p3 Passcard

ACCA Passcards

Paper P3

Business Analysis

Passcards for exams

up to June 2015

Professional Paper P3

Business Analysis

e ISBN 9781 4727 1187 8

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Contents

Preface

Welcome to BPP Learning Media’s ACCA Passcards for Professional Paper 3 Business Analysis.

 They focus on your exam and save you time.

 They incorporate diagrams to kick start your memory.

 They follow the overall structure of BPP Learning Media’s Study Texts, but BPP Learning Media’s ACCA

Passcards are not just a condensed book. Each card has been separately designed for clear presentation.

Topics are self contained and can be grasped visually.

 ACCA Passcards are still just the right size for pockets, briefcases and bags.

Run through the Passcards as often as you can during your final revision period. The day before the exam, try to go through the Passcards again! You will then be well on your way to passing your exams.

Good luck!

Page

1 Business strategy 1

2 Environmental issues 7

3 Competitors and customers 17

4 Strategic capability 27

5 Stakeholders, ethics and culture 41

6 Strategic choices 53

7 Organising for success 73

8 Managing strategic change 89

9 Business process change 95

10 Improving processes 105 11 E-business 111 Page 12 E-marketing 129 13 Project management 145 14 Finance 161

15 Human resource management 173

1: Business strategy

Topic List

Levels of strategy in an organisation Elements of strategic management The importance of context The strategy lenses

This chapter gives you an overview of the fundamentals of strategy and strategy formulation, and how they relate to business analysis.

STRATEGY: a course of action over the long term, including identifying the competences and resources

required, to achieve a specific objective and fulfil stakeholder expectations.

Four elements of mission

 Purpose and planning  Values

 Strategy

 Policies and standards

GOALS: General aim OBJECTIVES: SMART and PRIME

Areas for decision making

Long term direction Scope of activities Competitive advantage

Adapting activities to fit business environment

Exploiting resources/competences Expectations of key stakeholders

Strategic decisions

Complex

Subject to uncertainty Impact operational decisions Affect whole organisation Lead to change

Elements of strategic management What is strategy? The strategy lenses The importance of context Levels of strategy in an organisation

Corporate Overall purpose and scope, and how value will be added. Prioritisation and management of stakeholder expectations. Allocation of corporate resources.

Business How to compete successfully in particular markets. Combines with corporate strategy in a small organisation. In larger organisations, strategies for strategic business units must be co-ordinated with corporate strategy, and with each other.

Operational How the component parts of the organisation deliver the higher-level objectives. Largely created and delivered by business functions such as marketing, production, finance, human resources management, and information systems.

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Three main levels of strategy in an organisation

Position Choice Action is not simply a linear model. Need to recognise the interdependencies between position (analysis), choice and action (implementation).

Johnson, Scholes and Whittington’s model of strategy

Environment  opportunities  threats  complexity Capability

 resources and competences  strengths  weaknesses Stakeholder expectations  purpose of strategy  power/interest  governance  ethics Strategic position

 Made at corporate and business levels  How to achieve competitive advantage  Scope  Direction of development  Method of development Strategic choices Structuring  processes  relationships Enabling  management of resources Change  change management

Elements of strategic management What is strategy? The strategy lenses The importance of context Levels of strategy in an organisation

The organisational setting in which strategy is developed. Possible contexts include:

Small business Limited product range, markets and resources (especially financial), but significant pressure from competitors

Multinational Diverse products, processes and markets, with significant resources and multiple operations

The public sector Constraints on funding, commitment to service provision and the need to demonstrate value

Not for profit organisation Diverse sources of funds, strong underlying values and purpose

Intangible products Product information, after-sales service, brand values, staff performance (for both manufacturing and service companies)

The context of strategy

Exam focus

Context is very important in the P3 exam. Question scenarios will provide context for the question requirements. You must always consider the context of the question and make your answer directly relevant to it.

Johnson, Scholes & Whittington suggest that strategy, and the development of strategic thinking, can be examined through three lenses.

Strategy as design a rational, top-down process – rational managers, clear objectives. Strategy is exclusively management’s responsibility, and the organisation’s role is to implement management’s plans.

Strategy as experience an adaptation of what has worked in the past – based on experience, assumptions, and decisions to satisfice rather than optimise. Strategies develop in incremental and adaptive ways, and emerge from lower levels of the organisation.

Strategy as ideas strategy based on innovation, diversity of ideas, informal interaction and experimentation. Managers create the context and conditions for new ideas to emerge, but must prevent strategic drift. Organisational culture must support innovation.

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2: Environmental issues

Topic List

The organisation in its environment The macro environment

The competitive advantage of nations The environment in the future Competitive forces

Understanding the changing environment is one of the key elements in both defining and developing strategy. One possible definition of corporate strategy is ‘seeking a good fit with the environment’. To achieve that ‘fit’, an organisation must have a thorough knowledge of its environment.

All organisations are open systems – they have a variety of interchanges with the environment (inputs and outputs).

The environment can be divided into three concentric layers:

Environmental element Basis of analysis

Macro-environment PESTEL

Key drivers of change Scenarios

Industry or sector Five forces (Porter) Cycles of competition Competitors and markets Strategic groups

Market segments Critical success factors

Macro-environment

Industry or sector

Competitors and markets

The macro environment Competitive forces The organisation in its environment The environment in the future The competitive advantage of nations

The PESTEL framework is based upon six segments: political, economic, socio-cultural, technological, environmental protection and legal.

Political/legal factors

Governments oversee framework in which business operates eg physical, social and market infrastructure. Many aspects of business activity are subject to legal regulation:

 Contracts  Employment

 Health and safety  Tax

Other aspects are regulated by supervisory bodies. The EU is a significant influence.

Economic factors

These operate in both a national and international context. Relevant factors include:

 Inflation rates  Growth/fall of GDP  Employment rates  Savings levels  Interest rates  Exchange rates  Tax levels  International trade  The business cycle  Capital markets

 Fiscal policy (taxes, borrowing, spending)  Monetary policy (interest rates, exchange rates)  Size and scope of the public sector

Government policy

Political change and political risks affects the planning activities of many businesses

Social factors

Technological factors

Technological developments affect all aspects of business (especially IT developments)

Many strategies are based on exploiting technological change (eg Internet and e-commerce). Others are defences against such change (eg emphasising service or quality when a competitor introduces a major technical development).

Business must be particularly aware of cultural change.

 New products and services become available  New methods of production and service provision  New ways of selling (e-commerce);

 Improved handling of information in sales and finance  New organisation structures to exploit technology  New media for communication with customers and within

the business (eg Internet and email); facilitates business becoming global.

Demography is the study of human population and

population trends. (eg birth rate, average age, ethnicity, death rate, family structure, social structure and wealth). Demographic changes have clear implications for patterns of demand. They also affect availability of labour. Can also affect recruitment policies.

Culture in society provides a framework for understanding

beliefs and values, and creates patterns of human activity. It influences tastes and lifestyles.

Affects:

 Marketing - may need to adapt products/services for a particular market.

Environmental protection

Pressure coming from many quarters:

 Green pressure groups  Legislation

 Employees  Environmental risk screening

 Corporate Social Responsibility

Possible green issues for businesses to consider:  Consumer demand for environmentally friendly

products

 Greater regulation by governments and international bodies

 Businesses may be charged for the external cost of their activities

 Scarcity of non-renewable resources  Sustainability of operations.

 Opportunities to develop new environmentally friendly products and technologies

Four aspects of globalisation are key drivers of change in the macro environment

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Converging tastes; improving communications.

Economies of scale are a major source of cost advantage; purchasers search globally for lowest-cost suppliers.

Increasingly sympathetic to free trade.

High levels of international trade encourage global competition. The existence of global competitors and global customers in an industry encourages firms which currently only trade in one country to expand to be able to compete more effectively.

Competitive forces The organisation in its environment The environment in the future The competitive advantage of nations The macro environment

Porter identifies four determinants of national competitive advantage on an industry basis. He refers to them

as the ‘diamond’.

Demand conditions

Buyers in the home market set fundamental parameters such as market segments, degree of sophistication, rate of growth and rate of innovation. Early saturation of the home

market will encourage a firm to export.

Factor conditions

Endowments of inputs to production

Basic: natural resources, climate, labour

-unsustainable for competitive advantage

Advanced: infrastructure, technical education,

high-tech industries - promote competitive advantage

Related and supporting industries

Success in related industries gives mutual support. Strong home suppliers make the industry more robust. Rivalry creates supplier specialisations. Clusters of related industries derive strength from their links.

Firm strategy, structure and rivalry

Cultural factors, management style, time horizons and capital markets all help determine orientation and capability. Domestic rivalry leads to competitive strength.

Forecasting

Sound knowledge of the environment requires some element of forecasting. The past is not necessarily a good guide to the future, but in simple, static conditions time series analysis and

regression analysis can be used.

Economic forecasting uses leading indicators to

assess future economic conditions.

A scenario is a detailed and consistent view of how the environment might develop in the future. Macro scenarios consider possible futures overall. Industry scenarios look in more detail at a single industry.

Scenario construction (Mercer)

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Identify drivers of change Arrange drivers in a viable framework

Produce 7-9 mini-scenarios Group mini-scenarios into 2-3 comprehensive scenarios Write up the scenarios

Identify issues arising, and what they mean to the business

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The environment in the future Competitive forces The organisation in its environment The competitive advantage of nations The macro environment

 Scale economies  Product differentiation  Switching costs  Access to distribution  Patent rights  Access to resources

Porter says that five forces together determine the long-term profit potential of an industry

Bargaining power of

suppliers

Threat of new entrants

Rivalry among current competitors

Bargaining power of

customers

 Scope for substitution  Switching costs  Selling skills

Depends on:

 Volume bought  Scope for substitution  Switching costs  Purchasing skills  Importance of quality

Suppliers seek higher prices

 Market growth  Buyer’s ease of switching  Spare capacity  Exit barriers

 Uncertainty about competitor’s strategy

Customers seek lower prices This is limited by barriers to entry

Threat from substitute products

but satisfies the same needs

Depends on:

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3: Competitors and customers

Topic List

Competition dynamics The marketing mix

Customers and segmentation Understanding the customer

A detailed knowledge of both competitors and customers is very important for strategy development. In particular, the cycle of competition and critical success factors are very examinable.

Encirclement Simultaneous flank attacks Incumbent Head-on Identical marketing mix Flank Neglected segment area of technology Guerilla Aggressive, short term moves Flanking Defends secondary markets Contraction Concentrate on most desirable markets Incumbent Position Change nothing Pre-emtive Attack first Mobile Broaden and diversity markets Challenger Bypass Unrelated products, new areas, technical

advances Challenger

Attacks Defences

Industry life cycle

Exam focus point

For an organisation’s strategy to be successful, it needs to be appropriate to where its industry or products are in their lifecycles.

Inception Growth Maturity/shakeout Decline

Product characteristicsBasic, no standards established

Improved design and quality, differentiated

Standardised product with little differentiation

Varied quality but fairly undifferentiated Competitors None to few Many entrants Competition increases,

weaker players leave

Few remain. Competition may be on price

Buyers Early adopters, prosperous, curious must be induced

More customers attracted and aware

Mass market, brand switching common

Enthusiasts, traditionalists, sophisticates

Profits Negative – high first mover advantage

Good, possibly starting to decline

Eroding under pressure of competition Variable

Technology No standards established Technologies become more standardised

Technology is understood across the industry

Technology is understood across the industry

Production processes

Small scale batch production.

Specialised distributors

Mass production. Distribution networks expanded

Long production runs. Cost efficiency critical

Overcapacity. Production is reduced

Product

Trade off between price and value offered to customer

Place

Promotion

Price

 Design  Features

 Quality and reliability  After sales service

 Market channels  Logistics

 Direct distribution or use of intermediaries?

 Speed of delivery

 Advertising (on line; off line)  Sales promotion  Direct selling  Public relations  Luxury or necessity?  Competitors’ prices  Quality connotations  Discounts  Payment terms

People

 Service and service provider are inseparable in service marketing  Front-line staff embody

the service  Customer satisfaction?

Processes

times  Capacity management  Information gathering and processing

Physical evidence

 Design and specification of service environment

Marketing mix

Customers and segmentation Understanding the customer The marketing mix Competition dynamics

Buyer behaviour models aim to show how purchase decisions are made.

We can distinguish CONSUMER markets and INDUSTRIAL markets. Industrial buyers are more rationally motivated than consumers in deciding what goods to buy.

Government, reseller and export markets may also be considered.

The consumer market

 Socio economic  Psychological

Influences

 Convenience (everyday) goods  Shopping (higher value) goods  Speciality (unique) goods

Products

The industrial market

 User  Influencer

 Gatekeeper  Buyer

Decision Making Unit

 Quality and reliability

 Price  Credit offered

 Problems solved  Budgetary control

Influences

 Raw materials  Subcomponents

 Capital equipment  Supplies

Market segmentation

is the subdividing of a market into increasingly homogeneous subgroups of customers, where any subgroup can be conceivably selected as a target market to be met with a distinct marketing mix. It is relevant to a focus strategy.

Target market

One or more segments selected for special attention by a company.

Policy options



UNDIFFERENTIATED CONCENTRATED DIFFERENTIATED

Same product to whole market One segment only

Several versions for many segments

A firm should only develop a unique marketing mix for a valid segment.  Better satisfaction of customer needs

 Revenue/profit growth  Targeted communication  Customer retention  Product positioning

Reasons for segmentation

 Measurable  Potentially profitable

 Accessible, and can  Susceptible to a distinct marketing mix be accessed profitably Stable

Segments should be

the customer

segmentation mix

dynamics

The customer lifecycle

 Promotional expense is front-loaded; sales grow with time

 Consumer incomes rise with time; early purchases are likely to be basic – may be more differentiated later  Use it to identify your most

profitable/expensive customers  Compare cost of acquiring new

customers vs retaining existing ones  Details of costs could be obtained from

a relational database

Tools for analysis

To establish:

 Size of customer base  Order sizes

 Product profitability  Market share  Growth and prospects  Demand

 Price sensitivity  Competition/substitutes

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1 Marketing audit

 Who are the key customers?  Customer history  How important are they?  Attitudes and behaviour  Financial performance  Profitability of their orders

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2 Key customer analysis

This varies from customer to customer because of customer-specific costs such as discounts, distribution costs, complexity of orders and credit given.

3

Opportunities and threats

Information about the environment may be summarised as

opportunities and threats. Opportunities

Opportunities often take the form of strategic gaps such as:  Potential substitutes for existing products or

complements to them

 Different strategic customers via new distribution methods such as the Internet

 Potential new market segments

Threats

The most immediate threats probably emerge from the immediate industry: the five forces are a good guide. The wider PESTEL environment must also be monitored, but threats may be more difficult to recognise.

Strategic customer

Critical success factors

are those product features that are particularly valued by a group of customers and, therefore, where the organisation must outperform competitors.

is the purchaser of the product offered. This may not be the end user. The end user’s requirements are important, but those of any intermediary purchaser are of primary strategic importance.

 Strategic groups  CSFs  Market segmentation  Marketing mix Understanding the customer  Inception  Growth  Maturity  Decline Customers and markets External forces  New entrants  Substitute products

 Bargaining power of customers  Bargaining power of consumers  Rivalry amongst current competition

Industry analysis  Political  Economic  Social  Technological  Environmental  Legal Macro-environment National competitiveness Demand conditions Factor conditions Related industries Firm strategy, structure, rivalry Opportunities or Threats

4: Strategic capability

Topic List

The organisation’s resources Cost efficiency

Knowledge The value chain The product portfolio Benchmarking

Managing strategic capability SWOT and TOWS

A detailed knowledge of the frameworks and models in this chapter is very important in beginning to understand how strategic choices are made.

Strategic capability: the adequacy and suitability of an organisation’s resources and competences to achieve its strategy.

9 Ms Model (review of organisation’s resources)

 Machinery  Makeup  Management

 Markets  Materials  Methods

 Management information  Money  Men and women

Position-based strategy aims to achieve competitive advantage by positioning a market offering to respond to

the opportunities and threats present in the environment.

Resource-based strategy is based on the possession of distinctive resources, which may be physical resources or competences. Competences are the activities and processes through which an organisation

deploys its resources effectively.

Threshold competences and resources meet customer’s minimum requirements and are needed for survival. Unique resources and core competences underpin competitive advantage and are difficult for competitors to

Cost efficiency The value chain Knowledge The organisation’s resources Benchmarking The product portfolio

Cost Efficiency is fundamental to strategic capability

for both public and private sector organisations. It is regarded as a threshold competence (vital for mere survival) and is achieved in four main ways: If competitive advantage is to be based on core

competences and strategic capabilities, the capabilities must have four key qualities:

Exploitation of scale economies – reducing costs per unit

Control of the cost of incoming supplies – transport costs; supplier relationships Careful design of products and processes – minimising direct and indirect costs Exploitation of experience effects – learning curve effects; outsourcing

Offer value to buyers – contribute to customer needs

Rare – can create competitive advantage by itself

Robust (difficult to imitate) – linking of processes and activities in ways that cannot be copied

Non substitutable – substitute products and competences are a key threat

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The progression from data to knowledge

The aim of knowledge management is to capture, organise and make widely available all the knowledge that the organisation possesses (ie use knowledge as a resource to contribute to competitive advantage).

Data Information Knowledge

Nature Facts Relationships between

processed facts

Patterns discerned in information

Importance of context

Total Some Context independent

Importance to business

Mundane Probably useful for

management

May be strategically useful Relevant IT systems Office automation Data warehouse Groupware Expert systems Report writing software Intranet

Data mining Intranet Expert systems

Learning based strategy incorporates knowledge management and innovation.

Knowledge management

Innovation

Records, organises, retrieves and applies knowledge effectively. IT systems will probably be used. Good knowledge management avoids constant re-invention of the wheel.

Innovation is encouraged by top management; organisational

purposes are continually re-examined; it is accepted that innovative solutions can emerge at any level.

A top-down, command and control approach will not promote learning based strategy. The company must be

open to the environment and welcome new ideas and fresh insights. However, management must guide the

learning process and take necessary decisions.

Porter grouped the various activities of an organisation into a value chain.

FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS SUPPOR T A CTIVITIES PRIMARY ACTIVITIES MARGIN MARGIN MARKETING

& SALES SERVICE

The margin is the excess the customer is prepared to

pay over the cost to the firm of obtaining resource

inputs and providing value activities. It represents the

value created by the value activities themselves and

by the management of the linkages between them.

Linkages connect the activities in the value chain. The

activities affect one another and therefore must be co-ordinated.

Using the value chain. A firm can secure competitive

advantage in several ways.

 Invent new or better ways to do activities  Combine activities in new or better ways  Manage the linkages in its own value chain  Manage the linkages in the value network

Organisation’s value chain Supplier value chains Distributor/retailer value chains Customer value chains

A firm’s value chain is connected to the value network. The value created for a product's end user is often the output of a complex system that includes several organisations’ value chains. The links between these value chains represent opportunities to create more value.

The links also represent opportunities for individual organisations to capture more of the value created by the overall system by managing them to their advantage. This can be done in a direct way by vertical integration or the use of bargining power over suppliers and customers. It can also be achieved more subtly by providing coordination and by fostering relationships that promote innovation.

The company’s offerings to the market are fundamental to its success. They must be kept under review so that there is a suitable mix. The product life cycle is an important concept but it must be applied with care. We can distinguish 3 aspects of ‘product’.

Product class (or generic product)

– a broad category

Brand

– The specific product

Product form

– type within the category

Product life cycle

+ _

Inception Growth Maturity Decline Senility

Sales

Profits

Inception: development; marketing and production costs high;

sales volume low; profits low

Growth: sales volumes accelerate; unit costs fall; profits rise;

competitors enter the market

Maturity: longest period; profits good; reminder promotion Decline: many causes; sales fall; over capacity in industry; some

players leave market

Senility: profit negligible; product may be retained in niche

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The development of new products is an important aspect of a firm’s strategy. New products can overcome

entry barriers and help give a company a balanced portfolio. Product innovation can also be a major source

of competitive advantage.

 New to the world  New product line  Additions to product line  Repositioning

 Improvements/revisions  Cost reductions

How are they new?

 Leader strategy: high cost of R&D, potential high reward, high risk

 Follower strategy: lower cost, less R&D expertise needed, lower risk, reduced reward

How is it approached?

The management accountant can help by analysing the cost components of the new product. This may lead to the removal of superfluous features.

New product development should be controlled by subjecting projects to a

series of gates, or review meetings, to decide whether they have made the required progress, and to determine what must be achieved to pass the next gate.

Roles of the R&D department

Intrapreneurship

 Environmental analysis: technological

opportunities and threats.

 Technological position audit.  Planning and controlling R&D.  Developing new products.  Developing new processes.  Encouraging a culture of innovation

and learning.

New product research including developing, testing and prototyping. Screening product ideas against strategic objectives, technical

feasibility and market requirements.

Value engineering of existing products.

Extending product life cycles.

Ensuring (or preventing) backward compatibility with existing products.

Processes themselves may be crucial, as in service industries. Productivity enhancements.

Quality enhancements.

The R&D effort should support the organisation’s strategy. For example, product development and market development are likely to require different R&D emphases.

Entrepreneurial activity below the strategic apex. Innovation is encouraged by:

 Culture of risk-taking and tolerance of mistakes.  Flexible organisation structure.

 Willingness to devote resources to new ideas.  Reward policies that support new ideas.

Cost efficiency The value chain Knowledge The organisation’s resources Benchmarking The product portfolio

Benchmarking involves establishing targets and comparators against which to compare performance.

Process

Ensure senior management commitment

Determine areas to benchmark and set objectives Establish performance measures

Select organisations to benchmark against Measure own and others’ performance Compare performance

Design and implement improvements Monitor improvements

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 Why are these products or services provided at all?  Why are they provided in that particular way?  What are the examples of best practice elsewhere?  How should activities be reshaped in the light of

these comparisons?

The questions to ask (Johnson, Scholes and Whittington)

8

3 levels of benchmarking

 Resources: quantity and quality  Competences in separate activities  Competences in linked activities

Benchmarking can produce improvements in the value system but this is not guaranteed.

 It tends to improve the efficiency with which systems work rather than the effectiveness of their outputs.  Benchmarking will only be useful if the systems being compared are the ones which are critical for business

success. (It sometimes concentrates on ‘doing things right’ rather than ‘doing the right things.’)  Comparison with similar systems ignores the emergence of substitutes.

 It is a catching–up exercise rather than a development of anything new.  It does not indicate how competitors may be overtaken.

 It has significant costs, not least in management time.  It can be a threat to commercial security.

SWOT and TOWS

Managing strategic capability

Informal processes

Existing strategic capability can be difficult to understand and, therefore, to manage, especially when it derives from core competences based on informal processes. Managers must take care not to disrupt such competences by attempting to manage or formalise them.

Opportunities to stretch and improve

strategic capability

 Use existing competences in new activities  Eliminate or outsource activities that do not support

CSFs

 Extend best practice

 Improve and add activities to better support CSFs  Remedy weaknesses

 Utilise external capacity by acquisition and co-operation (alliances; joint ventures)

HRM

Much strategic capability depends on people’s abilities, skills and knowledge. Such capability can be enchanced by HRM practice.

 Recruit for specific aptitudes such as leadership and innovation

 Train and develop for specific rather than generic skills  Develop individual strategic awareness

SO strategy – employ strengths to seize opportunities ST strategy – employ strengths to counter or avoid

threats.

WO strategy – address weakness in order to exploit

opportunity

WT strategy – defensive, avoid threats and impact of

weakness The results can be combined in guiding strategy formation

Strengths

Internal

External

Weaknesses

Opportunities

Threats

SWOT analysis

(also known as corporate appraisal) is a review of:

Convert Remedy

Weihrich spoke of TOWS analysis to emphasise

threats and opportunities. SO strategies can be

profitable in the short term, generating the cash needed to undertake WO strategies in the longer term. ST and WT strategies are likely to be resource neutral and are needed in the medium term to achieve overall balance.

5: Stakeholders, ethics and culture

Topic List

Ethics and the organisation Social responsibility Corporate governance The role of culture Integrated reporting

Business ethics is an increasingly important area, and one that is highly examinable both for its topicality and its suitability for inclusion in scenario questions. Ethical ideas have a strategic impact upon organisations, and with them come notions of corporate social responsibility and principles of good corporate governance. The influence of culture upon an organisation and its people must not be underestimated.

Finally, the rise of integrated reporting is considered.

Ethics are ideas about right and wrong that set standards for conduct. Ethics are important to business because

society considers such things important. There are also rules of professional conduct to consider. Ideas of right and wrong have become more fluid and less absolute. As a result there is a greater scrutiny of organisations’ behaviour since it is likely to be less subject to definitive internal rules.

 Dealing with corrupt or unpleasant regimes  Honesty in advertising

 Employees – cost or asset?

 Corrupt payments to officials – extortion, bribery or gift? The local culture must be considered.

Scope of corporate ethics

Ethical dilemmas

Conflicting views of the organisation’s responsibilities create ethical dilemmas for managers at all levels.

Corporate ethics may be considered in three contexts: The organisation’s interaction with national and international society

The effects of the organisation’s routine

operations.

The behaviour of individual members of staff Organisations often publish corporate ethical codes to disseminate their policies on ethics.

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Ethics and the organisation Integrated reporting The role of culture Corporate governance Social responsibility

?

Should businesses actively practise social responsibility?

The business as fixer of

social problems

Big business has the resources

to fight inequalities

Examples

Companies already discharge their responsibilities by contributing towards tax revenues. The social audit recognises

the expectations on a firm to promote social responsibility. In addition, there are ‘green’ pressures.  Pressure groups  Employees  Legislation  Environmental screening  Sustainability of resources  Ecological concerns (005)ACP3PC13_CH05.qxp 5/28/2014 8:56 PM Page 43

Stakeholders have a legitimate

interest in how the organisation behaves. The extent to which stakeholders should be able to influence behaviour is subject to debate, as is the matter of just who should qualify as a stakeholder. Some groups will be accepted as

stakeholders and their views will help to determine the acceptability of a strategy.

Stakeholders’ interests are liable to conflict.Mendelow’s

stakeholder mapping helps the organisation to establish its

priorities and manage different stakeholder expectations.  A: Minimal effort  B: Keep informed; little

direct influence but may influence more powerful stakeholders  C: Treat with care; often

passive but capable of moving to segment D; keep satisfied  D: Key players – strategy must be acceptable to them, at least Level of interest High Low Low High Power A B C D

Stakeholders can be:  Internal  Connected  External

Ethics and the organisation Integrated reporting The role of culture Corporate governance Social responsibility

The conduct of an organisation’s senior officers constitutes its corporate governance. The influence of those officers over the behaviour of the organisation and the potential for both PR and financial disaster make this a matter of strategic importance.

External measures to improve corporate governance 1 Accounting standards attempt to prevent financial manipulation

2 Codes of professional conduct regulate many senior managers

3 Commissions on standards of behaviour (in the UK) have established best practice

Free flow of information

to stakeholders tends to inhibit wrong doing by senior managers. However, commercial confidentiality must be respected.

Non-executive directors

may remain objective and ensure proper governance in such areas as ethics, audit and senior manager remuneration. However, there are now accusations of partiality within a close-knit body of non-executives in the UK.

Structural

measures

Good corporate governance

 Reduces risk  Improves performance  Improves external perceptions

 Ensures an organisation’s strategy is directed towards the benefit of legitimate stakeholders

Good corporate governance

Codes of best practice identify the way large companies should be run. Among their provisions are these:

 Director’s remuneration should be subject to formal and clear procedures and be largely controlled by non-executive directors.

 Non-executive directors’ audit committee should oversee both internal and external audit.

The governance framework

Establishes who the organisation exists to serve and how its purposes and priorities should be decided. Separation of ownership and control brings the risk

of adverse selection and moral hazard. _{ Directors should use independent judgement;} the roles of Chairman and CEO should be separate; no individual or group should

dominate; there should be a balance of executive and non-executive directors.

Ethics and the organisation Integrated reporting The role of culture Corporate governance Social responsibility The Paradigm Control systems Organisa-tional structures Rituals and Routines Power structures Symbols Stories

Organisational culture consists of the beliefs, attitudes, practices and customs that affect people during their

interaction with an organisation. It can have an important influence on strategy, both in the way that information is interpreted and also by determining the acceptability of ideas and behaviour.

The cultural web

J, S and W suggest that the

paradigm is reinforced by physical aspects of culture.

The paradigm

The basic assumptions and

beliefs that an organisation’s

decision-makers hold in common and take for granted. It is essentially conservative since it is based on collective experience. It is closely linked to the ‘strategy

as experience’ lens.

The cultural web provides a way of understanding behaviours within an organisation and making sure all the organisational elements are aligned with one another, and with an organisation’s strategy.

If an organisation is not delivering the results management wants, is organisational culture contributing to the under-performance?

The cultural web can be very useful in change management.

Integrated reporting is concerned with conveying a wider message on organisational performance. It is

fundamentally concerned with reporting the value created by the organisation's resources.

Rise of integrated reporting

Traditional corporate reporting is said to only tell part of the story. Stakeholders are increasingly interested in understanding how management use the organisation's resources to create value.

Value creation

 The International Integrated Reporting Council introduced the Integrated Reporting Framework. The framework defines resources as 'capitals'.

 Capitals are used to assess value creation. The framework classifies capitals as being: Manufactured Capital Intellectual Capital Human Capital Financial Capital Natural Capital Social Capital Integrated Reporting Capitals (005)ACP3PC13_CH05.qxp 5/28/2014 8:56 PM Page 49

Interaction of capitals

An increase in one capital may result in a decrease in another.

Example

Paying for a staff training programme may increase human capital (eg improve staff skills), but reduce financial capital as the costs of the training programme will lead to a reduction in the company's financial reserves (eg money).

 Integrated reporting does not involve attaching monetary values to every part of an organisation's operations.  Value creation can be measured by the use of qualitative and quantitative performance measures.

Example

Customer satisfaction can be measured by comparing the number of customers retained year on year.

Implications of introducing integrated reporting

 IT costs  Consultancy costs

 Staff costs  Disclosure

6: Strategic choices

Topic List

Diversification The corporate parent The corporate portfolio Generic strategies

Sustaining competitive advantage Direction and method of growth Strategy and market position Success criteria

Various strategic choices can present themselves to an organisation. An organisation will select its preferred choice as a result of environmental and internal analysis that shows which choice provides the best strategic ‘fit’ for the organisation. There is no right or wrong answer: different frameworks and models will apply in different business settings.

Diversity of products and markets may be advantageous to the organisation for three reasons: Economies of scope in the form of synergy

Corporate management skills are extended Cross-subsidy can enhance market power

1

3 2

However, there are three questionable reasons that may be given to justify a policy of diversification:

Response to environmental change may be a cover for protecting the interests of top management

and may lead to ill-considered acquisitions.

Risk spreading is valid for owner managed businesses, but shareholders in large public companies can

diversify their own portfolios.

Powerful shareholder expectations, especially demands for growth, can lead to inappropriate

diversification. 1

3 2

Conglomerate (unrelated) diversification

Horizontal integration

Vertical integration

Other strategies

The organisation becomes its own supplier (backward integration) or distributor (forward integration).  Secures supplies

 Stronger relationship with end-users  Profits from all parts of value system  Creates barriers to entry

However:

 ‘More eggs in same end-market basket’ (Ansoff) – more vulnerable to a single market

 Does not offer significant economies of scale

 Spreads risk; escape from present business  May obtain synergy (eg acquiring new skills, utilising distribution channels, pooling R+D) organisational learning.

 Use surplus cash/exploit under-used resources However:

 Unfamiliarity with new segments increases risk  More opportunities to go wrong

 Lack of common culture and purpose Development into activities that are competitive with,

or complementary to, present activities; eg, electricity companies selling gas. Offers economies of scale.

International business orientations

(Perlmutter)

Ethnocentrism is a home country orientation in

which the same products are marketed in the same way both at home and in foreign countries.

Polycentrism adapts products and marketing

methods to each local environment. Each national subsidiary runs its own operations.

Geocentrism recognises both similarities and

differences between markets and incorporates them into regional or global strategies.

Regiocentrism is similar to geocentrism but

considers that there are differences between regions.

Global strategic management (Ohmae)

5 reasons why companies globalise (5 C’s) Customer: global market convergence

Company: search for economies of scale

Competition: demands global operations

Currency: manage exchange rate risk by operating globally

Country: explicit absolute and comparative advantage

5 stages in global expansion

Exporting via agents to extend scale of operations

Overseas branches to replace agents with stronger presence Overseas production exploits cheap labour and saves shipping

costs

Insiderisation via full capability: polycentric orientation Global company has geocentric management orientation 1 2 3 4 5 1 2 3 4 5

1.

2.

3.

Before getting involved, the company must consider both strategic (‘Does it fit?’) and tactical/operational (‘Can we do it?’) issues.

Adv

 Higher sales and profits  Life cycle extended  Spread seasonality  Spread risk Disadv  Less control  Costly  Adaptations needed

Key decisions for international expansion

Overseas production  Market attractiveness

 Competitive advantage possessed  Risks (political; business; currency)  Legal/regulatory factors Direct or indirect exporting Foreign subsidiaries or joint ventures (006)ACP3PC13_CH06.qxp 5/28/2014 8:57 PM Page 57

Exporting Overseas production

Advantages Concentrates production; small start possible; mnimises overheads

Lower distribution costs; overcomes trade barriers; possibly lower production costs

Key issues Exchange rates, protectionism Political risk; partnership; managing overseas facilities; more risky

Involvement Usually less involved, but an exporter might depend on the overseas market

Usually more involved, but overseas subsidiaries might act independently: varying levels of control and risk

Entry strategies Exporting Indirect Direct Ÿ Ÿ Ÿ Ÿ Export management firms Buying offices Piggy-backing Export houses Wholesalers Distributors Stockists Agents via company branch offices to final user

E-commence and Internet Licensing, Franchising Contract manufacture Joint venture, Consortium, Strategic alliances Wholly owned overseas production Ÿ

ŸAcquisitionOrganic growth Overseas

Generic strategies The corporate portfolio The corporate parent

Diversification Sustaining competitive

advantage

The corporate parent imposes costs, so it must create at least enough value to pay these costs. It may destroy value:

 Exercise of managers’ political ambitions  Size and complexity can obscure corporate vision  Process and hierarchy slow decisions, stunt enterprise.

 Envisioning corporate intent, communicating the vision to stakeholders and SBU managers, and acting in accordance with it.

 Intervention to improve performance.

 Provision of services, resources and expertise. Three value-creating roles for the corporate

parent

 Portfolio managers create value by applying financial discipline. They keep their own costs low.  Synergy managers pursue economies of scope

through the shared use of competences and resources.

 Parental developers add value by deploying their own competences to improve their SBUs' performance.

Three kinds of parent

Portfolio analysis is applicable to products, market segments and SBUs. There are four basic strategies:

The BCG Matrix Build

Invest for market share growth

Hold

Maintain current position

Harvest

Manage for profit in the short term

Divest

Release resources for use elsewhere

High Low

Market growth

Relative market share

Stars – build Cash cows – hold or harvest Question marks – build or harvest

Dogs – divest or hold

Star Cash cow

Question mark

Dog

Ashridge portfolio display

Benefit (fit between SBU opportunities and parental skills etc)

Feel

CSFs

(fit between SBU and parental skills etc)

High

High

Low Low

Ballast

businesses Heartlandbusinesses

Alien businesses

Value trap businesses

Heartland businesses can benefit from the attention of the parent without risk of harm from unsuitable developments.

Ballast businesses are well-understood by the parent, but need little assistance. They should bear as little central cost as possible. Value trap businesses provide good opportunities for parenting, but these opportunities do not relate to the SBU's CSFs. Alien businesses have no place in the portfolio. They need the attention of a skilled parent, but the actual parent does not have the

skills and resources required to help them. This approach is based on the idea of the corporate parent as a parental developer. (006)ACP3PC13_CH06.qxp 5/28/2014 8:57 PM Page 61

The public sector portfolio matrix

The principal way of judging success in the private sector is by reference to customers. In the public sector, activities must have political support. This does not depend exclusively on the opinions of the consumers of the services provided.

A public sector star is something that the system is doing well and should not change. They are essential to the viability of the system.

Political hot boxes are services that the public want, or

which are mandated, but for which there are not adequate resources or competences.

Golden fleeces are services that are done well but for

which there is low demand. They are potential targets for cost cutting.

Back drawer issues are unappreciated and have low

priority for funding. They are obvious candidates for cuts, but if managers perceive them as essential, they should attempt to increase support for them and move them into the political hot box category.

Public sector star

Ability to serve effectively

Political hot box

Golden fleece Back drawer issue High Public or political need (and therefore support for expense) High Low Low

Generic strategies The corporate portfolio The corporate parent

Diversification Sustaining competitive

advantage

Cost leadership

Focus

Differentiation

industry as a whole

 Economies of scale

 Use the latest production technology or cheap labour

 Productivity improvement  Minimisation of overheads  Favourable access to inputs

Aspects of cost leadership

Aims to exploit a product perceived as unique within the industry as a whole

 Breakthrough products – radical performance advantage

 Improved products – superior performance at a competitive price

 Competitive products – unique combinations of features – Brand image

– Special features

– Unique combination of value activities

Aspects of differentiation

Activity is restricted to a particular segment of the market. Either a cost leadership or differentiation strategy is then pursued. Such concentrated effort can be more effective, but the segment may be attacked by a larger firm.

Generic strategies and the five competitive forces

Cost leadership Advantages Differentiation Cost leadership Disadvantages Differentiation

Customers

Suppliers Industry rivalry

Economies of scale raise barriers to entry

Brand loyalty and perceived uniqueness are entry barriers Firm is not as vulnerable as its

less cost-effective competitors to the threat of substitutes

Customer loyalty is a weapon against substitutes Customers cannot drive down

prices further than the next most efficient competitor Flexibility to deal with cost increases

Firm remains profitable when rivals go under through excessive price competition

Unique features reduce direct competition

Technological change will require capital investment, or make production cheaper for competitors

Competitors learn via imitation Cost concerns ignore product design or marketing issues Higher margins can offset

vulnerability to supplier price rises

Increase in input costs can reduce price advantages Customers have no comparable

alternative

Brand loyalty should lower price sensitivity

Customers may no longer need the differentiating factor

Sooner or later, customers become price sensitive

High

Low

Low Price High

P

er

ceived ad

ded v

alue

3 Hybrid – Low price plus

differentiation. Cost base must be low. Can build market share or be used for market entry.

4 Differentiation – perceived added

value either increases market share or supports price premium

5 Focused differentiation –

seeks a high price premium in return for a high degree of differentiation.

3, 4 and 5 are all variants on differentiation.

6, 7 and 8 are all destined for ultimate failure.

2 Low price – better value

than competitors. Cost leadership needed. Price war may ensue.

1 No frills – needs a large

price-conscious segment. May be used for market entry to build volume and gain experience.

6

7

8

The strategy clock

SUSTAINING A PRICE BASED STRATEGY

SUSTAINING DIFFERENTIATION LOCK-IN (Delta model)

Increase volumes or cross subsidise from another SBU

Secure preferred access to customers or suppliers, via licensing for example, to block potential imitators

Achieved when a product becomes the industry standard (eg Microsoft operating systems)

Constantly and aggressively drive down all costs (meaning company can sustain a price advantage)

Strong branding, proprietary technology or co-specialisation can all make the cost of switching high for a customer

First mover advantage: Standard is more likely to be set early in product lifecycle than when it is mature. Engage in a price war (if

company is cost leader or has extensive financial resources)

Cost advantages might be used to invest in innovation, brand

management or quality improvements

Standard-setter becomes perceived as the one to follow, especially if the standard is set early in the product lifecycle

Implement a ‘no frills’ strategy, for those who particularly appreciate low prices

Fierce defence tactics will often be employed

Strategy and hypercompetition

 Be unpredictable  Pre-empt imitation  Small moves disguise intent  Send misleading signals

 Attacks on weakness may provoke attempts to improve

Principles for strategy

 Reposition on the strategy clock  Counter-attack – undermine first mover

advantage by leapfrogging; initiate product market moves

 Attack barriers to entry by rapid technological advance, cross subsidy or use of economies of scale from another market, and

development of new distribution methods  Small players concentrate on niches, build

trade alliances and merge with others

Options

Hypercompetition

A condition of constant competitive change created by frequent aggressive competitive moves. No firm can create lasting competitive advantage. Success

depends on effective short-term moves.

Market penetration

 Maintain or increase market share  Dominate growth markets  Drive out competition from mature

markets

 Increase usage by existing customers

Product development

 Launch new products (using existing knowledge of customers and their needs/wants)

 May require new competences  Forces competitors to follow suit  Discourages newcomers

 May require investment in R&D or new production facilities

Market development

 New markets for current products  New geographic areas - export  New package sizes

 New distribution channels  Differential pricing to suit new

segments Diversification Related Unrelated (conglomerate) Vertical Horizontal Forward Backward

New competences will be required

Ansoff described the four possible growth vectors in the four cells in the diagram

below: the growth vector matrix.

Existing

Existing New

New MARKET

Include consortia, joint ventures, licensing,

franchising and sub-contracting. These methods can

enhance access to resources of all kinds, achieve economies of scale, achieve synergy, and enhance competences but stop short of a merger or takeover.

Cooperative methods

Organic growth

Mergers and acquisitions

The development of internal resources  Supports learning and is supported by it  Consistent culture and management style  Provides economies of scale

 Ease of control However:  Can be slow

 Not good for dealing with barriers to entry

 Can overcome barriers to entry  Can spread risk

 Can defend against predators

 Provide access to a variety of resources: products; managers; suppliers; production facilities;

technology and skills; distribution facilities; cash; tax losses

However, many acquisitions fail to enhance shareholder value.

 Cost: the acquisition price is often too high  Customers may be disturbed by changes  Cultural problems, especially in management  Top management egos can warp judgement  Professional advisers drive the market

Joint ventures

Franchises

Two or more organisations join forces, and each has a share in the equity and management of the business.

Allow a business to expand with less capital expenditure than would otherwise be necessary. Franchisees pay lump sum to enter the franchise, and also bear some of the running costs.  Share costs - capital outlay is shared

 Synergies - combining expertise in different areas

 Overseas JVs provide local knowledge, quickly  Participating enterprises benefit from all sources

of profit But:

 Profits are shared

 Conflicts over interest between different parties  Disagreements over profit share splits,

management and strategy  Risk of one partner withdrawing

 Reduces capital requirements

 Quicker expansion than opening new company-owned facilities

 Specialisation - franchisee and franchiser both concentrate on their own areas

 Reduces head office and management costs But:

 Profits are shared

 Issues re control over franchisees, and potential for conflict

 Risk to brand/reputation if franchisee provides inferior goods/services

Strategy and market position Direction and method of growth Success criteria

PIMS research showed a strong link between market share and profitability, probably dervived from scale

economies

Aims  Expand total market

 Protect current market share  Expand market share (eg increased

promotion, aggrerssive pricing)

Aim Build market share using attack strategies outlined in Chapter 3 and by attacking smaller rivals

Accept status quo, compete in suitable segments, control costs and grow with market. Beware of predators.

Specialise in a niche with adequate size and growth potential. Multiple niching spreads risk.

Strategies may be based upon market position

Market leaders

Market followers

Market challengers

Market nichers

Strategies are evaluated according to:

Their suitability to the firm’s strategic situation This might be analysed using life cycle analysis; business profile analysis or strategy screening. TOWS strategies are inherently suitable. Their feasibility in terms of resources and competences

Resource deployment analysis, and financial approaches such as funds flow analysis and breakeven analysis would be appropriate tools to access feasibility.

Their acceptability to key stakeholder groups

Depends upon the view of each stakeholder! Financial considerations (return on investment, cash flow, cost benefit analysis) are generally important, but don’t forget issues such as government legislation or corporate social responsibility. Also, risks must be carefully assessed.

1 3 2 Internal factors TOWS Matrix SO Use strengths to maximise opportunities ST Use strengths to minimise threats WO Minimise weaknesses by taking advantage of opportunities WT Minimise weaknesses and avoid threats

7: Organising for success

Topic List

Challenges and concepts Types of structure Processes Relationships

Collaborative organisational structures Stereotypical configurations

Configuration and strategy

The modern business environment has seen the emergence of new structural ideas and designs, and traditional assumptions about organisation structure are being replaced with more flexible formats. The need to exploit knowledge has made organisation structures, processes and relationships vital ingredients in strategic success.