The role of the accountant in new product development

by Ralph Bedrock 16 May 2007 This article considers the strategic significance of accountants in the new product development (NPD) process. Without a formal process for developing new products and/or services most organisations face decline and eventual failure. Effective strategies for NPD have to be a significant outcome of the strategic management process, showing where and how an organisation has chosen to compete. In so doing they show the competitive advantage being sought or exploited. Such advantage is open to challenge from competitors and if not sustained by further innovation will eventually disappear. Most importantly, I think accountants must be actively engaged in the NPD process. This challenges some common misconceptions about the role played by accountants in NPD and strategy making. Key variables in strategy making In terms of the barriers to NPD, in my examiner's comments in the September 2003 issue of student accountant, I said that in my opinion, strategy concerned the relationship, explicit or otherwise, between an organisation and its environment and that strategy was determined by decision-making processes within the organisation. The term organisation referred to:
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the resources the organisation had access to the structure and systems designed to allocate and control these resources the capabilities and competences that resulted from combining these resources, and their value in the creation of products and/or services.

The organisation therefore makes itself a unique configuration or combination of three key variables - environment, organisation and decision-making, thereby deriving some competitive advantage.

Most organisations, whether large or small, private or public, manufacturing or service, profit making or non-profit making, need to introduce new products or services at regular intervals. If we take the world of charity organisations for example, competition between charities for donors has never been more intense. With 'donor fatigue' now common in the developed world, there is a need for charities to develop eye-catching appeals which are more effectively targeted. There is therefore a clear need for strategic management in charity organisations. In profit making organisations, many myths about NPD exist. One of the most prevalent is that small companies are more innovative than their larger counterparts. Space prevents a fuller discussion of this assumption but I would argue that NPD in a smaller, medium-sized enterprise is often profoundly influenced by its relationship with larger companies. Partners and strategic alliances (environment) One key observation of a company's research and development is that innovation is only possible through working with partners and networks which have vital skills and technologies that the company does not. Knowing your own capabilities and competencies, and those owned by others - especially those critical to your NPD process - is a vital strategic insight. Combining different technologies and companies together in new ways to develop new products may be a key skill in the NPD process. My own research into the impact of a management buyout on NPD in smaller

businesses points to the positive impact on NPD that support from large customers can have. Once again, the dangers of reaching sweeping generalisations are apparent. For one of the buyout companies I studied, the problems experienced by the few, large customers on which they relied, forced them to develop new products and move into new markets. 3M and Post-it notes (environment, organisation and decision making) If one looks at the famous example of Post-it notes, some immediate lessons become apparent. 3M, justifiably, is regarded as one of the world's most innovative companies. It manufactures over 60,000 products, employs 70,000 people, operates in 61 countries and achieves year-on-year growth in sales of 10%. To achieve this growth rate, it sets its business managers the task of ensuring that at least 30% of company sales come from products that are less than four years old. Imagine the pressure that such an objective and culture places on those managers. Equally important is its 15% rule whereby scientists and engineers working on NPD are able to allocate 15% of their time to projects that do not need formal approval. This creates the necessary freedom of space for new ideas to flourish. Rival companies with tighter control systems are not so innovative - or profitable. The most important barriers to NPD are often to be found inside the organisation, especially a culture that is stifling new thinking and ideas. It may only take one 'no' to reject an NPD proposal. Innovative people and teams often fail and need a management that is not 'destructively critical'. In one author's opinion the rule is not to 'reward success and punish failure' but to 'reward success and failure and punish inaction'. As Thomas Watson, founder of IBM, famously said: 'Success lies on the far side of failure'. Many ideas may need to be tried and rejected before a 'winner' is found. The key is to have a system that encourages the generation of new ideas. However, 3M's world-famous Post-it notes show how a significant innovation opportunity was nearly missed. Post-it notes were initially viewed as a failure by 3M, the parent organisation. 3M's normal adhesive products are designed to glue things together effectively and permanently. A product which stuck only as long as you wanted it to and could be used repeatedly, did not fit with any of 3M's existing NPD critical success factors. The momentum to commit resources to the product only came after samples of Post-it notes had been sent to the CEOs of America's largest corporations, and their secretaries had demanded further supplies of the new product. Samples had also been sent to the secretaries of 3M's main board directors, with the same result. Involving the customer - be they external or internal - is a key step in proving the viability of a new product or service. Equally important to note is that new products at 3M have to show that they will be able to command traditional 3M profit margins, and there is a exhaustive approval process before large-scale investment into a new venture is made. Despite a positive culture towards innovation, Postit notes still took ten years to become a significant 3M product. The role of the finance director My more recent research into NPD, and the reason for questioning the role of the accountant, stems from the unique access I was given to observe the NPD process in a medium-sized manufacturing company. The finance director had worked in a French multinational company with an active interest in corporate venturing. Immediately prior to joining as finance director, he had worked in a finance capacity within another division of the manufacturing company. The managing director of the company was convinced of the need for a multidisciplinary team to be involved with NPD. Equally necessary was the commitment of senior management to a formal NPD process. In a classic study of the NPD process, Booz, Allen and Hamilton Inc see it involving the following stages:
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y y

exploration - of new ideas which will meet company objectives screening - a quick analysis to see which ideas warrant further study business analysis - the development of the idea into a more concrete concept including product features and a programme for production, development - moving from the 'idea-on-paper' into a 'product-in-hand', demonstrable and producible testing - the commercial experiments necessary to verify earlier business judgements commercialisation - launching the product into full-scale production and sales, committing the company's reputation and resources. The launch point is often, particularly in smaller companies, a critical moment as it is the point where the maximum costs have been incurred and no revenue generated.

Small companies often neglect the necessary marketing of the new product, unable or unwilling to meet the cash

demands of the marketing spend. Certainly my own case research points to the need for a formal process to move from creativity (the generation of new ideas) to innovation (the commercial exploitation of new ideas). One of my favourite definitions of innovation is 'delivering new value to the customer'. In the case of the company referred to earlier, the senior management team met once a month to explicitly consider progress on new products and the responsibilities for making things happen. The finance director felt that accountants, with their ability to subject proposals to robust analysis, had an active and positive role to play in resource allocation and in the appraisal of research and development projects with varying degrees of risk. An accountant's realism can balance the naturally optimistic marketeer. Understanding the nature of the company's markets and customers, and the margins and profitability they can and should generate, provides a key input into assessing the viability, timescales and processes involved with NPD projects. The accountant is uniquely positioned to provide these key insights when making NPD decisions. Using a relevant time-horizon is important. Traditional cost-driven approaches look to make money from day one, but balancing the demand for current profits against the resources required for significant NPD, means a longer timehorizon is a necessity. There are real dangers in imposing a 'one solution fits all' approach. Certainly there is a need to have a clear view of what the break-even volume is and when it will occur. Reaching critical volume levels will determine when cost savings will occur and this may be equally critical for external partners and alliances involved in the project. If the project requires new technology and/or capacity that does not exist within the company then the feasibility of outsourcing, and the consequential changed timescales, leads to a whole new cost and revenue dynamic for the project concerned. The accountant must emphasise the difference between cash and profits and the nature and risk of the different costs involved in the project. Critically, the accountant's role changes from the traditionally risk averse (the 'business prevention officer') to that of ensuring profitable opportunities are not missed. This does not mean that the appraisal process is any less rigorous. But the rigour comes from an understanding or knowledge base that really appreciates the NPD process. Understanding the cost drivers and structure and how they are affected by time and volume is critical to making a positive contribution to taking necessary risks. As 3M shows, the attitude towards innovation is significantly affected by the culture of the organisation. Without this real business understanding there is a danger that the accounting treatments and measures used will favour the known and measurable. For example, preferring capital investment in a new machine (a tangible asset whose life and contribution can be estimated) over a research and development project with unavoidable unknowns. These include the people involved, their ability to work as a team, the need to involve others (including outside consultants) to generate market information materials and technology. The danger of striving to assess and allocate all direct, indirect, overheads, and services costs against a project may quickly deem it financially vulnerable, particularly if current market projections are small. Accountants - a health warning! One further criticism of accountants is that by nature (and possibly training) they are happier dealing with the internal cost side of the business rather than the revenue side where there is more uncertainty. Most NPD will have a significant impact on revenues as well as costs. Even familiarity with the cost side is likely to suffer if the senior accountants in the company have little contact with conditions on the factory floor or with customers or suppliers, who might influence their thinking about technological innovation. Risk perception is argued to be inversely related to familiarity and experience and consequently accountants lacking shop floor or external insights may well perceive technological innovation as more challenging than, say acquisitions which may be just as risky but are much more familiar. The 'traditional' accountant, immersed in their inward-looking discipline and systems, is likely to focus on cost control and risk avoidance rather than actively engaging with suppliers and customers. Some of my own research has confirmed the importance of having a culture and structure which accepts advice and support from outside the organisation, and shows the positive relationship between an outward-facing culture and corporate growth. Clearly, the accountant is a critical member of the senior management team in making this happen.

very few candidates were able to describe what such a process might look like. Many companies find that a continued reliance on the product or service to sell itself in the same way. For example. may automate the simple transactional relationships between the buyer and the seller. y y y y y y Successful innovation requires a formal process through which an idea moves into an innovation. if ever.process innovation may be just as important as new products or services. the company has developed a technology. The shift in the accountant's perception and role from being an acute analyst of what has happened. and change project timescales and costs. and which also has potential as anti-counterfeit and theft-prevention technology. the creation of effective management accounting information systems should give accountants a greater opportunity to engage with and contribute to the NPD process. Consequently. The NPD process can be adversely affected by 'silo' management. where the research and development function is largely divorced from mainstream activities. Rarely. I referred to 'space' and freedom above as a result of technology. Often. the managing director and the finance director are in a unique position. In my experience of observing NPD first hand. Managers in companies typically prefer to exploit current products and markets rather than explore new opportunities making it difficult to generate the . new technology. The current move to ban cigarette advertising has meant that promotion is increasingly limited to the cigarette pack itself. does the NPD process operate without involvement from key partners outside the company. actively looking for ways to differentiate their own contribution. Research and development may appear more risky but it has more potential for creating competitive advantage. They bring strategic thinking to NPD and are key members of the team shaping the future direction of new products and services. particularly in industries which are 'mature'. These strategic alliances make the process more complex. more creative individuals. and to the same customers. but are vital to achieving significant innovation. in particular. itself a vital strategy area for all organisations.the days of being outside the decision-making team and 'simply analysing the alternatives until only one is left' should be long gone. Conclusions The accountant has a key role to play in the NPD process. In effect they have created a product which gives more value to the customer. Some of this may involve moving from their traditional comfort zones and into the creative entrepreneurial processes. This involves their ability to look forward and not simply backwards. this process innovation affects the way a product or service reaches the customer.Team players Equally clear from my research is the importance of teams in making innovation and growth happen. enabling more positive relationships with customers. which allows it to print promotional messages on the tear tapes. to one significantly influencing the shape of the firm's future. who themselves are broader. Accountants can and must engage in the NPD process . is at best a recipe for stagnation. Implicit in this case example is the need for the accountant to actively engage in the process. In the December 2003 examination paper. such as electronic data interchange. Accountants should be aware of the dangers of preferring those projects or opportunities that are familiar and lend themselves to traditional evaluation and control methods. allowing them to become more significant players in the innovation process. is one I am convinced is happening in firms that are growing and competing in global markets. Managers in so-called mature industries should be alert to opportunities for new products and services. but at the same time create the 'space' for the customer to look for other ways in which their suppliers can add value. with the involvement of key partners. Accountants should be key members of a multidisciplinary team created to manage the NPD process. New product or service offerings may also need to be sold to internal customers or key stakeholders. Others have cited the contribution of multidisciplinary teams to the innovation process. sales and marketing. NPD affects all parts of the value chain and system . Innovations may have to overcome significant cultural barriers. Adding value The case study company makes a tear tape that facilitates easy opening of packaging on cigarettes and processed food. Equally. Conscious structures and systems need to be in place to encourage the dialogue.

creative insight. cannot perceive the challenges from new 'disruptive' technologies and ignore the new products or services that emerge. strategy and strategic planning are now very definitely back in vogue. committed to current technologies. They have a skill set that is relevant and necessary to the NPD process. The strategy should not just be more of the same. despite the existence of complex strategy formulation processes in many organisations. If companies are to learn from the inadequacies and failures of strategy planning in the past. Large. Strategy making is often considered to be easy. process re-engineering and increasing operational effectiveness. Research by Prospectus Strategy Consultants has revealed that up to 70% of business strategies fail to get fully implemented. the breadth of involvement and the amount of intellectual effort expended. It is easy if the strategy development process limits the scope of discovery. Accountants have a duty to actively engage in the process and improve the outcomes by themselves being innovative. Because of the weakness of over-centralised planning processes and the poor rate of strategy implementation. downsizing. divisionalised companies with significant corporate headquarters may find it particularly difficult to move into new areas of technology and business. we describe the main pitfalls of successful strategy implementation. It is seen as a chore that must be endured rather than enjoyed. when they are developed. ambition or practicality. the message for accountants is very positive. many corporate strategies fail to actually get implemented. which is quite different from the original intent. it is usually the result of an organisations not committing one or more of the 'seven deadly sins of strategy implementation'. how they go about implementing them. The focus of this period was on cost-reduction. The strategy planning process in many organisations is treated with groans rather than cheers. organisations need to look at how they formulate their business strategies and. Many large companies. is deficient in analytical rigor.y 'space' and resources necessary for new opportunities. In many cases. realistic and give the organisation something to strive for. Yet. Overall. what is referred to as business strategy. What can be done to improve the effectiveness of turning strategy into action? As often as not. the output of the process. incremental or comfortable. strategy planning as a major management tool went into decline in the 1980s and early 1990s. it needs to be specific. If the strategy is going to get the active support of management and staff. Ralph Bedrock is the assessor for Paper P3 The seven deadly sins of strategy implementation by Martin Corboy and DiarmidCorrbui 16 May 2007 CEOs and senior managers are increasingly judged on the success of their companies¶ business strategies. Strategy is of limited value unless it is acted upon. Deadly Sin one The strategy is not worth implementing In too many cases. the business strategy fails to get implemented or is implemented in a form. In this brief article. Often radically different products or services have to be located outside of the main business. However given recent market turbulence and a renewed focus on growth and expansion. It needs to be .

there are a number of important issues that need to be addressed including: y y y y y y priorities for management. impact on structure and staff at all levels. If staff feel that senior management are not fully committed to the strategy. senior management must sell and continue to sell the strategy to the organisation and to the other stakeholders. Deadly Sin four Individual responsibilities for implementing the change are not clear It is not sufficient just to develop a very insightful and relevant strategy and hope that the logic behind the strategy will be enough to make it a reality. timescale.stretching or innovative. customers. why it is important and how it will affect them. understandable instructions and tasks and reviewing progress at regular intervals. Part of assigning staff responsibility is giving clear. it then requires a plan to prepare the organisation for its implementation. and risks. Deadly sin five Chief executives and senior managers step out of the picture once implementation begins It is very important that strong leadership is provided during the implementation phase. This will create a wider sense of ownership. supervisors. They need to explain the vision and communicate the importance of the strategy for the future of the organisation. Staff must believe that implementing the strategy is one of the organisation's top priorities. staff. how can you hope to have it implemented? Your front-line supervisory staff must understand what the strategy is about. which sets out who needs to be told about the strategy. The strategy implementation plan should include a communications plan. Accountability must go hand in hand with responsibility. Deadly Sin three Customers and staff do not fully understand the strategy There is a tendency for chief executives and senior management to communicate the business strategy on a µµneed to know¶¶ basis. People will be looking for clues. If you don¶t put in the effort to sell and explain the strategy. suppliers and other key stakeholders. The plan should not only include senior management but also middle management. However. The more people you directly involve in the implementation process the better. The time spent on implementation planning is often seen as time wasting. participation. make sure they do it. lessons learnt from previous strategy implementations. Deadly Sin two People are not clear how the strategy will be implemented When the strategy has been developed and evaluated. Deadly Sin six The 'brick walls' are not recognised . There is always a strong desire to get started and make the strategy happen. From the time the strategy is developed. If someone has been given an implementation task. commitment and responsibility for making the strategy happen. People should be given clear and specific responsibilities for making strategy work. their commitment and enthusiasm for it will wane.

The development of global companies by Geoff Gravil 16 May 2007 Differences in terminology concerning the concept of globalisation lead to words such as global and multinational being applied to companies indiscriminately which can lead to confusion. Periodic checks are necessary. which may require a revision or addition to the strategy. Make the changes quickly and communicate them to all concerned. With reference to Paper P3 I intend to follow the nomenclature as used by the writers Warren Keegan and Kenichi Ohmae to differentiate between global and multinational companies. however make sure that the changes are really required and the strategy is not being adjusted in a frivolous manner. Both management and staff must believe that implementing the strategy is as important as doing the day job. One is not more important than the other and the strategy. Traditionally firms who are either small or unfamiliar with overseas marketing pursue an ethnocentric approach to international business.Nothing ever goes exactly according to plan. if it is relevant and meaningful. Strategy implementation is always going to be difficult and fraught with danger of being abandoned through inertia or resistance. targets to meet. However. As firms become more committed to overseas markets they realise that individual countries may require a degree of . are acknowledged and addressed. Perlmutter's typology of overseas marketing orientations Perlmutter has suggested that firms involved in overseas business can be driven by a specific philosophical approach. These differences influence the reasons for becoming either global or multinational and have an impact on the way companies are organised and how they function. Identify and anticipate events or developments. Change is never easy. both internal and external. Deadly Sin seven Forgetting to 'mind the shop' There is a risk that the process of developing and implementing strategy becomes the consuming concern of senior management. staff should be encouraged to develop creative and innovative solutions to surmount these obstacles. This implies that they see foreign markets as identical to their domestic markets. When those moments of crisis or uncertainty occur. Shareholders will not thank senior management for developing and implementing a very well crafted strategy while at the very same time. There is no necessity to change the design of the product nor any of the associated marketing activities. It is important that strategy is a continuous activity and not a once-off event. They forget that they have a business to run. Check that the assumptions are still valid. which inevitably will be encountered along the way. should become an integral part of the day job. a service to provide and customers to serve. the task of putting strategy to work can be made much easier and have greater chances of success by avoiding the seven deadly sins outlined above. Organisations operate in an ever changing and dynamic environment. The whole of the marketing mix can be standardised allowing a company to reap the rewards of economies of scale and to minimise the amount of time and expertise devoted to individual markets. letting profitability fall significantly or customer service to deteriorate. It is important that those brick walls.

Functions suitable for centralisation may include manufacturing. Firms need to be able to take advantage of economies of scale. then the company must compete on the same µplaying field¶ otherwise it will operate with a serious disadvantage. Additionally such a move also eradicates the dangers which trade barriers can . a company can spread its fixed costs over a larger volume of sales. or geocentric where the market is seen to be global). The popular slogan µthink global. It could be advantageous to attempt to reduce costs by forming strategic alliances with the previously considered dangerous competitors. According to Ohmae a geocentric company will centralise functions where localisation is inappropriate and will customise those areas where localisation is a benefit.the company. He has listed these under a simple 5 Cs model. There is a tendency in certain literature to describe organisations which are polycentric in philosophy as multi-national companies. However. This usually results in sales increases but often at the expense of profit. a closer affinity with each other than they do with their parents or with segments of that older age group. some marketing areas such as branding where a global brand name may be advantageous and certain financial operations such as investment and retrenchment where localised decision-making may be biased. a geocentric company is seen to be demand-driven whereas the former style (ethnocentric) is more supply-driven. If other competitors are already reaping the benefits of global commitment. acceptable in Europe. New York and London have. but it will be inappropriate to use an Olympic winter sports champion. unlike ethnocentrically oriented companies. The forth C is currency. Each individual market is seen as distinctive and so products and marketing activities (distribution. (In reality few organisations are totally polycentric but many do have a multiplicity of foreign operations which do curtail their profitability). certain functions may still need to be localised. enabling that company to lower its costs and become more competitive. Firms then frequently move to the other end of the spectrum and become polycentric in orientation.e. It must also become a global player. For example the youth segment has similar tastes in music and fashion goods. By being geocentric the company obtains the benefits of economies of scale whilst also being able to respond to local needs. Furthermore. There obviously needs to be a µhappy medium¶ where customisation can sit comfortably with standardisation. Kenichi Ohmae has argued that firms who cannot 'amortise' their capital costs over a large volume of customers are unlikely to be able to survive in the long term. promotion and price) are all individually customised. A slight variation in a currency value could more than cancel out any profit from exporting. which brings us to the third C ± competition. Customisation inevitably results in increased costs as there is a limited application for scale economies here. With the current volatility of exchange rates it may be sensible for a company to set up manufacturing or assembly operations overseas rather than to rely entirely on exporting products. Munich. For example the design of certain products and advertising may have to reflect local needs and customs. almost certainly. in his book The Borderless World. Where there has always been a financial incentive to standardise products there is now often a demand-led requirement. Firms need to be regiocentric (i. Increasingly. The move towards standardisation in a geocentric company is encouraged by a market convergence. This leads to a second C . This is a more specific description of what was originally a generic concept. the costs of operating on a global scale can be enormous. Similarly sales promotions may need to be localised. The first C is the customer. transnational segments are being developed whereby consumers in different countries may have similar tastes which are more convergent than those of different segments within the same geographic market. to promote it in South East Asia whereas a pop star may have greater impact. focused on a specific geographic area such as Europe or Latin America. It may be beneficial to have a standardised product and brand name for a luxury watch. More and more customers throughout a variety of countries are looking for products with similar characteristics. If it is seen as only a regional or local player its image may be degraded.customisation which the ethnocentric approach does not permit. act local¶ springs to mind. Furthermore. These geocentric companies are now frequently referred to as global companies. As has just been noted there has been a movement towards market conversion. R & D. has identified a number of reasons which might encourage a firm to act geocentrically (globally). Reasons why firms are moving towards a globalised position Kenichi Ohmae. The youth markets in Tokyo. By selling identical products to a number of markets.

it can gain several benefits ± access to cheap labour. These five Cs can all be seen as persuasive factors in influencing organisations to become more global in their philosophy. Maximise world-wide performance y y MNC: by using local competitive advantage to gain profits global: through the application of corporate sharing and integration Seek to benefit from the location of value-added activities y y MNC: all or most aspects of the value chain will be reduced in each country global: costs will be reduced by breaking up the value chain so that each activity may be produced optimally in different countries Which countries will be participants in a world wide trading enterprise? y y MNC: countries are selected for their individual potential for generating profit global: countries are chosen to reflect their integrative abilities and their potential contribution for globalisation benefit Product offering y y MNC: products are tailored to suit local preferences global: core products are standardised to minimise need for local adaptation Marketing approach y y MNC: this function is fully tailored for each country being locally and individually developed global: there is a uniform approach to marketing with only minor changes Competitive approach y y MNC: the managers decide on a strategic response without considering other markets global: the competitive strategy is integrated across the various countries Criteria needed to enable a company to become (and remain) a successful global operator . If a company seeks to locate its business activities (other than exporting) overseas. It can also be seen to operate as a local company so attracting the goodwill of host governments as well as the goodwill of customers who often prefer to buy from what they consider to be local companies. These factors should not be considered to be the same as the influences that encourage companies to operate overseas. A global company is generally more committed to overseas markets and its commitment is usually more long-term and expensive than those who are mainly export driven. raw materials or even finance. Comparisons Between the Implementation of Global and Multinational Company Strategies and Objectives Because of their differing orientations it is not surprising that the two types of companies use different approaches to implement strategies or pursue objectives.pose to an exporting company. The final C is country. I will firstly identify a strategy and then show the difference in the ways they are likely to be implemented.

Corporate decline and recovery should be viewed as an important topic. because of their commitments overseas. Externally. The Borderless World: Collins Kenichi Ohmae. and do. They can. threats that the organisation has failed to respond to or opportunities that it has failed to exploit may have led to present difficulties.5 Corporate decline by David Elliott 16 May 2007 In my first article.In addition to the usual criteria for successful firms ± factors such as functional competence in marketing. Senior managers must have strong locational skills as access to reliable infrastrucures. The second article will go on to consider what can and should be done about it. manufacturing and finance ± There are a number of other areas where global (geocentric) firms must excel. structures and strategies. Strengths may be under-utilised. Because these firms operate in many countries with differing cultures. Global corporations must address these conflicting tensions. By resorting to local freedoms there is a chance that duplication of activities may take place. with centralised direction. Due to the nature of these businesses. Whilst the HQ may wish to centralise as much as possible. innovation and motivation. The four italicised words used in this paragraph identify the possible reasons for or causes of corporate decline. it is imperative that these firms have unified visions or values which are communicated throughout the organisation so that every employee is pulling in the same direction and there is minimal internal conflict. senior management must have good political skills as negotiations often take place at senior level. skilled labour and an understanding and appreciation of local cultures can be of paramount importance. Bibliography Warren Keegan. Globalisation: BBC Executive Video Seminars Geoff Gravil is former examiner for Paper 3. Conclusion It is important to realise that organisations doing business overseas are not identical in their outlooks. (usually large and often strategically significant). which will impact upon their philosophies. For this to be established the HR function must be strong. so that suitable people are recruited and trained. Global Marketing Management: Prentice Hall Kenichi Ohmae. I will explore the reasons for corporate decline. SWOT analysis is a tool used to evaluate the current position of an organisation within its environment prior to the . Case studies rarely present the student with a rosy picture of a trouble-free organisation. Global organisations. so reducing fragmented activities. There also has to be balance in the organisational reporting systems. There needs to be a balance between control and delegation. have different orientations. Internal weaknesses are often apparent. need to be aware of overseas differences but they must sacrifice their strengths and efficiencies in pursuit of market volume growth. there is a consequent danger that such actions may reduce initiative.

weaknesses in. in fact. Tobacco companies are at present faced with the prospect of a ban on advertising. Even cars and furniture are susceptible to changes in trends and tastes. You ought to be familiar with these. and with the models available to assist in its execution. and then look at how they can be applied to different topics. An increasing concern about greenhouse gases and the ozone of suitable strategies. Suppliers of basic necessities will be less badly hit. The recent economic crisis in East Asia led to many cases of corporate decline in the Asia-Pacific region. Socio-cultural causes Demographic changes can have an adverse impact on demand. The preparation of a full SWOT will involve the examination of a number of aspects of both the internal organisation and the wider environment in which it operates. of course. Indeed. toys. restriction of money supply expansion and revaluation of the currency) can have a highly damaging impact on business. The potential costs of this µcompensation culture¶ could be huge and may lead to some corporate casualties. It could be argued that the preparation of a SWOT. to a certain extent. The culture has. Culturally. Falling birth rates could indicate problems ahead for producers and sellers of baby products and. testing of products on . and impact on financial strategy through increasing the cost of capital and reducing aftertax profits available for distribution or retention. later. a case in point. Emigrating populations can reduce demand on a local basis. Health scares such as the BSE crisis can affect sales (in the case of beef). Deflationary government fiscal policy (low government spending. Economic causes A downturn in the economy can lead to corporate failures across a number of industry sectors. whether required explicitly by the question or not. Those worst affected will be suppliers of goods with a high income-elasticity of demand. Particularly damaging might be the imposition of a complete ban on the organisation¶s product. The result is a brief but focused synopsis of the key points contained in the text. changes in tastes and fashions can have a damaging effect on organisations that fail to anticipate the changes. They can adversely affect levels of demand both domestically and overseas. high taxation and a planned budget surplus) and central bank monetary policy (high interest rates. Premises failing to meet the higher standards could be closed down. Students often complain that there are µtoo many points to learn and remember for the exam¶. Political and legal causes Changes in the law can affect organisations in many ways. been imported from the United States. the management team or the organisational structure may have led to a compounding of the problems arising externally. if not on their products. and Marks & Spencer is currently experiencing decline for this very reason. External environmental causes of decline It may be a little simplistic to assume that blame can be apportioned exclusively to the organisation¶s environment when. A World Bank Group report (1999) surveyed almost 4000 firms across the five countries most affected and emphasised the role of governments in stimulating corporate recovery through an appropriate package of macro-economic measures such as low interest rates. clearly made worse should they have failed to develop a product portfolio sufficiently broad to absorb such a loss. throughout our analysis we must bear in mind the linkages between issues and the possibility that it may have been a combination of various issues that led to the problems being experienced. A change in attitudes is taking place in the United Kingdom at present in relation to willingness to seek compensation from organisations for alleged wrongs. The secret is to learn a few key models very well. say. is the best way to summarise the information presented in the case study. A tightening of health and safety legislation may increase costs. Clothing is an excellent case in point. Basing a discussion of the reasons for corporate decline on the SWOT is. House-builders and related industries (such as home furnishings) are good examples.

research and development. Technological causes New technology can lead to the emergence of substitutes. again leading to a squeezing of margins. The loss of a major customer is more likely to have a catastrophic effect than the loss of a small customer. The bargaining power of suppliers may increase. leading to price wars and advertising wars. Both of these may lead to reduced margins. The potential damage caused by a collapse in entry barriers has already been versed. The potential for some of these internal issues to lead to corporate decline will now be considered: y y y y y y y y objectives. could lead to decline. Michael Porter s Five Forces Model No external environmental analysis would be complete without a review of the impact of changes in the organisation¶s micro-environment. personnel resources. When a fire severely damaged one of Toyota s supplier s key plants. evaluation and selection of strategy. The risk of single sourcing is well documented. larger competitors. In a mature market the degree of rivalry may intensify. Within any industry. Objectives A starting point might be to develop a mission statement. failure to exploit information technology and new production technology can lead to an organisation falling behind its rivals and losing its competitive edge. This erosion of entry barriers to industries such as banking and insurance through easier access to distribution channels (the Internet rather than a high street presence) and much lower start-up costs has created threats to the established players which. This may occur when the organisation becomes dependent on a single or reduced number of suppliers. Such a document would formally set out the organisation¶s reasons for existence and provide a general sense of purpose to management and staff. financial resources. The cinema industry went into decline in the early 1980s as a result of video. production activities. through acquisitions and mergers. Failure to establish a coherent framework of objectives for all parts of the organisation. if they do not respond to them. It may also contain core corporate values that can act as a filtering mechanism in the setting of objectives and the design.animals and generally greater social awareness could spell disaster in the future for those firms unwilling to embrace this cultural shift. can leave smaller organisations failing to benefit from the economies of scale enjoyed by the new. Internal causes of decline Several frameworks are available to assist in the execution of an internal position audit. but benefits can also accrue through the creation of clustered firm networks and partnerships. such as the banning of CFCs. systems and procedures. Traditional methods of delivering services have been turned upside down by rapid developments in information technology. y y y y Consolidation within the industry. But other changes within the industry can also contribute to the demise of some of its players. Indirectly. the way in which Toyota worked with the supplier (Aisin Seiki) and five of its other suppliers to overcome the problem and avoid too much disruption was a key factor in preventing a crisis. cultural changes often lead to changes in legislation. Consolidation within the customers industry can leave a reduced number of larger customers with increased bargaining power and the ability to drive down margins. and at all . marketing. organisation structure.

or µfour Ps¶ as it is often referred to. Marketing Despite Michael Porter¶s inclusion of a µfocus¶ option in his model of generic strategies for competitive advantage. A lack of understanding of customer needs and expectations will lead to inappropriate product design. Peters and Waterman pointed out the need to be µclose to the customer¶ ± psychologically. excessive reliance on niche markets can lead to problems if that market becomes saturated. Price this has already been discussed. in order to build market share. meaning that the target audience does not have access to products . if operating profits fall. During an economic downturn. Inappropriate evaluation of the acquired company (its strengths and weaknesses) or an over-estimation of the potential synergy from the deal can lead to the organisation paying too much and suffering the consequences. whereby the organisation grows too quickly and cannot finance the growth from working capital can lead to cash flow problems. Hierarchies that are too tall will lead to high management costs ± but by taking de-layering too far and chopping out management levels. to slow decision-making by out-of-touch managers. can lead to a lack of goal congruence and the taking of damaging. might include: y y y y Product limited new product development or research. sub-optimal decisions. But bureaucracy can work well in some levels. thereby starving the company of internal funds for investment. far removed from the local conditions of the decision situation. leading to an ageing portfolio. But an organisation that decentralises too much could find itself with other difficulties ± such as a high cost structure brought about by duplication of activities. The long-term nature of many projects means that outcomes are difficult to forecast. Indeed. many organisations focus on markets that just aren¶t big enough. Large investments will be needed for a Problem Child. not physically. The Boston Consulting Group (BCG) suggested that organisations should maintain a balanced portfolio of businesses. Many organisations run into difficulties after failing to appraise investment projects. Place (distribution) use of inappropriate channels. and probabilities are usually subjective. or image casualty effected by uncoordinated local decisions. Further investment will be needed to support and hold a Rising Star. a high proportion of debt to equity is bound to be a drain on cash flow. amongst other things. Too many cashabsorbing businesses (and not enough cash-generating Cows) could lead to problems. spans of control will widen and this too can cause huge problems. as can an insistence on paying ever-increasing dividends to keep shareholders happy. Promotion a lack of marketing spend. High gearing leads to high committed costs in terms of exposure to interest payments and low interest cover. Over-trading. excessive bureaucracy can slow down decision-making and create a role culture of inflexibility. these funds should be generated by Cash Cows. Acquisition of unrelated businesses (conglomerate diversification) can be particularly risky. A lack of attention to the marketing mix. Organisation structure Structural weaknesses can have a far reaching impact on organisational performance. Excessive centralisation may lead. Financial resources Students will recall carrying out ratio analysis and interpretation of financial statements from their Paper F7 studies. Whether it is likely to be a factor in bringing about organisational decline depends very much on the circumstances. Within the context of organisational structure. µBig projects gone wrong¶ is a common cause of decline ± a specific example being the acquisition of a µloser¶. In part. An organisation growing in terms of products or markets that fails to recognise the need to change its functional structure to a divisional structure could also be a casualty. leading to deterioration in brand profiles. that is.

a failure to learn from past crises/mistakes. The solution. low morale. Novell (a US-based infotech company) was almost destroyed by management¶s decision to diversify away from its core business. the importance of research and development will be clear ± but not in all industries to the same extent. with huge expenditures each year. would be to embrace activity-based techniques. a failure to focus on core business (distractions) recall how Peters and Waterman suggested that organisations should stick to the knitting . not enough staff. And a failure to spot poor quality before it reaches the customer can be catastrophic ± leading to image casualty and even lawsuits! Research and development Having already mentioned the BCG Matrix and the need for a balanced portfolio. Again. Quality problems caused by failing to get things right first time will lead to rework costs. Failure to invest in this key factor for success may well be a reason for decline. Managers must be provided with information to aid decision-making. Production activities Low productivity rates effected by low staff morale. can lead to financial losses that may be difficult to recover. the importance of looking at the context is emphasised. but became fragmented and unfocused when it moved the battle onto Microsoft¶s home turf of personal computer software and operating systems. involving trader Nick Leeson. opportunities and threats. illustrated. The last point ought to be emphasised and. It had built a sizeable reputation for developing computer the right time in the right place. Personnel resources Weaknesses in the organisation¶s human resources will pervade many of the other issues already discussed. students of ICDM will be aware. . a refusal to train workers and an inability to attract or select good workers are all likely to contribute to uncompetitive product costs.leading to dysfunctional behaviour. difficulties will be encountered if there is: y y y a lack of strategic capability to recognise strengths. Some products. Inadequate marketing research would prevent a thorough understanding of customer expectations. will lead to a failure to identify true product costs. both blue-sky (pure) and applied research may be important. And at a strategic level. Overhead apportionment based on assumed costdrivers such as floor area for telephone charges and staff numbers for canteen expenses. both financial and otherwise. an inappropriate culture . Systems and procedures Existing and past students of Paper F8 or its equivalent will be familiar with the concept of internal controls. Problems could emanate from: y y y y y too many staff. combined with wholly unrealistic bases of absorption like machine hours and labour hours. may even be discontinued based on such misleading accounting information. The Barings Bank scandal. which are really quite profitable. poor quality staff lacking knowledge and skills. A lack of controls. weaknesses. In pharmaceuticals. is an excellent case in point. Poor management information systems will put the organisation at a strategic disadvantage and could lead to inappropriate decisions. perhaps.

The consultants will bring with them a tool-kit of change management techniques. A crisis scenario is one instance in which shorttermism can be tolerated. It is important to note that the options I shall discuss below are not mutually exclusive. After all. Which businesses are worth saving? Can they be saved? What should be done in the short-term to µstop the rot¶? And if the organisation gets through the short-term. External consultants will be able to draw on their experience of managing decline and recovery in similar situations. or even encouraged.Conclusion The list of possible reasons for decline is almost endless. In the context of an exam question. I started by using the SWOT model as a basic framework. in other words. ACA worked in Corporate Recovery at KPMG during the recession of the early 1990s Corporate recovery by David Elliott 16 May 2007 In my first article. and then set out the key external and internal issues in the form of a few major points or µheadings¶. desirable) to select and implement several of these strategies either simultaneously or sequentially. I will look at corporate recovery. The particular circumstances of the organisation must be analysed to determine the action needed. I explored the reasons for corporate decline. the extent to which you should then µdrill down¶ within each point depends very much on the number of marks available. A contingency approach to recovery A contingency approach to the design of recovery strategies is vital. underinvestment in capital projects and other decisions engineered to increase a return on capital employed are an all-toofamiliar mistake in the quest for a long-term competitive edge. As with any other aspect of strategy. its culture and its systems must be minimised. This article goes on to consider what can and should be done about it. Despite their commercial experience. a µone size fits all¶ philosophy is both dangerous and wrong. They will be skilled not only in identifying the causes (something that internal management may be oblivious to) but also in analysing and evaluating the options for recovery. the uniqueness of each organisation means that consultants will inevitably have to pass along a learning curve. might even justify their considerable fees! Retrenchment and turnaround strategies We invariably criticiseorganisations for their short-termist cultures. DIY versus external consultants A decision may have to be made whether to engage consultants to act as the agents of change. and may well be more influential in their attempt to persuade stakeholders of the need for change than an internal change agent would be. if successful. without the placing of a firm emphasis on survival. there may . The consultants. The organisation may only get one chance to save itself. a µhorses for courses¶ approach. what lies ahead? David Elliott BSc. it may be possible (and. The time needed for them to familiarise themselves with the company¶s staff. In my second article. indeed. cancellation of training programmes.

o Facilitation of the process. o Participation of staff and other involved stakeholders. acceptable and suitable options. Senior management must be committed to the change and must lead by example 2. by inviting them to contribute their own ideas. The most important task is that of compiling a package of feasible. whose images had been tarnished by the scandal. A new culture In order to successfully transform an organisation. Defensive retrenchment must pave the way for a belligerent turnaround. The sources of resistance to any proposed changes should be identified and mapped. A policy statement should be issued setting out the new values. A number of key points are worth stating in terms of managing cultural change: 1. Examples include the disposal of assets to generate cash. dangerous. Weber. The post-contingency school of writers (including Peters and Waterman. Management changes A strengthening of the current team is quite common in recovery situations ± in particular. Indeed. trying to adopt a more ethical culture. In particular. a greater degree of decentralisation and better communication between staff feature highly. He sought forgiveness from wronged customers. vertical channels of communication and lines of authority advocated by the classical writers of the early Twentieth Century (Fayol. be unsuitable in the dynamic. and making them feel as if they own the change . however. The aim is to generate quick results and to µbuy time¶. They focus on the long-term. with a view to minimising destructive conflict and reaching a solution that is acceptable to the parties. A reliance on the formal. the incredibly difficult task of effecting cultural change may be necessary. o Negotiation with key stakeholders. Retrenchment strategies focus on µstopping the rot¶ and have an unashamedly short-term slant. together with the driving forces propelling change (Force Field Analysis can be used) 4. for example. at worst. etc. the neat compartmentalisation of strategies into these two categories is both unimportant and. I shall now consider some of the strategies commonly used to bring about corporate recovery. they point out. the provision of counselling and financial support for those who might be adversely affected). In effecting a transformation at Continental Airlines. They aim to build on the results of the retrenchment options. It is. global environment facing today¶s business. Culture can be thought of as the set of values. worth pointing out that a contingency approach to organisational design would suggest that the specific circumstances of the organisation should be borne in mind when deciding on an ideal structure. the appointment of a new chief executive officer.) will. and the implications of not doing so (this can be easier in a crisis situation. a consultant working on the project became President. and Ouchi) argue that an excellent. Turnaround strategies follow on naturally from retrenchment. and created a µnew look¶ image by refurbishing aircraft and terminal furnishings. Appropriate strategies for change must be identified and selected: o Education of staff and other stakeholders in the importance of adopting the change agent s proposals. as the negatives may be tangible). and any new mission statement should reflect the same 3. An inability to respond quickly to change might require the conversion of a mechanistic role culture to a more organic and flexible task culture. complex. attitudes and beliefs held by the organisation¶s members. Several of the strategies I shall discuss below will incorporate elements of both retrenchment and turnaround. strong culture will make unnecessary . by enabling staff and others to cope with the change (through. Restructuring The most successful recoveries involve some variation in the organisational structure and business processes. A flexible and organic form is the suggestion of current writers.well be no long-term to plan for. The well-publicisedmis-selling of pensions in the UK in the 1990s led to large pension companies. Taylor. then µcleaned out¶ the existing management at every level.

A manufacturer may select certain plants for closure with a view to rationalising production. If demand is price-elastic. then a reduction in the selling price will bring about a rise in revenue. the price should be raised to the point at which demand switches over from being price-inelastic to price-elastic. large conglomerates often select non-core businesses for divestment. Outsourcing might be considered for non-core service functions. Since price-elasticity of demand often varies from one market segment to another. Jewellery is often quoted as an example. Pricing Getting the price µright¶ is not always easy. A sale and leaseback is another possible cash generation option that utilises equity in properties owned by companies. a policy of price discrimination might be practised in order to maximise revenue. with divestment being the most common. no-frills µGo¶ brand. casual and freelance workers. cost-reduction strategies are used more frequently by firms that fail to recover than those that do. Unilever¶s disposals included Caterpillar Trucks and British Airways. it is clear that such a strategy is not enough on its own. divestment involves the selling of complete business units or brands. In some instances.many of the structural controls traditionally employed. it decided to withdraw from the UK market entirely and focus on what it felt to be its core market in mainland Europe. For products with price-inelastic demand. C&A is another high street retailer that announced a closure of stores. Perhaps new production technology . This is particularly the case for businesses selling goods and services for which there is no direct comparison. If the organisation has been under-pricing such products. it may have suffered from a lack of demand due to perceived low quality. A reduction in committed and fixed overheads will bring about a flexibility and leanness that may have eluded the declining firm. The restructuring process referred to earlier may lead to a flatter. the demand becomes progressively more price-elastic. And just-in-time purchasing and production methods can eliminate the high costs of stockholding. gross margins and ultimately profits. There is an increasing trend towards reducing the number of traditional full-time staff in favour of creating a periphery of part-time. decided to sell its low-cost. One aspect of pricing that is particularly interesting is that involving so-called Giffen goods. another ailing company. The existence of significant equity in the plants or stores being closed could provide a much-needed cash injection to an ailing organisation. leaner organisation with a corresponding reduction in managerial overheads. As the price of a good is increased. the demand for such goods increases as the selling price increases. In theory. Marks & Spencer recently announced it was to close all its stores outside the UK to enable it to focus on its core market. in order to maximise revenues. Despite being what some would consider one of the more obvious options for a declining organisation. Cost reduction Interestingly. Activity-based costing can highlight the true cost of carrying out functions in-house and enable a fairer comparison to be made with external agencies willing to provide these services. A good knowledge of the price elasticity of demand for each product is essential. Charging too much or too little could be equally damaging to revenues. One way to reduce costs might be through the implementation of a redundancy programme. In announcing the closure of its 18 French outlets. Care must be taken to ensure that this will not result in excessive deficiencies in knowledge and skills. an increase in the selling price will bring about a similar outcome. it received heavy criticism for failing to consult with and inform local staff. Asset reductions A large majority of successful recoveries involve cash generation strategies. Strangely.

The purchasing of intangible assets such as goodwill and brand names could be of great benefit. One option open to a company is to try and convert its debt to equity. Debenture-holders could be offered shares in return for cancellation of the debt. an acquisition has many advantages over the organic option. or to create separately identifiable segments and approach each with a unique offering. Whilst this will dilute the existing shareholders¶ interests. Once again. Is the organisationmaximising its potential to achieve economies of scale? Could centralised purchasing and the elimination of duplicated activities reduce corporate costs? I mentioned earlier that successful recoveries usually involve not only a restructuring. Several UK banks have reached this conclusion. A good understanding of cost drivers is essential. The way that overheads are allocated and apportioned may need to be addressed using an activity-based approach.can be embraced to reduce unit costs. additional funding is still needed in order to implement the turnaround strategies it may be necessary to attempt a new issue of shares. interest payments are not. I have already referred to the need to review pricing policies. If. with a view to focusing on value-adding processes. Companies like Boeing have achieved massive reductions in the huge costs of designing new products. but also a critical review of current business processes. it may be paying large amounts of interest to debt-holders. Marketing is common to both successful and unsuccessful recovery situations. If so. not business functions. an upbeat message will have to be communicated . or a mixture of the two. A radical examination of the reasons why certain activities are performed is necessary. or replacing ageing products within a brand portfolio might be a solution. Market share can be increased with immediate effect. rather than having to wait for aggressive pricing and promotion policies to have an impact. Acquisitions As a method of growth. Information technology may have a key role to play. Whilst the payment of dividends is optional. A rationalisation of product lines might be the result. but also in such areas as product design. The economies of scale that should be available from larger operations will increase competitiveness. reducing the funds available for retention within the company. and other aspects of the marketing mix should be subjected to a similar analysis. The delivery of superior products and levels of service to customers must be preceded by a thorough analysis of their needs and expectations. Capital restructuring If the company is highly geared. An in-depth analysis of product costs can lead to a better understanding of true product profitability. not only in furnishing management with improved information. Payment for the acquired company can be made in shares rather than cash. When interest cover is low. Asset-stripping and possible synergy are further attractive opportunities that an acquisition might present. This is likely to lead to reduced investment. a large proportion of operating profits will be paid in interest. The successful firms tend to combine it with a more fundamental product-market reorientation and with acquisitions. A decision may be taken to redefine the target market. Revitalising products and brands. following asset disposals. and the beginning of a vicious circle. especially if the turnaround involves developing new growth markets in which it is presently unknown. it will at least allow the company to reduce committed outgoings in the form of interest payments. Product-market repositioning The µexcellent¶ companies studied by Tom Peters and Bob Waterman understood their customers better than their competitors did. As a result of using modern management accounting techniques such as customer account profitability. it may even be decided to withdraw products from some market segments and to focus resources on more profitable groups of customers. It is activities and processes that create value. Marks & Spencer is a useful case in point.

pure (blue-sky) research will absorb huge sums. Increasing stock turnover and reducing the levels of stock held. Investment in research and development may be an essential ingredient in such a recipe for long-term success. but is of vital importance. Tighter credit control. A review of the entire system of internal controls would be advised. Investment in R&D Having survived the short-term. a totally owned foreign company operating within its country in order to encourage domestic development. This too can give the firm a competitive edge over its rivals.perfect partners? by Geoff Gravil 16 May 2007 Much has been written about how joint ventures are good vehicles for fostering corporate growth. knowledge and finance. It is advisable to clarify any potential for conflict as early as possible and this might be better addressed at the initial contract order to persuade investors to become more heavily involved. The aim of a good internal control system is to safeguard the assets of the company. there can be difficulties in operating within joint ventures. The causes of decline discussed in my first article are as diverse as the potential solutions. establishing a long-term competitive advantage should be high on the organisation¶s list of priorities. but may simply result in an improved version of an existing product. particularly those involving foreign firms where language. ACA worked in Corporate Recovery at KPMG during the recession of the early 1990s Joint ventures . business culture and even different perspectives on business ethics can generate misunderstanding and even mistrust between the partners. However. I hope to have given the reader a flavour of some of the main strategies used. Improved financial control Common to many recovery scenarios is the implementation of enhanced financial control systems. it is possible for a firm to develop its foreign business more swiftly and cheaply than if it has to rely solely on its own resources and efforts. These include non-financial controls such as segregation of duties and the need for authorisation. as well as accessing existing customer groups. There is no definitive list. Negotiating improvements in the credit terms offered by suppliers. just as there is no standard organisation. By 'tapping' into existing skills. particularly in overseas markets. A host government may discourage. despite these benefits. or even prohibit. R&D does not always lead to the development of breakthrough products. In sectors such as technology and pharmaceuticals. Many companies see joint ventures as a means of rapidly expanding geographically by using other companies' resources. Better management of working capital might involve: y y y y Reducing the credit terms allowed to customers. Conclusion Although I have not covered every possible option for corporate recovery. In some countries it is the only way of gaining access to a market. Problems which can arise from joint ventures . David Elliott BSc.

This can have a detrimental impact on areas such as quality. within the contract. The older partner (often having sought a foreign partner so as to access new markets) may be more concerned with repatriating profits to distribute to its own shareholders. and again destroy the trust and harmony between the partners. who may already have export business in those targeted areas. This has already been touched upon in discussing transfer payments and the re-investment of funds. This ought to clarify the duties of and expectations from each of the partners. The local partner usually provides marketing knowledge along with an existing customer base whereas the other partner brings technological expertise and know-how to the partnership. It is also important to clarify who the partners are within the joint venture. There is a danger that the partners may have strengths in the same areas but possess the same weaknesses. expertise and resources of the partners are complementary. already served by the longer-established partner. However it is fair to comment that joint ventures between foreign partners do not generally suffer from this difficulty. and is not willing to share this market with the new partner. 1. It is also possible that cultural differences in management between the two partners may disrupt smooth working relationships. It is important that any differences should be reconciled as smoothly and as swiftly as feasible. Issue concerning transfer pricing and the supply of components or expertise would be addressed in this clause of the contract. that the contract destroys romance. This should prevent arguments as to whether the newer local partner has the right to export joint venture products which might compete in markets. Attitudes towards equal opportunities. service and even delivery. 3. Careful preparation here can save innumerable problems and disagreements later. Many of these issues which can so easily become contentious may be avoided if the contract between potential partners was carefully drawn up. There may also be concerns over transfer pricing arrangements. be a precise statement as to the merchandise and product areas to be covered . technology and components to the newer local partner.the flexibility and entrepreneurial spirit. It is an avoidable problem if initial agreements have been made but all too frequently many small to medium-sized joint ventures have disagreements over this issue which only helps to destroy trust between the partners. Joint ventures benefit where synergies can be created. Any partnership must allocate responsibilities for decision-making so as to ensure that the venture does not suffer from management paralysis. It is probable that this partner will be looking to charge the highest price possible. 4. or in the case of a joint venture . The established partner may be transferring expertise. as with the pre-nuptial contracts now so popular with Hollywood film stars. short and long-term planning are a few among many issues where disagreements may occur. Any profit will belong 100% to that partner. There is the obvious danger. This is most prevalent where the knowledge. There should be a clear indication as to the parties to the joint venture. However the local partner will prefer a low transfer price charge. A contract should not be seen as a constraining influence but as a guiding light. There is obviously room for disagreement here. There also needs to be a clear specification of the purpose of the joint venture. This might minimise conflicts of interest and avoid accusations of greed or short-termism being levelled at one of the partners.y y y y y y y y There may be fundamental disagreements with the partners having different objectives. Another difficulty which can occur with joint ventures is the problem of ensuring smooth co-ordination and control. Difficulties can arise if one party chooses to use sub-contractors. Issues which should be addressed within a contract The following are areas which should be made clear in the contract between the partners. 2. This results when there is no clear pattern for decision making and stems from a lack of overall leadership. benefiting both partners. The local partner may be hoping to generate exports into other geographical areas. There should. This should minimise the risk of lower quality suppliers being brought into the chain as a result of uncontrolled sub-contracting. One partner (often the newer and more local party) may be more concerned with growing the business from its own geographic base and may be wanting to see the profits re-invested back into the enterprise. This may not be in the interests of the more established partner. This will enhance the profitability of the joint venture. There should be an unambiguous definition of territories to be covered by the joint venture. Another issue where disagreements may occur is how profits are to be allocated and distributed. commercial practice.

corporate expertise and market knowledge. 6. 3. Conclusion Joint ventures can be viewed from both technical and emotional perspectives. The scope of the agreement must be clear to all parties. particularly if the joint venture was not working well. With the development of a smooth and harmonious relationship between the partners this could be a preliminary stage before an agreed and beneficial acquisition strategy. Finally there should be some agreement as to arbitration if a dispute between the partners cannot be amicably resolved. These often involve comprehensive flow charts with many subparts. The following series of articles provides an insight into how to apply your knowledge effectively. and how much should be re-patriated. However if there is less cause for disagreement with the more quantitative aspects. what proportion should be ploughed back into the company. trust. The older company may not be willing to share technology over its whole product range. This is more concerned with cultural issues. The main skill that a student needs to develop is an ability to apply the acquired knowledge in a scenario situation. administration.5. 9. The first article deals with the strategic planning process. The strategic planning process by Sean Purcell 15 May 2007 One of the main problems faced by students is how to apply the concepts of management and strategy. It is relatively easy to ensure that these factors are complied with in contractual terms. It is only when students enter the revision phase do they realise that they need to do much more than just learn the notes in order to pass the exam. There are many costs which could be disputed promotional material. These factors are more intangible. style of management and expectations of each partner. There is a danger that where two companies come together as in a joint venture there will be a lack of overall leadership. It might also be advisable to set out in contractual format how costs are to be shared. This appears to be obvious but unfortunately this issue can create more conflict and animosity than one might imagine. Rather than explain these in detail let us first distil the process into three main areas: 1. R&D. Strategic analysis . Many of the various texts on the market comprehensively cover the key processes involved in strategic planning. There should also be also some time-scale attached to the contract. 2. There should also be an agreement as to how profits are to be shared. On the technical side there is the joint contribution of product technology. Many companies see joint ventures as a first step before acquiring a company. It may be necessary to itemise these costs and to allocate responsibility for their payment. Strategic implementation. Strategic choice. within the joint venture. because of contractual clarity then the less precise and more qualitative areas may become less contentious. 7. 8. It is less easy to legislate for the emotional aspects. Strategic analysis. considered above. whereas the newer local partner may be expecting much broader co-operation. No party would want to be locked into a lengthy agreement. It is probably sensible that one of the partners should be invested with the responsibility for decisionmaking so that there is no paralysis brought about by an inadequate command and reporting structure.

employees and the general underlying culture of the organisation. However. 6Ms is simply a mnemonic used to save time when thinking about the various resource constraints. plant and machinery and human resources. Key influencers are often the owners (eg shareholders) who may have a particular expectation for the organisation. However. It can be summarised as: y y y y y y Money Machinery Manpower Markets Materials Make-up. These views are very often consolidated into a corporate vision or mission statement. which you would ask against each of these resource constraints. What constraints exist on our resources? Resources needed would include finance. one also needs to take into account other stakeholder influences which could include the government.Essentially a business will address the following questions: y y y Where do we want to go? What constraints exist on our resources? What are the key threats from the external environment? Where do we want to go? The answer to this question is influenced by many factors. would be as follows: Money y y y How much do we have? What is the current cost of our capital? Is the company excessively geared or are there any opportunities for raising additional finance? Machinery This would refer to machinery in the broadest sense of the word and typical questions one might ask would include: y y y How technically up-to-date is the machinery? Is there a danger of obsolescence? Has it been poorly maintained over the years? Manpower y y y y y y y How expensive is our workforce? How efficient are our employees? Is the business overstaffed? Is it understaffed? What is the labour turnover rate? What is the absence rate? Are there good structures to allow management succession? Markets . to make it easy I would recommend that you simply think 6Ms. The typical questions.

Essentially this model determines the level of competition an organisation is facing by assessing the extent to which the five forces are relevant. 5. The five forces are summarised as follows: 1. 4. You potentially could get a whole Section B question which goes into detail on barriers to entry. The ease which new entrants can enter the business segment is largely determined by the extent of the barriers to entry. The easiest way to assess the external environment is to use the following two frameworks: 1. The following summarises the main barriers to entry. 2. LePEST analysis. The threat from substitute products. 2. The bargaining power of suppliers. The bargaining power of buyers. What are the key threats from the external environment? Once we have established constraints on our internal resources we need to assess the threat posed by the external environment. The threat from new entrants This is a problem because if competitors can easily enter your business sector they will be able to put a ceiling on your profits. The higher the capital cost the greater the deterrent to someone entering the business and . Capital cost of entry.There is a danger of overlapping with the external environment here so try to keep to such questions as: y y y Are the markets declining/growing? Where are new markets emerging? How strong are our brands in the current market? Materials y y y y How expensive are our materials compared to our competitors? Do our suppliers have excessive control of materials? Do we have favourable access to materials? Are our raw materials becoming exhausted? Make-up y y What type of structures do we have and are they likely to limit future growth? What is the culture of the organisation and will it stifle or fuel future developments? We will explain later how we can apply these concepts to a case scenario. The threat from new entrants. Porter s five forces. 3. The extent of competitive rivalry. Therefore the greater the threat from new entrants entering the sector the higher the levels of competition. Porter s five forces The American management writer Michael Porter describes the main external competitive threats to be summarised by his five forces model.

Buyers will have power when: y y they are concentrated and can exert pressure on the supplier. Access to distribution channels. This will apply if a substantial investment is needed to allow a new entrant to achieve cost parity. Therefore anyone entering the segment that cannot match the economies of scale will be at a substantial cost disadvantage from the start. Concorde. when thinking about the barriers to entry go through the above list in your planning to see which of them apply. The threat from substitute products If there are similar products that can be used as substitute then the demand for the product will increase or decrease as it moves upwards or downwards in price relative to substitutes. Existing relationships between manufacturers and the key distributors of the products may make it difficult for anyone else to enter the market. Legislation. The bargaining power of buyers Do the buyers of the product have the power to depress the supplier¶s prices? If the answer to this question is yes it is likely that competition will increase. Differentiation is said to occur if consumers perceive a product or service to have properties which make it unique or distinct from its rivals.therefore the likelihood of competition being less than in industries where it is much cheaper to set up business. The switching costs of moving to another supplier. Expected retaliation. when the compact disc was invented consumers had to incur a cost of a CD player. as the new compact discs would not work on a conventional record player. the level of importance attached to the buyer by the supplier. Economies of scale. If a competitor entering a market believes that the reaction of an existing firm will be too great then they will not enter the market. the buyer has a choice of alternative sources of supply.g. in summary. If the buyer will incur expense by changing to a new supplier they may not wish to change. The extent of the power of the suppliers will be affected by: y y y the concentration of suppliers: if only a few suppliers. e. The differentiation can be in the appearance of the product. Differentiation. Switching costs. Therefore.. This is the cost not incurred by a new company wishing to enter the market but by the existing customers. therefore they are likely to be put off. Remember that it is unlikely that they all will apply but the checklist should ensure that all those that do apply would be picked up. eg nuclear power. For example. its brand name or services attached to the product. the buyers will have less opportunity to shop around. The extent of competitive rivalry The most competitive markets will be affected by the previously discussed four forces. However they will also be . the degree to which products can be substituted by the various suppliers. Therefore if new entrants are to be successful in entering the market they will need to spend a lot of money on developing the image of the product. There might be patent protection for a product or the government might only license certain companies to operate in certain segments. The bargaining power of suppliers The extent of supplier bargaining power is very closely linked in with the issues of buyer power.

eg the defence industry. Government subsidies. Economic environment The current state of the economy can affect how a company performs. employment. employment laws. How an organisation gives information about its performance. They are explained more fully below: Legal environment How an organisation does business: y y y y y Law of contract. employer. Political influence will include legislation on trading.affected by: y y y y the number of competitors and the degree of concentration. the exit costs. is LePEST factors: y y y y y Legal Political Economic Social Technological. Other economic influences include: y y y y y y Taxation levels. customer and investor and any change in government spending priorities can have a significant impact on a business. Environmental legislation. dividends. which could include: . The government is the nation¶s largest supplier. the rate of growth of the industry. LePEST factors The other framework. firms may be willing to accept low margins so as to stay in the industry. Inflation rate. One should also look at international economic issues. which should be applied when surveying the external environment. Political environment The organisation must react to the attitude of the political party that is in power at the time. tax. pricing. How an organisation treats its employees. The rate of growth in the economy is a measure of the overall change in demand for goods and services. law on unfair selling practices. health and safety legislation. Again all of these factors will not necessarily apply but provide a useful checklist against which you can compare in an exam situation. Legislation on competitive behaviour. as well as health and safety. The level of unemployment Interest rates and availability of credit. The balance of trade and exchange rates. If they are high. the cost structures if high fixed costs prices are often cut to generate volume.

Relative exchange rates.000 Operating profit is before interest charges and taxation. How we identify markets. Year Champlan Champlan Systems design Operating units sold sales $ 1992 2. inflation.000 107. In addition the company provides a systems design consultancy service to the financial services industry. These show declining profitability although aggregate sales revenue has increased year on year.000 600.080. habits and attitudes of society.000 144. Therefore when surveying the external environment think through Porter¶s five forces and PEST factors and you will have a fully comprehensive framework with which you can assess the case. Demographic changes.050 1993 2. . Past exam related example Championsoft is a specialist software house which has developed and now markets a modular suite of financial software packages under the product name of Champlan.260. wages and taxation. Changing mix in the ethnic and religious background of the population. Technological change can influence the following: y y y y Changes in production techniques. The freedom of capital movement.000 550.000 1.y y y y y The extent of protectionist measures. The company was established in 1988 and the three founding shareholders are also the three full-time working directors. Changing values and beliefs. y y y y y Changing values and lifestyles. The type of products that are made and sold. Changing patterns of work and leisure. Comparative rates of growth.700 1994 3. Extracts from the financial results for the last three years are given below.600 922.500 1.500 services sales $ 650. Economic agreements. The technological influences This is an area in which change takes place very rapidly and the organisations need to be constantly aware of what is going on. The social environment The organisation is also influenced by changes in the nature. How services are provided.000 profits $ 162. The current interest rate on the medium term loan is 10% per annum.

The bank had concluded that they would like to see some medium-term projection about how the overdraft was to be . The software technical aspects of the business are managed by the Technical Director. pointed out that Championsoft¶s overdraft was rising year on year and that this must not be seen as a permanent source of finance.' He was thinking about the letter recently received from the bank which. their product range is very similar to Champlan if lacking in its level of functionality.000 400. He is responsible for research and development on the Champlan product range. He was the prime mover behind the creation of Championsoft and has substantial experience in the financial services industry. while professing continuing support. Simon Champion is not fully convinced. Championsoft see their Champlan product range as market leaders in terms of quality and functionality although this segment of the software market appears to be increasingly driven by price and product awareness. Her background is in the marketing of fast moving consumer products. 'Although our current advertising has generated lots of enquiries very few of these resulted in firm sales. There are few barriers to other software houses entering this market. He sees his main role as ensuring the efficient day-to-day administration of the business. This is also the agreed maximum. Every year there is a bigger market as new users get access to the hardware.000 on advertising while Pennsoft spent in the region of $500.000. Jill Mortimer has a strong personality and her views have tended to dominate the recent direction of the business. It is estimated that the operating profit to sales ratio on system design services is in the region of 15%. She believes that Championsoft must cut its prices and put more effort into winning sales. Our extra sales effort and a bigger sales force will easily be covered by additional unit sales. The premises have recently been expanded to cope with the increased sales volume of the Champlan package.000 475.000 1993 1.225. There is little subcontract software development undertaken. Championsoft is well regarded in the system design services field and attracts good profit margins on the work carried out. the high level of spending on promotion is straining our cash flow.000.000 200. customer technical support on software products and systems design consultancy projects.000 950.000 1994 1.000 200.000. The managing director and majority shareholder with 40% of the voting capital is Simon Champion.000 375.000 650. who holds 30% of the voting share capital. In fact.000 1.000 525. Jill Mortimer. the third director.Year Fixed assets $ 1992 950.000. Dr John Chan. Champlan about one quarter and the rest is split among a few other software houses.000 425. There is also a recent marked tendency for hardware suppliers to bundle in the Champlan product as part of the hardware price of their product.000 260.000 Current Current Medium Share capital assets $ liabilities term loan and reserves $ $ $ 915. Championsoft employs 18 people mainly as software specialists. Although the consultancy workload of the company has shown some decline in recent years this has been due to pressure on the software staff to develop more powerful versions of the Champlan package rather than a shortage of potential work.000 The current liabilities figure includes an overdraft with the bank of $300.' Last year Championsoft spent $100. Pennsoft software is marketed at prices which have always undercut Champlan. 'Look at the way the software market is developing. Almost any quality software house is able to produce a similar product for this market providing that they are willing to devote sufficient resources. The company owns its own premises and these comprise the majority of fixed assets. holds the final 30% of voting shares and is in charge of sales and marketing of both software products and consultancy services. We must tackle Pennsoft head on and capture some of their market share. The main competitor to Champlan is the Pennsoft product range. Jill Mortimer believes that Pennsoft hold about two thirds of the market. Pennsoft are part of a large international organisation.

.' Simon Champion was at a loss how to respond. I would expect your thought process to go something like the following: y y y y y y Machinery? Is machinery relevant to Championsoft s business as a specialist software house? How cost effective is the current use of the machinery? You may comment on the fact that in order to remain competitive ongoing investment in the latest equipment is likely to be relevant. which you need before you could set about writing your report and indicate how you would gather such information. So to help get some structure for Internal factors think 6Ms and you think: y y y y y y Money Markets Machinery Materials Manpower Make-up. Markets? The growth potential for financial software and the systems design consultancy market. Materials? In the case of Championsoft materials do not seem to be so relevant so I would suggest no comment is needed. Requirements: (a) Identify any additional internal and external information. As it stands my team is being torn between development of Champlan and working on software projects. 'We should move away from the package market and into consultancy activities. software development. He feels that Championsoft need a strategy but is not sure what it should be or how to go about preparing it. 'Events move so fast in our industry that plans are out of date before they can be implemented' was a comment made at your meeting.g. (12 marks) Suggested approach As you can see the question asked above in the case scenario clearly asks for information of both an internal and external nature together with how you would gather such information. We should now be confident in applying 5 Forces and LePEST in much the same way e. Something had to be done but what? Simon Champion has come to see you. questions regarding the 5 Forces would include: . We then need to quickly think which of these 6Ms would be most relevant to the answer. We cannot do both well. and has asked for your objective advice. how competitive is the interest on the medium-term loan? Manpower? Cost/productivity/staff turnover of the current employees compared to the industry average. 'The margins are good and we can sell on recommendation not expensive advertising campaigns. All answers in the examination should be roughly planned out and all you need to remember to score well in this part of the question are the mnemonics to help you break down the internal and external factors. as the company¶s auditor. These build on our reputation and software expertise. we are in danger of losing clients and at the same time failing to keep the edge over Pennsoft. Therefore we have shown how by using the 6Ms approach in our plan we can provide ourselves with more than enough criteria on which to comment..brought under control. Money? An analysis of profitability of individual products. As usual John Chan took the opportunity to launch into his familiar attack on the marketing strategy or lack of strategy as he was heard to remark to his software team. Make up? We would need to look at the current culture of the staff and assess whether they would be happy if one side of the business was run down e.g.

managing director of Bowland Carpets. based within the USA but with interests all over the world. to address this issue and provide guidance to the US board of directors. Are there any other packages out in the market. . ranging from luxury carpets down to the cheaper products. Armed with this information in your plan you should now be able to develop an answer that should fulfil the 12 marks allocated. Requirements: Acting in the capacity of Jeremy Smiles you are required to outline the various issues which might be of significance for the management of the parent company. Bowland Carpets operates within the UK in various market segments. as this would compete with other Universal Carpet companies. including the high value contract and industrial carpeting area . Funding does not appear to be a major issue at this time as the parent company has large cash reserves on its balance and office blocks etc . It has a powerful brand name. The recent decline in carpet sales. Do not forget to answer the entire question. particularly the mainstream retail organisations. in 1993. has worried the US parent company.and in the domestic (household) market. (7 marks) (c) In an external environmental analysis concerning the proposed strategy shift what are likely to be the key external influences which could impact upon the Bowland Carpets decision? (8 marks) (Total: 25 marks) Suggested approach If we are to concentrate on part (b) you can see that it asks for the prime entry barriers in the carpet retailing sector. It must be stressed that all of the 6M¶s. vertically integrated carpet manufacturing and retailing business. Universal Carpet is a giant. Bowland Carpets has traditionally been known as a producer of high quality carpets. Within the latter the choice is reasonably wide. Past exam-related example Bowland Carpets Ltd is a major producer of carpets within the UK. It has also maintained a good relationship with the many carpet distributors throughout the UK. which required suggestions as to how you would gather such information suggested. It has recognised that the increasing concentration within the European carpet-manufacturing sector has led to aggressive competition within a low growth industry. 5 Forces and LePEST need not necessarily be used in your answer but they should almost certainly be used in developing your answer plan. It does not believe that overseas sales growth by Bowland Carpets is an attractive proposition. The president of the parent company has asked Jeremy Smiles. The company was taken over by its present parent company. however. and it has been able to protect this by producing the cheaper. but at competitive prices. lower quality products under a secondary brand name. which could be used as a substitute for Championsoft s products? Questions of a LePEST nature would be similar to those used in the article above. This would give the UK company increased control over its sales and reduce its exposure to competition. partly recession-induced. but since 1992 sales have dropped by 5% per annum in real terms. Universal Carpet Inc. It does. During the late 1980s the turnover of the company was growing at 8% per annum.y y y y What are the main barriers to entry for new entrants entering the software and design consultancy business and how much of a deterrent are they? Do buyers have the power to ask Championsoft to reduce their prices? You may comment on the fact that they have an alternative choice in Pennsoft and therefore may be able to get a more competitive price than if Pennsoft was not there. which is currently £80 million. consider that vertical integration into retailing (as already practised within the US) is a serious option. Your answer should cover the following: (a) To what extent do the distinctive competencies of Bowland Carpets conform with the key success factors required for the proposed strategy change? (10 marks) (b) Suggest and discuss what might be the prime entry barriers prevalent in the carpet retailing sector. Industrial and contract carpets contribute 25% of Bowland Carpets¶ total annual turnover.

The strategic planning process . which we should all be able to break down into: y y y Where do we want to go? What constraints exist on our resources? (6Ms) What are the key threats from the external environment? (5 Forces. Switching costs are not relevant and one would become relevant if a householder were to enter into a lifelong contractual agreement to buy all their carpets from one particular retailer. Summary Hopefully now when we think about the strategic planning process we think about: 1. Therefore using the framework in an applied way we have been able to construct an answer. This article has explained in detail the process of strategic analysis. 2. Legislation. 3. So thinking back the main barriers to entry which we listed were: y y y y y y y Capital cost of entry Economies of scale Differentiation Switching costs Expected retaliation Legislation Access to distribution channels. y y y y y y y Capital cost of entry.All that you need to do here is to do a quick brainstorm of what we described earlier as barriers to entry and then see whether any of them will apply to the carpet retailing sector. If a retailer existed in the carpet retailing sector that was very aggressive to any potential new competitor this could prove to be a potential barrier. LePEST) The next article will take a similar approach to the issues of strategic choice and implementation. Expected retaliation. Strategic choice.see if you can do it. How easy will it be for a new entrant in the carpet retailing sector to find a prime retailing site that is appropriate for the sale of carpets. but in order to score high marks you need to apply them in the context of carpet retailing rather than just list them out. Strategic analysis. Are there any current carpet retailers which have superior buying power and economies of scale in distribution and marketing? Differentiation. Strategic Implementation. which have high levels of customer loyalty to their shop. Are there any retailers. Are there any planning constraints or specific licences that are needed to operate in the carpet retailing sector. which would prevent them from buying carpets from anyone else? Switching costs. How much investment would be required in a lease and stock? Economies of scale.part 2 . Access to distribution channels. Most of the above could be a potential barrier in the carpet retailing sector. If you look at part (c) you will see that the external analysis frameworks fit in perfectly again . which is clearly unlikely. which if presented appropriately will be worth almost maximum marks.

The following article provides an insight into how to apply your knowledge effectively. The previous article comprehensively explained strategic analysis by breaking it down into three questions: y y y Where do we want to go? (think stakeholder constraints) What constraints exist on our resources? (think 6Ms) What are the key threats from the external environment? (think LePEST and 5 Forces) In this article we are going to try to adopt a similar simplification approach to the issues of strategic choice and strategic implementation. Strategic choice Johnson and Scholes break down the issue of strategic choice into three distinct subheadings which are: y y y On what basis do we decide to compete? Which direction should we choose? How are we going to achieve the chosen direction? On what basis do we decide to compete? A useful framework to use here is Porter¶s Generic Strategies. thereby achieving advantage via superior profitability? Or Is the company wishing to differentiate itself and the customer is prepared to pay a premium price for the added value which the customer perceives in the product. is faced with two choices: Choice 1 Is the company seeking to compete by achieving lower costs than its rivals achieve and by charging similar prices for the products and services. It is only when students enter the revision phase do they realise that they need to do much more than just learn the notes in order to pass the exam. Michael Porter stated that a firm. The main skill that a student needs to develop is an ability to apply the acquired knowledge in a scenario situation. which it offers. 3. Choice 2 What is the scope of the area in which the company wishes to obtain competitive advantage? Is it industry-wide or is it restricted to a specific niche? The answers to these two choices leave the organisation faced with three generic strategies. Strategic choice. and thereby enjoys greater margin than the undifferentiated product. In the previous article we established how the complexities of strategic planning could be broken down into three main areas: Sean Purcell 15 May 2007 One of the main problems faced by students is how to apply the concepts of management and strategy. which are defined as: . which is wishing to obtain competitive advantage over its rivals. Strategic analysis. Strategic implementation. 2.

Ways of achieving differentiation Image differentiation Marketing is used to feign differentiation where it otherwise does not exist. which is above the cost incurred to create the differentiation. size. Invest in the latest technology improved quality less labour needed. Quality differentiation This means the features of the product. This may have to do with selling. The product will perform with: y greater initial reliability. Differentiation. 24 hour delivery. Seek to obtain favourable access to sources of raw materials. As a consequence of differentiation being about uniqueness it is not really possible to give an exhaustive list detailing how a firm may differentiate itself. . Minimise overhead costs by exploiting bargaining power. This can also include cosmetic differences to a product that do not enhance its performance in any serious way. some basis of support.not fundamentally different but just better. i.e. eg 0% finance. 1. 2. By producing at the lowest possible cost the manufacturer can compete on price with every other producer in the industry and earn the highest unit profits. Differentiation occurs when the differentiated product is able to obtain a price premium in the market. Focus. eg perfume ± colour. which make it better .y y y Cost leadership. packaging. value chain analysis. Differentiation A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers. eg ZBB. Concentrate on productivity objectives and constantly seek to improve efficiency and economy. Cost leadership Set out to be the lowest cost producer in an industry. Support differentiation More substantial but still has no effect on the product itself. One should also be aware of the drawbacks of such a strategy. is to differentiate on the basis of something that goes alongside the product. an image is created for the product. Look to develop product designs that facilitate automation. such as the need to continually keep up-to-date with potential changes in technology or consumer tastes.. To truly differentiate yourself we must understand the product or service offered and the customer to whom you are selling it. In order to achieve cost leadership some of the following need to be in place: y y y y y y Seek to set up production facilities for mass production as these will facilitate the economies of scale advantages to be achieved.

Design differentiation Differentiate on the basis of design and offer the customer something that is truly different as it breaks away from the dominant design if there is one. This can be summarised in the following diagram: We stated that the alternative directions available to a business could be described in general terms as follows: 1. Market development. which may be at the top of its cycle and hence will be in line with the goal of maximisation of cash flows. Diversification. 5. Differentiation focus: Select a particular niche and concentrate on competing in that niche on the basis of differentiation. Reward of a differentiation strategy Consumers are likely to pay a higher price for the goods because of the added value created by the differentiation. 3. Withdrawal. superior performance. Focus A focus strategy is based on fragmenting the market and focusing on particular market niche. Do nothing This involves following the current strategy whilst events around change and can often prove to be a successful shortterm strategy. 3. eg luxury goods. By concentrating on a limited range of products or a small geographical area the costs can be kept low. Market penetration. Cost focus: This involves selecting a particular niche in the market and focusing on providing products for that niche. eg Apple¶s iMac computer. 2. Product development. The firm will not market its products industry-wide but will concentrate on a particular type of buyer or geographical area. 4.y y greater long-term durability. Basically if an organisation is exposed to some form of competitive threat its short-term objective is to not react and hence get involved in what could be an expensive decision. 6. Sell out/withdraw from the market This may be followed so as to maximise the return on a business. Withdrawal from a business sector may be chosen to give the . Do nothing.

eg McDonald¶s and its geographic market development. Unrelated diversification This involves movement into industries which bear little relationship to the present one and is often the result of a profit motive. eg move down the supply chain into distribution more focus. This is an alternative to the present product and builds upon present knowledge and skills. eg Richard Branson¶s decision to sell his original business Virgin Records to concentrate on the airlines business. 3. A development into activities concerned with a company s outputs also called downstream integration. Movement into activities which are competitive with existing activities. Market development In this case the organisation keeps its tried and tested products but tries to apply them to different market segments. 1. The product change is often the result of changes and modifications to an existing successful product. Horizontal. Related diversification This involves development of the product and market but still remaining within the broad confines of the industry. eg move up the supply chain into raw material inputs. 2. There are three main types. Diversification This is the most risky of the product market strategies as it involves the introduction of a totally new product in a new market. Market share can be enhanced by such techniques as improved quality. This strategy maintains the security of the present product whilst enabling extra revenue to be generated from new segments. Forward. A development into the business which inputs into the present business. Ansoff represented the last four choices in his product/market matrix. Diversification can either be related or unrelated. . eg Mars ice cream. eg to benefit access to market or technology. Market penetration This involves increasing the market share in the current market with the current product. Backward. Product development This involves introducing a new product into the current market. productivity or increased marketing activity.

The purchase of the right to exploit a business brand in return for a capital sum and a share ofprofits or turnover. technology or business opportunities. Internal development Reasons Often undertaken to maintain the present equilibrium within the company as it is much less disruptive than an acquisition. Two or more firms working together to share the costs and benefits of a business opportunity. Another reason may be that there is not sufficient finance available for an acquisition or that the government may prevent acquisition/merger through legislation. Acquisitions If there is sufficient finance available an acquisition will provide a very quick way of providing access to new product/market areas and the new organisation will have economies of scale advantages. Joint development A formal agreement between two or more organisations to undertake a new venture together. The options available are: y y y internal development. A long-term agreement to share knowledge. yFranchising. The franchiser also usually provides marketing and technical support to the purchaser of the franchise. yJoint venture. eg Airbus (spreading of cost). eg Airbus (spreading of cost).How? The final problem that must be overcome is to decide how the chosen strategic option should be undertaken. Joint development A formal agreement between two or more organisations to undertake a new venture together. A separate business entity whose shares are owned by two or more business entities. Methods of joint development yConsortia. external development/acquisition. yStrategic alliance. Differs from franchise . yLicensing. joint development. The right to exploit an invention or resource in return for a share of proceeds.

Questions will normally touch on some part of the process we have described and if you have an in-depth understanding of everything which we have . Suitability Suitability identifies the extent to which the proposed strategy enhances the situation identified in the strategic analysis. To summarise then we can use the following diagram: Once all the alternative options have been generated we need to evaluate their appropriateness before making a choice. A useful framework to apply when considering the appropriateness of an option is: y y y Suitability Feasibility Acceptability. To save time simply think about the 6Ms. Remember that in the examination it is unlikely that you are going to get a question. The resources the organisation has at its disposal will obviously determine this. which asks you to regurgitate the information on strategic choice in the way in which I have just explained to you. The following questions need to be addressed about the strategic options: y y y y Does it close the planning gap? Does it address threats and weaknesses? Does it build on identified strengths and exploit opportunities? Does it fit in with the organisation s mission? Feasibility The issue of feasibility evaluates whether the chosen strategy can be implemented successfully. Acceptability The final issue to address is whether the selected strategy will meet the expectations of the key stakeholders in the firm and typical issues to be looked at would include the level of risk and return resulting from the option.because there will be little central support.

Change Is the second stage. Budgets and other performance management tools are likely to be used here. Refreeze. Management of change The scope. A useful model of change to remember is Kurt Lewins three-step model. However as with strategic analysis and strategic choice it is possible to simplify the issues in to a number of key sub-headings: y y y Resource management. Strategic implementation The area of strategic implementation covers almost all of the second tier level of the Paper P3 syllabus covering everything from project management to change. reward. Management of change. one should consider the adoption of the following management styles to improve the acceptance of the change: y y y Participation with employees affected by the change so they feel more of a sense of ownership. communicating it and encouraging individuals and groups to µown¶ the new attitude or behaviour. Therefore to summarise what we have just said: Strategic choice . which involved: y y y Unfreeze.) or negative reinforcement (sanctions applied to those who deviate from the new behaviour) may be used. desirable behaviour or norm should be. Positive reinforcement (praise.covered you will be able to construct much more comprehensive arguments in the exam and we will show this in a previous exam question later. Resource management This will ensure that the 6Ms are working for you in the best way possible. together with structural form and style of management. Organisational structure. Unfreeze For the change to take place the existing equilibrium must be broken down before a new one can be adopted. etc. mainly concerned with identifying what the new. speed and style of the changes need to be carefully reviewed in order to obtain full commitment to them. Refreeze is the final stage. To be successful. implying consolidation or reinforcement of the new behaviour. Change. Organisational structure This will deal with issues regarding the levels of centralisation and decentralisation. Negotiation may also be appropriate if there are large group stakeholders such as a trade union. Education and communication of the new ways so that they fully understand what is going on and not in a situation where they are afraid of the unknown and therefore show resistance.

do nothing. but it did not appeal to Jerome. change. Jerome was impatient with the lack of growth. It also allowed them to respond to local demand conditions as stock ordering was carried out by each shop and was not organised at the head office.) How are we going to achieve the chosen direction? (internal external joint venture. These shops are clustered in the south of the country. by late 1997 there was evidence that Sportak¶s overall position within the market was weakening. Sportak. He believed that only the big. At about this time another chain of 15 sports shops became available for purchase.) Which direction should we choose? (Ansoff¶s product market matrix. refreeze) Let us see how we can expect to get questioned in this area in the exam. It had been suggested to him that the franchising of the Sportak brand name would be a reasonable and relatively risk-free method of expansion.On what basis do we decide to compete? (Porter¶s generic strategies. Question 1 Jerome Gulsand is the owner and chief executive of a chain of 20 sports equipment shops. This group was in a distinctly separate area of the country ± about 150 miles from Sportak¶s current area of operations. He wanted a more µhands-on¶ approach. Jerome saw that the market was becoming so competitive that even small and specialist markets were proving to be vulnerable. He decided that a µdash for growth¶ was required if the company was to achieve the critical size to survive in the market place. By nature he was an entrepreneur who sought growth. The company was founded by Jerome¶s father a quarter of a century earlier when he opened his first small shop. nation-wide retail chains would survive and that the smaller sized groups would be taken over by the larger chains of sports goods retailers who were more profitable and had greater capability to raise finance. which the company owns and which are on prime retail sites account for the majority of the assets of Sportak. It was at this time that Jerome took over the company from his father. the price being asked for this acquisition was rather high. Sales had stabilised but even more importantly competition was growing from a number of discount traders who were prepared to operate on low profit margins but with larger volumes. A major reason for this successful development lay with the philosophy of Jerome¶s father who delegated much of the decision-making to the individual shop managers. He believed that Sportak needed this expansion so as to take advantage of the profitable sales still available in this sector. Before approaching the bank Jerome discussed this issue with his accountant and offered the following ideas for his proposed expansion. He was not sure that the steady organic growth was appropriate to these conditions. Recently it has expanded its range to include certain types of designer sports clothing. The managers were also permitted to develop local marketing activities. The company sells a wide range of sports equipment such as golf clubs. He believed that this gave the local managers a higher degree of motivation. skiing equipment. However Jerome was convinced that this was too good an opportunity to miss. soccer and other sports equipment. These methods of operation were satisfactory whilst the company was operating in a steady growth environment. using other people¶s money has its advantages. using sales promotions and publicity as they felt appropriate. funding this growth out of current earnings. As the overall sports equipment and sports wear market was still growing. In anticipating this proposed expansion and the need to manage an enlarged group Jerome believes that it is time for a . Growth. Jerome assumed that he might use the freeholds of the properties Sportak owned as securities for the finance the company needed to borrow. These shop managers were remunerated partly by a basic salary and partly by a sales-related performance bonus which could be up to 40% of their basic salary. withdraw.) Strategic implementation Resource management (6Ms) Organisational structure (centralisation. specific structural form) Management of change (unfreeze. tennis. However. decentralisation. However for an acquisition of this size it was obvious that the growth could not be funded internally. Over the next 25 years the company grew steadily. His father¶s policy had been to open a store each year. The company is privately owned by the family and the freeholds of these shops.

He believes that this growth in sales. they will be expected to hold much more stock. he proposes to provide a centralised purchasing function based upon a warehouse owned and controlled by Sportak. In appreciating that these shop managers provide much goodwill and their loss would be damaging to the company. Jerome anticipates that sales per store will rise by about 8% over the next year. and in particular.50 14.15% of sales to spend on press advertising and on public relations: and this level of commitment will continue for the foreseeable future. Sportak. and although they will still have some freedom on the stock range which they offer they might increasingly see their freedom to act as managers being eroded.25 0.02 2.52 2000 Forecast $m 57. Most customers were unwilling to wait for the product to be ordered and they therefore bought from competitors¶ shops. become a national company. By a competent use of merchandising it is hoped that these stores will increasingly be recognised as centres for influencing the fashion of both sports equipment and clothing.92 33. The decentralised approach adopted by his father has not brought about the development of a well-known image and therefore the brand of Sportak needs to be strengthened. promotion.04 29. Forecasts of immediate future sales appear to be attractive.50 4.28 33.50 2.75 14.50 1. Attached in Table 1 is a summary of the figures that have been prepared by Jerome¶s accountant for discussion. as well as upgrading stock with a wider and more sophisticated range of products.00 3.00 12.strong and centralising leader. Jerome is proposing to increase their sales-related bonuses as an inducement to stay. Jerome has also decided to tackle the problem of marketing.29 2.96 24.25 1999 Forecast $m 58. no longer having to operate as a regional retailer does. will also require funding.75 12. The shop managers will also be encouraged to stock more expensive lines of products where the margins will be higher and. Individual shop managers will be permitted to decide upon their stock range but they will have to order from the central warehouse set up by Sportak. Sports personalities will be paid to appear in all stores which will have to be re-equipped.0 3.50 0.00 0. These people have enjoyed substantial autonomy.79 . accompanied by his more aggressive approach to retailing will enable his bold expansion plans for Sportak to be achieved.00 1998 Budget $m 29. Table 1 1997 Actual $m Sales revenue Cost of sales Gross margin Expenses Operating profit Interest paid Profit after interest 30. Jerome recognised that during this period of change Sportak might lose a number of its key shop managers.80 25. Recognising that the current system of product ordering is delegated to individual store managers. A criticism of the stores when Jerome¶s father was in charge was that they were often short of stock. Under Jerome¶s plan it is proposed to allocate a substantial budget .52 29. Above all Jerome wishes to see his company. Jerome fully understands that the costs incurred in the proposed acquisition involve more than the purchase of the new shops. in addition.00 15.00 15.75 3.0 2. Part of the data has been obtained from trade association statistics as well as government forecasts. Store modernisationprogrammes for all the shops.

If you were to brainstorm the main issues regarding centralisation and decentralisation and then see which apply in the context of the case a comprehensive answer would be able to be obtained. (10 marks) y Evaluate the key features that you consider to be important and would expect to see in the business plan which Jerome Gulsand would have to present to his bank to support his application for financial assistance.75 0. (15 marks) y Discuss whether a franchise operation would have been a better option for expansion than an acquisition. external or joint . assess the viability of the strategy that has been proposed by him.59 0. (Use the internal.00 57% 6.14 6. (10 marks) Part (a) examines your knowledge of the implementation stage by asking a specific question on structure and whether you believe decentralisation has had any detrimental effect on Sportak.63% 1. together with an overview of the business environment in which it exists (use LePEST and 5 Forces for inspiration). A clear description of the basis on which Sportak intended to compete should also be included (use Porter¶s generic strategies and Ansoff¶s product market matrix for inspiration) together with the likely returns the business is to make from the chosen strategy. Common sense would tell you that the business plan should include an overview of Sportak¶s business.04 138 Required: y JeromeGulsand s father was a great believer in the decentralisation of both operations and decision-making. More detailed information should be provided on the organisation¶s resources (6Ms).21 12.8 7.15 25. Part (d) again would have been easily answered if you had approached your studies in the logical way suggested earlier and it specifically dealt with the 'how?' part of the strategic choice stage.35 26.83% 1.00 57% 5.9 3.85 5.2 125 15.91 25. To what extent has this process harmed or benefited Sportak? Provide examples to justify your arguments.15 9.67% 1. Part (c) requires you to apply the financial skills you have learned throughout your ACCA studies to give an overview of how viable Jerome¶s plans are.25 25.00 9.15 7.46 3.Fixed assets Current assets Current liabilities Equity Debt Gross margin Return of sales Activity ratio Return on net assets ROE Industry sales (1990 100) 15.15 135 34.20 9.00 5.66 7.0 50% 10% 1.00 9. Part (b) would be best answered by mixing common sense with the key issues from strategic analysis. (15 marks) y Acting in the position of Jerome Gulsand s accountant.00 3. strategic choice and strategic implementation.2 12.69 24.0 50% 7. and using the financial data provided and the intentions developed by Jerome.00 6.75 24.80 140 34.

choice and implementation. 5. It reduces the importance of price differentials between goods. 3 It reduces the importance of price differentials between goods People will often quite happily pay up to ten times the price over non-branded variety for a branded pair of running shoes. What does a brand possess then to make you behave in this way? Brands are said to do the following: 1. management of change). organisational structure. They act as a form of product differentiation. eg Polo Ralph Lauren. This article gives an overview of what brands do and how they affect our everyday lives. By displaying a brand on your clothing you are letting people know that you aspire or subscribe to a certain lifestyle. All you need to remember is the key steps of strategic analysis. All that is necessary now is to apply the framework in an applied way relevant to the question asked.venture model for inspiration. Other products can be added to the brand range to capitalise on the existing goodwill ² brand extension strategy. think LePEST and 5 Forces and stakeholder constraint. 4. reflected in the large price premiums that are paid in takeovers for companies which have a valuable brand portfolio. 1 They act as a form of product differentiation The brand removes anonymity and adds value to your purchase. a company¶s brand names are often the most valuable assets the organisation has. 2 Branding leads to more acceptability of manufacturers goods by wholesalers and retailers Brands make it easier for the retailer to sell the good because of the inherent goodwill built into them and hence many new product launches are coupled with strong brand investment. Think about your own spending habits and what and why you buy when out shopping.) Strategic choice (on what basis do we decide to compete? Which direction should we choose? How are we going to achieve the chosen direction?) Strategic implementation (resource management. Branding leads to more acceptability of manufacturers goods by wholesalers and retailers. 2.) Summary Hopefully you are now able to overview the strategic planning part of the syllabus in a more systematic and logical way. It is likely that you will often favour a shirt with a well-known logo or tomato ketchup from Heinz. It facilitates self-selection in the self-serve supermarkets of today and makes it easier for the manufacturer to obtain display space in shops and stores. The reason people are happy to do this is that the brand adds prestige to the purchase and therefore the customer is willing to pay for this. ie: y y y Strategic analysis (think 6Ms. This should then set off another chain of words in your head. 4 It facilitates self-selection in the self-serve supermarkets of today and makes it easier for the manufacturer to . 3. The power of branding by Sean Purcell 15 May 2007 Although not widely accepted to be included on the balance sheet.

there is still some evidence which suggests that these strategies do not always achieve the objectives which were hoped for. as it is considered an easier way of guaranteeing success. this could have a knock on effect on the whole brand portfolio. currently the focus is on related industries. eg Mars ice cream from the chocolate bar. There was a reaction to this and during the 1980s there was a reverse process.obtain display space in shops and stores. at the end of the 1990s (and still continuing) there has been a renewed growth in merger and acquisition activity. Persil washing up liquid from the laundry detergent. Consumers will tend to buy products which they trust. Regardless of the fact that there were few or no synergies apparent between the merged or acquired companies there was an enthusiasm for companies to come together and hopefully pool resources and achieve economies of scale either in manufacturing. Acquisition for the sake of diversification is not a major factor in these moves. There are also examples where inadequate financial controls have been in place. Empirical evidence has shown that many of these acquisitions/mergers did not achieve their objectives. Mergers and acquisitions . and it¶s the investment in the brand name which provides this trust. Some can be summarised as follows: y Age of firms New organisations are often seen to be more vibrant and responsive than older ones. a number of factors which can commonly be embraced within the word culture have been seen as reasons why mergers or acquisitions have failed to live up to expectations. joint ventures to full-scale integration with mergers or acquisitions. Concentration is now on building relationships with firms operating in similar or related technologies. Many companies divested themselves of some of their expensive acquisitions. In the 1960s and 1970s conglomerate organisations were in fashion. However. and that the price premium of the brand does not necessarily correlate to an improved quality product. Often it proves difficult for management to accept this change in the speed of doing business and decision-making. There is an awareness that different industries may need different skills and resources.a problem of culture by Geoff Gravil 15 May 2007 History has proved to be a rather critical judge of many mergers and acquisitions during the second half of the 20th century. The downside of this of course is if the new products are associated with some bad publicity. Lack of knowledge or experience in the relevant environments is a common factor. These linkages vary from strategic alliances. These moves are well illustrated with the current activities world-wide within the financial. It was assumed that management and commercial success in one type of industry could be easily be transferred to other unrelated industries. However. Nevertheless. Possible reasons for mergers and acquisitions failing to fulfil their potential There are many obvious reasons to explain why merged organisations fail. which may appear to be more conservative or bureaucratic. distribution or marketing. 5 Other products can be added to the brand range to capitalise on the existing goodwill ± brand extension strategy Most modern day product launches involve brand extension strategies. Therefore next time you are out shopping be aware that you are a potential victim of a very powerful marketing tool ± branding. However. retail and pharmaceutical sectors. This mirrors the differences which were commonly held to exist . Returns on investment fell as did many share prices.

What might be an acceptable style of management in one country may be unacceptable in another. Some managers are µhands-on¶ and wish to be involved in all decision-making. This resulted in agreed positions but often at the cost of delay.between Japanese and US organisations. y Type of employees: As organisations become more global the culture of the employees will vary considerably. . resulting in less flexible and responsive actions.the performers of the basic work in providing goods and services. increasingly many large firms. Some employees may expect to be consulted and enjoy working in a participative culture. Problems associated with this mix in technologies have occasionally been solved by isolating the different factions. whereas Japanese companies. Levels of education. This is possibly acceptable in a relatively stable environment where the technology is simple. are operating in leading edge technologies and on a global scale. particularly those involved in mergers and acquisitions. The strategic apex . 1. Decision-making may become more remote. There has been considerable discussion as to the validity and reality of these models. In the 1980s IBM set up its division. It is unlikely that senior management can operate within a highly centralised structure. 2. Handy and Morse and Lorsch have all demonstrated how culture affects strategy (and vice versa). y Management style Mergers or acquisitions can bring together senior management who have operated with different styles. However. This was seen in the printing industry when the introduction of computer-based technology generated problems with the more traditionally-based industry which had depended on the older-fashioned printing presses. which was to develop its new PC in Florida so that it had the freedom to operate in an entrepreneurial and innovative fashion. ability and expectations will vary. There has been sound empirical evidence demonstrating that smaller firms feel threatened when they are acquired by or are closely associated with larger companies. The operating core . Others may find this unusual and find the unexpected µfreedom¶ difficult to handle. y Technology Although this factor may not seem to have an immediate cultural link it becomes apparent that when older technologies associate with newer ones there can be difficulties. unhappy with confrontation politics. Less well documented are Henry Mintzberg s models. It could prove difficult for managers who have been accustomed to being the focus of all decisions to be suddenly expected to surrender such influence or to work with managers who expect to see more decentralisation. sought to win over doubters and opponents within a company by consultation. the concepts are interesting and most students will be familiar with Mintzberg s five basic parts of the organisation. However. Although the views have been exaggerated it has been argued that until recently US corporate decision-making was centralised and very speedy. In these circumstances the external environment is likely to be dynamic and technologies are becoming increasingly complex. Financial muscle and entrenched power can result in smaller units being neglected. It was believed that if this division had been located within the normal IBM framework it could have interfered with the development of this product and denied IBM the market opportunity it needed. This cultural problem is becoming more prevalent as the moves towards globalisation increase. They are unwilling to delegate. A model for understanding how conflicts may occur as companies embrace differing cultures There are a number of models which examine the impact of culture on strategy. often required to administer large companies. Highly innovative units such as R & D have been set up away from the more bureaucratic structures. y Size of firms Again we see the contrast between the entrepreneurial firm and the supposedly more ponderous bureaucratic organisation.the senior management who make the key policy decisions.

Companies do not always follow this seemingly logical process from an entrepreneurial company to a machine bureaucracy and on to a diversified company. as distinct from being part of the planning and control structure. professors or doctors. As organisations diversify into different markets and different technologies it proves difficult to manage these µconglomerate¶ structures. The middle line . The objective is to allow the company to concentrate on these areas and not to try to manage over too diverse a set of companies. as organisations grow larger and become older they frequently take on the characteristics of a bureaucracy. The key part of the structure here is the µmiddle line¶. Here the major influencing part of the organisational structure is the operating core. The leader is mostly concerned with giving the company a sense of direction and takes control of all significant decision-making. organising planning and controlling. catering. allowing each division or subordinate company to focus on a specialist geographical area or a specific technology. These can also include R&D and even IT services. The support staff . These functions are now frequently being outsourced.PR.the managerial hierarchy between the operating core and the strategic apex. However. but they are the custodians of the . Because of the differences of both internal and external environments the only logical means of controlling these diverse divisions is by using financial measures. This section could include accountants if their major responsibilities are concerned with drawing up financial plans and controlling expenditure. The leader is often the owner. 4. These may be teachers. legal.3. The technostructure . It is not surprising then that such managers can become obsessed by µbottom-line¶ criteria. The technostructure becomes more powerful here. This tends to predominate in younger and smaller organisations. The tendency is to divisionalise the organisation.people who provide various internal services . This can be typified by many public sector industries such as education and healthcare. Mintzberg has suggested that where one of these parts dominates then the organisation will lean towards a particular structure (see Figure 1). 5. Mintzberg has termed this structure a machine bureaucracy and the major purpose is to provide increased efficiency. This type of organisational structure is most applicable where there are stable environments and simple technologies where change is relatively minor.the analysts who plan and control the work of others. Their function is to carry out the key work. Where the strategic apex is powerful the organisation is often seen as an entrepreneurial structure. Accountants could be seen in this capacity if they were operating at a more corporate level and had a greater input in helping shape the strategic direction of the firm. If people orientation is dominant a company may proceed from an entrepreneurial company to a professional organisation. reporting to the strategic apex who are the directors at the Headquarters. These are the divisional managers who can act as local chief executive officers.

The innovative adhocracy company usually has outside clients and does work on its own behalf. It is difficult to imagine managing an R&D facility in the same structured way in which one might manage a production line. it is important not to concentrate only on rules and procedures. Example 2 In a professional organisation the danger is that the specialists. v. conflict with an efficient level of provision. intended to promote order and efficiency. Example 1 Within a machine bureaucracy there is a temptation to concentrate solely on efficiency targets. however. and therefore less adventurous strategies may be chosen. may seek proficiency at the expense of efficiency. Specialist consultancies involved in IT and scientific applications could be suitable examples. A few examples should illustrate this point. Their main preoccupation is to become as proficient as possible. iii. Therefore. where waste can easily occur. but it is possible that there could be a fundamental change in culture. Innovation means breaking away from the established patterns and applying new methods to problem solving. This focuses on the need for innovation. The danger here is that short-termism may predominate because annual financial results are all important. of course. providing the highest level of quality performance available. Furthermore. Example 3 A similar type of conflict may exist within innovative organisations whereby consultants may become so obsessed with the innovative issues that they ignore the managerial and financial aspects of the business. it is also true that the focus on one of the key objectives at the expense of others will alienate other members of the organisation.Often change is incremental. Just as the excess of one virtue can easily become a vice. Whilst this is important within a large firm. so adversely affecting future outcomes. proficiency. The work provided by the company can be considered a type of outsourcing ² hence the linkage with the support part of the basic Mintzberg structure. Focusing on only the dominant part of the organisation¶s cultural framework can be harmful to the future well-being of the company. iv. It should be noted. This can. particularly if there is a sudden change in senior management or if the . can afford to ignore the financial consequences of their decisions. if carried to extreme. that culture does change over time. within the diversified context the middle managers are being judged by their financial performance. who have the expertise in that environment. The final structure is the adhocracy. if a company is to be successful. if this discourages innovative and entrepreneurial activity. it must remain flexible. innovation. From this Mintzberg model it can be seen that a dominant culture within an organisation.expertise required. it is apparent that. the innovative firm cannot rely on any form of standardisation. The culture within a company should be seen as having many strands and they all need to be considered. ii. The innovative firm must avoid the trappings of bureaucracies. Above all. This example can be illustrated by the conflicts that are occurring in the health-care environments. Each of these five structures reflect the dominance of one part of the organisation and pursue the five individual objectives of: i. and integrated wherever possible. concentration. may also engender conflict which could adversely affect the performance of company. This has led to considerable arguments about the purpose for health-care provision throughout the world. although seemingly appropriate for pursuing an acceptable objective. however well-meaning. this will generate conflict within the organisation. direction. No organisation. efficiency. However. This is a suitable organisation orientation for a firm operating with leading-edge technology.

Answering these three questions. 5. 2. 6. It has to be powerful and compelling. It has to be clearly stated and communicated. they will be well on the way to successful strategy implementation. and keep reminding their people why they are doing this. (or failing to even have a strategy in place at all). However. and what will be the consequences if we don't embrace the change or at least go with the flow? The company has to sell it to the staff as individuals. These are: 1. 2. organisations may find the change management process less traumatic if they follow the six golden rules outlined in this article. 8. Where do they want to get to? This question sets the context for the strategy implementation and change.the result of a failed strategy or poor financial performance. What's in it for their employees? The third question is very important. Then the company may have to adopt a less participative culture. We need to see how it will affect us personally. if organisations address the following three questions. What difference will it make. a powerful business case vision clarity change leadership and accountability change-specific communication increased change capability integrated implementation teams stakeholder commitment aligned performance and culture. and reading all those exam questions on organisations failing to implement the correct strategic choices. 7. however. it would appear that making strategic choices happen is fraught with difficulty. the answer has to be compelling and the organisation has to communicate the answer again and again. Golden rule number 2 . Develop a powerful business case The case for the strategy and the change has to be made. but often ignored. Golden rule number 1 . 4. or make the need for change very clear. 3. Strategic choices and change management by DiarmaidCorrbui and Martin Corboy 15 May 2007 After studying strategy implementation and change faces some crisis . However. 3.address the eight critical success factors There are at least eight critical success factors to a successful strategy implementation and major change initiative. Poorly thought through responses will soon wear thin. Why do they need to get there? If they can't answer this question then they will have trouble persuading people in the organisation to go along with the changes proposed. The organisation will . We need to see and personalise the change and understand what it means to us. 1.know where you want to get to and why Many strategies fail this test because they don't define this fundamental parameter. requires a lot of preparation and effort. Even if they can answer the 'why' question. Humans are very self-centred.

People tend to think the worst if they are not updated on a regular basis. The organisation needs to gear itself up for the change process.listen and respond. Make sure they have a specific communication work stream as part of the implementation plan. Who will make the tough decisions? Who will take the blame if things don't work out? How will individual and collective responsibility and accountability be measured and tracked? Effective communication throughout the process is essential From the very beginning. . They need to understand how it will affect their current role. They will need to decide how people's efforts (or lack of effort) will be recognised or addressed. It won't happen by committee or by good intentions. To sell the strategy or change effectively. There also needs to be a strong focus on accountability and responsibility. Who will have the skills. and update and inform them of progress using different communication devices. openly supportive of the process. but they can use consultants to support and supplement the process. Each organisation should aim to develop internally as many of the change resources and skills required as is possible. They need to see what will be different. then they are less likely to embrace it. It needs to put the resources and skills in place to make the change happen. If they see that there is no cost or penalty if they do not change. Ensure there is clear leadership and accountability for making it happen Every strategy needs leaders if it is to be successful. they are less likely to change or support the change process.need to marshal its arguments and clearly set out why the change is both necessary and urgent. the commitment. to help and promote a culture of continuous improvement. Be clear about the vision underpinning the strategy and/or change initiative Even if there is a strong case for the strategy. how they do things and how they think about things. Organisations can't totally outsource the strategy implementation and the change process. it needs a vision. It must keep reminding people why it needs to be done. Allow for two-way communication and upward feedback .to see what the envisioned future might look like. Identify the range of skills and competences that need to be involved or represented in the process. Integrate and align implementation teams Choose the implementation teams carefully. They need to be able to picture it in their mind . If people don't see the need for the change. they are likely to resist or even sabotage the change initiative. External consultants won't make the change happen in the organisation but their specific skills and experience will help the organisation manage and implement the changes. If they see that it threatens them or that there is no positive result for them. the energy and the power to make this change happen? Identify who has to be on board. the organisation has to communicate and sell the strategy implementation process. Put change capability resources in place Strategy implementation and change management require special skill sets and competences. Identify the potential resistors and saboteurs and devise strategies to counter or eliminate them. Someone has to take public and visible ownership and have the stature to bring others along and persuade them to commit to the strategy. Obtain stakeholder commitment The organisation needs to do a stakeholder analysis to ask: y y y y what is their disposition to the strategy or the change? what needs to be done to get them on board or to deal with them? what roles do they need to play? how can the organisation make or help them perform their roles effectively? Align organisational performance and culture to support the implementation The organisation needs to get the performance and rewards system working to encourage the right behaviour and actions. something to help people make the strategy tangible or real. how success will be defined and how it will be measured and rewarded. it has to be sold and continue to be sold throughout the implementation process.

plan and manage the implementation process effectively In addition to considering these critical success factors. and what you can do to deal with those who are resisting or reluctant to change. responsibilities and relationships on them'2. The third. side of the implementation process. does it anchor the change? Here the organisation needs to consider what measures are needed to prevent people from slipping back into their old ways. there is still an implementation process to be scoped. we said that effective strategy implementation was simply about being able to answer three key questions. a number of years does it get there? At this stage. What things need to be put in place to help the change process? What is needed to help the different stakeholders prepare for and deal with the changes required? Stage 2 . mobilised.where does the organisation want to get to? This phase is all about establishing the strategic context. a deliberate decision was taken to redesign the work procedures and .don't neglect the people dimension At the start of this article. attitudes and style of the organisation is so much at variance with the vision. For example. whereas the other feels there is too much focus on the people side.. and how to make such a reverse as difficult as possible. Michael Beer is firmly on the opposite side. Golden rule number 4 .Golden rule number 3 . This involves identifying all the tasks. In this stage. change the old systems. In contrast. where a major transformation is required. if not impossible. making the case for change. there are two broad views on the importance of the people dimension when implementing major change. the technical side is usually handled properly with the management structures and operational systems devised and agreed with specialists. a complete new beginning may be needed. It is also about developing an understanding of how ready the organisation is for the change. This is because the culture. is usually poorly handled and this is why so many projects fail'. Kotter and Schlesinger1 argue in their 'six changes' approach that 'in major change initiatives. He maintains that 'converting individuals does not work and the most effective way to change behaviour is to put people into a new organisational context which imposes new roles. dependencies etc. The Beer view of change really relates to the type of change the organisation is trying to bring about. remove old forms or provide reward mechanisms and incentives to staff to make the necessary changes. One view regards people as the critical component in successful change. In change management literature. the people side. Trying to convert people to this new way of working will be difficult. question is 'What's in it for me?' This is the 'people'.how does it deliver it? This stage of the process is all about how to make it happen. For example.. Stage 1 . when a government department was being moved to a new regional location. sequences. Stage 3 . Stage 4 . that are needed to make up the implementation plan. For example. managed and delivered. the organisation should also recognise and reward those who made the change happen. It also involves identifying what you can use or do to smooth the implementation path. He believes that too much attention is often given to worrying about the people issues. or what some call the 'soft skills'. This requires good project planning and project management disciplines over the four key stages of the implementation process. and putting the leaders and other key change roles in place. In many cases. the organisation needs to think through what is the most effective use of resources. It needs to consider: y y y y the absolute priority areas that will deliver the greatest results what is needed to make it happen the early results required to establish momentum and convince people that change is really happening how to prepare people for the different roles and responsibilities that they need to play. and a very important.

some employees are very keen on security and stability in their work different assessments of the situation . Even in these situations.some people are more concerned with the implications of the change for themselves and how it may affect their own interests rather than considering the effects on the success of the business misunderstanding . one of the first things it should do is undertake a stakeholder analysis as described in Golden Rule 2. It is a campaign.understand why change is resisted and take appropriate measures Organisations need to recognise that proposed change is often resisted. therefore.processes completely. According to Kotter and Schlesinger (1979)1 there are four main reasons why certain people resist change: y y y y parochial self-interest . because the interventions and approaches it adopts will have to be tailored to achieve these specific results. It is important to examine and identify the reasons why the change may be resisted. and to recruit a new workforce who were not 'contaminated' with the 'old ways' of doing things. these positions and attitudes.some employees may disagree with the reasons for the change. and to develop and implement actions to address the causes of resistance. If the organisation is about to embark on a major strategy implementation or change programme. Organisations need to be prepared and organised. use some people as allies or well when trying to win hearts and minds participation . and also on the advantages and disadvantages of the strategy. plan accordingly. Lessons from successful change management programmes Even the adoption of the golden rules does not always bring about a successful strategy implementation. Strategies should be developed to make best use of. the following lessons have been learned. Lesson 1 .communication problems. feedback systems and work processes if the change is to be effective. bypass others. after doing their analysis. There are different change styles. The change style needs to be appropriate to the nature of the change well with strong leaders who can provide a strong vision and guidance on what is required to get there coercion . Golden rule number 6 . may have to change its strategy altogether because the numbers are against it. for example. It may have to destroy some objections. the people side cannot be completely ignored and effort and attention is required to properly define the roles. best in times of crisis when there is no alternative and time is critical. In a major change programme. From the experience of Prospectus Strategy Consultants in working with a number of companies. or to well for incremental changes collaboration . a campaign the organisation should set out to win when you want to get early buy-in and ownership for the changes direction . For example: y y y y y education and communication . inadequate information etc low tolerance to change . if the proposed change is just a realignment of current behaviours or a major clear about what needs to be changed and use the appropriate change style to deliver it An organisation needs to be very clear about what it needs to change and hopes to achieve. The type and scale of the change required should determine the change approach adopted. It needs to consider.create a burning platform . and in some cases. Golden rule number 5 . a combination of these different styles may be required to deal with the range of challenges that must be met if the change is to happen. And over what timescale does it want to achieve this change? Their answers to these two questions will determine the appropriate change approach or style to effect the change.

effective implementation Effective implementation requires up-front planning. Lesson 2 . When an organisation starts to shy away from these hard choices. Beer M and Nohria N. May 2000. hard work and a focus on results. Cracking the code of Change. Lesson 3 . The arguments for the change have to be compelling and clear. The stakeholders will be looking to see action and progress being made. the rituals. where there is no real alternative but to jump into the change process.make the tough decisions With any major strategy implementation or change initiative. momentum slows. as the organisation has to push on and tackle the bigger tasks. Also. so organisations must move quickly and use this window to put the change framework in place and start making changes. which have the most impact and deliver the greatest results.window of opportunity When organisations go through a strategy development process. They can be carrot or stick based arguments.When you are on a burning platform you have two choices: remain on the platform and be burnt. References 1. Strategies are often rightly accused of being highly aspirational with lots of 'nice to haves'.communication. hoping that you will survive the ordeal.choose projects that deliver the most value In any major strategy or change transformation. The arguments have to be real. time and spotlight. So it is important to get momentum going in the implementation process. March 1979. strong resolve. the chance of success should improve considerably. It requires the right context to be established. Lesson 4 . there are usually six to eight key activities. Lesson 7 . Communicate these early wins widely. but don't rest on laurels. and a robust progress reporting system. but it has to be made clear that no change is not an option. But the organisation also will need to tap into the culture and atmosphere and tailor its communications accordingly. Lesson 5 . There is no point claiming the platform is burning if people can't see the flames or feel the heat. They need to choose the activities that will have the greatest impact. People are expecting something to happen. and communicate the consequences of failing to make them. or take the risk and jump off the platform. Choosing Strategies for Change. Those early quick wins are important in demonstrating real intent and building morale. good planning. and the working style of the organisation when designing its implementation approach and communication strategy. or when announcing a major change initiative. If you are the implementation manager in the process. Bringing about major change needs the creation of a burning platform. an important window of opportunity arises. and not just only at the start of the process when everybody is geared up and expectant. an implementation infrastructure and resources. by applying the golden rules and learning from the insights above. . tough decisions have to be made. Let them know why they are necessary and urgent. HBR. Conclusion Strategy implementation is not easy but it can be achieved successfully. strong project management.deliver on the promises Talk is easy. HBR. Lesson 6 . It needs to think about the values. Good progress on these will make it easier to move on to the others. Kotter J and Schlesinger L. culture and atmosphere There is a need for continuous communication flows throughout the change process. 2. you will need to prepare and support senior management in taking those decisions. Organisations need to identify these important projects and prioritise them in terms of resources.

Sociological factors might be the prevailing organisational culture. The value chain Another model that can be used to illustrate flexibility in application is Porter's Value Chain. the company can also decide where information systems can help reduce costs and deliver competitive advantage. however. Technological). or diagnosing and appraising the current strategic situation. PEST PEST (Political. used in this way. Economic factors would include the budget allocation. The Political. Although the textbooks describe what could be called the 'classical' application of models. indicating the factors that an analyst may want to examine. the analysis allows us to see whether or not the proposed solution will be compatible with the company's present position and expectations. you should be both familiar with the models in their traditional form. be scaled down to show internal. . Others are diagrammatic. with examples at an organisational and departmental level. and be able to apply them to different scenarios. and organisational structure for political influences. the PEST model draws more on the internal. when considering a solution in a department or division of a company.showing how they can be used to reflect different situations. or are reasonable. The model itself has not been changed by using it in this way. organisational influences on a given target department. The analyst would examine the organisational strategy. also known as SLEPT (including Legal) and PESTLE (including Legal and Environmental). such as Porter's 5-forces or the Value Chain. PEST is not only relevant to environment analyses .The adaptability of strategic models by Malcolm Eva 10 May 2007 The Study Guide for Paper P3. such as the Boston Matrix. Sociological. Through this analysis. Technological considerations would cover the capability of the current infrastructure to handle the new system. and the compatibility of different components of the can also be used to help assess the feasibility of a proposal for business change. Thus a business analyst. Most textbooks describe the Value Chain in terms of the handling of physical resources. might perform a PEST analysis. At Paper P3. Some of these models are known by acronyms. Some are represented as matrices. to the world at large. In itself. To illustrate this. illustrates the macro and micro-levels of PEST. the value of the models often lies in their flexibility. As can be seen. two well-known models are discussed in this article .PEST and Value Chain . In the context of managing business information. such as the PEST or SWOT checklists. By focusing on internal factors. Table 1. board make-up. and Technological elements are usually applied at a macro-level. Economic. the company can identify where costs are too high. the Value Chain is a model which helps us break down the business cycle into strategic activities that add value to a product or service. These models can be used to assist in identifying and assessing strategic opportunities. Business Analysis. Economic. and also understand where and how differentiation from competitors can be achieved. at the end of this article. They can. cross-charging policies. departmental level experience. or the likelihood of a change in work practice or redundancies. features a number of models to aid Information System (IS) strategy planning. but it has demonstrated flexibility in its application. Sociological. and accounting models. represents the factors in the wider environment to which an organisation needs to react.

we can reconsider our view of the Value Chain as only appraising the cost of handling physical goods. are less tangible. Inbound and outbound logistics refer to the input and output to and from the process part of the system. as 'backroom' support (or secondary) activities are similar. as shown in Figure 2: Simple process model. however. Services. marketing. most textbooks simply describe the physical aspects.Handling physical goods Inbound logistics may be met by automated warehouse procedures for manufacturing. but not in the same manner. In Example 1. Service sectors include financial services. and advertising. So what can we see from this view? Here's an example of a training company that specialises in providing online learning rather than traditional classroom instruction. travel and tourism. only the primary activities are considered. such as a production scheduling system. as reflected in the descriptions above. a transport scheduling system or a collection point. often in a manufacturing or retail context. we need to be comfortable with what the model portrays. or by a dedicated transport fleet for shipping stock into branch stores. At the outset. Example 1 .As mentioned above. sales and service also feed into the process. Outward logistics could be handled by a delivery fleet. or by a stacking and selling process in a retail business . regardless of the type of organisation. See Figure 1: The value chain (M E Porter (1980) Although Porter defined the Value Chain as pertaining to both products and services. The source for this is a study undertaken by . hence their separate boxes on the process model. The terms 'Inbound logistics' and 'Outbound logistics' give emphasis to the idea of physical movement. so we need to examine whether the Value Chain model can still be applied. Any service must have identifiable inputs and outputs. Considered in this way. Our other primary activities of marketing. in most textbooks the Value Chain refers mainly to the handling of physical goods. The core activities can be seen as a simple process model. Operations would be controlled by a manufacturing system.

the process. . where service industries generate as much money as manufacturing. This example shows how a company selling a largely intangible service still has to control its value chain in order to manipulate its costs to maximum effect. Figure 3 suggests how these may populate the Value Chain. Although the term 'logistics' is there. the evolving business environment and the range of business strategies currently used means that these models should be used with thought and flexibility. Porter's Model is flexible enough to accommodate all types of services. However. it is important to be able to recognise the primary activities in these sectors.Woudstra and Powell in 1989. and outputs from. Conclusion The various models cited in the Paper P3 Study Guide are described in their original form and context. Their use is intended as an aid to thought. we need to consider what represents the inputs to. the business can analyse the costs of each element. Rather than talk in terms of logistics. as long as the analysis is not 'frozen' by the rigid terms used in the original model. and how they can be appraised. One way to approach this is to list some of what we (ie the business) consider to be the core activities. Figure 3: Value chain Once the activities have been identified and the model populated. and output from. and see how they map onto the process model. Typical core activities undertaken by an online learning provider will include: y y y y y y y y y y y y y y y y y market research into learning needs curriculum planning course development preparing written and multimedia teaching materials developing a learning technology strategy exercise preparation course promotion seeking affiliation with a funding or accreditation body deciding pre-requisites for modules student registration assessment marking distributing materials scheduling tutorial/guidance sessions providing telephone support for students ensuring students have access to learning materials feeding results back to students. In the current economy. as in the traditional model. the process. think more in terms of what is input to. not a substitute.

interest rates. Value Chain analysis: A framework for management of distance education. volatility of marketplace. possible changes of government. stage of the financial year. whether IT is developed in-house or outsourced. 1985 Woudstra. . M. share prices. Competitive advantage: Creating and sustaining superior performance.4 Table 1: Macro and micro-levels of PEST Political Organisational level Government policies. cross-charging policies. industry regulation. 7-21 Malcolm Eva is a former assessor for Paper 3. level of autonomy among staff. level of disposable income in the marketplace. such as wireless. work practices. international law. demographics. broadband. Pub Free Press. change of CEO or Board members. Departmental level Technology owned and used in-house. A and Powell. level of exchange rates. 3(3). Departmental level Company policies. trends. expected working hours. organisational strategy.Further reading y y Porter. management style. Economic Organisational level General state of economy/stock market. whether information or production. Departmental level Budget allocations. flexibility of work time. portable. R. Departmental level Organisational culture. Technological Organisational level New technologies. social priorities. organisational structure and lines of control. Sociological Organisational level Fashions. organisational infrastructure. availability of standard packages to suit the department's tasks. The American Journal of Distance Education.

Before embarking on a project it is recommended that a full PEST analysis is conducted. Each must put sufficient resources and time into the project to give it a chance to succeed. otherwise it will fail. Each stage poses a single question: 1. The cost escalation of . Third is the identification of future information system objectives (allied with business objectives). The next stage plans progression towards these objectives by exploiting relevant experiences. It spans the past. and future and incorporates both a planning and a review stage. The risks of failure are high and the causes may be Political.A generic framework for developing an IS strategy by George Bakehouse and Kevin Doyle 10 May 2007 Planning an Information Systems strategy is a decision-making process.the past W2R? is 'Where We Are?' . Social or Technological (PEST). which completes the cycle and provides an important part of the input into the first stage of the next cycle.the future (GT)2? is 'Going To Get There?' . The key issues that must be addressed when planning an IT strategy are: Commitment This must be spread from the very top down and across all management and user populations affected by the project. Communication 'The right people must communicate the right things at the right time and in the right media' to successfully implement an IT project. This proposed framework focuses on a five-stage model. Finally the whole process is reviewed. The third and fourth stages are iterative both within and between each other. contributing to 74% of all failed cases researched. 3. 5. present. what has been learnt from experience in terms of successes and failures? Second is a critical analysis of the current situation. Coordination IT projects must be planned and controlled in detail to ensure that 'the right people are doing the right things at the right time in the right sequence'. W3? Where We Were? Much is written about the experiences of both successful and failed IT projects that document 'where we were' for the benefit of future project teams. strengths and opportunities whilst overcoming weaknesses and threats. systematically and with a firm understanding of the business context. Examples are provided detailing possible tools and techniques that can be adopted at each stage. This approach to developing an Information Systems strategy systematically focuses the mind on the five key stages in turn. 4. This article describes and discusses a general framework that may be adopted when developing an Information Systems strategy. Otherwise unforeseen details can subsequently determine success or failure. W3? represents 'Where We Were?' .the plan W4? is 'Where We Went Wrong?' . Economic. This is especially true when analysing and specifying user requirements. First. 2. One survey suggests poor co-ordination is the most common cause of failure.the review. Such a crucial process should be undertaken carefully.the present W32B? is 'Where We Want To Be?' .

At best. To plan a route from A to B. then the IT project will probably fail. The four columns are headed Strengths. Strengths. its costs and timescales will escalate dramatically. in terms of both 'good and bad' news. Education and training are key to improving their understanding of the issues involved and their role in exploiting IT successfully. These can be further classified into components to assist in the critical analysis of the existing systems. based on competitive threats or return on investment . The business budgets and priorities. SWOT analysis yields a framework for conducting. as a 4 x 4 matrix. The matrix focuses on one set of issues at a time. Weaknesses. because this will affect the tactical plans to achieve the strategy. it is helpful that we know where A is. The four rows represent the main resources that are exploited by IT projects. Unfortunately. senior management does not always understand these lessons. The business objectives and constraints may drive the IT goals or alternatively IT developments may enable the business strategy. Opportunities and Threats. Usually. communicating and agreeing a balanced criticism of the present situation and identifies both short-term and long-term weaknesses that need to be resolved.correcting poor specifications when the system is operational has been estimated as between ten-fold and one hundred-fold. a first step is to construct the model with senior management and to identify the µgo/no go¶ areas. Every organisation planning an IT strategy should commence with workshops to help ensure that the lessons of the past are learnt by all concerned and that the same mistakes will not be made in its own IT projects. W2R? Where We Are? Workshops or discussions should also pave the way for a critical analysis of 'where we are' with respect to the existing information systems. ie the Internet and its accompanying technologies may enable a strategy of globalisation. This helps to ensure that the former will be retained and the latter will be corrected when designing a new or improved system. Opportunities and Threats (SWOT) analysis can be a useful technique to help ensure that criticism is structured in a systematic and comprehensive manner. The first two are internal to the domain of the information system and the latter are external to it. If any of these three conditions is lacking. Weaknesses. A suggested framework is shown in Figure 1. A target marketing strategy of focusing competitive products and services against customer segments may generate the IT applications portfolio. it is vital to understand the present situation. Figure 1: The 4x4 SWOT Matrix Internal Strengths People Money Technology Information Weaknesses External Opportunities Threats W32B? Where We Want To Be? Planning an IT strategy requires that a business strategy has already been planned or is simultaneously being planned. The SWOT matrix can be adapted to meet the particular requirements of organisations and their IT projects. When planning an IT strategy.

in most cases. It is important to recognise that this target is a moving one. particularly in light of emerging technologies (W32B) and the priorities imposed by the business plan in terms of achieving the IT benefits (competitive defence/attack. Too many senior managers are preoccupied by the short-term of this year¶s performance and competitive pressures. there is the need to drive the business objectives through to detailed IT objectives. reliability. 'stuff IT in quick and sort IT out later'. capacities. software quality. many companies are preoccupied with lead times and believe speed is the essence. possibly a number of years of operation are possibly needed to reap the benefits of the initial investment . facilities. may dictate budgets and priorities for the IT strategy. portability. an element of balance must be achieved. security. A nanosecond is a lifetime in IT. perhaps two or three years. the trade off between cost. plus the time-scales within which they must be resolved (W2R) the moving target nature of the long-term objectives and information systems design. costs and times can often be measured in pounds or months (albeit after the event).(ROI). Thereafter. IT involves many stakeholders. However. compatibility. An IT strategy cannot be planned in isolation from a business strategy . can we possibly design tomorrow¶s information systems today? The answer is that we cannot design future physical systems because we do not know the costs. maintainability. continually track the emerging technologies and exploit new products to achieve the IT objectives as and when they become available and proven. Thus. accuracy.the planning horizon may be several years or so. identifying 'Where We Want To Be' requires that a business strategy and an IT strategy are developed in unison. For example. flexibility. How then. internal and external to the organisation. return on .the two are inextricably intertwined. The answer often lies in getting the IT detail right. By ensuring that the focus of development is balanced. Thereafter. firms need to recognise the multiplicity of stakeholders involved and organise themselves to manage stakeholder relationships and to influence their IT environment. what we can do is identify logical requirements. or even cost is not the main concern. Each system may have its own set of quality parameters or a different hierarchy of measurement. robustness. As IT becomes strategic. This is because 'quality' is multi-dimensional and embraces such intangible and conflicting objectives as reliability. and so on of emerging technologies. the technology will certainly change. In order that the company can benefit from technological innovations that serve the business process. and so on. A strategic plan may require a long time to implement. This requires an infrastructure whereby the hardware and systems architecture is considered along with the business applications and the business objectives as the overall business process. and tomorrow¶s technology will definitely be physically different from today¶s. However. the business requirement may well change. as detailed below. but the quality of information systems cannot generally be quantified. In addition to the requirement to balance IT objectives. emerging technologies will need to be exploited in order to physically achieve the business goals within the planning horizon of the long-term IT strategy. A key issue in setting IT goals is to establish an appropriate balance between cost. Target information systems also need to be designed that will support the strategic business plan. to them. speeds. efficiency. systems and technology can be implemented in a way that provides benefits to all of the stakeholders. quality and lead times. However. quality and lead times can be achieved. It is important to examine in detail the costs and timings of all aspects of an IT project. If not. (GT)2? Going To Get There? The tactics of µGoing To Get There¶ which are adopted to implement an IT strategy should take into account: y y y y the high risks of failure and the causes of past disasters (W3) present and short-term problems. During this time.

Their ascending sequence often commences with emergency fixes to short-term problems. tactical choice is between a single.experienced and ignorant. Figure 2: Climbing the (GT)² Staircase Each step in the staircase represents a delivered application of IT resources (hardware.investment (ROI) etc). During the last decade we have seen a blurring of industry boundaries. Planning an IT strategy further requires that the total system be partitioned into steps and the staircase be designed with due regard to the continuing availability of IT resources. in sequence of decreasing benefits. The primary focus of the management of information systems should be to learn from and improve our products and practices. database. 'the staircase approach'. as illustrated in Figure 2. but a phased approach helps to focus on 'the right applications being implemented at the right time and in the right sequence'. where banks sell stocks. the crucial. and credit cards are issued by trade unions and car manufacturers. telecommunications etc). W4? Where We Went Wrong? Until we accept that the development of the information resource is an on-going. purposeful and systemic activity . The systems lifecycle is usually adopted for each step (ie an application or project). Implementation tactics should be designed to achieve the appropriate phasing. the staircase is initially designed to support the business plan and may then be adjusted to satisfy information systems and IT constraints. total implementation of the overall IT strategy. insurance and mortgages. particularly because they are more vulnerable to changing requirements management of innovation recognises that a big deal is more difficult to sell than many small deals some pressing short-term problems dictate that short-term solutions are vital (or there may be no long term). software. Of course some steps may be climbed simultaneously and there may even be several staircases to ascend. Further adjustments will also be made during its ascent due to business and IT dynamics as previously mentioned. integrated system. then to build any necessary infrastructures to support the introduction of information systems. shares. Bearing in mind that the planning horizon may be measured in years. Wholesale deregulation has occurred in . Thus. until they comprise a total. Most but not all organisations opt for the latter because: y y y y they will not (or cannot) wait years for the IT benefits longer projects are more difficult to manage.we will remain the worst sort of fools . or a phased one. Success and failure are emergent rather than engineered.

These projects have involved strategic. Examples of appropriate tools. Strategic Tools and Techniques A series of action research projects. communications and the Stock Exchange. The pace of business has increased. and the use of satellite offices are changing the nature of work. cost far more than expected and frequently did not meet the needs of the client. where the cycles of failure and success take many years. We now inhabit a global business community. construction. SWOT analysis and PEST analysis has been described here by way of example. Some seven years later. simultaneity. techniques and methods may also be usefully employed. The use of Failures Theory. contracting. The authors have attempted to define a general purpose framework of open utility. it is sound. and yet the software crisis persists. tactical and operational systems in education. As a general principle. organisations should document and objectively analyse their major information systems failures so that they and others may learn the key to success. asychronicity and decentralisation. New working practices such as desk sharing. they may be more appropriately employed at the application or project level. Computers. are now end-user tools seen as liberating and empowering. conducted by the authors. The µFirst World¶ is an information society with most of its workforce employed as knowledge workers. Information is a key determinant of the wealth of nations as world markets depend on it. Software is still difficult to develop and often fails to meet user expectations. spanning over a decade. The term µsoftware crisis¶ was coined during the NATO software engineering conference of 1968 to indicate that software projects often ran late. The world of the software systems developer is changing at breakneck speed. In the current business environment. Many of the well-established models and methods were originally developed to describe or to model organisations as a whole. health care. and differentiate products and services. Each new generation of Information Technology supports a new and improved generation of Information Systems. has seen the emergence of an approach to embedding a number of strategic tools and techniques in a simple cyclical framework. but many other tools. techniques and methods include: y y Nolan s Stage Hypothesis Checkland s Soft Systems Methodology . individual learning. is difficult. Systems professionals and their clients have been making the same mistakes for decades. once seen as constraining and controlling. This strategic framework supports the use of a wide range of established strategic tools. where organisations often have multi-generation system platforms and applications. Transferring the approach of learning from your mistakes from say bridge building. A key lesson to be learned from the engineering paradigm is that failure is the key to success. home working. Information management is broader and more complex and less certain a discipline now that it has ever been. job sharing. At the very least. dominated by international companies trading in a global (electronic) marketplace.banking. to systems strategy and software development where changes happen almost monthly. banking and other areas of the private sector. Information is considered to add value to. when as Brooks reminds us ³only an idiot makes the same mistake twice´. There is general recognition of information as a key resource or the µoil of the 21st century¶. The research has involved the adaptation and use of a recognised framework for the development of IS strategy. Fred Brooks reminded us that the only unforgivable failure is the failure to learn from our previous mistakes. thus increasing the complexity of management in a business environment that is characterised by complexity. air-transport. with a global 24 hours a day seven days a week electronic marketplace providing instant access to information. which may be used in one or more stages of the framework as appropriate. however.

Information system projects can fail for many reasons. coordination and communication) when developing and implementing information systems (IS). at the least. for example. George Bakehouse is the former Paper 3.. strengths and opportunities be exploited and weaknesses and threats overcome.4 marking team Commitment.elements of the was inadequate. to implement IS successfully. they were a small firm with a limited track record'... to focus the mind on five key questions in turn. what are the objectives of the change process? Fourth. economic. road crews got four hours training . LAS's chief executive resigned and the system was moth-balled... Systems Options. what have we learned from all of our efforts? The authors would like to acknowledge the contribution made by the late Professor Sam Waters to the development of the generic framework cited in this article..' The reported reasons for this failure include: y y y y Political: '.. though it can be concluded that unsuccessful application of the three Cs may lead to possible project failure.the original timescales were too tight. Transformate model Porter s Five Competitive Forces theory The Three Stage change process ( Unfreeze. Bray (1993). the successful application of the three Cs alone will not guarantee a successful information systems project.. reports on: 'the very public failure of the computerised command and control systems at London Ambulance Service (LAS)'. social and technological factors. Conclusion These. First.sixteen firms tendered for the contract which was awarded to a small software house. However.y y y y y y y Earl s System s Audit Grid and his Three Leg analysis McFarlan s Applications Portfolio and Peppard s adaption of it Parson s Six Information System Strategies Zuboff s Automate. Informate. how can experiences. with a (low) bid of around one and a quarter million pounds. has been learnt from experience in terms of successes and failures? Second. certainly there was pressure to get the system up and working as fast as possible to meet the Government's performance targets set out in the Patients' Charter'.. Hirschheim (1985). in broad terms. Social: '. coordination and communication by George Bakehouse and Kevin Doyle 10 May 2007 This article will discuss the relevance of the three Cs (commitment. in order to progress towards the stated objectives? Fifth. distilled approximately one hundred references into a taxonomy of information systems failures..the system has lost calls and failed to print calls out .if they were lucky!' Technological: '... techniques and methods may be used within the framework given. what aspects of the current situation are likely to be relevant to the strategic decision making process? Third. Empirical research and experience suggest that these three conditions are necessary. Re-freeze ) McFarlan s Information Systems Strategic Grid .... and other tools. Economic: '. which is essentially a PEST analysis covering political. This failure wasted millions of pounds of taxpayers' money and 'allegedly caused twenty people to die after ambulances took up to three hours to answer emergency calls. Change. Almost immediately.4 examiner Kevin Doyle is a former member of the Paper 3. such as a backup file . what is the historical background to the change process and what.

Such techniques deal quite well with tangible costs and benefits. If any of these 'three Cs' are lacking. Constructing a business case for any investment in information systems is generally concerned with convincing the organisation(s) involved that the investment is worthwhile.server are still not complete. will ensure successful competitive performance for the organisation. operators did complain the system was running slowly'. Empirical research and experience suggest there are at least three broad conditions necessary to implement IT successfully: y y y commitment coordination communication. Justification for an investment may take many forms. At best.. For example. the cost and timescale will escalate dramatically. a mega-million dollar space satellite had to be written off because a programmer typed a full stop instead of a comma and inadequate software testing failed to discover this. 'they are the few key areas where things must go right. either of a one-off or recurring nature.' In summary. Bray (1993) also echoes Strassman's (1985) failure factor that 'if you automate a mess. all you get is a faster mess'. However. It is possible a technological mistake could still cripple the project. A simple cost-benefit analysis might involve such techniques as: y y y y payback period net present value internal rate of return return on capital employed. then the project will probably fail. People y y project manager is competent project team is competent. normally on commercial grounds. if they are satisfactory.. these conditions alone are not sufficient to guarantee success. Organisation y y y y y y resources are sufficient control mechanisms are in place and used project has support of top management communication channels are adequate there is capability for feedback contractors are responsive to clients.' Fortune and Peters (1995) developed a systems approach to learning from failure referring to the nine critical success factors of Pinto and Slevin (1987) for general project implementation. Rockart (1979) emphasised critical success factors as 'the limited number of areas in which results. as follows: Aims y project goals are clearly defined. They are much . It is generally held to be important that the implications of any investment are clearly understood prior to any such investment being made.

Somebody is committed if: y y They put sufficient resources into the project . Generic strategies may be employed to reduce cost. 1992). For example. they share the blame and punishment and if it succeeds. They put their name on the project. The main reason for many failed projects is the lack of top management commitment . Strategic change is frequently viewed as an attempt to 'counter the competitive force. 2001). geographic and time barriers to promote themselves in a global.less useful for analysing 'intangible' or simply 'unquantifiable' costs and benefits. twenty-four-hours-a-day electronic marketplace (O'Brien. information and their time. One common approach is to use the overall business strategy to define the organisation's 'information needs' as the foundation of information. evenings and weekends. differentiate the product or service offered or to focus on a market niche (Porter.their people. However. the electronic world is becoming increasingly dominant over the physical world. The 'first world' is an information economy. money. and application architectures. with substantial benefits to all concerned. This may mean working over breakfast. time. whereby the formal business strategy drives and informs strategies for information technology. Their level of support can dictate the success or failure of any project. The Three Cs Commitment Commitment must exist from top management down and across all management levels. The management team are generally the people who control the financing of projects. Together these help define an appropriate technology architecture. A factor demonstrating commitment from senior management is the allocation of resources in terms of people. If the project needs their resources and if they are committed. In seeking to develop appropriate IT/IS/IM strategies it is common to apply some form of gap analysis to identify the 'gap' between 'where we are' and 'where we want to be'. they share the praise and rewards. solve the problem or close the gap' (Senn. A project must be seen as worthwhile and relevant. testing and implementation stages of any IS project. There are a number of ways in which the business strategy may be linked with the strategies for IM. IS and IT. Another way of using business strategy to drive and inform the IM. 1990). A range of strategies may be employed in order to differentiate a product or service in a competitive market. money. Information systems and technology can help organisations to break down organisational. The difficulty involved in conducting a meaningful cost-benefit analysis for anything other than a well bounded automation project has led to very few projects being formally justified in this way since the 1980s (Griffiths. IS and IT strategies involves consideration of 'competitive advantage'. The resources of the users will be necessary in the planning. many large contemporary organisations are currently pursuing the twin strategies of 'virtualisation' and 'globalisation' in order to reduce their cost structures and to increase their reach. technology. It is in 'closing the gap' that the three C's are of paramount importance. then they will find them. systems have failed despite generous helpings of user involvement and participation because commitment was lacking. information systems and information management (Earl. instant. Much has been written and said about user involvement/participation in IT projects. It therefore becomes essential that all interested parties be taken on board from the outset.they have to commit . data. In commerce. information and technology. It is also important to get all users that are involved or affected by a project to become committed. 1990). 1980). development. In recent years it has become more common that investments in technology have followed a broad strategic thrust. lunch. If it fails. Gaining their dedication and joint ownership of the project ensures that they are equally responsible for its eventual success or failure.

Omission may cause disaster during later stages. and normally at a greater cost than an organised one will. Necessary infrastructures are then built to support the introduction of information systems in a sequence of decreasing benefits. Their ascending sequence often commences with emergency fixes to short-term problems. which are going to influence the project need to be identified from the outset. Some steps may be climbed simultaneously and there may even be several staircases to ascend. including: Project Evaluation and Review Techniques (PERT). Coordination is an integral part of the 'going to get there' (GT)2 phase. A phased approach helps to focus on 'the right applications being implemented at the right time and in the right sequence'. If control is not gained early. Many have software support. it is very difficult. This increases the likelihood that such a project will never be completed. using the right resources at the right time. needs to take place from the beginning of a project. Remedies can then be employed to rectify these deviations where appropriate and thus avoid failure or costly problems. Figure 1: Climbing the (GT)2 Staircase Communication The right people must communicate the right information at the right time and in the right media in order to . software. Continued slippages can go unnoticed. like commitment. and thus becomes a month and so on.). If they do not believe in the project and its benefits. The important elements. (Bakehouse et al 2003). Coordination. All too soon one day's loss becomes a week's loss. then why should anybody else? Coordination Coordination is a critical element for successful project implementation. integrated system.themselves and lead from the front. The '(GT)2 staircase approach' is outlined in Figure 1. database. time consuming and costly to re-gain. telecommunications etc. Gantt charts and Critical Path Analysis (CPA). There are a wide variety of methods and techniques for controlling projects. A disorganised project will have constantly moving targets. Control is vital to prevent slippage in terms of timescales or budgetary allowances. This is undertaken until they comprise a total. which are seldom attained. if indeed it can be. Each step in the staircase represents a delivered application of IT resources (hardware. A disorganised project will take considerably longer to achieve success. Constant review of project progress should take place to ensure the early detection of divergence from the plan. A key message from Fred Brooks' The Mythical Man-Month (1993) is that large projects can 'suddenly' become one year late by slipping one day at a time. Coordination through planning and control of all the relevant factors will help to ensure that the right people are doing the right things in the right way.

Prentice-Hall Earl. For example. IS projects often suffer severe communication chain problems between the various people involved. JK and Slevin. i. G and Doyle. J (2001) Introduction to Information Systems: Essentials for the Internetworked E-Business Enterprise.'how can we transform our business?' Between these two strategies lies a spectrum of balances between efficiency and effectiveness. pp 271-277 Fortune. F (1993) The Mythical Man-Month. K (2003) A generic framework for developing an IS strategy. January 2003 Bray. Communication is a two-way issue. This is especially true when analysing and specifying user requirements. R (1985). Historically. The choices to be made cut across organisational boundaries (such as marketing. London. The communication chain involved in IS projects is often long and complex. human resources) and so can only be made by top management. operations. among and between them can be avoided in the planning and implementation of an information system.successfully implement an information system. The authors would like to acknowledge the contribution made by the late Professor Sam Waters to the development of the ideas cited in this article. Findings from an array of empirical studies suggest that many senior managers still avoid involvement in major IT / IS projects. An important lesson learned from the many projects that the authors have been involved in is that the commitment of top management is crucial. J and Peters. The chain is only as strong as its weakest link. Analysis of Failed IT Projects O'Brien. In many of the projects studied. semantics remain a key issue. All stakeholders need to be kept informed and be encouraged to become actively involved throughout the whole process. UNICOM seminar. G (1995) Learning from Failure: The Systems Approach. Conclusion This article has attempted to highlight the important contribution the 'three Cs' can make to the successful development and implementation of information systems.e. student accountant. C (1992) Responsibility for IT . IEEE Transactions on Engineering Management. Information Systems Failures In MIT (1985). Wiley Griffiths. Another answer is effectiveness . Communication is essential in developing a system for the benefit of all concerned. January. once senior management had decided how 'to do the right business right'. commitment. obstacles within. Through good relationships and communication with all interested parties. finance. coordination and communication were achieved much more easily. the penalty for incomplete and incorrect specifications raises costs by at least an order of magnitude. English dictionaries define: White = Pale = Dim = Obscure = Dark = Black. P (1993) Killer Applications? Which Computer? January Brooks. The key question they must answer is 'What are we using technology for?' One answer is efficiency. McGraw-Hill Pinto. IS personnel have believed they have fostered good communication with users by issuing instructions and information about proposed systems. When all people concerned communicate perfectly in some common language. M (1990) Approaches to Strategic Information Systems Planning: Experience in 21 UK Companies in Proceedings of the 11th International Conference on Information Systems.4 examiner Kevin Doyle is a former member of the Paper 3. The cost escalation of correcting poor specifications when the system is operational has been estimated as between ten-fold and one hundred-fold. DP (1987) Critical Success Factors in Successful Project Implementation.A Grey Area of Management in Evaluating and Managing the IT Investment. 10th ed. EM 34 . Users may ask for a white system only for developers to provide a black one. legal.4 marking team References y y y y y y y y y Bakehouse. pp50-70 Hirschheim. George Bakehouse is the former Paper 3.

It also has a section on information technology and how it is used to implement strategic plans. March / April Senn. Harvard Business Review. Prentice-Hall. often depending on the level of IT awareness of the head of that department or section. the use of standard software applications and the use of a centralised purchasing department for IT hardware and software purchases. hypothesised in 1979 that the way organisations have introduced IT and IT applications into their organisations can be viewed as a series of stages. M (1980) Competitive Strategy. Business Analysis is wide ranging and within it students are expected to have some understanding of the role played by an organisation¶s information systems in the drive for competitive advantage. In the determination of how companies use IT there are many models available to us. Stage 3: Control The IT spend increases and the organisation begins to realise it has a potential problem. Stage 2: Contagion Following the initial deployment of IT departments and individuals see the advantages arising and begin clamouring 'Me too'. Strategic planning models by Martin Corboy 10 May 2007 The syllabus for ACCA Qualification Paper P3. Nolan¶s life cycle Professor Richard Nolan. Soon IT applications spread like wildfire around the organisation. No attempt was made to show the link between cost and benefit and. the organisation puts a moratorium on any new spending. At this stage. The syllabus requires students to apply knowledge rather than simply testing their ability to recall information. Stage 4: Integration The organisation now realises the need to link the islands of automation that developed during the contagion stage. The stock application cannot talk to the sales application with the result that a sale has to be entered twice. The individual is then freed up to use their skills in a more analytical way. of the London School of Economics. These are powerful tools. New York Free Press Rockart. This role is underpinned by IT solutions but students need to appreciate the strategic importance of IT. typically budgets for hardware and software purchases. somewhat similar to Greiner¶s Life Cycle of Organisations. little 'islands of automation' develop. once to update the debtors ledger and again to . Wadsworth Strassman.y y y y y Porter. JF (1979) Chief Executives Define Their Own Data Needs. which can be used to analyse how IT can be used strategically. as some sections and work processes are automated and others are not. Volume of Processing and Accuracy). The purpose of this article is to explain some of the more popular models students will come across in their studies. J (1990) Information Systems in Management 4th ed. Different departments are using different applications. The syllabus has three whole sections on strategic choices and strategic action. M (1985) Competitive Advantage. Controls are introduced. Some bright spark in the organisationrealises the benefits IT applications can bring to the work they do and they persuade the organisation to allow them to bring in IT systems and applications to automate some of their work processes (the advantages of computerisation are often summarised under the headings ± Speed. These topics require an appreciation of how IT supports the overall business strategy and how IT is an inherent part of the overall strategy setting and implementation process. P (1985) The Information Payoff. The six stages are as follows: Stage 1: Initiation The organisation has no IT systems at all. using the information from these systems for decision making. ie the idea that organisations go through defined periods of growth and crises. New York Free Press Porter. More and more users are demanding IT applications and hardware. therefore.

b. IT might be absolutely vital in terms of how the company does its business currently and how it sees its business model developing in the future. d. IT is subject to long-range planning. IT is used as a source of competitive advantage. in 1983. You can then postulate where the company is headed and. you should be able to identify where any particular organisation currently stands from the information given to you by the examiner. come up with the appropriate strategies needed to guide the organisation successfully to the final phase. Information is used in the battle for competitive advantage and the management of information as a resource is seen as a key strategic issue for the organisation. There is heavy use by users and managers. Note. The information flows in the organisation mirror the real world requirements of the organisation. McFarlan&McKenney ± The Strategic Grid It is interesting to look at a company at any point in time to try to determine how that company is using IT. it can still be relevant to what organisations are doing today and how they use IT. A good use of Nolan¶s hypothesis is to consider where your own company is in terms of this life cycle. is simply unthinkable. Stage 6: Data Maturity This is the final phase and at this point. Professor Nolan suggested that few companies were at the final phase and his view on that point is probably still as true today. The organisation fully integrates IT as a resource and manages it as effectively as its other assets: a. hardware is not compatible throughout the organisation. devised a very useful grid for assessing a company¶s use of IT ± see Figure 1. hopefully. possibly even an intranet or an extranet. This phase involves networking the organisation¶s IT hardware and software to ensure that all systems and applications can talk to one another. This is patently not the case. McFarlan and McKenney. Figure 1: The McFarlan&McKenney Strategic Grid . In addition. IT can be used simply to support current operations. information is used as a key resource and as a source of added value. however. understandable by all. as it would seem to suggest that an organisation could not exhibit the characteristics of a number of stages concurrently. It might be a vital part of data processing. It could be argued that the model is too simplistic. c. The focus is on value not the technology. This phase involves the building of the organisation¶s database. that Professor Nolan gives no guidance as to how long each stage might last! From an exam standpoint.update the stock records. The interesting thing about Professor Nolan¶s hypothesis is that whilst it was developed over 20 years ago. This duplication of data causes errors and unnecessary time wasting. with IT professionals performing a support role. Stage 5: Data Administration The organisation now realises that the information it has is a key resource. where the alternative. ie to revert to manual methods of processing. Information needs to be accessible by all individuals at all levels and that information has to be in a common standard format. It is important that you then back up that observation by referring to the relevant theory.

The supermarket can also use the data collected from loyalty cards at the point of sale for marketing purposes. home shopping etc. IT is said to have a strategic significance. It is likely that most questions you will face in this paper will involve companies that are either in the turnaround or strategic quadrants.e. Therefore retailing is placed in the turnaround quadrant. So IT is a key part of operations. IT will feature more on the business agenda in the future. IT will be a key feature of future strategic planning. The example of the supermarket industry is interesting. EFTPOS technology (ie Electronic Funds Transfer at Point of Sales) is the scanning technology we all see at the checkout counter. However. the business model in the future will be completely different and IT will have a new role to play. The question will give you sufficient information to determine the role played by IT and therefore to determine the strategic significance of IT to the company. ie the impact of future IT developments on its way of doing business? Depending on the responses to these questions. Whilst EFTPOS technology is in the factory role. It is important in terms of day-today operations but it is not felt that there are any major IT developments on the horizon that will fundamentally alter the nature of the business. The role IT strategy plays in the formulation of the overall business strategy is critical. all the players in the retail industry currently have EFTPOS technology and it couldn¶t really be argued that it offers any major source of competitive advantage. do business with the industry. 2. it also updates the supermarket¶s stock records and may be on-line to the supermarket¶s suppliers who are immediately notified of the levels of stock (Electronic Data Interchange). 3. this technology not only indicates the price of the goods being purchased and computes the bill. It is mission critical (ie the company is not going to be in business at all without using IT effectively to deliver its products and services both now and in the future). IT has little relevance and simply supports existing processes. Payments both from the customer and to the supplier are automated electronically. Low Current: High Future Impact. The retailing industry is often given as an example of how IT has become critical to operations. In this quadrant. ie e-commerce and the development of web-based retailing. Consequently. the retail industry can see major changes in the future in the terms of how we. the consumers. 4. the key issue is the maintenance of existing systems. Low Current: Low Future Impact. High Current: Low Future Impact. .The grid has four quadrants built around two straightforward questions: a. Here. IT plays a crucial role both in terms of its current role and in terms of how future IT developments are viewed as impacting on the organisation. How important does management feel the current IT systems are to the company? b. However. This shows the application of your knowledge to the specifics of a question. How important does the company think future developments in IT will be for the company. High Current: High Future Impact. It may not have played such a role in the past. The company believes that IT will have a major impact on their business model in the future and IT is in a turnaround role i. Here IT is said to have a Factory Role. a company can be placed in the four quadrants as follows: 1.

delays and poor quality management information.For companies in the factory role. The interface with customers has current strategic significance (ie it is mission critical) but again developments in ecommerce and the way the customer deals with the manufacturer (i. In the strategic role we might place the manufacturer¶s Customer Relationship Marketing (CRM) software. In the turnaround role. and not just within the organisation. IT has meant a revolution in the way information is created and presented to management. A possible question in the exam could be based on this approach but instead ask students what might be the result of the failure of a company to have an IT strategy in place. Competitors. The software governing Computer Integrated Manufacturing might be viewed as having a factory role. Systems¶ implementations are late. No means exist to establish appropriate IS/IT resource levels. the key issue will be the security of their systems. IT requires effective management. It is important to note that very little credit will be given to students who simply recite Earl¶s nine reasons without any . Briefly. ie it has key operational implications but the technology is routine and no major developments might be expected. these can be summarised as follows: a. He calls the Low Future: High Current Impact ± 'µKey Operational' and the Low Current: High Future Impact ± 'High Potential'. It is possible to view a single organisations use of IT and see how different IT applications within that organisation can have different roles (ie it is possible for a single company to have different IT applications that occupy different quadrants at any one point in time). we might classify EDI links (Electronic Data Interchange) and the software governing the links with their suppliers. possibly by-passing the dealer and buying online) means that changes in this area need to be carefully monitored by the company. IT involves high costs. IT is now used as part of the commercial strategy in the battle for competitive advantage. IT systems are mission critical and the company should have a strategy as to (a) how to maximise the benefits arising from its deployment of IT and (b) how to cope in the event of a systems failure (i. Why a company should have an IT strategy ± Earl¶s nine reasons From an examination of McFarlan&McKenney¶s Grid. IT involves many stakeholders. inaccuracy. The same logic applies. IT affects all levels of management. It would be a pain if the computerisedpayroll were to fail but it would be possible to revert to manual methods of processing. b. The detailed technical issues in IT are important. over cost and fail to deliver expected benefits. Earl¶s nine reasons Professor Earl of the LSE provides a useful list of nine reasons as to why a company should have an IT strategy. The automated payroll system would be a good example of the support role. suppliers and customers gaining advantage. 2. Payroll has no strategic impact. Even if it is in the factory quadrant. Take the example of a car manufacturer. c. 3. Joe Peppard provides an alternative version to the Strategic Grid (the Applications Portfolio). e. it should be obvious why a company should have an IT strategy. to evaluate investments and set priorities. as this can make a real difference to successful IT use.e. If a company is on either the turnaround or strategic quadrants of McFarlan¶s Grid. standby arrangements and disaster recovery plans. IT is critical to the success of many organisations. 7. 5. not just management. d. Systems are not integrated thus causing duplication of effort. 9. 4. Briefly. have a back-up or recovery plan). they are as follows: 1. back-up procedures. Corporate objectives becoming unachievable due to systems limitations. 6. EDI technology has been around for some time but major developments might be on-line and web-based procurement and the development of extranets. then obviously a company should have the appropriate strategy to enable it to plan for future developments.e. IT is required by the economic context (from a macro-economic point of view). 8.

application to the question set. In this situation the organisation may well have a system that is over specified and is perceived as having little relevance in terms of what the end-users have to do. students should be able to assess where a given company¶s systems lie on this grid from the information given in the question. The IT specialists make this evaluation. they are too elaborate for what is required.e. Low Technical: High Business. Refer to Figure 2. the technical staff rather than the end-users drove the IT strategy?) 4. Business Value. Here. 2. Divestment may be the best approach. reliability and the need for maintenance. The approach should be to identify. b. High Technical: Low Business. This is one of the strategic . from an examination viewpoint. two questions are asked for a determination using this model: a. Earl's Audit Grid An exam question could give the student an indication of what types of IT applications and systems the organisation is using and possibly information as to the value derived from the IT systems as perceived by the users. It adds very little in terms of business value. Low Technical: Low Business. The four quadrants can be described as follows: 1. They help our understanding of the issues and are a useful starting point for a consideration of the problems and possible solutions. that the systems are actually over specified i. Porter's Generic Strategies Michael Porter answers the question 'How do organisations compete? ie what the organisation¶s competitive strategy should be' by considering whether the organisation is either a cost leader or a differentiator. the end users perceive that the systems can add value to their work but are dissatisfied with poor technical quality of those systems.e. How good are the systems in terms of cost. (Did the IT specialists suggest the investment i. That is the point of studying these models. The system users make this evaluation. from the information given in the question. The organisation needs to renew the IT systems if users are to be kept satisfied. Either scenario is not a good one from the company¶s point of view. The organisation needs to reassess why it has invested in IT resources in this way. The key issue here is to maintain and enhance the systems as end users perceive them as adding value and the technical quality is also seen as good by the IT specialists. alternatively. Again. How does the company assess the value of IT systems in terms of ease and frequency of use. The organisation really needs to ask itself why it has such a system at all. what is happening or could happen to the company because of the lack of an IT strategy and then use Professor Earl¶s reasons as a framework for constructing your answer. Technical Quality. It should then be possible to evaluate the use of IT by the company and how changes in the IT strategy could support the overall business strategy. Professor Earl¶s Audit Grid provides a useful method of assessing the quality of a company¶s systems. Figure 2 Again. 3. High Technical: High Business. It might be the case that the systems used are not suitable for the task or.

Figure 4 . shown in Figure 4.A. Let me use a simple example to illustrate the point ± the Internet.M Quality assurance systems Value system links Marketing y y y Streamlined distribution system Modelling capabilities Centralised control system y y y y y y y y y y Sophisticated marketing system Marketing databases IT displays/promotion Telemarketing Competition analysis system Differential pricing system Office-field communication Customer ± sales support Dealer support system Value system links Sales y y y Sales control system Advertising monitoring system Strict incentive ± monitoring system Cost control systems Planning and budgeting systems Office automation for staff reduction Administration y y y Porter's 5 Forces Model This model.I.D y Co-operative working y y y y y Differentiation y y y Product control systems R&D databases Speed of development Operations Processing engineering systems Inventory management Process control systems Labour control systems Value system links y y y C. computers and telephony. can also be applied to a company¶s use of IT. customer databases.M y C. E-commerce. students should be able to see how IT could support either of these methods of competition. more effective supply chain management. From the IT strategy viewpoint. on-line procurement. web-based marketing and home shopping have all come about as a result of the development of web-based technologies and the convergence of communications. yes IT can change each of the forces. A detailed examination of how IT can change the structure of an industry and the effects of IT on the various forces would require an article in itself. loyalty cards. online retailing. Figure 3 details possible IT applications. The answer to all of the questions posed within the model is. Figure 3 Product design and development Cost leadership y Production engineering systems y C.A. The Internet has fundamentally changed the bargaining power of both suppliers and customers. greater access to information.options that Johnson & Scholes suggest need to be considered in the overall determination of the business strategy (the others are the method and direction of growth).

Increasing cost efficiency. IT has been used offensively. Supply chain management and the linkages in the value chain system need to be fully understood.e. how the company¶s deployment of IT might be used to strengthen those forces in the company¶s favour and how IT could be used by the company¶s competitors to attack the competitive position of the organisation. as a means of entering an industry that was previously viewed as impregnable by the existing players (eg Direct Insurance) or defensively as a means of keeping out new entrants (eg heavy investment in IT by financial services companies as a barrier to entry). as either closing off an industry to outsiders (IT used defensively) or opening up an industry to new players (IT used offensively). Figure 5 Questions in this area are likely to be straightforward. An exam question could require students to assess the nature of the existing forces affecting the industry. The information in the question would allow the student to see the operation of various primary and support activities. as does the role IT plays in the integration of the value system. IT as a source of competitive advantage It is frequently stated that one of the main reasons why a company should have an IT strategy is because IT can be the source of competitive advantage. Porter's Value Chain The value chain can be used to assess the impact of IS/IT on the elements of a firm¶s individual value chain and on how the integration between the value systems of the various contributors can be strengthened. Affecting the cost of switching operations. Various applications that could be used in these activities can be identified to earn marks. Refer to Figure 5. But what does this term µcompetitive advantage¶ mean? Joe Peppard provides the following useful summary: y y y y y y y Establishing entry barriers. Limiting access to distribution channels. eg EDI and Customer Relationship Marketing. Decreasing supply costs. Ensuring competitive pricing. . Differentiating products/services.It would be wrong to characterise all these changes as shifting the balance of the forces one-way or the other i.

They explain how technology can increase productivity through providing better marketing information (eg databases) and more efficient sales and marketing tools (eg direct mail. ACMA is a Director of BPP Ireland Quality plans by Steve Skidmore 09 May 2007 This article explains the structure and purpose of the Project Quality Plan. Ward and Griffiths suggested four ways that IS/IT could be used for competitive advantage: 1. extranets. Hopefully. Moriarty and Swartz provide an example of how the application of IS/IT can generate a competitive advantage in relation to the sales and marketing function. 3. For example. data warehousing. Giving senior management information to help to develop and implement strategy. To be classed as a competitive advantage the increased productivity would not be available to others. Figure 6 As a result of the use of IS/IT. 2. AITI. produce. ERP. The purpose of this article is merely to introduce the concepts and models to the student and show how their application to the specifics of an examination question can very easily earn marks. this article will help you do both. or competitors are unaware of how to utilise it. fewer sales and marketing staff may be required. Building closer relationships with suppliers and customers. Increased productivity may lead to reduced fixed costs. CRM. market and distribute new products or services. website. Martin Corboy BCL. 4. Enabling the organisation to develop. The reason why the questions are set in the form of scenarios is to test the students¶ application of the theory. eg knowledge management. but if you cannot apply them. you won¶t pass. This is unlikely unless the technology is very expensive (entry barrier). websites). Conclusion Detailed consideration of the various models discussed above can be found in various study textbooks. VANs.y y Using information as a product. eg data mining. eg EDI. the breakeven point has been reduced from (A) to (B). allowing a move to smaller premises. Linking the organisation to customers or suppliers. The contents and structure of a Project . It is all very well learning the models. The effect of reduced fixed costs and a greater contribution arising from savings in variable costs is shown in Figure 6. Creating effective integration of the use of information in a value-adding process. Very little credit is given at this level of your accountancy studies for regurgitation of the theory. eg CAD.

Quality Plan differ between project management methodologies. For the purpose of the ACCA syllabus, the Project Quality Plan has a wide interpretation, covering most of the initial concerns of the project manager outside the Project Plan itself. The Project Quality Plan is created in tandem with the Project Plan. The Project Plan shows the project deliverables, the allocation of staff and the timescales of the project. The Project Quality Plan describes the framework in which the work will be accomplished. The Project Quality Plan is one of the key documents produced by the project manager or project management team. It defines all relevant standards and procedures to ensure that work is completed successfully to the required level of quality. The project manager must ensure that all project staff are aware of the existence, purpose and content of the Project Quality Plan and it should be referenced throughout the project. In some instances, external customers (such as the Ministry of Defence) may wish to define standards for the Project Quality Plan and to review and sign it off as part of their contractual procedures. The possible structure of a Project Quality Plan is presented below. This structure may at first glance look daunting, but it must be stressed that it is an exception document, cross-referencing other standards and policy statements produced by the organisation. The Project Quality Plan will cross-reference the documents where those procedures are defined and document any exceptions or additions to those procedures for this particular project.

Quality Plan Contents

The introduction should include a definition of the purpose of a Project Quality Plan and how it fits into the planning and management of a project. It should also indicate whether the plan is part of the contractual requirement and, if so, how this has influenced the content and format of the plan. Some customers may require the Project Quality Plan to adhere to certain defined standards (for example, PRINCE II) and this may mean that the format of the Project Quality Plan usually used within the company has to be amended.
Project Overview

This section contains a general description of the project including the client, the objectives and the major deliverables of the project. In many respects it is a summary of the main points of the Project Initiation Document (PID) and will cross-reference that document or extract its main points. However, unlike the PID, this section of the Project Quality Plan will be updated if changes take place in the project environment; for example, if the original project sponsor leaves and is replaced.
Glossary of Terms

The glossary provides definitions of general terms with particular meanings used in the plan and any terms specific to the project. This enables the reader to correctly interpret the contents of the Project Quality Plan. For example, the word µprototype¶ may have significant meaning in a particular project and hence this section of the Project Quality Plan may be an appropriate place to unambiguously define this term.
Product Requirement

This is a description of the work to be carried out with a list of timescales, deliverables and project milestones with appropriate references to relevant specifications. The description of the work may include areas such as performance criteria, security requirements, legal constraints and client standards. This section of the Project Quality Plan will extensively cross-reference the Requirements Specification and (where one exists) the legal contract with the client.
Project Organisation

This section details the organisation and management of the project, specifying management roles (with named

individuals) and their responsibilities. This might include:
y y

contact points for technical information within the client organisation required resources and their origin (departments, sub-contractors etc).

It is likely that the definition of the responsibilities of the project management roles are standard, although again significant exceptions may apply on certain projects and these should be highlighted in this section.
Monitoring and reporting procedures

This section is a description of the procedures that will be in place for planning, monitoring and controlling the project. This will cross-reference project standards that define how the plans will be constructed and presented, how progress will be monitored and slippage addressed and the frequency and contents of project reports. These standards will also include agreed support tools (such as Microsoft Project). Exceptions or additions to the normal standards will be documented in the Project Quality Plan. For example, exception reports will be produced fortnightly (rather than monthly) for deliverables on the critical path.
Development Lifecycle

This section will describe the main project phases of systems development, with details of the:
y y y y

start criteria for the phase standards, methods and procedures to be used in the phase test, inspection and review procedures for the phase phase completion criteria.

The development lifecycle description is likely to extensively cross-reference the organisation¶s development standards. Where the standard methods are not to be used an explanation should be given. For example; Data Flow Diagrams will not be used to model the current operational system because the client perceives that the proposed solution should be radically different to the current system and hence modelling the current system is inadvisable. This section of the Project Quality Plan will also comment on the use of support tools, such as CASE (Computer Aided Software Engineering) tools.
Quality Assurance

Quality Assurance (QA) is concerned with reviewing the project work as it progresses. It aims to discover errors as early in the project lifecycle as possible. The frequency of reviews will depend upon the type and quantity of work. For example, it may be appropriate to review a number of small, interrelated deliverables (perhaps produced by different staff) at a single meeting. Reviews may be:
y y y y

self-checking peer-to-peer review subject to formal project review subject to formal external review.

It is likely that standard Quality Assurance procedures have been defined within the organisation. This section will reference the documents where those procedures are described, with any significant exceptions noted. For example; ³peer-to-peer reviews will replace formal inspection methods in the Lotus Notes development team, because of lack of resources available to sensibly undertake the formal reviews´.

The dynamic testing phases (unit testing, system testing, user acceptance testing etc) will be defined in this section. If the company has a defined test methodology then appropriate documents will be cross-referenced in this section. If the company do not have such documents then the appropriate test strategy may be defined in this section of the Project Quality Plan.
Quality Documentation

It is important that the results of quality assurance and testing are documented so that quality management can be verified as rigorous and avoid inadvertent repetition. A simple process may be used, where for each quality check a form is completed showing:
y y y y y y

review date deliverable(s) reviewed or tested reviewer(s) description of errors found action point(s) for error correction severity of error.

These quality management requirements are usually defined in organisational standards, often with specific references to where documentation should be stored. The Project Quality Plan will cross-reference these standards, with variations and additions documented. For example; the project will use TESTDIRECTOR software product to log all static reviews.

The project may require certain products (for example, hardware) to be purchased, rather than developed. A process must be defined for effective procurement. This may again be project specific or it may extensively reference current organisational procedures for purchasing. This process will include:
y y y

the purchasing policy the system for supplier selection and evaluation the goods inspection method(s).


The project may require that certain parts of the systems development are sub-contracted to a separate organisation. For example, parts of the programming may be sub-contracted to software houses in India. This section will describe:
y y y y y

details of sub-contracts the system for sub-contractor selection and evaluation how work will be distributed to sub-contractors how sub-contract work is monitored and quality checked acceptance procedures for work produced by the sub-contractor.


The project may have to purchase goods and services that do not conform to the quality requirements of the project. This section will describe how they will be dealt with. This is important where suppliers cannot adhere to the overall certification standards required of the project. For example, they may not have the required ISO certification. Nonconformance has to be recognised and possibly reflected in the contract with both the customer and the sub-contractor / supplier.
Change Management

Risk management Risk management is concerned with identifying potential problems and eliminating or reducing the damage the realisation of those risks would cause. (See Example 1). Configuration Management Configuration management concerns the control of the product at all stages of development and production. transport and insurance should be included in this section. It is mainly concerned with controlling the components and versions of the system during production and maintenance. Summary This article defines the level of knowledge required by a candidate for the 2. in advance. As a project proceeds. Furthermore. A well-planned approach to risk control allows the Project Manager to concentrate resources in those areas where risk is high and reduce risks to acceptable limits. the nature of risk changes. In some instances risks are assigned at too low a level (the owner understands the risk but cannot do anything about it) or too high a level. This will include the system for logging change requests. it is essential that all risks are owned by someone who has sufficient authority and resources to do something about the risk. Delivery This section specifies the arrangements for handling. These will be applied in the Project Quality Plan or perhaps in a separate document. The risk management process requires that each risk is assessed and measures formulated to prevent it (avoidance actions) or minimise its effect should it occur (amelioration actions).1 examination. If changes are made to the system then it is important that changes are made to the correct version of the software and to all copies of that version. Failure to adequately manage risks will threaten the success of the project. It is usually impossible to eliminate all risk but it is possible to manage projects in a way that recognises the existence of risks and prepares.Describes the procedures to document and control changes to the scope of the project. Consequently. which is referenced by the Project Quality Plan. It is very likely that the organisation has standards for change management and so this section may just have an appropriate cross-reference to the standard process. Any special needs. Risk assessment and management must be conducted at the start of the project and also throughout the project lifecycle to ensure that risks are understood and controlled. the method of impact analysis and gaining and documenting the authorisation/approval to apply the change. access to buildings. In many organisations the . Risk management is the responsibility of the Project Manager because this is the person responsible for the success of the project. defined to help project managers identify the issues they must consider in delivering the product. delivering and installing the deliverables defined in the Product Requirement section of the Project Quality Plan. It is likely that standards exist for risk management in the organisation. Old risks disappear and new ones appear. Both need to be considered because avoidance measures may fail. such as security. Configuration management software may be used and specified in the Project Quality Plan to help ensure proper configuration management. It is possible that a standard checklist exists for this section. In this instance the owner has the resources and authority to do something about the risk but does not understand the risk or give its solution sufficient priority. Appropriate parts of this checklist will be used in this section. During the development of the system it is not uncommon for multiple versions of the system to exist. risk management is a continuous process and so there needs to be a procedure to regularly review and reassess risks. methods of dealing with them if they occur.

It involves purchasing the services required to perform business functions from outside the organisation . retaining and fully utilising the necessary technical expertise to adequately staff the function in the competitive environment of the United Kingdom IS/IT marketplace. Multiple/selective sourcing Where an organisation enters into agreements with a range of suppliers. The basis of decisionmaking has included: y y y y y y those seen as critical to current organisational performance the ones that are seen as driving the future growth and innovation of the business those that appear to offer the most scope for offering competitive advantage those traditionally performed internally those creating most problems of management or staffing those where there is a thriving industry to provide external support. ensuring that the project managers have considered these aspects of the project. In other instances. Different approaches to outsourcing Total outsourcing This is where an organisation enters into a contract with a specialist company to provide all of their IS/IT operations. The organisation creates a contractual relationship with its supplier but relinquishes direct managerial control. organisations have reached different decisions as to what constitutes a µcore activity¶. Steve Skidmore is examiner for Paper P3 Outsourcing IT/IS services by Jim Stone 09 May 2007 A strategic decision has been made by many organisations to concentrate on their µcore activities¶ and to µoutsource¶ functions which are not seen as core activities. where there is a shortage of qualified experienced staff. the host organisation will retain its main IS/IT internal staff organisation. over a fixed time period. For some organisations. maintenance and development activities. The host organisation may seek to retain a small core of internal staff to oversee the management of the contract but it is difficult to retain sufficient µintelligent customer capability¶ to maintain true independent control. The nomination of IS/IT for outsourcing has also been favoured in some cases because of difficulties in recruiting. However. at an agreed service level. This is frequently described as Facilities Management. it may create framework contracts whereby it can purchase specialist equipment or services with a degree of competition as and when required. the absence of such standard procedures means that many requirements have to be defined in the Project Quality Plan itself. Joint venture/strategic alliance sourcing Where an organisation enters into a joint venture with a supplier on a shared risk/reward basis for a specific purpose ± frequently the development of a software package or piece of equipment which is seen as having widespread . all or part of their IS/IT activities have not been defined as core and have thus been candidates for outsourcing. which embraces a number of different approaches. Outsourcing is a term. which is defined as the contracting out of the management and operation of an organisation¶s IT services to an external source. to an agreed cost formula.Project Quality Plan is an exception document. An example is where an organisation contracts out all of its existing IS/IT staff and facilities to be managed by an external specialist company such as EDS or SEMA for a period of three to five years.

there may well be a competition between customers for access to the supplier's development staff. The knowledge and skills of internal staff tends to erode if they are not actively involved and it is difficult to develop the next generation of senior management if they are not able to get experience in key areas of the business. Frequently the host organisation is looking to improve information systems and facilitate organisational change or competitive advantage. Overall the benefits of outsourcing have been seen as: y y y y Cost reduction because of the economies of scale available in purchasing equipment and efficiencies in utilising specialist staff Business improvement by management being able to concentrate on core competencies because of expertise and specialisation available to manage and staff the IT function Avoid the growing shortage of IT and IS systems staff and keep up with technological change Cost control creating a customer/contractor relationship tends to concentrate the focus on cost control which is sometimes lost when functions are performed internally. the issue of maintaining and developing the host organisation¶sorganisational learning capability is becoming an issue. An example of this approach is the use of µoff-shore systems development¶ whereby an organisation has a contract with a software house outside its own country borders to write (and in some cases maintain) the programs for a new application suite. Work that has been outsourced is difficult to switch to a new supplier if there are problems. loss of independence and over-dependency upon suppliers. The host organisation will usually retain its in-house IS/IT function. The contracting company will be seeking to minimise risk and maximise profit by maintaining stability and drive down its costs and is unlikely to suggest changes. Now that there is longer experience of outsourcing of IS/IT. This have been particularly popular with UK companies entering into contracts with software houses in the Indian sub-continent and there has been some success claimed. quality control. The benefit is seen as access to lower-priced. or at the end of a contract period. skilled labour but frequently the difficulties in project management and communication have been under-estimated. it can give apparent short-term advantages in cost-reduction but provide a hostage to fortune in the longer term. lack of supplier flexibility and shortage of management skills as major problems. There is always a need to nurture and develop a core of internal staff to initiate strategic thinking and development and to manage the outsourced contracts. Any outsourcing decision needs to be treated with care. To develop and retain these staff is difficult if all µaction learning¶ is performed outside the organisation. Problems of security and loss of confidentiality particularly where an outsourcing company is also working for competitors. Jim Stone is subject coordinator for business management .application across other organisations. Outsourcing may be seen as a way of off-loading problems rather than as the result of a strategic assessment of costs and benefits. This gives the external supplier significant bargaining power. Insourcing This is where an organisation buys in management or technical capabilities to accommodate the peaks of IS development work. with the specification of requirements being made by the host company. The company retains its own centralised IS/IT function but buys in maintenance or development services from outside. A survey of organisations with outsourced IS/IT contracts has highlighted cost escalation. Difficulties with outsourcing have been seen as: y y y y y y y The host organisation and the outsource organisation will have different objectives. Loss of flexibility particularly when there is a need to respond to changing requirements.