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Chapter 1 – Strategic Ideas

Strategic planning

Strategic decisions relate to the scope of a firm’s activities, the long-term direction of the
organisation and allocation of resources.

Planning is the establishment of objectives and the formulation, evaluation and selection
of the policies, strategies, tactics and action required to achieve them. Planning
comprises long-term/strategic planning and short-term/operational planning.

A strategy is a course of action, including the specification of resources required, to


achieve a specific objective.

A strategic plan is a statement of long-term goals along with a definition of the


strategies and policies which will ensure achievement of these goals.

A strategic thinker should have a vision of:


• What the business is now
• What it could be in an ideal world
• What the ideal world would be like

Strategic Planning: the rational model

The rational model is a comprehensive approach to strategy. It suggests a logical


sequence which involves analysing the current situation, generating choices (relating to
competitors, products and markets) strategies and implementing the chosen strategies.

The real test of a good strategy is whether it enables the business to use its capabilities
successfully in circumstances it cannot confidently predict.

Strategic Analysis
Step Stage Comment Tools, models, techniques
1 Mission and/or Mission denotes values, the • Mission statement
vision business’ rationale for existing;
vision refers to where the
company intends to be n a few
years time
2 Goals Interpret the mission to • Stakeholder analysis
different stakeholders
3 Objectives Quantified embodiments of • Measures such as
mission profitability, time
scale, deadlines
4 Environmental Identify opportunities and • PEST analysis
analysis threats • Porter’s 5 force
analysis; diamond
(competitive
advantage of nations
• Scenario building
5 Position audit or Identify strengths and • Resource audit
situation analysis weaknesses. • Distinctive
competence
Firm’s current resources, • Value chain
products, customers, systems, • Product life cycle
structure, results, efficiency, • BCG matrix
effectiveness
• Marketing audit
6 Corporate appraisal Combines steps 4 and 5 • SWOT analysis charts
7 Gap analysis Compares outcomes of step 6 • Gap analysis
with step 3

Strategic choice

Stage Comment Key tools, models and


techniques
Strategic options generation Come up with new ideas: • Value chain analysis
• How to compete • Scenario building
• Where to compete • Porter’s generic
• Method of growth strategic choices
• Ansoff’s growth vector
matrix
• Acquisition vs organic
growth
Strategic options evaluation Normally, each strategy has • Stakeholder analysis
to be evaluated on the basis • Risk analysis
of: • Decision-making tools
• Acceptability such as decision trees,
• Suitability matrices, ranking and
• Feasability scoring methods
• Financial measures (eg
ROCE, DCF)

Corporate strategy is the most general level of strategy in an organisation, identifying


the strategy for the business as a whole.

Business strategy relates to how an organisation approaches a particular market, or the


activity of a particular business unit.

Operational and functional strategies involve decisions which are made at operation
level. These decisions include product pricing, investment in plant, personnel policy and
so forth. The contributions of these different functions determine the success of the
strategy.
Less formal strategic planning

Advantages of formal planning:


• Identifies risks
• Forces managers to think
• Forces decision-making
• Better control
• Enforces consistency at all levels
• Public knowledge
• Time horizon
• Co-ordinates
• Clarifies objectives
• Allocates responsibility

Disadvantages of formal planning (Mintzberg):


• Practical failure
• Routine and regular
• Reduces initiative
• Internal politics
• Exaggerates power

An opportunistic strategy can seize fleeting opportunities, but may also fail to identify
them.

Advantages of an opportunistic strategy:


• Good opportunities are not lost
• A freewheeling opportunistic approach would adapt to change more quickly
• It might encourage a more flexible, creative attitude

Disadvantages of an opportunistic strategy:


• No co-ordinating framework for the organisation, so that some opportunities get
missed anyway
• It emphasises the profit motive to the exclusion of all other considerations
• The firm ends up reacting rather than acting purposively

Simon suggested that managers are limited by time, by the information they have and by
their own skills, habits and reflexes so small scale extensions to past policy –
incrementalism – rather than radical shifts.

Incrementalism is an approach to strategy and decision making highlighting small and


slow changes rather than one-off changes in direction. The danger is that such small
scale adjustments may not be enough to move with customers and their needs.
Henry Mintzberg suggests a credible alternative to their rather clumsy rational model in
the form of emergent strategy.

An emergent strategy is one developed out of a pattern of behaviour not consciously


imposed by senior management.

These activities are involved:


• Manage stability
• Detect discontinuity
• Know the business
• Manage patterns
• Reconcile change and continuity

While the rational approach may mean that there is no room for learning in the
strategy formulation process, the emergent approach could mean that there is no
overall control over the strategy.

Stacey argues that organisations that are capable of learning and adapting do so
because they are operating in the chaotic region between stability and instability
known as bounded instability.

The resource-based approach to strategy starts from a consideration of strengths and


weaknesses and, in particular, of distinctive competences.

Johnson, Scholes and Whittington’s terminology:


Strategic capability is the adequacy and suitability of the resources and competences
of an organisation for it to survive and prosper.

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

Intangible resources are non-physical assets such as information, reputation and


knowledge.

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

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


given market.

Threshold resources and threshold competences are needed to meet customers’


minimum requirements and therefore for the organisation to continue to exist.

Unique resources and core competences underpin competitive advantage and are
difficult for competitors to imitate or obtain.
Whittington’s analysis of approaches to strategy making:
• The Classical school – lays down rules on the basis that both environment
and firm are rational structures that can be analysed and a route to profit
maximisation established
• The Evolutionary school – proposes a more organic approach based on
survival because neither organisation nor environment can be completely
analysed, nor can their behaviour be completely predicted
• The Processual school – emphasises internal processes of bargaining and
learning and the gradual emergence of objectives
• The Systematic school – emphasises the need for awareness of the cultural
and social environment

Flexibility in strategic planning

Planning must have the following characteristics:


• It must be flexible
• It must establish controls for measuring performance

Management accounting and business strategy

Management accounting is the application of the principles of accounting and financial


management to create, protect, preserve and increase value for the stakeholders of for
profit and not-for-profit enterprises in the public and private sectors.

Management account is an integral part of the management. It requires the identification,


generation, presentation, interpretation and use of information relevant to:
• Inform strategic decisions and formulate business strategy
• Plan long, medium and short run operations
• Determine capital structure and fund that structure
• Design reward strategies for executives and shareholders
• Inform operational decisions
• Control operations and ensure the efficient use of resources
• Measure and report financial and non-financial performances to management and
other stakeholders
• Safeguard tangible and intangible assets
• Implement corporate governance procedures, risk management and internal
controls

What is strategy?

A strategy is a course of action, including the specification of resources required, to


achieve a specific objective.
Johnson, Scholes and Whittington state “strategy is the direction and scope of an
organisation over the long term which achieves advantage in a changing environment,
through its configuration of resources and competences with the aims of fulfilling
stakeholder expectations.

Strategic management accounting is a form of management accounting in which


emphasis is place on information which relates to factors external to the entity, as well as
non-financial information and internally generated information.

Relevant costs and revenues are costs and revenues appropriate to a specific
management decision. These are represented by future cash flows whose magnitude will
vary depending upon the outcome of the management decision made.

Goal congruence in a control system, the state which leads individuals or groups to take
actions which are in their self-interest and also in the best interest of the entity. Goal
incongruence exists when the interests of individuals or of groups associated with an
entity are not in harmony.

Information that a management accountant could provide includes:


• Competitors’ costs
• Financial effect of competitor response
• Product profitability
• Customer profitability
• Pricing decisions
• The value of market share
• Capacity expansion
• Brand valuation
• Shareholder wealth
• Cash-flow
• Effect of acquisitions and mergers
• Decisions to enter or leave a business area
• Introduction of new technology

Some cost classifications are particularly relevant:


• Differential/incremental cost - this is the difference in total cost between
alternatives. For strategic decision making this can be considered as the extra cost
that would be incurred by a decision.
• Avoidable cost – this is the specific cost of an activity or sector of a business
which would be avoided if the activity or sector did not exist
• Committed cost – a cost arising from prior decisions, which cannot, in the short
run, be changed
• Controllable cost – a cost that can be controlled, typically by a cost, profit or
investment centre manager
• Opportunity cost – is the value of the benefit sacrificed when one course of
action is chosen in preference to an alternative
The success factors of a strategic management accounting system (Ward) should:
• Aid strategic decisions
• Close the communication gap between accountants and managers
• Identify the type of decision
• Offer appropriate financial performance indicators
• Distinguish between economic and managerial performance
• Provide relevant information
• Separate committed from discretionary costs
• Distinguish discretionary from engineered costs
• Use standard costs strategically
• Allow for changes over time

Management accounting information can be use to support strategic decision making

Strategic plan is a statement of long-term goals along with a definition of the strategies
and policies which will ensure achievement of these goals.

Management control. All of the processes used by managers to ensure that


organisational goals are achieved and procedures adhered to, and that the organisation
responds appropriately to changes in its environment.

Closed loop system – control system that includes provision for corrective action, taken
on either a feedforward or a feedback basis.

Feedback control – measurement of differences between planned outputs and actual


outputs achieved, and the modification of subsequent action and/or plans to achieve
future required results.

Feedforward control – forecasting of differences between actual and planned outcomes,


and the implementation of action, before the event, to avoid such differences.

Open loop system – control system that includes no provision for corrective action to be
applied to the sequence of activities.
Chapter 2 – Information Strategy

Data is the raw material for data processing. Data consists of numbers, letters and
symbols and relates to facts, events and transactions.

Information is data that has been processed in such a way as to be meaningful to the
person who receives it.

Strategic information is used to plan the objectives of the organisation, and to assess
whether the objectives are being met in practice.

An Executive Information System (EIS) pools data from internal and external sources
and makes information available to senior managers in an easy-to-use form. EIS help
senior managers make strategic, unstructured decisions. It will have:
• Flexibility
• Quick response time
• Sophisticated data analysis and modelling tools

Management Information Systems (MIS) convert data from mainly internal sources
into information (eg summary reports, exception reports). This information enables
managers to make timely and effective decisions for planning, directing and controlling
the activities for which they are responsible. It will:
• Support structured decisions at operational and management control levels
• Designed to report on existing operations
• Have little analytical capability
• Relatively inflexible
• Have an internal focus

Decision Support Systems (DSS) combine data and analytical models or data analysis
tools to support semi-structured and unstructured decision making.

Be aware of extranets, also known as Value Added Networks, an example is Galileo


flight booking system.

Information Strategy

Earl’s IT strategy levels:


The Information systems strategy is the long-term plan for systems to exploit
information in order to support business strategies or create new strategic options.

The Information technology strategy is concerned with selecting, operating and


managing the technological element of the IS strategy.

The Information management strategy deals with the roles of the people involved in
the use of IT assets, the relationships between them and design of the management
processes needed to exploit IT.
Strategic Information Systems are systems at any level of an organisation that change
goals, processes, products, services or environmental relationships with the aim of
gaining competitive advantage.

A strategic approach is necessary because:


• IS/IT is a high cost activity
• IS/IT is critical to the success of many organisations
• It can provide information and competitive advantage
• IT can impact significantly on the business context
• IT affects all levels of management

Porter and Millar say that IT changes corporate strategy since products and business
activities have both physical and informational aspects. The rapid rate of change in IT is
having drastic effects on the informational aspects of products and activities. IT has the
potential to transform competition in three ways, it effects the 5 competitive forces, it has
potential for implementing the generic strategies and its makes a contribution to the
emergence of completely new businesses.

They redrew the value chain and highlighted the computer systems used in each one eg
planning models, automated personnel scheduling, computer aided design, online
procurement etc.

IT changes the structure of industry through its effect on the five forces eg supermarket
loyalty cards, CAD, better service through better IT. IT can reduce costs and make it
easier to differentiate products.

Porter and Millar suggested a 5 step process to take advantage of new IT based
opportunities:
• Assess information intensity
• Determine the role of IT in industry structure
• Identify and rank the ways in which IT might create competitive advantage
• Investigate how IT might spawn new businesses
• Develop a plan to exploit IT

Earl suggests that IT strategy could be top down/business objective led, bottom
up/business system led or inside out/innovative/exploitative. Other approaches include
enterprise analysis and the use of critical success factors.
Earl’s three leg analysis:

Leg or approach Comment


top down/business The overall objectives of an organisation are identified and then
objective led IS systems are implemented to enable these objectives to be met.
This approach relies on the ability to break down the
organisation and its objectives to a series of business objectives
and processes and to be able to identify the information needs of
these. This is an analytical approach and the people usually
involved are senior management and specialist teams.
Bottom up/ business Computer based transaction systems are critical to business
system led operations. The organisation focuses on systems that facilitate
transactions and other basic operations. This is an evaluative
approach. The people usually involved are system users and
specialists.
inside out/ innovative/ The organisation encourages idea that will exploit existing IT
exploitative and IS resources. Innovations may come from entrepreneurial
managers or individuals outside the formal planning process.
This is an innovative/creative approach. The people involved
are entrepreneurs and/or visionaries.

Enterprise analysis involves examining the entire organisation in terms of structure,


processes, functions and data elements to identify the key elements and attributes of
organisational data and information.

It involves the following steps:


1) ask a large sample of managers how they use information, where they get it from, what
their objectives are, what data they want, how they make decisions and the influence of
their environment.

2) Aggregate the findings from step 1 into subunits, functions, processes and data
matrices. Make a matrix which shows what data classes are required to support particular
organisational processes and which process are the creators and users of the data.

3) use the matrix to identify areas that information systems should focus on

Critical success factors are the small number of key operational goals that are vital to
the success of the organisation. Rockart says there are four general sources:
• The industry the business is in
• The company itself and its situation within the industry
• The environment, eg consumer trends, the economy
• Temporal organisational factors, which are areas of corporate activity which are
currency unacceptable eg high stock levels

CSF approach strengths:


• Takes into account environmental changes
• Focuses on information
• Facilitates top management participation in system development

CSF approach weaknesses:


• Aggregation of individual CSFs to a coherent plan is hard
• Bias towards top management
• CSFs change too often

An information audit aims to establish the needs of users and how these needs could be
met:
• Identify information needs
• Identify information provided by current systems
• Analyse the gap

Earl devised a grid to identify suitability of systems in terms of business value and
technical quality.

Technical Quality
Low High
Low DIVEST REASSESS
This is a costly and Why do users not
Business Value unused system value the system
High RENEW MAINTAIN AND
This will enhance its ENHANCE
technical quality Upgrade system to
maintain position

McFarlan and McKenney’s strategic grid shows levels of dependence on IT:

Strategic importance of current info systems


Strategic importance Low High
of planned info Low Support Factory
systems High Turnaround Strategic

Organisations in:
• The strategic quadrant depend on IS for competitive advantage and expect to
continue to do so
• The turnaround quadrant to not currently view it has having strategic importance
but expect it to be in the future
• The support quadrant see no strategic value in IT
• The factory quadrant see IT as strategically important but predict this will not be
the case in the future
Peppard developed McFarlan and McKenney’s strategic grid into the applications
portfolio:

Strategic importance of individual applications in the current


competitive environment
Strategic importance Low High
of individual Low Support Key operational
applications in the High High potential Strategic
predicted future
competitive
environment

• Support applications eg accounting or payroll software. Key to business


efficiency
• Key operational applications eg inventory control, support established core
business processes
• Strategic applications will be industry unique, seek to gain competitive advantage
through innovation through support of business strategies
• High potential applications eg supermarket online ordering, could make or break
the future but white elephants are costly

Information sources and management

An information system should be designed to obtain information from all relevant


sources – both internal and external. Data will be collected formally and informally.

The phrase environmental scanning is often used to describe the process of gathering
external information, which is available from a wide range of sources.

Information for planning and control

Strategic planning is the process of deciding on objectives of the organisation, on


changes in these objectives, on the resources used to attain these objectives, and on the
policies that are to govern the acquisition, use and disposition of these resources.

Operational control is the process of assuring that specific tasks are carried out
effectively and efficiently.

The decision making process:


1. problem recognition
2. problem definition and structuring
3. identifying alternative courses of action
4. making and communicating the decision
5. implementation of the decision
6. monitoring the effects of the decision
Risk is a condition in which there exists a quantifiable dispersion in the possible
outcomes from any activity.

Uncertainty means that you do not know the possible outcomes and/or the chances of
each outcome occurring.

Perfect information is information that predicts the future with perfect accuracy.

Imperfect information is information which cannot be guaranteed to be completely


accurate. Almost all information is therefore imperfect – but may still be very useful.

Knowledge management

Knowledge management is the systematic process of finding, selecting, organising,


distilling and presenting information so as to improve comprehension of a specific area of
interest. Specific activities help focus the organisation on acquiring, storing and utilising
knowledge for such things as problem solving, dynamic learning, strategic planning and
decision making.

Organisational knowledge is the collective and shared experience accumulated through


systems, routines and activities of sharing across the organisation as defined by Johnson,
Scholes and Whittington

Nonaka and Takeuchi, four ways in which knowledge moves within and between the tacit
and explicit categories:
1. Socialisation – is the informal process by which individuals share and transmit
their tacit knowledge
2. Externalisation – converts tacit knowledge into explicit knowledge; this is a very
difficult process to organise and control
3. Internalisation – is the learning process by which individuals acquire explicit
knowledge and turn it into their own tacit knowledge
4. Combination – brings together separate elements of explicit knowledge into
larger, more coherent systems; this is the arena for meetings, reports and
computerised knowledge management systems

A learning organisation is capable of continual regeneration from the variety of


knowledge, experience and skills of individuals within a culture that encourages mutual
questioning and challenge around a shared purpose or vision. Johnson, Scholes and
Whittington

Databases and Models

A database is a collection of data organised to service many applications. The database


provides convenient access to data for a wide variety of users and user needs.
Advantages of a database system include the avoidance of data duplication, management
is encouraged to manage data as a valuable resource, data consistency across the
organisation and the flexibility for answering ad-hoc queries. Disadvantages of a
database system include initial development costs and the potential problems of data
security.

A data warehouse consists of a database containing data from various operational


systems and reporting and query tools.

Datamining software looks for hidden patterns and relationships in large pools of data.
Chapter 3 – Strategic Objectives

Mission, Goals and Strategy

Mission guides strategic decisions and provides values and a sense of direction.

The Ashridge College model of mission links business strategy to culture and ethics by
including four separate elements in an expanded definition of mission:
1. Purpose – why does the company exist, who does it exist four
2. Values are the beliefs and moral principles that underlie the organisation’s culture
3. Strategy provides the commercial logic for the company – what is out business,
what should it be
4. Policies and standards of behaviour provide guidance on how the organisation’s
business should be conducted.

A mission statement is a published statement, apparently of the entity’s fundamental


objective(s). This may or may not summarise the true mission of the entity.

The mission statement can play an important role in the strategic planning process:
• By inspiring and informing planning
• By screening – providing a yardstick by which plans are judged
• By establishing an ethics framework of how things should be implemented

A goal is often a longer term overall aspiration: Mintzberg defines goals as “the
intentions behind decisions or actions, the states of mind that drive individuals or
collectives of individuals called organisations to do what they do.”

Objectives are often quite specific and well-defined, though they can embody
comprehensive purposes.

Targets are generally expressed in concrete numerical terms and are therefore easily used
to measure progress and performance.

Peter Drucker, Management by Objectives:


Smart
Measurable
Achievable
Realistic
Time-related

Functions of objectives:
• Planning
• Responsibility
• Integration
• Motivation
• Evaluation
Solutions to conflicts between goals:
• Rational evaluation according to financial criteria
• Bargaining managers with different goals will compete and form alliances to
achieve their individual goals
• Satisficing balancing goals so one is not achieved at the expense of another
• Sequential attention – goals are dealt with one by one in sequence
• Priority setting – certain goals get priority over others
• Exercise of power

Critical Success Factors are those product features that are particularly valued by a
group of customers and, therefore, where the organisation must excel to outperform
competitors. Johnson, Scholes and Whittington

Stakeholder goals and objectives

Stakeholders are those persons and organisation that have an interest in the strategy of
an organisation. Stakeholders normally include shareholders, customers, staff and the
local community.

Mendelow suggested mapping stakeholders on a matrix of Power and Level of Interest so


that the organisation prioritises satisfying the right ones.

The short term and the long term

Short-termism is bias towards paying particular attention to short-term performance


with a corresponding relative disregard to the long run. There may need to be a trade off
between short term and long term objectives.

Corporate social responsibility and sustainability

Social costs are tangible and intangible costs and losses sustained by third parties or the
general public as a result of economic activity, for example pollution by industrial
effluent.

Social responsibility accounting is identification, measurement and reporting of the


social costs and benefits resulting from economic activities.

Social responsibility and ethical behaviour are not the same thing although they are
related. Business ethics is concerned with the standards of behaviour in the conduct of
business. Corporate social responsibility is an organisation’s obligation to maximise
positive stakeholder benefits while minimising the negative effects of its actions.

Milton Friedman argued against CSR saying people, not businesses, have responsibilities.
Manager’s should not spend the owners money for purposes other than those that have
been authorised. There is also the argument that the maximisation of wealth is the
business way that society can benefit from a business’ activities.
A business may carry out a social audit.

Strategies for social responsibility:

Proactive strategy A strategy which a business follows where it is prepared to take full
responsibility for its actions. A company which discovers a fault in a
product and recalls the product without being forced to, before any
injury or damage is caused, acts in a proactive way.
Reactive strategy This involves allowing a situation to continue unresolved until the
public, government or consumer groups find our about it.
Defence strategy This involves minimising or attempting to avoid additional
obligations arising from a particular problem
Accommodation This approach involves taking responsibility for actions, probably
strategy when on of the following happens:
• Encouragement from special interest groups
• Perception that a failure to act will result in government
intervention

Sustainability involves developing strategies so that the company only uses resources at
a rate that allows them to be replenished. At the same time, emissions of waste are
confined to levels that do not exceed the capacity of the environment to absorb them.

Elkington argues that business must help to deliver:


• Economic prosperity
• Environmental quality
• Social equity

The three main forms of capital that they need to value therefore are:
• Economic capital (physical, financial and human skills and knowledge)
• Natural capital (replaceable and irreplaceable)
• Social capital (the ability of people to work together

Not for Profit Organisations

Not for Profit Organisations have their own objectives, generally concerned with efficient
use of resources in the light of specified targets.

Bois proposes that a not-for-profit organisation be defined as “an organisation whose


attainment of its prime goal is not assessed by economic measures. However, in pursuit
of that goal it may undertake profit making activities. This may involve a number of
different kinds of organisation with, for example, differing legal status – charities,
statutory bodies offering public transport or the provision of services such as leisure,
health or public utilities such as water or road maintenance.
The Public Sector

In the public sector, resources (not sales) are the limiting factor. The rationing of health
care typifies the problems safe.
Chapter 4 – The Changing Environment

Relating the organisation to its enviroment

The general environment covers all the political/legal, economic, social/cultural and
technological (PEST) influences in the countries an organisation operates in.

The task environment relates to factors of particular relevance to a firm, such as its
competitors, customers and suppliers of resources.

Framework for assessing environmental influences:


Demographic
Environment
Economics
Politics
Law
Information
Society
Technology

Johnson and Scholes contrast the concepts of environmental complexity (how many
influences and the inter-relationships between them) and environmental dynamism (the
rate of change). Together complexity and dynamism create uncertainty.

Environmental issues can be of:


• Long-term impact, which can be dealt with in advance
• Short-term impact, which require crisis management

The political and legal environment

The political environment affects the firm in a number of ways:


• A basic legal framework generally exists
• The government can take a particular stance on an issue of direct relevance to an
business or industry
• The government’s overall conduct of its economic policy is relevant to business

All companies are impacted by tax law and health and safety legislation but some also
have to deal with extra regulations eg utility companies, train companies.
Porter notes several ways the government can directly affect the economic structure of an
industry:

Capacity expansion Government policy can encourage firms to increase or cut their
capacity:
• The UK tax system offers capital allowances to encourage
investment in equipment
• A variety of incentives, funded by the EU and national
governments, exist for locating capacity in a particular
area
• Incentives are used to encourage investment by overseas
firms. Different countries in the EU have competed for
investment from Japan, for example
Demand • The government is a major customer
• Government can also influence demand by legislation, tax
reliefs or subsidies
Divestment and In some European counties, the state takes many decisions
rationalisation regarding the selling off or closure of businesses, especially in
sensitive areas such as defence
Emerging industries Can be promoted by the government or damaged by it
Entry barriers Government policy can discourage firms from entering an
industry, by restricting investment or competition or by making it
harder, by use of quotas and tariffs, for overseas firms to compete
in the domestic market
Competition • The government’s purchasing decisions will have a strong
influence on the strength of one firm relative to another in
the market eg armaments
• Regulations and controls in an industry will affect the
growth and profits of the industry – eg minimum product
quality standards
• As a supplier of infrastructure eg roads, the government is
also in a position to influence competition in an industry
• Governments and supra-national institutions such as the
EU might impose policies which keep an industry
fragmented, and prevent the concentration of too much
market share in the hands of one or two producers

The economic environment

Economic factors include the overall level of growth, the business cycle, official
monetary and fiscal policy, exchange rates and inflation.

Services are value creating activities which in themselves do not involve the supply of
physical product. Service provision may be subdivided into:
• Pure services, where there is no physical product, such as consultancy
• Service with a product attached, such as the design and installation of a computer
network
• Products with services attached, such as the purchase of a computer with a
maintenance contract

The social and cultural environment

Demography is the study of populations and communities. It provides analysis of


statistics on birth and death rates, age structures of populations, ethnic groups within
communities and so on. It is important because:
• Labour is a factor of production
• People create demand for goods, services and resources
• It has a long-term impact on government policies
• There is a relationship between population growth and living standards

Culture is used by sociologists and anthropologists to encompass the sum total of the
beliefs, knowledge, attitudes of mind and customs to which people are exposed in their
social conditioning. It has the following characteristics:
• Beliefs and values
• Customs
• Artefacts – physical tools. Art
• Rituals

It is particularly important for marketing and human resource managers.

Society can be divided into subcultures:


• Class
• Ethnic background
• Religion
• Geography or region
• Age
• Sex
• Work

The technological environment

Technological factors have implications for economic growth overall, and offer
opportunities and threats to many businesses. Meta-technologies are technologies that
are applicable to many applications eg lasers.

Futurology is the science and study of sociological and technological developments,


values and trends with a view to planning for the future.
The Delphi model involves a panel of experts providing view on various events to be
forecast such as inventions and breakthroughs, or even regulations or changes over a time
period in to the future.

Interest and pressure groups

The members of pressure groups come together to promote an issue or cause. They come
together either because political representatives fail to air important concerns or different
groups in society have different interests. They may pressure government or lobby a
company or industry.

Aside from public pressure groups there are also employers’ organisations, professional
associations, trade unions and consumer’s associations.

Companies can deal with pressure groups by assessing which might target them and
providing information to correct misapprehensions and using public relations in crisis
management.

Environmental information and Analysis

A company’s response to the environment is influenced by its complexity and its


dynamism. The value of forecasts varies according to these factors.

Johnson and Scholes suggest that a firm should conduct an audit of environmental
influences although a firm can never be sure because of the complexity and dynamism of
the environment.

The impact of uncertainty is:


• The planning horizon may be shortened
• Strategies may be more conservative
• Emergent strategies may be encouraged
• Increased information requirements
• Firms may follow multiple strategies

A forecast is a prediction of future events and their quantification for planning purposes.

In simple/static conditions the past is a relatively good guide to the future:


• Time series analysis
• Regression analysis
• Leading indicators

In dynamic/complex conditions:
• Scenario building
• The past is not a reliable guide
Strategic intelligence, according to Donald Marchand, is defined as what a company
needs to know about its business environment to enable it to anticipate change and design
appropriate strategies that will create business value for customers and be profitable in
new markets and new industries in the future.

The process is:


• Sensing – identify appropriate external indicators of change
• Collecting – gather information in ways that ensure it is relevant and meaningful
• Organising – structure the information in the right format
• Processing – analyse information for implications
• Communicating – package and simplify information for users
• Using – apply strategic intelligence

Key dimensions of strategic intelligence:


Information culture What is the role of information in the organisation? Is it only
distributed on a need to know basis or do people have to five
specific reasons for secrecy?
Future orientation Is the focus on specific decisions and trade-offs or a general
attitude of enquiry
The structure of Is communication vertical, up and down the hierarchy, or lateral
information flows
Processing strategic Are professional strategists delegated to this task or is it
intelligence everybody’s concern?
Scope Is strategic intelligence dealt with by senior management only,
or is intelligence built throughout the organisation
Time horizon Short termist or orientated towards the long term
The role of IT Some firms are developing sophisticated knowledge
management systems to capture the data they gather
Organisational Do managers keep in mind the lessons of past successes or
“memory” failures

CACI is a company providing market analysis and other data products to clients its
products include:
• Paycheck – income data for 1.6 million postcodes
• People UK – geodemographic, life stage and lifestyle data
• InSite – geographic information system
• Acorn – A classification of residential neighbourhoods
• Lifestyles UK – 300 defined lifestyle segments
• Monica – helps people identify the age of people on its database by popularity of
their first name through time
Chapter 5 – The global competitive environment

The competitive environment – the 5 forces

A market comprises the customers or potential customers who have needs which are
satisfied by a product or service.

An industry comprises those firms which use a particular competence, technology,


product or service to satisfy customer needs.

Competitive forces/Five forces are the external influences upon the extent of actual and
potential competition within any industry which in aggregate determine the ability of
firms within that industry to earn a profit. Porter argues that a firm must adopt a strategy
that combats these forces better than its rivals’ strategies if it is to enhance shareholder
value.

The are factors which characterise the nature of competition in one industry to another
(why selling chemicals is more profitable than selling clothes) and within a particular
industry (individual company’s strategies).

There are five forces:


1. The threat of new entrants to the industry
2. the threat of substitute products or services
3. the bargaining power of customers
4. the bargaining power of suppliers
5. the rivalry amongst current competitors
Barriers to entry for new entrants:
• Scale economies
• Product differentiation – brand loyalty
• Capital requirements
• Switching costs for the consumer
• Access to distribution channels
• Cost advantages of existing producers, independent of scale economies (eg
patents, experience, favoured access to raw materials)

Entry barriers might be lowered by:


• Changes in the environment
• Technological changes
• Novel distribution channels for products or services

The bargaining power of customers:


• How much the customer buys
• How critical the product is to the customer
• Switching costs
• Whether the products are standard items
• The customer’s own profitability
• Customer’s ability to bypass or take over the supplier
• The skills of the customer’s purchasing staff
• The importance of product quality

The bargaining power of suppliers:


• Is there a monopoly or oligopoly
• The threat of new entrants or substitute products to the supplier’s industry
• Whether the suppliers have other customers outside the industry
• The importance of the supplier’s product to the customer’s business
• Whether the supplier has a differentiated product which the customer needs
• Whether switching costs for the customer would be high

The intensity of competition within the industry would depend on:


• Market growth
• Cost structure
• Ease with which customers will switch, brand loyalty
• Capacity
• Uncertainty
• Exit barriers

Remember that products’ profitability may depend on complementary products eg a CD


player is useless without CDs and vice versa.
When thinking about the competitive forces think about the impact of IT. Also
government can be considered to be a “sixth force”.
Trading relationships have strategic impact and, while mutual benefit may be desirable,
they must be firmly managed.

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

The impact of globalisation on competition

Globalisation of markets (Levitt, 1983), is an expression which relates first to demand:


taste, preferences and price-mindedness are becoming increasingly universal. Second, it
relates to the supply side: profits and services tend to become more standardised and
competition within industries reaches a world-wide scale. Third, it relates to the way
firms, mainly multination corporations, try to design their marketing policies and control
systems appropriately so as to remain winners in the global competition of global
products for global consumers.

Bear in mind that protectionist measures are not the only barriers, also:
• Tax regimes
• Wage levels
• Infrastructure
• Language and culture
• Skills levels
• Prosperity

But for some niche products the domestic market may saturate too quickly so global sales
are essential for success.

The EU is the most integrated of the regional trading organisations, aspiring to a single
market in goods, services and factors of production. It aims to harmonise as much as
possible.

The World Trade Organisation was set up to promote free trade and resolve disputes
between trading partners and reduce protectionist measures.

The competitive advantage of a nation’s industries

Four factors support competitive success in a nation’s industries: factor conditions,


demand conditions, related and supporting industries and firm strategy, structure and
rivalry.

Porter, in The Competitive Advantage of Nations, suggested that some nations’ industries
succeed more than others in terms of international competition.
Porter argues that countries should focus on what they are based at in relation to other
countries. Industries that require high technology and highly skilled employees are less
affected than low technology industries by the relative costs of their inputs of raw
materials and basic labour as determined by the national endowment of factors.

Comparative advantage is too general a concept to explain the success of individual


companies and industries.

Factor conditions are a country’s endowment of inputs to production:


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

There are basic factors (land, unskilled labour) which are inherited, or their creation
involves little investment. Advanced factors are required to create high order competitive
advantage and require investment eg universities, broadband infrastructure.

An abundance of factors is not enough, it is the efficiency with which they are deployed,
inappropriate economic policy can erode competitive advantage.

The home market determines how firms perceive, interpret and respond to buyer needs
and puts pressure on firms to innovate and provides a launch for global ambitions.
Competitive success in one industry is linked to success in related industry, eg good local
produce = good restaurants.
National culture can encourage certain tendencies eg Germany has a lot of technological
manufacturing companies.

Porter says that a nation’s competitive industries are clustered. Porter believes clustering
to be a key to national competitive advantage. A cluster is a linking of industries through
relationships which are either vertical (buyer-supplier) or horizontal (common customers,
technology, skills). An individual firm is more likely to succeed if there is a supporting
cluster eg Italian suits.

Overcoming lack of advantage:


• Compete in the most challenging market to emulate domestic rivalry and obtain
information
• Spread research and development activities to countries to where there is already
a cluster
• Invest heavily in innovation
• Invest in human resources
• Look out for new technologies
• Collaborate with foreign companies
• Supply overseas companies
• Source components from overseas
• Exert pressure on politicians

Competitor Analysis

Competitive position is the market share, costs, prices, quality and accumulated
experience of an entity or a product relative to the competition.

Kotler lists four kinds of competition:


1. Brand competitors – similar firms offering similar products eg McDonalds and
Burger King
2. Industry competitors – similar products but different in other ways such as range
of products or geographic locations, eg British Airways and American Airways
3. Generic competitors – compete for the same disposable income with different
products eg home improvements vs foreign vacations
4. Form competitors – offer products which are technically significantly different
but which satisfy the same needs, eg matches and cigarette lighters

Competitor analysis is the identification and quantification of the relative strengths and
weaknesses (compared with competitors or potential competitors), which could be of
significance in the development of a successful competitive strategy, eg
• Competitor’s goals
• Competitor’s assumptions
• Competitor’s current and potential situation and strategy
• Competitor’s capabilities

Kotler’s competitor response profiles:


• Laid back – does not respond
• Tiger – responds aggressively to all opposing moves
• Selective – reacts to some threats in some markets but not to all
• Stochastic – unpredictable

Accounting for competitors

The management accountant’s techniques are useful in competitor analysis and by


modelling the impact of different strategies.

Look at impact of various competitor moves. Look at debt structure of rival, what if
interest rates change etc. Look at cost structures and barriers to entry.

E-Commerce and the Internet

Electronic commerce can be defined as using a computer network to speed up all stages
of the business process, from design to buying, selling and delivery.
Chapter 6 – Customers and Suppliers

The supply chain

Supply chain management is about optimising the activities of companies working


together to produce goods and services, to be responsive to customers demands and
reliable in the delivery of them.

The aim is to co-ordinate the whole chain, form raw material suppliers to end customers.
The chain should be considered as a network rather than a pipeline. A network of
vendors support a network of customers, with third parties such as transport firms helping
to link the companies.

A lean supply chain:


Advantages Counter - arguments
Reduced cost Leanness focuses on reducing cost rather
than improving quality.
Improved quality
Reduced inventories There may be insufficient slack in the
system to deal with fluctuations in demand
Shorter lead times Preferred supplier relationships may
become akin to monopolies, which
damages the consumer

Partnering across the supply chain may damage a company because:


• Reduces flexibility
• Arguments about profit sharing
• Relative bargaining power may make partnership unnecessary
• Dependence on another firm
• Could reduce competitiveness overall

Marketing

Marketing is the management process responsible for identifying, anticipating and


satisfying customer requirements profitably.

Kotler identifies four key components in marketing:


1. identifying target markets
2. determining the needs and wants of those markets
3. delivering a product offering which meets the needs and wants of those markets
4. meeting the needs of the market profitability

Marketing activities can be grouped in to four broad roles:


• sales support
• marketing communications
• operational marketing
• strategic marketing

A marketing audit is a systematic assessment of the organisation’s marketing objectives,


strategies, organisation and performance. It involves a review of an organisation’s
products and markets, the marketing environment, and its marketing system and
operations. The profitability of each product and each market should be assessed, and the
costs of different marketing activities established.

Marketing: products, customers and segmentation

A product (goods or services) is anything that satisfies a need or want. It is not a thing
with features but a package of benefits.

The decision to make a purchase can be very simple, very complex or somewhere
between the two. Buyers do not always proceed rationally though the motivation of
industrial buyers may be more logical than that of consumers.

Market segmentation is the subdividing of a market into distinct and increasingly


homogenous subgroups of customers, where any subgroup can conceivably be selected as
a target market to be met with a distinct marketing mix.

Reasons for segmenting markets:


• better satisfaction of customer needs
• growth in profits
• revenue growth
• customer retention
• targeted communications
• innovation
• segment share

Segments should be identified and then their attractiveness analysed as well as their
ability to be practically differentiated and targeted.

Undifferentiated marketing: this policy s to produce a single product and hope to get as
many customers as possible to buy it eg strawberry jam

Concentrated marketing: the company attempts to produce the ideal product for a
single segment of the market eg Rolls Royce

Differentiated marketing: the company attempts to introduce several product versions,


each aimed at a different market segment eg clothes soap powder/liquid/concentrate

The major disadvantage of differentiated marketing is the additional costs of marketing


and production and the loss of economies of scale.
Review the customer portfolio

The customer base is an asset to be invested in, as future benefits will come from existing
customers, but not all customers are as important as others. It will help you in evaluating
the customers portfolio if you consider the customer base as an asset worth investing in.

Key customer analysis calls for six main areas of investigation in to customers, in order
to identify which customers offer most profit.
• Key customer identity – name, location, size
• Customer history – first purchase date, who make purchase decision, motives,
order trend,
• Relationship of customer to product – what do they use if for, is it essential to
them
• Relationship of customer to potential market – size of customer in relation to total
end market, is the customer likely to expand, diversify or integrate?
• Customer attitudes and behaviour – do they buy competitor products, closeness of
relationship
• The financial performance of the customer – are they successful, overleveraged,
credit rating

Customer profitability analysis is the analysis of the revenue streams and service costs
associated with specific customers or customer groups. In practice it is very difficult to
do precise calculations. It can be made easier if it was considered when the accounting
system was designed.

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

Customer revenues and costs should be looked at over more than one period, most
customers have a lifecycle.
Chapter 7 – Resource Analysis

The position audit

Position audit is part of the planning process which examines the current state of the
entity in respect of:
• Resources of tangible and intangible assets and finance
• Products, brands and markets
• Operating systems such as production and distribution
• Internal organisation
• Current results
• Returns to stockholders

Resources and limiting factors

Limiting factors are normally:


• Machinery – age, condition, up-to-date?, value
• Make-up – culture and structure, patents, good will
• Management – size, skills, loyalty
• Management information – innovation, information systems
• Markets – products and customers
• Materials – source, suppliers and partnering, cost, new materials
• Men and women – number, skills, wage costs, efficiency
• Methods – capital or labour intensive, outsourcing, JIT
• Money – credit and turnover periods, cash surplus/deficit

A limiting factor or key factor is anything which limits the activity of an entity. An
entity seeks to optimise the benefit it obtains from the limiting factor. Examples are a
shortage of supply of a resource or a restriction on sales demand at a particular price.

Efficiency is how well resources have been utilised irrespective of the purpose for which
they have been employed.

Effectiveness is whether the resources have been deployed in the best possible way.

Converting resources: the value chain

The value chain models all the activities of a business and the linkages between them. It
shows how value is created, how costs are caused and how competitive advantage can be
gained.

Activities are the means by which a firm creates value in its products.
Porter’s value chain:

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.

The value chain is the sequence of business activities by which, in the perspective of the
end-user, value is added to the products or services produced by an entity.

There is a clear link between the concept of value activities that cut across departments
and the principles of activity based costing. Porter stresses the importance of using IT to
increase the linkages.

The value chain is not designed for service business or network organisations.

Outputs: the product portfolio

The product life cycle concept holds that products have a life cycle, and that a product
demonstrates different characteristics of profit and investment at each stage of its life
cycle. The life cycle concept is a model, not a prediction. It enables a firm to examine its
portfolio of goods and services as a whole:
• Introduction
• Growth
• Shake out (number of producers reduces as market saturates)
• Maturity
• Decline
Portfolio analysis examines the current status of the organisation’s products and their
markets. Portfolio analysis is the first stage of portfolio planning, which aims to create a
balance among the organisation’s market offerings in order to maximise competitive
advantage. The same approach is equally applicable to products, market segments and
even SBUs. The Boston matrix is one approach.

There are four major strategies:


1. build
2. hold
3. harvest
4. divest

Shell and GE developed the approach by adding an intermediate level in to each axis.

Market share is one entity’s sale of a product or service in a specified market expressed
as a percentage of total sales by all entities offering that product or service.

Direct product profitability is a measure used primarily in the retail sector and involves
the attribution of both the purchase price and other indirect costs (eg distribution and
retailing) to each product line. Thus a new profit, as opposed to a gross profit can be
identified for each product. The cost attribution process utilises a variety of measures (eg
transport time) to reflect the resource consumption of individual products.

New products and innovation

Innovation can be a major source of competitive advantage but brings a burden of cost
and uncertainty. To avoid waste there should be a programme of assessment for major
product development. Being the second one in to a market can be more profitable
because you can learn from other’s mistakes.
Managers must choose between a leader strategy or a follower strategy.

A product may be totally new, or new to a certain market or segment it may be


repositioned, a replacement for a technologically inferior version, a diversified or
improved product.

Pure research is original research to obtain new scientific or technical knowledge or


understanding. There is no obvious commercial or practical end in view.

Applied research is also original research work but has a specific practical aim or
application.

Development is the use of existing scientific and technical knowledge to produce new
(or substantially improved) products or systems, prior to starting commercial production
operations.

Product research is based on creating new products and developing existing ones, in
other words the organisation’s “offer” to the market.

Process research is based on improving the way in which those products or services are
made or delivered, or the efficiency with which they are made or delivered.

Cooper describes a product screening process called Stage-Gate:


1. preliminary investigation
2. business case
3. physical development
4. testing and validation
5. full production and market launch

External to this process are idea-generation and strategy formulation.

Intrapreneurship is entrepreunership carried on within the organisation at a level below


the strategic apex.

Benchmarking

Benchmarking is the establishment, through data gathering, of targets and comparators,


that permit relative levels of performance and particularly areas of underperformance to
be identified. Adoption of identified best practices should improve performance.
• Internal benchmarking – comparing one operating unit or function with another
in the same industry
• Functional benchmarking – comparing internal functions with those of the best
external practitioners, regardless of their industry
• Competitive benchmarking – in which information is gathered about
competitors through techniques such as reverse engineering
• Strategic benchmarking – type of competitive benchmarking aimed at strategic
action and organisational change

Benchmarking:
1. obtain management support
2. determine areas to benchmark and set objectives
3. understand processes and identify key performance measures
4. choose organisations to benchmark against
5. measure performance
6. compare performance and discuss results
7. improvement programmes
8. monitor improcements

Advantages Disadvantages
Benchmarking can assess a firm’s existing It concentrates on doing things right rather
position and provide a basis for than doing the right thing, the difference
establishing standards of performance between efficiency and effectiveness
The comparisons are carried out by the The benchmark may be yesterday’s
managers who have to live with the solution to tomorrow’s problem
changes made as a result
Benchmarking focuses on improvement in It is a catching-up exercise rather than the
key areas and sets targets which are development of anything distinctive
challenging but achievable
The sharing of information can spur It depends on accurate information about
innovation comparator companies
The result should be improved performance It is not cost-free and can divert
management attention
Sharing information with other companies
can be a burden and a security risk
It may reduce motivation if a manager’s
area is compared unfavourably with
another organisation
Chapter 8 – SWOT analysis and Gap Analysis

Corporate Appraisal: SWOT analysis

Corporate appraisal is a critical assessment of the strengths, weaknesses, opportunities


and threats in relation to the internal and environmental factors affecting an entity in
order to establish its condition prior to the preparation of the long term plan

Strengths and weaknesses are internal matters such as product portfolio, cash and
financial structure, cost structure and managerial ability.

Opportunities and threats are external and can be summarise as PEST with the addition of
competitors.

SWOT analysis can be the basis for developing strategy. It is important to match
strengths and opportunities and remedy weaknesses.

Gap analysis is a comparison between an entity’s ultimate objectives (often expressed a


profit or ROCE) and the expected performance of projects both planned and underway.
Differences are classified in a way which aids understanding of performance and which
facilitates improvement.

The planning gap is not the gap between the current position of the organisation and the
desired future position. Rather it is the gap between the position forecast from continuing
with current activities and the desired future position.

A forecast is a prediction of future events and their quantification for planning purposes.

A projection is expected future trend pattern obtained by extrapolation. It is principally


concerned with quantitative factors, whereas a forecast includes judgements.

Extrapolation is the technique of determining a projection by statistical means.

A model is anything used to represent something else. It is a simplified representation of


reality, which enables complex data to be classified and analysed, they can be descriptive
or predictive.

Market forecast. This is a forecast for the market as a whole. It is mainly involved in
the assessment of environmental factors, outside of the organisation’s control, which will
affect the demand for its products/services.

Sales potential is an estimate of the part of the market that is within possible reach of a
product.
Scenario planning

A scenario is an internally consistent view of what the future might turn out to be.

Macro scenarios use macro economic or political factors to create alternative view of the
future environment.

Porter believes that scenario analysis is most appropriate if restricted to an industry.

The scenarios constructed are unlikely to be wholly accurate but they force management
to think about how the environment could change and how they can prepare for that.
Chapter 9 – Competition, products and markets

Strategic options and marketing issues

An organisation, having identified its strengths and weaknesses and opportunities and
threats, must make choices about what strategies to pursue in order to achieve its targets
and objectives.

There are three categories of strategic choice:


• how to compete
• where to compete
• method of growth

A firm’s horizontal boundaries define the variety of products and services that it
produces, the optimum boundary for a firm depends on economies of scale.

The vertical boundaries of a firm define which activities the firm performs itself and
which is purchases from third parties.

Services are any activity of benefit that one party can offer to another that is essentially
intangible and does not result in the ownership of anything. Its production may or may
not be tied to a physical product. There are 5 characteristics:
• intangibility
• inseparability
• variability
• perishability
• lack of ownership

Strategic marketing issues include market share, which has implications for ROI. Low
market share does not necessarily mean poor returns, eg watches and Patek Philippe.

Generic competitive strategy

Porter suggests that there are three generic strategies:


1. cost leadership
2. differentiation
3. focus

Competitive strategy means taking offensive and defensive actions to create a


dependable position in an industry, to cope successfully with competitive forces and
thereby yield a superior return on investment for the firm. Firms have discovered many
different approaches to this end, and the best strategy for a given firm is ultimately a
unique construction reflecting its particular circumstances.

Cost leadership means being the lowest cost producer in the industry as a whole.
Differentiation is the exploitation of a product or service which the industry as a whole
believes to be unique.

Focus (niche) involves a restriction of activities to only part of the market (a segment)
through:
• providing goods/services at lower cost to that segment (cost focus)
• providing a differentiated product or service to that segment (differentiation-
focus)

But Porter’s model depends on clear notions of what the industry and firm in questions
are but these are not often easy to define.

Pricing and competition

Pricing strategy is an important component, both as part of the marketing mix and as a
company’s competitive weapon.

Pricing is the determination of a selling price for the product or service produced. A
number of methodologies may be used.

Competitive pricing is setting a price by reference to the prices of competitive products.

Cost plus pricing is the determination of price by adding a mark-up, which may
incorporate a desired return on investment, to a measure of the cost of the
product/service.

Dual pricing is a form of transfer pricing in which the two parties to a common
transaction use different prices.

Historical pricing is basing current prices on prior period prices, perhaps uplifted by a
factor such as inflation.

Market-based pricing is setting a price based on the value of the product in the
perception of the customer; also known as perceived value pricing.

Penetration pricing is setting a low selling price in order to gain market share.

Predatory pricing is setting a low selling price in order to damage competitors. May
involve dumping, ie selling a product in a foreign market below cost, or below the
domestic market price (subject to, for example, adjustments for tax differences,
transportation costs, specification differences).

Price skimming involves setting a high price in order to maximise short-term


profitability, often on the introduction of a novel product.
Range pricing involves the pricing of individual products such that their prices fit
logically within a range of connected products offered by one supplier, and differentiated
by a factor such as weight of pack or number of product attributes offered.

Selective pricing involves setting different prices for the same product or service in
different markets. Can be broken down as follows:
• Category pricing involves cosmetically modifying the product such that the
variations allow it to sell in a number of price categories, as where a range of
brands are based on a common product
• Customer group pricing involves modifying the price of a product or service so
that different groups of consumers pay different prices
• Peak pricing involves setting a prices which varies according to the level of
demand
• Service level pricing involves setting a price based on the particular service level
chosen from a range
• Time material pricing is a form of cost plus pricing in which price is determined
by reference to the cost of the labour and material inputs to the product/service.

Price elasticity of demand: % change in sales demand


% change in sales price

Products with >1 are elastic and <1 are inelastic.

Price sensitivity will vary amongst purchasers and will partly depend on whether the
cost can be passed on. For example, a family holiday will be price sensitive but a worker
buying petrol for a company van won’t be.

Product-market strategy: direction of growth


Product-market mix is a short hand term for the products/services a firm sells and the
markets it sells them to.

Lynch suggested the following additions:


• As well as market penetration the company could withdraw, demerge or privatise
• To diversify it could do related diversification or unrelated diversification
(financial reasons, spread risk, other)

Related diversification is development beyond the present product market, but still
within the broad confines of the industry, it therefore build on the assets or activities
which the firm has developed. It takes the form of vertical and horizontal integration.

Unrelated or conglomerate diversification is development beyond the present industry


into products/markets which, at face value, may bear no close relation to the present
product/market.

The Strategic Role of Directors

Corporate governance is the system by which organisations are directed and controlled.

The board should be responsible for taking major policy and strategic decisions.
Directors should have a mix of skills and their performance should be assessed regularly.
Appointments should be conducted by formal procedures administered by a nomination
committee.
Chapt. 10 – Growth and Divestment

Methods of growth

Companies can expand domestically or internationally, they can grow organically or


through acquisition/merger etc.

Organic growth is the expansion of a firm’s size, profits, activities achieved without
taking over other firms.

International expansion is a big undertaking and firms must know their reasons for it,
and be sure that they have the resources to manage it both strategically and operationally.
The decision about which overseas market to enter should be based upon assessment of
market attractiveness, competitive advantage and risk.

Companies may begin by casual or accidental exporting, then actively exporting and then
develop a committed international business.

A merger is the joining of two separate companies to form a single company.


An acquisition is the purchase of a controlling interest in another company.

A joint venture is a contractual arrangement whereby two or more parties undertake an


economic activity which is subject to joint control.

A firm may also enter a strategic alliance or franchise.

Divestment is disposal of part of its activities by an entity.

A management buy-out is the purchase of a business from its existing owners by


members of the management team, generally in association with a financing institution.
Where a large proportion of the new finance required to purchase the business is raised
by external borrowing, the buy-out is described as leveraged.

The public and not-for-profit sectors

The public sector and not-for-profit organisations will find some commercial strategic
management techniques useful, particularly in the fields of marketing and innovation.
Chapt. 11 – Strategic Decisions

Evaluating strategic choices

Strategic choices are evaluated according to their suitability to the organisation and its
current situation, their feasibility in terms of usefulness or competences and their
acceptability to relevant stakeholder groups.

Strategic Management Accounting

Decisions about investment can be illuminated by the use of relevant costs and
discounting.

Cost of Capital is the minimum acceptable return on an investment, generally computed


as a discount rate for use in investment appraisal exercises. The computation of the
optimal cost of capital can be complex, and many ways of determining this opportunity
cost have been suggested.

Strategic investment appraisal is the method of investment appraisal which allows the
inclusion of both financial and non-financial factors. Project benefits are appraised in
terms of their contribution to the strategies of the organisation either by their financial
contribution, for non-financial benefits, by the use of index numbers or other means.

Strategic investment decisions must be assessed with regard to their:


• Immediate financial viability
• Effect on competitive advantage in the light of environmental uncertainties

Risk and cost behaviour

Risk is taken to mean both general unquantifiable uncertainty and volatility, often
measured by standard deviation.

Cost-volume-profit analysis is the study of the effects on future profits of changes in


fixed cost, variable cost, sales price and mix.

Decision techniques

Decision trees are a pictorial method of showing a sequence of interrelated decisions and
their expected outcomes. Decision trees can incorporate both probabilities of, and values
of, expected outcomes and are used in decision making.

Cost/benefit analysis involves a comparison between the cost of the resources used, plus
any other costs imposed by an activity and the value of the financial and non-financial
benefits derived.

Ranking and scoring methods are less precise than decision trees.
Scenario building is the process of identifying alternative futures.

Sensitivity analysis is a modelling and risk assessment procedure in which changes are
made to significant variables in order to determine the effect of these changes on the
planned outcome. Particular attention is thereafter paid to variables identified as being of
special significance.
Chapt. 12 – Issues in Strategic Management

Managing projects

The hierarchy of project management extends upwards beyond the project manager.
More senior managers must provide strategic control. The main instrument for such
control is the project board. PRINCE2 project management proceeds on the basis that a
project is driven by its business case.

Lean systems

A flexible manufacturing system is an integrated, computer controlled production


system which is capable of producing any of a range of parts and of switching quicly and
economically between them.

Just in Time aims for zero inventory and perfect quality and operates by demand-pull. It
consists of JIT purchasing and JIT production and results in lower investment
requirements, space savings, greater customer satisfaction and increased flexibility. JIT
aims to remove all non-value-adding costs.

World class manufacturing aims for high quality, fast production and the flexibility to
respond to customer needs.

Change Management

Change is inevitable in most organisations and must be managed. It can be incremental


or transformational and management may be proactive or reactive.

Johnson and Scholes’s model of strategic change:


Management Role

Nature of Change
Incremental Transformational
Proactive Tuning Planned
Reactive Adaptation Forced

Reactions to change:
• Acceptance
• Indifference
• Passive resistance
• Active resistance

Gemini 4Rs approach: reframing, restructuring, revitalising and renewal.

John Hunt’s model: Unfreeze – change – refreeze


Systems intervention strategy has the following steps:
• Diagnosis
• Design
• Implementation

There is a theory that a champion of change (a senior manager) has to win support from
functional and operational managers and galvanise them in to action.

Lewin’s Force Field Analysis

When dealing with change managers must consider:


• Pace
• Manner
• Scope

Johnson, Scholes and Wittington’s five styles of change management:


1. education and communication
2. collaboration/participation
3. intervention
4. direction
5. coercion/edict

Introducing change can often lead to a need to manage conflict effectively.

Marketing and Strategy


Marketing mix: the set of controllable variables and their levels that the firm uses to
influence the target market. These are product, price, place and promotion.

A brand is a name, term, sign, symbol or design or combination of them, intended to


identify the goods or services of one seller or group of sellers and to differentiate them
from those of competitors.

Customer Relationships

Retention is cheaper then getting new customers.

Relationship marketing is defined as the management of a firm’s market relationships.

Loyalty should be promoted, key customers identified and looked after, avoidance of an
adversarial sales approach helps.

Re-engineering and innovation

Business automation is the use of computerised working methods to speed up the


performance of existing tasks.

Business rationalisation is the streamlining of operating procedures to eliminate obvious


inefficiencies. Rationalisation usually involves automation.

Business process re-engineering is the selection of areas of business activity in which


repeatable and repeated sets of activities are undertaken; and the development of
improved understanding of how they operate and of the scope for radical redesign with a
view to creating and delivering better customer value.

Davenport and Short’s BPR approach:


1. develop the business vision and process objectives
2. identify the processes to be redesigned
3. understand and measure the existing processes
4. identify change levers
5. design and build a prototype of the new process

Process innovation combines the adoption of a process view of the business with the
application of innovation to key processes. What is new and distinctive about this
combination is its enormous potential for helping any organisation achieve major
reductions in process cost or time, or major improvements in flexibility, service levels or
other business objectives.

IT is often a change trigger for PI it is usually an implementation tool for BPR.


Organisation structure

Buchanan and Huczynski suggest that there are three essential aspects that define an
organisation:
• Social arrangements
• Collective goals
• Controlled performance
Chapt 13- Measuring Performance I

Control Systems

All systems can be analysed using the cybernetic model. The essence of this is the
feedback of control action to the controlled process: the control action itself being
generated from the comparison of actual results with what was planned.

Ouchi identified market, bureaucratic and clan control strategies, their application is
dependent on the control contingencies encountered.

Performance measurement aims to establish how well something or somebody is doing


in relation to previous or expected activity or in comparison with another thing or body.
It aims to:
• Communicate the objectives of the company
• Concentrate efforts towards those objectives
• Produce feedback for comparison with the plan

Strategic Control and CSFs

Strategic control is bound up with measurement of performance, which often tends to be


based on financial criteria. Techniques for strategic control suggest that companies
develop strategic milestones to monitor the achievement of strategic objectives as a
counterweight to purely financial issues.

Critical success factors are the few key areas where things must go right for the
organisation to flourish. Incorrect selection leads to gaps and false alarms.

Budgetary control systems

Budgetary control is the process whereby the master budget, devolved to responsibility
centres, allows continuous monitoring of actual results versus budget, either to secure by
individual action the budget objectives or to provide a basis for budget revision.

A budget is a plan expressed in monetary terms.

Activity based budgeting is a method of budgeting based on an activity framework and


utilising cost driver data in the budget setting and variance feedback processes.

Rolling/continuous budget is a budget continuously updated by adding a further


accounting period when the earliest accounting period has expired. Its use is particularly
beneficial where future costs or activities cannot be forecast accurately.

Zero based budgeting is a method of budgeting that requires all costs to be specifically
justified by the benefits expected.
Financial and non financial performance measures

Performance measures must be relevant to both a clear objective and to operational


methods and their production must be cost-effective.

Types of measurement are:


• Profit
• Ratios
• Percentages
• Qualitative

Non financial performance measures may give more timely indication of the levels of
performance achieved than financial measures and may be less susceptible to distortion
either deliberate or environmental.

The Balanced Scorecard

An approach that tries to integrate the different measures of performance is the balanced
scorecard, where key linkages between operating and financial performance are brought
to light. There are four perspectives:
1. financial
2. customer
3. innovation and learning
4. internal business

The scorecard emphasises process rather than departments.

Problems with this method include conflicting measures, not choosing appropriate
measures, interpretation and doing something useful about the results.

Service departments are harder to measure but can look at efficiency gains and lower
costs e.g Corporate Finance. There must be a measurable output to be able to judge by
though.

One way of tracking performance is to use an index with a base of 100. These are easy to
understand and clearly show trends over time. This leads to the use of a common figure
for different categories.

To measure performance:
• define boundaries
• define formal objectives
• identify appropriate measures
• select suitable bases for comparison

A results and determinants framework can be created:


Results:
• competitive performance eg market share growth
• financial performance eg liquidity, profitability

Determinants (of those results):


• quality of service
• flexibility
• resource utilisation
• innovation

The key measures for manufacturing businesses are:


• cost
• quality
• time (bottlenecks)
• innovation

Total Quality Management (TQM) is an integrated and comprehensive system of


planning and controlling all business functions so that products or services are produced
which meet or exceed customer expectations. TQM is a philosophy of business
behaviour, embracing principles such as employee involvement, continuous improvement
at all levels and customer focus, as well as being a collection of related techniques aimed
at improving quality such as full documentation of activities, clear goal-setting and
performance measurement from the customer perspective.

Target costing is a process of establishing what the cost of the product should be over
the entire product life cycle. To begin with costs will exceed price because of
development costs and learning time, later costs should come down because of the
experience curve but the price remains the same.

Companies must comply with legal and voluntary regulation and from pressure from
stakeholders.

In can be a good idea to introduce a code of ethics or corporate code to help create the
“right” culture in the organisation.

Corporate social accounting is the reporting of the social and environmental impact of
an entity’s activities upon those who are directly associated with the entity (eg
employees, customers) or those who are in any way affected by the activities of the
entity, as well as an assessment of the cost of compliance with relevant regulations in this
area.

It is possible to have a compliance based approach or an integrity based approach.


Chapt 14 Measuring Performance II

Inflation makes it harder to compare performance over time, as it affects accounting


values, and hence measures of performance. It affects the base line and comparative
figures. Discounted cash flows help here.

Capital projects involve any long term commitments of funds undertaken now in
anticipation of a potential inflow of funds at some time in the future.

Contribution margin can be defined as the difference between sales volume and the
variable cost of those sales, expressed either in absolute terms or as a contribution per
unit.

Residual Income (RI) deducts from profit an imputed interest charge for the use of the
assets.

Earnings before interest and tax – (invested capital x imputed rate)

Must look at controllable profit (minus fixed costs/recharges) to keep managers


motivated and be fair.
Chapt. 15 – Strategic Control

Shareholder value may be increased through a merger or divestment.

Shareholder value is the total return to the shareholders in terms of both dividends and
share price growth, calculated as the present value of future free cash flows of the
business discounted at the weighted average cost of capital of the business less the market
value of its debt.

Rappaport proposes that a single value be calculated by reference to seven value drivers
which drive the generation of cash:
1. sales growth rate
2. operating profit margin
3. cash tax rate
4. fixed capital investment rate (capital investment ties up free cash)
5. working capital investment rate
6. the planning period
7. cost of capital

Economic Value Added is a measure which approximated a company’s profit.


Traditional financial statements are translated in to EVA statements by reversing
distortions in operating performance created by accounting rules and by charging
operating profit for all the capital employed. For example, written off goodwill is
capitalised, as are extraordinary losses and the present value of operating leases.
Extraordinary gains reduce capital

EVA = adjusted profits (NOPAT) after tax – (adjusted invested capital x WACC)

The principles of EVA are:


• investment leads to assets regardless of accounting treatments
• assets once created cannot be diminished by accounting action

Market Value Added is the difference between the market value of a company and the
economic book value of capital employed.

Transfer pricing is used to encourage optimal performance by keeping track of costs


incurred through a business. Ideally, prices should be set by reference to the external
market, but where this is not possible transfer prices will have to be negotiated, or head
office might impose a transfer price.

There are three major approaches to running divisionalised companies:


1. strategic planning (centre establishes extensive planning processes, emphasis on
longer term strategic objectives, aiming for unified strategic approach)
2. strategic control (low degree of planning influence but firm targets for selected
performance indicators)
3. financial control (cautious, tight budget control of profits, little focus on strategy)