e2 Bpp Study Notes

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(1)Project and Relationship Management Operational Level Paper E2 Course Notes FOR EXAMS IN 2015. 978-1-4727-8539-8.

(2) Improving study material and removing errors There is a constant need to update and enhance our study materials in line with both regulatory changes and new insights into the exams. BPP appoints, from one of our experienced tutor team, a subject expert to update and improve these course notes regularly. These updates are technically checked by another tutor and frequently proof read. We always aim to leave no numerical errors and narrative typos. However, given the volume of detailed information being changed in a short space of time, it is regrettable that an error may slip through our net despite our best intentions. We apologise sincerely for any inconvenience that this might cause. If you find a specific error or typo please let us know at [email protected] so we can correct it immediately. In addition we would welcome any suggestions you may have to further improve these study materials.. 2.

(3) Contents Page Welcome to E2 .................................................................................................................................. 4 Exam Technique Overview ............................................................................................................... 9 Introduction to strategy and contemporary perspectives 1a Introduction to strategy....................................................................................................... 11 1b Contemporary perspectives in strategy development ........................................................ 29 General environment 2 General environment ............................................................................................................ 41 Competitive environment 3 Competitive environment...................................................................................................... 51 Key concepts in management and leadership 4a Key concepts in management ............................................................................................ 63 4b Key concepts in leadership................................................................................................. 75 Culture 5 Culture .................................................................................................................................. 87 Conflict, negotiation and communication 6 Conflict, negotiation and communication.............................................................................. 99 Control and the finance function 7 Control and the finance function......................................................................................... 119 Change management 8 Change management ......................................................................................................... 131 Introduction to project management 9 Introduction to project management................................................................................... 143 The project team 10 The project team............................................................................................................... 159 Answers to lecture examples ........................................................................................................ 179. 3.

(4) WELCOME TO E2. Welcome to E2 Project and Relationship Management Our aim is to help you confidently prepare for success in your exam in an effective and efficient way; allowing you to personalise your learning experience, step by step, whilst being supported by BPP’s team of experts. These course notes are one of the components of your programme, and are one of the tools you have at your disposal as a student of BPP. They focus primarily on ensuring you acquire the technical knowledge and understanding required to pass your exam. They have been written by our subject matter experts and tutors, are will be delivered to you by our expert tutor team, be it in centre or online. These course notes play two important roles in your programme: 1.. Knowledge – the course notes will help you to learn and understand the key knowledge topics to allow you to progress up the Achievement Ladder. 2.. Support – you can revisit specific elements in your course notes in the light of feedback you receive as you attempt each step on the Achievement Ladder.. Remember, the Achievement Ladder is the unique tool to allow you to see your own progression towards being fully prepared for the real exam.. Description of the paper E2 emphasises a holistic, integrated approach to managing organisations, from external and internal perspectives. It builds on the understanding of organisational structuring gained from E1 and is centred on the concept of strategy and how organisation strategy can be implemented through people, projects, processes and relationships. It provides the basis for developing further insights into how to formulate and implement organisational strategy, which is covered in E3. Syllabus Areas and their weighting Summary of syllabus Weight. Syllabus topic. 30%. A. Introduction to strategic management and assessing the global environment. 20%. B. The human aspects of the organisation. 20%. C. Managing relationships. 30%. D. Managing change through projects. 4.

(5) WELCOME TO E2. The Objective Test exam Pass Mark. 70%. Format. Computer Based Assessment. Duration. 90 minutes. Number of Questions. 60. Weighting. As per Syllabus Areas All component learning outcomes will be covered. Question Types. Multiple Choice Multiple Response Drag and Drop Gap Fill Hotspot Drop Down List. Booking availability. On demand. Results. Immediate. How To Pass Your OT exam In simple terms, the best way to pass your exam is to work your way up the Achievement Ladder at a good steady pace, acting on all feedback as you go. This will ensure you cover all the technical syllabus in a balanced way, and will get you familiar with the different real-exam question types and how to approach them. A great way of furthering your understanding is to continually try to put the topics, concepts and ideas in the syllabus into context. As you move through your course, think about how your learning relates to your working life, or to reports in the business news. Read management accounting journals and articles and see how they tie in with your studies. Passing CIMA exams is all about applying what you know to real business situations, so the more you can think along these lines the better. A key first step you should take is to construct a Study Plan, based around the dates you will attempt each step of the Achievement Ladder. You should look to transfer these dates to your online calendar in the near future.. 5.

(6) WELCOME TO E2. Syllabus Learning Outcomes Lead Outcome. Component Outcome. Chapter. A Introduction to strategic management and assessing the global environment 1 Discuss developments in strategic management. (a) discuss the concept of strategy and the rational/formal approach to strategy development. 1a Introduction to Strategy. (b) compare and contrast alternative approaches to strategy development. 1a Introduction to Strategy 1b Contemporary Perspectives in Strategy Development. 2 Analyse the relationship between different aspects of the global business environment. (c) explain the approaches to achieving sustainable competitive advantage. 3. Competitive Environment. (a) distinguish between different aspects of the global environment, including the competitive environment. 1b Contemporary Perspectives in Strategy Development 2. General Environment. (b) discuss the approaches to competitor 3 analysis including the collection and interpretation of trend data. Competitive Environment. B The human aspects of the organisation 1 Discuss the concepts associated with managing through people. (a) discuss the concepts of leadership and management. 4a Key Concepts in Management 4b Key Concepts in Leadership. 2 Discuss the hard and soft aspects of people and organisational performance. (b) discuss HRM approaches for managing and controlling individual’s performance. 6. (a) discuss behavioural aspects of management control. 4a Key Concepts in Management 7. (b) explain the importance of organisational culture 6. Conflict, Negotiation and Communication. Control & the Finance Function. 5 Culture.

(7) WELCOME TO E2 Lead Outcome. Component Outcome. Chapter. C Managing relationships 1 Discuss the effectiveness of organisational relationships. (a) evaluate the issues associated with building, leading and managing effective teams. 10 The Project Team. (b) discuss the effectiveness of handling, 7 relationships between the finance function and other parts of the organisation and the supply chain. Control & the Finance Function. (c) discuss the effectiveness of handling relationships between the finance function and external experts and stakeholders. 7. Control & the Finance Function. 2 Discuss management tools (a) discuss the roles of communication, 6 and techniques in negotiation, influence and persuasion managing organisational in the management process relationships. Conflict, Negotiation and Communication. (b) discuss approaches to managing conflict. 6. Conflict, Negotiation and Communication. D Managing change through projects 1 Advise on important elements in the change process. (a) discuss the concept of organisational change. 8. Change Management. (b) recommend techniques to manage resistance to change. 8. Change Management. 2 Discuss the concepts involved in managing projects. (a) discuss the characteristics of the different phases of a project. 9. Introduction to Project Management. (b) apply tools and techniques for project 9 managers. Introduction to Project Management. (c) discuss management and leadership issues associated with projects, including the roles of key players in projects. 7. 10 The Project Team.

(8) WELCOME TO E2. 2015 Syllabus Changes For resit students who first studied the paper under the 2010 syllabus only… There have been some specific changes to the technical content of this paper’s syllabus, and you should be fully aware of these to help you prepare for your resit under the 2015 Syllabus. Here’s a summary of the ‘ins and outs’ for this paper: Main Topics that have come in… Change Management. See Chapter 8. LoNGPEST. See Chapter 2. Big Data. See Chapter 3. Main Topics that have gone out…. As well as ensuring you take these main changes into account during your preparations for your resit, you should also be aware that the new assessment structure in 2015 means that you will be examined in a different way even for topics that have ‘rolled over’ from the 2010 Syllabus. We would therefore strongly recommend attempting all the Steps in your Achievement Ladder, and act on the feedback provided, to ensure you are fully exam ready for your resit. You will find more detail and guidance online.. The Case Study Exam Your Integrated Case Study exam for this Level will draw on the technical content of each paper’s syllabus. To pass, you will need to APPLY this knowledge in the context of the preseen case study, demonstrating CIMA’s four core competencies and your ability to integrate your knowledge across the three pillars in a single exam. It is therefore a very good idea to keep your technical knowledge fresh after passing your OT exam for this paper, and to start to think more about how the technical theories, techniques and concepts apply to ‘real life’, as this is effectively what you will be assessed on in your Case Study exam. The specifically written ICS Bridging Questions that you will find online will help you with this and we would recommending looking at these after your OT exam, and as your attention starts to shift towards preparing for your Case Study.. 8.

(9) WELCOME TO E2. Exam Technique Overview 1 Knowing the best way to approach each Question Type Passing your CBA is all about demonstrating your understanding of the technical syllabus content. You will find this easier to do if you are comfortable with the different types of Objective Test Questions that you will encounter in the CBA, especially if you have a practised approach to each one. OTQ Type. Example. Multiple Choice. “Choose one correct answer from the following options: A B C D”. Multiple Response. “Which THREE of the following are true in this situation?”. Drag and Drop. “Drag and drop these steps of the process into the correct order”. Gap Fill / Numeric Entry. “Give your answer to the nearest $million”. Hotspot. “Click on the area of the graph that represents profit”. Drop Down List. “The strategy adopted by the company is best described as … ”. You will find yourself continuously practising these styles of questions throughout your Objective Test programme. This way you will check and reinforce your technical knowledge at the same time as becoming more and more comfortable with your approach to each style of question.. 2 Making all the decisions you can before your CBA You’re not likely to have a great deal of ‘spare time’ during the CBA itself so you must make sure you don’t waste a single minute. One way to do this is to make any decisions that you can before your CBA, so all your exam time is purely focused on answering questions… How long should I spend on each question? With 60 questions to answer in 90 minutes, on average you have a minute and a half per question. You can also use this to build handy benchmarks – eg after the first 30 minutes, you should ideally have answered 20 questions, and with 30 mins to go you should have 20 questions remaining, etc. What’s the mix of question types likely to be in the CBA? This is especially important for papers with calculation questions, as these usually take quite a bit longer than purely narrative questions, so this will allow you to flex your time sensibly in the exam. Which order should I do the exam questions in? Another thing you can do in advance of your real CBA is to decide which exam approach works best for you. There’s no single right way of working through a long exam – its all down to personal preferences, but what is important is that you make your decision in advance and then stick to it! There are at least three different ways of doing this: 1. Work through the exam from the first question to the last, attempting every single question as you go and flagging any you want to return to at the end.. 2. Work through quickly once, answering all the questions that seem ‘easy’ to you, then go back to the beginning and work through all the trickier ones. 9.

(10) WELCOME TO E2 3. If there are a mix of calculations and narrative questions in your CBA, you could work through and do all of the narrative questions first as these are often easier and certainly quicker, but you must set yourself a target time to complete them to ensure you don’t overrun as you will need longer per question to complete all the calculation questions.. The key here is to try out different approaches during your studies, so that you can identify and settle on the one that works best for you.. 3 Maximising your marks in your CBA Time does funny things in an exam! Scientific studies have shown that humans have great difficulty in judging how much time has passed if they are concentrating fully on a challenging task (which your CBA should be!). You can try this for yourself. Have a go at say five questions for your paper, and notice what time you start at. As soon as you finish the last question try to estimate how long it took you and then compare to your watch/clock/phone. The majority of us tend to underestimate how quickly time passes and this can cost you dearly in a full exam if you don’t take steps to keep track of time. So, the key thing here is to set yourself sensible milestones, and then get into the habit of regularly checking how you are doing against them: . You need to develop an internal warning system – “I’ve now spent more than 3 minutes on this one calculation – this is too long and I need to move on!” (less for a narrative question!). . Keep your milestones in mind (eg 20 questions done after 30 mins). If you are a distance from where you should be then adjust your pace accordingly. This usually means speeding up but can mean slowing down a bit if needs be, as you may be rushing when you don’t need to and increasing the risk of making silly mistakes.. A full exam will be a mix of questions you find harder and those you find easier, and in the real CBA the order is randomised, so you could get a string of difficult questions right at the beginning of your exam. Do not be put off by this – they should be balanced up later by a series of questions you find easier.. 10.

(11) Introduction to strategy. Introduction Syllabus Area A.  Introduction to strategic management and assessing the global environment  30%. Lead learning outcome.  Discuss developments in strategic management.  Discuss the concept of strategy and the rational/formal approach to strategy development Syllabus component  Compare and contrast alternative approaches to strategy development. Context This syllabus component will require that you have a good understanding of the fundamental techniques for strategic planning for an organisation. You will need an in-depth understanding of the rational planning model and its alternatives, and when is appropriate to use them. This chapter addresses the following indicative syllabus content:. Section. Defining strategy and strategic management; Core areas of strategic management Levels of strategy within organisations Stages in the rational approach to strategy developments Intended, emergent, logical incrementalism and political approaches Resource-based view – resources and competencies, internal value and dynamic capabilities. 1 1 2-9 10-11 12-13. Other chapters in Syllabus Area A Chapter 1a Introduction to strategy. Chapter 1b Contemporary perspectives in strategy development. Chapter 2 General Environment. Chapter 3 Competitive Environment 11.

(12) 1a: INTRODUCTION TO STRATEGY. Overview The rational planning model. What is Strategy?. The rational planning model. Top-down strategy process. Positioning view vs resource-based view. Criticisms of the rational planning model Emergent strategy. Mission and objectives. Environmental analysis Logical incrementalism Position audit. Strategy & small businesses. Strategic option, choice, implementation and review. 12.

(13) 1a: INTRODUCTION TO STRATEGY. The rational planning model. What is Strategy?. Top-down strategy process. Positioning view vs resourcebased view. 13.

(14) 1a: INTRODUCTION TO STRATEGY. 1. What is a strategy?. 1.1. A strategy is “a course of action, including the specification of resources required, to achieve a specific objective.” (CIMA) It is concerned with:     . 1.2. the purpose and long-term direction of an organisation the scope of an organisation’s activities meeting challenges arising from the external environment using internal resources effectively delivering value to people who depend on the organisation. Strategic management is the strategic decision making which is characterised by the consideration of:       . 1.3. Strategy can play a number of roles within an organisation. Henry Mintzberg suggested five such roles, known at the 5 Ps of strategy. (a) (b) (c) (d) (e). 1.4. the scope of business activities matching a business’s activities to its capabilities allocation of resources the operational decisions which follow the values and expectations of senior management the long-term direction that the business takes change in the business. Plan. Strategy can provide direction for an organisation. Pattern. Strategy, whether intended or not, will be evident as a consistent pattern of behaviour over the long term. Ploy. Strategy can be used as a tactic to deter or confuse competition. Position. An organisation's strategy can provide an indication as to where that organisation places itself within a particular market or environment. Perspective. Strategy indicates more than just a chosen position, it represents the unique way in which an organisation perceives the environment in which it operates and how it interprets the information from it.. Strategies exist at all levels of the organisation and can be considered as covering three areas as follows: Levels Corporate strategy. the overall purpose and scope of the organisation. Business strategy. how a strategic business unit approaches a particular market. Functional strategy. long-term management policies of functional areas. Areas Financial strategy. capital structure, dividend policy, investor relations. Investment strategy. use of capital to provide strategically valuable resources. Competitive strategy. how the business outperforms its rivals. 14.

(15) 1a: INTRODUCTION TO STRATEGY. Lecture example 1. Exam Standard. A consultant has told the board of ABC Ltd that the strategic planning process should result in a strategy at all levels of an organisation. He has shared a document setting out how overall objectives are to be achieved, by specifying what is expected from specific functions, stores and departments. What type of strategy has he created? A. Corporate Strategy. B. Business Strategy. C. Functional Strategy. D. Competitive Strategy. Solution. 2. The rational planning model. 2.1. In order to plan a strategy effectively, many organisations follow a formal process, of which the rational planning model is the most widely used. With the rational planning model:    . Strategy is seen as the achievement of objectives A formal, documented process is followed The process is led by senior management The process incorporates corporate / business / functional strategies. Position Audit. Mission and Objectives. Review and Control. Corporate appraisal. Strategic option generation. Environment analysis 15. Strategy evaluation & choice. Strategic implementation.

(16) 1a: INTRODUCTION TO STRATEGY 2.2. Each stage within the rational planning model is considered in detail from section 4 onward.. 3. Top-down strategy process. 3.1. When it comes to setting a strategy, most large organisations adopt a top-down process, where senior management maintain close control. This means:     . Establishing a designated team responsible for strategy development. Formalising the collection of information, both internal and external. Senior managers deciding on the strategy collectively. Formal communication and implementation of the strategy. Regularly reviewing the strategy at a senior level.. Lecture example 2. Discussion. Required Explain the advantages and disadvantages of the top-down approach to strategy.. Solution. 4. Mission & objectives. 4.1. A mission is a broad statement of the purposes of an organisation that has been prepared in line with the values and expectations of its stakeholders. It is often communicated in the form of a mission statement.. 16.

(17) 1a: INTRODUCTION TO STRATEGY 4.2. According to Hooley et al (1992), a mission statement should: (a) (b) (c) (d) (e). Provide a basis for consistent decision-making. Assist in translating direction into objectives suitable for assessment and control. Provide a consistent purpose between different interest groups (stakeholders). Establish organisational goals and ethics. Improve understanding and support from key groups outside the organisation.. Lecture example 3. Discussion. The bus service provider Stagecoach Group has the following mission statement: “Stagecoach Group is committed to being a market-leading public transport business with longterm growth prospects based on high-quality services and investment in innovation. Our vision is to create sustained shareholder value and share our success with our people, our customers and our communities.” Required Discuss whether this is an effective mission statement.. Solution. 4.3. A mission is expected to last for several years and therefore needs to be relatively openended. The mission therefore needs to be converted into a series of strategic objectives that set targets for the business to achieve. Such objectives need to be: Specific Is it clear and unambiguous? Measurable Can it be objectively measured? Achievable Do those involve believe it is realistic? Relevant Will it help the organisation meet its mission? Time-bound Has a deadline for achievement been agreed?. 17.

(18) 1a: INTRODUCTION TO STRATEGY 4.4. An objective that meets these characteristics will perform the following functions: Planning A framework that identifies the targets to be reached Responsibility Place clear expectations on managers Integration Ensure coordination of effort across the organisation Motivation Inspires managers to meet targets Evaluation Acts as a criteria for performance evaluation. 4.5. Like controls (see Chapter 7), objectives are needed at strategic, tactical and operational levels.. 5. Environmental analysis. 5.1. In order to develop an effective strategy, there needs to be an awareness of the opportunities and threats contained in the external environment. This can be done using PESTEL and Porter’s Five Forces. Both these models will be discussed in more detail in Chapter 2.. 6. Position audit. 6.1. The position audit involves an internal analysis of the organisation’s strengths and weaknesses. Johnson, Scholes & Whittington (2008) identify four areas to consider: Threshold resources. resources needed to meet the customer’s minimum requirements. Threshold competences activities and processes needed to meet the customer’s minimum requirements. 6.2. Unique resources. resources that underpin competitive advantage and are difficult for competitors to replicate. Core competences. activities and processes that underpin competitive advantage and are difficult for competitors to replicate. The organisation’s internal position can also be analysed using Porter’s Value Chain (also assumed knowledge from E1). The components of each activity below can be analysed to determine the extent to which they “add value to the customer”: Firm infrastructure Human resource management. Support activities. Technology development Procurement. Primary activities. Inbound logistics. Operations. Outbound logistics. 18. Marketing and sales. Service. M A R G I N.

(19) 1a: INTRODUCTION TO STRATEGY. Lecture example 4. Exam Standard. ABC Ltd provides financial planning services for small businesses. Their management accountant has been tasked with a review of the company’s activities in providing its services to customers. In terms of Porter’s Value Chain, which are the primary activities they should consider? A. Inbound logistics. B. Procurement. C. Firm infrastructure. D. Marketing & sales. E. Service. Solution. 7. Corporate appraisal. 7.1. The internal position audit and external environmental analysis combine to form a corporate appraisal or SWOT analysis: Internal Strengths Weaknesses External Opportunities Threats. 8. the skills or competences that give an organisation an advantage over its competitors. internal failures that hinder the organisation from meeting its aims. events or changes outside the organisation that could be exploited to the organisation’s benefit. events or changes outside the organisation that are unfavourable to the organisation and need to be guarded against.. Strategic option, choice, implementation & review. Strategic options 8.1. Having completed the corporate appraisal, it is up to managers to identify the options open to the organisation. While some of these will extend clearly from the SWOT analysis, others may emerge through a more creative idea-generation process. 19.

(20) 1a: INTRODUCTION TO STRATEGY. Strategic choice 8.2. With a range of options to choose from, a strategic choice is made using the following three criteria:   . 8.3. Will it achieve competitive advantage? What is the organisation’s strategic advantage? What methods will be used to meet these objectives?. The organisation can choose to meet their objectives using the following methods:   . Internal development / organic growth Takeover / acquisition or merger Strategic alliance. Strategic implementation 8.4. Having agreed the overall strategy, it is necessary to convert it into a set of detailed plans in order to implement it. These take place at tactical and operational levels.. Strategic review 8.5. The strategy should be continually reviewed from two perspectives:  . Will the delivery of the strategy help the business meet its strategic objectives? Do changes in the environment require a change in strategy?. 9. Criticisms of the rational planning model. 9.1. Although the rational planning model is the most widely used method of generating a strategic plan, it has been criticised by some for being too academic and failing to reflect “the real world”. These criticisms include: (i). The model is too rigid. The rational planning model does not allow users to go backwards – only forwards. This could result in a strategy being implemented that does not reflect recent changes to the internal or external environment.. (ii). No strategy can be completely formalised in advance. Any strategy is based on imperfect knowledge of the future. Any attempt to allow scope for change undermines the stability of the whole model.. (iii). Managers only declare their strategy after the event. Mintzberg argues that managers present their past actions as being part of an intentional strategy, whether they were or weren’t. In other words, strategy is not created in advance but emerges over time.. 20.

(21) 1a: INTRODUCTION TO STRATEGY (iv). An organisation cannot set an objective – only the people within it. Objectives are the outcome of negotiation between internal factions. Objectives therefore conflict with each other and become obsolete as different groups become more or less dominant.. (v). The people who set the strategy aren’t the people responsible for implementing it. Objectives are set by senior management, who don’t have sufficient awareness of the issues being faced in the front line or the social and cultural values of staff.. (vi). Strategy is not a rational process. An excessively rational approach to strategy can cause managers to become obsessed with the associated problems (inconsistency between objectives, resistance from those who disagreed with their approach). Instead, it is argued, lower level managers should select shorter-term courses of action.. In addressing these criticisms, two alternative models have been identified:  . Emergent strategy Logical incrementalism. 10 Emergent strategy 10.1 Mintzberg (1987) sees strategy as including an unanticipated or emergent dimension.. Intended strategy is formally created by established senior management. Some of these will be taken forward (deliberate strategy) and others will not. At the same time, informal patterns or consistencies will create an emergent strategy. 10.2 The emergent model reduces the reliance on a formal process and instead shifts the focus for creating a strategy on the manager. Mintzberg recognised that managers could develop deliberately emergent strategies by creating conditions that allow new ideas to flourish. 10.3 To develop such a strategy effectively, the manager needs the following skills: . Manage stability – there is no need to constantly re-think the organisation’s strategy.. . Detect discontinuity – look for subtle changes that may impact on future performance. 21.

(22) 1a: INTRODUCTION TO STRATEGY . Know the business – develop a hands-on feel for the business.. . Manage patterns – encourage strategic initiatives to grow and intervene as necessary.. . Reconcile change and continuity – major change will require careful management.. 11 Logical incrementalism 11.1 Lindblom (1959, 1979) used logical incrementalism to demonstrate how administrators operated without implementing any radical changes. Radical strategy. Environment Strategic drift Logical incrementation. Now. Time. 11.2 Administrators do not take drastic action to achieve radical strategy but continue along the same path as before, towards logical incrementation. However, where there are changes in the environment, the path of logical incrementation will deviate from what is required and create a strategic drift. 11.3 Note that this is a statement of reality rather than a recommendation to follow! 11.4 Quinn (1978) develops logical incrementalism into something more positive, where the manager moves towards a defined destination through a series of small steps, adapting to circumstances as they change. 11.5 In Quinn’s model, logical refers to the use of a formal strategic framework (such as the rational planning model), while incrementalism is the belief that stakeholder consensus is best achieved through incremental (rather than rapid) change. In this context, the manager’s role is to: . Be attuned to the issues the organisation is facing by networking formally and informally with internal and external stakeholders.. . Develop a strategic vision when the need arises.. . Build political support for the vision (as opposed to presenting a full-blown strategy).. . Obtain commitment by initiating a trial of the new strategy.. . Allow the consensus to build and implement the change incrementally. 22.

(23) 1a: INTRODUCTION TO STRATEGY. Lecture example 5. Discussion. Required Explain how the duties and skills required of a manager using the rational planning model compare to those of a manager using logical incrementalism.. Solution. 12 Further considerations Positioning view versus resource-based view of strategy 12.1 In the context of a strategy’s aim to “meet the challenges of arising from the external environment”, theorists disagree over how organisations can compete successfully. This has led to two conflicting theories: the positioning view and resource-based view.. 23.

(24) 1a: INTRODUCTION TO STRATEGY. Positioning view 12.2 The positioning view sees competitive advantage as coming from the way a firm positions itself in relation to its competitors, customers and stakeholders. This competitive advantage can therefore be secured through:   . High market share compared to rivals Differentiated products Low costs. According to this view, the organisation therefore needs to adapt to fit its environment (referred to as an outside-in view).. Criticisms of the positioning view 12.3 Until the 1990s, the positioning view was widely accepted. However, the following criticisms emerged: (a). Competitive advantages are not sustainable Positioning advantages can be replicated by competitors with relative ease.. (b). Environments are too fast-moving for positioning to be effective If the environment changes too quickly, the organisation will always be changing in a futile attempt to catch up.. (c). It is easier to change the environment than the organisation The organisation’s structure and competences will be destroyed if it is always having to change to meet the environment’s demands.. Resource-based view 12.4 Resource-based theorists believe that, instead of permanently reacting to its environment, the organisation should focus on developing a unique competence or asset and then find a market which wants it. This is referred to as an inside-out view. 12.5 Stalk et al (1992) identify four principles of the resource-based view (referred to by them as capabilities-based competition): (a) (b) (c) (d). Advantage needs to be based on business processes, not products. Success derives from converting these processes into value-adding capabilities. These capabilities require group-wide investment (i.e. across functional boundaries). The CEO needs to champion this group-wide approach for it to be effective.. 24.

(25) 1a: INTRODUCTION TO STRATEGY 12.6 Resource-based theorists have attempted to identify where internal competitive advantage comes from: Stalk et al (1992). Barney (1991). Kay (1997). Speed. Valuable. Competitive architecture (see below). Consistency. Rare. Reputation. Acuity. Imperfectly imitable. Innovative ability. Agility. Substitutability. Owning strategic assets. Innovativeness 12.7 Kay’s competitive architecture refers to the relationships that make up the organisation. These break down into: (i) (ii) (iii). Internal architecture (relationships with employees) External architecture (relationships with suppliers and customers) Network architecture (relationships between a group of collaborating firms). Lecture example 6. Exam Standard. As compared with the Resource-Based Approach the Positioning Approach to strategy: A. assumes the future of markets is predictable. B. ensures the organisation has a good fit with the environment. C. is outside-in. D. is based on core competences. E. focuses around what the organisation does best. Solution. 12.8 Prahaland & Hamel (1990) argue that organisational controls should be based, not on a division/SBU basis, but instead on its competence. This supports Stalk et al’s theory that failing to cross divisional boundaries can ultimately damage an organisation’s competence.. Implications of the resource-based view 12.9 Taken to its logical conclusion, the resource-based view conflicts with theories that focus on products and/or markets. Such theories include Porter’s Five Forces, the Product Life Cycle and even the rational planning model! However, resource-based theorists would argue that even a unique product will eventually be replicated or substituted, whereas processes can form a long-term source of competitive advantage. 25.

(26) 1a: INTRODUCTION TO STRATEGY. The political approach to strategy 12.10 The political approach to strategy recognises the influence of power in strategy development, and hence the use of bargaining and negotiation in setting strategy. The formulation of strategy is viewed as a political process where political and stakeholder analysis is critical to determine the main sources of power.. 13 Strategy and small businesses 13.1 Brian Birely (1982) saw the traditional top-down approach to strategy as being inappropriate for small businesses for four reasons: (a). Internal stakeholder interests Small businesses are often owner-managed, making it difficult to separate strategic decision making from shareholder (and, potentially, family) issues.. (b). Limited market choice A small business will have fewer products / services than larger competitors and therefore have a narrower range of strategic options to choose from.. (c). Limited resources Even when a strategy has been proposed, small businesses often have insufficient capital to pursue it.. (d). Organisational structure Small firms may not have the infrastructure (or management skills) to deliver the strategy.. 13.2 Although Birely’s points will be familiar to many small, family-run firms, some entrepreneurs have grown rapidly due to adopting a freewheeling opportunism approach. This involves:     . Successfully competing against a much larger, complacent competitor. Sticking to the founder’s vision of how they wanted the business to develop. Providing products / services in markets where customers behave spontaneously. Not reliant on conventional funding sources. The day-to-day involvement of the founder who demonstrates appropriate skills.. Some very large businesses have been successful with a freewheeling opportunism approach also.. 26.

(27) 1a: INTRODUCTION TO STRATEGY. Summary The rational planning model. What is Strategy?. The rational planning model. Strategy is "a course of action, including the specification of resources required, to achieve a specific objective.. Criticisms of the rational planning model. Mission and objectives. Emergent strategy. SMART and PRIME. Intended strategies Unrealised strategies Deliberate strategies Emergent strategies Realised strategies. Environmental analysis PESTEL O&T of SWOT. Logical incrementalism. Position audit. a series of small steps toward a goal, adapting to the environment as it changes. Value chain S&W of SWOT Strategic option, choice, implementation and review. Strategy & small businesses Stakeholder interests Limited market choice Limited resources Organisational structure. 3 Questions: 1 will it achieve competitive advantage? 2 what is the organisation's strategic direction? 3 what methods will be used to meet these objectives. 27.

(28) 1a: INTRODUCTION TO STRATEGY. The rational planning model. What is Strategy?. Top-down strategy process. Positioning view vs resourcebased view. Requirements: Designated team Formalised collection of internal and external information Collective decision-making Formal communication & implementation of strategy Regular review of strategy. Positioning: Outside-In Resource-based: Inside-Out. Advantages: Avoids short-termist behaviours Helps identify strategic issues Gives goal congruence Improves stakeholder perception of the business Provides a basis for strategic control Develops future management potential, and helps ensure continuity Disadvantages: Too infrequent Prevents innovative strategies Harder to implement due to lack of participation Loss of entrepreneurial spirit Impossible to use if environment is uncertain Too expensive and complicated for a small business. END OF CHAPTER 28.

(29) Contemporary perspectives in strategy development. Introduction Syllabus Area A.  Introduction to strategic management and assessing the global environment  30%. Lead learning outcome.  Discuss developments in strategic management  Compare and contrast alternative approaches to strategy development. Syllabus component  Distinguish between different aspects of the global business environment including the competitive environment. Context This syllabus component introduces you to other strategic considerations organisations can have in the modern environment, in addition to the models learnt in the previous chapter. This chapter addresses the following indicative syllabus content: Strategy development in different contexts, e.g. SMEs, public sector, not-for-profit Strategy and structure Globalisation Transaction cost theory in the context of shared service centres and outsourcing, including contractual relationship, SLAs (service level agreements), bounded rationality and co-creation with customers. Section 5-6 2-3 1 4. Other chapters in Syllabus Area A Chapter 1a Introduction to strategy. Chapter 1b Contemporary perspectives in strategy development. Chapter 2 General Environment. Chapter 3 Competitive Environment 29.

(30) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT. Overview Contemporary perspectives. Mergers and acquisitions. Transaction cost theory. Complex organisational forms. Hierarchy solutions. Strategic alliances. Market solutions. Asset specificity. 30. Ecological perspective of strategy.

(31) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT. 1. Contemporary perspectives. 1.1. The growth of internationalisation and globalisation means that, although firms have the opportunity to explore new international markets, they will also find themselves having to defend their domestic market against new entrants from overseas.. Globalisation 1.2. The growing economic interdependence of countries worldwide. (IMF). Lecture example 1. Discussion. Required Why has there been such a strong move towards globalisation?. Solution. 1.3. However, at the same time as global markets opened up, there emerged an increasing emphasis on customising products and services to local conditions. This has resulted in glocalisation (sic) under the tag line: “think global, act local”.. 1.4. The modern business environment is now characterised by internationalisation and globalisation: Internationalisation Extension of trade beyond national / economic / political boundaries Globalisation. 1.5. Functional integration of internationally dispersed activities. Dicken (1998) clarifies that globalisation is not uprooting political or cultural differences. Nevertheless, he recognises that globalisation has become prevalent due to:      . Production chains being extended across national boundaries Foreign Direct Investment (FDI) Creation of supranational organisations (aided by legal / tax / currency harmonisation) Transformation of communication and transport through technology “Webs of enterprise” transcending political boundaries Transference of culture, lifestyle and personnel across national boundaries 31.

(32) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT. Lecture example 2. Discussion. Required Discuss the challenges facing governments and individuals in industrialised nations as a consequence of the increased growth of the globalised economy.. Solution. 1.6. As a business decides how to approach a global market, it would consider adopting one of the following strategies.. 2. Mergers and acquisitions. 2.1. The traditional approach to becoming a global player was to acquire a subsidiary in the target country. However, by the 1990s, many firms found that any economies of scale they experienced were more than offset by the need for increased structure and management. This overall lack of synergy combined with a desire to focus on the customer’s need led to a number of high-profile de-mergers.. 2.2. In this context, the concept of a strategic alliance has replaced as a viable alternative to mergers and acquisitions.. 3. Complex organisational forms. 3.1. In exploring alternatives to traditional mergers and acquisitions, firms are driven by two needs:  . Cost reduction Market penetration. 32.

(33) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT. Strategic alliances 3.2. A strategic alliance is the sharing of resources and activities across two or more organisations in order to pursue strategies. Types of strategic alliance include: Franchising. The franchisee manufactures or distributes a product or service while the franchiser retains control of the brand and marketing. Joint ventures A new, shared organisation is set up by two or more firms who each retain an independent entity. Consortia Short-term legal entities to deliver a particular project. Licensing The right to manufacture a patented product (in return for a fee). Network organisations 3.3. Often, when a customer deals with a supplier, he or she is dealing with a network of firms which come together to provide a single product or service.. Lecture example 3. Exam Standard. ABC Ltd has decided to work with a foreign manufacturer of a complementary service to market both services jointly in both countries, through a new legal entity, DEF Ltd. What type of structure have they agreed on? A. Franchise. B. Joint venture. C. Consortium. D. License. Solution. 3.4. Where an organisation owns relatively few physical assets and instead relies heavily on IS/IT, it may be referred to as a virtual network.. 3.5. Ghoshal & Bartlett (1997) explain that firms can replace traditional organisational structures with a network (or virtual) structure and buy in those value-adding activities they require: (a) (b) (c) (d). Staff can be hired on a contract / temporary basis Capital assets can be leased Outsourcing production / service provision Customer referrals 33.

(34) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT. 4. Transaction Cost Theory (TCT). 4.1. Organisations seeking to adopt a network / virtual orientation need to consider two questions:. 4.2. (a). Which activities should be bought in?. (b). How can management control operations in a network organisation? These questions are addressed through Transaction Cost Theory.. Oliver Williamson (1981) identifies two alternative approaches to controlling resources: Hierarchy solutions Having decided to own the relevant assets (or employ staff directly), managers focus on controlling their use and performance. Market solutions Managers enter into a contract to buy in the relevant asset (or staff) from outside the organisation. If the transaction costs associated with the market solution are too high, the hierarchy solution will be preferred.. Lecture example 4. Discussion. Required Identify the transaction costs associated with a market solution and explain why they are hard to quantify.. Solution. 4.3. Transaction Cost Theory (TCT) leads to the following conclusions: TCT allows distinctive competences to be identified A firm’s distinctive competence is one that cannot be provided by another company without prohibitive transaction costs. Anything that can be provided cheaper with a market solution cannot be a source of competitive advantage. TCT supports organisational restructuring For the reasons highlighted above, any non-core competences should be bought in from outside using a market solution. IT reduces transaction costs IT allows the more efficient searching, comparison and monitoring of suppliers. 34.

(35) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT 4.4. Williamson goes on to ask why any firm would choose incur transaction costs over and above the cost of the project itself. His answer is based on the concept of asset specificity.. 4.5. If the relationship between supplier and customer is of high asset specificity, the supplier is expected to provide an expensive asset with no alternative use. This increased risk may deter suppliers from entering this market at all but, even if they did, the transaction costs would become prohibitively high. Therefore, high asset specificity is likely to encourage a hierarchy solution.. 4.6. Williamson identifies six types of asset specificity: Site specificity. a location with a limited range of uses.. Physical asset specificity. a unique work of art or building. Human asset specificity. knowledge or skills unique to one organisation.. Dedicated asset specificity. a man-made asset with only one application.. Brand name capital specificity a brand that would lose impact if spread wider. Temporal specificity. exclusive access to a product / service for a certain time. Other issues to consider 4.7. The following issues need to be considered when investigating TCT: Organisations may underestimate the costs of internal control As an organisation takes on more hierarchy solutions and becomes more complex, its internal costs may increase exponentially. Increased trust reduces transaction costs Where an existing relationship of trust exists between supplier and customer, the transaction costs are likely to be considerably lower.. 5. Ecological perspective of strategy. 5.1. With ecological issues becoming an increasing social, political and economic issue, a new style of strategy has emerged that focuses on the organisation’s relationship with the environment.. 5.2. Bennett & James (1996) identify six ecological areas that need to be monitored: Production. minimising inputs required to generate outputs. Environmental auditing. compliance with legislation, treatment of waste etc. Ecological approach. trace the full life-cycle of the product. Quality. A TQM approach to continuous improvement. Accounting. Shadow pricing to quantify environmental consequences. Economic. Environmental costs allocated to relevant processes. 35.

(36) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT. 6. Social responsibility. 6.1. Social responsibility involves “taking more than just the immediate interests of the shareholders into account when making a business decision.”. Lecture example 5. Discussion. Required Discuss whether or not social responsibility conflicts with shareholder interests.. Solution. Implications for the accountant 6.2. When facing a real-life ethical issue, the philosophies above offer no simple solution. For the purposes of E2, the following facts should be borne in mind: . What seems ethical to you may seem unethical to someone else, especially if they have a different social, commercial or cultural background.. . Different stakeholders are likely to expect different behaviour from the firm.. . Moral and ethical debates inform government policy, often through pressure groups.. 36.

(37) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT. Summary Contemporary perspectives. Mergers and acquisitions. Transaction cost theory. Complex organisational forms. Hierarchy solutions. Strategic alliances. Market solutions. Franchising Joint ventures Consortia Licensing. Asset specificity Site Physical asset Human asset Dedicated asset Brand name capital Temporal. 37. Ecological perspective of strategy Production Auditing Ecological approach Quality Accounting Economic.

(38) 1b: CONTEMPORARY PERSPECTIVES IN STRATEGY DEVELOPMENT. END OF CHAPTER 38.

(39) Achievement Ladder Step 1. You have now covered the Topic that will be assessed in Step 1 of your Achievement Ladder. It is vital in terms of your progress towards ‘exam readiness’ that you attempt this Step in the near future. You will receive feedback on your performance, and you can use the wide range of online resources and ongoing BPP support to help address any improvement areas. This will help you to tailor your learning exactly to your own individual requirements.. Topic name Introduction to strategy and contemporary perspectives. Subtopic/Chapter name. Course notes chapter. Introduction to strategy. 1a. Contemporary perspectives in strategy development. 1b. 39.

(40) Achievement ladder. 40.

(41) General Environment. Introduction Syllabus Area A Lead learning outcome Syllabus component.  Introduction strategic management and assessing the global environment  30%  Analyse the relationship between aspects of the global business environment  Distinguish between different aspects of the global business environment, including the competitive environment. Context This syllabus component builds on the rational planning model and looks at various techniques to assess the external environment. You will need to be able to differentiate between the different models and apply them to specific scenarios. This chapter addresses the following indicative syllabus content: The macro and micro environments LoNGPEST analysis and its derivatives Country and political risk factors Emerging markets Porter’s Diamond and its use for assessing the competitive advantage of nations Porter’s Five Forces model and its use for analysing the external environment. Section 1 2 3 6 5 4. Other chapters in Syllabus Area A Chapter 1a Introduction to strategy. Chapter 1b Contemporary perspectives in strategy development. Chapter 2 General Environment. Chapter 3 Competitive Environment 41.

(42) 2: GENERAL ENVIRONMENT. Overview Environmental analysis. Analysing the macro-environment. LoNGPEST. Analysing the microenvironment. Corporate political activity. Porter's Five Forces. Industry life cycle analysis. Emerging nations. Comparative advantage. Porter's Diamond. 42.

(43) 2: GENERAL ENVIRONMENT. 1. Environmental analysis. 1.1. The environment can be seen as any factor outside management’s control which can impact on the organisation’s operations. It can be analysed at macro (wider business environment) and micro (industry) levels.. 2. Analysing the macro-environment. LoNGPEST analysis 2.1. The macro-environment covers developments in the wider business environment and examines four key factors, across three levels: Political Economic Social Technological. government policy, legislation, stability of ruling party tax rates, inflation, interest rates, exchange rates, unemployment cultural or demographic factors; attitudes, values & beliefs impact of IT on work processes. These are examined across three levels, which is useful for management when attempting to understand the key external influences on the organisation. Once those influences considered most important are known the decision on how to respond can be made: Local National Global. the community that they operate within the country that they operate within the international environment that they operate within. Additionally, the PEST analysis is often extended to include two extra factors, referred to as a PESTEL analysis: Ecological Legal. energy consumption, waste disposal employment law, product safety, monopolies legislation. Lecture example 1. Exam Standard. ABC Ltd’s management accountant is carrying out a PESTEL analysis. During her research she discovers a significant growth across the country in the number of female-led small businesses, which she deems to be an important strategic issue for the company. In which section of her analysis should she record this matter? A. Local Political. B. National Social. C. Global Technological. D. Local Economic. Solution. 43.

(44) 2: GENERAL ENVIRONMENT. 3. Economic systems. 3.1. Economic nationalism – Protectionism One country (or group of countries) attempts to restrict trade with another, to protect their producers from competition.. 3.2. Economic liberalisation – Free Trade The movement of goods, services, labour and capital without tariffs, quotas, subsidies, taxation or other barriers likely to distort the exchange. (CIMA). Lecture example 2. Idea generation. Required Explain the advantages and disadvantages of a country adopting a Free Trade policy.. Solution. Corporate political activity 3.3. If political factors are identified through the PEST analysis, organisations can get involved in the political process in two ways: Buffering Lobbying government before legislation is ratified in order to explain its potential impact. Bridging Monitoring political developments so as to ensure compliance with upcoming legislation. 44.

(45) 2: GENERAL ENVIRONMENT. 4. Analysing the industry / micro-environment. Porter’s Five Forces 4.1. Unlike PEST, which analyses the general environmental influences on an organisation, Porter’s Five Forces focus on the competitive environment in which an organisation operates. Threat of new entrants. Bargaining power of suppliers. Rivalry among existing firms. Bargaining power of buyers. Substitute products/services. 4.2. Threat of new entrants The arrival of a new entrant can lead to reduced economies of scale and / or a price war. However, even the threat of a new entrant can result in costs to existing firms as they try to prevent the new entrant from becoming established. Barriers to entry include:      . 4.3. Economies of scale enjoyed by existing firms. Differentiated (normally branded) products. Capital investment required. Switching costs. Access to distribution channels. Government policy / legislation.. Pressure from substitute products or service A substitute product is one that meets a similar need but is manufactured in a different way.. 4.4. Bargaining power of buyers / suppliers Buying power will be greater if:    . There are a small number of customers buying high volumes. The products are undifferentiated. Buyers are aware of alternative prices. Low switching costs.. 45.

(46) 2: GENERAL ENVIRONMENT 4.5. Competitive rivalry Michael Porter identifies six factors that create high competitive rivalry: 1. 2. 3. 4. 5. 6.. Numerous rivals. Low industry growth rate. High fixed costs. Low differentiation / switching costs. High strategic stakes. High exit barriers.. Lecture example 3. Exam Standard. Which of the following would encourage new entrants into a market, with regard to Porter’s Five Forces? A. High competition. B. A monopoly supplier of a vital component. C. One large customer. D. Low competition. Solution. 5. Comparative advantage & Porter’s Diamond. 5.1. In a Free Trade global economy, each nation would theoretically produce the products and services most suited to its own circumstances.. 46.

(47) 2: GENERAL ENVIRONMENT 5.2. Michael Porter’s Diamond identifies 4 factors to be considered when determining a nation’s comparative advantage. These factors can lead to clusters of successful businesses. Firm strategy, structure and rivalry Factor conditions. Demand conditions. Related and supporting industries 5.3. Factor Conditions What sources of comparative advantage does the country have? They can be basic (e.g. raw materials, unskilled labour) or advanced (e.g. IT infrastructure, trained labour).. 5.4. Related and supporting industries What support is available to enable a new industry to emerge in this country?. 5.5. Firm strategy, structure and rivalry Does the country’s culture and management style help or hinder the industry?. 5.6. Demand conditions To what extent does consumer demand in the home country encourage a global approach?. Limitations of the Diamond 5.7. There are a number of difficulties in applying Porter’s Diamond: 1. 2. 3. 4.. The choice of country does not, in itself guarantee success. Globalisation makes it difficult to identify a single country of origin. When exporting, it ignores the traits of the target country. Services are more impacted by their local environment.. 47.

(48) 2: GENERAL ENVIRONMENT. Lecture example 4. Exam Standard. Which of the following is an example of “firm strategy, structure and rivalry” under the Porter’s Diamond model? A. The demand in the home market. B. The quality of domestic competitors. C. The presence of competitive supplier industries. D. The demand in the global market. Solution. 6. Newly industrialising and emerging nations. 6.1. Developing nations seek to attract overseas investment from multi-national enterprises (MNEs). This is known as foreign direct investment (FDI) and can take two forms: (a). acquisition purchasing an existing company based in a developing nation.. (b). greenfield investment setting up new facilities in a developing nation.. 6.2. The BRIC countries (Brazil, Russia, India, China) are developing nations growing at a rapid rate. This growth has led to the BRIC countries undertaking foreign direct investment themselves. For example, in February 2010, China had over $750bn invested in US Treasury Bonds.. 6.3. Successful emerging nations have adopted some of the following methods: Export of national commodities Selling oil, metals or land to foreign countries to generate income that can be invested in the domestic infrastructure. Import-substitution The government uses import taxes or tariffs to protect developing industries and remove the country’s dependence on foreign imports. Export led industrialisation The government devalues the local currency to make exports cheaper and imports more expensive. The government may also subsidise the cost base of industries. 48.

(49) 2: GENERAL ENVIRONMENT. Summary Environmental analysis. Analysing the macro-environment. LoNGPEST Political Economic Social Technical Local National Global Ecological Legal. Analysing the microenvironment. Corporate political activity Buffering Bridging. Porter's Five Forces. Industry life cycle analysis. Existing rivalry. Introduction. Threat of new entrants. Growth. Threat of substitute products. Maturity Decline. Bargaining power of buyers Bargaining power of suppliers. Emerging nations. Comparative advantage. Acquisition Greenfield Porter's Diamond Factor conditions Demand conditions Related and supporting industries Firm strategy, structure and rivalry. 49.

(50) 2: GENERAL ENVIRONMENT. END OF CHAPTER 50.

(51) Competitive environment. Introduction Syllabus Area A.  Introduction to strategic management and assessing the global environment  30%. Lead learning outcome.  Analyse the relationship between different aspects of the global business environment  Explain the approaches to achieving sustainable competitive advantage. Syllabus component  Discuss the approaches to competitor analysis including the collection and interpretation of trend data. Context This syllabus component requires you to understand the competitive environment that modern businesses operate in, and how an organisation can create and retain competitive advantage. This chapter addresses the following indicative syllabus content: The concept of competitive advantage; Generic competitive strategies Value, rarity, inimitability, non-substitutability as bases of competitive advantage Achieving sustainable competitive advantage Key concepts in competitor analysis The role of competitor analysis Approaches to collecting competitor information; Sources, types and quality of competitor data Analysing and interpreting competitor data The application of Big Data to competitor analysis. Section 6 6 6 2 1 3 4 5. Other chapters in Syllabus Area A Chapter 1a Introduction to strategy. Chapter 1b Contemporary perspectives in strategy development. Chapter 2 General Environment. Chapter 3 Competitive Environment 51.

(52) 3: COMPETITIVE ENVIRONMENT. Overview Competitor analysis. Levels of competitor. Gathering competitor intelligence. Use of big data. Responding to competitors. Benchmarking. Competitive advantage. 52.

(53) 3: COMPETITIVE ENVIRONMENT. 1. Competitor analysis Wilson & Gilligan (1997) identify three roles of competitor analysis:   . Help managers understand their own competitive advantages / disadvantages. Generates insights into competitors’ past, present and future strategies. Informs future strategies to out-perform competitors.. 2. Levels of competitor. 2.1. Kotler (2008) identifies four levels of competitor: (a) (b) (c) (d). 2.2. Brand – similar size, structure, and products Industry – same products, but different size or structure Form – satisfy the same needs but in a different way Generic – different products competing for the same disposable income. The extent to which these competitors pose a threat to an organisation depend on: (a). The number of rivals.. (b). The extent of differentiation.. (c). Entry and mobility barriers.. (d). Cost structure.. (e). Degree of vertical integration.. Lecture example 1. Exam Standard. ABC Ltd has only been in existence for two years, while one of their competitors, XYZ Ltd, was founded over fifty years ago and is three times the size. What type of competitors are they? A. Brand. B. Industry. C. Form. D. Generic. Solution. 53.

(54) 3: COMPETITIVE ENVIRONMENT 2.3. Kotler (2008) identifies four reactions to competitor action:    . Laid back competitor Selective competitor Tiger competitor Stochastic competitor. 3. Gathering competitor intelligence. 3.1. Gathering competitor intelligence is more than a fact-finding mission. Grant (2002) advises that, to properly understand a competitor, you need to identify their:    . 3.2. Current strategy Objectives Assumptions about the industry Resources and capabilities. Two approaches can be taken to sourcing information to inform strategic decision-making: environmental scanning and detailed environmental analysis.. Environmental scanning 3.3. Environmental scanning is a low-intensity method of gathering information. It can be done by line managers, the strategic management team or a specialist unit. Wilson & Gilligan (1997) emphasise the importance, not just of generating this information but also of sharing it effectively.. Detailed environmental analysis 3.4. Detailed environmental analysis takes place to address a specific issue. This requires a more in-depth understanding of competitors (see Chapter 17).. Categories of information sources 3.5. Tudor (1992) identifies three categories of information source:   . Primary (original information) Secondary (commentary on primary sources) Computer-based information services (online databases, web sites). Qualitative and Quantitative information 3.6. Quantitative research is based on facts and numbers, and is objective. The following methods are examples of quantitative research:   . Time series analysis Regression analysis Econometrics. 54.

(55) 3: COMPETITIVE ENVIRONMENT 3.7. Qualitative research involves collecting and analysing non-numerical data, and is useful for understanding behaviours and attitudes. This can be done through:    . Observation Interviews Focus groups Surveys. Strategic Intelligence 3.8. Strategic intelligence is defined as “what a company needs to know about its business environment to enable it to anticipate change and design appropriate strategies that will create business value for customers and be profitable in new markets and new industries in the future” (Marchand).. 3.9. Key dimensions of strategic intelligence:. Information culture. What is the role of information to the organisation? Specific decisions or general line of enquiry Vertical or horizontal? Who does it? Experts, or everyone? Senior management or whole organisation? Short- or long-term view? What kind of management information system is there? Do we learn from past successes and failures?. Future orientation Structure of information flows Processing strategic intelligence Scope Time horizon Role of IT Organisational “memory”. Lecture example 2. Discussion. Required Identify the sources of information about a competitor that would be useful to an organisation.. Solution. 55.

(56) 3: COMPETITIVE ENVIRONMENT. 4. Benchmarking. 4.1. Benchmarking can be performed as part of SWOT analysis to determine the extent of strengths or weaknesses. Performance should improve if best practices can be identified and adopted. Benchmarking can also be used a control technique when measuring performance.. 4.2. Benchmarking is “The establishment, through data gathering, of targets and comparators, through whose use relative levels of performance (and particularly areas of underperformance) can be identified.”. 4.3. The main types of benchmarking include:. 4.4. . Internal benchmarking. A means of comparing one operating unit or function with another in the same business.. . Functional benchmarking. Internal functions are compared with those of the best external practitioners of those functions, regardless of the industry they are in (also known as operational benchmarking or generic benchmarking).. . Competitive benchmarking. Information is gathered about direct competitors. Financial information is easier to obtain but information on products can be gained, through reverse engineering (the process of dismantling a competitor’s product in order to understand its content and configuration).. Competitive benchmarking is sometimes also referred to as competitor accounting, the analysis of competitors’ costs in order to determine their likely strategies and impact on the firm.. Lecture example 3. Discussion. When Sony launched the PlayStation 3 in 2006, competitors couldn’t understand how it could provide such an advanced piece of technology (including a Blu-Ray player) at such a low price. Required (a) (b). How could one of Sony’s competitors work out the cost of manufacturing a PS3? Why would Sony choose sell each PS3 at a significant loss?. Solution. 56.

(57) 3: COMPETITIVE ENVIRONMENT. 5. Big Data in Competitor Analysis. 5.1. Big data is a term used to describe the extraction of meaning from vast quantities of uncorrelated data. Organisations are particularly interested in identifying trends and correlations in the data that they collect and store with the aim of putting this to commercial use. Big data was defined by Doug Laney by using the 3 V’s: Volume. The volume of data generated is a key feature of ‘big data’. The quantity of data now being produced is being driven by social media and transactional-based data sets recorded by large organisations, for example data captured from instore loyalty cards and till receipts. Data is also now being derived from the increasing use of ‘sensors’ in business.. Velocity. Velocity refers to the speed at which ‘real time’ data is being streamed into the organisation. To make data meaningful it needs to be processed in a reasonable time frame.. Variety. Modern data takes many different forms. Structured data may take the form of numerical data whereas un-structured data may be in the format of email or video. This presents a challenge for organisations as processing varied forms of data requires significant investment in people and IT infrastructure.. Big data can be used in competitor analysis to identify and analyse competitor’s strategies, as well as trends in customer behaviour. Benefits to using big data in this way are as follows: Examine vast quantities of data relatively quickly. Big data analytics allows for large quantities of data to be examined to identify trends and correlations e.g. shopper buying habits. Improves organisational decision making. Better data analysis help management to take advantage of current social trends by introducing new products to meet customers needs. Greater focus on the individual customer. Organisations can target special offers or discounts directly to individual customers to encourage repeat business. Cost reduction. Improved data about customers and internal operations may help to reduce costs.. 57.

(58) 3: COMPETITIVE ENVIRONMENT. Lecture example 4. Exam Standard. Which of the following is not an advantage of using big data? A. Making faster, better decisions. B. Creating brand-new revenue streams. C. Increased volume of data within the organisation. D. Generating insights to tackle important challenges. Solution. 6. Competitive advantage. 6.1. Competitive advantage is anything which gives one organisation an edge over its rivals. When a company can continue to earn excess profit despite the effects of competition, it possesses a sustainable competitive advantage. To transform a short-term competitive advantage into a sustained competitive advantage for the long-term, the following criteria must be met: (a) (b) (c) (d). 6.2. Value Rarity Inimitability Non-substitutability. A competitive strategy is ‘taking offensive or defensive actions to create a defendable position in an industry; to cope successfully with… competitive forces and thereby give a superior return on investment for the business' (Porter). Porter believes there are three generic strategies for competitive advantage. To be successful, Porter argues, a company must follow only one of the strategies. If they try to combine more than one they risk losing their competitive advantage and becoming 'stuck in the middle.' . Cost leadership means being the lowest cost producer in the industry as a whole.. . Differentiation is the exploitation of a product or service which the industry as a whole believes to be unique.. 58.

(59) 3: COMPETITIVE ENVIRONMENT . Focus involves a restriction of activities to only part of the market (a segment) through: –. Providing goods and/or services at lower cost to that segment (cost-focus). –. Providing a differentiated product or service to that segment (differentiationfocus). Cost leadership and differentiation are industry-wide strategies. Focus involves segmentation but involves pursuing, within the segment only, a strategy of cost leadership or differentiation.. Lecture example 5. Exam Standard. Which of the following best describes a strategy of differentiation, according to Porter's generic strategies model? A. When an organisation's products or services offer features that are not offered by competitors' offerings. B. When an organisation has a competence that distinguishes it from other organisation in its industry. C. When the products are perceived to offer greater satisfaction and for which customers are, consequently, prepared to pay premium price. D. When an organisation has a widely recognised brand name. Solution. 59.

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