc

as

The project definition stage may also include the procedures required for project selection
...
Some rational process for
deciding just which projects will proceed is therefore required
...
1
...
Final project
authorisation may be delayed until this stage to ensure that the decision is taken in the light of more
detailed information about planned costs and benefits
...
1
...
Planning
will continue, but the emphasis is on getting the work done
...

(a)

(b)

Planned project activities are carried out during execution
...

Completion consists of success or, sometimes, abandonment
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
(d)

The delivery phase comes to an end with handover
...


2
...
4 Project development
Handover brings the delivery phase to an end but the project continues through a further stage of
management largely aimed at improving the organisation's overall ability to manage projects
...

Longer-term review will examine the project outcomes after the passage of time to establish its
overall degree of success
...
There should also
be longer-term review of all aspects of the project and its management, perhaps on a functional
basis
...
co
m

(a)

ial

To download more visit http://freeaccastudymaterial
...
It is, however, essential if the organisation is to improve
the effectiveness of its project management in the future
...
2 Project definition

Grundy and Brown summarise the process of project definition as the preparation of answers to a series
of questions
...


tud

2
...
1 Defining the key issues – fishbone analysis

Fishbone analysis (root-cause, cause and effect or Ishikawa diagram analysis) is useful for establishing
and analysing key issues
...


fre

ea

cc

as

The essence of fishbone analysis is to break a perceived issue down into its smallest underlying causes
and components, so that each may be tackled in a proper fashion
...


Part F Project management  13: Project management

join us on facebook @ fb
...
Each 'bone'
can be further analysed if appropriate
...
The fish bone diagram itself is not, of course, essential to the process of
analysis, but it forms a good medium for brainstorming a problem and for presenting the eventual results
...
2
...
It has a lot in common with the force field analysis we
will encounter later in this Study Text, during our consideration of the management of change
...


fre

ea

cc

as

The essence of the technique is to identify two groups of performance related influences: those that
enable good performance and those that hinder or prevent it
...


Performance driver analysis

440

13: Project management  Part F Project management

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
2
...
It can be
used in a similar way in project selection and definition as a route to establishing both what projects
should be undertaken and what their scope should be
...
co
m

Strategic objectives

Existing plans

To download more visit http://freeaccastudymaterial
...
2
...
The essence of the technique is to both define the
current state ('from this') and the desired state ('to this') of relevant issues such as management style,
control methods, power structures, communications practices, working methods, cost base and customer
service
...
From-to analysis would supplement gap analysis by
looking at the gap from a different perspective
...
2
...


2
...


ea

Project initiation tasks include the appointment of project manager and sponsor; stakeholder analysis and
the definition of project scope
...


2
...
1 Project selection

fre

FAST FORWARD

6/12

As already mentioned, it is likely that an organisation will be aware of a greater number of potentially
advantageous projects than it has resources to undertake
...
Project assessment and selection is
analogous to strategic choice, not least because many projects are of strategic significance
...
The criteria of suitability,
acceptability and feasibility are applicable to many project choice problems, perhaps reinforced by the
use of more detailed assessment techniques such as those below
...
com/freeaccastudymaterial

441

To download more visit http://freeaccastudymaterial
...


(e)

2
...
2 Project initiation tasks

ial

When a project has been approved in general terms, it should be the subject of a number of management
processes and tasks in order to start it up and move it into the execution phase
...
Schwalbe lists pre-initiating tasks and initiating tasks
...


2
...
3 Pre-initiating tasks

(b)

Determination of project goals and constraints
...
3
...


tud

We noted at the start of this chapter that a project will be deemed successful if it is completed on time,
within budget, and to the specified scope
...

There are several aspects to consider for each of these elements
...


Time

How many tasks or activities are to be included in the project?
What level of quality is required for each task?

cc




There is likely to be an overall deadline for when the project has to be completed



Within this overall deadline, there is likely to be an operational 'time budget' containing the number
of staff hours which can be devoted to the project

Cost

A project should have a cost budget, and the project manager should aim to ensure costs remain
within this budget

fre



ea






442

Costs should be commensurate to the benefits the project will deliver, and the business case (see
below) should demonstrate that the project's benefits exceed its costs
Budget constraints will mean the project has limited resources – for example, contractors,
materials or equipment

13: Project management  Part F Project management

join us on facebook @ fb
...
com


...
com
The trade-off between scope, time and cost can best be viewed as a triangle
...
If there is a change to one aspect of the
triangle, there is likely to be a knock-on effect on the remaining aspects
...



...
com

Cost

Time



Senior management meeting with project manager to review the process and expectations for
managing the project
Decision whether the project actually needs to be divided into two or more smaller projects

ym
a



ter

Note
...


2
...
5 Initiating tasks

Initiating tasks are carried out by the project manager
...
3
...
Failure to manage risks adequately could
threaten the success of a whole project
...


Risk prevention
Minimising the effect of a risk event if it does occur

ea

(a)
(b)

cc

Risk management is the responsibility of the project manager, who should assess the likelihood and
potential impact of each risk
...
There are two aspects of risk management:

fre

Risk assessment and management should be conducted at the start of the project, but should be revisited
throughout the project to ensure that risks are understood and controlled
...

As a project proceeds, the nature of risk changes
...

Consequently, risk management is a continuous process, so there needs to be an ongoing risk
assessment procedure which regularly reviews and reassesses risks throughout a project
...

Part F Project management  13: Project management

join us on facebook @ fb
...
com

2
...


ial

It is important to understand who has an interest in a project, because part of the responsibility of the
project manager is communication and the management of expectations
...
Each stakeholder's degree of interest in and support for (or opposition to) the
project should be estimated
...
5 Preparation of a business case

ter

When the project selection process is complete and a project selected for action, there is likely to be a
great deal of information available to justify the decision to proceed
...
A business case is a reasoned account of why the project is
needed, what it will achieve and how it will proceed
...
An important use of the business case in
any project is to maintain focus and prevent mission creep by regular reference back to it
...

A business case is not, of course, something that is confined to commercial organisations: the principles
are equally applicable to any organisation undertaking a project
...


2
...
The charter also has an important role in internal communication within the
organisation, since it can be given wide distribution in order to keep staff informed of what is happening
...




Details of the project sponsor and project
Authorisation by the main stakeholders




Outline of project scope and work sequence
Further details of roles and responsibilities

Other elements of information may be included
...
7 Statement of project scope
As we have already indicated, the word scope is used in project management to mean both the outcomes
that are required and the work that is to be done to achieve them
...
If this common
understanding is not reached, sooner or later there will be acrimonious disputes
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

We discussed the strategic importance of stakeholders earlier in this Study Text
...
The stakeholder concept can also be applied to the management of projects
of less overall significance
...


To download more visit http://freeaccastudymaterial
...
Equally, it may be that the business case and the project charter
between them provide a clear statement of agreed scope
...



...
This might occur,
for example, if resources are unavoidably reduced or it becomes clear that a feasibility study was too
optimistic or too pessimistic
...


2
...
This will provide you with essential information for dealing with
any question that involves the early stages of a project
...
It is used to propose a course of action to senior
management for their consideration
...
It would be worth taking the time to study this
article
...


ea

Key term

12/10

Provide, where appropriate, arguments that define how the project will contribute to enhancing
existing capabilities or create new ones
Help ensure the effective coordination and management of the activities and resources involved

fre

FAST FORWARD

ter

Exam focus
point

To download more visit http://freeaccastudymaterial
...
For example, there have
been a couple of mentions of stakeholders and the whole problem of scope has been approached from
several different directions
...




Ensure the investment is understood from the viewpoints of both what benefits can be expected
and how feasible it is to achieve those benefits, in comparison with alternative uses of funds and
resources

The business case is not a one-off process; it will be continually developed and revised throughout the life
of the project
...
com/freeaccastudymaterial

445

To download more visit http://freeaccastudymaterial
...
1 Structure of a business case
Business cases vary greatly in size depending on the preferences of the organisation in question
...

Regardless of their size and format, they generally contain the same key elements
...
co
m

Introduction
Management summary
Description of the current situation
Options considered
Analysis of costs and benefits
Investment appraisal
Impact assessment
Risk assessment
Recommendations
Appendices and supporting information

ter

3
...
1 Introduction

3
...
2 Management summary

ym
a

The introduction defines the scope and objectives of the change and provides the necessary background
information to illustrate why the business case is being put forward
...


This is the last piece of the business case to be prepared
...
It should be carefully worded as it may be the only part of the business case which is actually
read in detail by senior decision makers
...
1
...
This
section should be as short as possible as senior managers can become frustrated at reading large
amounts of text, only to discover what they already knew! The exception is where the real problems are
not in line with the current understanding of management, in which case more detailed explanation can be
provided
...
1
...


3
...
5 Analysis of costs and benefits

6/14

This section should provide the benefits first, followed by the costs
...
Preparation of the section involves a
number of challenges
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com




Values are often based on assumptions which may or may not turn out to be accurate
...
co
m

One of the questions in the June 2014 exam focused on an examining body (the Institute of Independent
Analysts (IIA)) which was looking to replace its conventional assessment process with computer-based
assessments
...
The question required candidates to critically evaluate the financial case
(cost/benefit) of the computer-based assessment project
...
A significant number of the assumptions provided were, at best, highly questionable
...
com

ter

ial

The examining team were disappointed to note that although the question asked for a critical evaluation of
the financial case, a significant number of candidates appeared to be unable to evaluate the numbers
...
'

3
...
6 Investment appraisal

ym
a

These comments illustrate the importance of adopting a critical mindset when evaluating financial
assumptions
...


3
...
7 Impact assessment

tud

Any impacts the project may have on the organisation, in addition to the cost, should be described here
...


as

All changes such as these should be clearly described, along with details of any costs these changes will
incur
...
1
...
For every risk, the following should be stated
...
In some organisations
managers will not consider intangible benefits at all
...
The best policy with intangible benefits is to state them but not
value them, leaving the reader to come to their own conclusion about their worth



Ownership of the risk (the individual responsible for managing that risk should be defined)

3
...
9 Recommendations
This section should summarise the business case and clearly state the decisions that senior management
are being asked to take
...
com/freeaccastudymaterial

447

To download more visit http://freeaccastudymaterial
...
1
...
Statistics, charts and the detailed cost/benefit calculations may
also be put into the appendices
...
2 Identifying the benefits
A business case should be based on the ability to measure each benefit and estimate expected
improvements
...


ial

Some projects are more successful than others at delivering benefits
...
This approach aims to avoid the loss of achievable benefits as well as to realise more
extensive benefits than from previous investments
...

Benefits management has much in common with change management and the business process change
lifecycle model as it recognises that the way in which a major change is managed must be appropriate to
the content of the change and the context of the organisation involved
...
It is made up of five key stages as shown by the following diagram
...
The point of the business case is to secure funding by demonstrating the benefits for the
organisation that the project will bring
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

FAST FORWARD

To download more visit http://freeaccastudymaterial
...
If a perceived benefit cannot be measured, or no one owns it, then that benefit does not really
exist
...
2
...
This required the application of the four types of benefit identified
in the next section: observable, measurable, quantifiable and financial
...
co
m

Exam focus
point

6/12

ial

To download more visit http://freeaccastudymaterial
...
It should aim to express benefits
in financial terms so that the overall expected return of the investment can be calculated
...

However, all benefits can be measured in some way
...

Observable benefits are those which are measured by experience or judgement
...


ter

Key terms

ym
a

Measurable benefits relate to an area of performance that could be (or already is being) measured, but it
is not possible to quantify how much performance will increase as a result of the change
...


The examining team has stressed the importance of understanding the different ways that benefits can be
classified
...
It would be worth taking the time to
study this article
...
2
...
The benefit
gained from the process is observed
...


ea

Observable benefits are unlikely to be sufficient to argue the business case
...
They should be included in the business plan, even if there are plenty
of other financial and quantifiable benefits to secure funding
...
2
...


As their name suggests, measurable benefits relate to areas of the business where performance could be
measured
...
This will only be possible
after the improvement has been put in place and the appropriate measurements taken
...
Process improvement benefits are often measurable benefits
...
com/freeaccastudymaterial

449

To download more visit http://freeaccastudymaterial
...
These measures should be relevant to both the measure itself and the changes
needed to realise it
...


3
...
4 Quantifying benefits


...

Quantifiable benefits differ from measurable benefits because it is possible to quantify the degree of
improvement before the change is actually made
...
Relevant detailed evidence may be obtained from existing systems over an appropriate
period of time
...


2

Modelling and simulating can be carried out using computer software to identify the level of
performance that could be achieved if particular new processes are adopted, providing a basis for
estimates for what could be achieved in the specific situation under review
...
Benefits can be quantified by evaluating the changes in relation to best practices in
the industry, or in similar processes in different industries
...


4

Reference sites are examples of the change being made or of the technology being used in other
organisations or industries
...
Once a relevant implementation has been identified, it will be necessary to determine:

tud

ym
a

ter

1



What changes had to be made in order to obtain the required improvement in performance



The starting point (in performance terms) of the reference organisation in order to
determine how much of their achievement is relevant and feasible for the current
organisation
...
This method is necessary where proof of the benefit is
required
...
Ideally, a comparable control group, working in the old way, will
be monitored simultaneously to provide a baseline
...
2
...
However, over-reliance on financial benefits will
limit the benefits included because, as we have seen, not all benefits can be reliably quantified and hence,
no reliable financial value can be attached to it
...
However some quantified benefits, such as increased productivity, can be difficult to
convert to a financial benefit, especially if the improved productivity arises from a saving in staff time
...


450

13: Project management  Part F Project management

join us on facebook @ fb
...
com

Many investment cases are criticised for being unable to provide sufficient evidence to back up the
assumptions made to quantify the benefits listed in their business case
...
This is therefore the most
crucial stage in building a sound economic case for investment
...


To download more visit http://freeaccastudymaterial
...
Generally,
reductions in costs are easier to identify, quantify and prove than increases in revenue
...


3
...
Care should be
taken to ensure all costs are fully identified within the business case
...
co
m

FAST FORWARD

As we have seen with project benefits, predicting costs can also be difficult particularly as some (such as
those associated with making business changes) may not be recorded
...
These are costs that are incurred exclusively for the new system



Costs of carrying out the business changes should be included to provide a complete financial
view of the investment
...
These are the permanent costs involved in the new ways of working
...
com



Key term

ym
a

We can see from this that a project will include both capital and operational costs
...

Operating costs refer to any expenditure on things whose value is used up within the same financial year
...

This could involve expenditure on items such as building new facilities, refits and refurbishment, new
technology and systems and so on
...
Recurrent operating expenditure could continue long after the project has been completed and
the finished solution implemented
...
However, it is easy to overlook such costs as part of 'business as
usual'
...


A requirement in the compulsory Section A of the Pilot Paper requires candidates to evaluate a costbenefit technique that has been used in the scenario to justify investing in a project
...
You should also be familiar with the way benefits should be classified (ie observable,
measurable etc as descibed above) to ensure the benefits included in such analyses are justified
...
4 Evaluation of the costs and benefits

When investment decisions are made, an outlay of economic value (usually cash) is made in anticipation
of future benefits
...
The benefits do
not occur until later and then generally arrive in a number of smaller amounts over a period of time
...
com/freeaccastudymaterial

451

To download more visit http://freeaccastudymaterial
...

Given this, it is important that investment proposals are properly appraised before they are taken on
...


3
...
1 Accounting rate of return

The accounting rate of return takes the average accounting operating profit that the investment will
generate and expresses it as a percentage of the average investment made over the life of the project
...
It is likely that this target would
be based on the Return on Capital Employed (ROCE) perhaps of similar prior projects, or of the industry
average
...


Consistent with the overall approach to measuring business performance (ROCE)
Gives the result expressed as a percentage, managers generally feel comfortable with this

There are also several problems in using ARR:

Ignores the time factor
...
However, it may be that in one the
returns are concentrated in year 1 and in the other the returns are concentrated in year 5
...

Is based on profits not cash
...
Accounting
profit is more appropriate for reporting achievement on a periodic basis, eg a year or half-year
...


(c)

ARR can create problems when considering competing investments of different size
...
It would suggest that the best project to invest in would be the
one with the biggest percentage return; however, it may be far better to select the project with the
biggest absolute return
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m



To download more visit http://freeaccastudymaterial
...
co
m

Arrow wants to buy a new item of equipment
...
The expected costs and profits of each item are as
follows
...
com

Profits before depreciation
Year 1
Year 2
Year 3
Year 4
Year 5
Disposal value

ARR is measured as the average annual profit after depreciation, divided by the average net book value of
the asset
...
7%

cc

A question in the June 2011 exam asked for a critical evaluation of comments made by the owner of an
events company which organised folk music festivals
...
To perform well on this question,
students needed to demonstrate an understanding of payback period calculations, discount rate and IRR
...
4
...

This method overcomes the problem of time that is associated with the ARR method of project appraisal
...


For a project to be acceptable, it would need to have a payback period shorter than a maximum payback
period set by the organisation
...


Part F Project management  13: Project management

join us on facebook @ fb
...
com
Payback period has the following advantages
...
co
m



Question

Payback Period

ial

ter

$
12,000
17,000
28,000
37,000
8,000

ym
a

Year
1
2
3
4
5

How long is the payback period to the nearest month?

Answer

Year

Depreciation

Profit after
depreciation

4

37

5

8

24

24

29

53

12

40

93

12

49

142

12

20

cc

28

$'000

12

17

3

$'000

12

12

2

Cumulative
profit

ea

1

$'000

Profit
before
depreciation

as

$'000

tud

Profits before depreciation should be used
...
4
...


454

13: Project management  Part F Project management

join us on facebook @ fb
...
com

An asset costing $120,000 is to be depreciated over ten years to a nil residual value
...


To download more visit http://freeaccastudymaterial
...

Interest lost
...
The longer the funds are tied up in an investment, the longer the organisation does not
have access to them and hence, the longer they will be unavailable to earn interest
...
Investing in something that will bring about future benefits is risky – the benefits actually
received may not be in line with what was expected
...
The greater the risk, the higher the rate of return is expected
...
Money loses purchasing power over time as a result of inflation; a dollar now is worth
more than a dollar in a year's time
...
com


...

The present value is worked out using the equation

actual cashflow
(1+r)n

ter

PV of a cashflow =

n = year of cashflow

ym
a

r = the opportunity investing cost of capital expressed as a decimal (rather than a percentage)
The NPV is the sum of all the cashflows associated with a project, less the cost of the original investment
...
If several competing investments all have
positive NPVs, then the one with the highest NPV should be selected
...
This is for a
number of reasons
...
NPV takes account of the time value of money by discounting future cashflows to arrive at
a present value of those cashflows
...
This method considers all future cashflows, regardless of when they will occur
...
NPV is the only method of investment appraisal that produces
an output that relates directly to the amount of wealth generated for shareholders

Question

cc

as



NPV

Year

ea

Slogger has a cost of capital of 15% and is considering a capital investment project, where the estimated
cash flows are as follows
...

Part F Project management  13: Project management

join us on facebook @ fb
...
com

Answer
Cash flow
$

0
1
2
3
4

Discount factor
15%

(100,000)
60,000
80,000
40,000
30,000

Present value
$

1
...
15)= 0
...
152 = 0
...
153 = 0
...
154 = 0
...
co
m

Year

(Note
...
)

3
...
4 Internal rate of return

ter

The internal rate of return (IRR) is the discount rate that, when applied to its future cash flows, will
produce an NPV of zero
...
A range of discount rates are
calculated until the one that yields zero NPV is found
...
When the discount rate increases, there is a corresponding decrease in
the NPV
...


ea

If we determine a cost of capital where the NPV is slightly positive, and another cost of capital where it
is slightly negative, we can estimate the IRR by using the interpolation method
...
The real rate of
return is therefore assumed to be on a straight line between the two points at which the NPV is calculated
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
It should therefore be undertaken
...
com
Note that N doesn't have to be negative, but if it is, then we effectively end up adding in the denominator
...
If several competing
investments all have IRRs greater than the cost of capital, then the one with the highest IRR should be
selected
...
co
m

A company is trying to decide whether to buy a machine for $80,000 which will save costs of $20,000 per
annum for five years and which will have a resale value of $10,000 at the end of year 5
...


ial

To download more visit http://freeaccastudymaterial
...
One NPV should be positive and the other negative
...
As a rough guide, try starting at a return figure which is about two thirds or three
quarters of the ARR
...


The ARR would be (20,000  depreciation of 14,000)/(½ of (80,000 + 10,000)) = 6,000/45,000 = 13
...
9% and so we can start by trying 9%
...


PV factor
9%
1
...
890
0
...


cc

as

This is fairly close to zero
...

We can use 9% as one of our two NPVs close to zero, although for greater accuracy, we should try 10%
or even 11% to find an NPV even closer to zero if we can
...

Year

ea

0
1–5
5

Cash flow
$
(80,000)
20,000
10,000

PV factor
12%
1
...
605
0
...
The real rate of return is therefore greater than 9% (positive
NPV of $4,300) but less than 12% (negative NPV of $2,230)
...
If the first NPV is positive, choose a higher rate for the next calculation to get a negative NPV
...


4,300


So, IRR = 9 + 
 (12  9)% = 10
...
com/freeaccastudymaterial

457

To download more visit http://freeaccastudymaterial
...


IRR has some features in common with NPV: all cash flows are taken into account, and the timing of the
cashflows is handled logically
...
This can cause there to be
several IRRs, or none at all, for a particular investment

ial

IRR generally gives similar results to the NPV, but is viewed as an inferior approach due to the inherent
problems listed here
...
4
...


ter

NPV and IRR have become increasingly popular and are now the most widely used methods, particularly
by larger organisations
...


Investment appraisal was specifically examined in an optional question of the June 2011 P3 exam
...
This was an unpopular question choice, suggesting that candidates are not confident
in this area
...


tud

Exam focus
point

ym
a

Despite the inherent problems with ARR and payback period, they are still widely used by many
organisations
...


FAST FORWARD

6/14

as

3
...
Change owners may also be required to
ensure benefits are fully realised
...


fre

Key term

ea

cc

Once the costs and benefits of a project have been identified, an owner should be assigned to each
individual benefit before it can be stated in the business case
...


The benefit owner will work with the project team, either personally or through the resources he or she
has to ensure the benefit is realised
...
People who do this are known as
change owners
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m



To download more visit http://freeaccastudymaterial
...

For example, if an organisation is based in two separate geographical locations, it may be appropriate to
have one benefit manager in each of the sites
...
co
m

However, there should not be a large group of benefit owners due to difficulties they may face in obtaining
agreement within the group, and the risk that if they have to make decisions to influence the benefit's
delivery, they are unlikely to have much influence on others in the organisation
...

The benefit owners will be responsible for establishing measures for benefits, and identifying how they will
know when the benefit has been achieved (what evidence of achievement is required? How can the
achievement of each change be assessed?)

ial

A change owner is an individual or group who will ensure that an identified business or enabling change is
successfully achieved
...
The change owners may not be personally responsible for making the changes, but they are
accountable for the changes being effected successfully
...

A single change owner is best, if there are multiple change owners, change can be difficult to achieve as
the responsibilities for resolving any problems that may arise may become unclear
...
5
...
However, if a very senior person is the change owner,
then they will not have day-to-day involvement in making the change happen and this will be delegated to
others
...


cc

Benefit owners, although not necessarily responsible for changes, should have active (rather than passive)
involvement in the project and should work closely with those who are managing the changes
...
The benefit owner should
also therefore be senior or influential enough to ensure that others understand and carry out their
responsibilities in the project
...
In smaller and mid-size projects, middle management levels are usually
ideal for these roles
...

In all cases, the important criteria for benefit and change owners is their interest and perceived
commitment to the project
...
A
lack of willingness to take on the responsibilities probably suggests a lack of interest or commitment to
the project
...


fre

Key term

To download more visit http://freeaccastudymaterial
...
These are named
individuals of groups who will be responsible for making each of the identified changes happen
successfully
...
com/freeaccastudymaterial

459

To download more visit http://freeaccastudymaterial
...
6 The benefits realisation plan
FAST FORWARD

12/10

A benefits realisation plan should be included as part of the business plan to demonstrate how the
identified benefits will be measured, taken forward and achieved
...
co
m

After the benefits have been quantified (or otherwise measured) and allocated to owners, the business
case will need to identify how those benefits will be realised
...
The aim of this plan is to demonstrate
how the identified benefits will be measured, taken forward and achieved
...




Measures, and where possible, expected values, for each benefit



Measurements to establish the current baseline



Agreed ownership of all the changes and actions in place to address issues that may affect the
achievement of changes



Evidence or criteria to be used to assess whether each change has been successfully carried out



Complete and documented benefits dependency network identifying all the benefit and change
relationships

ter

ial

Full descriptions of each benefit and change with responsibilities for delivery defined and agreed

Key term

ym
a

The plans should also clearly define the drivers for change
...


Drivers for change can be either internal or external, but are specific to the context in which the
organisation operates
...


tud

Drivers must be strategic to the future of the whole organisation, not just specific functions or
departments
...
A business case will be greatly strengthened if it can demonstrate that it is linked to the
priorities of the senior management of the organisation
...
6
...
When the
senior decision makers review the business case and benefits realisation plan, they will need to assess
how the investment will achieve the necessary changes to address these drivers
...


ea

Rather than a long list of small and overlapping objectives, the plan should include only a few compelling
and clearly stated investment objectives
...


fre

Each investment objective should explicitly address one or more of the drivers to ensure that the project
will contribute to achieving the changes that are important to the future of the organisation
...

Organisations are affected by many drivers, and one single project will not be able to address them all
...
This project could be the only way that a particular driver can be
addressed, making it of high importance to the organisation
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
3
...
2 A benefits dependency network


...


Enabling
changes

Business
changes

Business
benefits

Investment
objectives

ym
a

IS/IT
enablers

ter

ial

To download more visit http://freeaccastudymaterial
...
Each benefit should be considered in turn and the necessary changes should be identified
and described on the benefits dependency network
...

Business changes are the new ways of working that will be permanently required, such as new roles and
responsibilities, new or refined processes or new governance arrangements
...
Examples might include training, process
mapping and process design, decommissioning of legacy systems and definition of new roles and
responsibilities
...
These are known as IS/IT enablers
...
If so, they need to be added to the relevant part of the network
...

It is often found that the changes could be undertaken, and many of the benefits realised with current
systems
...
chooseandbook
...
uk) which would allow patients to select a time and date for their appointment
that is convenient for them
...
com/freeaccastudymaterial

461

To download more visit http://freeaccastudymaterial
...
The new system allows the patient to
choose their own time and date, reducing the number of wasted appointments,
The below shows a simplified benefits dependency network for this project
...
However, it also shows that if the system can be used to transmit test results back to GPs and update
patient records, then additional benefits could also be expected
...


Source: Ward and Daniel: Benefits Management

ea

cc

Working back towards the left, we can see the required changes to IT/IS in order to achieve these benefits
...
6
...
It will need to be revised, as issues and events that
affect its viability arise
...

A business project manager is usually appointed to ensure that the project is delivered and the needs are
met without unnecessary disruption or risk
...


462

13: Project management  Part F Project management

join us on facebook @ fb
...
com

Develop patient
education
programme

Interface to
medical
records

Improved GPs ability to
track patients pre and
post test

ial

Security and
encryption

Reduced costs due to
lack of referral
letters/calls


...
com
The project manager will also have to decide what action to take in terms of reviewing the scope and
specification of the project in light of any changes that have arisen
...
The plan may also be revised in light of any further benefits that have
been identified during the implementation of the plan
...
Force field analysis identifies enablers,
constraints and showstoppers
...
com

ial

The unique nature of each project means that careful planning is an essential component of project
management
...


ym
a

ter

Project management as a discipline is commonly associated with fairly clearly defined issues such as
preparing for a conference, organising an office move or installing a new IT system
...
It is important to understand
that this is unlikely to be the case with truly strategic projects: with projects such as the turnaround of an
underperforming division or an initial move into a foreign market, project management and strategic
management are likely to merge into one another
...
A failure to think
strategically is likely to lead to project failure
...
1 Why do projects go wrong?

Unproven technology
The use of new technological developments may be a feature of any project
...
As the practical
potential of a technical change moves from minor to major, so too moves its potential to cause
disruption if something goes wrong with it
...
Not only did the project fail to
meet its objectives, its failure led to the company's financial failure and subsequent takeover by
government
...
Realistic timescales must be established, use of
shared resources must be planned and, most fundamental of all, jobs must be done in a sensible
sequence
...
Here are some examples
...

However, if the work is to come in on time and on budget, they must be aware of what is
technically feasible, reasonable in their aspirations, prompt with their decisions and, ultimately,
prepared to freeze the specification so that it can be delivered
...


fre

FAST FORWARD


...
Again, the benefits plan will have to be modified accordingly, along with any associated business
changes
...

Part F Project management  13: Project management

join us on facebook @ fb
...
com
Identification of a senior figure with a project; public interest and press hysteria; hidden agendas;
national prestige; and political dogma can all have deleterious effects on project management
...


4
...
co
m

Grundy and Brown suggest that force field analysis can be useful in project planning
...

The emphasis of force field analysis is an assessment of the degree of difficulty that implementing a
project is likely to encounter: the problems discussed above, and any of a wide range of other attitudes
and conditions will affect the degree of difficulty encountered and this will be particularly the case with
projects of a strategic nature
...


ial

What is it about each force that allows it to be identified as an enabler or a constraint?
How great is its potential influence on the change process?
What other, less obvious factors does it depend on?

ym
a





ter

A degree of objectivity can be brought into this analysis by seeking to expose implicit assumptions about
these factors and the overall situation
...


A further important part of the overall analysis is the identification of potential showstoppers
...
These factors
must be continuously monitored
...


as

(b)

It may be possible to turn one of the constraints around and turn it into a driver
...

Careful examination of the context of the project may reveal latent enablers that could be called
into play
...


tud

(a)

4
...
It is
appropriate to take this further at the planning stage
...
A stakeholder grid of the type discussed earlier in this Study
Text should be prepared and an assessment made of overall stakeholder attitudes
...


FAST FORWARD

464

fre

5 Practical aspects of project planning
Work breakdown structure is an analysis of the work involved in a project into a structure of phases,
activities and tasks
...


13: Project management  Part F Project management

join us on facebook @ fb
...
com

The essence of force field analysis is the identification and assessment of the underlying forces tending to
promote successful implementation or to hold it back
...
The overall potential of each force must be estimated
...


To download more visit http://freeaccastudymaterial
...
1 Work breakdown structure
Work breakdown structure (WBS) is fundamental to traditional project planning and control
...



...
This can then be analysed into physical and intangible components, which can in turn be further
analysed down to whatever level of simplicity is required
...
This
approach, called product breakdown, is the basis of project planning under the PRINCE2 system
...
There is no standardised terminology for the various levels of disaggregation,
though an activity is sometimes regarded as being composed of tasks
...
com

The delivery phase of many projects will break down into significant stages or sub-phases
...


5
...
1 Dependencies and interactions

ym
a

ter

A very important aspect of project planning is the determination of dependencies and interactions
...
Careful analysis of dependencies is a major
step towards a workable project plan, since it provides an order in which things must be tackled
...
The more complex a project, the greater the need for analysis of dependencies
...
This can arise for a
variety of reasons: a good example is a requirement to share the use of a scarce resource
...
This then becomes the input into the planning and control processes
described below
...
2 The project budget

as

cc

Project budget
...


Building a project budget should be an orderly process that attempts to establish a realistic estimate of the
cost of the project
...


ea

Key term

The project budget plans the allocation of resources to the project and forms a basis for their control
...


Top-down budgeting describes the situation where the budget is imposed from above
...
The figure may
prove realistic, especially if similar projects have been undertaken recently
...


fre

FAST FORWARD

In bottom-up budgeting the project manager consults the project team, and others, to calculate a budget
based on the tasks that make up the project
...


Part F Project management  13: Project management

join us on facebook @ fb
...
com

5
...

A Gantt chart, named after the engineer Henry Gantt who pioneered the procedure in the early 1900s, is a
horizontal bar chart used to plan the time scale for a project and to estimate the resources required
...
co
m

The Gantt chart displays the time relationships between tasks in a project
...


ter
ym
a
tud

The chart shows that at the end of the tenth week, Activity 9 is running behind schedule
...


as

Activity 4 had not been completed on time, and this has resulted in some disruption to the computer
installation (Activity 6), which may mean further delays in the commencement of Activities 7 and 8
...
A combination of Gantt charts and network analysis will
often be used for project planning and resource allocation
...
It is used to plan the sequence of tasks
making up project scope and to determine the critical path
...


fre

FAST FORWARD

ea

5
...


CPA aims to ensure the progress of a project, so the project is completed in the minimum amount of
time
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


To download more visit http://freeaccastudymaterial
...
The technique
can also be used to assist in allocating resources such as labour and equipment
...


5
...
1 Project evaluation and review technique (PERT)


...
For each activity in the project, optimistic, most likely and pessimistic estimates of
times are made, on the basis of past experience, or even guess-work
...


Once the mean time and standard deviation of the time have been calculated for each activity, it should be
possible to do the following
...

Calculate a contingency time allowance
...


ym
a

A resource histogram shows a view of project data in which resource requirements, usage, and
availability are shown against a time scale
...
5 Resource histogram
FAST FORWARD

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

467

To download more visit http://freeaccastudymaterial
...
Can we re-schedule the non-critical activities to
reduce the requirement to the available level of 10? We might be able to re-arrange activities so that we
can make use of the workers available from day 9 onwards
...


as

The project manager takes responsibility for ensuring the desired result is achieved on time and within
budget
...
It represents the interests of the project sponsor
...
Sometimes a project champion is appointed
...


ea

Project owner
...


fre

6
...
Resources must be allocated to the project by a person or
group with the power to do so and the project manager must be subject to supervision
...
The project sponsor may, in fact, be the strategic

468

13: Project management  Part F Project management

join us on facebook @ fb
...
com


...
The
chart then shows any instances when the required resource hours exceed the available hours
...
Alternately, the chart may show times when the available resource is excessive, and should be
redeployed elsewhere
...
com
apex body of the organisation, or may be a person or committee at a lower level; the essential feature is
that the project sponsor has the budgetary capability to authorise the project
...
Under these circumstances, the project sponsor
may appoint a project owner, whose role will be to review project plans and progress at regular intervals
and to arbitrate on any conflicts that may arise between project and line management
...

Some organisations use the terms project owner and project sponsor in a way exactly opposite to the
usage we have outlined here! An example is the Scottish Executive construction works procurement
guidance, which makes the project owner subordinate to the investment decision-maker and superior to
the project sponsor
...


6
...
1 The project manager

ter

ial

The person who takes ultimate responsibility for ensuring the desired result is achieved on time and within
budget is the project manager
...


ym
a

Some project managers have only one major responsibility: a specific project
...
As a result, many project managers, will
have routine work responsibilities outside their project goals, which may lead to conflicting demands on
their time
...

There are, however, some important differences, as shown in the table below
...
2 The responsibilities of a project manager
The overall issue for all project managers is understanding how to balance the factors of scope, resources,
time and risk
...


6
...
1 Responsibilities to management
Ensure resources are used efficiently – strike a balance between cost, time and results
Keep management informed with timely and accurate communications
Manage the project to the best of his or her ability
Behave ethically, and adhere to the organisation's policies
Maintain a customer orientation (whether the project is geared towards an internal or external
customer) – customer satisfaction is a key indicator of project success

ea







fre

FAST FORWARD

To download more visit http://freeaccastudymaterial
...
co
m

Exam focus
point

6
...
2 Responsibilities to the project and the project team




Take action to keep the project on target for successful completion
Ensure the project team has the resources required to perform tasks assigned
Help new team members integrate into the team

Part F Project management  13: Project management

join us on facebook @ fb
...
com


Provide any support required when members leave the team, either during the project or on
completion

6
...
Resource requirements unforeseen at the planning stage will have
to be authorised separately by the project board or project sponsor

Team building

Build cohesion and team spirit in the project team

Communication

Keep all stakeholders suitably informed and ensure that members of the
project team are properly briefed
...
co
m

Comment

It is also possible to view the process of project management as having five stages:
Initiation
Planning
Leadership

tud








Controlling
Completing

as

The first, second, fourth and fifth of these phases correspond closely to the phases of the project life
cycle, which was discussed earlier in this chapter
...


6
...


cc

FAST FORWARD

fre

ea

To perform these duties and meet these responsibilities, a project manager requires a wide range of skills
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Skill

Application to project management

Leadership and
team building

A participative style of leadership is appropriate for much of most projects, but a
more autocratic, decisive style may be required on occasion
Be positive (but realistic) about all aspects of the project
Understand where the project fits into the big picture
Delegate tasks appropriately – and not take on too much personally


...
com

Communication
and negotiation

Negotiate on funding, timescales, staffing and other resources, quality and disputes

ter

Ensure management is kept informed and is never surprised
Technical

By providing (or at least providing access to) the technical expertise and experience
needed to manage the project

Personal qualities

Be flexible
...
Even successful projects will encounter difficulties that require
repeated efforts to overcome
Be creative
...
The 'quick-fix' may
eventually cost more time than a more thorough, but initially more time-consuming,
solution

Only the very simplest projects will be without problems
...
By the nature of a project there is always uncertainty and risk involved
...
Here, however, we are
concerned with changes to the project itself
...
They must be properly authorised, planned and resourced
and records kept of their source, impact and authorisation if the project is not to
become unmanageable
...
5 Leadership style
An article titled 'Conflict management and the accountant as project manager' (2011) written by Dr
Graham Morgan is available in the technical articles section for P3 on the ACCA website
...


Part F Project management  13: Project management

join us on facebook @ fb
...
com
As in other forms of management, different project managers have different styles of leadership
...

The key is adopting a style that suits both the leader and the team, and that is appropriate to the current
situation
...
Although an
autocratic style may prove successful in some situations, such as very simple or repetitive projects, a
more consultative style has the advantage of making team members feel more a part of the project
...



...
For example, decisions that do not have direct
consequences for other project personnel may be made with no (or limited) consultation
...

The type of people that comprise the project team will influence the style adopted
...
Some people however, prefer to
follow clear, specific instructions and not have to think for themselves
...
6 Organising for projects – the matrix structure

6
...
However, much
project management is undertaken within a framework of routine operations, with staff being seconded to
the project from their own departments or functions
...
In general
terms, a matrix structure provides for the formalisation of management control between different
functions, whilst at the same time maintaining functional departmentation
...
It is particularly suitable for structuring
the management of projects
...
A matrix
approach enables such specialists to receive management and leadership inputs from both the project
manager and their own functional manager
...





Forming
Storming

as

Teams enable people's talents and efforts to be combined and teamwork can have a motivating effect
...




Norming
Performing

ea

Co-ordinator
Plant
Resource investigator
Team worker
Specialist






Shaper
Monitor-evaluator
Implementer
Finisher

fre







cc

However, teams bring their own problems, including disharmony, risky shift, groupthink and political
conflict
...
Belbin identified nine roles played by
team members
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


To download more visit http://freeaccastudymaterial
...
At P3 you may be required
to apply your knowledge of teams and appropriate leadership styles in a scenario context
...


Key term

A group is any collection of people who perceive themselves to be a group
...
There is awareness of membership and acknowledged boundaries to the group
which define it
...
This generally expresses itself as
conformity or the acceptance of the norms of behaviour and attitudes that bind the group together
and exclude others from it
...
Most groups have an express purpose, whatever field they are in: most
will, spontaneously or formally, choose individuals or sub-groups to lead them towards the
fulfilment of those goals
...
com

(c)


...
They
have certain attributes that a random crowd does not possess
...
A formal group
used for particular objectives in the work place is called a team
...
Although many people enjoy working in teams, their popularity in the workplace arises because
of their effectiveness in fulfilling the organisation's work
...
(Katzenbach and
Smith, 1994)
Work organisation
...


(b)

Control
...
Teams can also be used to resolve conflict
...
Teams can generate ideas
...
Teams can be set up to investigate new developments and decisions can be
evaluated from more than one viewpoint
...
Team work can enhance the flow of information
...
People generally have a need for company and social interaction
...
7
...
Multi-disciplinary teams
bring together individuals with different skills and specialisms, so that their skills, experience and
knowledge can be pooled or exchanged
...

Team working increases workers' awareness of their overall objectives and targets
...
7
...


(c)

Team working helps to generate solutions to problems, and suggestions for improvements, since
a multi-disciplinary team has access to more 'pieces of the jigsaw'
...
7
...


Part F Project management  13: Project management

join us on facebook @ fb
...
com
Size is important: larger groups can do more work, but individual productivity tends to fall
...
This effect is held to be the product of social loafing, which arises
when group members believe they will not receive a fair share of reward if they make a great effort,
nor appropriate blame if they make an inadequate one
...
Cohesion is reduced by membership turnover and if members have
divided loyalties
...


(c)

Group roles
...
More formal
roles are acknowledged by mechanisms such as election
...
We return to this
concept later when we discuss the work of Belbin on team roles
...
co
m

(a)

Four stages in team development were identified by Tuckman
...
There may be
changes agreed in the original objectives, procedures and norms established for the group
...


Step 3

Norming
A period of settling down: there will be agreements about work sharing, individual
requirements and expectations of output
...


Step 4

Performing
The team sets to work to execute its task
...


as

tud

ym
a

ter

ial

Forming
The team is just coming together, and may still be seen as a collection of individuals
...
The individuals will be
trying to find out about each other, and about the aims and norms of the team
...
The objectives being
pursued may as yet be unclear and a leader may not yet have emerged
...


6
...
4 Characteristics of the ideal functioning team

(c)

fre

(d)

cc

(b)

Each individual gets the support of the team and a sense of identity and belonging that encourages
loyalty and hard work on the group's behalf
...
Synergy is achieved through the pooling of skills
...
The team provides a focus for
creativity and innovation, especially in multi-disciplinary teams
...
Equally, control and discipline are enhanced by
commitment to the team's expectations
...
This can contribute to empowerment
when responsibility and authority are delegated to self-managing teams
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
6
...
5 Problems with teams
Unfortunately, team working is rarely such an undiluted success
...

Awareness of group norms and the desire to be acceptable to the group may restrict individual
effort
...
Where an individual is a member of more than one group, conflicting roles and
relationships can cause difficulties in communicating effectively
...

Rigid leadership and procedures may stifle initiative and creativity in individuals
...
Some managers find this difficult to do
...

Differences of opinion and political conflicts of interest are always likely
...
Teams work best when there is room for disagreement
...
I L Janis describes this as groupthink
...
Alternatively, efforts
to paper over differences may lead to bland recommendations without meaning
...
Teams will fail if the company promotes and rewards the
individual at the expense of the group
...

Too many meetings
...
Not only does this waste
time in meetings, but team members are exposed to less diversity of thought
...

Powerlessness
...

Risky shift
...
A good example is the way that a group of risk-averse individuals may adopt a far less
risk-averse approach to collective decision-making
...
com

(f)

ial

(e)

ter

(d)

ym
a

(c)


...
7
...
Handy takes a contingency
approach to the problem of team effectiveness
...


Part F Project management  13: Project management

join us on facebook @ fb
...
com

6
...
8
...
This involves eight necessary roles that should be played by
team members
...
co
m

Role

The specialist joins the group to offer expert advice when needed
...


6
...
2 The task
(a)

If a job must be done urgently, it is often necessary to dictate how things should be done, rather
than to encourage a participatory style of working
...


as

(b)

tud

The nature of the task must have some bearing on how a group should be managed
...
8
...


ea

6
...
4 Intervening factors and outcomes
Processes and procedures
...


fre

Motivation and leadership style
...
Where teams are, for example, allowed to set
their own improvement goals and methods and to measure their own progress towards those goals, it has
been observed (by Peters and Waterman among others) that they regularly exceed their targets
...
This depends on the circumstances
...
These are personal goals that
may have nothing to do with the declared aims of the team, such as protection of a sub-group, impressing
superiors and pursuit of inter-personal rivalry
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Exam focus
point

Project management has been examined fairly regularly and is a core part of the P3 syllabus
...
Make sure you are able to identify the application of elements of good project
management in practice
...
co
m

7 Controlling projects
Progress reports should report progress towards key milestones
...
Project
changes must be carefully considered, communicated, documented and controlled
...


ial

To download more visit http://freeaccastudymaterial
...
1 Gateways

A key feature of many project management systems is the use of predefined gateways
...

A gateway is a project review point at which certain criteria must be met before the project can pass
through the gateway and proceed to the next stage
...
In order to ensure the benefits defined at the outset are realised, progress towards these
should be reviewed and any further benefits identified
...


tud

The business case will also have to be revisited at these points
...
Projects must pass certain
tests, particularly in relation to their business viability, in order to pass through these gateways and be
allowed to proceed to the next stage
...

Scope creeprelates to uncontrolled changes in the scope of a project
...
This can cause significant delays in
the project as well as causing it to exceed its intended budget
...
They are a useful expectations management tool, and they
allow project sponsors and senior management to review their project investments as they proceed
...


7
...


fre

Key term

The frequency and contents of progress reports will vary depending on the length of, and the progress
being made on, a project
...
A common form of progress reports uses two
columns – one for planned time and expenditure and one for actual
...
Some organisations include only the raw facts in the report, and use these as a basis
for discussion regarding reasons for variances and action to be taken, at a project review meeting
...
com/freeaccastudymaterial

477

To download more visit http://freeaccastudymaterial
...

The report should monitor progress towards key milestones
...


ial
ter
ym
a

as

tud

On the chart above, milestones are indicated by a triangle on the diagonal planned progress line
...
At milestone 3 some slippage has occurred
...
The
progress report should also include an updated budget status – such a report could adopt the format
shown in the following example
...
3 Dealing with slippage

One of the question scenarios in the December 2008 exam described a software implementation project
which was slipping behind schedule, and appeared unlikely to meet its target delivery data
...


cc

Exam focus
point

ea

When a project has slipped behind schedule, there are a range of options open to the project manager
...


fre

Action

Comment

Do nothing

Add resources

478

After considering all options it may be decided that things should be
allowed to continue as they are
If capable staff are available and it is practicable to add more people to
certain tasks it may be possible to recover some lost ground
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

A progress report may include a milestone slip chart which compares planned and actual progress
towards project milestones
...

Where actual progress is slower than planned, progress slippage has occurred
...
com
Comment

Work smarter

Consider whether the methods currently being used are the most suitable –
for example, would prototyping be more effective at eliciting requirements?

Replan

If the assumptions that the original plan was based on have been proved
invalid, a more realistic plan should be devised

Reschedule

A complete replan may not be necessary – it may be possible to recover
some time by changing the phasing of certain deliverables

Introduce incentives

If the main problem is team performance, incentives such as bonus
payments could be linked to work deadlines and quality
...
In some cases, poor team performance may need to be
addressed through more negative responses, for example, disciplinary
action if staff are not working to the level required of them
...
They could
equally relate to contractors or suppliers, in which case the project manager
will need to introduce incentives (positive or negative, as appropriate) to
improve their performance

Briefings and motivation

If the project is long, it may be beneficial for the manager to hold update
briefings with the team to renew their energy and enthusiasm and thereby
increase productivity

Change the specification

If the original objectives of the project are unrealistic, given the time and
money available, it may be necessary to negotiate a change in the
specification

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m

Action

ym
a

This change could either be to reduce the number of activities included in
the scope, or to reduce the level of quality required in each activity
There are also two specific courses of action a project manager should consider if a project starts to slip
dramatically, but has a fixed deadline and so cannot be delayed
...


tud

7
...
1 Fast-tracking

Fast-tracking involves taking activities that are normally done in sequence, and doing them in parallel
instead (for example, starting construction alongside the design phase, instead of waiting for the design
phase to be completed before beginning construction)
...
3
...
For example, if the design is changed before it is finalised, yet some construction
work has already been done, the change of design may result in having to re-do some of that construction
work
...
For example, if one person was
working on a twelve day activity on the critical path, and it was essential to reduce the path length to eight
days, a second person could be added to work on the activity
...


fre

Crashing usually leads to an increase in the cost of the project, but this may be considered an acceptable
trade-off for getting the project back on schedule
...


Part F Project management  13: Project management

join us on facebook @ fb
...
com

7
...
co
m

Some of the reactions to slippage discussed above would involve changes that would significantly affect
the overall project
...
However, changes will cost time and
money and should not be undertaken lightly
...

The impact of the change on time, cost and quality
...

The risks associated with the change, and with the status-quo
...
Changes will need to be implemented into the project plan and communicated to all
stakeholders
...
5 Risk management

ym
a

Projects and other undertakings carry an element of risk, for example, the risk of an inappropriate system
being developed and implemented
...
The identification of risks involves an overview of the
project to establish what could go wrong, and the consequences
...
The general rule is
that as risk increases, so do potential returns
...


Stage 2

Identify and record risks
Existing plans for time, costs and quality should be examined for risk potential
...
It
will be useful for project staff to brainstorm and external advice may be sought: this could
come from non-project staff within the organisation or from external sources
...
Schwalbe suggests the detail shown below
should be recorded for each risk event in the risk register
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

Stage 3

Assess the risks
There are two aspects to the assessment of risk
...
co
m

Several quantitative techniques may be useful in assessing risk, including expected values,
sensitivity analysis, Monte Carlo simulation and programme evaluation and review
technique (PERT)
...

The likelihood and consequences of risks may be plotted on a matrix
...


as

tud

ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
Following
the principle of management by exception, the most efficient way of dealing with risks
outside these quadrants may be to do nothing unless the risk presents itself
...


ea

cc

Stage 4

Dealing with risk involves four strategies
...
For example, an acquisition is rejected because of the potential legal
liabilities attached to the potential acquisition target
...
(Refer back to Chapter 10 for further information on risk
avoidance, reduction and mitigation)
...
com/freeaccastudymaterial

481

To download more visit http://freeaccastudymaterial
...

Absorption: the potential risk is accepted in the hope or expectation that the
incidence and consequences can be coped with if necessary
...
co
m

Risk management is a continuous process
...

As well as being an important part of your syllabus for this exam, project management is also likely to be
an important part of your ongoing role as an accountant
...


Key term

ym
a

Exam focus
point

The project completion report shows the project outcomes, and any continuing issues
...


A question in the December 2011 exam asked students to explain the purpose of a post-project review,
post-implementation review and a benefits realisation review
...


tud

FAST FORWARD

12/11

ter

7
...

On project completion, the project manager will produce a completion report
...


(c)

Project objectives and the outcomes achieved
The final project budget report showing expected and actual expenditure
...


ea

The completion report will also include provision for any continuing issues that will need to be addressed
after completion
...
An example of
such an issue would be a procedure for dealing with any bugs that become apparent after a new software
program has been tested and approved
...

The manager may find it useful to distribute a provisional report and request feedback
...

A more detailed review of the project follows a few months after completion, the post-completion audit
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
7
...
1 Post-project and post-implementation reviews
The post-project review is a formal review of the project that examines the lessons that may be learned
and used for the benefit of future projects
...

Was the project achieved on time and within budget?

(b)

Was the management of the project as successful as it might have been, or were there bottlenecks
or problems? This review covers:
(i)
(ii)


...

The performance of the team individually and as a group
...


ial

BBC and DMI

ter

Case Study

To download more visit http://freeaccastudymaterial
...
A simple questionnaire could be
developed for all team members to complete, and a reasonably informal meeting held to obtain feedback,
on what went well (and why), and what didn't (and why)
...

The project aimed to modernise the BBC's existing production operations, moving the corporation away
from the use of video tape towards digital production
...
In an article published on the BBC website in February
2014, the corporation reported that the estimated project cost was £125
...


tud

The Guardian newspaper, highlighting the findings of a National Audit Office inquiry, reported that the
deteriorating fortunes of DMI were not adequately reported, either within management or, critically, to the
BBC Trust
...


The BBC Director General (the most senior executive officer at the organisation) at the time had believed
that the technology was being used on programmes including the early evening 'One Show'
...
However, the final estimate of the benefits it brought to the BBC was zero
...


cc

Commenting on the National Audit Office report, Margaret Hodge MP of the Public Accounts Committee
(the body which overseas UK government spending) wrote, 'this report reads like a catalogue of how not
to run a major programme
...


ea

The BBC responded, saying it had adopted new procedures for managing big projects in the light of the
problems with the DMI project
...
bbc
...
uk

fre

Key term

2) 'BBC's Digital Media Initiative failed because of more than poor oversight', by Steve Hewlett (February
2014) published on The Guardian website; www
...
com

Part F Project management  13: Project management

join us on facebook @ fb
...
com
This information should be formalised in a report
...

A cost-benefit review should be included, comparing the forecast costs and benefits identified at
the time of the feasibility study with actual costs and benefits
...



...

At the end of the project, the finished solution will be implemented into the organisation
...
The timing of this
will depend on the specific situation
...


Key term

Post-implementation reviews are assessments of the completed working solution
...
This
could involve improving processes such as research and development, and operational processes
as well as making changes to who is involved in certain processes and the timings at which
individual processes are carried out

ym
a

ter



Exam focus
point

tud

In order to do this, work will centre around determining the current situation, identifying the benefits
actually being delivered in comparison to those originally defined by the project, and identifying any
further improvements that could be made and the learning points for the future
...
The post-project review focuses on the project itself and the way it was carried out
...


as

This was examined in December 2011 where six marks were available for explaining the purpose of each
of a post-project review, a post-implementation review, and a benefits realisation review
...


ea

cc

A further twelve marks were then on offer for applying this knowledge to the scenario in order to identify
the problems and lessons that should be learnt from a post-project review and a post-implementation
review of the system implemented in the scenario
...

A starting point for any new project should be a review of the documentation of any similar projects
undertaken in the past
...
6
...

Has a project delivered what it was meant to? Has it been worthwhile?

484

13: Project management  Part F Project management

join us on facebook @ fb
...
com

The post-implementation review focuses more specifically on the product that was produced by the
project
...


To download more visit http://freeaccastudymaterial
...

It also covers any required organisational transition processes
...
This is
most relevant to projects aimed at process improvement and changing the organisation's way of doing things
...
The benefits profile defines each
anticipated benefit and is used to track progress towards its realisation
...
Benefits may be complex and spread across
departments: designing usable and realistic measures may be difficult
...

Project managers should conduct regular benefits profile reviews in collaboration with key
stakeholders
...
Adjustments may be required if it becomes clear the original plan is
no longer realistic
...


Stage 4

Transition management
Projects are likely to bring change and this must be implemented in a proper way
...


Stage 5

Support for benefit realisation
Benefits realisation will mainly accrue after the end of the project
...
During this period, costs may rise and problems may occur
...
A philosophy of continuous improvement is required if further benefits are to
be achieved
...


tud

ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m

Stage 1

cc

Project management software can be used to produce detailed project planning documentation, to update
plans and to produce reports
...
1 Project management software

ea

We have now considered a number of aspects of project management, but we will end by looking at the
ways project management software can support project planning and control
...
Project management software
packages have been available for a number of years
...


fre

FAST FORWARD

as

8 Project management software

Software might be used for a number of purposes
...
Packages also allow a sort of 'what if?'
analysis for initial planning, trying out different levels of resources, changing deadlines and so on

Part F Project management  13: Project management

join us on facebook @ fb
...
com
to find the best combination
...

(b)

Estimating

(c)


...
Since many projects involve basically similar tasks (interviewing
users and so on), actual data from one project can be used to provide more accurate estimates for
the next project
...

Monitoring

Actual data can also be entered and used to facilitate monitoring of progress and automatically
updating the plan for the critical path and the use of resources as circumstances dictate
...

(d)

Reporting

ial

ter

8
...

(a)
(b)
(c)
(d)

ym
a

A typical project management package requires four inputs
...
3 Advantages of project management software packages
The advantages of using project management software are summarised below
...

The project manager is able to compare actual progress against planned
progress and investigate problem areas promptly
...
Changes to the plan can be reflected immediately
...
Many project managers conduct this type of analysis using
copies of the plan in separate computer files – leaving the actual plan
untouched
...


486

13: Project management  Part F Project management

join us on facebook @ fb
...
com

Software packages allow standard and tailored progress reports to be produced, printed out and
circulated to participants and senior managers at any time, usually at the touch of a button
...


To download more visit http://freeaccastudymaterial
...
4 Disadvantages of project management software packages
Some disadvantages of project management software are:
(a)

Some packages are difficult to use
...



...
However, project
management software can be very useful for multiple, larger projects
...
In particular, there is a
danger they do not adjust the initial project plan to reflect actual progress through the project (for
example, to reflect tasks that are completed late or are re-sequenced)
...
(This problem is similar to the one some accountants suffer from when
they spend too much time looking at spreadsheets, rather than talking to operational managers to
understand what is really happening in the business
...
com

(b)

Part F Project management  13: Project management

join us on facebook @ fb
...
com

Chapter Roundup
A project is an undertaking that has a beginning and an end and is carried out to meet established goals
within cost, schedule and quality objectives
...
co
m





Adaptation to environmental change makes project management an important feature of strategic
implementation
...

Strategic project management envisages strategy as a stream of projects intended to achieve
organisational breakthroughs
...




The project life cycle concept describes the progression of many projects through four stages: definition,
design, delivery and development
...




Project initiation tasks include the appointment of project manager and sponsor; stakeholder analysis and
the definition of project scope
...




The business case is a key document which is initially used to secure funding for a project, then revisited
and revised during the life of the project to ensure the project remains on track and the identified benefits
are realised
...
Benefits can be classified as observable, measurable, quantifiable or financial
...
Care should be
taken to ensure all costs are identified within the business case
...
Change owners may also be required to
ensure benefits are fully realised
...




Many large-scale projects, particularly those involving major change, are strategically significant and
project management can merge into strategic management
...




Work breakdown structure is an analysis of the work involved in a project into a structure of phases,
activities and tasks
...


488

ter

ym
a

tud

as

cc

ea

fre



ial

Project management is the combination of systems, techniques, and people used to control and monitor
activities undertaken within the project
...
Achieving this can be very difficult: most projects present a range
of significant challenges
...

Budgeting may be top-down or bottom-up
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

Chapter Roundup (cont'd)
A Gantt chart shows the deployment of resources over time
...
It is used to plan the sequence of tasks
making up project scope and to determine the critical path
...




A resource histogram is a useful planning tool that shows the amount and timing of the requirement for a
resource (or a range of resources)
...
Duties of the project manager include: Planning, teambuilding,
communication, co-ordinating project activities, monitoring and control, problem-resolution and quality
control
...




Project managers should have some understanding of the way that groups of people interact at work
...
com


...

Norming
Performing

Co-ordinator
Plant
Resource investigator
Team worker
Specialist

tud

–
–
–
–
–

ym
a

However, teams bring their own problems, including disharmony, riskshift, groupthink and political
conflict
...
Belbin identified nine roles played by
team members
...
Slippage may be managed with a
number of options, including incentives, working smarter, extra resources and rescheduling
...
Risk management
involves risk assessment and recording; and action to reduce, avoid, transfer or absorb risks
...
There should be a
post-completion audit process to examine the degree of success achieved, review methods and
organisation and note lessons for future reference
...


fre

ea

cc

as



Part F Project management  13: Project management

join us on facebook @ fb
...
com

Quick Quiz
2

What are the two main project management methodologies in the UK and the US?

3

What is a breakthrough project?

4

What are four phases of a typical project lifecycle?

5

What does a Gantt chart do?

6

Who provides the resources needed for a project?

7

What is a milestone?

8

Name two specific courses of action available to a project manager if a project starts to slip dramatically,
but has a fixed deadline and so cannot be delayed
...
co
m

What are the three main measures of project success?

490

13: Project management  Part F Project management

join us on facebook @ fb
...
com

1

To download more visit http://freeaccastudymaterial
...
com


...
com/freeaccastudymaterial

491

ial
ter
ym
a
tud
as
cc
ea
fre
492

13: Project management  Part F Project management

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
com


...
com/freeaccastudymaterial

ial
ter
ym
a
tud
as
cc
ea
fre
494

join us on facebook @ fb
...
com


...
com

ter

ial

Finance
Topic list
1

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
This evolution is due to a growing expectation that finance
professionals should not just communicate performance but play an active
role in helping to shape strategy
...
The organisation's financial position will form a major part of
the strategic position and will also constitute a strong influence on the
process of strategic choice, for example, in assessing the acceptability and
feasibility of different options
...
Finance is therefore relevant to all three of
strategic position, strategic choice and strategic action and so has inherent
strategic significance
...


join us on facebook @ fb
...
com

Study guide
Intellectual level
G1

The link between strategy and finance

(a)

Explain the relationship between strategy and finance
Managing for value

(ii)

Financial expectations of stakeholders

(iii)

Funding strategies

2

Discuss how the finance function has transformed to enabling an
accountant to have a key role in the decision-making process from strategy
formulation and implementation to its impact on business performance

G2

Finance decisions to formulate and support business strategy

(a)

Determine the overall investment requirements of the business

(b)

Evaluate alternative sources of finance for these investments and their
associated risks

3

(c)

Efficiently and effectively manage the current and non-current assets of the
business from a finance and risk perspective

2

G3

The role of cost and management accounting in strategic planning and
decision making

(a)

Evaluate budgeting, standard costing and variance analysis in support of
strategic planning and decision making

3

(b)

Evaluate strategic and operational decisions, taking into account risk and
uncertainty (Including using decision trees)

3

(c)

Evaluate the following strategic options using marginal and relevant costing
techniques
...


2

Apply appropriate gearing ratios to assess the risks associated with
financing and investment in the organisation
...


2

(d)

Apply appropriate profitability ratios to assess the viability of chosen
strategies
...


2

(b)

fre

(c)

ea

G4

496

14: Finance  Part G Finance

join us on facebook @ fb
...
com


...
com

Exam guide


...
Nonetheless, the evidence of the papers to date suggests you are
likely to encounter numerical analysis of some kind in Question 1 and the examining team has indicated
that there will continue to be opportunities for calculation
...

There is no certainty that the numerical analysis will be of a financial kind
...


ial

To download more visit http://freeaccastudymaterial
...
1 Transformation of the role of the accountant and the finance function

ym
a

ter

The role of the finance function and finance professional is changing
...
This gradual evolution has given rise to the
notion of the finance function acting as a business partner, where finance professionals share their
finance expertise with operational teams
...

In this section, we explore how the traditional role of the finance function and that of the finance
professional is continuing to evolve
...


tud

1
...
1 The role of the traditional finance function

The specific activities and roles undertaken by the traditional finance function include:
Processing transactions, maintaining accounting records and delivering month-end reports
efficiently and at low cost
...


(c)

Ensuring the effective operation of corporate governance and control
...


cc

as

(a)

1
...
2 The finance function as a business partner

ea

The finance function has faced pressures to become more actively involved in business operations
...
This means gaining broad knowledge of the business, participating as full
members of operational teams and bringing financial expertise to the management process
...

Important areas where the finance functions role has developed have included:

fre

FAST FORWARD








Providing more useful information on business units, projects, products and customers
Collaborating in the formulation of corporate objectives, strategic plans and budgets
Monitoring outcomes against plans and initiating responsive action to improve performance
Supplying business cases for new investments
Communicating and interpreting financial and non-financial information for a range of stakeholders
Helping operational and strategic managers understand information on which decisions are based

Part G Finance  14: Finance

join us on facebook @ fb
...
com


Designing information systems that provide greater support for management

1
...
3 The hybrid accountant


...
Growing numbers of accountants spend the majority of their time as internal consultants or
business analysts
...
Moreover, many no longer work in an accounting department, but are based in
the operating departments with which they work, meaning that they are increasingly involved with the
operations of their business, and more actively involved in decision making
...


ym
a

Managing the multitude of risks faced, supporting strategic decision-making that drives sustainable longterm value, and simply controlling the organisation effectively are difficult but ever more important finance
priorities for finance leaders
...
The
finance journey has seen the role of the function evolve from back office to centre stage in supporting
organisations create and protect value
...


tud

Many of the challenges and priorities that face the finance function are very evident in the aftermath of the
financial and economic crisis in 2008-2009; in particular, the desire for sustainable wealth creation
...


as

A defining hallmark of finance leadership post-crisis has been the need for balance between the pursuit of
growth and appropriate control of the organisation; in essence supporting the business to drive
sustainable growth
...


fre

ea

cc

In practical terms, what do we mean by balanced finance leadership? Finance leaders have an important
role to play in supporting the organisations strategy and partnering with the business effectively, but to do
this sustainably the business first and foremost must be effectively controlled
...
This
balanced finance stewardship is the building block of sustainable value creation in today's competitive
business environment'
...
accaglobal
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
The report outlined findings from ACCA's global survey of CFO's on the skills and capabilities they
see as being most relevant to their role
...


To download more visit http://freeaccastudymaterial
...
2 Importance of decision making to organisations
FAST FORWARD

A large part of the modern accountant's role is to work closely with the business to improve strategic
decision making to enhance the business' ability to create value
...



...
In the context of developing business strategy, perhaps the
most important of these job roles is the provision of information and analysis on which decisions are
based
...

This change in the focus of the modern accountant's role also reflects an increasing recognition that high
quality decision-making is becoming critical to superior business performance and may form the basis of
a competitive advantage
...
com

1
...
1 The challenge for modern accountants

The challenge lies in providing more relevant information for decision making
...

Historical costs are not necessarily the best guide to decision making
...


(b)

Strategic issues are not easily detected by accounting systems
...
However, it is important to balance this with external
factors, especially as strategic management involves competitor and environmental considerations
...


ym
a

ter

(a)

tud

In other words, to support strategic decisions, accounting itself needs to become more strategic
...


1
...


as

FAST FORWARD

ea

Strategic management accounting is a form of management accounting in which emphasis is placed on
information about factors which are external to the organisation, as well as non-financial and internallygenerated information
...
3
...


Ward suggests that the role of the strategic management accountant can be analysed as follows
...
(The concept of customer profitability was discussed earlier in the Study Text in Chapter
3)
...


Part G Finance  14: Finance

join us on facebook @ fb
...
com
(c)

Financial control
...


However, although Ward focuses on the financial information which could be provided by a strategic
management accountant, it is also important to remember the contribution of non-financial information to
strategic management accounting; for example, in relation to a product or business unit's market share
...
co
m

'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 aim of fulfilling
stakeholder expectations
...


(a)

ter

ial

The important fact which distinguishes strategic management accounting from other management
accounting activities is its external orientation towards customers and competitors, suppliers and other
stakeholders
...

Competitive advantage is relative
...


(b)

ym
a

For example, knowledge of competitors' costs, as well as a firm's own costs, could help inform
strategic choices: a firm would be unwise to pursue a cost leadership strategy without first
analysing its costs in relation to the cost structures of other firms in the industry
...


1
...
3 Future orientation

as

1
...
4 Goal congruence

tud

Another criticism of traditional management accounts is that they are backward-looking
...
Strategic management accountants will use relevant costs
(covered later in this chapter) and revenues (ie incremental costs and revenues and opportunity costs) for
decision making
...
The strategic management accounting system will require the inputs of
many areas of the business
...


(b)

It relates business operations to financial performance and, therefore, helps ensure that business
activities are focused on shareholders' needs for profit
...


fre

(c)

ea

(a)

1
...
However, bearing in mind the need for goal
congruence, external orientation and future orientation, some more specific examples of how strategic

500

14: Finance  Part G Finance

join us on facebook @ fb
...
com

1
...
2 External orientation

To download more visit http://freeaccastudymaterial
...

(a)

Competitor analysis
...
How
do competitors' costs compare with ours? Are competitors vulnerable because of their cost
structure or their product/service portfolio (or are we vulnerable because of our cost structure or
our product/service portfolio)?


...

Financial effect of competitor response
...
A firm should want to know what profits or losses are being made by each of
its products, and why
...
What are the firm's key products or strategic business units – in terms of their
contribution to revenue or profit? What strategies should be adopted for different products or
business units (eg in relation to their relative market share and market growth; per BCG matrix)?

(e)

Customer profitability
...

Which customers are most important/profitable to us? Why are some groups of customers more
profitable than others?

(f)

Pricing decisions
...
What are the potential costs and benefits of launching new products
and/or entering new markets? Should the organisation launch the products, or enter the markets?
Alternatively, should the organisation discontinue a product or leave a market which does not seem
to be performing well?

(h)

Capacity expansion
...
What are the costs and benefits of investing in building brands?

(j)

Shareholder wealth
...


tud

ym
a

ter

ial

(c)

To download more visit http://freeaccastudymaterial
...
5 Success factors for a strategic management accounting system (SMAS)

Strategic management accounting has to bridge a gap between financial reporting, on the one hand; and
the uncertainties of the future, on the other
...
It should:



Aid strategic decisions
Close the communication gap between accountants and managers

Part G Finance  14: Finance

join us on facebook @ fb
...
com









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

1
...
1 Aid strategic decisions

ial

As part of a strategic management system, the SMAS will provide one-off information to support and
evaluate particular strategic decisions and information for strategic management, in order to monitor
strategies and the firm's overall competitive position
...


1
...
2 Close the communication gap

Ask the recipient how he or she would like the format of the report
Provide only the relevant supporting financial data
Identify the key assumptions on which the information is prepared

ym
a





ter

The SMAS converts financial data into information for strategic decision-making
...
Consequently, the originator of such information should make sure that it is
tailored
...
5
...

Changing the balance of resource allocation between different business areas, for example, by
increasing spending in one area
...
Some account will
have to be taken of the timescale in which the strategy is expected to consume resources, as
benefits may be some time in coming
...


as

tud

(a)

Closing down part of the business and selling off the assets
Selling the business as a going concern

(i)
(ii)

Incorporate future cash flows rather than historic costs
Include only those items which will be changed by the particular decision

ea




cc

To support such decisions, the SMAS should:

1
...
4 Offer suitable financial performance indicators
Two general points can be made
...
Customers drive a business, and competitors can ruin it, so
performance measures which ignore key variables of customer satisfaction or competitor activity
ignore critical strategic issues
...
A report complaining about the
expense of an advertising campaign ignores the fact that failing to advertise could lead to loss of
market share
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

These are now discussed in more detail
...
com
1
...
5 Distinguish economic versus managerial performance
A business's overall economic performance results from both controllable and uncontrollable factors
...
Shareholders may be happy with the risk, if it is balanced by suitable return, but a manager
may be unhappy if their career is at risk from pursuing a strategy, the success of which is outside
their control
...
Judging a manager's contribution on the basis of the overall economic performance
of the business may not reflect their contribution at all
...


1
...
6 Provide relevant information


...
Specific, tailored reports should support individual decisions and activities,
perhaps with profitability analyses for each market segment
...
com

1
...
7 Separate committed from discretionary costs

Ignore sunk costs
...

A cost may be committed, even though it has not actually been incurred
Discretionary costs are those over which the decision-maker still has choice
...
5
...


1
...
9 Use standard costs strategically

Standard costs (covered later in this chapter) consist of a physical usage element (eg volume of
materials) and a price element
...
If the relationships between the input material and output quantities are known, or variable,
then standard costing can show the financial effects of different mixes
...


(b)

If the price of a raw material escalates suddenly, the standard costing system can be amended with
the new price, and a new mix analysis calculated which takes it into account
...
If
a factory is working at 60% capacity utilisation, this could lead to higher indirect costs being absorbed per
unit
...


FAST FORWARD

fre

2 Finance and strategy
In commercial organisations, managing for value is about creating shareholder value, while in the public
sector; it is about obtaining value for money
...
Financial risk is determined exclusively by gearing, but there are several sources
of business risk
...


Part G Finance  14: Finance

join us on facebook @ fb
...
com
In the first part of this chapter, we explored the evolution in the role of the finance function and that of the
modern finance professional
...

JS&W suggest that organisations of all types must deal with three broad issues of finance
...
co
m

2
...


2
...
1 Shareholder value

ial

Funds from operations, which are determined by sales revenues and costs
...

Capital structure (gearing), which will determine the company's cost of capital (and its financial
risk)
...
1
...
However,
they should understand the significance of the factors outlined above as they apply to their
responsibilities
...


tud

2
...
3 Drivers of cost and value

as

Value creation does not occur and costs do not arise evenly across the organisation, so managers should
have a firm grasp of the key cost and value drivers affecting their operations
...
This will depend on relative bargaining power, as discussed
elsewhere in this Study Text
...


ea

The structure of costs and value creation is likely to change over time, as, for example, illustrated by the
cost and profit aspects of the product life cycle
...


2
...

Among these are: the ownership structure; whether a company is quoted or privately held; and, perhaps
most significantly, the attitude of the owners and senior managers to risk
...
Gearing up, with a high proportion of loan
capital, enables holders of equity to benefit significantly when overall returns are in excess of the cost of
debt, since the surplus accrues to them
...
This is financial risk
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
This will enable the payment of
dividends, which, in turn, will drive up the market value of the business, offering capital gain as an
alternative form of value
...


To download more visit http://freeaccastudymaterial
...



...
There are several other important sources of risk,
including political change and the dangers inherent in the physical environment
...
Business risk is the total of all the
uncertainties that exist in any business venture and thus includes such aspects of uncertainty as sales
success, public image, changes in the bargaining power of suppliers and so on
...
2
...
com

JS&W point out that financial risk can, to some extent, be balanced against business risk in order to
produce an acceptable level of risk overall
...
Similarly, if business risk increases, a
proportionate response might be to aim to pay off an element of debt
...


Growth
(Star)

Maturity
(Cash Cow)

Decline
(Dog)

Business risk

Very high

High

Medium to low

Low

Financial risk

Keep very low

Keep low

May be increased

Can be high

Funding

Venture capital

Equity

Debt and equity

Secured Debt

Nominal, if any

High

Total

2
...
2 Conglomerates

ym
a

Nil

Dividends

ter

Launch
(Question mark)

ial

JS&W illustrate the relationships involved here using the four cases of the Boston matrix, which parallel
the life cycle model to some extent
...


tud

A large company is likely to seek a balanced portfolio of businesses at different stages of their lives
...
They should then
adjust their funding strategy using the ideas illustrated above
...
2
...

A highly geared company is likely to avoid high levels of business risk
...


(c)

A strategy based on acquisitions may be driven by the need to reinvest surplus funds or to
demonstrate a high level of growth to the market; wider strategic considerations may be neglected
as a result
...
3 Stakeholders' financial expectations

fre

We discussed the general expectations of stakeholders earlier in this Study Text
...

There will also be expectations of solvency and liquidity on the part of trading partners and providers of
loan finance
...
This also applies to public sector
organisations
...
com/freeaccastudymaterial

505

To download more visit http://freeaccastudymaterial
...





Investment
Financing
Dividends

3
...
Often short-term gains must be sacrificed in the interests of the company's long-term prospects
...


3
...


3
...
Managers have
to take decisions in the light of strategic considerations such as whether the business intends to expand
internally (through investment in existing operations) or externally (through expansion)
...

The financial manager will need to determine the source, cost and effect on risk of the possible sources of
long-term finance
...


as

3
...
This may be particularly difficult in the case of equity
shareholders, since dividends are paid at the company's discretion; however, if equity shareholders do not
receive the dividends they want, they will sell their shares, the share price will fall and the company will
have more difficulty raising funds from share issues in future
...
Investment may have direct
consequences for decisions involving the management of finance; extra working capital may be required
if investments are made and sales expand as a consequence
...

A further issue managers will need to consider is the matching of the characteristics of investment and
finance
...

Another aspect is the financing of international investments
...
It

506

14: Finance  Part G Finance

join us on facebook @ fb
...
com


...


To download more visit http://freeaccastudymaterial
...
It may though be better to obtain finance on the international markets
...
5 Dividend decisions
Dividend decisions may affect the view that shareholders have of the long-term prospects of the
company, and thus the market value of the shares
...
co
m

3
...
Managers have a difficult decision here; how much do they pay out to shareholders each year
to keep them happy, and what level of funds do they retain in the business to invest in projects that will
yield long-term income? In addition, funds available from retained profits may be needed if debt finance is
likely to be unavailable, or if taking on more debt would expose the company to undesirable risks
...


ter

FAST FORWARD

4
...


ym
a

Key term

To download more visit http://freeaccastudymaterial
...




How much cash is required?
When it is required?




How long it is required for?
Whether it will be available from anticipated sources

tud

A company must know when it might need to borrow and for how long, not just what amount of funding
could be required
...
2 Cash forecasts based on the statement of financial position
(balance sheet)

cc

A forecast based on the statement of financial position (balance sheet) is produced for management
accounting purposes and so not for external publication or statutory financial reporting
...
A number of sequential forecasts can be produced, for example, a
forecast of the statement of financial position at the end of each year for the next five years
...
The links between these variables and the figures in the forecasts may not be
straightforward
...


4
...
In a cash flow forecast

Part G Finance  14: Finance

join us on facebook @ fb
...
com
model, managers may wish to know the cash flow impact if sales growth per month is nil, 1/2%, 1%,
1½%, 2½% or minus 1% and so on
...
This will be more problematic
...
4 Changes in economic variables

However, businesses will also need to forecast:

(b)

How the predicted changes will affect demand
...
Businesses
should consider separately the effect of major increases on each type of product
...
For example will the business
automatically adjust prices upwards by the rate of inflation, or will it try to hold prices? What will
its competitors do? If raw material prices increase, will the business try to change suppliers? What
effect will this have on payment patterns?

ial

(a)

4
...

Businesses need to be aware of the other factors, such as changes in the competitive environment that
could affect these variables and how this effect might work
...
However, if factors such as taste change, businesses need to recognise this might not just
require marginal changes in forecasts, but a re-visiting of the base data, since the changes will ultimately
render the previous surveys or models redundant
...

Businesses should have procedures for investing surpluses with appropriate levels of risk and return
...
1 Deficiencies

tud

FAST FORWARD

(b)

ea

(c)

Borrowing
...
If a company cannot fund its cash deficits, it could be wound up
...

The firm can delay payments to suppliers, or pull in payments from customers
...


cc

(a)

as

Any forecast deficiency of cash will have to be funded
...
The approximate size
of the contingency margin will vary from company to company, according to the cyclical nature of the
business and the approach of its cash planners
...
If planned in advance, instead of a panic
measure to avert a cash crisis, a company can more easily choose when to borrow, and will probably
obtain a lower interest rate
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Businesses need to be aware of likely changes in inflation, interest rates and so on
...


To download more visit http://freeaccastudymaterial
...
2 Cash surpluses
Many cash-generative businesses are less reliant on high quality cash forecasts
...

In some cases, the amount of interest earned from surplus cash could be significant for the company's
earnings
...


FAST FORWARD


...


To download more visit http://freeaccastudymaterial
...
1 Retained profits

6
...
1 Advantages of using retentions

(b)

Retentions are a flexible source of finance; companies are not tied to specific amounts or specific
repayment patterns
...


ym
a

(a)

ter

ial

For many businesses, the cash needed to finance investments will be available because the earnings the
business has made have been retained within the business, rather than paid out as dividends
...


6
...
2 Disadvantages of using retentions

(b)

As mentioned above, shareholders may be sensitive to the loss of dividends that will result from
retention for re-investment, rather than paying dividends
...
There is an opportunity cost in that if dividends were paid, the cash received could
be invested by shareholders to earn a return
...


cc

Equity share capital is a company's issued share capital, less capital which carries preferential rights
...


ea

Ordinary (equity) shares are those of the owners of a company
...
Outside the UK, it
is not uncommon for a company's shares to have no nominal value
...


fre

Key terms

as

6
...
3 Reasons for share issues
A new issue of shares might be made in a variety of different circumstances
...


Part G Finance  14: Finance

join us on facebook @ fb
...
com
(b)

(c)

The company might want to issue new shares, partly to raise cash but more importantly, to obtain
a stock market listing
...

The company might issue new shares to the shareholders of another company, in order to take it
over
...
co
m

7 Bank loans
Bank loans tend to be a source of medium-term finance, linked with the purchase of specific assets
...


7
...
2 Loan or overdraft

A customer might ask the bank for an overdraft facility when the bank would wish to suggest a loan
instead; alternatively, a customer might ask for a loan when an overdraft would be more appropriate
...
The customer should not be
short of cash all the time, and should expect to be in credit in some days, but in need of an
overdraft on others
...

When a customer wants to borrow from a bank, but cannot see its way to repaying the bank except
over the course of a few years, the medium- or long-term nature of the financing is best catered
for by the provision of a loan rather than an overdraft facility
...
2
...

The bank has the flexibility to review the customer's overdraft facility periodically, and perhaps
agree to additional facilities, or insist on a reduction in the facility
...

Being short-term debt, an overdraft will not affect the calculation of a company's gearing
...
2
...
This makes planning (budgeting) simpler
...
Overdrafts are normally repayable on
demand
...

Loans normally carry a facility letter setting out the precise terms of the agreement
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
The customer borrows a
fixed amount and pays it back with interest over a period or at the end of it
...
Overdrafts are repayable on demand
...
com

7
...


7
...
1 Advantages of bank loan over other forms of loan capital

(b)
(c)
(d)

Flexibility
...

Confidentiality
...

Speed
...

Costs
...



...
Restrictions such as collateral and possible restrictive covenants are required, as
opposed to none for certain types of loan capital
...
Detailed financial information such as budgets and management accounts
may have to be submitted periodically to the bank, whereas other lenders will not require
information in this detail
...
com

7
...
2 Disadvantages of bank loan over other forms of loan capital

ym
a

7
...
A business manager will often expect to
use the revenues earned by the asset to repay the loan, and obviously, an asset can only do this as long as
it is in operational use
...
1 Loan stock

Loan capital (or loan stock) is made up of debentures and other long-term loans to a business
...


as

FAST FORWARD

Stock is an amount of fully paid up capital, any part of which can be transferred
...
Where the coupon
rate is fixed at the time of issue, it will be set according to prevailing market conditions given the credit
rating of the company issuing the debt
...


fre

Key term

ea

Loan capital or stock has a nominal value, which is the debt owed by the company, and interest is paid at
a stated coupon on this amount
...
The rate
quoted is the gross rate, before tax
...
com/freeaccastudymaterial

511

To download more visit http://freeaccastudymaterial
...
It converts strategic plans into specific targets
...


Exam focus
point

A question in the December 2013 exam focused partly on the benefits of introducing a formal budgeting
process to address inaccurate forecasting at the company featured in the case study scenario
...
It is important that you relate your answer back to the information provided; otherwise you are in
danger of producing a general response which attracts few, if any, marks
...
1 Budgets, long-term plans and corporate objectives

Budgets are an important planning tool for the organisation and are directly related to the mission and
objectives of an organisation
...
It is likely to be expressed in financial
terms and its role is to convert the strategic plans into specific targets
...


These budgets will then have to be controlled to ensure the planned events actually occur
...


tud

A budget is a plan, not a forecast
...
Forecasts are helpful to budget setters and planners
...

A continual, or rolling budget, is continually updated
...
The contents of each of the individual budgets affect, and are
influenced by, the contents of the others; they are linked together
...

Planning (including budgeting) is the responsibility of managers, not accountants
...


ea

9
...

Promotes forward thinking
...


fre

(1)
(2)

512

Helps to co-ordinate the various aspects of the organisation
...


14: Finance  Part G Finance

join us on facebook @ fb
...
com


...
com
Motivates performance
...
Managers should be able to relate their own role back to the organisational
objectives, seeing as the budgets are based on these objectives
...
Budgets provide a yardstick for measuring performance
by comparing actual against planned performance
...
Allows managers to spend up to a certain limit
...



...
For example, a budget used as a system of
authorisation may motivate a manager to spend to the limit, even though this is wasteful
...
In addition to this, budgets
have some other limitations that could potentially arise
...

Slack may be built in by managers to make the budget more achievable
...

Unrealistic budgets may cause managers to make decisions that are detrimental to the company
...
com

(1)
(2)
(3)
(4)

ter

9
...
This means finding out where and why things did not go to plan, then
seeking ways to put them right for the future
...
Only realistic budgets can form the
basis for control, and therefore they should be adaptable
...
This is done by comparing the actual performance to the budgets to identify the
variances
...


tud

9
...

Senior management take the system seriously
...
This attitude cascades down through the organisation
...
There are clear responsibilities stating which manager is responsible for each
business area
...
Targets set too high, or too low, would have a
demotivating effect
...
This should be done automatically on a
monthly basis
...
Managers receive specific, rather than general purpose, reports so that they do
not have to wade through information to find the relevant sections
...


fre



ea



as





Timely reporting
...
This is so they can take action to prevent the same problems occurring
in the next reporting period
...
Simply reporting variances does not cause change
...


Part G Finance  14: Finance

join us on facebook @ fb
...
com

9
...
In particular, budgets have been found to:
Improve performance



Be most effective when they are demanding, yet achievable; though if they are unrealistically
demanding, performance may deteriorate



Are most effective when the managers have participated in the setting of their own targets


...
It is likely that
having an understanding of budgets will be a key part of your future career as an accountant
...
Variance analysis involves comparing actual and planned performance, identifying the
differences and investigating the reasons for the variances
...

They are often constructed of standards
...
Budgets and standards are similar in the following ways
...


(b)

They are both used for control purposes
...
Actual achievements or expenditures are then compared with the budgets
and action is taken to correct any variances where necessary
...


tud

(a)

as

As well as being similar, budgets and standards are interrelated
...
The unit cost is multiplied by the budgeted activity
level to arrive at the budgeted expenditure on production costs
...

Budgets

ea

Gives planned total aggregate costs
for a function or cost centre

Standards
Shows the unit resource usage for a single task, for example,
the standard labour hours for a single unit of production
Limited to situations where repetitive actions are performed
and output can be measured

Expressed in money terms

Need not be expressed in money terms
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

10
...



...
The predetermined costs are known as standard costs and the difference between the standard
and the actual cost is known as a variance
...


ial

Standard costing has two principal uses
...
com

Although standard costing can be used in a variety of costing situations such as batch and mass
production, process manufacture, jobbing manufacture (where there is standardisation of parts) and
service industries (if a realistic cost per unit can be established), the greatest benefit from its use can be
gained if there is a degree of repetition in the production process so that average or expected usage of
resources can be determined
...


To value inventories and cost production for cost accounting purposes
...


(b)

To act as a control device by establishing standards (expected costs) and comparing actual costs
with the expected costs, thus highlighting areas of the organisation which may be out of control
...
They
represent targets against which actual performance is measured and provide the basis for variance
analysis
...

Ideal standards assume no inefficiency due to defects, downtime and so on, in order to encourage
employees to strive for excellence
...
Ideal standards cannot be achieved, so if such
standards are used for budgeting, an allowance will have to be included to make the budget
realistic and attainable
...
They
are intended to be challenging but achievable
...
These standards can be used for product costing, cost control, inventory valuation,
estimating and as a basis for budgeting
...
Another approach is to use past data such as costs, times and
usage for the same or similar products and use this as a basis for the estimates
...
This may mean that an element of slack is built into the
standard in order to make it easier to achieve
...
When the same process is carried out time and
time again, a learning-curve effect tends to occur
...
Although the speed of performing the task improves, standards often remain
unchanged for many years
...
For example, large adverse variances in the labour efficiency may
be more likely if the process, or member of staff concerned, is new
...



Carefully planned standards are an aid to more accurate budgeting



Standard costs provide a yardstick against which actual costs can be measured

Part G Finance  14: Finance

join us on facebook @ fb
...
com
The setting of standards involves determining the best materials and methods which may lead to
economies



A target of efficiency is set for employees to reach and cost-consciousness is stimulated



Variances can be calculated which enable the principle of 'management by exception' to be
operated
...
However, care must be taken to distinguish between controllable and noncontrollable costs in variance reporting


...
The
two main problems are that they do not provide a useful basis for exercising control (for instance ,where
inappropriate action is taken to obtain favourable variances), and they may not achieve their aim of
motivating managers
...
Despite these problems, standards are still used widely
...
They may be favourable or adverse, depending on whether they result in an increase to, or a
decrease from, the budgeted profit figure
...
2
...
This is an
important variance because losing sales generally means losing profit as well
...

Sales price variance is the difference between actual sales revenue and actual volume at the standard
sales price
...


tud

10
...
2 Materials variances

Total direct materials variance is the difference between the actual and direct materials cost and the
direct materials cost according to the flexed budget
...


as

Direct materials usage variance is the difference between actual usage and budgeted usage for the actual
volume of output, multiplied by the standard materials cost
...


cc

Direct materials price variance is the difference between actual materials cost and the actual usage
multiplied by the standard materials cost
...


ea

10
...
3 Labour variances

Total direct labour variance is the difference between the actual direct labour cost and the direct labour
cost according to the flexed budget
...


fre

Direct labour efficiency variance is the difference between the actual labour time and budgeted time, for
the actual volume of output, multiplied by the standard labour rate
...
If actual time is greater than budgeted time, the
effect on the profit will be adverse
...

Direct labour rate variance is the difference between the actual labour cost and the actual labour time
multiplied by the standard labour rate
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
2 Variance analysis

To download more visit http://freeaccastudymaterial
...
Where actual costs exceed the standard, profit will be
adversely affected
...
2
...
Higher than budgeted overheads lead to less profit, so have an adverse effect
...
co
m

10
...
5 Example: Flexible budgets and budgetary control

ter

ial

To download more visit http://freeaccastudymaterial
...
Budgeted results and actual results for May are as
follows
...
(F) denotes a favourable variance and (A) an unfavourable or adverse variance
...
All costs were higher than
budgeted but the volume of output was also higher; it is to be expected that actual variable costs would be
greater those included in the fixed budget
...


tud

Similarly, it is not possible to tell how much of the increase in sales revenue is due to the increase in
activity
...

For control purposes, we need to know the answers to questions such as the following:




Were actual costs higher than they should have been to produce and sell 8,200 Darcys?
Was actual revenue satisfactory from the sale of 8,200 Darcys?

as

Instead of comparing actual results with a fixed budget which is based on a different level of activity to
that actually achieved, the correct approach to budgetary control is to compare actual results with a
budget which has been flexed to the actual activity level achieved
...


(b)

Production overhead is a semi-variable cost, the budgeted cost for an activity level of 10,000 units
being $25,000
...


Selling prices are constant at all levels of sales
...
com/freeaccastudymaterial

517

To download more visit http://freeaccastudymaterial
...

Production and sales (units)
Sales revenue
Direct materials
Direct labour
Production overhead
Administration overhead
Profit

Flexible budget
8,200
$
82,000 (W1)
24,600 (W2)
16,400 (W3)
23,200 (W4)
10,000 (W5)
74,200
7,800

Workings

Flexible budget sales revenue = $10 × 8,200 = 482,000
2

Direct materials cost per unit = $22,500 / 7,500 = $3

3

Direct labour cost per unit = $15,000 / 7,500 = $2
Budget cost allowance = $2 × 8,200 = $16,400

Variable production overhead cost per unit = $(25,000 – 22,500)/(10,000 – 7,500)
= $2,500/2,500 = $1 per unit

ym
a

4

ter

Budget cost allowance = $3 × 8,200 = $24,600

$
1,000 (A)
1,100 (F)
900 (F)
400 (F)
1,000 (A)
1,400 (F)
400 (F)

ial

Selling price per unit = $75,000 / 7,500 = $10 per unit

Variance

Fixed production overhead cost = $22,500 – (7,500 × $1) = $15,000
Budget cost allowance = $15,000 + (8,200 × $1) = $23,200
5

Administration overhead is a fixed cost and hence budget cost allowance = $10,000

(a)

tud

Comment

In selling 8,200 units, the expected profit should have been, not the fixed budget profit of $5,000,
but the flexible budget profit of $7,800
...


as

One of the reasons for this improvement is that, given output and sales of 8,200 units, the cost of
resources (material, labour etc) was $1,400 lower than expected
...

The sales revenue was, however, $1,000 less than expected because a lower price was charged
than budgeted
...
You have probably already realised that
this variance of $1,000 (A) is a selling price variance
...
We do not know if this is the
case but without flexing the budget we could not know that a different selling price to that
budgeted had been charged
...


The difference of $400 between the flexible budget profit of $7,800 at a production level of 8,200 units and
the actual profit of $8,200 is due to the net effect of cost savings of $1,400 and lower than expected sales
revenue (by $1,000)
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Fixed budget
7,500
$
75,000
22,500
15,000
22,500
10,000
70,000
5,000

To download more visit http://freeaccastudymaterial
...

The savings in resource costs/lower than expected sales revenue (a net total of $400 as indicated
by the difference between the flexible budget and the actual results)
...
This is the sales volume
contribution variance
...

$
Fixed budget profit
Variances
Sales volume
Selling price
Direct materials cost
Direct labour cost
Production overhead cost
Administration overhead cost


...
com

2,800 (F)
1,000 (A)
1,100 (F)
900 (F)
400 (F)
1,000 (A)

3,200 (F)
8,200

10
...


tud

Variances may occur for a number of reasons
...
Unless they are achievable, budgets are not a useful method of control
...

Variance

Possible reason for variance

Sales volume

Poor performance by sales staff

as

Deterioration in market conditions between the time that the budget was set and
the actual event
Lack of goods or services to sell as a result of a production problem

Poor performance by sales staff

Sales price

cc

Deterioration in market conditions between the time that the budget was set and
the actual event

ea

Direct materials
usage

fre

Direct materials
price

Poor performance by production department staff, leading to high rates of scrap
Substandard materials, leading to high rates of scrap
Faulty machinery, causing high rates of scrap

Poor performance by the buying department staff
Using higher quality material than was planned
Change in market conditions between the time the budget was set and the actual
event

Part G Finance  14: Finance

join us on facebook @ fb
...
com
Variance

Possible reason for variance

Direct labour
efficiency

Poor supervision
A worker with a low skill grade taking longer to do the work than was envisaged
for the correct skill grade
Low-grade materials, leading to high levels of scrap and wasted labour time
Problems with a customer for whom a service is being rendered


...


ym
a

Also notice that adverse variances may not necessarily indicate problems
...
While this could indicate a problem in the printing processes, it could equally just be due
to their being a greater demand for books, causing more books to be sold and therefore higher print costs
to be incurred
...
4 Investigating variances

Finding out why variances have occurred can be expensive
...
Sometimes
production may even have to be stopped
...


cc

Knowing the reason for a variance is useful to help management bring things back under control and
enables future targets to be met
...

Significant adverse variances should be investigated as, if it continues to occur, it could become
very costly



Significant favourable variances should be investigated but with lower priority than for adverse
variances
...
Although the individual variance may be
insignificant, the cumulative effect (over time, or when considered along with related insignificant
variances) may not be
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

10
...
For example,
where spending is discretionary, such as for advertising or human resource development, there is no
direct link between inputs and outputs
...

Standards can quickly become out of date
...


(b)

Variances for which a manager is held accountable can be influenced by factors that are out of the
control of that manager
...


(d)

Once a standard has been met, there is no incentive to improve
...
This could happen if managers
exploit opportunities for bulk purchase discounts to attain a favourable direct materials price
variance
...
com


...
These calculations and values are incorporated into decision trees to illustrate the possible
choices and outcomes of decisions
...
1 Probability

tud

Decision trees can be very helpful tools for making strategic and operational decisions
...
In order for the decision tree to be useful, each
outcome should be assigned a probability and expected value
...
Let us first recap
the basic concepts of probability and expected values before we go on to look at how these can assist
decision making by incorporating them into decision trees
...
It is a measure of the likelihood of an event happening in the long run, or over a large
number of times
...
For example, you can't roll one dice and score both 5 and 6
simultaneously
...
For example, the probability of rolling a dice and scoring either a five or a six can be determined
by adding together the probability of rolling 5 and the probability of rolling 6
...
For example, simultaneously rolling a dice and tossing a coin
...


1/6 × 1/2 = 1/12

Part G Finance  14: Finance

join us on facebook @ fb
...
com
The general rule of addition for two events, A and B, which are not mutually exclusive, is as follows
...
co
m

Therefore, the probability of selecting an ace or a spade is:

Dependent or conditional events are events where the outcome of one event depends on the outcome of
the others
...
Contingency tables can be useful for dealing with conditional probability
...
The higher the probability of an event
occurring, the lower the associated risk will be
...


11
...


An expected value (or EV) is a weighted average value, based on probabilities
...

Although the outcome of a decision may not be certain, there is some likelihood that probabilities could be
assigned to the various possible outcomes from an analysis of previous experience
...

The concepts of probability and expected value are vital in business decision making
...

A project with a positive EV should be accepted



A project with a negative EV should be rejected



When choosing between options the alternative which has the highest EV of profit (or the lowest
EV of cost) should be selected
...
The principle is that when there are a number of
alternative decisions, each with a range of possible outcomes, the optimum decision will be the one which
gives the highest expected value
...
The amount of expected
profit is likely to be conditional on the result of various decisions
...

First, let us briefly consider some limitations of using expected values as a basis for decisions
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
11
...
1 Limitations of expected values
Evaluating decisions by using expected values has a number of limitations
...
They may
therefore be unreliable or inaccurate
...
They may therefore be useful as a guide to decision making
...
They do not, therefore, take into account all of the factors involved in the decision
...



...

An article titled 'Strategic planning in an age of turbulence' written by Ken Garrett is available in the
technical articles for P3 on the ACCA website
...
Consideration is given to the practical approaches management can use
when making decisions
...
It would be worth
taking the time to study this article
...
3 Structure of decision trees

12/12

ym
a

A Section B question in the December 2012 exam required students to develop a decision tree from the
information provided and discuss the implications and shortcomings of using decision trees in strategic
decision making
...
However, a significant number of students appeared to be confident in constructing and
interpreting decision trees
...

A decision tree is a pictorial method of showing a sequence of interrelated decisions and their expected
outcomes
...

Decision trees provide a clear and logical approach to problem solving by:
Showing all possible choices as branches on the tree
Showing all possible outcomes as subsidiary branches on the tree

as




cc

Decision trees begin with a decision point, usually represented by a square, and the various choices
branch off from this, flowing from left to right
...


ea

If the outcome of a particular choice is uncertain, then the various possible outcomes must be shown
...
This is symbolised by a circle
...
These are known as subsidiary branches
...


fre

Exam focus
point

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

523

ym
a

ter

ial

Sometimes, a decision taken now will lead to other decisions being taken in the future
...


In this tree, a choice between A and B, or else a choice between C and D will be made, depending on the
outcome which occurs after choosing X
...


11
...
1 Evaluating decisions with a decision tree
The EV of each decision option can be evaluated, using the decision tree to help with keeping the logic
properly organised
...

We start on the right hand side of the tree and work back towards the left hand side and the
current decision under consideration
...


(b)

Working from right to left, we calculate the EV of revenue, cost, contribution or profit at each
outcome point on the tree
...
The
decision is whether the new product should be test marketed or abandoned
...


524

14: Finance  Part G Finance

join us on facebook @ fb
...
com


...
com

0
...
5
0
...
com

The right-hand-most outcome point is point E, and the EV is as follows
...
co
m

To download more visit http://freeaccastudymaterial
...
It may help you
to write the EV on the decision tree itself, at the appropriate outcome point (point E)
...


(i)
(ii)

Market, EV = + 360 (the EV at point E)
Abandon, value = + 50

The choice would be to market the product, and so the EV at decision point C is +360
...


(i)
(ii)

tud

(b)

Market, value = – 600
Abandon, value = +50

as

The choice would be to abandon, and so the EV at decision point D is +50
...
If the original decision is to test market, the
company will market the product if the test shows positive customer response, and will abandon the
product if the test results are negative
...


+
=

(b)

0
...
4  50 (EV at D)
216 + 20 = 236
...


Compare the options at point A, which are as follows
...


Evaluating decisions by using a decision tree has a number of limitations:


The time value of money may not be taken into account



Decision trees are not suitable for use in complex situations

Part G Finance  14: Finance

join us on facebook @ fb
...
com


The outcome with the highest EV may have the greatest risks attached to it
...
co
m

12 Evaluating strategic options using marginal and
relevant costing techniques
Relevant costs and marginal costing are useful when evaluating strategic options including
accepting/rejecting special contracts, efficient use of scarce resources, make or buy decisions, and closing
or continuation decisions
...
1 Costs, output and breakeven

ial

ter

Fixed costs are costs that do not change, no matter how many units of a product are produced
...
They will only change if there is a significant change in demand and the
organisation decides to expand or scale back based on this and change its staffing requirement
accordingly
...


ym
a

Fixed costs are affected by inflation and are almost always time-based, ie they vary with the length of time
concerned
...
1
...


tud

Some costs have an element of both fixed and variable costs
...
Telephones are a good example where a fixed line rental and a charge per minute are
charged
...
1
...
The below chart shows the
relationship between the different kinds of costs, revenue, profits and losses
...

The margin of safety is the extent to which the planned volume of output or sales lies about the breakeven
point
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
1
...
com
The relationship between contribution and fixed costs is known as operational gearing
...
Increasing the
level of gearing makes profits more sensitive to changes in the volume of activity
...
1
...
It is a widely-used and popular planning tool
...
co
m

There are, however, three main problems associated with breakeven analysis
...
Breakeven assumes linear (straight line) relationships
...
Most fixed costs are not fixed over all volumes of activity and are more likely
to be stepped



Multi-product businesses
...
It may be hard
to identify which fixed costs belongs to which product, and the effect that the sale of one product
may have on the sales of another

ial



To download more visit http://freeaccastudymaterial
...
2 Marginal analysis

ym
a

Relevant costs are any cost that is relevant to a particular decision
...


When making these decisions, the key strategic objective should be the enhancement of shareholder
wealth
...


tud

As fixed costs are ignored, marginal cost (the cost of producing one additional unit) usually equals the
variable cost per unit
...

Marginal analysis is useful in four key areas of decision making:
Accepting/rejecting special contracts
Determining the most efficient use of scarce resources
Make-or-buy decisions
Closing or continuation decisions

as






cc

12
...
1 Accepting/rejecting special contracts

ea

Marginal analysis can be used to decide whether or not a special contract should be accepted by
determining the contribution (revenue less cost) that the price offered would yield
...

However, there will also be other factors that are difficult, or impossible, to quantify which will also have to
be considered before a final decision is made
...


fre

Key term

ter

When an organisation is trying to decide between two or more possible courses of action, only costs that
vary with the decision should be included in the decision analysis, ie it should only consider relevant
costs
...
2
...
The fixed costs of operating the workshop for a month is $600
...
40
...
com/freeaccastudymaterial

527

To download more visit http://freeaccastudymaterial
...
They are employed on a contract basis, so they are only paid if they work
...
80
...
60 each
...
60
14
...
40)
1
...
20) $480
...
2
...


ym
a

Usually output is restricted by level of demand, rather than by the organisation's ability to produce
...

The most profitable combination of products will occur where the contribution per unit of the scarce
factor is maximised
...
2
...

Machine time is limited to 148 hours a week
...
75

$4
...
75

2nd

1st

3rd

14: Finance  Part G Finance

join us on facebook @ fb
...
com


...


To download more visit http://freeaccastudymaterial
...



...
2
...
com

A common decision faced by businesses is whether to produce the product or service they sell themselves
or whether to buy it from another business
...
As with accepting or rejecting contract decisions
...
These other
factors include loss of control of quality, potential unreliability of supply, and access to expertise and
specialisation
...
2
...
It can purchase the components from Ray Ltd, a
subcontractor) for $20 each, or it can produce them internally for total variable costs of $15 per
component
...

Should the component be produced internally or subcontracted to Ray Ltd?

ym
a

Solution

Shark Ltd should produce the component internally as this is $5 per unit cheaper than contracting out to
Ray Ltd
...
Shark Ltd will lose contributions of
$12 from the other product
...


12
...
7 Closing or continuation decisions
Many organisations produce separate financial statements for each department or section in order to
attempt to assess the relative effectiveness of each one
...
This means the organisation can determine the contribution to
the overall organisation that the individual departments make
...
com/freeaccastudymaterial

529

To download more visit http://freeaccastudymaterial
...
This is because the fixed costs
would still be incurred and the organisation would be worse off without it
...
2
...
The three
departments occupy similar sized areas of the premises
...
co
m

Total
$'000
534
(482)
52

This suggests that if the cat furniture department was closed, the company as a whole would be $9,000
more profitable per year
...
All running costs of a particular
facility are part of the cost of output of that facility
...
The direct costs are easily assigned to products
...


as

FAST FORWARD

tud

This shows the cat furniture department actually makes a positive contribution of $37,000 and should not
be closed
...
The
fixed costs would continue to be incurred, whether or not the department is closed
...
It includes all amounts sacrificed,
so all costs related to the production of the product or provision of the service would be included as part
of the full cost
...
For example, the rent is unlikely to change if we produce one more unit
of the product
...


fre

Full costing is widely used in practice and can be a useful tool for assisting managers in decision making
...


Exercising control: budgets are typically prepared on a full-cost basis and so actual performance based on
full costs can be easily compared to the plans to identify, and take measures to address, any discrepancies
between actual and planned performance
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
This gives the following results:
Total
Cat Food
Cat Toys
Cat Furniture
$'000
$'000
$'000
$'000
534
254
183
97
Variable costs
(344)
(167)
(117)
(60)
Contribution
190
87
66
37
Fixed costs (eg rent)
(138)
(46)
(46)
(46)
Profit/(loss)
52
41
20
(9)

To download more visit http://freeaccastudymaterial
...
This can give
managers an insight into the most efficient way of operating and so provide a basis for decisions related
to the processes to be followed, or the location of a plant
...
co
m

Assessing performance: Profit and income are important performance measures for an organisation and
provide a basis for many decisions for managers
...
One major expense will be the cost of making the product or
service itself, ie the full cost
...
1 Multi-product businesses

If a business has only one product or service, calculating the full cost is very straightforward
...


ial

To download more visit http://freeaccastudymaterial
...
Simply summing the costs and dividing by the number of units of output to get
a cost per unit would not be reasonable in this situation
...


ym
a

Direct costs are costs that can be measured in respect of each particular unit of output, such as materials
or labour
...

Indirect costs or overheads are all the other costs
...


Identifying the full cost per unit of output where the units of output differ is known as job costing
...
For this reason, full costing is
also referred to as absorption costing
...
This raises the question of
how such costs should be allocated to individual cost units or products
...
2 Overhead apportionment

cc

There is no 'correct' way to allocate overheads to particular jobs; by their very nature, overheads to do not
directly relate to individual jobs
...


ea

The best method for apportioning overheads, therefore, is the one which results in the provision of the
most useful information
...


fre

The choice of an absorption basis is a matter of judgement and common sense
...
But the basis should realistically reflect the characteristics of a given cost centre,
avoid undue abnormalities, and be 'fair'
...
It is the relative share of overhead costs borne by individual products and
jobs which is affected by the basis of absorption
...
If a different basis is used for
different jobs, then either total overheads will not be fully charged to the jobs, or the jobs will be
overcharged with overheads
...
com/freeaccastudymaterial

531

To download more visit http://freeaccastudymaterial
...
If selling prices are based on full costs, this also may mean that the organisation
does not charge high enough prices to cover all of its costs
...
2
...
co
m

Although it is not possible to charge overheads to different jobs on different bases, it is possible to charge
one segment of the total overheads on one basis and another segment on another basis
...

All but the smallest organisations are generally divided into departments for a number of reasons:


It is more practical
...

The departments then charge all of their overheads to their specific jobs and so, between them, the
departments will charge all of the overheads of the business to individual jobs
...
2
...
The cost for the batch is derived using a job-costing basis and this is
divided by the number of units in the batch to determine the cost for each cost unit
...
2
...
This is often for the sake of pricing (eg car repair quote) where it is necessary to set the price
before the customer will accept the job
...
Where the outcome is different to that originally predicted, corrections will have to be made to
the full costs calculated
...
3 Activity Based Costing
Activity based costing (ABC) is an alternative to the traditional method of full costing
...
Support overheads
are charged to products on the basis of their usage of the factor causing the overheads
...
Also, overheads were only a very small fraction of total
costs, because direct labour and direct material costs accounted for the largest proportion of the costs
...
The benefits of a more accurate system of overhead allocation would
probably have been relatively small
...
Machines are at the heart of much
production, a high proportion of costs are now made up of overheads (direct labour may now only
account for as little as 5% of a product's cost), and organisations operate within a highly competitive
532

14: Finance  Part G Finance

join us on facebook @ fb
...
com

Where costs are dealt with departmentally, each department is known as a cost centre
...


To download more visit http://freeaccastudymaterial
...
It therefore now appears difficult to justify the use of direct labour or direct material
as the basis for absorbing overheads or to believe that errors made in attributing overheads will not be
significant
...
Support overheads are charged to products on the basis of their usage of
the factor causing the overheads
...


Costs are assigned to a product on the basis of the product's consumption of the activities
...
com

(b)

Activities cause costs
...

Producing products creates demand for the activities
...

The costs that vary with production volume, such as power costs, should be traced to products using
production volume-related cost drivers, such as direct labour hours or direct machine hours
...


13
...
1 Cost Pools

tud

ABC establishes separate cost pools for support activities such as despatching
...

Cost pools are similar to cost centres, except each cost pool is likely to relate to a particular activity,
rather than being more general, as is the case with cost centres in traditional product costing
...
3
...
This is because the
lack of direct materials may mean an even greater proportion of costs are made up of overheads
...


13
...
3 ABC and decision making




ea

Many of ABC's supporters claim that it can assist with decision making in a number of ways
...
It is therefore
particularly suited to the following types of decision:

fre

Key term


...

Activity based costing (ABC) attempts to overcome this problem
...
An ABC cost is therefore not a relevant cost
for all decisions
...
com/freeaccastudymaterial

533

To download more visit http://freeaccastudymaterial
...


13
...
4 Criticisms of ABC
It has been suggested by critics that activity based costing has some serious flaws
...
What drives the cost of the annual
external audit, for example?

(d)

ABC is sometimes introduced because it is fashionable, not because it will be used by management
to provide meaningful product costs or extra information
...


(e)

The cost of implementing and maintaining an ABC system can exceed the benefits of improved
accuracy
...


ter

ial


...


ym
a

13
...
This is because it is only possible to make decisions
about the future, not about the past
...
Candidates were expected to use the financial information provided in the scenario to support
their answers by calculating a selection of appropriate ratios
...
They can be grouped under the
headings profitability, liquidity, gearing and shareholders' investment
...


ea

FAST FORWARD

as

An article titled 'Performance appraisal' written by Bobbie Retallack is available in the technical articles
section for P3 on the ACCA website
...


14
...
The financial situation of
a company will also obviously affect its share price
...


534

14: Finance  Part G Finance

join us on facebook @ fb
...
com

(a)

To download more visit http://freeaccastudymaterial
...
Investors, for example, will be interested in the risk and return relating to
their investment, so will be concerned with dividends, market prices, level of debt versus equity and so on
...
Managers are interested in ratios that indicate how well the
business is being run, and also how the business is doing in relation to its competitors
...
co
m

Try not to be too mechanical when working out ratios, and think constantly about what you are trying to
achieve
...

The compulsory question in the December 2013 exam required students to consider whether a company
specialising in the sale of small electrical machines and tools to trade and domestic customers should
acquire a similar entity based overseas
...


ial

To download more visit http://freeaccastudymaterial
...
Students were confident in calculating basic ratios, but failed to go further and expand on
the practical considerations of acquiring an overseas target, eg the company lacked experience in
operating in a foreign country
...
2 Limitations of ratio analysis

ter

It is therefore critical that you apply the financial data provided and make the numbers 'talk' as this
provides you with evidence to support the practical points you raise
...

Availability of comparable information - When making comparisons with other companies in the
industry, industry averages may hide wide variations in figures
...


(b)

Use of historical/out-of-date information -Comparisons with the previous history of a business
may be of limited use, if the business has recently undergone, or is about to undergo, substantial
changes
...
Comparisons over time
may also be distorted by inflation, leading to assets being stated at values that do not reflect
replacement costs, and revenue increasing for reasons other than more sales being made
...

Companies may be able to exist without any difficulty with ratios that are rather worse than the
industry average
...
This might appear to be good, but further investigation might
reveal that the higher ratios are a result of higher inventory and receivable levels which are a result
of poor working capital management by the business with the better ratios
...
For
smaller companies, working capital ratios may be distorted, depending on whether a big customer
pays, or a large supplier is paid, before or after the year-end
...


Part G Finance  14: Finance

join us on facebook @ fb
...
com
Exam focus
point

Bear these limitations in mind when calculating and interpreting ratios, as the examiners' reports give
many examples of misapplication of ratio analysis, and over-simplistic and misleading interpretations
...
3 Broad categories of ratios
Ratios can be grouped into the following four categories:
Profitability and return
Debt and gearing
Liquidity: control of cash and other working capital items
Shareholders' investment ratios (or stock market ratios)

ial






The Du Pont system of ratio analysis involves constructing a pyramid of interrelated ratios like that below
...


as

Although you will have encountered most or all of the ratios that we are about to define before, make sure
you know how to calculate them in the exam
...


cc

Exam focus
point

14
...
An important profitability ratio is therefore return on capital
employed (ROCE), which states the profit as a percentage of the amount of capital employed
...
This is the same as total assets less
current liabilities
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Financial data will frequently be provided in the exam, particularly in Question 1, but the examiner's
reports indicate not enough use is made of it
...
However, make sure that you do interpret the data
...


To download more visit http://freeaccastudymaterial
...
This is PBIT, since interest is the return for loan capital
...


14
...
1 Evaluating the ROCE


...

(b)

The ROCE being earned by other companies, if this information is available

(c)

A comparison of the ROCE with current market borrowing rates

ial

The change in ROCE from one year to the next

To download more visit http://freeaccastudymaterial
...
5 Analysing profitability and return in more detail: the secondary
ratios
We may analyse the ROCE, to find out why it is high or low, or better or worse than last year
...


14
...
1 Profit margin

tud

A company might make a high or a low profit margin on its sales
...


as

The profit margin can be calculated both in terms of gross profit margin and net profit margin
...


14
...
2 Example: Profit margin

cc

A company has the following summarised income statements for two consecutive years
...

Year 1

28,000
= 40%
70,000

Year 2

45,000
= 45%
100,000

Is this good or bad for the business?

Part G Finance  14: Finance

join us on facebook @ fb
...
com
Solution
An increased profit margin must be good because this indicates a wider gap between selling price and
cost of sales
...
In year 1, expenses were 30% of turnover, whereas in year 2 they were 35% of turnover
...

Percentage analysis of profit between year 1 and year 2

Year 1
%
60
40
100

30
10
40

35
10
45

ial

Expenses as a % of sales
Net profit as a % of sales
Gross profit as a % of sales

ter

14
...
3 Asset turnover

ym
a

Asset turnover is a measure of how well the assets of a business are being used to generate sales
...
This will help company A to make a higher return on capital
employed than company B
...
The relationship between the three ratios is as follows
...
Strong sales growth will
usually indicate volume growth as well as turnover increases due to price rises, and volume growth is one
sign of a prosperous company
...
6 Debt and gearing ratios

When a company is earning only a modest profit before interest and tax, and has a heavy debt
burden, there will be very little profit left over for shareholders after the interest charges have been
paid
...


ea

(a)

cc

Debt ratios are concerned with how much the company owes in relation to its size and whether it is
getting into heavier debt or improving its situation
...
6
...


(a)
(b)

Assets consist of non-current assets at their balance sheet value, plus current assets
...


You can ignore long-term provisions and liabilities, such as deferred taxation
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Cost of sales as a % of sales
Gross profit as a % of sales

Year 2
%
55
45
100

To download more visit http://freeaccastudymaterial
...
In addition, if the debt ratio is over 50% and getting worse, the company's
debt position will be worth looking at more carefully
...


Example:

20,000

ial

Ordinary shares of $1

To download more visit http://freeaccastudymaterial
...
co
m

Suppose that two companies are identical in every respect, except for their gearing
...
The only
difference between the two companies is that Nonlever Co is all-equity financed and Lever Co is partly
financed by debt capital, as follows:
Nonlever Co
Lever Co
$
$
Assets
20,000
20,000
(10,000)
10% Bonds
0
10,000
20,000
10,000

ter

Because Lever has $10,000 of 10% bonds it must make a profit before interest of at least $1,000 in order
to pay the interest charges
...
A company, which is lower geared, is considered less risky than a higher
geared company because of the greater likelihood that its PBIT will be high enough to cover interest
charges and make a profit for equity shareholders
...
6
...
Gearing
ratios provide a long-term measure of liquidity
...
It does not include loans repayable
within one year and bank overdraft, unless overdraft finance is a permanent part of the business's capital
...
6
...
High operating gearing means
that a high proportion of cost is fixed
...
Operating gearing can be calculated as

cc

Contribution
PBIT

14
...
4 Interest cover

ea

The interest cover ratio shows whether a company is earning enough profits before interest and tax to pay
its interest costs comfortably, or whether its interest costs are high in relation to the size of its profits, so
that a fall in profit before interest and tax (PBIT) would then have a significant effect on profits available for
ordinary shareholders
...
Note that it is usual to exclude
preference dividends from interest charges
...
com/freeaccastudymaterial

539

To download more visit http://freeaccastudymaterial
...
6
...
This will be shown in a company's statement of cash flows for the
year
...



...


ial

ter

Profitability is, of course, an important aspect of a company's performance, and debt or gearing is
another
...
A company needs liquid assets so
that it can meet its debts when they fall due
...
Liquid funds consist of:
Cash
...
(Short-term investments are distinct from investments in shares in subsidiaries or
associated companies
...


(d)
(e)

Trade receivables
...

Bills of exchange receivable
...


tud

(c)

ym
a

(a)

Liquidity ratios

as

If an analysis of a company's published accounts is to give us some idea of the company's liquidity,
profitability ratios are not going to be appropriate for doing this
...


The current ratio is defined as:

cc

Current assets

Current liabilities

ea

In practice, a current ratio comfortably in excess of 1 should be expected, but what is comfortable varies
between different types of businesses
...
For companies with a
fast inventory turnover, a quick ratio can be less than 1 without suggesting that the company is in cash
flow difficulties
...


540

14: Finance  Part G Finance

join us on facebook @ fb
...
com

14
...
com
We can calculate turnover periods for inventory, receivables and payables (receivables and payables
days)
...
Both receivables days and inventory days therefore give us a
further indication of the company's liquidity
...
7
...
co
m

Calculate liquidity and working capital ratios from the accounts of a manufacturer of products for the
construction industry, and comment on the ratios
...
0
1,788
...
0
Cost of sales
1,478
...
7
Gross profit
586
...
1
62
...
2
370
...
0

ym
a

Net current assets
Notes

tud

Trade receivables
Trade payables

Solution

Current ratio

71
...
9

20X8
$m
329
...
2

20X7
$m
285
...
8

20X8
572
...
14
501
...
3
= 0
...
0
329
...
0

20X7
523
...
24
420
...
2
= 0
...
3
285
...
7

119
...
6

109
...
0

as

Quick ratio

35
...
7
14
...
0
420
...
0
347
...
8
48
...
2

ial

119
...
9
4
...
2
572
...
com

Current assets
Inventory
Receivables (note 1)
Short-term investments
Cash at bank and in hand

236
...
6

210
...
0

fre

As a manufacturing group serving the construction industry, the company would be expected to have a
comparatively lengthy receivables' turnover period, because of the relatively poor cash flow in the
construction industry
...

The company's current ratio is quite low, but we do not know what the industry average is
...

The quick ratio is only a little lower than the current ratio
...


Part G Finance  14: Finance

join us on facebook @ fb
...
com

14
...

We shall then consider their significance in the analysis of performance
...
co
m

Interest yield =

Dividend per share
Market price per share

Price/Earnings ratio =

Market value per share
Earnings per share

Dividend cover =

ial

Pr ofit after tax, extraordinary items and preference dividends
Number of equity shares in issue and ranking for dividend

Earnings available for distribution to ordinary shareholders
Actual dividend for ordinary shareholders

The value (market price) of the securities that they hold
The return that the security has obtained in the past
Expected future returns
Whether their investment is reasonably secure

ym
a






ter

Investors are interested in:

14
...
1 Dividend and interest yields

tud

In practice, we usually find with quoted companies that the dividend yield on shares is less than the
interest yield on debentures and loan stock (and also less than the yield paid on gilt-edged securities)
...
In the long run, shareholders
will want the return on their shares, in terms of dividends received plus capital gains, to exceed the
return that investors get from fixed interest securities
...
8
...
A company must be able to sustain its earnings in order
to pay dividends and re-invest in the business so as to achieve future growth
...


cc

Example: Earnings per share

Walter Wall Carpets Co made profits before tax in 20X8 of $9,320,000
...


ea

The company's share capital is as follows
...


542

14: Finance  Part G Finance

join us on facebook @ fb
...
com

Earnings per shares =

To download more visit http://freeaccastudymaterial
...
6c

EPS must be seen in the context of several other matters
...
Is EPS growing? What is the rate
of growth? Is the rate of growth increasing or decreasing?
Is there likely to be a significant dilution of EPS in the future, perhaps due to the exercise of share
options or warrants, or the conversion of convertible loan stock into equity?
EPS should not be used blindly to compare the earnings of one company with another
...
When earnings are
used to compare one company's shares with another, this is done using the P/E ratio or perhaps
the earnings yield
...
The EPS
of one company must be directly comparable with the EPS of others, and the EPS of a company in
one year must be directly comparable with its published EPS figures for previous years
...


To download more visit http://freeaccastudymaterial
...
co
m

Profits before tax
Less tax
Profits after tax
Less preference dividend (8% of $2,000,000)
Earnings

tud

Note that EPS is a figure based on past data, and it is easily manipulated by changes in accounting
policies and by mergers or acquisitions
...
8
...


as

The value of the P/E ratio reflects the market's appraisal of the shares' future prospects
...


cc

One approach to assessing what share prices ought to be, which is often used in practice, is a P/E ratio
approach:
The relationship between the EPS and the share price is measured by the P/E ratio
...


(c)

ea

(a)

So if the EPS goes up or down, the share price should be expected to move up or down too, and
the new share price will be the new EPS multiplied by the constant P/E ratio
...
60, its P/E ratio would have
been 12
...
96
...


(a)

If interest rates go up, investors will be attracted away from shares and into debt capital
...


Part G Finance  14: Finance

join us on facebook @ fb
...
com
(b)

If prospects for company profits improve, share prices will go up, and P/E ratios will rise
...


(c)

Investors' confidence might be changed by a variety of circumstances, such as:

(i)
(ii)

The prospect of a change in government
The prospects for greater exchange rate stability between currencies


...
8
...


Ratio analysis often forms the basis of comparisons of performance over time or with other
organisations
...
1 Results of the same company over successive accounting periods
Useful comparisons over time include:

Percentage growth in profit (before and after tax) and percentage growth in turnover
Increases or decreases in the debt ratio and the gearing ratio
Changes in the current ratio, the inventory turnover period and the receivables' payment period
Increases in the EPS, the dividend per share, and the market price

tud






The principal advantage of making comparisons over time is that they give some indication of progress:
are things getting better or worse? However, there are some weaknesses in such comparisons
...


(b)

The progress a company has made needs to be set in the context of what other companies have
done, and whether there have been any special environmental or economic influences on the
company's performance
...
1
...


fre

(b)

Return on capital employed (ROCE) can be misleading if non-current assets, especially property,
are valued at historical cost net of depreciation rather than at current value
...

Some growth trends can be misleading, in particular, the growth in sales turnover, and the growth
in profits or earnings
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

15
...


(b)

Even if two companies are in the same broad industry (for example, retailing) they might not be
direct competitors
...

If two companies are direct competitors, a comparison between them would be particularly
interesting
...
co
m

(a)

Comparisons between companies in the same industry can help investors to rank them in order of
desirability as investments, and to judge relative share prices or future prospects
...

Non-current assets - Large companies are more likely to have freehold property in their statement
of financial position than small companies
...
com

(a)

15
...
An investor ought to be aware of how companies in one industrial sector are
performing in comparisons with companies in other sectors
...
com/freeaccastudymaterial

545

To download more visit http://freeaccastudymaterial
...
Today's finance professional is
expected to take on a broader advisory and strategic role
...
Furthermore, the hybrid accountant is now regarded as the
modern model of an accountant in business, where they act as internal consultants and business analysts
...
co
m

A large part of the modern accountant's role is to work closely with the business to improve strategic
decision making to enhance the business' ability to create value
...

Strategic management accounting is a form of management accounting in which emphasis is placed on
information about factors which are external to the organisation, as well as non-financial and internally
generated information
...
Managers must understand the key cost and value drivers
affecting their operations
...
Financial risk may be balanced against business risk, so that overall risk is managed
...

Investment
Financing
Dividends

as

–
–
–

tud



These three policy areas interact and decision makers must also manage the interactions
...




As part of a business's risk analysis, different forecasts should be prepared with changing financial or
business variables
...




Cash deficits will be funded in different ways, depending on whether they are short- or long-term
...




546

ea

fre



cc



Companies seeking extra equity finance can obtain it by retaining cash in the business for investment or
issuing shares
...

Interest and repayments will be set in advance
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


To download more visit http://freeaccastudymaterial
...




A budget is a short-term plan expressed in financial terms
...

Budgets help organisations as they promote forward thinking, assist in the co-ordination of different
aspects of the organisation, motivate managers and provide a basis for systems of control and
authorisation
...
Variance analysis involves comparing actual and planned performance, identifying the
differences and investigating the reasons for the variances
...
These calculations and values are incorporated into decision trees to illustrate the possible
choices and outcomes of decisions
...




Full cost is the total amount sacrificed to achieve a particular objective
...
Where there is more than one product, costs are split
into direct and indirect costs
...
To determine the full cost, a
fair proportion of the indirect costs, or overheads, must also be allocated to each product
...
It involves the
identification of the factors which cause the costs of an organisation's major activities
...




Ratios provide a means of systematically analysing financial statements
...
It is important to calculate
relevant ratios and to take into account the limitations of ratio analysis
...


tud

ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
co
m



as

Quick Quiz

What do JS&W consider to be the three main issues in strategic finance?

2

What is the name of the type of risk associated with gearing?

3

How might a company fund a forecast cash deficiency?

4

What are the advantages of using retained profits as a source of equity funds?

5

What is loan capital?

6

What is the formula for capital employed used in the ROCE calculation?

7

What is operating gearing?

ea

fre

8

cc

1

Is inflation relevant to the calculation of ROCE?

Part G Finance  14: Finance

join us on facebook @ fb
...
com

Answers to Quick Quiz
Managing for value; funding; financial expectations of stakeholders

2

Financial risk

3

By borrowing; by selling marketable investments; and by managing cash flows to payables and from
receivables

4

Retained profits are flexible in that there is no specific schedule of repayments
...


ial
ter

Q15

Marks

Examination

Time

25

45 mins

fre

ea

cc

as

tud

ym
a

Level

548

14: Finance  Part G Finance

join us on facebook @ fb
...
com

Now try the question below from the Practice Question Bank

Number


...
com

ial

R
T
H

ym
a

ter

A

To download more visit http://freeaccastudymaterial
...
co
m

P

fre

ea

cc

as

tud

People

549

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Topic list

Syllabus reference

1 Strategic leadership

H1(a), (b)

H2(a), (c), (d)

ym
a

2 Job design
3 HRM and knowledge work

H2(b)

H3(a)–(d)

tud

4 Staff development

as

Introduction

fre

ea

cc

This chapter looks at a number of human resource management topics
...
We will then move on
to look at how the people within the organisation contribute to its success
...
These approaches are job design (Section 2), HRM and
knowledge work (Section 3) and staff development (Section 4)
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
Students are expected to be familiar
with the following Study Guide subject areas from that syllabus: A1, A2, B1B3, D1, and D4-D6)
(a)

Explain the role of visionary leadership and identify the key leadership traits
effective in the successful formulation and implementation of strategy and
change management
...


3

H2

Strategy and people: job design

(a)

Assess the contribution of four different approaches to job design (scientific
management, job enrichment, Japanese management and re-engineering)

3

(b)

Explain the human resource implications of knowledge work and postindustrial job design

2

(c)

Discuss the tensions and potential ethical issues related to job design

2

(d)

Advise on the relationship of job design to process re-design, project
management and the harnessing of e-business opportunities

3

H3

Strategy and people: staff development

(a)

Discuss the emergence and scope of human resource development,
succession planning and their relationship to the strategy of the
organisation

2

(b)

Advise and suggest different methods of establishing human resource
development

3

(c)

Advise on the contribution of competency frameworks to human resource
development

3

(d)

Discuss the meaning and contribution of workplace learning, the learning
organisation, organisation learning and knowledge management

3

Exam guide

as

tud

ym
a

ter

ial


...

You may also face a scenario where process redesign or information technology has an impact on job
design
...


ea

Models and theories

fre

The Study Guide for this chapter indicates you need to be able to apply and compare alternative classical
and modern theories of leadership in the effective implementation of strategic objectives
...

The Study Guide also refers explicitly to four approaches to job design – scientific management, job
enrichment, Japanese management and re-engineering – so an assessment of any of these approaches
could be specifically required in a question
...


552

15: Human resource management  Part H People

join us on facebook @ fb
...
com

H1

To download more visit http://freeaccastudymaterial
...
com




Trait theories
Behavioural theories

Contingency theories
Transformational theories

ter




ial

The study of leadership has produced a wide range of theories; these may be analysed into four main
groups
...
1 Trait theories

ym
a

Trait theories are based on the idea that some people are inherently suited to positions of leadership
because they possess appropriate personal qualities
...
However,
there was little agreement as to what those qualities actually were
...
Leadership came to be seen as a matter of behaviour and could therefore be taught
...
Research has identified a number of traits that have been linked to leadership
effectiveness with reasonable consistency, including emotional maturity and tolerance of stress
...


6/13

as

1
...


cc

(a)

1
...
1 A continuum of leadership styles

ea

FAST FORWARD

Note that whereas questions on leadership in F1 tested factual recall, questions in P3 will be contextbased
...


Tannenbaum and Schmidt proposed a continuum of behaviours (and associated styles) based on the
degree of authority used by a manager and the degree of freedom for the team
...
co
m

Paper F1, Accountant in Business, includes a section called 'Leading and managing individuals and
teams'
...


Part H People  15: Human resource management

join us on facebook @ fb
...
com
Authoritar ian
Task orientation

Democratic
R elations hip orientation

Use of authority by manager
Area of subordinate freed om

Manager
'sells'
decision

Manager
presents ideas
and invites
questions

Manager
presents
intended
decision, subject
to amendment

Manager
defines limits
and goals and
asks the group
to make the
decision

ial

Manager
allows
subordinates
to act as they
wish, within
specified
limits

ter

Blake and Mouton carried out research (The Ohio State Leadership Studies) into managerial behaviour,
and observed two basic dimensions of leadership: concern for production (or task performance) and
concern for people
...
Blake and Mouton observed that the two concerns did not seem to correlate,
positively or negatively: a high concern in one dimension, for example, did not seem to imply a high or low
concern in the other dimension
...


ea

cc

as

tud

A questionnaire was designed to enable users to analyse and plot the positions of individual respondents
on the grid
...


The managerial grid

fre

The extreme cases shown on the grid are:
(a)

(b)

1
...
However, there is little attention paid to achieving results
...
1 impoverished: the manager is lazy, showing little interest in either staff or work
...
1 task oriented: almost total concentration on achieving results
...


15: Human resource management  Part H People

join us on facebook @ fb
...
com

1
...
2 Blake and Mouton's Managerial Grid

Manager
presents a
problem, gets
suggestions,
and makes a
decision


...
com
(d)

5
...


(e)

9
...



...
It shows, in an easily assimilated form, where the behaviour and assumptions of a
manager may exhibit a lack of balance between the dimensions and/or a low degree of concern in either
dimension or both
...
9 team leader is balance by
a 9
...

However, the grid is a simplified model, and as such, has practical limitations
...
9 is the desirable model for effective leadership
...
Concern for people, for example, would not be necessary in a context of
comprehensive automation: compliance is all that would be required
...
Scores can appear polarised, with judgements attached about
individual managers' suitability or performance
...


(c)

Organisational context and culture, technology and other 'givens' influence the manager's style of
leadership, not just the two dimensions described by the grid
...


1
...
3 Theory X and Theory Y

ym
a

ter

ial

(b)

To download more visit http://freeaccastudymaterial
...

Theory X suggests that most people dislike work and responsibility, and will avoid both if possible
...
Managers who operate according to these
assumptions will tend to supervise closely, apply detailed rules and controls, and use 'carrot and
stick' motivators
...
The ordinary
person does not inherently dislike work: according to the conditions it may be a source of
satisfaction or dissatisfaction
...

People can be motivated to seek challenge and responsibility in their job, if their goals can be
integrated with those of the organisation
...


cc

as

tud

(a)

ea

Both are intended to be extreme sets of assumptions – not actual types of people
...
Employees treated as if 'Theory X' were true will begin to behave
accordingly
...


fre

Theory X and Theory Y can be used to heighten managers' awareness of the assumptions underlying their
motivational style
...
3 Contingency theories
Contingency theory as applied to leadership suggests that no one style is likely to be entirely appropriate
for all circumstances
...
The setting for the

Part H People  15: Human resource management

join us on facebook @ fb
...
com
exercise of leadership will vary from case to case
...

Contingency theories are based on the belief that there is no 'one best way' of leading, but that effective
leaders adapt their behaviour to the specific and changing variables in the leadership context: the nature of
the task, the personalities of team members, the organisation culture and so on
...
3
...
3
...
Leadership style depends on the personality of the leader,
which is fixed
...

Position power
...


(b)

Task structure
...
The quality of performance is difficult to control when the
task is vague and unstructured
...
The leader's task is eased when subordinates have trust and
confidence in him or her
...
In less extreme cases, a more people-centred approach
was more effective
...
3
...
The leader should determine the maturity of followers
...

Achievement motivation (can the followers set high but realistic goals?)

(b)

Responsibility (willingness and ability to assume it)

(c)

Education/experience
...


ea

Where maturity is low, on the other hand, an autocratic approach may be required, with great attention to
the task but little need for attention to relationships
...
Participative approaches are useful here
...
4 Transformational theories
All of the models so far considered may be referred to collectively as transactional theories of leadership
...
Transformational theories generally accept that the world is a
much less stable place than it was and that changes of all kinds are frequent and far-reaching
...


556

15: Human resource management  Part H People

join us on facebook @ fb
...
com


...

These are task needs, the individual needs of group members, and the needs of the group as a whole
...

Effective leadership is identifying and acting on that priority to create a balance between the needs
...


To download more visit http://freeaccastudymaterial
...




To drive forward adventurous, visionary strategies
...

To motivate others
...

To provide clarity of purpose and direction
...



...
com

Case Study

Bill Gates and Microsoft

ter

Bill Gates founded the Microsoft Corporation in 1975, with his childhood friend Paul Allen
...


ym
a

Microsoft is now the global leader in software, services and solutions that enables people and businesses
to maximise the value of computers in their lives
...


tud

In April 2002, Microsoft announced its fourth major reorganisation in five years, before, in 2005, Gates
announced a further realignment of the company into three distinct newly formed divisions, each headed
up by its own president
...
The other two are the Platforms
Products and Services Division; and the Business Division
...


as

From the fiscal year 2007, Microsoft changed to operate its business in five operating segments: (i) Online
Client, (Subsequently re-named Windows and Windows Live Division) (ii) Server and Tools, (iii) Online
Services Group, (iv) Business Division and (v) Entertainment and Devices Division
...


ea

The divisional structure is designed to support Microsoft's drive for innovation and growth for the future,
increasing the number of new products and services it delivers
...
On the one hand, Gates has continually strived to
advance software technology with a view to making computing more accessible and fun for people; on the
other, he has strived to make Microsoft an attractive and exciting place to work
...
com/freeaccastudymaterial

557

To download more visit http://freeaccastudymaterial
...
5 Leadership and strategy
Ultimately, the importance of leadership in strategy is that it cultivates innovation and organisational
change
...

Management provides the order and procedures to deal with the organisational requirements of business
...
In this way, leaders
inspire and motivate their followers in a way which managers do not
...
co
m

Leadership

Think of a business leader who you are familiar with, and identify the reasons which you think have
contributed to their success
...
It would be worth taking the time to study this article
...


as

Key term

Scientific Management is an engineering approach that seeks to apply a single, ideal solution to
any given piece of work
...

Job enrichment attempts to overcome the undesirable effects of the Scientific Management
approach by making work more meaningful for the worker
...

Re-engineering pursues major improvements in organisational systems while, at the same time,
empowering workers to make the best use of their skills and abilities
...


ter



Exam focus
point

ial

Job design is essentially about organising work and that has always been a major role of management
...


ym
a

FAST FORWARD

6/10

Bratton

ea

cc

The importance of job design as a managerial responsibility has been apparent ever since there have been
organised societies
...
A little later, Frederick Taylor founded his business and the
approach still known as Scientific Management on the careful consideration and control of individual job
content and technique
...
1 Scientific Management
Frederick W Taylor argued that management should be based on 'well-recognised, clearly defined and
fixed principles, instead of depending on more or less hazy ideas
...
His methods were later applied to many other types of work
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Taylor's early experience convinced him that workers had a natural tendency to do the minimum they
could get away with: he described workers as 'marking time' or 'soldiering', rather than working
productively
...
It was always his principle that there was
'one best way' of doing a given job and the main thrust of much of his early work was therefore careful
experimentation and measurement to find the most effective methods
...



...
1
...


(d)

To download more visit http://freeaccastudymaterial
...
'All knowledge which had hitherto been kept in the
heads of workmen should be gathered and recorded by management
...
'
The scientific selection and progressive development of workers: workers should be carefully
trained and given jobs to which they are best suited
...
The
application of techniques to decide what should be done and how, using workers who are both
properly trained and willing to maximise output, should result in maximum productivity
...
'

2
...
2 Scientific Management in practice

ter

(a)

ym
a

Trade unionists, politicians of the left and those sympathetic to their ideas see Scientific Management as
an extremely undesirable development, since it minimised worker autonomy and maximised
management control
...
)
Work study techniques established the 'one best way' to do any job
...
Preparation and servicing tasks were allocated to unskilled workers
...
This process of
deskilling makes such work unfulfilling and boring but very productive
...
First line management of work groups
might involve several 'functional foremen,' each responsible for a different aspect of planning and
controlling the work
...

Workers received large pay increases as the new methods greatly increased productivity and
profits
...


cc

(d)

as

(c)

tud

(a)

The Scientific Management approach was for an external expert to prescribe the improvement: the
modern approach is to involve the people concerned with the process
...


fre

(a)

ea

Despite the views of the detractors of Scientific Management, there is much that is relevant today in this
approach and the pursuit of productivity through efficiency of method is still a major preoccupation for
management at all levels
...
However, we may identify two important and linked differences
...

(a)

The alienation and boredom associated with the production-line approach lead to high levels of
labour turnover and absenteeism
...
com/freeaccastudymaterial

559

To download more visit http://freeaccastudymaterial
...


(c)

Lack of job satisfaction can lead to lack of commitment and hence to quality problems
...
2 Job enrichment

6/13

2
...
1 The human relations background


...
2
...
These authors are best known in the wider field of management studies for their
ideas about motivation and the potential of work and the work situation to provide higher psychological
satisfactions
...


2
...
3 Job enrichment

Job rotation and job enlargement are simple approaches to the redesign of jobs
...

Job enlargement reverses the process of de-skilling by combining a number of linked processes
together in one job
...


tud

(a)

as

A more sophisticated approach is known as job enrichment: this may be distinguished from job
enlargement in that the latter brings tasks together on a horizontal axis, while job enrichment involves an
element of vertical amalgamation: an enriched job includes some elements of responsibility for planning
and control
...


(b)

Task identity (sometimes called closure): the job includes all the tasks needed to complete an
identifiable product or process
...


(d)
(e)

ea

(c)

cc

(a)

Autonomy: workers have a degree of discretion in scheduling and organising their work
...


fre

These elements should lead to three desirable psychological states:




Experience of meaningful work
Experience of responsibility for outcomes
Knowledge of actual results

These, in turn, should produce desirable outcomes:



560

High productivity and quality
High job satisfaction and low absenteeism and labour turnover

15: Human resource management  Part H People

join us on facebook @ fb
...
com

The development of the human relations school of thought can be traced back to experiments carried out
in the early 1920s at Western Electric's Hawthorne plant in Chicago
...
Subsequent research extending over many years indicated the complex interplay of social,
material and personal factors in determining much workplace behaviour and its influence on productivity
...
There
was also an understanding that financial reward alone would be unlikely to motivate workers to high
levels of output
...


To download more visit http://freeaccastudymaterial
...





The level of knowledge and skill possessed by the employee
The strength of the employee's need for growth in the job
The influence of the work context over satisfaction

Thus, an ignorant, clumsy and unambitious person working in unsatisfactory conditions is unlikely to
demonstrate the desired outcomes when his or her job is enriched
...
co
m

If you consider the processes involved in job enrichment, you should discern potential links to process
redesign and the changes inherent in adopting an e-business method
...


2
...
3
...
com

Japanese industry has had enormous influence on western manufacturing practice
...
Bratton suggests that three notable elements of the Japanese production model
contribute to its influence on job design
...
3
...
The principal features of the Japanese method of achieving this
are multi-skilled workers and careful shop floor layout that makes a range of machinery and equipment
available to each of them
...
This approach stands in
strong contrast to both the principles of Scientific Management and the assembly line layout; it inevitably
brings a high degree of job enrichment through the variety of work and the skills needed to perform it
...
One of the results of this focus was the
development of the total quality approach
...
This feature, together with participation
in activities aimed at achieving continuous improvement, also produces job enrichment
...
3
...
Separate inspection processes (and the rework they lead to) add no value, therefore they are
abolished
...
Inventories of materials, components and
work-in-progress must be financed with capital that could be better employed earning a return elsewhere
...
To achieve this, the kanban
system is used
...
As a result,
production is pulled through the factory by demand, not pushed by production schedule
...
It is also a good
illustration of one application of e-business methods – the use of electronic data interchange to link stages
in the value network
...
com/freeaccastudymaterial

561

To download more visit http://freeaccastudymaterial
...
3
...
In order to counterbalance this, Japanese companies have made use of a set of
social mechanisms that enhance the commitment of their workers
...
Work groups
tend to develop their means of disciplining members felt not to be conforming
...
You should refer to our earlier discussion
and consider how BPR may be said to fit into the job design spectrum
...
5 Ethics and job design

When we discussed ethics, we dealt with two important matters that are directly related to job design
...

Natural law theory imposes a duty to respect the rights of others
...


(b)

as

(c)

Jobs may be deskilled and organised in ways that prevent workers from deriving any satisfaction
or fulfilment from them
...

Work groups may be broken up, limiting the potential of work to fulfil this is a difficult and complex
problem
...


tud

(a)

Productivity through work specialisation leads to mechanisms of close managerial control
...
All job design must attempt to reconcile
these forces
...
6 An overview of job design

All job design must attempt to reconcile two forces that tend to work in opposition to one another
...

Scientific Management was based on extremes of specialisation and management control and ignored the
potential psychological effects on the work force
...


562

15: Human resource management  Part H People

join us on facebook @ fb
...
com


...
4 Re-engineering

To download more visit http://freeaccastudymaterial
...
7 Summarising four approaches to job design
Features

Assumptions about
motivation

Job design

Scientific
Management

Prescribed standard
methods

Pay – piecework

Extreme specialisation

Human relations/
job enrichment

Work groups

Social needs

Combination of tasks

Achievement, growth,
responsibility

Less extreme, with some
control tasks shifted
downwards


...
com

Japanese model

Your syllabus specifically mentions the relationship of job design to process design, project management
and e-business
...
You should bear this in mind when answering questions that deal
with those elements
...
This has had
important effects on the way organisations work and are managed, with a shift away from procedure and
control towards a looser, more flexible system based on problem solving and empowerment
...
You should refer back in order to refresh your memory
...
As a result, service industries have become far more important to the
economies of developed countries
...
This has two important implications:
Knowledge is recognised as a vital asset and crucial to business success
...


fre

FAST FORWARD

tud

3 HRM and knowledge work

(b)

This vital asset, knowledge, fundamentally exists in the brains of knowledge workers and is
controlled by them
...


Part H People  15: Human resource management

join us on facebook @ fb
...
com
These factors have led to a shift away from the classic bureaucratic structure of management and
organisation, which was built around the careful planning and control of procedures and operations, to a
looser, 'post-modern', 'post-bureaucratic' or 'post-industrial' approach that emphasises information
sharing, flexibility and empowerment
...
1 The move to knowledge work
Type of work

Individual

Project teams

Focus

Task performance

Customers, problems, opportunities

Skills and knowledge

Narrow

Specialist but with wide interest

Feedback and results

Rapid

Slow

Employee loyalty

Organisation and career within it

Peers, profession

Contribution to success

Individual support to the wider
strategy

A few major successes

ial

3
...
co
m

To

ter

Bratton, quoting Hecksher, suggests that as organisations evolve to take account of these changes, they
will display five features:
Organisational dialogue and trust reduces the scope for managerial control and direction and
enables a wide range of bottom-up and lateral inputs
...


(b)

Sharing of information about the organisation's operations, problems and opportunities
...


(d)

Communication flows and decision-making are built around projects and problem-solving rather
than hierarchical routine
...


tud

ym
a

(a)

4 Staff development

as

Human resource development should be seen as an investment in strategic capability since it improves
both skills and commitment
...
In the UK, governments encourage rather than enforce HRD efforts,
despite concerns about low levels of skills
...


cc

FAST FORWARD

The view of training as a cost is being replaced with a view of HRD as an investment in strategic
capability
...


fre

(a)

ea

The traditional personnel management function of training is now supplemented and may be replaced by
the wider concept of human resource development (HRD)
...

Organisations seeking to benefit from employee loyalty and commitment find that HRD can enable
employees to contribute to the development and success of strategy and operations
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
This wider vision of HRD can link to the organisation's strategy in two ways: these correspond to the
traditional 'top-down' model of strategy as a controlled response to environmental change and the
emergent or 'bottom-up' model
...
For example,
technological developments may lead to the recognition of a skills gap and the need for staff
training
...
An example would be the improvement of a product as a result of customer
contact and internal consultation and action
...
co
m

(a)

It is appropriate for organisations to utilise both approaches, though this requires senior management
effort to reconcile them and enable them to work in a synergistic fashion, rather than interfering with each
other
...
com

A traditional view of the place of HRD in strategic management is that it responds to imperatives
generated by the strategic management process, whatever form that takes
...
This is not yet a popular approach in the UK
...
1 Establishing HRD

ym
a

The prevailing view of HRD in UK commercial organisations is human capital theory
...
This approach requires clear evidence of probable benefit before investment is made in HRD
and restricts developmental activities that have uncertain though possibly important benefits
...


tud

The alternative view is a developmental humanistic approach, as discerned by Gold and Smith
...

Advocates of this approach accept that it is necessary to present its advantages in terms that relate to
human capital theory if it is to be adopted
...


(b)

The organisation may find that recruitment, adaptation to change, staff turnover and productivity
are enhanced by good HRD, but Machin and Vignoles have suggested that any causal relationship
that exists may in fact work in the reverse sense; that is, it may just be that profitable and
productive firms do more HRD
...


ea

cc

as

(a)

fre

In general, the UK displays a voluntarist approach to HRD, in that the role of government is to encourage
rather than to enforce HRD
...
This system was tried in the UK by the Labour government of the late
1960s and later abolished because the system inevitably imposed a deadweight cost of administration in
addition to the cost of any HRD actually undertaken
...
5% of the levy it had paid, the balance being consumed by
government in administering the scheme
...
com/freeaccastudymaterial

565

To download more visit http://freeaccastudymaterial
...
2 Competence frameworks

6/10

Key term

Competencies, in the sense used here, are 'the required outcomes expected from the performance of a
task in a work role, expressed as performance standards with criteria'
...
It would be worth taking the time to study this article
...


ter

The emphasis on workplace performance reflects the human capital approach to HRD
...
There has been criticism of the N/SVQ approach
because of their emphasis on outcomes measured against standards rather than on knowledge and
understanding
...


4
...
1 Institutions

tud

The UK national structure of institutions concerned with HRD includes the Qualifications and Curriculum
Authority, which oversees all standards in both education and training, and a number of Regional
Development Agencies and Learning and Skills Councils, which promote and oversee all education and
training after the age of 16 years
...
2
...

Recruitment
...
The competencies required to do the job are
identified, and then the suitability of various candidates is compared against them
...
Competencies can be used to demonstrate the levels of performance and
behaviour needed to achieve the business strategy
...
In this way, if each individual achieves their objectives (competencies) the
organisation will achieve its objectives as well
...
The comparison of a person's actual
performance against their target competencies can be used as the basis of an appraisal system
...
Competencies can be used to identify the training needs of staff, so
that a development plan can be drawn up to meet those needs
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

The dominance of the voluntarist view in the UK has led government to promote HRD within a market-led
framework
...
Government has responded to this problem with a range of
supply-side measures and exhortation
...


To download more visit http://freeaccastudymaterial
...
ACCA's Practical Experience Requirements are a framework
for recording achievement, allowing you to demonstrate your competence against a number of
performance objectives
...


4
...
com







...
HRD practitioners place the following concepts under the umbrella of
workplace learning
...
E-learning is an effective way to acquire knowledge and non-manipulation skills using
interactive software
...
4 Succession planning

ym
a

Succession planning is undertaken in order to ensure continuity in the organisation's leadership
...


tud

Succession planning should be an integral part of the HR plan and should support the organisation's
chosen strategy
...
It is likely that strategic objectives will only be obtained if management
development proceeds in step with the evolution of the organisation
...
4
...
Such a plan gives focus to management development by suggesting
objectives that are directly relevant to the organisation's needs
...

Assessment of managerial talent is improved by the establishment of relevant criteria
...
4
...


The plan should focus on future requirements, particularly in terms of strategy and culture
...
Line management also have important
contributions to make
...

Management development is as important as assessment and selection
...

Succession planning will work best if it aims to identify and develop a leadership cadre rather than
merely to establish a queue for top positions
...


fre

FAST FORWARD

(e)

Part H People  15: Human resource management

join us on facebook @ fb
...
com

Chapter Roundup
The study of leadership has produced a wide range of theories; these may be analysed into four main
groups:
–
–


Trait theories
Behavioural theories

– Contingency theories
– Transformational theories

Job design is essentially about organising work and that has always been a major role of management
...



...


–

The Japanese model emphasises enhanced worker responsibility in pursuit of higher quality and
reduced waste
...


–

Managers should be as humane as possible when undertaking job design
...
It leads to work study, deskilling, efficiency and alienation
...
Together,
these forces produce job dissatisfaction and poor motivation
...




Knowledge work has become a major part of the economies of developed countries
...




Human resource development should be seen as an investment in strategic capability since it improves
both skills and commitment
...
In the UK, governments encourage rather than enforce HRD efforts,
despite concerns about low levels of skills
...




Succession planning not only provides for continuity of leadership, it also facilitates management
development at all levels
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

Answers to Quick Quiz
Experience of meaningful work; experience of responsibility for outcomes; knowledge of actual results

2

Flexible manufacturing; quality methods; minimisation of waste

3

Organisational dialogue and trust, which depends on sharing of information; principle-based management
rather than procedure-based management; problem-solving and project-based communication-flows; peer
evaluation of performance

4

As investment in assets

5

Competencies, in the sense used here, are 'the required outcomes expected from the performance of a
task in a work role, expressed as performance standards with criteria'

Level

Marks

Q16

Examination

10

Time

18 mins

fre

ea

cc

as

tud

ym
a

ter

Number

ial

Now try the question below from the Practice Question Bank

To download more visit http://freeaccastudymaterial
...
co
m

1

Part H People  15: Human resource management

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com

ial

R
T
I

ym
a

ter

A

To download more visit http://freeaccastudymaterial
...
co
m

P

fre

ea

cc

as

tud

Strategic development

571

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Topic list

Syllabus reference
C3(a)

2 Developing intended strategies

C3(b)

ym
a

1 Intention, emergence and realisation
3 Developing emergent strategies

C3(c), (d)

4 Diversity of strategic processes

C3(e)

C3(e)

tud

5 C hallenges and implications

as

Introduction

ea

cc

We have covered a great deal of ground in this Study Text, but nearly all of our
discussion has related to specific ideas that may be used when developing
strategy; that is to say, we have concentrated on tools, models and techniques
that may be used to create answers to specific strategic problems
...
This final chapter attempts to round off our consideration of
business strategy by looking at the ways in which strategies come into
existence
...

We will start by contrasting these classes and discussing their relationship
...
The final sections of this chapter will
examine some challenges and more general concepts relating to strategy
development
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...


3

(b)

Explain how organisations attempt to put an intended strategy into place
...


3

(d)

Discuss how process redesign, and e-business can contribute to emergent
strategies
...


3

ial

Exam guide

ter

This may seem a rather theoretical chapter at first, but it is important that you realise that in the real world,
strategies often emerge rather than develop via some neatly ordered process
...
Also, Section 5 has some detail on
specific strategic challenges that could be useful in dealing with the kind of complex scenario typical of
Section A questions
...

Remember that the areas shown in the middle row of the rational diagram of the syllabus – business
process change, e-business – can help shape an organisation's business strategy, and by discussing
emergent strategies, this chapter reminds us of that
...


FAST FORWARD

tud

1 Intention, emergence and realisation
Realised strategy may emerge from everyday actions and routine decisions, or it may be the result of
considered intention
...


as

You will recall that in Chapter 1 of this Study Text, we explained the way that JS&W analyse strategy into
three main elements: strategic position, strategic choices and strategy into action
...


(b)

Strategic choices are about scope, the direction and method of development and how to achieve
competitive advantage
...
Major issues here include structuring, enabling and
change
...
Understanding of strategic
position informs strategic choice: together they create an intention
...

Intended strategy

574

Realised strategy

Strategy by intention

16: Strategic development  Part I Strategic development

join us on facebook @ fb
...
com


...
com
In our discussion of the strategy lenses, we explained that this represents just one view of strategy and
that there are other, equally valuable, views of its nature
...
The essence of this kind of strategy is that it is not the result of any kind of top-down,
intended managerial process
...
Thus, realised
strategy can emerge, as well as arise from, intention
...
co
m

We also have to be aware that what managers intend may not actually be realised: plans may be
unworkable for a variety of reasons, resources may be inadequate, important stakeholders may be
obstructive and so on
...

Think, for example, of the times where organisations have promised 'excellent customer service' or 'first
rate service'
...

Our diagrammatic overview thus has to be amended to include these extra possibilities
...
com

ter

Emergent strategy

ym
a

Intended strategy

Strategy: a fuller picture

Realised strategy

Unrealised strategy

as

Intended strategies are developed in a systematic way, making use of rational procedures and, probably,
specialist staff
...
More recently, workshops and project teams have been
used to develop intended strategies and strategy consultants have been employed
...
JS&W use the
phrase 'systematised, step-by-step, chronological procedures' in their discussion of this idea
...
Such a system is illustrated on the next page
...
com/freeaccastudymaterial

575

To download more visit http://freeaccastudymaterial
...
co
m

CORPORATE
APPRAISAL

CORPORATE STRATEGIC CHOICE

ter

Evaluating options:

STRATEGY
IMPLEMENTATION

Resource planning
Operations plans
Structure
Culture
Change
Functional strategies

ym
a

Strategic
implementation

FEEDBACK
TO STRATEGIC
ANALYSIS
STAGE

REVIEW &
CONTROL

ACTUAL PERFORMANCE

tud

When you look at the detail of this model, you will recognise much that we have discussed in this Study
Text
...


as

The idea that strategy should be made in this way is no longer popular for reasons that will be reviewed
later in this section, but it does have its advantages, both for determining what the strategy should be and
in implementing it
...
1 Advantages of a formal system of strategic planning

ea

Provides a structure

Comment
Developing strategy is a complex task, with many variables to take into
account
...
The planning process draws attention to the need to change and
adapt, not just to 'stand still' and survive

fre

Risk management

576

16: Strategic development  Part I Strategic development

join us on facebook @ fb
...
com

Strategic
choice

Value chain
Scenarios
Generic strategies
Product-market vector
Acquisition/growth
Acceptability - stakeholders
Suitability - mission, strategic intent
Feasibility - resources

ial

Generating options:

To download more visit http://freeaccastudymaterial
...

Otherwise, strategies can be rendered ineffective by budgeting systems and
performance measures that have no strategic content

Communication

Discussion at the various stages helps to make the reasoning behind strategy
clear, while the creation of specific plans prompts appropriate dissemination

Time horizon

Longer-term views can be built in to the system by setting a suitable time
horizon for the planning period

Co-ordination

Business unit plans, the use of resources and the activities of different
business functions can be co-ordinated and directed towards a common goal

Objectives

Managers are forced to define what they want to achieve

Responsibility and
involvement

A plan shows people where they fit in and what they have to do

ial

ter

2
...
com


...
The complexity of the model shown above is capable of
distracting managers' attention from controlling actual progress
...
There is an
obvious relationship between the two, but they are not the same
...

The best is the enemy of the good: there is no guarantee that a complex planning system will
produce the perfect strategy and too much time and effort can be spent searching for it
...


(f)

(g)
(h)

tud

A split may develop between the people responsible for planning and those responsible for
implementation
...
The result
is that planning becomes divorced from operational reality
...

Particularly in very large organisations, the planning system may be too extensive and complex for
even quite senior managers to understand the way it works
...

Very detailed analysis can lead to information overload; this, in turn, can prevent the planners from
recognising major strategic issues when they arise
...


as

(e)

cc

(d)

ea

(c)

ym
a

(a)

fre

Possibly as a result of these problems, the use of formal strategic planning systems has declined
markedly and it has been common for more responsibility for strategic decision-making to be devolved to
line managers
...


2
...
Such groups can be set up at almost any
level in the organisation and can be particularly useful for keeping managers at the strategic apex in touch

Part I Strategic development  16: Strategic development

join us on facebook @ fb
...
com
with current routine operational experience and problems
...


(c)

A cross-hierarchical group might be set up to challenge current assumptions
...


(e)

The planning of strategic implementation cannot be done by top management alone
...


(f)

Consideration of factors blocking strategic change could be carried out by a project team
...
4 Strategy consultants

(c)

(d)

ter

(b)

Strategic analysis and options generation may be an appropriate task for consultants where the
situation is confused or there is disagreement among top managers
...

Consultants should bring knowledge and experience and can be transmitters of best practice
between organisations
...
However, they should not
exercise undue influence: responsibility for strategy should remain with the managers at the
strategic apex of the client organisation
...


2
...
Some of these are political,
such as lending their authority to a new CEO who wishes to bring about change, or symbolic, as when
their presence and activity emphasise the importance of a new approach
...


tud

Powerful external stakeholders may be able to impose a strategy
...
Privatisation is an
example of the way in which governments have imposed strategic change on organisations
...
Resource allocation procedures
may lead to the emergence of strategy, as may the cultural processes that make up the paradigm
...
Strategies may emerge from the bargaining and negotiation associated with political activity
...


fre

Realised strategy can emerge as well as arise from intention
...


578

16: Strategic development  Part I Strategic development

join us on facebook @ fb
...
com


...

Strategic analysis could be undertaken by more junior managers who then report upwards
...
com

3
...

JS&W
Quinn observed processes typical of logical incrementalism
...
co
m

(a)

ial

To download more visit http://freeaccastudymaterial
...
It allows for
constant adjustment and testing of strategy, good quality of environmental information, readiness to
change and continuing internal consultation
...
2 Resource allocation routines

3
...
Managers at lower and intermediate levels bid for resources for
the projects they favour
...
JS&W quote the example
of Intel, which in the 1980s switched from making memory chips to concentration on microprocessors in
this fashion
...


cc

JS&W suggest that strategic drift arises because of the tendency to prefer small adjustments to large
ones
...

If this is ineffective, a new strategy may be developed
...
By the time the organisation's leaders understand and accept that cultural change is
required, it may be too late
...
4 The Icarus paradox
Miller describes the way in which a once successful paradigm becomes obsolete, referring to the effect as
the Icarus paradox
...


fre

Key term

tud

The structures, assumptions, practices and processes that make up the paradigm and the wider cultural
web may be sufficiently influential as to determine strategy, particularly in the shape of strategic
responses to environmental changes
...
However, making strategy in this
way can slow response to environmental change and lead to strategic drift
...

(a)

Leadership failures occur when success reinforces top management's preconceptions, makes
them over confident, less concerned for the customer's views, conceited and obstinate
...
com/freeaccastudymaterial

579

To download more visit http://freeaccastudymaterial
...

Power games and politics are used by dominant managers and departments to resist change and
amplify current strategic thinking
...


The interplay of these factors leads to decline, usually along one of four trajectories
...
5 Political processes

It is common to view organisations as arenas of political activity: we discussed the political aspects of
change management earlier in this Study Text
...


ym
a

Key term

tud

The political view is reasonable, in that powerful executives are likely to defend and seek to extend their
power and influence
...
Existing strategies and potential challengers will become identified
with particular factions and the outcome of strategic choice may amount to victory and defeat if
compromise is not reached
...

Nevertheless, the political process is equally capable of leading to significant innovation, as powerful
managers seek new ideas to enhance their own power
...
In this context, it is important to remember the relational diagram of your syllabus: process
change, quality initiatives and e-business are both the important elements of strategic implementation and
sources from which unintended strategies are likely to emerge
...


fre

FAST FORWARD

ea

4 Diversity of strategic processes

We have examined a wide range of means of arriving at strategy and considered the advantages and
disadvantages of each
...

(a)

580

There is no single correct way to develop a strategy
...
For example, we would expect the way strategies develop in a rapidly
changing environment to be different to the way strategies develop in an environment with little
change
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

(b)

Craftsmen become tinkerers
...

Builders become imperialists
...

Pioneers become escapists
...

Salesmen become drifters
...


ial

(a)

To download more visit http://freeaccastudymaterial
...


(c)

Different managers will perceive strategy development differently
...

It is unlikely that any organisation's strategy is the result of a single process; several are likely to be
at work, and this may well produce a more successful outcome than a single approach
...
co
m

5 Challenges and implications

Organisational learning can form a strong base for the development of strategy, especially when
environmental conditions are both complex and dynamic
...
Stable but complex environments promote decentralisation of strategic development
...
com

Our discussion above raises some challenges and implications for the management of strategy
development
...
1 Strategic drift

ter

We have discussed the nature of strategic drift already
...
Cultural rigidity can also reduce the
organisation's ability to innovate and confine it to simply reacting to its environment, rather than seeking
to influence it
...
A strategy-making system that incorporates more than one of the
approaches discussed in this chapter is more likely to be successful at this than concentrating on any one
in particular
...
2 The learning organisation

as

cc

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
...
It
challenges notions of hierarchy and managers are facilitators, rather than controllers
...
The concept has much in common with that of logical
incrementalism
...


ea

Key term

An article titled 'The learning organisation' written by Fearghal McHugh is available in the technical articles
section for P3 on the ACCA website
...


fre

Exam focus
point

tud

Continuing challenge to assumptions and search for improvement are typical of a learning organisation
...


5
...
It is usual in this context to analyse an
organisation's environment along axes of complexity and change
...
com/freeaccastudymaterial

581

To download more visit http://freeaccastudymaterial
...
However, this approach becomes
less useful as environmental conditions become more complex or more dynamic, or both simultaneously
...
Decentralisation into specialised organisational parts will allow the various aspects
of the environment to be dealt with separately as they evolve
...
co
m

Relatively simple environments that are subject to rapid change will display significant uncertainty
...
Extensive and continuous
environmental scanning will be required and the creativity and cooperation typical of logical
incrementalism and the learning organisation will be required
...
Decentralisation is also appropriate
here, combined with an acceptance at the strategic centre that operation experience and learning present
at the periphery represent the organisation's greatest strategic strength
...
4 Managing strategy development

(c)

Managers at the strategic apex must consider their role, since there are several approaches they
can use
...

Therefore, managers at different levels must understand the importance of the roles played at
other levels
...
Co-ordination across SBUs will require a rational approach, but within each business
unit a different approach, perhaps based on learning may be appropriate, for example
...


ea

(a)

as

As we have already indicated, the use of more than one approach is likely to be useful when an
organisation develops its strategy
...

JS&W complete their consideration of the management of strategy development by considering some
further, connected points
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com

5
...


Strategic choices(B)

Project
management
(F)

Information
technology
(E)

Financial
analysis
(G)

To download more visit http://freeaccastudymaterial
...
co
m

Business
and process
change
(D)

Strategic action(C)

ial

Strategic position(A)

ter

The diagram illustrates the importance of having an overall strategic perspective (position, choice, action)
but also highlights the need for all the components of an organisation to fit with, and support, that
strategy
...


ym
a

However, remember the double headed arrow between the top and the middle layers indicates that as well
as being planned (top-down), strategy can also emerge (middle-up) from the operational activities of an
organisation
...
Good plans are the foundations of any strategy, but the
real story lies in how the strategy unfolds, and how the various parts of an organisation react and adapt to
what is happening around them
...
com/freeaccastudymaterial

583

To download more visit http://freeaccastudymaterial
...
Intended strategies may also fail to be realised
...
This approach has advantages associated with system and method and disadvantages
associated with ponderousness and inflexibility
...




Logical incrementalism develops strategy in small experimental steps
...

However, an obsolete paradigm will lead to strategic drift and the emergence of inappropriate strategic
moves
...



...




Organisational learning can form a strong base for the development of strategy, especially when
environmental conditions are both complex and dynamic
...
Stable but complex environments promote decentralisation of strategic development
...


ym
a

Quick Quiz

The sources of realised strategy may be divided into two categories
...
What are they?

4

What is strategic drift?

5

Can you recommend a single mode of strategy development that will be satisfactory under all conditions?

fre

ea

cc

as

tud

1

584

16: Strategic development  Part I Strategic development

join us on facebook @ fb
...
com



To download more visit http://freeaccastudymaterial
...
Strategic drift reflects a preference for minor adjustments
rather than clear changes to address performance issues

5

You might try, but would be ill-advised to do so
...
A strategy
must always be appropriate to its context

Level

Marks

Q17

Examination

50

ter

Number

ial

Now try the question below from the Practice Question Bank

To download more visit http://freeaccastudymaterial
...
co
m

1

Time

90 mins

fre

ea

cc

as

tud

ym
a

This question is actually a case study question with an extensive scenario
...


Part I Strategic development  16: Strategic development

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

fre

ea

cc

as

tud

Practice question and answer
bank

587

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com

1 Bartok Fuel

20 mins

Bartok Fuel is a private company run by two brothers, David and Sean Bartok
...
After
some years, Gerald expanded by buying a tanker and starting to distribute household fuel to customers
...



...
From this grew an
element of the business, called Bartok Glass, which now makes sealed glass window units for the
construction industry and has a turnover of about $8 million
...
com

During the 1970s and 1980s Gerald had purchased a number of sites from which petrol was sold
...
The original garage no longer exists, but the company still operates a car dealership and repair
workshop in the centre of Erewhon, a large town in the country Oceania
...
However, due to changes in the market place, the luxury car franchise had
to be sold and the business now sells budget cars
...
The car retail business is notoriously cutthroat, with margins as low as 2– 3% and very high targets set by the manufacturers
...
This division now employs about
50 people
...
One suggestion is that the site
should be sold for its development potential and the car dealership brought to an end
...
He has recently met an Arcadian entrepreneur who was visiting Oceania,
who is making considerable profits in this area and is looking for investment from a new partner
...

Required

Describe the approach to strategy that Bartok Fuel has adopted in the past
...
Those who have studied at this level have
tended to do so abroad, since there are limited opportunities to do so in D4D
...
Some of this
revenue is generated by providing services for the oil industry, but the majority comes from a tax on every
barrel of oil that the foreign oil companies extract
...
It now recognises that, although politically popular, this decision might not
have been in the best long-term interests of the country
...
He
wishes to build a competitive advantage over the neighbouring countries
...


Exam Practice question bank

join us on facebook @ fb
...
com
As a management accountant within the Ministry of Finance and Trade, you have been asked to produce a
number of documents, for both the Prime Minister and the Finance and Trade Minister, considering how
competitive advantage could be achieved for D4D and examining the possibilities of attracting inward
investment from foreign companies
...



...
EMS has its own Board
who report to a Council of eight members
...
EMS is
registered as a private limited entity
...
If they pass this oral
they are eligible to become members
...
At a recent meeting, EMS Council rejected the concept of computer-based
assessment
...

Candidate numbers for the qualification have fallen dramatically in the last two years
...
Many people who were
practitioners in environmental management and audit when the qualification was introduced have now
gained their Diploma
...


tud

Consequently, the EMS Board has suggested that they should now look to attract international candidates
and it has targeted countries where environmental management and audit is becoming more important
...


as

However, any strategy has to recognise that both the EMS Board and the Council are very cautious and
notably risk averse
...
Attempts to look at complementary qualification areas (such as soil
and water conservation) have been swiftly rejected by Council as being non-core areas and therefore
outside the scope of their expertise
...
Explain the principles of internal development and
discuss how appropriate this development method is to EMS
...
She has based her designs on ethnic
patterns, inspired by clothing she has seen in Central Asia
...
Her products, though stylish, are relatively cheap, but her marketing strategy is totally passive
...
The
resultant sales and, in particular, profits have been disappointing and so she has hired a marketing
consultant to give her some advice
...


590

Practice question bank

join us on facebook @ fb
...
com

EMS employs staff to administer its qualification and to provide services to its members
...
It has since been
developed, by members and officers of the EMS, into a four certificate scheme leading to a Diploma
...
No examinations are currently held in other
countries
...
com


...
The designs have no patents nor copyright and
because the production technology is so simple and inexpensive there are few barriers to entry
...
Your promotion is too general
...
By
relying on the internet your advertising is rather indiscriminate and you have failed to create a loyal
following and your image is diffused with little opportunity for building brand awareness
...
Most consumers wish to see, handle or try on products before making a purchase,
particularly if the products do not already have a well-established reputation and/or a brand name
...
Your pricing structure is too costbased
...

‘You have failed to establish yourself in the market place as a dominant player
...
You are following market trends and not
attempting to lead them
...
com

Natalia is naturally disturbed by the criticisms which this report has levelled at her company's operations
and has decided that she must be more positive in her actions
...

Required

ter

In order to focus her company's marketing efforts more precisely Natalia has decided to segment the
market for knitwear products
...

(15 marks)

(b)

Evaluate strategies which Natalia might pursue as a market follower to make her knitwear company
more competitive
...
FTL manufactures and sells tyres under a number of different brand names
...


cc

GTC is rather less focused; not only does it make tyres and some other components, but it also owns a
chain of car service centres specialising in minor maintenance matters such as tyre replacement, exhaust
fitting, and wheel balancing
...
Moreover, sales of new cars have not been as high as had been
hoped, and consumers are more reluctant than before to part with their money
...

FTL would like to export to the US and to Asia
...
Instead, GTC suggests that FTL imitate GTC's strategy by running a chain of service
stations similar to GTC's service stations in the US
...
GTC has no shortage of cash
...

Required
(a)

Discuss the principal factors in the external environment that would influence FTL's strategic
choice
...
com/freeaccastudymaterial

591

To download more visit http://freeaccastudymaterial
...

(6 marks)
Assess whether FTL's existing strategic capability gives it a good chance of success in the service
centre business
...
These products are sold through a selection of
specialist shops and through larger stores
...
The company operates at the lower end of the
market and does not have a strong reputation for service
...
In order to encourage increased sales the Board of Directors have
decided to pay senior staff a bonus if certain targets are achieved
...
Two months before the end of the financial year the Finance Director asks
one of his staff to check through the orders and accounts to assess the current situation
...


2
...


A significant discount can be offered to any retail outlet which takes delivery of additional products
prior to the end of the financial year
...

Distributors can be told that there is a risk of price increases in the future and that it will be
advisable to order early so as to circumvent this possibility
...


ter

The Finance Director has proposed to other senior staff that this shortfall in sales can be corrected by
taking one of the following decisions
...


tud

Required

As a consultant, prepare a report for the Board of Nadir Products assessing the commercial and
ethical implications associated with each of the proposed options mentioned above
...
(12 marks)

as

(a)

7 Arragon Antennas

(Total = 20 marks)

36 mins

ea

cc

Arragon Antennas Ltd is a company based in the country of Dragovia
...
The industry is characterised by dedication
to high technical standards because of the demands of aircraft safety
...

Design of new installations is highly technical and very time consuming since it depends on extensive
tests, including test flying
...


fre

The aftermarket operation includes spares for Arragon's own products and for antennas the company has
designed to replace the other three manufacturers' own proprietary designs
...

Demand for subcontracting work tends to be intermittent but forms a profitable supplement to the
manufacture of the company's own designs
...


592

Practice question bank

join us on facebook @ fb
...
com


...
com
Arragon's market is now being threatened by Wizzomatic Inc, which is a subsidiary of a major armaments
group based in the larger country of Erewhon
...
The antennas offer a substantial price advantage over
most proprietary designs and are being promoted as suitable for most applications
...

Suggest an appropriate marketing mix for Arragon Antennas
...
co
m

8 United Products

36 mins

ial

To download more visit http://freeaccastudymaterial
...
Over the years it has acquired and disposed of several businesses and
now has operations in Europe and North America
...
It is also involved via joint ventures and
partnerships in quarrying, electronics design and clothes retailing
...
Its growth has not kept pace with its
competitors and some of its divisions' performance is distinctly poor
...
Control
is devolved to the CEOs of each division, subject to the compilation and submission of detailed monthly
performance reports to the corporate HQ in Fazackerley, near Liverpool in the UK
...
These
managers are frequently visited by senior members of the relevant head office staff
...


tud

There has been a history of disputes between HQ and the divisions
...
Some have said that they find HQ
requirements and visits to be disruptive and counter-productive
...

Required

Evaluate the way that UP is currently organised
...
Assess whether such an approach would be
suitable for any of UP's operations
...
Mark has created an
innovative way of selling cars to the public which takes advantage of the greater freedom given to
independent car distributors to market cars more aggressively within the European Union
...
He has opened a number of showrooms in the London region and by 2004 Auto Direct had
20 outlets in and around London
...
He then concentrates
on selling the cars to the public, leaving servicing and repair work to other specialist garages
...

Mark now wants to develop this business model onto a national and eventually an international basis
...
Such
growth will place considerable strain on the existing organisation and staff
...
Currently the 20 showrooms are grouped into a
Northern and Southern Sales Division with a small head office team for each division
...


EPractice question bank

join us on facebook @ fb
...
com
Required
Using appropriate strategies for managing change provide Mark with a brief report on how he should
pursue his proposed growth plans
...
Following the initial investigation the consultant reported
...
'

ter

Required

11 Fashion retailer

ym
a

With reference to the above scenario, describe what is meant by a Business Process Re-engineering
approach
...
This industry segment, comprising many small firms, each with a few retail stores, has
very few large scale competitors
...
Despite this growth in business there has never been any associated integration
of activities
...

However, he has now realised that despite this fast expansion his profits have not grown at the same rate
as turnover
...
The products are cheap but
with the ever changing demand for fashion garments there are few opportunities for individual stores to
hold inventory for long periods of time
...


ea

cc

Each of his stores has tended to be run in isolation
...
His view has been that these managers are nearer to the customers and
therefore they will know the fashion trends better
...
His computing system is being used in a oldfashioned way
...
Paul has been talking to friends who are
operating in similar but non-competitive environments, and they have told him how useful they have found
the up-to-date computer-based information systems
...
However, one person has said that it would be more cost-effective to have a standard
package modified to fit Paul's particular business operations
...

(12 marks)

(b)

Acting in the role of a consultant, write a report to Paul discussing packages generally and
assessing the two software package options that have been suggested
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

ABC has a chain of twenty supermarkets
...
The clerk then raises a request daily
to the ABC central warehouse for replenishment of inventory via fax or e-mail
...
If the
local warehouse cannot replenish the stock from its inventory holding, it raises a purchase order to one of
its suppliers
...
The ABC area warehouse staff conduct all business
communication with suppliers
...
com

12 Good Sports Ltd

45 mins


...
The sports retailing business in Oceania has undergone a major
change over the past ten years
...
This
consolidation has made them increasingly unwilling to provide good service to the independent
sportswear retailers too small to buy in sufficiently large quantities
...
Secondly, Oceania's sportswear retailing has undergone significant
structural change with the rapid growth of a small number of national retail chains with the buying power
to offset the power of the global manufacturers
...


ter

ial

To download more visit http://freeaccastudymaterial
...
They are able to offer the specialist advice and stock the goods that their
customers want
...
They employed a specialist website designer and created an online
purchasing facility for their customers
...
The seasonal nature of Good Sports' business, together with
the variations in sizes and colours needed to meet an individual customer's needs, meant that the sales
volumes were insufficient to justify the costs of running the site
...
He has been encouraged by the
growing interest of customers in other countries to the service and product range they offer
...

Above all, he wants to avoid head-on competition with the national retailers and their emphasis on popular
branded sportswear sold at retail prices that are below the cost price at which Good Sports can buy the
goods
...

(15 marks)

(b)

Good Sports Limited has successfully followed a niche strategy to date
...

(10 marks)
(Total = 25 marks)

45 mins

fre

ea

DRB Electronic Services operates in a high labour cost environment in Western Europe and imports
electronic products from the Republic of Korea
...
Its only current
source of supply is ISAS electronics based in a factory on the outskirts of Seoul, the capital of the
Republic of Korea
...
As soon as the payment is confirmed ISAS automatically e-mails DRB a confirmation
of order, an order reference number and likely shipping date
...
ISAS currently organises all the
shipping of the products
...
EIF then delivers the products to the DRB factory
...
These products

EPractice question bank

join us on facebook @ fb
...
com
are then stored ready for sale
...
Products that fail the inspection are
returned to ISAS
...
The company employs specialist technicians who (for a fee) will install equipment in both
homes and offices
...
DRB also offer a helpline and a back to base facility for customers whose products are out of
warranty
...
One commented
that 'it contrasts favourably with your large customers who offer support through impersonal off-shore
call centres and a time-consuming returns policy'
...




Missing, or potentially missing shipments
...
The
trans-shipment to EIF has also caused problems and this has usually been identified as the point
where goods have been lost
...

The likely delivery dates of orders, the progress of orders and the progress of shipments is poorly
specified and monitored
...


ym
a



ter

DRB now plans to increase their product range and market share
...
Dilip Masood, the owner of DRB,
believes that DRB must change its business model if it is to achieve this growth
...
He is
also adamant that DRB will continue to import only fully configured products
...
DRB also does not wish to build or invest in assembly
plants overseas or to commit to a long-term contract with one supplier
...
Comment on the significance of each of these
activities and the value that they offer to customers
...

(10 marks)
Explain how DRB might re-structure its downstream supply chain to achieve the growth required
...
com/freeaccastudymaterial

(Total = 25 marks)

To download more visit http://freeaccastudymaterial
...
co
m

Currently 60% of sales are made to domestic customers and 40% to business customers
...
In contrast, most business
customers ask DRB to set up the electronic equipment at their offices, for which DRB makes a small
charge
...
DRB also has a website
which provides product details
...
DRB then e-mails an appropriate response directly to
the person making the enquiry
...


To download more visit http://freeaccastudymaterial
...
co
m

Dave is the project manager in-charge of a project team installing new software in the ABC Company
...
Due to the time constraints, Dave has cancelled all project meetings to try and focus
his team on meeting the project deadlines
...
Most of the team are professional staff with appropriate project management
qualifications
...
com

Over the last week, both of the systems analysts have left to move onto other assignments due to double
bookings by the project management company
...
To try and compensate for the lack of staff, the project manager has asked two other team
members with a small amount of systems analysis experience to continue their jobs
...


ter

In the last few days, the working situation in the team has become significantly worse, with many minor
quarrels and disagreements breaking out
...

Required

(10 marks)
(10 marks)

Identify and explain where the ABC Company project is being poorly managed
...


ym
a

(a)
(b)

(Total = 20 marks)

15 Educational Institution

45 mins

tud

You are a newly-appointed Finance Manager of an Educational Institution that is mainly governmentfunded, having moved from a similar post in a service company in the private sector
...
'

as

The only financial performance measure evaluated by the government is that the Institution has to remain
within cash limits
...


cc

However, almost 20% of total cash generated by the Institution is now from the provision of courses and
seminars to private sector companies, using either its own or its customers' facilities
...


fre

ea

The Head of the Institution aims to increase the percentage of income coming from the private sector to
50% over the next five years
...

Required
(a)

Discuss the main issues that an Institution such as this has to consider when setting objectives
...
com/freeaccastudymaterial

597

To download more visit http://freeaccastudymaterial
...
A report format is NOT required in answering this question
...
co
m

Choose two of each type of measure, explain their purpose and advise on how they could be used
by the Educational Institution over the next five years to assess how it is meeting the Head of the
Institution's aims
...
He has decided that power and control must now return to the centre
...
However it is obvious that such a change in management style could create even
further problems for the company
...

(10 marks)

Introduction

90 mins

cc

17 Shirtmaster Group

fre

ea

Tony Masters, chairman and chief executive of the Shirtmaster Group, is worried
...
The consultant's brief is to fully analyse the performance
of the privately owned company, identify key strategic and operational problems and recommend a future
strategy for the company
...

Group origins and structure
Tony's father, Howard Masters, set up Shirtmaster in the 1950s in Elmrich, the capital city of the country
of Gondour
...
Howard set up a shirt
manufacturing company with good access to the employee skills needed to design and make shirts
...
In the 1960s Elmrich was a global fashion centre exploiting the UK's

598

Practice question bank

join us on facebook @ fb
...
com

Coxford Doors is a family owned wood products company, specialising in producing doors and windows
to be sold directly to house builders
...
In recent years the industry has become
much more competitive
...
These customers generally require standardised products in large
volume, and they buy on the basis of low prices and guarantees of regular delivery
...
This company is still operating as if it were dealing with
the fragmented market of twenty years ago
...
This has avoided industrial unrest but there
have been disadvantages to this approach
...
There has appeared to be a lack of focus
...


To download more visit http://freeaccastudymaterial
...
Men became much more fashion conscious, and were willing to pay
premium prices for clothes with style and flair
...
These retailers sold the full range of
men's wear including made-to-measure suits, shirts and matching ties, shoes and other clothing
accessories
...



...
Corporate Clothing has similar origins to Shirtmaster, also being a family owned
and managed business and is located in the same town as Shirtmaster
...
The decline of Gondour
manufacturing and allied industries led to profitability problems and in 1990 the Shirtmaster Group
acquired it
...

Shirtmaster division – operations and market environment

ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
In a mature market most of
Shirtmaster's competitors have outsourced the making of their shirts to low cost manufacturers based
overseas in Catopia and Europolis
...
Once a year Tony and the buyer for the division go Eurpolis, visiting cloth manufacturers and buying
for stock
...
Shirtmaster prides
itself on its ability to respond to the demands of its small retail customers and the long-term relationships
built up with these retailers
...

Shirtmaster has to introduce new shirt designs throughout the year, contrasting with the spring and
autumn ranges launched by its competitors
...


as

tud

The retail side of the shirt business has undergone even more fundamental change
...

There is increasing competition between the shirt makers for the limited shelf space available in the
departmental stores
...
They sell to the premium segment of the market and are regarded as the
trendsetters for the industry
...
All of them require their suppliers to make their
clothes under the chain's own label brand
...
Finally, the Gondour supermarket chains have discovered the profitability of selling nonfood
goods
...
Small independent clothing retailers are
declining both in number and market share
...

The Shirtmaster division's international strategy

fre

ea

Tony's answer to these changes is to make the Shirtmaster brand an international one
...
He recognises that the division's current
Godour focus means that working with a Catopian partner is a necessity
...

Corporate Clothing division – operations and market environment
Corporate Clothing has in recent years implemented a major turnaround in its business as the market for
corporate clothing began to grow significantly
...
com/freeaccastudymaterial

599

To download more visit http://freeaccastudymaterial
...
It supplies the corporate clothing requirements of large customers in the private
and public sectors
...


ter

ial

The Corporate Clothing division also has ambitions to enter the markets for corporate clothing in Catopia
and recognises that might be most easily done through using a suitable strategic partner
...
Over the past 10
years the fortunes of the two divisions have been completely reversed
...

Shirtmaster Group – future strategy

ym
a

Tony is determined to re-establish Shirtmaster as a leading shirt brand in Gondour and successfully
launch the brand in Catopia
...
Though he welcomes the success of the Corporate Clothing division and recognises its
potential in Catopia, he remains emotionally and strategically committed to restoring the fortunes of the
Shirtmaster division
...
He continues to play an active role in both the operational
and strategic sides of the business and is both well known and regarded by workers in the Shirtmaster
division's factory
...
The consultant commented that Tony's influence could be felt throughout the
Shirtmaster division
...
The end result is a division not able to
meet the challenges of an increasingly competitive retail marketplace, and losing both money and market
share
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

The Corporate Clothing division supplies the whole range of workwear required and in the sizes needed for
each individual employee
...
Corporate
employers are increasingly aware of the external image they need to project and the clothes their
employees wear are the key to this image
...
It is particularly proud of its
computer-aided design and manufacturing (CAD/CAM) systems, which can be linked to its customers and
allows designs to be updated and manufacturing alterations to be introduced with its customers' approval
...
The Gondour market for corporate workwear was worth £500
million in 2005
...


To download more visit http://freeaccastudymaterial
...
0
24
...
5
17
...
8
23
...
6
16
...
4
21
...
4
15
...
3
1
...
6
1
...
2

7
...
5
1
...
8
2
...
2
1
...
2
1
...
1

Shirtmaster division
Total sales
Gondour sales
Overseas sales
Cost of sales
Gross profit
Marketing
Distribution
Administration
Net profit
Inventory
Employees

14
...
3
0
...
1
3
...
5
1
...
3
(0
...
0
100

12
...
0
0
...
8
2
...
3
1
...
2
(0
...
2
100

10
...
9
0
...
2
2
...
0
0
...
1
(0
...
0
98

Corporate Clothing
division
Total sales
Cost of sales
Gross profit
Marketing
Distribution
Administration
Net profit
Inventory
Employees

10
...
6
3
...
2
0
...
5
2
...
9
84

ym
a

tud
as

11
...
0
4
...
2
0
...
6
2
...
8
80

2013
Forecast
26
...
7
2
...
8

7
...
7
1
...
9
2
...
6
1
...
5
1
...
3

8
...
2
1
...
1
2
...
7
10
...
8
9
...
6
1
...
9
1
...
0)
2
...
0
11
...
0
9
...
6
1
...
0
1
...
3)
2
...
5
11
...
0
10
...
4
2
...
3
1
...
2)
2
...
8
7
...
6
0
...
5
0
...
2
0
...
4
7
...
0
0
...
5
0
...
6
0
...
2
7
...
5
0
...
6
0
...
9
1
...
2
7
...
2
0
...
4
0
...
0
1
...
4
23
...
0
16
...
co
m

Total sales
Gondour sales
Overseas sales
Cost of sales

2011
Budget
23
...
7
0
...
3

ial

2010

ter

2009

To download more visit http://freeaccastudymaterial
...
Your analysis should make use of models where appropriate
...


ea

(a)

fre

Critically evaluate the advantages and disadvantages of the divisions using strategic alliances to
develop their respective businesses in Catopia
...

Assess the costs and benefits of the two divisions continuing to operate independently of one
another
...
com/freeaccastudymaterial

601

ial
ter
ym
a
tud
as
cc
ea
fre
602

Practice question bank

join us on facebook @ fb
...
com


...
com

To download more visit http://freeaccastudymaterial
...
This is quite a simple question that offers a gentle introduction to the style of the examination
...
It is usually pretty clear what
the overall worth of the proposals is, but not always
...



...
com

There would appear to be no real evidence of any formal strategic planning in the past
...
The company seems to have moved
from a garage and workshop into fuel distribution and glass manufacture almost by accident
...
However, there is also an
element of logical incrementalism as the business has not strayed far from its origins but has taken small
steps into new areas where it already has some knowledge and expertise
...
This approach has been termed bounded rationality by Herbert Simon
...


ym
a

If the Erewhon site is sold for its development potential, this will clearly be a boost to the company's cash
flow
...
Nevertheless, the board must consider
what use can be made of the funds received
...
In any
case, the sale should only be considered further if it seems likely that the income can be invested in a way
that will generate a higher return than the garage business currently achieves
...
The division employs 50 people who must either be made redundant or be re-employed in
other areas of the business
...
The car dealership appears to be a fairly stand-alone element of the business but it
must also be considered whether its closure will have any knock-on effects on the other parts of the
company
...
Bartok Fuel has always been an
Oceania based business and therefore expansion abroad is a major issue
...
The company has no experience of doing business in Ardacia and it knows nothing of
local business conditions or regulations
...


fre

ea

All this is partially countered by the existence of a partner who knows the market and the culture of
Arcadia, but Bartok Fuel will still be making something of a leap in the dark
...
It would appear that the company's only
real contribution will be to provide risk capital and the brothers must ask themselves if they really see that
as their area of expertise – they are not running a bank, after all
...

He does not suggest (as the D4D Prime Minister rightly notes) that countries as such are competitive, but
that various factors support or inhibit the ability of the industries and firms within them to compete
successfully on the international stage
...


Practice answer bank

join us on facebook @ fb
...
com
Factor conditions
Factor conditions are a country's endowment of inputs to production
...
D4D
appears to benefit from positive basic factor conditions (oil reserves and related revenues, a temperate
climate, a young tertiary educated population and political stability) – but there are limitations (eg lack of
local education institutions) and risks (eg dwindling oil reserves)
...


The home market determines how firms perceive, interpret and respond to buyer needs
...
Given the recent revenue D4D has earned from
oil, it is possible that it has not been focusing on demand conditions very closely
...


ial

Firm strategy, structure and rivalry

ter

Capital markets, ownership structures, attitude to time horizons, degree of innovation and
entrepreneurship vary from country to country
...


Related and supporting industries

ym
a

Meanwhile, domestic rivalry makes exporting attractive and keeps firms on their toes, while the opposite
is also true: as in D4D's case, lack of domestic rivalry stunts competitive development and encourages
firms to rely on the home market
...


tud

Competitive success in one industry is linked to success in related industries, by creating a pool of
managerial and technical talent, the exchange of information for organisational/industry learning and
benchmarking, and a robust supply market for parts and components
...
Porter believes clustering to be a
key to national competitive advantage: firms will be more likely to succeed internationally if there is a
supporting cluster that supports lower costs, infrastructure development, transfer of expertise and so on
...
The large pool of unqualified environmental managers and auditors that existed when the
qualification was launched has now been exploited
...
The organisation's response to this has been to look
for international markets where it can promote the qualifications it currently offers
...


fre

The scenario suggests that EMS currently has relatively limited strategic ambitions
...
Indeed, attempts to look at
complementary qualifications (such as soil and water conservation) have been rejected by Council
...


604

Practice answer bank

join us on facebook @ fb
...
com


...
com
Strategy Development
Internal development
Internal development takes place when strategies are developed by building on or developing the
organisation's own capabilities
...
This is how EMS has operated up to
now
...
Since then, additional
certificates have been added and the Diploma programme developed at the instigation of members and
officers of the Society
...
com


...
The organic approach spreads cost and risk over
time and growth is much easier to control and manage
...
Growth is also restricted by the breadth of the
organisation's capabilities
...
Furthermore, although internal
development may be a reasonable strategy for developing a home market it maybe an inappropriate
strategy for breaking into new market places and territories
...


Part (a)

ym
a

4 Natalia Norman

ter

In summary, internal growth has been the method of strategy development at EMS up to now, based on a
strategic direction of consolidation and market penetration
...
However, the Board has suggested
developing new markets for the current qualification range and India, China and Russia have been
identified as potential targets
...


Top tips
...
This saves money and allows the firm to make best use of its competences
...


cc

as

Easy marks
...
Thus we might expect three marks for proposing three bases and saying a little about the
relevance of each, with another three (or possibly four) for deeper discussion
...


ea

Segmentation would be Natalia's first step towards a more active relationship with her existing and
potential customers
...


fre

The simplest form of segmentation is probably geographical
...
Indeed, she probably does this already, in a sense,
since she must make appropriate arrangements for the extra complications of shipping to foreign
customers
...

Geographical segmentation becomes much more useful when it is combined with demographic
information
...
A consideration of these variables might for
instance lead her to concentrate her marketing effort on older, affluent people in specific metropolitan
areas
...


EPractice answer bank

join us on facebook @ fb
...
com
Psychographic segmentation analyses the market according to personality and lifestyle
...

A further segmentation variable is customer behaviour
...

This approach might be useful to Natalia
...
This might have important implications for design and
sizing
...
Different segments will probably require different products
...
Natalia might
find, for instance, that she needed to adjust her designs to make her range more recognisable and
coherent
...
Pricing decisions are fundamental to trade and very difficult to take
...
The problem is compounded
by the complex messages about quality, exclusivity and value that can be sent by price levels and changes
to them
...


ym
a

Promotion
...
Detailed knowledge of the characteristics of her target
segments will allow Natalia to develop the accuracy of her promotion
...


Part (b)
Reactive follower strategy

tud

Place
...
This limits her potential market to those
who are both confident in the use of computers and interested in original design knitwear
...

This could be established by careful consideration of the results of the segmentation exercise
...
Such a me-too strategy follows closely what the leader does and
is based on the leader's approach
...


cc

However, it is very easy for this strategy to come to depend entirely on charging lower prices
...
Given the inimitable style of Natalia's products, this does not seem a strategy
she should use
...
This permits the follower to
demonstrate some innovative and original features while still copying other ideas from the leader, thereby
saving time and expense on research and development
...


fre

However, a strategy which may be more appropriate for Natalia to use it to follow selectively rather than
simply imitating the market leader
...

Follow selectively
The follower should compete in the most appropriate market and product segments, maintain its
customer base and ensure that its turnover grows in line with the general expansion of the market
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

The benefit of accurate market segmentation is that it permits a more precise specification of the
marketing mix variables, so that they are shaped to conform to the needs of the target segment or
segments
...
com
Natalia could attempt to do this by exploiting the originality of her designs, thus effectively differentiating
her market offering and justifying higher prices
...

Natalia is unlikely to have sufficient resources to become an overall market leader, but her products seem
to be relatively innovative and unique
...
Therefore, with appropriate marketing mix strategies supporting the business, Natalia's
company could become a strong niche market player
...
co
m

The option of developing a market niche is particularly important where the niche is of a viable size and
has growth potential, yet is not seen as threatening to major competitors so as to attract their interest and
attention
...


To download more visit http://freeaccastudymaterial
...


ter

ial

An agreed takeover may, in due course, be a suitable way for Natalia to realise the equity in her business;
however, assuming that she wishes to maintain her independence of operations for the foreseeable future
she must control her costs and exploit appropriate opportunities to achieve differentiation
...


5 Firebridge Tyres Ltd

ym
a

Top tips
...
Part (a) may
look very wide ranging and therefore rather daunting
...
You will see from our answer that a
detailed knowledge of the motor industry is not required to answer this question
...

Organisations are by definition open to the environment: it is the source of their inputs; it is the destination
of their outputs; and it sets constraints over what the organisation can do
...
The degree of uncertainty it causes results from its complexity and the rate of change
...

This might be an extreme position, as it implies reaction to the environment rather than activity to shape
environmental forces
...

As far as the general environment is concerned, we can analyse PEST and competitive factors
...
Agreements between governments
have opened up international markets, not only to FTL but to its competitors: however GTC does not want
FTL to increase its exports outside Europe
...
Local government might determine the siting of certain
activities
...

Economic factors
In the UK, tyres must be checked annually, as part of the MOT testing process
...
However, in times of
hardship, people will be less likely to buy the premium brand range preferring to go for the lower cost
Freeway range, cheaper overseas tyres, or even retreads
...
com/freeaccastudymaterial

607

To download more visit http://freeaccastudymaterial
...
People will also move to lower cost service options in
hard times: FTL does not want a service business lumbered with heavy overheads
...

Social factors

Technological factors

ial

Tyres are a fairly mature technology, although there are improvements to be made to increase their grip,
their longevity, and their recyclability
...
Also, if cars become lighter, lighter tyres will be needed
...


ter

A number of service chains already exist in the UK, but otherwise the industry is fairly fragmented
...
However, FTL needs to assess how the competition
will respond
...

There are few substitute products, but competitive rivalry is intense
...

Part (b)

Barriers to entry discourage new competitors to an industry
...
The main barriers to entry are described below
...
Tyres are high
volume, low margin products on the whole, and for most cases, the best way to make money is to
manufacture in large quantities
...
There
is little evidence that significant economies of scale can be achieved in servicing
...

Product differentiation

cc

FTL already pursues this strategy by producing different tyres, directed at different segments
...

Advertising costs might be considerable, however, to build the brand
...
Many of the prime spots might be taken over by petrol
stations
...
The
cost of this depends on the size of the operation that GTC is proposing
...


608

Practice answer bank

join us on facebook @ fb
...
com


...
For example, governments are more concerned with ecological issues
...
This might affect what they are made of
...
The proposed service business depends on
patterns of car use
...


To download more visit http://freeaccastudymaterial
...
The importance of choosing the right sites for
distributing the service was identified above
...

Conclusion


...
This will make it easy to set up business, but hard to make a profit perhaps,
unless some unique lessons can be transferred from GTC, operating in a very different transport
infrastructure
...


They produce effects that are valuable to buyers
...

They are robust in that they are difficult for competitors to imitate
...


ial

To download more visit http://freeaccastudymaterial
...
Organisations must get these things right if they are to succeed
...


(a)
(b)
(c)

ym
a

FTL is a manufacturing business, producing what is essentially a commodity product, tyres, and making a
stab at product differentiation
...
The strategic capabilities
that led to this position probably look something like those shown below
...

Well-trained staff who not only know how to change wheels and tyres, and do other repairs but
who are able to demonstrate high standards of customer care
To be seen as preferable to the local garage in terms of the processes by which the service is
provided

as

(a)

tud

How do these relate to the proposed service centre business? A key problem is that services are a very
different proposition to products
...


ea

FTL's existing competences, at best, cover brand building
...
FTL runs a manufacturing business; a service business, based on a
variety of intangibles such as staff courtesy, is a different proposition
...


fre

The firm might have to spend a lot of money on training, both technically and in terms of customer care
...
However, GTC should be able to provide some
expertise in building the service aspects
...
GTC may be able to provide some help, but GTC might end up investing more money and making
short term losses, rather than the profits it is looking for
...


EPractice answer bank

join us on facebook @ fb
...
com

6 Nadir Products: ethics
Part (a)


...
While this question clearly has an important ethical slant, it is important to deal with the
commercial impact of the proposed courses of action
...

Do not spend more than a minute on dealing with the report form requirement: a suitable heading and,
perhaps, numbered paragraphs are all that are required
...


Board Members, Nadir Products plc
A Consultant
December 2001
Proposed adjustments to turnover reporting

ter

You asked me to comment on the commercial and ethical implications of suggestions that had been made
about the value of this year's turnover
...


ym
a

My first comment is that the assumption behind the suggestions appears to be wrong
...
If performance has not improved, it would be perverse to adjust the numbers so that they
receive the bonuses anyway
...


tud

I understand that there is concern that staff will be adversely affected by the downturn in sales value
...
It is
likely that the detailed proposals will create a conflict of interests since each has the potential to
disadvantage shareholders
...

I will now examine the individual proposals
...
A discount is an unexceptional sales promotional device that may be used, for
instance, to increase or defend market share or to shift excess inventory
...
It
may also have the effect of merely bringing sales forward in time, so that later trading periods suffer
...
However, it is quite indefensible if it is undertaken
solely in order to boost bonuses, because of the conflict of interest discussed above
...
Your auditors will deploy checks on
such activities as a matter of course, and may succeed in detecting this
...
It can be seen as detrimental to
shareholders since the reported profit would be overstated and, while this may have a positive effect on
share value in the short term, were it ever discovered, it would bring into question the company's
corporate governance
...
This would clearly disadvantage the company
...

Warning of possible price rises
...
Further, to hide behind a form of words such as 'there may be price rises'
would be equally dishonest, since the intention would be to create a specific, incorrect impression in

610

Practice answer bank

join us on facebook @ fb
...
com

To:
From:
Date:
Subject:

ial

REPORT

To download more visit http://freeaccastudymaterial
...
When the warning is eventually shown to be spurious, customers' estimation of the
company will fall, with an eventual knock-on effect on turnover
...

Conclusion
...

Part (b)

To download more visit http://freeaccastudymaterial
...
co
m

The stakeholder view is that many groups have a stake in what the organisation does
...
It is suggested that
modern corporations are so powerful, socially, economically and politically, that unrestrained use of their
power will inevitably damage other people's rights
...
Particular emphasis is laid on
the preservation of employment and protection of the environment
...
Some of these resources are obtained by direct contracts with suppliers but others are
not, being provided by government expenditure
...
Clearly, Nadir Products contributes to the taxes that
pay for these things, but the relationship is rather tenuous and the tax burden can be minimised by careful
management
...


ym
a

Mintzberg suggests that simply viewing organisations as vehicles for shareholder investment is
inadequate, since in practice, he says, organisations are rarely controlled effectively by shareholders
...
We do not know whether or not this is the case with Nadir Products
...
The management of Nadir Products therefore may feel that it is appropriate to
take an instrumental approach to such matters as sponsorship and charitable giving
...
They can
be regarded as another form of promotion, which like advertising, serves to enhance consumer awareness
of the business
...


as

The arguments for and against social responsibility are complex ones
...
It is unlikely to be something that need occupy a great deal of the time of Nadir
Products' directors
...
We answer the first part of this question largely in terms of Porter's generic strategies
...
There is mention of price sensitivity, to which cost is related; the
market is clearly highly specialised, so the idea of a niche approach is relevant; and finally, the products
tend to be highly differentiated
...
We are given no information relevant to market penetration; product development is clearly
going on anyway; market development and diversification are high-risk strategies for such a specialised
company working in such high technology
...

The possible solution of a reorganisation of the industry, however, could be applied just as easily to an
analysis using the product-market model
...
com/freeaccastudymaterial

611

To download more visit http://freeaccastudymaterial
...
However,
Wizzomatic's products, being standardised, are unlikely to be suitable for many specialised applications
...
Cost leaders tend to seek as much product standardisation as
possible in order to obtain economies of scale and Wizzomatic seem to have a major advantage here
...
co
m

It would therefore not be advisable for Arragon to meet the new entrant head on
...
It would find itself in the classic 'stuck in the middle' trap, subject to continuing high costs
but unable to raise its prices
...



ial



The first of these options represents a strategy of differentiation, while the second is a niche strategy
...
This need not lead to a fall in turnover if it is able to penetrate its chosen segments more
deeply
...
It may be that Arragon will have to withdraw from the volume part
of its business
...

To expand its share of the new systems market, Arragon will have to increase its sales effort and its
design and test capacity
...
Depending on the company's access to investment funds, therefore, this strategy may
require a long period of time to implement
...
An immediate problem here is likely to be that the
other three established players may also be planning a similar strategy
...
This is all the more likely if they too are unable to meet the challenge head on
...
The aim would be to accumulate the
resources necessary to compete with Wizzomatic rather than ceding dominance in the volume sales
segments of the market
...
It would probably involve painful
rationalisation of several functions, with job losses and other staff upheaval
...


fre

ea

The aim of the consolidation would be for a larger, more efficient company to emerge, retaining the best of
the products, people, markets and resources of its parents
...
It may be, for
example, that even a merged company would not dispute the volume market but would aim to dominate
the new design market
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Part (b)
Top tips
...

With a question like this, do not dwell too much on background explanations
...
You don't need to know anything about aircraft communication
systems
...



...
A firm's product may be viewed as a
solution to a customer's problem
...


ial

To download more visit http://freeaccastudymaterial
...
The standard antennas must be produced to existing precise specifications, while the new designs
must satisfy strict performance requirements before they are released to service
...
Spares, in particular, must have a long shelf life and may be
transported to any part of the world
...

Price

ym
a

We are told that prices in the industry are generally high and that co-operation between suppliers is not
unusual
...
It is likely that winning contracts for new systems design is likely to
depend far more on long-term relationships with customers and proven technical quality
...
So long as variable costs
can be covered, Arragon may feel it can cut its prices in these markets in order to maintain its
manufacturing capacity in being
...
Those gaps can then be exploited with
higher prices
...
There is also likely
to be attendance at trade fairs and a small amount of reminder advertising in the specialist press
...


ea

Distribution to aircraft manufacturers is likely to be direct to the end user, without any use of
intermediaries
...
Distribution of aftermarket
spares may involve the use of intermediaries, since the products are highly standardised technically and
may be sold globally without modification
...


fre

8 United Products
Part (a)

Top tips
...
Remember that
with this type of question there will be a lot of easy marks for explaining the basics
...


EPractice answer bank

join us on facebook @ fb
...
com
In order to score well on this question you must do two slightly different things when you are applying
your knowledge to the scenario: use the setting to illustrate your theory; and suggest ways in which the
theory might be used to make improvements
...
Similarly, we
say that the detailed monthly reporting might be over-restrictive in its effects and, on examination, might
prove to be unnecessarily expensive
...
UP seems to qualify
under all three of these categories
...


ter

ial

The diversity of the company's operations is itself worthy of comment from a strategic point of view
...
However, the organisation is committed to
managing a very wide range of technologies and markets and it may be that its lacklustre financial
performance is linked to a lack of specialist knowledge among its senior managers
...


ym
a

It is generally considered that conglomerate diversification only adds value when the expertise of the
corporate headquarters is such that its allocation of capital is more effective than would be achieved by a
normally efficient capital market
...
The less profitable divisions are protected from the disciplines of the market by the corporate HQ,
while those with good prospects may find themselves starved of funds
...
There is a tendency for the divisions to be
more bureaucratic than they would be as independent organisations in order to service the demands of the
corporate HQ's control procedures
...
The probable effect of this is to stifle the creativity and sense of ownership
that flow from greater autonomy
...
A side effect is the
absorption of an excessive degree of divisional revenue in management charges for HQ and in the
divisional bureaucracies themselves
...
This is the
natural desire of the division heads for independence from central control
...
So long as the reporting parameters fall within set limits, it may be
possible to conceal unauthorised ventures for a long time, possibly with unfortunate consequences
...
This might be a sensible response to UP's geographical range and variety of
products
...
This will be particularly apparent when new
markets are entered
...
Overall, the potential for complexity and confusion is significant
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Notice also that we begin with a comment about the very nature of UP's business, which you might think
is a matter over and above the question of its organisation
...


To download more visit http://freeaccastudymaterial
...
The idea of virtuality has become very fashionable and people tend to use the term rather
loosely
...
Be sure that you do not confuse the virtual
organisation with Handy's concept of the shamrock organisation, which is merely an organisation that
makes extensive use of self-employed and temporary staff in order to be able to control its labour costs in
times of economic slowdown
...
co
m

The idea of a virtual organisation or cybernetic corporation has attracted considerable attention as the
usefulness of IT for communication and control has been exploited
...

Such an organisation is a temporary or permanent collection of geographically dispersed individuals,
groups, organisational units (which may or may not belong to the same organisation), or entire
organisations that depend on electronic linking in order to complete the production process
...
com

However, an organisation is not a virtual organisation merely because it uses IT extensively and has
multiple locations
...

Also, organisations that make extensive use of temporary and self-employed labour are not necessarily
virtual organisations because of that, though they may have some virtual characteristics
...
It would be surprising if it
did not have an internal e mail system and it may well have a corporate intranet
...


ym
a

Of the activities we are told about, electronic design is perhaps the one most suited to the virtual
approach
...
However, where the design work requires a team effort, coordination may become a problem
...
Authors of books are
likely to work alone, and editors may be able to do the same, as may their assistants and other specialists
such as proof readers and indexers
...


cc

as

Top tips
...
Superficially, it asks you for a summary
of change management strategies in a particular context, which would be a large job to do properly, but
offers only twelve marks
...


ea

Managing Director, Auto Direct
Report: Change management strategies and methods

fre

The change that you are contemplating, while extensive, is incremental and does not involve the
transformation of your organisation
...

It would be a very worthwhile exercise to consider some of the factors that might affect the success of
your programme of change
...


Presumably you will include some element of promotion and cross-posting of your existing workforce in
order to provide a basis of experience at your new sites, so you should consider the degree of readiness
(or willingness) of your staff to undertake the development you plan
...
com/freeaccastudymaterial

615

To download more visit http://freeaccastudymaterial
...
The former depends largely on past experience
...
This is because change will not happen unless people
make it happen
...


ial

An autocratic approach, imposing change by means of coercion can work reasonably well in some
circumstances, especially where the staff expect nothing else
...
However, it does have the weakness of ignoring the
experience and knowledge that staff may be able to offer
...
Ideally, information will be provided as early as possible, explaining why change is necessary and
the course that will be followed
...


ym
a

Sometimes neither participation nor coercion can resolve all problems and negotiation may be required
...

This has been a brief overview of some approaches to change management
...


10 BPR and supply chain

tud

Top tips
...

Remember at all times that the examiner is interested in your ability to apply your knowledge in a practical
setting
...


ea

cc

In other words, BPR involves significant change in the business rather than minimal or incremental
changes to processes
...
Although some improvements in speed may be obtained, the
processes are essentially the same
...
However, the process of sending the order and receiving
the goods to the warehouse is the same
...
For example, rather than inventory being ordered from
the store via the central warehouse, the supplier could monitor inventory in each store using an extranet
...

Not only does this provide inventory replenishment much more quickly, it is also more cost effective for
the supplier as the central warehouse effectively becomes redundant
...
In the example, ABC may have to clearly explain the benefits to
staff from the new systems, to ensure that they are accepted
...
New hardware and software will also

616

Practice answer bank

join us on facebook @ fb
...
com


...
It is probably advantageous to involve staff in decisions
affecting them, their conditions and their work processes and at least hear what they have to say
...
Also, the normal
management style and culture of the organisation must be considered
...


To download more visit http://freeaccastudymaterial
...
The aim of BPR is to provide radical improvements in efficiency and cost savings of
up to 90%
...


11 Fashion retailer

An organisation's value-creating activities must be mutually supporting
...
co
m

Top tips
...
However, we all have some experience of it from the
customer's side of the counter
...


ial

To download more visit http://freeaccastudymaterial
...
This part of the fashion industry operates with very slim margins and with profitability not keeping
pace with the increase in turnover, Paul realises that he must operate in a more cost-conscious manner
...


ter

We can use Porter's value chain model to consider how the IS function can be applied to help provide
Paul with a competitive edge in his business
...
The IS investment will be
worthwhile if it can be used to reduce costs or to differentiate Paul's business from the others in the
industry sector
...
An IS
system can help with inventory control levels, economic ordering and efficient distribution routings
...
IS could also be used to
analyse the different consumer demand profile in different locations in order to help each store ensure that
it has sufficient inventories of the type of sales made in its store
...
In Paul's business there will not be much distribution to customers but the system may be able
to produce a customer database to assist with marketing and promotions
...
Internet retailing is a possibility, though it would create a fulfilment problem
...


fre

Support activities

Firm's infrastructure
In this area IS can be used to help with the budgeting, finance and management information in order to
improve the Paul's company's performance compared to that of his competitors
...
com/freeaccastudymaterial

617

To download more visit http://freeaccastudymaterial
...

Technology development
It is possible that Paul could make some radical changes, for example, developing the business’ ecommerce ability and starting to sell through an online store
...
This
could be used to automatically update inventory records and indicate when new orders should be placed
and could also help to minimise times when excessive inventory is held in a store
...


Paul Singh
A Consultant
December 20XX
Software package options

Introduction

ym
a

To:
From:
Date:
Subject:

ter

Part (b)

You asked for advice on the use of software packages and, in particular on two specific software package
options that have been suggested to you
...
They can provide immediate benefits in the form of improved methods,
records and possibilities for analysis of data
...
Claims by vendors that their products
can give a competitive edge are questionable: competitors can easily buy the same product
...
Also, such
packages force the organisation to adjust itself to the requirements of the software
...


fre

(d)

ea

(b)
(c)

While selection may take some time, installation should be rapid and there should be no
requirement for extensive testing
...

Quality should be guaranteed both by the vendor and, except for launch customers, by earlier
installation by other customers
...

Maintenance support should be good and would normally include help desk service and routine
software amendments to correct faults as they become apparent
...
This might include use for a trial period
and visits to existing installations
...

(a)

Property rights over the software usually reside with the supplier
...

(i)

618

The supplier controls future development of the software
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

However, if he doesn’t want to make such dramatic changes, Paul can still use IS to support process
improvements; for example, by enabling the operational changes to the ordering and inventory
management processes
...
com
(ii)

The supplier controls the support available and may discontinue it, forcing the customer to
purchase an upgrade
...

The financial stability and survival of the supplier is not guaranteed
...
Further
problems may be caused by unwanted standard features: these may cause difficulties in training
and implementation
...

Changing requirements can erode a package's functionality
...
These may change as time passes or may not have
been properly specified in the first place
...



...
com

Because of the generic nature of standard packages, some clients have them tailored to fit their
requirements and their existing systems and procedures
...


The cost advantage of buying off the shelf is destroyed
...


Reliability is reduced
...


12 Good Sports Ltd
Part (a)

ym
a

Generally it is cheaper and more effective to redesign the organisation's processes to fit a standard
package than to do the opposite
...
This question puts e-commerce firmly into a strategic context
...
The main advantages and disadvantages of an e-business strategy that you put into your answer
must be applicable to Good Sports' own business situation
...
There a several strategic issues to consider –
such as the familiar framework of 'suitability, acceptability and feasibility'
...

Easy marks
...
If you have a good
knowledge of e-business you should be able to identify a number of advantages and disadvantages
...
The markets that Good Sports operates in are being affected by the development of e-business
...
In many ways the advantages and disadvantages of ebusiness can be viewed from the perspective of the customer
...
com/freeaccastudymaterial

619

To download more visit http://freeaccastudymaterial
...

Although the internet has a global reach, its benefits are not confined to large organisations
...



...

Increased quantities of data, and more sophisticated methods of analysing it, mean that greater attention
can be paid to customising product offerings to more precisely defined target customers
...
There may be a lack of in-house expertise
...

Processes

ym
a

For Good Sports, e-business will probably be a supplement to its traditional retail operations, with the
website forming a supplementary channel for communication and sales
...
It is also necessary that it conform to the standard criteria for any strategic choice:
suitability, acceptability and feasibility
...
The
company will need to go back to basics and ask itself some fundamental questions such as:





tud

What do customers want to buy from us?
What business are we in?
What kind of suppliers might we need?
What categories of customer do we want to attract and retain?

Assuming that these questions can be answered satisfactorily, new technology can be introduced to
connect electronically with employees, customers and suppliers to help drive the strategy forward
...
Good Sports has pursued such a
strategy, seeking to serve a local market for less popular sports, in a way that insulates it from
competition against the major high volume retailers who are concentrating on the more popular sports
such as football
...
There is nothing in the scenario to suggest they have reached saturation point in their
chosen niche market
...


fre

Bargaining power of customers
It is recognised that one of the key features of e-business is that it brings far greater price transparency,
with customers being able to shop around for the cheapest deal using the vast information resources
available on the internet (either from other companies, or other customers)
...
There is a theory that customers expect goods and services to be discounted when
sold online (and indeed, many are) since they are aware that administrative costs are likely to be lower
than in more traditional forms of distribution
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
It may even be decided that costs exceed the
benefits of setting up the e-business operation
...
com
same range of goods
...

Such customer involvement however could provide a mechanism for increasing customer loyalty, for
example by targeting particular groups and finding out more about their sports activity and spending
habits
...


13 DRB
(a)


...


A simple value chain of the primary activities of DRB is shown below
...
com

Handling and
storing inbound
fully configured
equipment
Quality inspection

Marketing and sales Service

ym
a

Inbound logistics: Excellent quality assurance is required in inbound logistics
...
As well as
contributing to customer satisfaction, high quality also reduces service costs
...
It is also being undertaken in a relatively high cost country
...


tud

Outbound logistics: Customer feedback shows that this is greatly valued
...
Most of the company's larger
competitors cannot offer this service
...


as

Marketing and sales: This is very low-key at DRB and will have to be developed if the company is to
deliver the proposed growth
...


DRB has already gained efficiencies by procuring products through the supplier's web-site
...
When DRB places the order it is not informed of
the expected delivery date until it receives the confirmation email from ISAS
...
Because DRB is not the owner of the shipment, it is unable to track the
delivery and so the physical arrival of the goods cannot be easily predicted
...
This has not been very satisfactory and the problem has been exacerbated by
having two shippers involved
...

Some shipments have been lost and it is time-consuming to track and follow-up shipments which

fre

(b)

ea

cc

Service: Customer feedback shows that this is greatly valued
...
They offer support from off-shore call centres and a returns policy
that is both time consuming to undertake and slow in rectification
...


EPractice answer bank

join us on facebook @ fb
...
com
are causing concern
...

DRB has stated that it wishes to continue importing fully configured products
...
It also does not wish to build or invest in assembly
plants in other countries
...
co
m

ym
a



DRB might also wish to consider two other procurement models; buy-side and the independent
marketplace
...
This places the onus on suppliers to spend time completing
details and making commitments
...

Unfortunately, it is unlikely that DRB is large enough to host such a model
...


fre

ea

cc

In the independent marketplace model, DRB places its requirements on an intermediary website
...
Such marketplaces promise
greater supplier choice with reduced costs
...
It is also
likely that such marketplaces will increasingly offer algorithms that automatically match customers
and suppliers, so reducing the search costs associated with the sell-side model
...
Many of the suppliers participating in these
marketplaces are electronics companies
...
It has a web-site that shows
information about DRB products
...
Conventional marketing is undertaken
through local advertising and buyers either collect their products or they are delivered and installed
by a specialist group of technicians
...
For example:

Practice answer bank

join us on facebook @ fb
...
com



ial



Seek to identify a wider range of suppliers and so trade through other sell-side websites
...
Suppliers have to be identified and evaluated
and financial and trading arrangements have to be established
...

Seek to identify suppliers who are willing and able to re-brand and package their products
with DRB material at the production plant
...

Re-consider the decision not to negotiate long-term contracts with suppliers (including
ISAS) and so explore the possibility of more favourable payment terms
...
It may also not be possible to enter into such contracts if
DRB begins to trade with a number of suppliers
...
This should allow much better planning
...
This should
reduce physical transhipment problems and allow seamless monitoring of the progress of
the order from despatch to arrival
...


ter



To download more visit http://freeaccastudymaterial
...

Customers would be able to place orders and pay for them securely over the website
...
DRB must recognise that most of its competitors already have such
systems
...

Participating in independent marketplace websites as a supplier
...

DRB may also consider participating in B2C marketplaces such as eBay
...



...
com

DRB may also wish to consider replacing its sales from inventory approach with sales from order
...
This leads to very quick order fulfillment but high
storage and financing costs
...
DRB
may wish to consider offering products on its website at a discount but with specified delivery
terms
...


ter

14 Project initiation

ym
a

Top tips
...
This should ensure that actions to
resolve the problem are included in your answer
...
This leadership style
tends to be appropriate for staff who need a lot of guidance through a project
...
A more appropriate
management style would be participative
...
This approach would benefit staff by providing them with more responsibility
and benefit Dave by freeing up more time to monitor the overall progress of the project
...
While it appears that more work will be
carried out on the project, if staff feel that they are not being communicated to, or that they cannot
discuss problems, then overall work efficiency is likely to suffer
...
This will provide an appropriate channel of
communication and help team members realise it was not their fault that the meetings were
cancelled
...
Team members may not feel motivated to work harder if
they perceive that other members are not 'pulling their weight'
...

Re-introducing the team meetings will assist communication and help all team members to see
how the project is progressing
...


fre

(a)

(b)

EPractice answer bank

join us on facebook @ fb
...
com
Accountability for errors
Making team members accountable for errors is acceptable, where those members made mistakes
in the first place
...

Dave should really be grateful that these two team members are attempting to continue this
important work, and not place hindrances in their way
...


(b)


...
Dave must attempt to resolve the
conflicts in some way, preferably by meeting and discussing with the team members why the
conflicts are arising
...

These problems will tend to affect overall communication and working efficiency within the team,
as members will not feel that they can discuss problems with each other
...
The conflicts
and the lack of trained analysts may indicate that the project deadlines need to be moved, or the
project cancelled until a full working team with good relationships can be used
...
The key to (a) was recognising the range of requirements that the Institution now has to fulfil –
the needs of different stakeholders and the different objectives that should be met
...
In (b) we have provided
answers for all the measures, although you were only asked to discuss a selection
...


as

At present the government is the most important external stakeholder
...
In addition the Institution will also have to take into
account the interests of staff (internal stakeholders) and public sector students
...

The limits that the Institution has to meet are determined by what its outputs are in terms of
research publications and quality
...

Use of finance

fre

Fulfilling the government's requirements (and therefore obtaining finance) is the most important
current objective
...
It should be looking to
minimise costs as far as possible
...
The
Institution should also have the objective that the expenditure it undertakes produces the
maximum return in terms of meeting the non-financial objectives
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
com
Level of investment
The Institution also needs to consider how much to spend on long-term investment rather than
spend its entire budget on short-term requirements
...

(ii)

Advantages of publicising objectives


...
Likewise publicising an investment
target will indicate to prospective teachers and students the Institution's recognition that it needs
to allocate resources to ensure that it keeps up with changing views on what constitutes
excellence
...
com

The main problem with publicising objectives is that the Institution may be judged on the basis of
objectives which it does not have the freedom to set
...
In addition publicising objectives may highlight
conflicts between serving the needs of the public sector and serving the needs of private sector
clients
...
Sales revenue is not however the
only measure of the success of an Educational Institution
...
For non-exam private sector courses the measure should ideally relate to
enhanced job performance
...
Benefits can be measured in a variety of ways; for non-exam
courses they could take the form of students demonstrating improved skills or knowledge at the end of the
course, for example by giving a presentation
...
Sophisticated measures such as shareholder value added can be used to measure the
impact of fixed and working capital investment, and the Institution's required rate of return
...
Measured in these terms, profit measures by themselves do not take account of the
investment used to generate the profits
...
Depreciation charges may be particularly problematic if many of the assets
have not been purchased on the open market but provided by the government, and have no resale value
...

Profits should also be used in conjunction with measures of quality
...


EPractice answer bank

join us on facebook @ fb
...
com
Profitability measures can also influence the range and frequency of courses run, with the most profitable
courses being run more often
...

Return on investment
Return on investment is calculated by dividing profits by the value of assets used
...
These include
the number and variety of courses offered by competitors, also the extent to which competitors are
introducing new courses, the standard of courses offered and the pricing structure of courses
...
The feedback provided should indicate
to the Institution in what areas its own courses need to be improved to match those offered by
competitors
...

Customer satisfaction

Customer satisfaction is likely to be a key measure for the Institution
...


tud

Use of customer satisfaction

as

The Institution can obtain feedback from customers by review forms at the end of every class
...
Targets could be set for the marks that should be achieved
...
Alternative
methods of assessing how customers' needs have been met include internal peer reviews, quality
audits, and obtaining feedback from private sector participants' employers
...
In a competitive market, customers will only book again if they are happy with what
they have received in the past
...
It measures the success of the sales performance, pricing strategy and product quality
...
The
courses offered by others need to be tracked over time
...
Market share targets
may be set as subsidiary targets to growth targets
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Again the profit figures used may be subject to distortion, but return on investment does at least take into
account the resources needed to generate profits
...
Provided though the methods used are consistent, return on investment can be
used as an indication of changing efficiency levels over time
...


To download more visit http://freeaccastudymaterial
...
co
m

Top tips
...
Nevertheless, this question is a gift
to the reasonably well prepared candidate
...
Almost – but not quite: you must always relate your answer to the
scenario!
This company seems to have operated more like a soviet than a business
...


ial

To download more visit http://freeaccastudymaterial
...
This occurs via the process of internalisation, whereby the
members of the workforce adopt the corporate goal as their personal goal
...
However, there is no conclusive evidence that such
an approach necessarily leads to improved overall performance
...


ter

Andrew Smith's style of management is likely to bring the focus that has been missing in the past
...
Confusion and delay should be reduced and control enhanced
...


ym
a

However, Andrew Smith is likely to encounter resistance from a work force used to proceeding according
to its own ideas of what is appropriate
...
There is likely to be a lack of co-operation and, possibly, active resistance to the new order
...

Even if there is acceptance that the trading position demands change it is unlikely to be wholehearted
...


tud

Routine changes are harder to sell than transformational ones if they are perceived to be unimportant and
not survival-based
...
This is certainly the
case at Coxford Doors
...
Andrew Smith is
himself an outsider, prepared to challenge and expose, in a visible way, the existing behaviour pattern; his
appointment will act as a trigger; and alterations to the power structure will be an inherent part of his
actions
...


ea

Change is the second stage of the process and is mainly concerned with introducing the new, desirable
behaviours and approaches
...

Individuals must be encouraged to take ownership of the new ways of doing things
...


fre

Refreeze is the final stage, involving consolidation and reinforcement of the new behaviour
...

It will be important for Andrew Smith to retain control of the process at all times, since the company's
history of participative management will tend to undermine his move towards a firmer style
...
It would be advisable to aim for an intermediate style of management, in which
the workforce retain a voice
...


EPractice answer bank

join us on facebook @ fb
...
com

17 Shirtmaster Group
Part (a)
Top tips
...



...
Your findings are likely to inform your answers to later parts
of the question
...
The figures should indicate to you that the two divisions are performing very differently
...

Tutorial note
...


25
...
5

23
...
2

fre

ea

628

2012
Forecast

21
...
0

2013
Forecast

23
...
7

24
...
4

26
...
7

– 10%
0
...
2
71%
6
...
2
1
...
7
19%
2
...
8
16
...
2
31%
1
...
4
1
...
2
9%

4%
1
...
8
69%
7
...
9
1
...
9
22%
2
...
0
17
...
9
33%
2
...
9
2
...
7
10%

14
...
3

12
...
0

10
...
9

0
...
1
75%
3
...
5
1
...
3
27%
(0
...
0
100

– 15%
0
...
8
78%
2
...
3
1
...
2
28%
(0
...
2
100

– 18%
0
...
2
80%
2
...
0
0
...
1
28%
(0
...
0
98

11
...
9
14%
0
...
1
78%
2
...
5
0
...
2
31%
(1
...
7
98

12
...
0
3%
1
...
4
78%
2
...
7
1
...
2
33%
(1
...
5
99

13
...
5
13%
2
...
1
75%
3
...
0
1
...
3
34%
(1
...
0
100

tud

cc

Shirtmaster division:
Total sales
Gondoir sales
Trend in total sales
Overseas sales
Cost of sales
Cost of sales %
Gross profit
Gross profit %
Marketing
Distribution
Administration
Other costs %
Net profit
Net profit %
Inventory
Employees

2011
Budget

– 5%
0
...
8
71%
7
...
5
1
...
8
20%
2
...
5
17
...
3
29%
1
...
6
1
...
2
9%

as

Total sales
Gondour sales
Trend in total sales
Overseas sales
Cost of sales
Cost of sales %
Gross profit
Gross profit %
Marketing
Distribution
Administration
Other costs %
Net profit
Net profit %

2010

ym
a

Overall Shirtmaster Group:

ial

2009

ter

2008

Practice answer bank

join us on facebook @ fb
...
com

You should not replicate all the data in the exam; simply calculate the key percentages, ratios or trends
and then use them in your analysis
...
com
2008

2009

2010

2011
Budget

2012
Forecast

2013
Forecast

Corporate Clothing division:
11
...
1

11
...
4

13
...
6
65%
3
...
2
0
...
5
11%
2
...
0
63%
4
...
2
0
...
6
11%
3
...
0
63%
4
...
2
0
...
6
11%
2
...
2
61%
4
...
2
0
...
7
12%
3
...
4
60%
5
...
2
0
...
7
11%
3
...
7
58%
5
...
2
0
...
8
12%
3
...
9
84

1
...
8
80

0
...
9
77

1
...
co
m

10
...
com

Total sales
Trend
Cost of sales
Cost of sales %
Gross profit
Gross profit %
Marketing
Distribution
Administration
Other costs %
Net profit
Net profit %

ter

The results and forecast for the two divisions indicate that the Shirtmaster Group is a composite of two
very different performances by the totally separate divisions
...
For the group as a whole, sales have
declined to 2010 and net margins are struggling to get into double figures
...
The overall group net
profit margin of 10% in 2010 masks the fact that the Shirtmasters division suffered a net loss, while
Corporate Clothing recorded a net profit margin of 26%
...

There is no competitive advantage in retaining production in the higher cost Gondour, particularly when
the company has no other point of differentiation (such as recognised high style or fashion) for its
products
...


cc

The figures indicate that Shirtmaster's reliance on small retailers has seen the costs of its support
activities (marketing, distribution and administration) take up a huge part of its turnover (19% in 2010,
and forecast to rise still further to 23% by 2013)
...
Meeting the demands of its many small customers is
therefore having a real impact on marketing, manufacturing and distribution costs
...


fre

Making reference to Porter's five competitive forces, the key ones at work are the rivalry between the
shirt makers, and the increased buying power of customers in the industry – the specialist retail outlets
and supermarkets
...

The effect of these problems is revealed in selected aspects of performance, when compared to the
Corporate Clothing division:

EPractice answer bank

join us on facebook @ fb
...
com
Corporate Clothing division

Sales growth to 2010

Slowing

Increasing

Gross margin

Lower

Higher and sustained

Sales per employee

Modest

Improving

Marketing etc expenses

Out of control

Acceptable levels

Inventory levels

Too high

More modest

Net margins

Negative

Positive

Market share

Minimal, stagnant

Product innovation

Nil

Process innovation

Nil

Customer base

Declining


...
Begin your answer by defining a strategic alliance, and outlining its advantages and
disadvantages
...
Apply the
advantages and disadvantages to the circumstances of Shirtmakers and Corporate Clothing and use your
answers to part (a) to examine the suitability of each company
...


as

tud

Johnson, Scholes and Whittington define a strategic alliance as 'where two or more organisations share
resources and activities to pursue a strategy'
...
One particular form of strategic alliance is the joint venture, whereby two or more firms join
forces for manufacturing, financial and marketing purposes and each has a share in both the equity and
the management of the business
...

Share costs
...
The joint
operation may lead to economies of scale that mean that costs can be reduced
...
A joint venture can reduce the risk of government intervention if a local firm is involved
...


ea

Overseas joint ventures provide local knowledge
...


fre

(d)

cc

(a)

(e)

(f)

630

Synergies
...
In this way, particular competences can be exploited for the
good of the whole alliance
...
Alliances can also be a learning exercise in which each partner tries to learn as much as
possible from the other, particularly about local markets
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
On all measures,
Corporate Clothing is a stronger performer and this must be due to its focus on the customer, through its
willingness to embrace the realities of its market, invest in appropriate technology and take close note of
customer needs
...


To download more visit http://freeaccastudymaterial
...
New technology offers many uncertainties and many opportunities
...


(h)

The alliance itself can generate innovations and be a learning exercise for all participants
...


What benefits are going to be offered by collaboration?





Which partners should be chosen?
Is the environment favourable to a partnership?
What activities and processes will have to be set up?
Are there any other alliances within the industry?


...


ial

To download more visit http://freeaccastudymaterial
...


ter

The major disadvantage of joint ventures is that there can be major conflicts of interest
...
Shirtmakers and Corporate Clothing would need to make sure that such issues are clearly set out
and agreed at the beginning to avoid damaging clashes later
...
Shirtmaster may struggle to attract a partner with its current product and
strategy, particularly its insistence on retaining manufacture in Gondour when most competitors now
source from cheaper markets in Catopia and Eurpolis
...
By contrast, the Corporate Clothing division seems to
be much more favourable as a potential partner
...
This could be
repeated in Catopia if the right partner could be found
...
This is a complex question
...
Think about the
advantages and disadvantages of divisionalisation and how these are currently manifested in the
Shirtmasters group
...


ea

Divisionalisation has some advantages, notably focusing the attention of subordinate management on
business performance and results
...
It also enables proper concentration on particular product-market areas – in this
case, shirts and workwear
...
It
appears that Tony Masters has more emotional commitment, and presumably more management time, to
devote to Shirtmaster at the expense of Corporate Clothing
...
In the Shirtmaster group, it could be that each business might be better run
independently
...


There does not appear to be any common effort between the divisions, with no sharing of resources
apparent from the scenario details
...
com/freeaccastudymaterial

631

To download more visit http://freeaccastudymaterial
...
Information systems are also likely to operate independently
...

If divisionalisation is to operate effectively, divisional management should be free to use their authority to
do what they think is right for their part of the organisation
...
Performance in both divisions needs to be clearly identified and controlled, and
resources channelled to those areas showing potential
...
co
m

Each division must have a potential for growth in its own area of operations
...

Divisions should exist side by side with each other
...
There should be no insistence on preferential treatment to be given to one particular
unit
...


ial

ter
ym
a
tud
as
cc
ea
fre
632

Practice answer bank

join us on facebook @ fb
...
com

Using the BCG matrix it is possible to classify the Shirtmaster division as a 'dog' with low market share, in
a market with little growth
...
The
Corporate Clothing division, by contrast, has a small share of a growing market, and this potential also
needs to close management
...
com


...
com

fre

ea

cc

as

tud

Index

633

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com

Note: Key Terms and their page references are given in bold


...
com

ial

A

fre

ea

cc

as

tud

ym
a

bsorption, 482
ACCA and CIMA, 59
Acceptability, 215, 218, 366
Access to distribution channels, 55
Acid test ratio, 540
Acquisitions, 206, 207, 208
Activity based costing (ABC) , 532, 533, 547
Actual Product, 393
Adair, 556
Adaptation, 263, 267
Adhocracy, 254
Administrative adhocracy, 254
Adverse selection, 145
Advertising, 396
Affiliate marketing, 387
Agency theory, 145
Airline code sharing, 247
Airlines, 343
Alien businesses, 189
Alignment, 285
Allen et al, 416
Alliance partners, 212
Alliances, 246, 247, 272
Amazon
...
com/freeaccastudymaterial

Index

635

To download more visit http://freeaccastudymaterial
...
co
m

ym
a

tud

as

cc

ea

fre
636

Index

join us on facebook @ fb
...
com

ial

C

2B (Consumer-to-Business), 341
C2C (Consumer-to-Consumer), 341
C2G (Citizen-to-Government), 341
Capabilities, 96
Capital, 39
Capital expenditure, 451
Capital requirements, 54
Cash budget, 507
Cash cows, 186
Cash flow ratio, 540
Categorical imperative, 132
Category killers, 191
Central services, 183
Centralisation, 240
Chaffey, D, 387
Challenge, 67
Change, 262
Change agent, 267
Change and performance J curve, 256
Change control, 480
Change management, 267, 296
Change owner, 459
Channel management, 337
Channel structures, 341
Characteristics of strategic decisions, 6
Charismatic leaders, 269
Chart of accounts, 355
Chief executive, 269
Client/server architecture, 349
Closed system, 283
Cobra report, 294
Co-branding, 407
Coca Cola, 82
Cognitivist theories, 131
Collaboration, 201
Collaborative CRM, 421
Collective intelligence, 419
Commercial auctions, 337
Commercial organisation, 97
Communication, 339, 470
Communication backbones, 347
Comparative advantage, 38
Competence, 100
Competence based qualifications, 566
Competence frameworks, 566
Competences, 96
Competencies, 96, 566
Competitive advantage, 38, 178, 190, 339, 344,
564
Competitive environment, 53, 344

Competitive forces, 53, 58
Competitive products, 191
Competitive rivalry, 57, 59, 97, 98
Competitive strategy, 190
Competitors, 25
Complementary exporting, 180
Complementary products, 85
Completion Report, 482
Complex buying behaviour, 412
Complexity, 581
Computer games, 59
Concentrated marketing, 79
Concentric diversification, 172
Configuration, 229
Conglomerate, 172
Conglomerate diversification, 172, 207
Consequentialist ethics, 131
Consolidation, 203
Consortia, 208
Consultants, 269, 578
Consumer generated content, 419
Consumer goods, 75
Contingency, 481
Contingency funding, 508
Contingency plan, 481
Continuity planning, 356
Continuous improvement, 561
Continuum of leadership styles, 553
Contract manufacture, 181
Control, 339, 560, 562
Control process, 236
Controls over data input, 354
Controls over logical access, 353
Controls over physical access, 352
Cookies, 417
Core competences, 96
Core competencies, 97, 109, 211
Core employees, 31
Core Product, 393
Corporate appraisal, 122
Corporate culture, 206
Corporate ethical code, 134, 161
Corporate ethics, 134
Corporate governance, 139, 144, 148
Corporate parent, 169, 182
Corporate portfolio, 185
Corporate social responsibility, 140
Corporate strategy, 10
Correlation, 48
Cost drivers, 371
Cost efficiency, 97
Cost focus strategy, 192
Cost globalisation, 37
Cost leadership, 80, 190, 194, 196
Cost leadership, differentiation or focus, 59
Cost reduction, 339
Cost-benefit analysis, 218, 314

ter

Business risk, 179
Business strategy, 11
Business-level strategy, 11
Business-to-business markets, 75
Buyer behaviour, 75

To download more visit http://freeaccastudymaterial
...
co
m

ial

ter

ym
a

D

ata, 101
Data migration, 323
Data mining, 417
Data warehouse, 105
Database marketing, 416
Databases, 247
Datamining, 105
Davenport and Short, 293
Deadweight cost of administration, 565
Debt ratios, 538
Decentralisation, 240, 241, 582
Decision-making unit, 76
Decline, 112
Definition, 286
Delayering, 273
Delta model, 199
Demand conditions, 39
Demand-led convergence, 53
Demerger, 205
Demography, 30
Deontology, 132
Design, 98
Design requirements, 322
Deskilling, 559, 565
Development, 116
Diamond, 39
Differentiated marketing, 79
Differentiation, 190, 191, 195, 199

Differentiation focus strategy, 192
Differentiation strategies, 196
Direct changeover, 324
Direct exporting, 179, 180
Direct marketing, 396
Disaster recovery, 356
Discounts, 84
Disintermediation, 341, 342
Disruptive power, 294
Diversification, 204
Diversified form, 253
Diversity, 173
Divestment, 205
Dividend cover, 544
Dividend yield, 542
Divisional form, 253
Divisionalisation, 230, 231, 254
Document analysis, 320
Dogs, 186
Domestic country orientation, 174
Drivers, 460
Drivers of change, 25
Du Pont system of ratio analysis, 536
Dual authority, 233
Dynamic capabilities, 100
Dynamic pricing, 397

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

Index

637

To download more visit http://freeaccastudymaterial
...
co
m

Financial intermediaries, 343
Financial management, 506
Financial services, 344
Firewall, 104, 348
Firm infrastructure, 108
Firm strategy, structure and rivalry, 40
First mover, 98
First mover advantage, 199
First pass selection, 326
Five competitive forces, 54
Five Cs, 176
Five forces, 25, 191
Flexibility, 322
Flexible firm, 248
Flexible manufacturing, 561
Focus, 190, 192
Focussed differentiation, 197
Follower strategy, 115
Forcefield analysis, 264
Forecast, 507
Forecasting a cash surplus, 509
Forecasts, 43
Forming, 474
Forums, 343
Forward integration, 171
Four Ps, 73
Franchising, 208, 209
Functional organisation, 229
Functional requirements, 322
Functional structure, 229

ea

Factor conditions, 39

fre

Failure strategies, 197
Fan clubs, 343
Feasibility, 215, 217, 236, 313, 366
Feedback, 560
Fiedler, 556
Fighting back, 67
File creation, 323
Finance, 11
Financial, 449
Financial control, 251
Financial control style, 243
Financial feasibility, 314

638

G2B (Government-to-Business), 341

G2C (Government-to-Citizen), 341
G2E (Government-to-Employee), 341
G2G (Government-to-Government), 341
Gantt chart, 466, 485
Gap analysis, 286
Gaps and disconnects, 313
Gateway, 477
Gearing, 538
Gearing ratio, 539
Generic strategies, 190
Generic strategy, 59
Geocentrism, 175
Geographical, 77
Ghoshal and Bartlett, 247
Gifts, 134
Global company, 176
Global competition, 38
Global heterarchy, 177
Globalisation, 37, 173
Goal, 9
Goals, 6, 7
Golden fleeces, 188
Goold and Campbell, 242
Governance framework, 144

Index

join us on facebook @ fb
...
com

Enterprise resource planning, 294, 316
Enterprise Resource Planning (ERP), 379
Entrepreneurial structure, 252
Environment, 10, 25
Environmental change, 170
Environmental costs, 35
Environmental feasibility, 314
Environmental performance, 35
Environmental protection, 33
Environmental protection policy, 34
Environmental risk screening, 34
Environmental taxes, 35
Environmental uncertainty, 26
Environment-related management accounting,
35
Envisioning, 182
E-procurement, 377
Equity, 509
Equity share capital, 509
Equity shares, 509
ERP, 316
Escrow agreements, 328
E-tailers, 343
Ethical dilemmas, 131, 132, 133
Ethical relativism, 131
Ethical stance, 143
Ethics, 131
Ethnocentrism, 174
Eurostar, 56
Evolution, 263, 267
Exit barriers, 57, 205
Experience curve, 98
Expert system, 105
Explicit knowledge, 104
Exponential smoothing, 52
Exporting, 175, 180
Export-led growth, 173
Extended marketing mix, 74
Extended product, 393
Externalities, 142
Extortion, 133
Extranet, 105, 345, 347, 348, 380

To download more visit http://freeaccastudymaterial
...
com

ial

H

abitual buying behaviour, 412
Hammer and Champy, 293
Harmon, 311
Harmon's process-strategy matrix, 297
Harris and Ogbonna, 274
Heartland businesses, 189
Hersey and Blanchard, 556
Hierarchical structure, 257
Hierarchy of objectives, 8
Holding company, 230, 231
Hollow organisation structure, 244
Horizontal integration, 171
Human capital theory, 565
Human relations, 560, 563
Human resource management, 11, 108
Human resources, 39, 122
Hybrid chief executive, 269
Hybrid strategy, 196
Hypercompetition, 68, 100, 198, 200
Hypercompetitive strategy, 200

Information intensity matrix, 374
Information systems, 11, 208
Information technology, 58
Infrastructure, 39
In-house development, 317
Initial implementation requirements, 323
Innovation, 68, 110, 114, 117, 206
Innovation and competitive advantage, 114
Insiderisation, 176
Intangible products, 15
Intangible resources, 96
Integrated reporting, 154
Integration, 391
Intelligence, 391
Intended strategy, 574
Interactive advertising, 387
Interactive digital television, 351
Interactivity, 391
Interdependence of organisations, 247
Interest cover, 539
Interest yield, 542
Internal development, 206
Internal marketing, 396
International Standards Organisation, 345, 350,
380
Internet, 177, 295, 346, 347
Internet Protocol (IP), 350
Intervention, 183
Interviews, 318
Intranet, 104, 345, 347, 380
Intrapreneurship, 117
Investment decision-maker, 468
Investment synergy, 170
Invitation to tender, 325
IP address, 350


...
com/freeaccastudymaterial

Index

639

To download more visit http://freeaccastudymaterial
...
co
m

ym
a

tud

as

cc

Machine bureaucracy, 252

fre

ea

Machine cells, 561
Macro scenarios, 44
Macro-environment, 25
Malls, 343
Management by exception, 472, 481
Management by objectives, 8
Management of change, 257
Management of relationships, 247
Management style, 150
Management synergy, 170
Management team, 345
Managerial grid, 554
Managerial Grid, 554
Market, 75
Market attractiveness, 178
Market convergence, 173
Market development, 203

640

National vocational qualifications, 566
Natural law, 132
Neo-human relations, 560
Network Access Points, 347
Network diagram, 466, 485
Network marketing, 396
Network organisations, 247
Networks, 272
Networks of influence, 272

Index

join us on facebook @ fb
...
com

Latin model of corporate governance, 147
Le Shuttle, 56
Lead generation, 387
Leader strategy, 115
Leadership, 150, 237, 268, 579
Leading indicators, 52
Lean production, 561
Learning, 206, 211, 582
Learning curve, 98, 180, 190
Learning organisation, 100, 581, 582
Leasing, 247
Least squares regression analysis, 49
Legal environment, 36
Levels of strategy, 10, 20
Licensing agreement, 209
Life cycle, 35, 80
Life cycle analysis, 215
Life cycle/portfolio matrix, 215
Lifestyle segmentation, 77
Lifetime costs, 98
Limiting factor, 94
Linear regression analysis, 46
Linkages, 108
Loan capital, 511
Loan stock, 511
Lock-in, 199
Logical incrementalism, 579, 581, 582
Long-term direction, 5
Lotus Notes, 104
Low price strategy, 196
Luxury goods, 174
Lynch, 202

ial

Labour, 174

Market globalisation, 37
Market growth rate, 186
Market opportunity, 344
Market options matrix, 202
Market penetration, 203
Market position, 213
Market power, 170
Market processes, 240
Market segmentation, 76, 77
Market segments, 25, 85
Market share, 83, 186, 202
Market strategy, 344
Marketing, 11, 73, 117, 207, 337
Marketing and sales, 108
Marketing audit, 82
Marketing mix, 73
Marketing synergy, 170
Markets, 25
Mashups, 418
Matrix, 254
Matrix organisation, 232, 472
Matrix structure, 232, 233, 234
Maturity, 112, 556
McDonald and Wilson, 390
McGregor, 555
Measurable, 449
Medium-term forecasting, 52
Megatrends, 365
Mendelow's matrix, 138
Mergers, 208
Middle line, 252, 253
Milestone, 478
Military analogies, 67
Mintzberg, H, 142, 251, 259
Mission, 6, 9, 150
Mission statement, 7
Missionary organisation, 255
Modes of entry, 179
Modular organisation structure, 243, 245
Moral hazard, 145
Moving averages, 52
Multi-disciplinary teams, 473
Multi-divisional structure, 231
Multinationals, 15
Multi-skilling, 563
Mythology, 150

ter

Kotler, 76
KPIs, 82
Kvaerner, 36

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

Index

641

To download more visit http://freeaccastudymaterial
...
co
m

Rarity, 99
Ratio analysis, 534
Ratio pyramids, 536
Rayport and Jaworski, 368
Real options, 219
Realisation of the benefits of change, 291
Realised strategy, 574, 578
Reconstruction, 263, 267
Reduction, 481
Redundancy payments, 57
Redundancy programmes, 273
Regiocentrism, 175
Regression analysis, 49
Reinforcing cycles, 256
Reintermediation, 341,342, 395
Related and supporting industries, 40
Related diversification, 171
Relationship marketing, 409, 414
Relationships, 229, 240
Relative market share, 186
Relevant costs, 527
Renewable and non-renewable resources, 35
Research and development, 11, 115, 117
Research techniques, 320
Resource, 10, 93, 100, 433
Resource allocation routines, 579
Resource audit, 93
Resource histogram, 467
Resource-based strategy, 94
Response, 67
Return on capital employed, 536
Revenue model, 344
Revolution, 263, 267
Rhine model of corporate governance, 146
Ringelmann effect, 474
Risk, 178, 218
Risk assessment matrix, 481
Risk avoidance, 327
Risk management, 480
Risk mitigation, 327
Risk reduction, 328
Risk register, 480
Risks of poor corporate governance, 149
Rituals, 31, 149
Rivalry amongst current competitors, 54, 57
Robustness, 99
Rollback analysis, 524
Routines, 271
Rummler – Brache methodology, 295

Qualitative forecasting, 46

Quality, 434, 560
Quality control, 470
Quality improvement methods, 295
Quality methods, 561
Quantifiable, 449
Question marks, 186

642

Sales growth, 538
Sales promotion, 396

Index

join us on facebook @ fb
...
com

Procurement, 108
Product, 73, 393
Product class, 111
Product development, 203
Product differentiation, 54
Product form, 111
Product innovation, 68
Product life cycle, 68, 111, 112, 113, 215
Product portfolio, 111
Product positioning, 80
Product research, 116
Production, 11, 207
Production possibility curve, 33
Product-market mix, 202
Product-market strategy, 202
Professional bureaucracy, 253
Profit margin, 537
Progress report, 477
Project, 433
Project Board, 468
Project Budget, 465
Project champion, 468
Project change procedure, 480
Project co-ordinators, 232
Project Evaluation and Review Technique, 467
Project management, 434, 488
Project management software, 485
Project manager, 468, 469
Project manager responsibilities, 469
Project owner, 468
Project sponsor, 468
Project stakeholders, 444, 451
Project teams, 564, 577
Project-based structure, 235
Promotion, 74, 395
Promotional mix, 396
Protocol analysis, 320
Protocol stack, 351
Prototyping, 320
Psychographic segmentation, 77
Public policy on competition, 28
Public sector, 15, 97, 237
Public sector portfolio matrix, 187
Public sector star, 188
Publisher websites, 343
Pull model, 370
Pure research, 116
Purpose, 6

To download more visit http://freeaccastudymaterial
...
co
m

Stakeholders, 136, 170, 218, 269, 270
Stakeholders' objectives, 136
Standard cost, 515
Standard costing, 515
Standardisation, 254
Stars, 186
STEEPLE, 27
Stereotypical configurations, 251
Stock, 511
Stock market ratios, 536, 542
Storming, 474
Strategic alliances, 211, 243
Strategic analysis, 578
Strategic apex, 251, 582
Strategic business units, 169
Strategic capability, 9, 12, 93, 98, 122, 198,
564
Strategic change, 262, 578
Strategic choices, 12, 574
Strategic control, 9, 242
Strategic control style, 242
Strategic customer, 81, 85
Strategic drift, 18, 579, 581
Strategic gaps, 85
Strategic group analysis, 72
Strategic groups, 25, 72, 85
Strategic intent, 9
Strategic leadership, 268
Strategic management accounting, 84, 499
Strategic management styles, 242
Strategic planning, 242
Strategic planning process, 7
Strategic planning systems, 575
Strategic position, 12, 574
Strategic project management, 437
Strategic space, 72
Strategies for market challengers, 214
Strategies for market followers, 214
Strategies for market leaders, 214
Strategies for market nichers, 214
Strategy, 4, 5, 6
Strategy as design, 16, 17
Strategy as experience, 16, 17
Strategy as ideas, 16, 18
Strategy clock, 195
Strategy into action, 13, 574
Strategy lenses, 16
Strengths, 122
Structure, 150, 229
Stuck-in-the-middle strategy, 193
Styles of change management, 266
Subcultures, 31, 150
Substitutes, 59, 85
Succession planning, 567
Suitability, 215, 366
Supermarkets, 82
Supervision, 237

fre

ea

cc

as

tud

ym
a

ter

ial

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

Index

643

To download more visit http://freeaccastudymaterial
...
co
m

ial

Uncertainty, 581

ter

Undifferentiated marketing, 79
Undifferentiated marketing, 79
Unique resource, 94
Unique resources, 94, 96
Universal Mobile Telephone System (UMTS),
352
Unrealised strategy, 575
Unrelated diversification, 172
User contribution systems, 249
User generated content, 419
User groups, 343
User training, 324
Utilisation of indivisibilities, 98
Utilitarianism, 131

ym
a

Tacit knowledge, 100, 104

Time horizon, 577
Time series analysis, 50
Top-down budgeting, 465
Total quality, 561
TOWS matrix, 124, 197
Transactional leaders, 268
Transference, 482
Transnational, 177, 251
Transparent pricing, 397
Travel agents, 343
Trend line, 50
Tuckman, 474
Turnaround, 269
Turnover periods, 541

Value activities, 106, 107, 371
Value chain, 106, 201, 371
Value creation, 182
Value destruction, 183
Value drivers, 371
Value network, 372
Value proposition, 344
Value system, 109
Value trap businesses, 189
Value-added analysis, 312
Values, 6, 150
Variance, 515, 517
Variance analysis, 515
Vertical disintegration, 375
Vertical integration, 171, 375
Viral marketing, 411
Virtual and network organisational structures,
243
Virtual integration, 375
Virtual organisation, 249
Virtual resellers, 343
Virtual teams, 247
Virtue ethics, 133
Vision, 9
Visual identity, 407

Index

join us on facebook @ fb
...
com

Supplier citizenship requirements, 323
Supplier stability requirements, 322
Supply chain, 369, 381
pull model, 370
push model, 370
Supply chain management, 369, 375, 381, 382
Supply costs, 97
Supply-led convergence, 53
Support activities, 108
Support staff, 252, 254
Sustainability, 35
Sustainability Ltd, 35
Sustainable competitive advantage, 98, 198
Sustaining competitive advantage, 198
Switching costs, 54
SWOT analysis, 122, 123
Symbolic processes, 271
Symbols, 271
Synergy, 170, 204
Synergy managers, 184
System, 283
System architecture, 345, 346, 380
System implementation, 324
Systems theory, 283

To download more visit http://freeaccastudymaterial
...
com


...
0 technologies, 417
Web-based communities, 418
Website evaluators, 343
Weirich, 124
Weirich's TOWS matrix, 124
What if? analyses, 486
WiFi Internet access, 352

,

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Notes

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Notes

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Notes

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Notes

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Notes

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Notes

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Notes

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com


...
com

Notes

join us on facebook @ fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
...
com

Review Form – Paper P3 Business Analysis (4/15)
Please help us to ensure that the ACCA learning materials we produce remain as accurate and user-friendly
as possible
...

Address:


...
bpp
...

Introductory section
Chapter introductions
Quality of explanations

Useful

Not useful

Good

Adequate

Poor

Yes

No

cc

Key terms

Very useful

Case studies and other examples

ea

Exam focus points
Questions and answers in each chapter
Fast forwards and chapter roundups
Quick quizzes

fre

Question Bank
Answer Bank
Index

Overall opinion of this Study Text

Excellent

Do you intend to continue using BPP products?

On the reverse of this page is space for you to write your comments about our Study Text We welcome your
feedback
...
com
Please return this form to: BPP Learning Media Ltd, FREEPOST, London, W12 8AA

join us on facebook @ fb
...
com

On a BPP in-centre course

To download more visit http://freeaccastudymaterial
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

Please note any further comments and suggestions/errors below
...
com

fre

ea

cc

fb
...
com/freeaccastudymaterial

To download more visit http://freeaccastudymaterial
...
co
m

To download more visit http://freeaccastudymaterial
Title: ACCA BPP P3(Study Text- September 2016)
Description: PDF Format.
Buy These NotesPreview