PSA - Business Strategy

The Institute of Chartered Accountants of Bangladesh

BUSINESS STRATEGY

Professional Stage Application level

www.icab.org.bd

Study Manual

These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales ISBN: 978-1-84152-839-7

First edition 2009

All rights reserved. No part of this publication may be reproduced in any form or by any means or stored in any retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior permission of the publisher.



Introduction

vii



Business strategy

viii



The learning materials

ix



Study guide

x



Study cycle

xi



Detailed study guide

xii



Getting help

xv



Syllabus and learning outcomes

xv



Skills assessment guide

xvii

1.

Strategy and business

1

2.

The purpose of a business

37

3.

The macro environment

75

4.

The industry and market environment

113

5.

Strategic capability

151

6.

Strategic options

203

7.

Strategies for products and markets

259

8.

Strategy and structure

327

9.

Risk management

389

10.

Methods of development

443

11.

Evaluation of strategies and performance measurement

483

12.

Business planning and functional strategies

523

13.

Strategies for information

589

1 Introduction

1.1 What is Business Strategy and how does it fit within the

Professional Stage?

Structure

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

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

The knowledge base

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

Progression to application level

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

Progression to advanced stage

The advanced level paper Business Analysis takes things further again. The aim is to ensure that students can expand on the purely strategic considerations and provide also technical advice in respect of financial, reporting and taxation issues arising in business transformations, e.g. from mergers and acquisitions. The above illustrates how the knowledge and application of business strategy principles gives a platform from which an advanced application of business skills and expertise can be developed.

1.2 Services provided by professional accountants

Professional accountants should be able to:

 Identify and analyse the consequences of a business’s current objectives, market position, and direction  Evaluate the likely consequences of strategic choices and recommend strategies to meet the objectives

of the business

 Develop a business plan to achieve the business’s strategic objectives, recommend an appropriate organisational structure and explain the process of effective change management.

2 Business strategy

2.1 Module aim

To provide students with an understanding of how businesses develop and implement strategy.

2.2 Specification grid

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

Strategic analysis 35

Strategic choice 35

Implementation of strategy 30

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

3 The learning materials

You will find the learning materials are structured as follows:  Title page

 Contents page

 Introduction. This includes

– A review of the subject to set the context

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

 The specification grid for Business Strategy  A brief note about the learning materials  Study Guide. This includes

– Hints and tips on how to approach studying for your CA exams – Guidance on how to approach studying with this study manual

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

 Information on how to obtain help with your studies  The detailed syllabus and learning outcomes

Each chapter has the following components where relevant:  Introduction

– Learning objectives – Practical significance – Stop and think – Working context – Syllabus links  Examination context  Chapter topics  Summary and Self-test  Answers to Self-test

4 Study guide

4.1 Help yourself study for your CA exams

Exams for professional bodies such as the ICAB are very different from those you have taken at college or university. You will be under greater time pressure before the exam – as you may be combining your study with work. Here are some hints and tips.

The right approach

1 Develop the right attitude

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

Remember why you're doing it You are studying for a good reason: to advance your career. 2 Focus on the exam

Read through the Syllabus and Study Guide

These tell you what you are expected to know and are supplemented by Examination context sections in the text.

3 The right method

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

 The Introduction of each chapter puts the material in context.

 The Learning objectives, Section overviews and

Examination context sections show you what you

need to grasp.

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

words.

 Take notes.

 Answer the questions in each chapter.  Draw mindmaps.

 Try 'teaching' a subject to a colleague or friend.

Give yourself cues to jog your memory

The Study Manual uses bold to highlight key points.  Try colour coding with a highlighter pen.  Write key points on cards.

4 The right recap

Review, review, review Regularly reviewing a topic in summary form can fix it in your

memory. The Study Manual helps you review in many ways.

 Each Chapter summary will help you to recall that study session.

 The Self-test actively tests your grasp of the essentials.  Go through the Examples in each chapter a second or

4.2 Study cycle

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

Key study steps Activity

Step 1

Topic list

This topic list is shown in the contents for each chapter and helps you navigate each part of the book; each numbered topic is a numbered section in the chapter. Step 2

Introduction

This sets your objectives for study by giving you the big picture in terms of the context of the chapter. The content is referenced by the Study guide, and Examination context guidance shows what the examiners are looking for. The Introduction tells you why the topics covered in the chapter need to be studied. Step 3

Section overviews

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

Step 4

Explanations

Proceed methodically through each chapter, particularly focusing on areas highlighted as significant in the chapter introduction or Study guide. Step 5

Note taking

Take brief notes, if you wish. Don't copy out too much. Remember that being able to record something yourself is a sign of being able to understand it. Your notes can be in whatever format you find most helpful; lists, diagrams, mindmaps. Step 6

Examples

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

Step 7

Answers

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

Step 8

Chapter summary

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

Step 9

Self-test

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

Step 10

Learning objectives

Ensure you have ticked off the Learning objectives.

Moving on...

When you are ready to start revising, you should still refer back to this Study Manual.  As a source of reference.

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

4.3 Detailed study guide

Use this schedule and your exam timetable to plan the dates on which you will complete each study period below:

Study Period

Approach Essential Points Due

Date

1 Read through Chapter 1 of the Study Manual to understand the different approaches management may take to the development of business strategy. These, and ethical issues, will be reinforced in later chapters.

Work through the Self-test questions carefully to ensure that you have grasped the main points in the chapter.

The distinctions between:  Rational and emergent approaches to strategy formulation; and between  Positioning and resource-based

approaches to gaining competitive advantage. 2 Chapter 2 considers the goals of

businesses. Ensure you understand why simplistic notions of profit maximisation are inadequate explanations of the economic goals of commercial organisations. Note the power of stakeholders.

Question practice is vital for to reinforce chapter, so attempt the Interactive questions as you go along and the Self-test at the end.

Role and nature of mission Distinction between profit and shareholder wealth as objectives for a firm

Stakeholder mapping

3 Chapter 3 introduces the wider business environment. There is no need to memorise all the examples but rather try to appreciate the range of issues contained in the frameworks of PESTEL, Porter’s Diamond and so on. Pay attention to factors encouraging and limiting

globalisation of business as the risks from these are returned to in several later chapters.

Work through the Interactive questions and the Self-test questions to practise applying your knowledge.

PESTEL analysis Ohmae’s 5 Cs Porter’s Diamond

4 Chapter 4 is a short chapter with three key models in it. Ensure you memorise the elements of the models and also their significance for the financial outlook of an industry or business.

Attempting the Interactive and Self-test questions is of particular importance to ensuring you understand how to use these models in the exam.

Industry life cycle Porter’s 5 forces

International product life cycle

5 Chapter 5 returns to the discussion, started in Chapter 1, of the sources of competitive advantage. The key models must be memorised and their application practiced by working through the

Kay’s core competences Strategic architectures Value chain analysis

Study Period

Approach Essential Points Due

Date

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

Network organisations BCG matrix

6 Chapter 6 is possibly the pivotal chapter in the text because the generation of options forms a watershed between analysis of the present situation of the business and the development of strategies to improve it. There are only three major models to learn but all are very important indeed to your exam.

It is essential that you attempt the Self-test questions to understand how these models may be used in exam.

Conducting as SWOT analysis Porter's 3 generic strategies (modified by Bowman’s Clock) Ansoff matrix

7 Chapter 7 provides comprehensive coverage of marketing strategy. Marketing is one element of strategy implementation. The examples and illustrations are there to help you understand the principles. Don’t memorise them.

Application of knowledge to the Interactive examples and Self-test questions is

essential.

The elements of the marketing mix

The purpose and bases of segmentation

Marketing research Pricing approaches

8 Chapter 8 deals with the traditionally dry subject of strategy and structure. Reading the worked example in paragraph 1.2 may help put it in context. Note in particular the types of divisionalisation and the methods and problems of managing and controlling divisionalised organisations. The topics in the section on corporate

governance will be familiar but make close notes on corporate governance in not for profit organisations.

Work through the Self-test questions carefully to ensure that you have grasped the main points in the chapter.

Bases of divisionalisation Network organisations Corporate governance

9 Chapter 9 covers risk. You will have covered aspects of this in your earlier studies of auditing and of finance, but this chapter goes further and will need close attention. Risk has rapidly become a major concern of strategic management. Note the types of risk from IT/IS and global

operations but pay most attention to the policies management can adopt to treat risk.

It is essential that you attempt the Self-test

Risk management strategies Sources of risk

Study Period

Approach Essential Points Due

Date

10 Read through Chapter 10 carefully working through all the examples and interactive questions. This chapter covers an area of important overlap with your studies in finance, and it is therefore of importance for your exam.

Implementing a strategy by organic or external growth will figure in many exam questions. Prepare by trying the Self-test questions at the end of the chapter.

Benefits and drawbacks of different growth methods Methods of international expansion

Methods of merger and acquisition

11 Chapter 11 combines two topics. Evaluation of strategic options, though covered briefly, is an essential topic that will figure in exam questions. Learn the criteria.

Control and performance measurement enable you to use some of your finance studies in a different context. Focus on what is being controlled as you read these sections rather than on the numbers themselves.

Application of knowledge to the Interactive examples and Self-test questions is

essential.

The suitability, acceptability, feasibility criteria

CSFs in control

The perspectives of the balanced scorecard

12 Several of the topics in Chapter 12 deal with the detailed planned implementation of aspects of business strategy. Note the stages of the plans and also relate back to earlier chapters in this text. Read the sections on HR, R&D, Operations, and quality closely as these are new technical areas for you.

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

Elements of a business plan Human resources planning Operations planning and management

Purchasing and procurement Role of the finance department

13 Information strategy is a new area for you and will need close attention. Note the purposes and qualities of good information and learn the basic characteristics of the systems you read about.

Completing the Self-test questions will help reinforce your understanding of this complex area.

Types of system

Knowledge management Risks from IT/IS systems

14 Strategy changes organisations and this needs management. Chapter 14 covers some of the issues and techniques. You may find this an abstract area so read the illustrations to see how it works in practice. Memorise the approaches to change and use them as a framework for

Types of change Frameworks for change Stages in project management

Study Period

Approach Essential Points Due

Date

answers.

Memorise the stages in project management.

Application of knowledge to the Interactive examples and Self-test questions is

essential.

Revision phase

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

5 Getting help

Firstly, if you are receiving structured tuition, make sure you know how and when you can contact your tutors for extra help.

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

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

Call +88 (02) 9112672, or +88 (02)9115340 or [email protected] non-technical queries. Watch the ICAB website for future support initiatives.

6 Syllabus and learning outcomes

Covered in chapter

1

Strategic analysis

Candidates will be able to analyse and identify the consequences of a business’s current objectives, market position and direction.

In the assessment, candidates may be required to:

(a) Evaluate a business’s purpose, in terms of its stated mission, objectives and critical success factors, highlighting omissions, inconsistencies and weaknesses in its strategic management

systems 1,2

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

 Sustainable development issues  Global macroeconomic forces

 International trade and financial systems  Government policies

 Industry developments  Cultural environment  Stakeholder impact  Current markets

(c) Analyse a business’s current markets and competitive strategy in sufficient detail for decisions to be made, drawing conclusions consistent with the data and results and

highlighting relevant issues in terms of their likely impact on the strategy of the business 6 (d) Identify the effect of the internal factors in a given situation which affect or may affect a

business’s ability to achieve its chosen strategy, including its:  Financial resources

 Current product/service portfolio

 Organisational and operational capabilities (including existing business processes,

human resource capabilities and information systems capabilities) 5 (e) Analyse for a given situation, the resources required to produce a product or service and

identify their availability, associated costs and significant limiting factors 11 (f) Analyse the governance and management structures of businesses and identify weaknesses 8 (g) Identify the steps needed for a given business to enable it to meet the appropriate

regulations, codes of conduct and disclosure requirements in respect of its governance 8 (h) Identify the risk attached to a business’s present position, considering all relevant factors

(including attitudes to risk) and stating all assumptions made. 9

2

Strategic choice

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

In the assessment, candidates may be required to:

(a) Advise on the non-complex aspects of strategy formulation as part of the strategic

management process for businesses 1

(b) Identify and describe in a given scenario the alternative strategies available to a business 6,10 (c) Show, in a given scenario, how a business chooses from competing strategies in order to

maximise the achievement of its key objectives 11 (d) Explain, in a given scenario, how products and services must evolve in the face of changing

consumer demand 7

(e) Analyse financial and other data in order to provide information for pricing decisions 7 (f) Explain, using information provided, how to position particular products and services in the

market place to maximise competitive advantage 7 (g) Identify the risk attached to proposed courses of action in a given situation, considering all

relevant factors (including attitudes to risk) and stating all assumptions made 9 (h) Choose, for a given scenario, a strategy or combination of strategies which will achieve the

business’s objectives and takes account of known constraints, including stakeholder risk

preferences and ethical stance 11

(i) Identify the implications for stakeholders, including shareholder value, of choice between

strategies 2,11

(j) Assess a business’s current position from a financial perspective. 11

3

Implementation of strategy

Candidates will be able to develop a business plan to achieve an business’s strategic objectives, recommend an appropriate organisational structure and explain the process of effective change management.

(a) Describe, in a given scenario, the relationship between a business’s overall strategy and its

functional strategies 12

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

objectives 12

(c) Critically assess an entity’s business plan 12 (d) Describe, in a given scenario, the advantages and disadvantages of alternative business

structures 8

(e) Evaluate the different types of organisational structure and recommend an appropriate

structure for a given strategy 8

(f) Identify methods of further developing a specific business which take account of positional analysis and risk and would be most likely to achieve the business’s strategic objectives, and

justify the methods selected 10

(g) Explain and demonstrate how a business collects and distributes information in order to

manage its strategy 3,13

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

appropriate examples 14

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

advantage 13

(j) Identify key changes needed in an information system in order to meet changes in the needs

and resources of a business 13

(k) Describe the key stages in a change management project 14 (l) Identify in a given situation the key issues which should be addressed by the management of

a business during the planning and implementation of a change project, including project

management. 14

7 Skills assessment guide

7.1 Introduction

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

 Assimilating and using information  Structuring problems and solutions  Applying judgement

 Drawing conclusions and making recommendations

7.2 Assessing your professional skills

Set out below is a pictorial representation of the different mix of knowledge and skills that will be assessed in the examinations that comprise the CA qualification.

Skills

Case Study

Initial Professional

Development

F&CR

AA&A

ETHICS

BA

TAX

ITA

FA

CL&P

A&A

FM

BS

PS - K

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

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

7.3 Assessment grids

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

 The specific skills that are assessed  How these skills are assessed

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

T

e

c

h

n

ic

a

l

K

n

o

w

le

d

g

e

Learning outcomes Assessed skills How skills are assessed

Assimilating and using information

2d Explain how products and services must evolve 2f Explain how to position

products and services to maximise competitive advantage

3a Describe the relationship between overall strategy and functional strategies 3d Describe advantages and

disadvantages of alternative business structures 3h Explain the levels of change

in a business

3k Describe the key stages in a change management project

 Reading and understanding subject matter

 Accessing, evaluating and

managing information provided in a few defined sources

 Operating to a brief in structured situations

 Explaining the nature of ethics and its significance in the business environment

 Understanding the public interest and social responsibility

 Understanding of the pressures on professional ethical behaviour, including the interaction between professional ethics and the law and other value systems

The majority of written test questions will require candidates to absorb and understand both structured and unstructured material. Candidates will be required to:  Understand key information

from the scenario provided.  Understand the context of

the scenario in terms of type of business, industry and wider context.  Understand the ethical

environment in which an organisation operates.  Select appropriate tools for

Learning outcomes Assessed skills How skills are assessed

Structuring problems and solutions

1b Analyse the external factors which may impact on performance and identify significant issues 1c Analyse a business’s

current markets and competitive strategy 1d Identify the effect of

internal factors affecting a business’s ability to achieve a chosen strategy

1e Analyse and identify the availability of resources required

1f Analyse and identify weaknesses in governance and management

structures

1g Identify how to meet appropriate regulations etc in respect of governance 1h Identify the risk attached to

a business’s present position

2b Identify and describe alternative strategies 2c Show how a business

chooses from competing strategies

2e Analyse financial data to provide information for pricing decisions

2g Identify the risk attached to proposed courses of action 2i Identify the implications of

choice between strategies 3g Explain and demonstrate

how a business collects and distributes information to manage its strategy 3i Explain and demonstrate

how an information system can be used to create competitive advantage 3j Identify key changes

needed in an information system to meet changes

 Understanding data and

information given: identifying and understanding issues arising in straight-forward scenarios  Using the data and information

given: understanding requirements, analysing data and information to support requirement

 Drawing upon technical and professional knowledge learnt to analyse issues

 Understanding the workings of, and controls within, an

organisational framework

 Applying knowledge from different technical areas

 Using new concepts  Appreciating the ethical

dimensions of situations, problems and proposals

 Identifying and selecting appropriate courses of action using an ethical framework  Financial data analysis: performing

the required calculations; explaining or stating the issues

Questions will be scenario-based (on occasions scenario-based on actual situations in the real world). These will require candidates to apply technical knowledge to practical situations and analyse information (including quantitative analysis) to support sound decision making.

Candidates will be required to:

 Identify and use

information to define key business issues.

 Demonstrate understanding of the business, its strategy, industry and wider context.

 Demonstrate the impact of ethics on the objectives and methods of an organisation.  Identify the ethical

implications of strategic proposals.

 Demonstrate relevant technical knowledge.  Perform appropriate

analysis of numerical data and demonstrate an understanding of what is relevant.

 Use data analysis to develop and illustrate an answer.

Learning outcomes Assessed skills How skills are assessed

Applying judgement

1a Evaluate a business’s purpose

2j Assess a business’s current position from a financial perspective

3c Assess a business plan 3l Identify the key issues to be

addressed by management during the planning and implementation of a change project

 Applying discrimination: identifying the

relevant/reasonable in data and evidence; recognising varying quality in data or evidence  Relating parts and wholes:

discerning particular issues as part of wholes

 Sensitivity analysis: demonstrating an understanding of sensitivities to change: calculating a range of outputs for given inputs

 Demonstrating an understanding of different perspectives (e.g. social, political, economic): analysing and interpreting problems and situations from a given stance

 Change management

(appreciating the impacts/effects of change): considering and evaluating the effects of a given future scenario

 Applying a sceptical and critical approach in a given straight-forward situation

 Exercising ethical judgement  Developing arguments, having

first appreciated the perspective of all other parties

 Conducting critiques: critically reviewing a statement, argument or position

Questions will require candidates to use their understanding and interpretation of the

information, together with the results of any analysis, to provide a reasoned argument and as a means of developing conclusions and

recommendations.

Candidates will be required to:  Evaluate the impact of a

business proposal on an entity.

 Assess the reliability, accuracy and limitations of any analysis performed.  Be able to produce

arguments integrating numerical and linguistic arguments.

 Prioritise the issues facing an entity.

 Identify links and relationships between different issues affecting an entity and use these to establish priorities.  Evaluate options for an

organisation, taking into account its stakeholders, objectives, priorities, available resources and ethical obligations.  Provide reasons for the

Learning outcomes Assessed skills How skills are assessed

Drawing conclusions and making recommendations

2a Advise on strategy formulation 2h Choose a strategy to achieve

objectives

3b Draft a plan to achieve objectives

3e Evaluate different types of organisational structure and recommend an appropriate structure

3f Identify and justify methods of developing a specific business

 Using technical knowledge to support reasoning and conclusions

 Decision making: using relevant quantitative approaches in decision analysis

 Identifying the best explanation, solution or steps against defined criteria in a given straight-forward situation

 Formulating opinions, reservations, advice, recommendations, plans, solutions, options and risks including business

implications in a given straight-forward situation  Preparing, describing,

outlining the advice, report, notes required in a given straight-forward situation  Presenting a basic or routine

memorandum or briefing note in writing in a clear and concise style

 Combining cognitive and behavioural skills to communicate to specialists and non-specialists

The provision of advice to managers and others will be central to most questions. Candidates will be required to:  Draw realistic conclusions

from data and the information provided.  Prepare a report or

memorandum structured according to the

requirements of the scenario, with appropriate context.

 Provide reasoned advice based on an understanding of the business and the relevant scenario, including an assessment of possible alternatives.

 Recommend suitable courses of action in a given situation.  Identify risks and outline

reservations about the advice.

Contents

chapter 1

Strategy and business

Introduction Examination context

Topic List

1 Approaches to strategy

2 Strategic planning versus strategic management 3 The role of the leader in strategic management 4 Doing without overarching visions:

incrementalism

5 Deliberate and emergent strategies 6 Positioning versus resource-based views of

strategic advantage 7 Planning horizon 8 Strategy and ethics Summary and Self-test Answers to Self-test

Answers to Interactive questions

Introduction

Learning objectives

 Explain strategic management systems

 Evaluate omission, inconsistencies and weaknesses in strategic management systems  Evaluate potential ethical stances of an organisation

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

Practical significance

Strategies are the courses of action a firm follows through time. A business that survives is one that has followed a successful strategy. One that fails or that loses-out in a takeover did not have a successful strategy. Strategies affect earnings, jobs, ability to pay suppliers and whether and what terms customers get products and services. Only in retrospect can we say with any certainty whether it has worked or not. Management needs a way to ensure its strategies are good ones from the start. This chapter contrasts strategies that are planned in advance with strategies made up 'on the run'.

Strategy pervades most areas of management. It influences how the business is viewed by investors and significant business partners such as a supplier or the customer who has a major contract to award. But strategy theory is also subject to fashions and fads. In your career you will learn to speak the jargon of strategy and of the latest fad being pushed by consultants, academics and journalists. This chapter will show you that strategy matters. It will also show you that it is an art and not a science and that, even as art, management needs to be aware of just what it is buying into.

Stop and think

What businesses can you think of that have done well? Do you think it was plain luck or was it good management?

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

Working context

Trainee accountants are not routinely invited to advise major corporations on business strategy formulation. However you may still see the impact of strategy formulation in a number of ways.  Is your client getting involved in new lines of business and markets and have they considered the

benefits and risks. This could affect your assessment of their risk and ability to stay as a going concern.  Are adequate financial controls in place or are things getting out of control. A good strategic plan will

ensure controls and risks are dealt with, whereas more ad hoc strategies often lead to overtrading and poor financial control. You may be required to give an initial assessment of this in an audit.

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

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

Syllabus links

In the Business and Finance paper you will have covered the basic objectives and processes of strategic management. You will also have covered the polices that can be used to help ensure a business acts ethically.

This chapter revises these topics and provides a range of alternative perspectives on the role of

management in the strategic process. The following topics, revised and expanded here, were introduced in your Business and Finance paper:

 General objectives of strategic management, the strategic management processes  Nature and purpose of strategic plans, business plans and operational plans

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

 In addition the section on professional ethics draws upon material from section 4 of the Assurance paper syllabus

Examination context

Exam requirements

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

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

1 Approaches to strategy

Section overview

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

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

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

1.1 What is 'strategy'?

There are probably as many different definitions of 'strategy' (or 'corporate strategy') as there are textbooks on the subject.

Definitions

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

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

From these we can say that strategy is therefore concerned with:  The long-term direction (objectives) of the organisation  The environment in which it operates

 The resources at its disposal  The return it makes to stakeholders.

About your studies

This chapter reviews some of the leading theories of strategy formulation and provides the names of many authorities on strategy. The remaining chapters of this text also provide coverage of names and theories. The focus of your examination is a practical one. You will be required to interpret business scenarios and to provide professional advice to clients and management on what to do. You will not be required to write out pages of names and theories for the sake of it.

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

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

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

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

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

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

strategic management approach.

Types

Competitive

strategy Financialstrategy resource strategyInvestment and A P P R O A C H E S Corporate strategy L E V E L S Corporate Business Functional Traditional Emergent

1.2 Levels of strategy

Strategy can exist at several levels in an organisation as shown in the diagram below:

Corporate Business Functional

1.2.1

Corporate strategy

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

 Determining the overall corporate mission and objectives

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

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

 Overall financing decisions - obtaining sufficient funds at lowest cost to meet the needs of the business  Relations with external stakeholders, e.g. shareholders, bondholders, government, etc.

1.2.2

Business strategy

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

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

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

 How advantage over competitors can be achieved

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

1.2.3

Functional (operational) strategies

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

1.3 Mintzberg's 5Ps

Mintzberg (The Strategy Process) looked at how the word 'strategy' has been used by people who have written about the subject.

 Plan  Ploy  Pattern  Position  Perspective Strategy as plan

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

Strategy as ploy

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

Strategy as pattern

Strategy may become apparent by a stream of actions or as a pattern of

behaviour or a consistency in what the organisation does. This arises from the

culture of the management team.

Strategy as position

Strategy as 'position' involves how the firm fits with its environment. It includes:  'Matching' the internal resources and competences (strengths and weaknesses)

of the organisation with environmental conditions (opportunities and threats).  A market position in relation to other firms: e.g. offering a product/service to a

particular segment or satisfying customer needs in a particular way (e.g. high price and high quality vs low price and lower quality).

Strategy as perspective

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

2 Strategic planning versus strategic management

Section overview

 There is a contrast between strategic planning and strategic management as approaches to strategy formulation.

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

 This yields benefits for the business such as integration of business units and increased strategic thinking.

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

2.1 Contrast between planning and management approach

Strategic planning also called

 Top down approach  Rational approach  Formal approach  Traditional approach

 Strategy involves setting goals first and then designing strategies to reach them

 Some prediction of the future is possible  Outcomes of strategic choices can be

predicted and controlled

 Possible to separate the planning and selection of strategies from the implementation of strategies

Strategic management also called

 Emergent approach  Bottom up approach

 Builds management team with right strategic skills

 Managers of divisions granted significant autonomy

 Empowerment of mangers to develop and adapt strategies as circumstance change and opportunities and threats arise

2.2 A rational (prescriptive) approach to strategy formulation

ANALYSIS INTERNALANALYSIS

CORPORATE APPRAISAL MISSION AND OBJECTIVES GAP STRATEGIC CHOICE STRATEGY IMPLEMENTATION REVIEW AND CONTROL STRATEGIC ANALYSIS STRATEGIC CHOICE STRATEGY IMPLEMENTATION

The main stages in the rational approach are:

1. Conduct a corporate appraisal: This involves assessing the present business environment and

assessing how it may develop over the timescale of the plan horizon (typically five + years). It will also consider the internal position of the business, including such things as its present staffing, quality of products and financial condition.

2. Set mission and objectives: Management will assess whether the long-term interests of the

business are best met in its present industry and competing in its present way or whether the business needs to strike out in a new direction. This is called its mission. Objectives will be set for the coming years. The job of strategy is to attain them.

3. Gap analysis: Involves forecasting performance forward and comparing it with the strategic

objectives set by management. If forecast performance is below the objectives set then this exposes a gap which must be filled by new and better strategy.

4. Strategic choice: Management must generate new business options for the firm such as new

products or markets, and evaluate these to arrive at a set of potentially successful and affordable strategies to help the firm reach the objectives set.

5. Strategy implementation: Management carries out the strategy at corporate, business and

functional levels by the development of organisational structures, policies and programmes to carry it out.

2.3

Benefits claimed for strategic planning

Strategic planning can achieve several purposes:

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

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

 Enables derivation of milestones for achievement of goals and monitoring progress by stages  Mechanism to ensure harmony of objectives, both between different SBUs and over time (often

referred to as 'goal congruence')

 Improves stakeholder perceptions of the business, for example a clear strategy may improve the share price

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

2.4 Mintzberg's criticisms of strategic planning

Strategic planning has fallen from popularity and has been criticised. Mintzberg's critique below is amongst the most insightful.

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

Problem Comments

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

Routine and regular

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

Reduces initiative

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

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

Exaggerates power

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

Impractical The hierarchy of objectives, budgets, strategies and programmes does not reflect the reality of most organisations who prefer simple, more easy to apply

Secondly Mintzberg claims the concept is flawed in principle.

Criticism Comment

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

Detachment: divorcing planning from operations

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

Formulation precedes implementation

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

Predetermination Planning assumes that the environment can be forecast, and that its future

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

3 The role of the leader in strategic management

Section overview

 The rational planning approach sought to identify a process by which successful strategy can be formulated.

 Many businesses succeed through the actions of its CEO or entrepreneurial individuals within it.  To some writers like Ohmae strategy comes from managers with a strategic mode of thinking.  This brings us to a discussion of whether strategy may be more to do with the leadership of people

than the management of processes – a view advanced by Barlett and Ghoshal.

3.1 The entrepreneur in strategy

Many businesses have been successful through the actions of their founders or chief executives rather than through formal strategic planning.

Interactive question 1: Famous business leaders

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

create value.

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

3.2 Ohmae's strategic thinking as an intuitive process

Ohmae (The Mind of the Strategist – 1982) blames formal strategic planning processes for having withered strategic thinking.

Ohmae says strategy is essentially a creative process in which the strategist must pay attention to a

strategic triangle of 3 Cs.

1. Corporate-based strategies build competitive strength by focusing on the superior competences

which the corporations has in comparison to rivals. He cites Sony's skills in miniaturisation of electronic circuitry and Coca Cola's control over distribution channels as examples of this. 2. Customer-based strategies gain superior market position by segmenting markets closely and

ensuring products and service are closely tailored to requirements of each segment. The ability of Mercedes-Benz or BMW to cornering a particularly valuable segment of the car industry might be an example of this.

3. Competitor-based strategies. Close identification of the methods of rivals and exploitation of any

weaknesses in them, such as absolute cost differences or flexibility of supply. Ohmae cites the example of Toyota utilising its superior R&D and quality assurance systems to launch Lexus to exploit the executive limousine market at prices unattainable to Jaguar and Mercedes-Benz who relied on more traditionally engineered cars and car plants.

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

 Observe the problems: The manager must be actively engaged in the business and see the issues

first-hand (e.g. quality issues, bad customer experiences, loss of sales contracts etc.)

 Ask the right question: Focus on finding a solution to a problem rather than just a remedy to a symptom. E.g. a software developer faced with late-running and excessively complex and

resource-hungry final products could decide to put in extra resources to solve the symptom. In fact the problem may be that the R&D function is divorced from the Sales function and so not concerned with time to market or ultimate value-in-use of its developments.

Customers

 Group problems together: Use processes of abstraction (e.g. brainstorming sessions) to see what

problems have in common (the key factors) and hence to deal with these. For example, an office equipment supplier grouped the problems of excessive costs of development, limited product knowledge amongst service staff, poor sales performance and burgeoning inventories of parts and accessories. The underlying key factor was the width of the product range. Reducing the number of models available solved all the problems at one stroke.

Interactive question 2: Impact of strategic style on financial management

[Difficulty level: Intermediate] Assuming the existence of financial controls is at the heart of many accountants' jobs, what should be the implications of a firm moving from strategic planning to strategic management for:

(a) Budgetary control and performance management (b) Control over capital expenditure?

See Answer at the end of this chapter.

4 Doing without overarching visions: incrementalism

Section overview

 Strategic plans cannot be expected to work out as intended because management does not know what will happen in the future: bounded rationality.

 Therefore to some extent management must always be in a position to 'make it up as it goes along'.  Incrementalism describes how strategies emerge from the adjustments and bargaining of the

management process.

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

4.1 Bounded rationality

Strategies are made in conditions of partial ignorance. In practice, managers are limited by time, by the information they have and by their own skills, habits and reflexes.

It can be argued that managers do not optimise (i.e. get the best possible solution). Instead the manager

satisfices. In other words, the manager carries on searching until he or she finds an option which appears

tolerably satisfactory, and adopts it, even though it may be less than perfect. This approach is known as

bounded rationality.

4.2 Incrementalism

Incrementalism refers to 'strategy in small steps' rather than radical shifts following the prolonged and

comprehensive search suggested by the rational planning approach.

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

 The need to gain wide consent for changes means more radical options are rejected, or simply not suggested

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

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

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

4.3 Logical incrementalism

Identified by Quinn, logical incrementalism is a half-way house between the planning approach and the incrementalist approach.

It describes both the analytical and behavioural aspects.

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

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

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

 Because precise objectives discourage experimentation by business units, these objectives are reformulated.

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

5 Deliberate and emergent strategies (Mintzberg)

Section overview

 Mintzberg provides a framework that describes how strategic plans and incrementalism combine in practice to form strategies.

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

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

5.1 Deliberate and emergent strategies

Definitions

Intended strategies(which, if implemented, are referred to as deliberate strategies) are conscious plans imposed by management.

EXTERNAL

ANALYSIS INTERNALANALYSIS

CORPORATE APPRAISAL MISSION AND OBJECTIVES GAP STRATEGIC CHOICE STRATEGY IMPLEMENTATION REVIEW AND CONTROL STRATEGIC ANALYSIS STRATEGIC CHOICE AND STRATEGY IMPLEMENTATION

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

1. Identity of decision and action. The managers thinking up and choosing the strategies are also

responsible for carrying them out.

2. Learning process. The choice of strategies interacts with implementation. Rather than having a

grand scheme for the next five years management tries something out this year, learns lessons from where it succeeds and fails, and develops new initiatives for next year.

5.2 Five types of strategies

Mintzberg (The Strategy Process) identified the following.  Intended: The result of a deliberate planning process.

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

 Unrealised: Not all planned strategies are implemented.

 Emergent: Sometimes strategies are created by force of circumstances.

 Realised: It can be seen that the final realised strategy results from a balance of forces of the other

types of strategies.

Strategies must still have purpose and this will be set by senior management. No actual strategy will be

wholly deliberate or wholly emergent.

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

develop.

5.3 Crafting strategies

Mintzberg uses the metaphor of crafting strategy to help understand his approach to strategic management.

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

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

A U

Interactive question 3: Six Continents hotels

See Answer at the end of this chapter.

Global hotel chains

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

Tom Oliver, chief executive of the UK group, Six Continents Ltd (formerly Bass Hotels and Resorts), says: 'Brands are everything – as travel becomes increasingly trans-border, hotels which aren't carrying

international brands simply don't deliver the same rate of revenue per room'. The company was unwittingly pushed into the hotel trade by [the then] UK Trade Secretary Margaret Beckett, who thwarted the group's ambitions to become a global brewer by blocking the purchase of Carlsberg-Tetley.

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

Scale

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

Technology

Hi-tech reservation systems are also emerging as a crucial factor. In an industry where 75% of costs are staff Yes

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

Branding

There will be limits to the creeping internationalisation of European hotels. One CEO says: 'The US is a wide-open country – if you want a hotel, you can just build it. In Europe, there's much less opportunity for new-builds so you get a lot of conversions, They're harder to fit into the specific model of the US chain'. It is difficult to turn a 17th_{century Provençal château into a Holiday Inn, so some independent operators still}

prosper. This is bad news for the ideal guest of a multinational chain, who likes to wake up anywhere in the world in the knowledge that the bathroom is on the left, the blinds are blue and the phone is on the wall, six and a half inches above the bedside table.

Interactive question 4: Superware products

Company structure

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

Planning and control

Once a year the directors, under the guidance of Paul and with assistance from Zandra, agree a full budget for the next twelve months. The budget is always based on the previous year's performance, with

adjustments for known changes such as inflation, costs and forecasts of demand from sales staff feedback. During the discussion of the budget Zandra calculates various ratios to illustrate trends in the company's profitability and liquidity, and the budget is normally adjusted to ensure that trends are as desired. When the budget is agreed, a copy is sent to the bank for its records.18

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

The current position

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