The Association of Business Executives QCF

Corporate Strategy and Planning

December 2011 Suggested Answers

STRUCTURE OF PAPER: Answer ALL FOUR sections SECTION A: Answer BOTH questions Q1 Q2 Either Q3 or Q4 Either Q5 or Q6 Either Q7 or Q8 20 marks 20 marks 20 marks 20 marks 20 marks 100 marks

SECTION B: Answer ONE question SECTION C: Answer ONE question SECTION D: Answer ONE question

TOTAL MARKS AVAILABLE FOR THE PAPER

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

SECTION A: Candidates must answer BOTH questions in Section A. Each question carries 20 marks. Section A is worth 40% of the total marks available for the paper. Question 1 Q1 (a) Identify five key characteristics which distinguish strategic from tactical decisions. The following are the key distinguishing characteristics of strategic as opposed to tactical decisions:

Q1 (b)

Broader in scope Greater influence stakeholder factors of external environmental, competitor and

Involve major resource allocations Longer term planning horizons Greater complexity/ uncertainty More need for integration 5 marks

Explain the importance and implications of each characteristic for the process of strategic planning.

Broad scope: Less detail, concerned with overall scope of organisation

including mission statement and business definition and broad strategies for achieving. Need to avoid narrow decisions and detailed plans

Outward looking: Considers macro and competitor environment. Focus on

future and assessing major opportunities and threats. Also need to consider/plan for stakeholder interests and power

Involve major resource decisions and allocations: Examples include e.g.

major capital investment decisions, new products. Affect overall investment profile of company. Necessitates use of investment appraisal and portfolio analysis techniques.

Longer planning horizons: typically strategic 3 years minimum often up to

ten years; tactical one year or usually shorter. Requires longer term forecasting, use of scenarios.

Greater complexity/uncertainty: Longer planning horizons means more

uncertainty and risk difficult to forecast, more factors with often complex interrelationships. Necessitates use of risk analysis techniques.

More need for integration: Requires inputs from and co-ordination of

different specialist functional managers. Strategic planner must work with and balance different functional areas of business Q1 Total Maximum Marks for Question 15 marks 20 marks

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

Question 2 Several companies have recently received damaging publicity due to allegations regarding unethical business practices. For example, one large multinational retailer was alleged to be using child labour to produce some of its products. Another large, well known company was charged with bribery to obtain government contracts. Q2 (a) Discuss why ethical issues have become more important to corporate planning in recent years.

Q2 (b)

Increased competition /drive for profits: more pressure /reasons to act unethically Growth of consumerism /green customers /pressure groups Increased legislation/ sanctions for unethical behaviour More socially /ethically aware public Growth of Corporate Governance Power of Stakeholders

8 marks

Discuss the steps a company can take to encourage ethical behaviour and practices on the part of its employees.

Q2

Leading by example top management commitment Clear ethical corporate guidelines and policies Written code of ethics Openness /encouragement to raise any unethical practices Conduct regular ethics audits Conduct ethics training Reward ethical practices and behaviour

12 marks 20 marks

Total Maximum Marks for Question

END OF SECTION A MAXIMUM MARKS FOR SECTION A: 40

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

SECTION B: Candidates must answer ONE question in this section (not BOTH). Each question carries 20 marks. Section B is worth 20% of the total marks available for the paper. Question 3 Q3 Bowman suggests that only five of his Strategy Clock alternative price and perceived value strategies are likely to be successful. Using examples, discuss the nature and application of each of these five success strategies. Building on Porters notion of generic strategies, Bowman suggested eight possible alternative competitive strategies based on different permutations of price and perceived value. However he suggested that only five of these are likely to be potentially successful. These five success strategies are as follows: Strategy 1: No frills Strategy 2: Low price Strategy 3: Hybrid Strategy 4: Differentiation Strategy 5: Focussed differentiation Discussion of each strategy: Strategy 1: No frills As the term implies, this strategy is based on products or offerings which have no additional features, design elements, service back up and so on. They represent the most basic of products and therefore the lowest perceived added value. However, this strategy also enables the lowest of prices to be charged. This can be a very effective strategy for market segments that are unwilling or unable to afford anything but the most basic product or service. Ryanair in the airline market is an example of a company using this strategy Strategy 2: Low Price This strategy also seeks to achieve a lower price than competitors, but at the same time attempting to maintain similar value of products or services to those offered by competitors. The major disadvantage of this strategy is that it is easily copied by competitors and can result in severe price wars in an industry. To successfully pursue this strategy a company needs to be the cost leader. The Co-operative Retail Group in the UK appear to be pursuing this strategy Strategy 3: Hybrid Again, as the term implies, this is a strategy based on relatively high perceived value but low prices. Obviously this combines two strategies which are likely to give a company a competitive advantage, and for obvious reasons is therefore potentially very attractive to customers. However, it is normally a strategy which can only be supported for a short period of time as margins and profits are too low in the long run to make it sustainable. A company may pursue this strategy with the intention of rapidly gaining market share and driving other competitors from the market. The Dell computer company would appear to be using this strategy.

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

Strategy 4: Differentiation This strategy is based on providing products or services which are in some way unique or different from those of competitors. Prices charged are similar to those of competitors, thereby offering the customer better value or slightly higher than competitors giving the organisation better margins whilst remaining competitive through differentiated products. The key to success for this strategy is that the basis for differentiating the product or service must be of value to the customer and must also be based on sustainable competences which are difficult for competitors to copy or match. Nokia have been successful with this strategy in the mobile phone market. Strategy 5: Focused Differentiation This is similar to Strategy 4 with the difference being that the differentiated product or service is offered to a particular group of customers or segment. This enables a company to concentrate on those customers who will value the differentiation being offered and also has the advantage of having the potential to protect from would-be competitors. This strategy should be used where customers want and will pay for, something different and where the threat of competitive entry is intense. Jaguar in the car industry has successfully used this strategy. Q3 Total marks for question 20 marks

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

Question 4 Critchley Engineering has recently appointed you to advise them with regard to improving the effectiveness of their corporate planning. The founder and chairperson of the company has recently heard of a database developed by the Strategic Planning Institute of America, the so called PIMS database, and wondered if it would be worthwhile subscribing to this database. Q4 (a) Explain the background and purpose of the PIMS database and give examples of the strategic questions it seeks to answer. Background purpose In the early 1970s the Marketing Science Institute and the Harvard Business School established a joint study to investigate the relationship between company strategies and company profitability. This study led to the so called PIMS (Profit Impact of Marketing Strategies) database. The major purpose of PIMS is to use empirical evidence to establish which strategies are associated with higher levels of profitability in an industry and thereby to advise managers in these industries towards better (more profitable) courses of action. Examples of strategic questions that PIMS seeks to answer are:

What is the typical profit rate for different types of business? Given current strategies in a company what are future operating results What strategies are likely to help improve future operating results?
5 marks Q4 (b) Give examples of the sorts of information required from subscribers to PIMS and explain the main PIMS reports available from the database. In order to obtain information for a particular company, the company must subscribe to the PIMS project and provide detailed strategic information, including for example: likely to be?

Competitors and market information. Balance Sheet information. Assumptions about future sales, costs, strategies. Details of objectives and competitive strategies being pursued.

This information is then compared with the PIMS database and a series of reports are produced, as follows:

A Par report - showing the ROI and cash flows that are "normal" for this
type of business given its market, competition, technology, and cost structure. Also included is an analysis of strengths and weaknesses that are regarded as explaining high or low par figures compared to other businesses in the database. A Strategy Analysis report which computes the predicted consequences of each of several alternative strategic actions, judged by information on similar businesses making similar moves, from a similar starting point and in a similar business environment.

A report on Look-Alikes (ROLA) which examines possible tactics for

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

10 marks

achieving strategic objectives, such as an increase in market share, by analysing strategically similar businesses more closely. An Optimum Strategy" report, which is aimed at predicting the best combination of strategies for that particular company again based on the experiences of other businesses in "similar" circumstances. Q4 (c) Problems and limitations of PIMS include:

Outline the problems and limitations of using PIMS in strategic planning.

High cost. The full range of PIMS services is expensive and not every company can afford them The amount of data required to be supplied by a company for a PIMS analysis is extensive. Again, this can be not only a costly process but is also time consuming. PIMS data is historical and may be misleading in conditions of rapid change. Underlying assumptions of the PIMS model are not clarified and, therefore, must be taken on trust. Statistical basis of PIMS can give rise to different interpretations of results. 5 marks 20 marks

Q4

Total Maximum Marks for Question

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

SECTION C: Candidates must answer ONE question in this section (not BOTH). Each question carries 20 marks. Section C is worth 20% of the total marks available for the paper. Question 5 Q5 A key element in the successful implementation of corporate strategies is the design of a suitable organisation structure. However, the most suitable structure must match the type of organisation and context. Select five of Mintzbergs alternative organisational configurations and discuss the characteristics of each selected configuration, suggesting the type of organisation and context to which it is most suited. Mintzberg has suggested that there are a number of alternative organisational configurations, each of which will tend to be suited to a particular situation according to the nature of the organisation and the context in which the organisation operates. Five of these alternatives are as follows: The Simple Structure Configuration This type of structure is perhaps not a structure at all in the sense that relatively few activities in the organisation are formalised and planned. The hierarchy in this structure is flat and dominated by the chief executive who may often be the owner. Division of work is flexible and responsibilities are rarely specified precisely. This type of structure or configuration is very flexible and therefore is well suited to small entrepreneurial organisations and/or where the pace of environmental and market change is extremely rapid. The Machine Bureaucracy Configuration This configuration is dominated by a large staff function which focuses on routinised systems to even out processes and procedures in the organisation. Responsibilities and lines of authority are tightly defined and well known throughout the organisation. This type of configuration is best suited to environments where rates of change are relatively slow and where the emphasis in terms of competitive advantage needs to be on cost efficiency. Many of the mature manufacturing industries are well suited to this type of configuration. The Professional Bureaucracy Configuration Although organisational structures and procedures are formalised in this type of structure, efficiency and effectiveness are achieved through professional competence and skills amongst the employees of the organisation. A substantial amount of group interaction is found in this type of configuration with a high degree of emphasis on training, learning and professional knowledge. Adherence to rules and procedures is achieved through a professional commitment. This type of configuration is best suited to organisations where the work is complex and requires professional skills such as, for example, hospitals, accountancy offices, etc. The Divisionalised Configuration Perhaps as one would expect, this type of configuration is often found where a company produces diverse products and/or operates in diverse markets. Often, the key issue is the relationship between corporate headquarters and the Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

divisions or strategic business units of the organisation, particularly with regard to the degree of autonomy given to each division. This configuration has proved to be well suited to the larger diversified type of organisation where the requirements for success in different markets require different skills and strategies. The Adhocracy Configuration Best suited to organisations who base their competitive success on innovation and change, this type of configuration is highly flexible and organic. Communication between the different parts of the organisation is open and the predominant style in such organisations is supportive and open. Systems for creating and disseminating knowledge and information are particularly important in this type of structure, with a need to avoid anything which stifles creativity in the organisation. This type of configuration is particularly suited to companies in high technology industries where product lifecycles are short. 20 marks

Q5

Total marks for question

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

Question 6 Q6 Critically evaluate the use of the Balanced Scorecard for assessing corporate strategic performance. Understanding of and reasons for development of the Balanced Scorecard: It came about based on the notion that many traditional approaches to measuring corporate performance are essentially unbalanced and: Too narrow Over emphasise quantitative measure of performance Concentrate on past rather than future performance Dont indicate which strategies work best and why

Explanation of the nature and operation of balanced scorecard, including four key areas of measurement : - Includes quantitative and quantitative measures - Organisation specific - Includes expectations of different stakeholders

Four key areas of measurement: - Financial - Customer - Internal - Growth /future

Issues in implementing and using balanced scorecard: Still need to identify/measure most strategically crucial activities not those which are easiest to measure Can lead to conflict between different departments and different stakeholders as to what is strategically important Can lead to excessive measurement and control Needs full co-operation and involvement of all staff Q6 Total marks for question 20 marks

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

SECTION D: Candidates must answer ONE question in this section (not BOTH). Each question carries 20 marks. Section D is worth 20% of the total marks available for the paper. Question 7 Q7 (a) The idea of Strategic Competitor Groups is to identify competitors on the basis of their strategic characteristics. It is based on the notion that the most direct and important competitors are those companies which are similar with respect to these strategic characteristics. The more similar a company is with respect to these characteristics the more they are likely to be direct and intense competitors and therefore the more they will need to be analysed and understood in the development of corporate strategies and plans. Competitors therefore are grouped together on the basis of the similarity of their strategic characteristics. This raises the issue of which characteristics should be used to assess similarity. Q7 (b) Discuss the uses and limitations of this approach to identifying and analysing competitors. Some of the strategic characteristics which can be used to assess similarity, and hence identify Strategic Competitor Groups include the following: Explain Strategic Competitor Group Analysis.

5 marks

Degree of product (or service) diversity Extent of geographical coverage Number of market segments served Distribution channels used Extent of branding Product or service quality Ownership structure Size Cost Structure
Clearly, any number of characteristics might conceivably form the basis for judging similarity. Porter suggests that what constitute the key characteristics will vary from industry to industry but normally just two or three characteristics will be sufficient to identify Strategic Competitor Groups. So, for example a company might identify strategic groups on the basis of, say, geographical coverage, size, and distribution channels. The strategic planner however must judge what the most important characteristics are in any given industry/market situation. Strategic Competitor Group analysis can be used in the following ways: Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected. 15 marks

First of all, it enables the strategic planner to distinguish between close and distant competitors and therefore, which competitors are likely to present the greatest threat and need to be closely monitored and assessed when developing strategic plans. Secondly, it enables the planner to assess how likely or possible it is for a company to move from one strategic group to another. This assessment of mobility between Strategic Competitor Groups can be useful in assessing potential new competitors, or the extent to which the company itself can move into new competitive arenas. Thirdly, Strategic Competitor Group analysis can be used to identify possible opportunities and/or strategic problems. For example, the analysis may suggest gaps in the market where there are few existing competitors and which a company might wish to take advantage of. On the other hand, the analysis may point to potential future problems, e.g. where the number of companies pursuing similar strategies means that the market is overcompetitive. Strategic Competitor Group analysis then has several potential uses; however, there are some limitations both to the concept and in its application. Perhaps the most important limitation with the concept of Strategic Competitor Groups is that the problem of determining lies in what constitute the key strategic characteristics to enable the grouping to take place. Essentially this is based entirely on judgment. As already mentioned, the strategic planner must identify and assess the relevant characteristics based on experience and knowledge of the product market being assessed. Apart from this, there is nothing to guide the planner in the selection of the strategic characteristics, meaning that serious errors can be made in identifying key competitors. Secondly, of itself, Strategic Competitor Group analysis does not help identify and develop specific competitive strategies. Finally, Strategic Competitor Group analysis focuses only on existing competitors and therefore can cause the planner to miss potential new types of competition from say new technology. 20 marks

Q7

Total Maximum Marks for Question

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

Question 8 Q8 (a) Examples of key areas would include: Identify five key areas of market and customer analysis.

Q8 (b)

Customer Needs Market Size and Potential Market Life Cycle Stage Competitive Market Structure Market Segmentation Cost/Value Structure Strategic Fit/ Key Factors for Success 5 marks

Discuss the importance of each of these areas to the process of strategic planning and decision making. Customer Needs It is crucial to identify and understand the needs of customers in a market. If a company is for some reason unable or unwilling to supply these needs it should not even consider entering the market. As a minimum, an organisation needs to understand who the customers are, what their needs are, how they buy, and what factors affect the buying process. Market Size and Potential Another key area of market analysis is the assessment of current and potential market size. All other things being equal, the larger the market the more attractive the market. In many ways though it is the potential market which is most important. There are several approaches to forecasting future market potential and it is not always easy as it involves trying to predict the future and assess market dynamics. With respect to market dynamics a key concept here is the product life cycle. Market Life Cycle Stage Just as products have life cycles, so too do whole markets. Sometimes referred to as market evolution, markets pass through the same life cycle stages as products .So for example they start from new, grow, mature and eventually decline .Obviously in making decisions about whether or not to enter a market it is important to identify what stage in its evolution a market has reached and where it is destined to go next. Competitive Market Structure An important facet of any market is the nature and extent of competition within it. For example, a market that in all other respects looks attractive to a potential new entrant, may look very unattractive when considered from the point of view of the competition already present. In assessing the competitive structure of a market it is important to look not only at the degree of competitive rivalry existing in the market, but also at - the threat of new entrants; the bargaining power of buyers; the bargaining power of suppliers and the threat from substitutes.

15 marks

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.

Market Segmentation Most markets are comprised of groups of customers with distinctly different needs and wants. Marketers refer to these different groups as market segments. It is essential to identify these different segments in a market so the planner can determine for example: the bases for segmentation; the needs of the different segments, and the size and trends in the different segments. Decisions can then be made with regard to targeting and positioning. Cost/value added structure This aspect of market analysis considers the cost structure and cost dynamics in a market together with the value added structure of the market. Analysing cost structures and dynamics would involve assessing, for example, the relationship between fixed and variable costs. Markets with high fixed costs require large investments to be made and are volume sensitive, meaning that small changes in market share can have large effects on profitability. This can affect decisions regarding market selection and entry. It is also necessary to assess what parts in the manufacturing and distribution process represent the major points of value added. Once again, this can affect the extent to which a market might be profitable. Strategic fit /key factors for success In some ways this element of market analysis draws together all the previous elements with a view to determining whether or not the organisation has a strategic fit with the proposed market. The concept of strategic fit is crucial to market selection and involves determining whether or not a market matches the strengths of the organisation. In turn, this entails understanding the key factors for success in the market and whether or not the organisation can meet these. 20 marks

Q8

Total Maximum Marks for Question

Please note that these are not fully-worked model answers, but they are intended as a guide to the type of answer expected.