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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.

   


In terms of the barriers to NPD, in my examiner's comments in the September 2003 issue of j    , 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:

2Ê the resources the organisation had access to


2Ê the structure and systems designed to allocate and control these resources
2Ê 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.

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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.

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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, Post-
it notes still took ten years to become a significant 3M product.

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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:

2Ê exploration - of new ideas which will meet company objectives


2Ê screening - a quick analysis to see which ideas warrant further study
2Ê 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
2Ê testing - the commercial experiments necessary to verify earlier business judgements
2Ê 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 time-
horizon 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.

‰ 
     
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.
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Equally clear from my research is the importance of teams in making innovation and growth happen. Others have
cited the contribution of multidisciplinary teams to the innovation process. The NPD process can be adversely affected
by 'silo' management, where the research and development function is largely divorced from mainstream activities, in
particular, sales and marketing. Conscious structures and systems need to be in place to encourage the dialogue. Many
companies find that a continued reliance on the product or service to sell itself in the same way, and to the same
customers, is at best a recipe for stagnation. New product or service offerings may also need to be sold to internal
customers or key stakeholders, who themselves are broader, more creative individuals, actively looking for ways to
differentiate their own contribution. For example, new technology, such as electronic data interchange, may automate
the simple transactional relationships between the buyer and the seller, but at the same time create the 'space' for the
customer to look for other ways in which their suppliers can add value.

Accountants can and must engage in the NPD process - the days of being outside the decision-making team and
'simply analysing the alternatives until only one is left' should be long gone. I referred to 'space' and freedom above as
a result of technology, enabling more positive relationships with customers. Equally, the creation of effective
management accounting information systems should give accountants a greater opportunity to engage with and
contribute to the NPD process. Some of this may involve moving from their traditional comfort zones and into the
creative entrepreneurial processes, allowing them to become more significant players in the innovation process. In my
experience of observing NPD first hand, the managing director and the finance director are in a unique position. They
bring strategic thinking to NPD and are key members of the team shaping the future direction of new products and
services.

‰ 

The case study company makes a tear tape that facilitates easy opening of packaging on cigarettes and processed food.
The current move to ban cigarette advertising has meant that promotion is increasingly limited to the cigarette pack
itself. Consequently, the company has developed a technology, with the involvement of key partners, which allows it
to print promotional messages on the tear tapes. In effect they have created a product which gives more value to the
customer, and which also has potential as anti-counterfeit and theft-prevention technology.

Implicit in this case example is the need for the accountant to actively engage in the process. The shift in the
accountant's perception and role from being an acute analyst of what has happened, to one significantly influencing
the shape of the firm's future, is one I am convinced is happening in firms that are growing and competing in global
markets.

 
  
The accountant has a key role to play in the NPD process, itself a vital strategy area for all organisations. This
involves their ability to look forward and not simply backwards.

2Ê Successful innovation requires a formal process through which an idea moves into an innovation. In the
December 2003 examination paper, very few candidates were able to describe what such a process might look
like.
2Ê Accountants should be key members of a multidisciplinary team created to manage the NPD process.
2Ê Rarely, if ever, does the NPD process operate without involvement from key partners outside the company.
These strategic alliances make the process more complex, and change project timescales and costs, but are
vital to achieving significant innovation.
2Ê NPD affects all parts of the value chain and system - process innovation may be just as important as new
products or services, particularly in industries which are 'mature'. Often, this process innovation affects the
way a product or service reaches the customer. Managers in so-called mature industries should be alert to
opportunities for new products and services.
2Ê 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. Research and development may appear more
risky but it has more potential for creating competitive advantage.
2Ê Innovations may have to overcome significant cultural barriers. Managers in companies typically prefer to
exploit current products and markets rather than explore new opportunities making it difficult to generate the
'space' and resources necessary for new opportunities.
2Ê Many large companies, committed to current technologies, cannot perceive the challenges from new
'disruptive' technologies and ignore the new products or services that emerge. Often radically different
products or services have to be located outside of the main business. Large, divisionalised companies with
significant corporate headquarters may find it particularly difficult to move into new areas of technology and
business.

Overall, the message for accountants is very positive. They have a skill set that is relevant and necessary to the NPD
process. Accountants have a duty to actively engage in the process and improve the outcomes by themselves being
innovative.

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CEOs and senior managers are increasingly judged on the success of their companies¶ business strategies. Yet, despite
the existence of complex strategy formulation processes in many organisations, many corporate strategies fail to
actually get implemented. In this brief article, we describe the main pitfalls of successful strategy implementation.

Research by Prospectus Strategy Consultants has revealed that up to 70% of business strategies fail to get fully
implemented. The strategy planning process in many organisations is treated with groans rather than cheers. It is seen
as a chore that must be endured rather than enjoyed. In many cases, the output of the process, the business strategy
fails to get implemented or is implemented in a form, which is quite different from the original intent.

Because of the weakness of over-centralised planning processes and the poor rate of strategy implementation, strategy
planning as a major management tool went into decline in the 1980s and early 1990s. The focus of this period was on
cost-reduction, downsizing, process re-engineering and increasing operational effectiveness.

However given recent market turbulence and a renewed focus on growth and expansion, strategy and strategic
planning are now very definitely back in vogue. If companies are to learn from the inadequacies and failures of
strategy planning in the past, organisations need to look at how they formulate their business strategies and, when they
are developed, how they go about implementing them.

Strategy is of limited value unless it is acted upon. What can be done to improve the effectiveness of turning strategy
into action? As often as not, it is usually the result of an organisations not committing one or more of the 'seven
deadly sins of strategy implementation'.

Deadly Sin one


The strategy is not worth implementing

In too many cases, what is referred to as business strategy, is deficient in analytical rigor, creative insight, ambition or
practicality. If the strategy is going to get the active support of management and staff, it needs to be specific, realistic
and give the organisation something to strive for. Strategy making is often considered to be easy. It is easy if the
strategy development process limits the scope of discovery, the breadth of involvement and the amount of intellectual
effort expended. The strategy should not just be more of the same, incremental or comfortable. It needs to be
stretching or innovative.

Deadly Sin two


People are not clear how the strategy will be implemented

When the strategy has been developed and evaluated, it then requires a plan to prepare the organisation for its
implementation. There is always a strong desire to get started and make the strategy happen. The time spent on
implementation planning is often seen as time wasting. However, there are a number of important issues that need to
be addressed including:

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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. If you don¶t put in the effort to sell and explain the strategy, how can you hope to have it implemented?
Your front-line supervisory staff must understand what the strategy is about, why it is important and how it will affect
them. The strategy implementation plan should include a communications plan, which sets out who needs to be told
about the strategy. The plan should not only include senior management but also middle management, supervisors,
staff, customers, suppliers and other key 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. People should be given clear and specific responsibilities for making strategy
work. The more people you directly involve in the implementation process the better. This will create a wider sense of
ownership, commitment and responsibility for making the strategy happen. Accountability must go hand in hand with
responsibility. If someone has been given an implementation task, make sure they do it. Part of assigning staff
responsibility is giving clear, understandable instructions and tasks and reviewing progress at regular intervals.

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. People will be looking for
clues. If staff feel that senior management are not fully committed to the strategy, their commitment and enthusiasm
for it will wane. Staff must believe that implementing the strategy is one of the organisation's top priorities. From the
time the strategy is developed, senior management must sell and continue to sell the strategy to the organisation and to
the other stakeholders. They need to explain the vision and communicate the importance of the strategy for the future
of the organisation.

Deadly Sin six


The 'brick walls' are not recognised
Nothing ever goes exactly according to plan. Organisations operate in an ever changing and dynamic environment. It
is important that those brick walls, which inevitably will be encountered along the way, are acknowledged and
addressed. When those moments of crisis or uncertainty occur, staff should be encouraged to develop creative and
innovative solutions to surmount these obstacles.

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. They forget that they have a business to run, targets to meet, a service to provide and customers to serve.
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, if it is relevant and meaningful, should become an integral part of
the day job.

Shareholders will not thank senior management for developing and implementing a very well crafted strategy while at
the very same time, letting profitability fall significantly or customer service to deteriorate.

It is important that strategy is a continuous activity and not a once-off event. Periodic checks are necessary. Check that
the assumptions are still valid. Identify and anticipate events or developments, both internal and external, which may
require a revision or addition to the strategy. Make the changes quickly and communicate them to all concerned;
however make sure that the changes are really required and the strategy is not being adjusted in a frivolous manner.

Strategy implementation is always going to be difficult and fraught with danger of being abandoned through inertia or
resistance. Change is never easy. However, 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.


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Perlmutter's typology of overseas marketing orientations

Perlmutter has suggested that firms involved in overseas business can be driven by a specific philosophical approach.
Traditionally firms who are either small or unfamiliar with overseas marketing pursue an ethnocentric approach to
international business. This implies that they see foreign markets as identical to their domestic markets. There is no
necessity to change the design of the product nor any of the associated marketing activities. 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.

As firms become more committed to overseas markets they realise that individual countries may require a degree of
customisation which the ethnocentric approach does not permit. Firms then frequently move to the other end of the
spectrum and become polycentric in orientation. Each individual market is seen as distinctive and so products and
marketing activities (distribution, promotion and price) are all individually customised. This usually results in sales
increases but often at the expense of profit. Customisation inevitably results in increased costs as there is a limited
application for scale economies here. (In reality few organisations are totally polycentric but many do have a
multiplicity of foreign operations which do curtail their profitability). There is a tendency in certain literature to
describe organisations which are polycentric in philosophy as multi-national companies. This is a more specific
description of what was originally a generic concept.

There obviously needs to be a µhappy medium¶ where customisation can sit comfortably with standardisation. The
popular slogan µthink global, act local¶ springs to mind. 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. Firms need to
be able to take advantage of economies of scale. Firms need to be regiocentric (i.e. focused on a specific geographic
area such as Europe or Latin America, or geocentric where the market is seen to be global). According to Ohmae a
geocentric company will centralise functions where localisation is inappropriate and will customise those areas where
localisation is a benefit.

Functions suitable for centralisation may include manufacturing, R & D, 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. However, certain functions may still need to be
localised. For example the design of certain products and advertising may have to reflect local needs and customs.
Similarly sales promotions may need to be localised. It may be beneficial to have a standardised product and brand
name for a luxury watch, but it will be inappropriate to use an Olympic winter sports champion, acceptable in Europe,
to promote it in South East Asia whereas a pop star may have greater impact. By being geocentric the company
obtains the benefits of economies of scale whilst also being able to respond to local needs. Furthermore, unlike
ethnocentrically oriented companies, a geocentric company is seen to be demand-driven whereas the former style
(ethnocentric) is more supply-driven.

The move towards standardisation in a geocentric company is encouraged by a market convergence. Increasingly,
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. For example the youth
segment has similar tastes in music and fashion goods. The youth markets in Tokyo, Munich, New York and London
have, almost certainly, a closer affinity with each other than they do with their parents or with segments of that older
age group. These geocentric companies are now frequently referred to as global companies.

`easons why firms are moving towards a globalised position

Kenichi Ohmae, in his book c  



jj 
, has identified a number of reasons which might encourage a firm
to act geocentrically (globally). He has listed these under a simple 5 Cs model. The first C is the customer. As has just
been noted there has been a movement towards market conversion. More and more customers throughout a variety of
countries are looking for products with similar characteristics. Where there has always been a financial incentive to
standardise products there is now often a demand-led requirement. This leads to a second C - the company. By selling
identical products to a number of markets, a company can spread its fixed costs over a larger volume of sales,
enabling that company to lower its costs and become more competitive, which brings us to the third C ± competition.
If other competitors are already reaping the benefits of global commitment, then the company must compete on the
same µplaying field¶ otherwise it will operate with a serious disadvantage. It must also become a global player. If it is
seen as only a regional or local player its image may be degraded.

Furthermore, the costs of operating on a global scale can be enormous. It could be advantageous to attempt to reduce
costs by forming strategic alliances with the previously considered dangerous competitors. The forth

               


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The final C is country. If a company seeks to locate its business activities (other than exporting) overseas, it can gain
several benefits ± access to cheap labour, raw materials or even finance. 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 five Cs can all be seen as persuasive factors in influencing organisations to become more global in their
philosophy. 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.

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. I will firstly identify a strategy and then show the difference in the ways
they are likely to be implemented.

Maximise world-wide performance

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Seek to benefit from the location of value-added activities

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ïhich countries will be participants in a world wide trading enterprise?

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Product offering

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Marketing approach

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Competitive approach

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Criteria needed to enable a company to become (and remain) a successful global operator
In addition to the usual criteria for successful firms ± factors such as functional competence in marketing,
manufacturing and finance ± There are a number of other areas where global (geocentric) firms must excel. Because
these firms operate in many countries with differing cultures, 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. For this to be established the HR function must be strong, with centralised
direction, so that suitable people are recruited and trained.

Senior managers must have strong locational skills as access to reliable infrastrucures, skilled labour and an
understanding and appreciation of local cultures can be of paramount importance. Due to the nature of these
businesses, (usually large and often strategically significant), senior management must have good political skills as
negotiations often take place at senior level.

There also has to be balance in the organisational reporting systems. There needs to be a balance between control and
delegation. By resorting to local freedoms there is a chance that duplication of activities may take place. Whilst the
HQ may wish to centralise as much as possible, so reducing fragmented activities, there is a consequent danger that
such actions may reduce initiative, innovation and motivation. Global corporations must address these conflicting
tensions.

Conclusion

It is important to realise that organisations doing business overseas are not identical in their outlooks. They can, and
do, have different orientations, which will impact upon their philosophies, structures and strategies. Global
organisations, because of their commitments overseas, need to be aware of overseas differences but they must
sacrifice their strengths and efficiencies in pursuit of market volume growth.

Bibliography

Warren Keegan, â   


  : Prentice Hall
Kenichi Ohmae, c  

jj 
: Collins
Kenichi Ohmae, â   j : BBC Executive Video Seminars

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In my first article, I will explore the reasons for corporate decline. The second article will go on to consider what can
and should be done about it.

Corporate decline and recovery should be viewed as an important topic. Case studies rarely present the student with a
rosy picture of a trouble-free organisation. Internal ÷jjj are often apparent. 
 j may be under-utilised.
Externally,
 j that the organisation has failed to respond to or 
 j that it has failed to exploit may have
led to present difficulties. The four italicised words used in this paragraph identify the possible reasons for or causes
of corporate decline.

SWOT analysis is a tool used to evaluate the current position of an organisation within its environment prior to the
design of suitable strategies. It could be argued that the preparation of a SWOT, whether required explicitly by the
question or not, is the best way to summarise the information presented in the case study. The result is a brief but
focused synopsis of the key points contained in the text.

Students often complain that there are µtoo many points to learn and remember for the exam¶. The secret is to learn a
few key models very well, and then look at how they can be applied to different topics. Basing a discussion of the
reasons for corporate decline on the SWOT is, of course, a case in point.

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. You ought to be familiar with these, and with the models available to
assist in its execution.

ðxternal environmental causes of decline

It may be a little simplistic to assume that blame can be apportioned exclusively to the organisation¶s environment
when, in fact, weaknesses in, say, the management team or the organisational structure may have led to a
compounding of the problems arising externally. Indeed, 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.

Political and legal causes

Changes in the law can affect organisations in many ways. A tightening of health and safety legislation may increase
costs. Premises failing to meet the higher standards could be closed down. Particularly damaging might be the
imposition of a complete ban on the organisation¶s product, clearly made worse should they have failed to develop a
product portfolio sufficiently broad to absorb such a loss. Tobacco companies are at present faced with the prospect of
a ban on advertising, if not on their products.

ðconomic causes

A downturn in the economy can lead to corporate failures across a number of industry sectors. Those worst affected
will be suppliers of goods with a high income-elasticity of demand. House-builders and related industries (such as
home furnishings) are good examples. 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. 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. Deflationary government fiscal policy (low government spending, high taxation and a planned budget surplus)
and central bank monetary policy (high interest rates, restriction of money supply expansion and revaluation of the
currency) can have a highly damaging impact on business. They can adversely affect levels of demand both
domestically and overseas, and impact on financial strategy through increasing the cost of capital and reducing after-
tax profits available for distribution or retention.

Socio-cultural causes

Demographic changes can have an adverse impact on demand. Falling birth rates could indicate problems ahead for
producers and sellers of baby products and, later, toys. Emigrating populations can reduce demand on a local basis.
Culturally, changes in tastes and fashions can have a damaging effect on organisations that fail to anticipate the
changes. Clothing is an excellent case in point, and Marks & Spencer is currently experiencing decline for this very
reason. Even cars and furniture are susceptible to changes in trends and tastes. Health scares such as the BSE crisis
can affect sales (in the case of beef). 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 potential costs of this µcompensation
culture¶ could be huge and may lead to some corporate casualties. The culture has, to a certain extent, been imported
from the United States. An increasing concern about greenhouse gases and the ozone layer, testing of products on
animals and generally greater social awareness could spell disaster in the future for those firms unwilling to embrace
this cultural shift. Indirectly, cultural changes often lead to changes in legislation, such as the banning of CFCs.

Technological causes

New technology can lead to the emergence of substitutes. The cinema industry went into decline in the early 1980s as
a result of video. Traditional methods of delivering services have been turned upside down by rapid developments in
information technology. 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, if they do not respond to them, could lead to decline. Within any
industry, failure to exploit information technology and new production technology can lead to an organisation falling
behind its rivals and losing its competitive edge.

Michael Porterǯs Five Forces Model

No external environmental analysis would be complete without a review of the impact of changes in the organisation¶s
micro-environment. The potential damage caused by a collapse in entry barriers has already been versed. But other
changes within the industry can also contribute to the demise of some of its players.

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Internal causes of decline

Several frameworks are available to assist in the execution of an internal position audit. The potential for some of
these internal issues to lead to corporate decline will now be considered:

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Objectives

A starting point might be to develop a mission statement. Such a document would formally set out the organisation¶s
reasons for existence and provide a general sense of purpose to management and staff. It may also contain core
corporate values that can act as a filtering mechanism in the setting of objectives and the design, evaluation and
selection of strategy. Failure to establish a coherent framework of objectives for all parts of the organisation, and at all
management levels, can lead to a lack of goal congruence and the taking of damaging, sub-optimal decisions.

Organisation structure

Structural weaknesses can have a far reaching impact on organisational performance. Excessive centralisation may
lead, amongst other things, to slow decision-making by out-of-touch managers, far removed from the local conditions
of the decision situation. 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, or image casualty effected by uncoordinated local
decisions.

Within the context of organisational structure, excessive bureaucracy can slow down decision-making and create a
role culture of inflexibility. But bureaucracy can work well in some situations. Whether it is likely to be a factor in
bringing about organisational decline depends very much on the circumstances. Hierarchies that are too tall will lead
to high management costs ± but by taking de-layering too far and chopping out management levels, spans of control
will widen and this too can cause huge problems. 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.

Financial resources

Students will recall carrying out ratio analysis and interpretation of financial statements from their Paper F7 studies.
High gearing leads to high committed costs in terms of exposure to interest payments and low interest cover. During
an economic downturn, if operating profits fall, a high proportion of debt to equity is bound to be a drain on cash flow.
Over-trading, whereby the organisation grows too quickly and cannot finance the growth from working capital can
lead to cash flow problems, as can an insistence on paying ever-increasing dividends to keep shareholders happy,
thereby starving the company of internal funds for investment.

The Boston Consulting Group (BCG) suggested that organisations should maintain a balanced portfolio of businesses.
Large investments will be needed for a Problem Child, in order to build market share. Further investment will be
needed to support and hold a Rising Star. In part, these funds should be generated by Cash Cows. Too many cash-
absorbing businesses (and not enough cash-generating Cows) could lead to problems.

Many organisations run into difficulties after failing to appraise investment projects. The long-term nature of many
projects means that outcomes are difficult to forecast, and probabilities are usually subjective. µBig projects gone
wrong¶ is a common cause of decline ± a specific example being the acquisition of a µloser¶. 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. Acquisition of unrelated businesses
(conglomerate diversification) can be particularly risky.

Marketing

Despite Michael Porter¶s inclusion of a µfocus¶ option in his model of generic strategies for competitive advantage,
excessive reliance on niche markets can lead to problems if that market becomes saturated. Indeed, many
organisations focus on markets that just aren¶t big enough. Peters and Waterman pointed out the need to be µclose to
the customer¶ ± psychologically, that is, not physically. A lack of understanding of customer needs and expectations
will lead to inappropriate product design.

A lack of attention to the marketing mix, or µfour Ps¶ as it is often referred to, might include:

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Production activities

Low productivity rates effected by low staff morale, a refusal to train workers and an inability to attract or select good
workers are all likely to contribute to uncompetitive product costs. Quality problems caused by failing to get things
right first time will lead to rework costs. And a failure to spot poor quality before it reaches the customer can be
catastrophic ± leading to image casualty and even lawsuits!

`esearch and development

Having already mentioned the BCG Matrix and the need for a balanced portfolio, the importance of research and
development will be clear ± but not in all industries to the same extent. Again, the importance of looking at the context
is emphasised. In pharmaceuticals, both blue-sky (pure) and applied research may be important, with huge
expenditures each year. Failure to invest in this key factor for success may well be a reason for decline.

Personnel resources

Weaknesses in the organisation¶s human resources will pervade many of the other issues already discussed. Problems
could emanate from:

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The last point ought to be emphasised and, perhaps, illustrated. Novell (a US-based infotech company) was almost
destroyed by management¶s decision to diversify away from its core business. It had built a sizeable reputation for
developing computer networking, but became fragmented and unfocused when it moved the battle onto Microsoft¶s
home turf of personal computer software and operating systems.

Systems and procedures

Existing and past students of Paper F8 or its equivalent will be familiar with the concept of internal controls. A lack of
controls, both financial and otherwise, can lead to financial losses that may be difficult to recover. The Barings Bank
scandal, involving trader Nick Leeson, is an excellent case in point.

Managers must be provided with information to aid decision-making. Poor management information systems will put
the organisation at a strategic disadvantage and could lead to inappropriate decisions. Inadequate marketing research
would prevent a thorough understanding of customer expectations. Overhead apportionment based on assumed cost-
drivers such as floor area for telephone charges and staff numbers for canteen expenses, combined with wholly
unrealistic bases of absorption like machine hours and labour hours, will lead to a failure to identify true product costs.
Some products, which are really quite profitable, may even be discontinued based on such misleading accounting
information. The solution, students of ICDM will be aware, would be to embrace activity-based techniques.
Conclusion

The list of possible reasons for decline is almost endless. I started by using the SWOT model as a basic framework,
and then set out the key external and internal issues in the form of a few major points or µheadings¶. In the context of
an exam question, the extent to which you should then µdrill down¶ within each point depends very much on the
number of marks available.

In my second article, I will look at corporate recovery. 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, what lies
ahead?

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In my first article, I explored the reasons for corporate decline. This article goes on to consider what can and should be
done about it.

‰ contingency approach to recovery

A contingency approach to the design of recovery strategies is vital; a µhorses for courses¶ approach. As with any
other aspect of strategy, a µone size fits all¶ philosophy is both dangerous and wrong. The particular circumstances of
the organisation must be analysed to determine the action needed. It is important to note that the options I shall discuss
below are not mutually exclusive; in other words, it may be possible (and, indeed, desirable) to select and implement
several of these strategies either simultaneously or sequentially.

DIY versus external consultants

A decision may have to be made whether to engage consultants to act as the agents of change. External consultants
will be able to draw on their experience of managing decline and recovery in similar situations. 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 organisation may only get one chance to save itself.

Despite their commercial experience, the uniqueness of each organisation means that consultants will inevitably have
to pass along a learning curve. The time needed for them to familiarise themselves with the company¶s staff, its
culture and its systems must be minimised. The consultants will bring with them a tool-kit of change management
techniques, and may well be more influential in their attempt to persuade stakeholders of the need for change than an
internal change agent would be. The consultants, if successful, might even justify their considerable fees!

`etrenchment and turnaround strategies

We invariably criticiseorganisations for their short-termist cultures; cancellation of training programmes, under-
investment in capital projects and other decisions engineered to increase a return on capital employed are an all-too-
familiar mistake in the quest for a long-term competitive edge. A crisis scenario is one instance in which short-
termism can be tolerated, or even encouraged. After all, without the placing of a firm emphasis on survival, there may
well be no long-term to plan for.

Retrenchment strategies focus on µstopping the rot¶ and have an unashamedly short-term slant. The aim is to generate
quick results and to µbuy time¶. Examples include the disposal of assets to generate cash.

Turnaround strategies follow on naturally from retrenchment. They aim to build on the results of the retrenchment
options. They focus on the long-term. Several of the strategies I shall discuss below will incorporate elements of both
retrenchment and turnaround. Indeed, the neat compartmentalisation of strategies into these two categories is both
unimportant and, at worst, dangerous. The most important task is that of compiling a package of feasible, acceptable
and suitable options. Defensive retrenchment must pave the way for a belligerent turnaround.

I shall now consider some of the strategies commonly used to bring about corporate recovery.

Management changes

A strengthening of the current team is quite common in recovery situations ± in particular, the appointment of a new
chief executive officer. In effecting a transformation at Continental Airlines, a consultant working on the project
became President, then µcleaned out¶ the existing management at every level. He sought forgiveness from wronged
customers, and created a µnew look¶ image by refurbishing aircraft and terminal furnishings.

‰ new culture

In order to successfully transform an organisation, the incredibly difficult task of effecting cultural change may be
necessary. Culture can be thought of as the set of values, attitudes and beliefs held by the organisation¶s members. The
well-publicisedmis-selling of pensions in the UK in the 1990s led to large pension companies, whose images had been
tarnished by the scandal, trying to adopt a more ethical culture. An inability to respond quickly to change might
require the conversion of a mechanistic role culture to a more organic and flexible task culture. A number of key
points are worth stating in terms of managing cultural change:

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The most successful recoveries involve some variation in the organisational structure and business processes. In
particular, a greater degree of decentralisation and better communication between staff feature highly. A flexible and
organic form is the suggestion of current writers. A reliance on the formal, vertical channels of communication and
lines of authority advocated by the classical writers of the early Twentieth Century (Fayol, Taylor, Weber, etc.) will,
they point out, be unsuitable in the dynamic, complex, global environment facing today¶s business. It is, however,
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 post-contingency school of
writers (including Peters and Waterman, and Ouchi) argue that an excellent, strong culture will make unnecessary
many of the structural controls traditionally employed.

Pricing

Getting the price µright¶ is not always easy. This is particularly the case for businesses selling goods and services for
which there is no direct comparison. Charging too much or too little could be equally damaging to revenues, gross
margins and ultimately profits. A good knowledge of the price elasticity of demand for each product is essential.

If demand is price-elastic, then a reduction in the selling price will bring about a rise in revenue. For products with
price-inelastic demand, an increase in the selling price will bring about a similar outcome. As the price of a good is
increased, the demand becomes progressively more price-elastic. In theory, the price should be raised to the point at
which demand switches over from being price-inelastic to price-elastic, in order to maximise revenues.

Since price-elasticity of demand often varies from one market segment to another, a policy of price discrimination
might be practised in order to maximise revenue. One aspect of pricing that is particularly interesting is that involving
so-called Giffen goods. Strangely, the demand for such goods increases as the selling price increases. Jewellery is
often quoted as an example. If the organisation has been under-pricing such products, it may have suffered from a lack
of demand due to perceived low quality.

‰sset reductions

A large majority of successful recoveries involve cash generation strategies, with divestment being the most common.
A manufacturer may select certain plants for closure with a view to rationalising production. Marks & Spencer
recently announced it was to close all its stores outside the UK to enable it to focus on its core market. In announcing
the closure of its 18 French outlets, it received heavy criticism for failing to consult with and inform local staff. C&A
is another high street retailer that announced a closure of stores; it decided to withdraw from the UK market entirely
and focus on what it felt to be its core market in mainland Europe.

The existence of significant equity in the plants or stores being closed could provide a much-needed cash injection to
an ailing organisation. A sale and leaseback is another possible cash generation option that utilises equity in properties
owned by companies.

In some instances, divestment involves the selling of complete business units or brands; large conglomerates often
select non-core businesses for divestment. Unilever¶s disposals included Caterpillar Trucks and British Airways,
another ailing company, decided to sell its low-cost, no-frills µGo¶ brand.

Cost reduction

Interestingly, cost-reduction strategies are used more frequently by firms that fail to recover than those that do.
Despite being what some would consider one of the more obvious options for a declining organisation, it is clear that
such a strategy is not enough on its own.

One way to reduce costs might be through the implementation of a redundancy programme. Care must be taken to
ensure that this will not result in excessive deficiencies in knowledge and skills. There is an increasing trend towards
reducing the number of traditional full-time staff in favour of creating a periphery of part-time, casual and freelance
workers. A reduction in committed and fixed overheads will bring about a flexibility and leanness that may have
eluded the declining firm. Outsourcing might be considered for non-core service functions.

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. The restructuring process referred to earlier may
lead to a flatter, leaner organisation with a corresponding reduction in managerial overheads. And just-in-time
purchasing and production methods can eliminate the high costs of stockholding. Perhaps new production technology
can be embraced to reduce unit costs.

Information technology may have a key role to play, not only in furnishing management with improved information,
but also in such areas as product design. Companies like Boeing have achieved massive reductions in the huge costs
of designing new products. 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, but also a critical review of
current business processes. It is activities and processes that create value, not business functions. A radical
examination of the reasons why certain activities are performed is necessary, with a view to focusing on value-adding
processes.

Product-market repositioning

The µexcellent¶ companies studied by Tom Peters and Bob Waterman understood their customers better than their
competitors did. The delivery of superior products and levels of service to customers must be preceded by a thorough
analysis of their needs and expectations. I have already referred to the need to review pricing policies, and other
aspects of the marketing mix should be subjected to a similar analysis. A decision may be taken to redefine the target
market, or to create separately identifiable segments and approach each with a unique offering. Revitalising products
and brands, or replacing ageing products within a brand portfolio might be a solution. Once again, Marks & Spencer is
a useful case in point.

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. Several UK banks have reached this conclusion. An in-depth analysis of product costs can lead to a better
understanding of true product profitability. A rationalisation of product lines might be the result. The way that
overheads are allocated and apportioned may need to be addressed using an activity-based approach. A good
understanding of cost drivers is essential.

Marketing is common to both successful and unsuccessful recovery situations. The successful firms tend to combine it
with a more fundamental product-market reorientation and with acquisitions.

‰cquisitions

As a method of growth, an acquisition has many advantages over the organic option. Market share can be increased
with immediate effect, rather than having to wait for aggressive pricing and promotion policies to have an impact.
Payment for the acquired company can be made in shares rather than cash, or a mixture of the two. The purchasing of
intangible assets such as goodwill and brand names could be of great benefit, especially if the turnaround involves
developing new growth markets in which it is presently unknown. Asset-stripping and possible synergy are further
attractive opportunities that an acquisition might present. The economies of scale that should be available from larger
operations will increase competitiveness.

Capital restructuring

If the company is highly geared, it may be paying large amounts of interest to debt-holders. Whilst the payment of
dividends is optional, interest payments are not. When interest cover is low, a large proportion of operating profits will
be paid in interest, reducing the funds available for retention within the company. This is likely to lead to reduced
investment, and the beginning of a vicious circle. 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. Whilst this will dilute the
existing shareholders¶ interests, it will at least allow the company to reduce committed outgoings in the form of
interest payments. If, following asset disposals, additional funding is still needed in order to implement the turnaround
strategies it may be necessary to attempt a new issue of shares. If so, an upbeat message will have to be communicated
in order to persuade investors to become more heavily involved.

Improved financial control

Common to many recovery scenarios is the implementation of enhanced financial control systems. Better management
of working capital might involve:

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A review of the entire system of internal controls would be advised. These include non-financial controls such as
segregation of duties and the need for authorisation. The aim of a good internal control system is to safeguard the
assets of the company.

Investment in ` D

Having survived the short-term, establishing a long-term competitive advantage should be high on the organisation¶s
list of priorities. Investment in research and development may be an essential ingredient in such a recipe for long-term
success. In sectors such as technology and pharmaceuticals, pure (blue-sky) research will absorb huge sums, but is of
vital importance. R&D does not always lead to the development of breakthrough products, but may simply result in an
improved version of an existing product. This too can give the firm a competitive edge over its rivals.

Conclusion

Although I have not covered every possible option for corporate recovery, I hope to have given the reader a flavour of
some of the main strategies used. There is no definitive list, just as there is no standard organisation. The causes of
decline discussed in my first article are as diverse as the potential solutions.

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Much has been written about how joint ventures are good vehicles for fostering corporate growth, particularly in
overseas markets. In some countries it is the only way of gaining access to a market. A host government may
discourage, or even prohibit, a totally owned foreign company operating within its country in order to encourage
domestic development. Many companies see joint ventures as a means of rapidly expanding geographically by using
other companies' resources. By 'tapping' into existing skills, knowledge and finance, as well as accessing existing
customer groups, 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. However, despite these benefits, there can be difficulties in operating within
joint ventures, particularly those involving foreign firms where language, business culture and even different
perspectives on business ethics can generate misunderstanding and even mistrust between the partners. It is advisable
to clarify any potential for conflict as early as possible and this might be better addressed at the initial contract stage.

Problems which can arise from joint ventures


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Many of these issues which can so easily become contentious may be avoided if the contract between potential
partners was carefully drawn up. There is the obvious danger, as with the pre-nuptial contracts now so popular with
Hollywood film stars, that the contract destroys romance, or in the case of a joint venture - the flexibility and
entrepreneurial spirit. A contract should not be seen as a constraining influence but as a guiding light.

Issues which should be addressed within a contract

The following are areas which should be made clear in the contract between the partners. Careful preparation here can
save innumerable problems and disagreements later.

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Conclusion

Joint ventures can be viewed from both technical and emotional perspectives. On the technical side there is the joint
contribution of product technology, corporate expertise and market knowledge. It is relatively easy to ensure that these
factors are complied with in contractual terms. It is less easy to legislate for the emotional aspects. This is more
concerned with cultural issues, trust, style of management and expectations of each partner. These factors are more
intangible. However if there is less cause for disagreement with the more quantitative aspects, considered above,
because of contractual clarity then the less precise and more qualitative areas may become less contentious.

Many companies see joint ventures as a first step before acquiring a company. 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.


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One of the main problems faced by students is how to apply the concepts of management and strategy. 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. The main skill that a student needs to develop is an ability to apply the acquired knowledge in a
scenario situation. The following series of articles provides an insight into how to apply your knowledge effectively.

The first article deals with the strategic planning process. Many of the various texts on the market comprehensively
cover the key processes involved in strategic planning. These often involve comprehensive flow charts with many
subparts. Rather than explain these in detail let us first distil the process into three main areas:

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Strategic analysis
Essentially a business will address the following questions:

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ïhere do we want to go?

The answer to this question is influenced by many factors. Key influencers are often the owners (eg shareholders) who
may have a particular expectation for the organisation. However, one also needs to take into account other stakeholder
influences which could include the government, employees and the general underlying culture of the organisation.
These views are very often consolidated into a corporate vision or mission statement.

ïhat constraints exist on our resources?

Resources needed would include finance, plant and machinery and human resources. However, to make it easy I
would recommend that you simply think 6Ms. 6Ms is simply a mnemonic used to save time when thinking about the
various resource constraints. It can be summarised as:

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The typical questions, which you would ask against each of these resource constraints, would be as follows:

Money

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Machinery

This would refer to machinery in the broadest sense of the word and typical questions one might ask would include:

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a 
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2Ê    O 
  
2Ê    
  O
   

Make-up

2Ê   a         


  
    
2Ê                   a
 

We will explain later how we can apply these concepts to a case scenario.

ïhat 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 easiest way to assess the external environment is to use the following two frameworks:

Ê      


Ê *ð  

Porterǯs five forces

The American management writer Michael Porter describes the main external competitive threats to be summarised
by his five forces model. Essentially this model determines the level of competition an organisation is facing by
assessing the extent to which the five forces are relevant. The five forces are summarised as follows:

Ê    


    
Ê  O   a  O  
Ê  O   a   aa  
$Ê    
 O a  
'Ê     
a  

c   
   

This is a problem because if competitors can easily enter your business sector they will be able to put a ceiling on your
profits. Therefore the greater the threat from new entrants entering the sector the higher the levels of competition. The
ease which new entrants can enter the business segment is largely determined by the extent of the barriers to entry.
You potentially could get a whole Section B question which goes into detail on barriers to entry.

The following summarises the main barriers to entry.

    The higher the capital cost the greater the deterrent to someone entering the business and
therefore the likelihood of competition being less than in industries where it is much cheaper to set up business.

!     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.

      Differentiation is said to occur if consumers perceive a product or service to have properties which
make it unique or distinct from its rivals. The differentiation can be in the appearance of the product, its brand name or
services attached to the product, e.g., Concorde. 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, therefore they are likely to be put off.

"    This is the cost not incurred by a new company wishing to enter the market but by the existing
customers. If the buyer will incur expense by changing to a new supplier they may not wish to change. For example,
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.

!      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.

    There might be patent protection for a product or the government might only license certain companies to
operate in certain segments, eg nuclear power.

‰   
     Existing relationships between manufacturers and the key distributors of the
products may make it difficult for anyone else to enter the market.

Therefore, in summary, when thinking about the barriers to entry go through the above list in your planning to see
which of them apply. 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.

c     
  

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. Buyers will have power when:

2Ê           a     aa  


2Ê  O          aa 

c     
  

The extent of supplier bargaining power is very closely linked in with the issues of buyer power. The extent of the
power of the suppliers will be affected by:

2Ê        aa       aa   O     aa    a  
2Ê     a   O O O     aa  
2Ê     
a    O  O   aa      
     aa  

c     

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.

c  

The most competitive markets will be affected by the previously discussed four forces. However they will also be
affected by:

2Ê  
O  
a         
2Ê           
2Ê          a        

2Ê          

 O  a 
        

åePðST factors

The other framework, which should be applied when surveying the external environment, is LePEST factors:

2Ê *  
2Ê   
2Ê ð 

2Ê  
2Ê     

Again all of these factors will not necessarily apply but provide a useful checklist against which you can compare in
an exam situation. They are explained more fully below:

åegal environment

How an organisation does business:

2Ê *         a           


2Ê &     
a  
a 
  
2Ê &      
 O a 
 
2Ê *    
aO  
2Ê ð  
      

Political environment

The organisation must react to the attitude of the political party that is in power at the time. The government is the
nation¶s largest supplier, employer, customer and investor and any change in government spending priorities can have
a significant impact on a business, eg the defence industry.

Political influence will include legislation on trading, pricing, dividends, tax, employment, as well as health and
safety.

ðconomic environment

The current state of the economy can affect how a company performs. The rate of growth in the economy is a measure
of the overall change in demand for goods and services. Other economic influences include:

2Ê     


2Ê    
2Ê  O         
2Ê      
a 
 
2Ê      O    
2Ê â
  O

One should also look at international economic issues, which could include:
2Ê     a  
 
2Ê 
a           
2Ê   
 a 

 
2Ê ð 
 
 
2Ê `     

The social environment

The organisation is also influenced by changes in the nature, habits and attitudes of society.

2Ê         


2Ê      O  
2Ê    a  
   
2Ê 
 a   
2Ê    
         O
   aa  

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. Technological change can influence the following:

2Ê    a     


2Ê   a a    
  
2Ê &  a 
2Ê &  



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.

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. In addition the company provides a systems design
consultancy service to the financial services industry. The company was established in 1988 and the three founding
shareholders are also the three full-time working directors. Extracts from the financial results for the last three years
are given below. These show declining profitability although aggregate sales revenue has increased year on year.

A       Ä  
  


         

  Ê
 
)) ' )' ' 

))  (  $$

))$   '' '

Operating profit is before interest charges and taxation. The current interest rate on the medium term loan is 10% per
annum.
A  
       —
  Ä    

           


   

    

)) )' $'  )'

))  '''  )'

))$ ' '$' $ 

The current liabilities figure includes an overdraft with the bank of $300,000. This is also the agreed maximum. The
company owns its own premises and these comprise the majority of fixed assets. The premises have recently been
expanded to cope with the increased sales volume of the Champlan package. 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. Championsoft is well
regarded in the system design services field and attracts good profit margins on the work carried out. It is estimated
that the operating profit to sales ratio on system design services is in the region of 15%.

Championsoft employs 18 people mainly as software specialists. There is little subcontract software development
undertaken. The managing director and majority shareholder with 40% of the voting capital is Simon Champion. He
was the prime mover behind the creation of Championsoft and has substantial experience in the financial services
industry. He sees his main role as ensuring the efficient day-to-day administration of the business. The software
technical aspects of the business are managed by the Technical Director, Dr John Chan, who holds 30% of the voting
share capital. He is responsible for research and development on the Champlan product range, customer technical
support on software products and systems design consultancy projects.

Jill Mortimer, the third director, holds the final 30% of voting shares and is in charge of sales and marketing of both
software products and consultancy services. Her background is in the marketing of fast moving consumer products.

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. 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. The main competitor to Champlan is the Pennsoft product range. Pennsoft are part of a large
international organisation, their product range is very similar to Champlan if lacking in its level of functionality.
Pennsoft software is marketed at prices which have always undercut Champlan. Jill Mortimer believes that Pennsoft
hold about two thirds of the market, Champlan about one quarter and the rest is split among a few other software
houses. There are few barriers to other software houses entering this market. Almost any quality software house is
able to produce a similar product for this market providing that they are willing to devote sufficient resources.

Jill Mortimer has a strong personality and her views have tended to dominate the recent direction of the business. She
believes that Championsoft must cut its prices and put more effort into winning sales. 'Look at the way the software
market is developing. Every year there is a bigger market as new users get access to the hardware. Our extra sales
effort and a bigger sales force will easily be covered by additional unit sales. We must tackle Pennsoft head on and
capture some of their market share.' Last year Championsoft spent $100,000 on advertising while Pennsoft spent in
the region of $500,000.

Simon Champion is not fully convinced. 'Although our current advertising has generated lots of enquiries very few of
these resulted in firm sales. In fact, the high level of spending on promotion is straining our cash flow.' He was
thinking about the letter recently received from the bank which, while professing continuing support, pointed out that
Championsoft¶s overdraft was rising year on year and that this must not be seen as a permanent source of finance. The
bank had concluded that they would like to see some medium-term projection about how the overdraft was to be
brought under control.

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. 'We should move away from the package market and into
consultancy activities. These build on our reputation and software expertise.

'The margins are good and we can sell on recommendation not expensive advertising campaigns. As it stands my team
is being torn between development of Champlan and working on software projects. We cannot do both well, we are in
danger of losing clients and at the same time failing to keep the edge over Pennsoft.'

Simon Champion was at a loss how to respond. Something had to be done but what?

Simon Champion has come to see you, as the company¶s auditor, and has asked for your objective advice. 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.

Requirements:
(a) Identify any additional internal and external information, which you need before you could set about writing your
report and indicate how you would gather such information. #(

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.

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.

So to help get some structure for Internal factors think 6Ms and you think:

2Ê   
2Ê 

2Ê    
2Ê   
2Ê  a 
2Ê 
! a

We then need to quickly think which of these 6Ms would be most relevant to the answer. I would expect your thought
process to go something like the following:

2Ê    
       
a  O  a     &  
     
   + 
 

         


 
a   
 
    a
  
 O   
2Ê       a  O      a   
a     

!
  
2Ê  a a          
a  
a       
2Ê 
   a             
     


2Ê       
a  
   
O      

 

2Ê 
 a   
               O aa   
  O        a
 

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. We should now be confident in applying 5 Forces and LePEST in much the
same way e.g., questions regarding the 5 Forces would include:
2Ê    
 O                      O    

       
2Ê O    a 
 
a      a + 
 

         


           
 OO  
 
aa       
  
2Ê       a
    

   O  O    
a  a  
2Ê 6   *ð   O
        O

Armed with this information in your plan you should now be able to develop an answer that should fulfil the 12 marks
allocated. Do not forget to answer the entire question, which required suggestions as to how you would gather such
information suggested. It must be stressed that all of the 6M¶s, 5 Forces and LePEST need not necessarily be used in
your answer but they should almost certainly be used in developing your answer plan.

Past exam-related example

Bowland Carpets Ltd is a major producer of carpets within the UK. The company was taken over by its present parent
company, Universal Carpet Inc, in 1993. Universal Carpet is a giant, vertically integrated carpet manufacturing and
retailing business, based within the USA but with interests all over the world.

Bowland Carpets operates within the UK in various market segments, including the high value contract and industrial
carpeting area - hotels and office blocks etc - and in the domestic (household) market. Within the latter the choice is
reasonably wide, ranging from luxury carpets down to the cheaper products. Industrial and contract carpets contribute
25% of Bowland Carpets¶ total annual turnover, which is currently £80 million. During the late 1980s the turnover of
the company was growing at 8% per annum, but since 1992 sales have dropped by 5% per annum in real terms.
Bowland Carpets has traditionally been known as a producer of high quality carpets, but at competitive prices. It has a
powerful brand name, and it has been able to protect this by producing the cheaper, lower quality products under a
secondary brand name. It has also maintained a good relationship with the many carpet distributors throughout the
UK, particularly the mainstream retail organisations.

The recent decline in carpet sales, partly recession-induced, has worried the US parent company. It has recognised that
the increasing concentration within the European carpet-manufacturing sector has led to aggressive competition within
a low growth industry. It does not believe that overseas sales growth by Bowland Carpets is an attractive proposition,
as this would compete with other Universal Carpet companies. It does, however, consider that vertical integration into
retailing (as already practised within the US) is a serious option. This would give the UK company increased control
over its sales and reduce its exposure to competition. The president of the parent company has asked Jeremy Smiles,
managing director of Bowland Carpets, to address this issue and provide guidance to the US board of directors.
Funding does not appear to be a major issue at this time as the parent company has large cash reserves on its balance
sheet.

)
 *
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. Your answer should cover the following:

 To what extent do the distinctive competencies of Bowland Carpets conform with the key success factors required
for the proposed strategy change? #%

 Suggest and discuss what might be the prime entry barriers prevalent in the carpet retailing sector. +

  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? ,
c*(

"

If we are to concentrate on part (b) you can see that it asks for the prime entry barriers in the carpet retailing sector.
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.

So thinking back the main barriers to entry which we listed were:

2Ê a    
2Ê ð 
  
2Ê     
2Ê   
2Ê ð a   
2Ê *   
2Ê  O     

Most of the above could be a potential barrier in the carpet retailing sector, but in order to score high marks you need
to apply them in the context of carpet retailing rather than just list them out.

2Ê a    &


  
  O      

2Ê ð 
         a       a  O  a   
   
 O   

 
2Ê                     
        a   a  
 
 
O   a 
   
2Ê             O
             
        
 O     a 
 a           
 
2Ê ð a           a        a   

a   a Oa  O  
2Ê *       a       a      a    a   
 
2Ê  O     &  O         a      a 

   aa a       a

Therefore using the framework in an applied way we have been able to construct an answer, which if presented
appropriately will be worth almost maximum marks. If you look at part (c) you will see that the external analysis
frameworks fit in perfectly again - see if you can do it.

Summary

Hopefully now when we think about the strategic planning process we think about:

Ê     


Ê    
Ê   
a 
  

This article has explained in detail the process of strategic analysis, which we should all be able to break down into:

2Ê     


2Ê          
2Ê    
   
      
 '# *ð

The next article will take a similar approach to the issues of strategic choice and implementation.


c    (
O Ä   

' 

One of the main problems faced by students is how to apply the concepts of management and strategy. 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. The main skill that a student needs to develop is an ability to apply the acquired knowledge in a
scenario situation. The following article provides an insight into how to apply your knowledge effectively.

In the previous article we established how the complexities of strategic planning could be broken down into three
main areas:

Ê     


Ê    
Ê   
a 
  

The previous article comprehensively explained strategic analysis by breaking it down into three questions:

2Ê      



      
2Ê           

2Ê    
   
      
  
*ð '# 

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:

2Ê   O
a
2Ê        
2Ê &         

On what basis do we decide to compete?

A useful framework to use here is Porter¶s Generic Strategies. Michael Porter stated that a firm, which is wishing to
obtain competitive advantage over its rivals, is faced with two choices:

 

Is the company seeking to compete by achieving lower costs than its rivals achieve and by charging similar prices for
the products and services, which it offers, 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, and thereby enjoys greater margin than the undifferentiated product.

 

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, which are defined as:
2Ê    a
2Ê     
2Ê # 

R Cost leadership

Set out to be the lowest cost producer in an industry. 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.

In order to achieve cost leadership some of the following need to be in place:

2Ê 
 aa       
a         
    O
 
2Ê         
a      O  
2Ê 
O   O    
  
2Ê *
 aa       
 
2Ê  
 O  a  O   a 
2Ê     a   O    

a      
 ,   
  

One should also be aware of the drawbacks of such a strategy, such as the need to continually keep up-to-date with
potential changes in technology or consumer tastes.

Differentiation

A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers.
Differentiation occurs when the differentiated product is able to obtain a price premium in the market, which is above
the cost incurred to create the differentiation.

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. To truly differentiate yourself we must understand the product or service offered
and the customer to whom you are selling it.

ïays of achieving differentiation

þ   

Marketing is used to feign differentiation where it otherwise does not exist, i.e., an image is created for the product.
This can also include cosmetic differences to a product that do not enhance its performance in any serious way, eg
perfume ± colour, size, packaging.

  

More substantial but still has no effect on the product itself, is to differentiate on the basis of something that goes
alongside the product, some basis of support.

This may have to do with selling, eg 0% finance, 24 hour delivery.

  

This means the features of the product, which make it better - not fundamentally different but just better. The product
will perform with:

2Ê      O  


2Ê    !
 O  
2Ê  a  a 
 

    

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, eg Apple¶s iMac computer.


    

Consumers are likely to pay a higher price for the goods because of the added value created by the differentiation.

_ Focus

A focus strategy is based on fragmenting the market and focusing on particular market niche. The firm will not market
its products industry-wide but will concentrate on a particular type of buyer or geographical area.


* This involves selecting a particular niche in the market and focusing on providing products for that niche.
By concentrating on a limited range of products or a small geographical area the costs can be kept low.

     
* Select a particular niche and concentrate on competing in that niche on the basis of
differentiation, eg luxury goods.

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:

Ê    


Ê    
Ê 
a   
$Ê    a
 
'Ê 
 a
 
Ê    

Do nothing

This involves following the current strategy whilst events around change and can often prove to be a successful short-
term strategy. 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.

Sell out/withdraw from the market

This may be followed so as to maximise the return on a business, which may be at the top of its cycle and hence will
be in line with the goal of maximisation of cash flows. Withdrawal from a business sector may be chosen to give the
business more focus, eg Richard Branson¶s decision to sell his original business Virgin Records to concentrate on the
airlines business.

Market penetration

This involves increasing the market share in the current market with the current product. Market share can be
enhanced by such techniques as improved quality, productivity or increased marketing activity.

Product development

This involves introducing a new product into the current market. The product change is often the result of changes and
modifications to an existing successful product, eg Mars ice cream. This is an alternative to the present product and
builds upon present knowledge and skills.

Market development

In this case the organisation keeps its tried and tested products but tries to apply them to different market segments.
This strategy maintains the security of the present product whilst enabling extra revenue to be generated from new
segments, eg McDonald¶s and its geographic market development.

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. Diversification can either be related or unrelated.

`elated diversification

This involves development of the product and market but still remaining within the broad confines of the industry.
There are three main types.

Ê @   a


   O     a   a  O   
 a  aa    

   a 
Ê -   a
     
a  a     
    

   aa     O  
Ê     
     
a    O  

 
   

·nrelated diversification

This involves movement into industries which bear little relationship to the present one and is often the result of a
profit motive.

Ansoff represented the last four choices in his product/market matrix.


 ow?

The final problem that must be overcome is to decide how the chosen strategic option should be undertaken.
The options available are:

2Ê     a
 
2Ê     a
   
2Ê   a
 

ºoint development

A formal agreement between two or more organisations to undertake a new venture together, eg Airbus (spreading of
cost).

Internal development

  

Often undertaken to maintain the present equilibrium within the company as it is much less disruptive than an
acquisition. Another reason may be that there is not sufficient finance available for an acquisition or that the
government may prevent acquisition/merger through legislation.

  

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.

  

A formal agreement between two or more organisations to undertake a new venture together, eg Airbus (spreading of
cost).

     


2    
  

        O   O  aa   

2º a O         O  


 O   

2Ä     !


 
   
      O  aa  

2-   a       a O  O       a 


    a   
           a 

     aa  a        

2å    a                a    


   
O    O      aa 

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:

2Ê  O  
2Ê #O  
2Ê aO  

Suitability

Suitability identifies the extent to which the proposed strategy enhances the situation identified in the strategic
analysis. The following questions need to be addressed about the strategic options:

2Ê   a    a


2Ê    

2Ê O          a aa  
2Ê        
 

Feasibility

The issue of feasibility evaluates whether the chosen strategy can be implemented successfully. The resources the
organisation has at its disposal will obviously determine this. To save time simply think about the 6Ms.

‰cceptability

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.

Remember that in the examination it is unlikely that you are going to get a question, which asks you to regurgitate the
information on strategic choice in the way in which I have just explained to you. 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
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.

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. However as with strategic analysis and strategic choice it is possible
to simplify the issues in to a number of key sub-headings:

2Ê ` 
  
 
2Ê       
2Ê   
    

`esource management

This will ensure that the 6Ms are working for you in the best way possible. Budgets and other performance
management tools are likely to be used here.

Organisational structure

This will deal with issues regarding the levels of centralisation and decentralisation, together with structural form and
style of management.

Management of change

The scope, speed and style of the changes need to be carefully reviewed in order to obtain full commitment to them. A
useful model of change to remember is Kurt Lewins three-step model, which involved:

2Ê · 
2Ê   
2Ê ` 

·nfreeze

For the change to take place the existing equilibrium must be broken down before a new one can be adopted.

Change

Is the second stage, mainly concerned with identifying what the new, desirable behaviour or norm should be,
communicating it and encouraging individuals and groups to µown¶ the new attitude or behaviour. To be successful,
one should consider the adoption of the following management styles to improve the acceptance of the change:

2Ê  a  
a   O        
       a
2Ê ð   

                     
        
         
2Ê   
  Oaa a         a
        

- is the final stage, implying consolidation or reinforcement of the new behaviour. Positive reinforcement
(praise, reward, etc.) or negative reinforcement (sanctions applied to those who deviate from the new behaviour) may
be used.

Therefore to summarise what we have just said:

Strategic choice
On what basis do we decide to compete? (Porter¶s generic strategies.)
Which direction should we choose? (Ansoff¶s product market matrix, do nothing, withdraw.)
How are we going to achieve the chosen direction? (internal external joint venture.)

Strategic implementation

Resource management (6Ms)


Organisational structure (centralisation, decentralisation, specific structural form)
Management of change (unfreeze, change, refreeze)

Let us see how we can expect to get questioned in this area in the exam.

6
  #
Jerome Gulsand is the owner and chief executive of a chain of 20 sports equipment shops, Sportak. These shops are
clustered in the south of the country. The company is privately owned by the family and the freeholds of these shops,
which the company owns and which are on prime retail sites account for the majority of the assets of Sportak. The
company sells a wide range of sports equipment such as golf clubs, tennis, skiing equipment, soccer and other sports
equipment. Recently it has expanded its range to include certain types of designer sports clothing.

The company was founded by Jerome¶s father a quarter of a century earlier when he opened his first small shop. Over
the next 25 years the company grew steadily. 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 this
gave the local managers a higher degree of motivation. 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. The managers were also
permitted to develop local marketing activities, using sales promotions and publicity as they felt appropriate. 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. These methods of operation were satisfactory whilst the company was operating in
a steady growth environment. However, by late 1997 there was evidence that Sportak¶s overall position within the
market was weakening. 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. It was at this time that
Jerome took over the company from his father.

Jerome was impatient with the lack of growth. By nature he was an entrepreneur who sought growth. He was not sure
that the steady organic growth was appropriate to these conditions. His father¶s policy had been to open a store each
year, funding this growth out of current earnings. Jerome saw that the market was becoming so competitive that even
small and specialist markets were proving to be vulnerable. He believed that only the big, 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. He decided that a µdash for growth¶ was required if
the company was to achieve the critical size to survive in the market place. 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. Growth,
using other people¶s money has its advantages, but it did not appeal to Jerome. He wanted a more µhands-on¶
approach.

At about this time another chain of 15 sports shops became available for purchase. This group was in a distinctly
separate area of the country ± about 150 miles from Sportak¶s current area of operations. As the overall sports
equipment and sports wear market was still growing, the price being asked for this acquisition was rather high.
However Jerome was convinced that this was too good an opportunity to miss. He believed that Sportak needed this
expansion so as to take advantage of the profitable sales still available in this sector. However for an acquisition of
this size it was obvious that the growth could not be funded internally. Jerome assumed that he might use the freeholds
of the properties Sportak owned as securities for the finance the company needed to borrow. Before approaching the
bank Jerome discussed this issue with his accountant and offered the following ideas for his proposed expansion.

In anticipating this proposed expansion and the need to manage an enlarged group Jerome believes that it is time for a
strong and centralising leader. Recognising that the current system of product ordering is delegated to individual store
managers, he proposes to provide a centralised purchasing function based upon a warehouse owned and controlled by
Sportak. 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.

Jerome has also decided to tackle the problem of marketing, and in particular, promotion. 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. Under Jerome¶s plan it is proposed to allocate a substantial budget - 15% of sales -
to spend on press advertising and on public relations: and this level of commitment will continue for the foreseeable
future. Sports personalities will be paid to appear in all stores which will have to be re-equipped. 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. The shop managers will also be encouraged to stock more expensive lines of
products where the margins will be higher and, in addition, they will be expected to hold much more stock. A
criticism of the stores when Jerome¶s father was in charge was that they were often short of stock. Most customers
were unwilling to wait for the product to be ordered and they therefore bought from competitors¶ shops.

Jerome recognised that during this period of change Sportak might lose a number of its key shop managers. These
people have enjoyed substantial autonomy, 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. In appreciating that these shop
managers provide much goodwill and their loss would be damaging to the company, Jerome is proposing to increase
their sales-related bonuses as an inducement to stay.

Jerome fully understands that the costs incurred in the proposed acquisition involve more than the purchase of the new
shops. Store modernisationprogrammes for all the shops, as well as upgrading stock with a wider and more
sophisticated range of products, will also require funding. Forecasts of immediate future sales appear to be attractive.
Jerome anticipates that sales per store will rise by about 8% over the next year. He believes that this growth in sales,
accompanied by his more aggressive approach to retailing will enable his bold expansion plans for Sportak to be
achieved. Above all Jerome wishes to see his company, Sportak, become a national company, no longer having to
operate as a regional retailer does.

Attached in Table 1 is a summary of the figures that have been prepared by Jerome¶s accountant for discussion. Part
of the data has been obtained from trade association statistics as well as government forecasts.

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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. 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.

Part (b) would be best answered by mixing common sense with the key issues from strategic analysis, strategic choice
and strategic implementation. Common sense would tell you that the business plan should include an overview of
Sportak¶s business. More detailed information should be provided on the organisation¶s resources (6Ms), 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.

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.

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. (Use the internal, external or joint
venture model for inspiration.)

"

Hopefully you are now able to overview the strategic planning part of the syllabus in a more systematic and logical
way. All you need to remember is the key steps of strategic analysis, choice and implementation. This should then set
off another chain of words in your head, ie:

2Ê      


 
*ð '#  
      
2Ê      O
a       &   
      
2Ê   
a 
    
  
       
  
    

All that is necessary now is to apply the framework in an applied way relevant to the question asked.


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by " r
 
15 May 2007

Although not widely accepted to be included on the balance sheet, a company¶s brand names are often the most
valuable assets the organisation has, reflected in the large price premiums that are paid in takeovers for companies
which have a valuable brand portfolio. This article gives an overview of what brands do and how they affect our
everyday lives.

Think about your own spending habits and what and why you buy when out shopping. It is likely that you will often
favour a shirt with a well-known logo or tomato ketchup from Heinz. What does a brand possess then to make you
behave in this way? Brands are said to do the following:

1.Ê They act as a form of product differentiation.


2.Ê Branding leads to more acceptability of manufacturers goods by wholesalers and retailers.
3.Ê It reduces the importance of price differentials between goods.
4.Ê 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.
5.Ê Other products can be added to the brand range to capitalise on the existing goodwill ² brand extension
strategy.

#c  


    
The brand removes anonymity and adds value to your purchase. By displaying a brand on your clothing you are
letting people know that you aspire or subscribe to a certain lifestyle, eg Polo Ralph Lauren.

(     


 
   
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.

_.
         
People will often quite happily pay up to ten times the price over non-branded variety for a branded pair of running
shoes. 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.

/.       


    
 

      
Consumers will tend to buy products which they trust, and it¶s the investment in the brand name which provides this
trust.

0 
             1     

Most modern day product launches involve brand extension strategies, eg Mars ice cream from the chocolate bar,
Persil washing up liquid from the laundry detergent, as it is considered an easier way of guaranteeing success. The
downside of this of course is if the new products are associated with some bad publicity, this could have a knock on
effect on the whole brand portfolio.

Therefore next time you are out shopping be aware that you are a potential victim of a very powerful marketing tool ±
branding, and that the price premium of the brand does not necessarily correlate to an improved quality product.


  )
   


O â â 

' 

History has proved to be a rather critical judge of many mergers and acquisitions during the second half of the 20th
century. In the 1960s and 1970s conglomerate organisations were in fashion. It was assumed that management and
commercial success in one type of industry could be easily be transferred to other unrelated industries. 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, distribution or marketing. Empirical evidence has shown that many of these acquisitions/mergers did
not achieve their objectives. Returns on investment fell as did many share prices. There was a reaction to this and
during the 1980s there was a reverse process. Many companies divested themselves of some of their expensive
acquisitions.

However, at the end of the 1990s (and still continuing) there has been a renewed growth in merger and acquisition
activity. However, currently the focus is on related industries. There is an awareness that different industries may need
different skills and resources. Concentration is now on building relationships with firms operating in similar or related
technologies. Acquisition for the sake of diversification is not a major factor in these moves. These linkages vary from
strategic alliances, joint ventures to full-scale integration with mergers or acquisitions. These moves are well
illustrated with the current activities world-wide within the financial, retail and pharmaceutical sectors. Nevertheless,
there is still some evidence which suggests that these strategies do not always achieve the objectives which were
hoped for.

Possible reasons for mergers and acquisitions failing to fulfil their potential
   
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       a a 
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2Ê ‰  

New organisations are often seen to be more vibrant and responsive than older ones, which may appear to be
more conservative or bureaucratic. Often it proves difficult for management to accept this change in the speed
of doing business and decision-making. This mirrors the differences which were commonly held to exist
between Japanese and US organisations. Although the views have been exaggerated it has been argued that
until recently US corporate decision-making was centralised and very speedy, whereas Japanese companies,
unhappy with confrontation politics, sought to win over doubters and opponents within a company by
consultation. This resulted in agreed positions but often at the cost of delay.

2Ê Ä  

Again we see the contrast between the entrepreneurial firm and the supposedly more ponderous bureaucratic
organisation. There has been sound empirical evidence demonstrating that smaller firms feel threatened when
they are acquired by or are closely associated with larger companies. Financial muscle and entrenched power
can result in smaller units being neglected. Decision-making may become more remote, resulting in less
flexible and responsive actions.

2Ê c  

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. 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. Problems associated with this mix in technologies
have occasionally been solved by isolating the different factions. Highly innovative units such as R & D have
been set up away from the more bureaucratic structures, often required to administer large companies. In the
1980s IBM set up its division, which was to develop its new PC in Florida so that it had the freedom to operate
in an entrepreneurial and innovative fashion. 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.

2Ê —     

Mergers or acquisitions can bring together senior management who have operated with different styles. Some
managers are µhands-on¶ and wish to be involved in all decision-making. They are unwilling to delegate. This
is possibly acceptable in a relatively stable environment where the technology is simple. However,
increasingly many large firms, particularly those involved in mergers and acquisitions, are operating in leading
edge technologies and on a global scale. In these circumstances the external environment is likely to be
dynamic and technologies are becoming increasingly complex. It is unlikely that senior management can
operate within a highly centralised structure. 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.

2Ê c    

As organisations become more global the culture of the employees will vary considerably. Levels of education,
ability and expectations will vary. What might be an acceptable style of management in one country may be
unacceptable in another. Some employees may expect to be consulted and enjoy working in a participative
culture. Others may find this unusual and find the unexpected µfreedom¶ difficult to handle. This cultural
problem is becoming more prevalent as the moves towards globalisation increase.

‰ model for understanding how conflicts may occur as companies embrace differing cultures
   
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4.Ê c  

 the analysts who plan and control the work of others. This section could include
accountants if their major responsibilities are concerned with drawing up financial plans and controlling
expenditure.
5.Ê c 
 people who provide various internal services - PR, legal, catering. These functions are
now frequently being outsourced. These can also include R&D and even IT services.

Mintzberg has suggested that where one of these parts dominates then the organisation will lean towards a particular
structure (see Figure 1).

Where the strategic apex is powerful the organisation is often seen as an entrepreneurial structure. The leader is
mostly concerned with giving the company a sense of direction and takes control of all significant decision-making.
The leader is often the owner. This tends to predominate in younger and smaller organisations. However, as
organisations grow larger and become older they frequently take on the characteristics of a bureaucracy. The
technostructure becomes more powerful here, organising planning and controlling. 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. As organisations diversify into different markets and different technologies it proves difficult to manage these
µconglomerate¶ structures. The tendency is to divisionalise the organisation, allowing each division or subordinate
company to focus on a specialist geographical area or a specific technology. 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. The key part of the structure
here is the µmiddle line¶. These are the divisional managers who can act as local chief executive officers, reporting to
the strategic apex who are the directors at the Headquarters. Because of the differences of both internal and external
environments the only logical means of controlling these diverse divisions is by using financial measures. It is not
surprising then that such managers can become obsessed by µbottom-line¶ criteria.

Companies do not always follow this seemingly logical process from an entrepreneurial company to a machine
bureaucracy and on to a diversified company. If people orientation is dominant a company may proceed from an
entrepreneurial company to a professional organisation. This can be typified by many public sector industries such as
education and healthcare. Here the major influencing part of the organisational structure is the operating core. These
may be teachers, professors or doctors. 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, as distinct from being part
of the planning and control structure. Their function is to carry out the key work, but they are the custodians of the
expertise required. Their main preoccupation is to become as proficient as possible, providing the highest level of
quality performance available. This can, of course, conflict with an efficient level of provision. This has led to
considerable arguments about the purpose for health-care provision throughout the world. The final structure is the
adhocracy. This focuses on the need for innovation. This is a suitable organisation orientation for a firm operating
with leading-edge technology. Specialist consultancies involved in IT and scientific applications could be suitable
examples. Innovation means breaking away from the established patterns and applying new methods to problem
solving. Therefore, the innovative firm cannot rely on any form of standardisation. The innovative firm must avoid the
trappings of bureaucracies. Above all, it must remain flexible. The innovative adhocracy company usually has outside
clients and does work on its own behalf. 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.

Each of these five structures reflect the dominance of one part of the organisation and pursue the five individual
objectives of:

Ê   


Ê    
Ê     
Ê a    
Ê   

However, it is apparent that, if carried to extreme, this will generate conflict within the organisation. Just as the excess
of one virtue can easily become a vice, 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. A few examples should illustrate this point.

ðxample R

Within a machine bureaucracy there is a temptation to concentrate solely on efficiency targets. Whilst this is important
within a large firm, where waste can easily occur, it is important not to concentrate only on rules and procedures,
intended to promote order and efficiency, if this discourages innovative and entrepreneurial activity. It is difficult to
imagine managing an R&D facility in the same structured way in which one might manage a production line.

ðxample

In a professional organisation the danger is that the specialists, who have the expertise in that environment, may seek
proficiency at the expense of efficiency. No organisation, however well-meaning, can afford to ignore the financial
consequences of their decisions. This example can be illustrated by the conflicts that are occurring in the health-care
environments.

ðxample _

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. Furthermore, within
the diversified context the middle managers are being judged by their financial performance. The danger here is that
short-termism may predominate because annual financial results are all important, and therefore less adventurous
strategies may be chosen, so adversely affecting future outcomes.

From this Mintzberg model it can be seen that a dominant culture within an organisation, although seemingly
appropriate for pursuing an acceptable objective, may also engender conflict which could adversely affect the
performance of company. The culture within a company should be seen as having many strands and they all need to
be considered, and integrated wherever possible, if a company is to be successful. Focusing on only the dominant part
of the organisation¶s cultural framework can be harmful to the future well-being of the company.

It should be noted, however, that culture does change over time.Often change is incremental, but it is possible that
there could be a fundamental change in culture, particularly if there is a sudden change in senior management or if the
company faces some crisis - the result of a failed strategy or poor financial performance. Then the company may have
to adopt a less participative culture.


"        
by   
   
15 May 2007

After studying strategy implementation and change management, and reading all those exam questions on
organisations failing to implement the correct strategic choices, (or failing to even have a strategy in place at all), it
would appear that making strategic choices happen is fraught with difficulty. However, organisations may find the
change management process less traumatic if they follow the six golden rules outlined in this article.

â 

#   
    
Many strategies fail this test because they don't define this fundamental parameter, or make the need for change very
clear. However, if organisations address the following three questions, they will be well on the way to successful
strategy implementation.

1.Ê ï    '


This question sets the context for the strategy implementation and change. It has to be clearly stated and
communicated.
2.Ê ï    '
If they can't answer this question then they will have trouble persuading people in the organisation to go along
with the changes proposed. Even if they can answer the 'why' question, the answer has to be compelling and
the organisation has to communicate the answer again and again, and keep reminding their people why they
are doing this.
3.Ê ï 2    '
The third question is very important, but often ignored. Humans are very self-centred. We need to see and
personalise the change and understand what it means to us. We need to see how it will affect us personally.
What difference will it make, 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.

Answering these three questions, however, requires a lot of preparation and effort. Poorly thought through responses
will soon wear thin.

â 

(      
 
There are at least eight critical success factors to a successful strategy implementation and major change initiative.
These are:

1.Ê a powerful business case


2.Ê vision clarity
3.Ê change leadership and accountability
4.Ê change-specific communication
5.Ê increased change capability
6.Ê integrated implementation teams
7.Ê stakeholder commitment
8.Ê aligned performance and culture.

 

  
The case for the strategy and the change has to be made. It has to be powerful and compelling. The organisation will
need to marshal its arguments and clearly set out why the change is both necessary and urgent. If people don't see the
need for the change, then they are less likely to embrace it. If they see that it threatens them or that there is no positive
result for them, they are likely to resist or even sabotage the change initiative. If they see that there is no cost or
penalty if they do not change, they are less likely to change or support the change process.

 
    
   3     
Even if there is a strong case for the strategy, it has to be sold and continue to be sold throughout the implementation
process. To sell the strategy or change effectively, it needs a vision, something to help people make the strategy
tangible or real. They need to be able to picture it in their mind - to see what the envisioned future might look like.
They need to see what will be different. They need to understand how it will affect their current role, how they do
things and how they think about things.

! 
      
     
Every strategy needs leaders if it is to be successful. It won't happen by committee or by good intentions. Someone
has to take public and visible ownership and have the stature to bring others along and persuade them to commit to the
strategy. There also needs to be a strong focus on accountability and responsibility. 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?

!   


   
 
     
From the very beginning, the organisation has to communicate and sell the strategy implementation process. It must
keep reminding people why it needs to be done, and update and inform them of progress using different
communication devices. Allow for two-way communication and upward feedback - listen and respond. Make sure
they have a specific communication work stream as part of the implementation plan. People tend to think the worst if
they are not updated on a regular basis.

r
     
   
Strategy implementation and change management require special skill sets and competences. The organisation needs
to gear itself up for the change process. It needs to put the resources and skills in place to make the change happen.
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. Organisations can't totally outsource the strategy
implementation and the change 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, to
help and promote a culture of continuous improvement.

.        


Choose the implementation teams carefully. Identify the range of skills and competences that need to be involved or
represented in the process. Who will have the skills, the commitment, the energy and the power to make this change
happen? Identify who has to be on board, openly supportive of the process. Identify the potential resistors and
saboteurs and devise strategies to counter or eliminate them.

0     


The organisation needs to do a stakeholder analysis to ask:

2Ê what is their disposition to the strategy or the change?


2Ê what needs to be done to get them on board or to deal with them?
2Ê what roles do they need to play?
2Ê how can the organisation make or help them perform their roles effectively?

‰       




    
The organisation needs to get the performance and rewards system working to encourage the right behaviour and
actions. They will need to decide how people's efforts (or lack of effort) will be recognised or addressed, how success
will be defined and how it will be measured and rewarded.
â 

_           
In addition to considering these critical success factors, there is still an implementation process to be scoped,
mobilised, managed and delivered. This requires good project planning and project management disciplines over the
four key stages of the implementation process.

"#       '


This phase is all about establishing the strategic context, making the case for change, and putting the leaders and other
key change roles in place. It is also about developing an understanding of how ready the organisation is for the
change. 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?

"(    '


At this stage, the organisation needs to think through what is the most effective use of resources. It needs to consider:

2Ê the absolute priority areas that will deliver the greatest results
2Ê what is needed to make it happen
2Ê the early results required to establish momentum and convince people that change is really happening
2Ê how to prepare people for the different roles and responsibilities that they need to play.

"_     '


This stage of the process is all about how to make it happen. This involves identifying all the tasks, sequences,
dependencies etc, that are needed to make up the implementation plan. It also involves identifying what you can use or
do to smooth the implementation path, and what you can do to deal with those who are resisting or reluctant to
change.

"/       '


Here the organisation needs to consider what measures are needed to prevent people from slipping back into their old
ways, and how to make such a reverse as difficult as possible. For example, change the old systems, remove old forms
or provide reward mechanisms and incentives to staff to make the necessary changes. In this stage, the organisation
should also recognise and reward those who made the change happen.

â 

/ 2      
At the start of this article, we said that effective strategy implementation was simply about being able to answer three
key questions. The third, and a very important, question is 'What's in it for me?' This is the 'people', or what some call
the 'soft skills', side of the implementation process.

In change management literature, there are two broad views on the importance of the people dimension when
implementing major change. One view regards people as the critical component in successful change, whereas the
other feels there is too much focus on the people side. For example, Kotter and Schlesinger1 argue in their 'six
changes' approach that 'in major change initiatives, the technical side is usually handled properly with the
management structures and operational systems devised and agreed with specialists... the people side, however, is
usually poorly handled and this is why so many projects fail'.

In contrast, Michael Beer is firmly on the opposite side. He believes that too much attention is often given to worrying
about the people issues. 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, responsibilities and
relationships on them'2.

The Beer view of change really relates to the type of change the organisation is trying to bring about. In many cases,
where a major transformation is required, a complete new beginning may be needed. This is because the culture,
attitudes and style of the organisation is so much at variance with the vision. Trying to convert people to this new way
of working will be difficult, if not impossible. For example, a number of years back, when a government department
was being moved to a new regional location, a deliberate decision was taken to redesign the work procedures and
processes completely, and to recruit a new workforce who were not 'contaminated' with the 'old ways' of doing things.

Even in these situations, the people side cannot be completely ignored and effort and attention is required to properly
define the roles, responsibilities, feedback systems and work processes if the change is to be effective.

â 

 
     
    
  
An organisation needs to be very clear about what it needs to change and hopes to achieve, because the interventions
and approaches it adopts will have to be tailored to achieve these specific results. The type and scale of the change
required should determine the change approach adopted. It needs to consider, for example, if the proposed change is
just a realignment of current behaviours or a major transformation. 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. The
change style needs to be appropriate to the nature of the change desired. There are different change styles. For
example:

2Ê education and communication - works well for incremental changes


2Ê collaboration - works well when trying to win hearts and minds
2Ê participation - works when you want to get early buy-in and ownership for the changes
2Ê direction - works well with strong leaders who can provide a strong vision and guidance on what is required to
get there
2Ê coercion - works best in times of crisis when there is no alternative and time is critical.

In a major change programme, 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.

â 

4
        

Organisations need to recognise that proposed change is often resisted. According to Kotter and Schlesinger (1979)1
there are four main reasons why certain people resist change:

2Ê parochial self-interest - 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
2Ê misunderstanding - communication problems, inadequate information etc
2Ê low tolerance to change - some employees are very keen on security and stability in their work
2Ê different assessments of the situation - some employees may disagree with the reasons for the change, and also
on the advantages and disadvantages of the strategy.

It is important to examine and identify the reasons why the change may be resisted, 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, one of the first things it should do is undertake a stakeholder analysis as described in Golden
Rule 2.

Strategies should be developed to make best use of, or to counter, these positions and attitudes. Organisations need to
be prepared and organised. It is a campaign, a campaign the organisation should set out to win and, therefore, plan
accordingly. It may have to destroy some objections, bypass others, use some people as allies or advocates, and in
some cases, after doing their analysis, may have to change its strategy altogether because the numbers are against it.

 

    
Even the adoption of the golden rules does not always bring about a successful strategy implementation. From the
experience of Prospectus Strategy Consultants in working with a number of companies, the following lessons have
been learned.

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When you are on a burning platform you have two choices: remain on the platform and be burnt, or take the risk and
jump off the platform, hoping that you will survive the ordeal. Bringing about major change needs the creation of a
burning platform, where there is no real alternative but to jump into the change process. The arguments for the change
have to be compelling and clear. They can be carrot or stick based arguments, but it has to be made clear that no
change is not an option.

The arguments have to be real. There is no point claiming the platform is burning if people can't see the flames or feel
the heat.

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There is a need for continuous communication flows throughout the change process. But the organisation also will
need to tap into the culture and atmosphere and tailor its communications accordingly. It needs to think about the
values, the rituals, and the working style of the organisation when designing its implementation approach and
communication strategy.

 _    


Talk is easy. Strategies are often rightly accused of being highly aspirational with lots of 'nice to haves'. So it is
important to get momentum going in the implementation process. The stakeholders will be looking to see action and
progress being made. Those early quick wins are important in demonstrating real intent and building morale.
Communicate these early wins widely, but don't rest on laurels, as the organisation has to push on and tackle the
bigger tasks.

 /  



When organisations go through a strategy development process, or when announcing a major change initiative, an
important window of opportunity arises. People are expecting something to happen, so organisations must move
quickly and use this window to put the change framework in place and start making changes.

      


Effective implementation requires up-front planning, an implementation infrastructure and resources, strong project
management, and a robust progress reporting system.

 4 


    
With any major strategy implementation or change initiative, tough decisions have to be made, and not just only at the
start of the process when everybody is geared up and expectant. When an organisation starts to shy away from these
hard choices, momentum slows. If you are the implementation manager in the process, you will need to prepare and
support senior management in taking those decisions. Let them know why they are necessary and urgent, and
communicate the consequences of failing to make them.

 + 5    



In any major strategy or change transformation, there are usually six to eight key activities, which have the most
impact and deliver the greatest results. Organisations need to identify these important projects and prioritise them in
terms of resources, time and spotlight. They need to choose the activities that will have the greatest impact. Good
progress on these will make it easier to move on to the others.

 
 
Strategy implementation is not easy but it can be achieved successfully. It requires the right context to be established,
good planning, strong resolve, hard work and a focus on results. Also, by applying the golden rules and learning from
the insights above, the chance of success should improve considerably.

 

1.Ê Kotter J and Schlesinger L, Choosing Strategies for Change, HBR, March 1979.
2.Ê Beer M and Nohria N, Cracking the code of Change, HBR, May 2000.
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The  â for Paper P3, jjj jj, features a number of models to aid Information System (IS) strategy
planning. These models can be used to assist in identifying and assessing strategic opportunities, or diagnosing and
appraising the current strategic situation.

Some of these models are known by acronyms, such as the PEST or SWOT checklists. Some are represented as
matrices, such as the Boston Matrix. Others are diagrammatic, such as Porter's 5-forces or the Value Chain.

At Paper P3, you should be both familiar with the models in their traditional form, and be able to apply them to
different scenarios. Although the textbooks describe what could be called the 'classical' application of models, the
value of the models often lies in their flexibility. To illustrate this, two well-known models are discussed in this article
- PEST and Value Chain - showing how they can be used to reflect different situations.

PðST

PEST (Political, Economic, Sociological, Technological), also known as SLEPT (including Legal) and PESTLE
(including Legal and Environmental), represents the factors in the wider environment to which an organisation needs
to react. The Political, Economic, Sociological, and Technological elements are usually applied at a macro-level, to
the world at large. They can, however, be scaled down to show internal, organisational influences on a given target
department.

Table 1, at the end of this article, illustrates the macro and micro-levels of PEST, with examples at an organisational
and departmental level, indicating the factors that an analyst may want to examine.

PEST is not only relevant to environment analyses - it can also be used to help assess the feasibility of a proposal for
business change. Thus a business analyst, when considering a solution in a department or division of a company,
might perform a PEST analysis. The analyst would examine the organisational strategy, board make-up, and
organisational structure for political influences. Economic factors would include the budget allocation, cross-charging
policies, and accounting models. Sociological factors might be the prevailing organisational culture, or the likelihood
of a change in work practice or redundancies. Technological considerations would cover the capability of the current
infrastructure to handle the new system, and the compatibility of different components of the system.

As can be seen, used in this way, the PEST model draws more on the internal, departmental level experience. By
focusing on internal factors, the analysis allows us to see whether or not the proposed solution will be compatible with
the company's present position and expectations. The model itself has not been changed by using it in this way, but it
has demonstrated flexibility in its application.

The value chain

Another model that can be used to illustrate flexibility in application is Porter's Value Chain. Most textbooks describe
the Value Chain in terms of the handling of physical resources.

In itself, 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. Through this analysis, the company can identify where costs are too high, or are
reasonable, and also understand where and how differentiation from competitors can be achieved. In the context of
managing business information, the company can also decide where information systems can help reduce costs and
deliver competitive advantage.
As mentioned above, in most textbooks the Value Chain refers mainly to the handling of physical goods, often in a
manufacturing or retail context. In Example 1, only the primary activities are considered, as 'backroom' support (or
secondary) activities are similar, regardless of the type of organisation.

Example 1 - Handling physical goods

Inbound logistics may be met by automated warehouse procedures for manufacturing, or by a dedicated transport fleet
for shipping stock into branch stores.

Operations would be controlled by a manufacturing system, such as a production scheduling system, or by a stacking
and selling process in a retail business



Outward logistics could be handled by a delivery fleet, a transport scheduling system or a collection point.

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Although Porter defined the Value Chain as pertaining to both products and services, most textbooks simply describe
the physical aspects, as reflected in the descriptions above. The terms 'Inbound logistics' and 'Outbound logistics' give
emphasis to the idea of physical movement. Services, however, are less tangible, so we need to examine whether the
Value Chain model can still be applied. Service sectors include financial services, travel and tourism, marketing, and
advertising.

At the outset, we need to be comfortable with what the model portrays. The core activities can be seen as a simple
process model, as shown in Figure 2: Simple process model.

Any service must have identifiable inputs and outputs. Inbound and outbound logistics refer to the input and output to
and from the process part of the system. Our other primary activities of marketing, sales and service also feed into the
process, but not in the same manner, hence their separate boxes on the process model.

Considered in this way, we can reconsider our view of the Value Chain as only appraising the cost of handling
physical goods. 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. The source for this is a study undertaken by
Woudstra and Powell in 1989.

Rather than talk in terms of logistics, we need to consider what represents the inputs to, and outputs from, the process.
One way to approach this is to list some of what we (ie the business) consider to be the core activities, and see how
they map onto the process model. Typical core activities undertaken by an online learning provider will include:



        
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Figure 3 suggests how these may populate the Value Chain. Although the term 'logistics' is there, think more in terms
of what is input to, and output from, the process.

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Once the activities have been identified and the model populated, the business can analyse the costs of each element,
as in the traditional model.

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. In the current economy, where service industries generate as much money as
manufacturing, it is important to be able to recognise the primary activities in these sectors, and how they can be
appraised.

Porter's Model is flexible enough to accommodate all types of services, as long as the analysis is not 'frozen' by the
rigid terms used in the original model.

Conclusion

The various models cited in the Paper P3  â are described in their original form and context. However, the
evolving business environment and the range of business strategies currently used means that these models should be
used with thought and flexibility. Their use is intended as an aid to thought, not a substitute.
Further reading

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Table 1: Macro and micro-levels of PEST

Political
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Government policies, possible changes of government, international law, industry regulation.

 

Company policies, organisational strategy, change of CEO or Board members, organisational structure and lines of
control, management style.

ðconomic
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General state of economy/stock market, level of exchange rates, interest rates, share prices, level of disposable income
in the marketplace, volatility of marketplace.

 

Budget allocations, cross-charging policies, stage of the financial year.

Sociological
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Fashions, trends, social priorities, demographics.

 

Organisational culture, work practices, expected working hours, flexibility of work time, level of autonomy among
staff.

Technological
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New technologies, whether information or production, such as wireless, broadband, portable.

 

Technology owned and used in-house, organisational infrastructure, whether IT is developed in-house or outsourced,
availability of standard packages to suit the department's tasks.
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This article describes and discusses a general framework that may be adopted when developing an Information
Systems strategy. This proposed framework focuses on a five-stage model. Examples are provided detailing possible
tools and techniques that can be adopted at each stage. It spans the past, present, and future and incorporates both a
planning and a review stage. Each stage poses a single question:

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This approach to developing an Information Systems strategy systematically focuses the mind on the five key stages
in turn. First, what has been learnt from experience in terms of successes and failures? Second is a critical analysis of
the current situation. 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, strengths
and opportunities whilst overcoming weaknesses and threats. The third and fourth stages are iterative both within and
between each other.

Finally the whole process is reviewed, which completes the cycle and provides an important part of the input into the
first stage of the next cycle.

ï_?ǯ ïhere ïe ïere?

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. The risks of failure are high and the causes may be Political, Economic, Social or
Technological (PEST). Before embarking on a project it is recommended that a full PEST analysis is conducted. 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.
Each must put sufficient resources and time into the project to give it a chance to succeed, otherwise it will fail.

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'. Otherwise unforeseen details can subsequently determine success or failure. One
survey suggests poor co-ordination is the most common cause of failure, contributing to 74% of all failed cases
researched.

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 is especially true when analysing and specifying user requirements. The cost escalation of
correcting poor specifications when the system is operational has been estimated as between ten-fold and one
hundred-fold.

If any of these three conditions is lacking, then the IT project will probably fail. At best, its costs and timescales will
escalate dramatically.

Unfortunately, senior management does not always understand these lessons. Education and training are key to
improving their understanding of the issues involved and their role in exploiting IT successfully. 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.


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Workshops or discussions should also pave the way for a critical analysis of 'where we are' with respect to the existing
information systems, in terms of both 'good and bad' news. This helps to ensure that the former will be retained and
the latter will be corrected when designing a new or improved system. Strengths, Weaknesses, Opportunities and
Threats (SWOT) analysis can be a useful technique to help ensure that criticism is structured in a systematic and
comprehensive manner. A suggested framework is shown in Figure 1, as a 4 x 4 matrix. The matrix focuses on one set
of issues at a time. The four columns are headed Strengths, Weaknesses, Opportunities and Threats. The first two are
internal to the domain of the information system and the latter are external to it. The four rows represent the main
resources that are exploited by IT projects. These can be further classified into components to assist in the critical
analysis of the existing systems. SWOT analysis yields a framework for conducting, communicating and agreeing a
balanced criticism of the present situation and identifies both short-term and long-term weaknesses that need to be
resolved.

The SWOT matrix can be adapted to meet the particular requirements of organisations and their IT projects. Usually,
a first step is to construct the model with senior management and to identify the µgo/no go¶ areas. When planning an
IT strategy, it is vital to understand the present situation, because this will affect the tactical plans to achieve the
strategy. To plan a route from A to B, it is helpful that we know where A is.

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Planning an IT strategy requires that a business strategy has already been planned or is simultaneously being planned.
The business objectives and constraints may drive the IT goals or alternatively IT developments may enable the
business strategy, ie the Internet and its accompanying technologies may enable a strategy of globalisation. A target
marketing strategy of focusing competitive products and services against customer segments may generate the IT
applications portfolio. The business budgets and priorities, based on competitive threats or return on investment
(ROI), may dictate budgets and priorities for the IT strategy. An IT strategy cannot be planned in isolation from a
business strategy - the two are inextricably intertwined.

In order that the company can benefit from technological innovations that serve the business process, an element of
balance must be achieved. 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.

IT involves many stakeholders. As IT becomes strategic, firms need to recognise the multiplicity of stakeholders
involved and organise themselves to manage stakeholder relationships and to influence their IT environment. By
ensuring that the focus of development is balanced, systems and technology can be implemented in a way that
provides benefits to all of the stakeholders, internal and external to the organisation.

A key issue in setting IT goals is to establish an appropriate balance between cost, quality and lead times. However,
many companies are preoccupied with lead times and believe speed is the essence, 'stuff IT in quick and sort IT out
later'. Too many senior managers are preoccupied by the short-term of this year¶s performance and competitive
pressures; to them, software quality, or even cost is not the main concern.

However, in most cases, the trade off between cost, 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. The answer often lies in getting the IT detail right. For
example, costs and times can often be measured in pounds or months (albeit after the event), but the quality of
information systems cannot generally be quantified. This is because 'quality' is multi-dimensional and embraces such
intangible and conflicting objectives as reliability, flexibility, robustness, security, portability, accuracy, compatibility,
maintainability, efficiency, and so on. Each system may have its own set of quality parameters or a different hierarchy
of measurement.

In addition to the requirement to balance IT objectives, there is the need to drive the business objectives through to
detailed IT objectives. Target information systems also need to be designed that will support the strategic business
plan. It is important to recognise that this target is a moving one, as detailed below.

A strategic plan may require a long time to implement, perhaps two or three years. Thereafter, possibly a number of
years of operation are possibly needed to reap the benefits of the initial investment - the planning horizon may be
several years or so. During this time, the business requirement may well change. If not, the technology will certainly
change, and tomorrow¶s technology will definitely be physically different from today¶s. How then, 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, capacities, speeds,
reliability, facilities, and so on of emerging technologies. A nanosecond is a lifetime in IT. However, what we can do
is identify logical requirements, continually track the emerging technologies and exploit new products to achieve the
IT objectives as and when they become available and proven.

Thus, identifying 'Where We Want To Be' requires that a business strategy and an IT strategy are developed in unison.
Thereafter, 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.

(GT)
?ǯ Going To Get There?

The tactics of µGoing To Get There¶ which are adopted to implement an IT strategy should take into account:

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Bearing in mind that the planning horizon may be measured in years, the crucial, tactical choice is between a single,
total implementation of the overall IT strategy, or a phased one. Most but not all organisations opt for the latter
because:

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Implementation tactics should be designed to achieve the appropriate phasing, as illustrated in Figure 2, 'the staircase
approach'.

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Each step in the staircase represents a delivered application of IT resources (hardware, software, database,
telecommunications etc). Their ascending sequence often commences with emergency fixes to short-term problems,
then to build any necessary infrastructures to support the introduction of information systems, in sequence of
decreasing benefits, until they comprise a total, integrated system. Of course some steps may be climbed
simultaneously and there may even be several staircases to ascend, but a phased approach helps to focus on 'the right
applications being implemented at the right time and in the right sequence'.

The systems lifecycle is usually adopted for each step (ie an application or project). 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. Thus, the staircase is initially designed to support the business plan and may then be
adjusted to satisfy information systems and IT constraints. Further adjustments will also be made during its ascent due
to business and IT dynamics as previously mentioned.

ï?ǯ ïhere ïe ïent ïrong?

Until we accept that the development of the information resource is an on-going, purposeful and systemic activity - we
will remain the worst sort of fools - experienced and ignorant. Success and failure are emergent rather than
engineered. The primary focus of the management of information systems should be to learn from and improve our
products and practices.

During the last decade we have seen a blurring of industry boundaries, where banks sell stocks, shares, insurance and
mortgages, and credit cards are issued by trade unions and car manufacturers. Wholesale deregulation has occurred in
banking, air-transport, communications and the Stock Exchange.

The pace of business has increased, with a global 24 hours a day seven days a week electronic marketplace providing
instant access to information. We now inhabit a global business community, dominated by international companies
trading in a global (electronic) marketplace. The µFirst World¶ is an information society with most of its workforce
employed as knowledge workers, thus increasing the complexity of management in a business environment that is
characterised by complexity, simultaneity, asychronicity and decentralisation.

Computers, once seen as constraining and controlling, are now end-user tools seen as liberating and empowering.
There is general recognition of information as a key resource or the µoil of the 21st century¶. Information is a key
determinant of the wealth of nations as world markets depend on it. Information is considered to add value to, and
differentiate products and services. New working practices such as desk sharing, home working, individual learning,
job sharing, contracting, and the use of satellite offices are changing the nature of work.

The world of the software systems developer is changing at breakneck speed. Each new generation of Information
Technology supports a new and improved generation of Information Systems. Information management is broader and
more complex and less certain a discipline now that it has ever been.

The term µsoftware crisis¶ was coined during the NATO software engineering conference of 1968 to indicate that
software projects often ran late, cost far more than expected and frequently did not meet the needs of the client. Some
seven years later, Fred Brooks reminded us that the only unforgivable failure is the failure to learn from our previous
mistakes, and yet the software crisis persists. Software is still difficult to develop and often fails to meet user
expectations.

A key lesson to be learned from the engineering paradigm is that failure is the key to success. Transferring the
approach of learning from your mistakes from say bridge building, where the cycles of failure and success take many
years, to systems strategy and software development where changes happen almost monthly, is difficult. As a general
principle, however, it is sound.

Systems professionals and their clients have been making the same mistakes for decades, when as Brooks reminds us
³only an idiot makes the same mistake twice´. At the very least, organisations should document and objectively
analyse their major information systems failures so that they and others may learn the key to success.

Strategic Tools and Techniques

A series of action research projects, conducted by the authors, spanning over a decade, has seen the emergence of an
approach to embedding a number of strategic tools and techniques in a simple cyclical framework. These projects
have involved strategic, tactical and operational systems in education, health care, construction, banking and other
areas of the private sector. The authors have attempted to define a general purpose framework of open utility.

The research has involved the adaptation and use of a recognised framework for the development of IS strategy. This
strategic framework supports the use of a wide range of established strategic tools, which may be used in one or more
stages of the framework as appropriate.

The use of Failures Theory, SWOT analysis and PEST analysis has been described here by way of example, but many
other tools, techniques and methods may also be usefully employed. Many of the well-established models and
methods were originally developed to describe or to model organisations as a whole. In the current business
environment, where organisations often have multi-generation system platforms and applications, they may be more
appropriately employed at the application or project level.

Examples of appropriate tools, techniques and methods include:

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These, and other tools, techniques and methods may be used within the framework given, to focus the mind on five
key questions in turn. First, what is the historical background to the change process and what, in broad terms, has been
learnt from experience in terms of successes and failures? Second, what aspects of the current situation are likely to be
relevant to the strategic decision making process? Third, what are the objectives of the change process? Fourth, how
can experiences, strengths and opportunities be exploited and weaknesses and threats overcome, in order to progress
towards the stated objectives? Fifth, 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.

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This article will discuss the relevance of the three Cs (commitment, coordination and communication) when
developing and implementing information systems (IS). Empirical research and experience suggest that these three
conditions are necessary, at the least, to implement IS successfully. However, the successful application of the three
Cs alone will not guarantee a successful information systems project, though it can be concluded that unsuccessful
application of the three Cs may lead to possible project failure.

Information system projects can fail for many reasons. Hirschheim (1985), for example, distilled approximately one
hundred references into a taxonomy of information systems failures, which is essentially a PEST analysis covering
political, economic, social and technological factors.

Bray (1993), reports on: 'the very public failure of the computerised command and control systems at London
Ambulance Service (LAS)'. 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. Almost immediately, LAS's chief
executive resigned and the system was moth-balled.' The reported reasons for this failure include:

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Bray (1993) also echoes Strassman's (1985) failure factor that 'if you automate a mess, all you get is a faster mess'.

Rockart (1979) emphasised critical success factors as 'the limited number of areas in which results, if they are
satisfactory, will ensure successful competitive performance for the organisation.' In summary, 'they are the few key
areas where things must go right.' 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, as follows:

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Empirical research and experience suggest there are at least three broad conditions necessary to implement IT
successfully:

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If any of these 'three Cs' are lacking, then the project will probably fail. At best, the cost and timescale will escalate
dramatically.

However, these conditions alone are not sufficient to guarantee success. It is possible a technological mistake could
still cripple the project. For example, 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.

Constructing a business case for any investment in information systems is generally concerned with convincing the
organisation(s) involved that the investment is worthwhile, normally on commercial grounds. It is generally held to be
important that the implications of any investment are clearly understood prior to any such investment being made.
Justification for an investment may take many forms.

A simple cost-benefit analysis might involve such techniques as:

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Such techniques deal quite well with tangible costs and benefits, either of a one-off or recurring nature. They are much
less useful for analysing 'intangible' or simply 'unquantifiable' costs and benefits.

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, 1992).

In recent years it has become more common that investments in technology have followed a broad strategic thrust,
whereby the formal business strategy drives and informs strategies for information technology, information systems
and information management (Earl, 1990).

There are a number of ways in which the business strategy may be linked with the strategies for IM, IS and IT. One
common approach is to use the overall business strategy to define the organisation's 'information needs' as the
foundation of information, data, and application architectures. Together these help define an appropriate technology
architecture.

Another way of using business strategy to drive and inform the IM, IS and IT strategies involves consideration of
'competitive advantage'. A range of strategies may be employed in order to differentiate a product or service in a
competitive market. Generic strategies may be employed to reduce cost, differentiate the product or service offered or
to focus on a market niche (Porter, 1980).

For example, 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. Information systems and technology
can help organisations to break down organisational, geographic and time barriers to promote themselves in a global,
instant, twenty-four-hours-a-day electronic marketplace (O'Brien, 2001). In commerce, the electronic world is
becoming increasingly dominant over the physical world. The 'first world' is an information economy.

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'. Strategic change is frequently viewed as an attempt to 'counter
the competitive force, solve the problem or close the gap' (Senn, 1990).

It is in 'closing the gap' that the three C's are of paramount importance.

The Three Cs Commitment

Commitment must exist from top management down and across all management levels. It is also important to get all
users that are involved or affected by a project to become committed. A factor demonstrating commitment from senior
management is the allocation of resources in terms of people, money, time, information and technology. The
management team are generally the people who control the financing of projects. Their level of support can dictate the
success or failure of any project. A project must be seen as worthwhile and relevant, with substantial benefits to all
concerned. It therefore becomes essential that all interested parties be taken on board from the outset. The resources of
the users will be necessary in the planning, development, testing and implementation stages of any IS project. Gaining
their dedication and joint ownership of the project ensures that they are equally responsible for its eventual success or
failure.

Much has been written and said about user involvement/participation in IT projects. However, systems have failed
despite generous helpings of user involvement and participation because commitment was lacking. Somebody is
committed if:

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The main reason for many failed projects is the lack of top management commitment - they have to commit
themselves and lead from the front. If they do not believe in the project and its benefits, then why should anybody
else?

Coordination

Coordination is a critical element for successful project implementation. A disorganised project will take considerably
longer to achieve success, and normally at a greater cost than an organised one will. This increases the likelihood that
such a project will never be completed. A disorganised project will have constantly moving targets, which are seldom
attained. 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, using the right resources at the right time. Coordination, like commitment,
needs to take place from the beginning of a project. If control is not gained early, it is very difficult, time consuming
and costly to re-gain, if indeed it can be. The important elements, which are going to influence the project need to be
identified from the outset. Omission may cause disaster during later stages.

Control is vital to prevent slippage in terms of timescales or budgetary allowances. 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. Continued slippages can go unnoticed. All too soon one day's loss becomes a week's loss, and thus becomes a
month and so on. There are a wide variety of methods and techniques for controlling projects. Many have software
support, including: Project Evaluation and Review Techniques (PERT), Gantt charts and Critical Path Analysis
(CPA). Constant review of project progress should take place to ensure the early detection of divergence from the
plan. Remedies can then be employed to rectify these deviations where appropriate and thus avoid failure or costly
problems.

Coordination is an integral part of the 'going to get there' (GT)2 phase. (Bakehouse et al 2003). The '(GT)2 staircase
approach' is outlined in Figure 1. Each step in the staircase represents a delivered application of IT resources
(hardware, software, database, telecommunications etc.). Their ascending sequence often commences with emergency
fixes to short-term problems. Necessary infrastructures are then built to support the introduction of information
systems in a sequence of decreasing benefits. This is undertaken until they comprise a total, integrated system. Some
steps may be climbed simultaneously and there may even be several staircases to ascend. A phased approach helps to
focus on 'the right applications being implemented at the right time and in the right sequence'.

6 
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Communication

The right people must communicate the right information at the right time and in the right media in order to
successfully implement an information system. This is especially true when analysing and specifying user
requirements. The cost escalation of correcting poor specifications when the system is operational has been estimated
as between ten-fold and one hundred-fold, i.e. the penalty for incomplete and incorrect specifications raises costs by at
least an order of magnitude. Communication is essential in developing a system for the benefit of all concerned.
Through good relationships and communication with all interested parties, obstacles within, among and between them
can be avoided in the planning and implementation of an information system. Communication is a two-way issue.
Historically, IS personnel have believed they have fostered good communication with users by issuing instructions
and information about proposed systems. All stakeholders need to be kept informed and be encouraged to become
actively involved throughout the whole process. IS projects often suffer severe communication chain problems
between the various people involved. The chain is only as strong as its weakest link.

When all people concerned communicate perfectly in some common language, semantics remain a key issue. For
example, English dictionaries define: White = Pale = Dim = Obscure = Dark = Black. The communication chain
involved in IS projects is often long and complex. Users may ask for a white system only for developers to provide a
black one.

Conclusion

This article has attempted to highlight the important contribution the 'three Cs' can make to the successful
development and implementation of information systems. 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. The key question they must answer is 'What are we using technology for?' One answer is
efficiency. Another answer is effectiveness - 'how can we transform our business?' Between these two strategies lies a
spectrum of balances between efficiency and effectiveness.

The choices to be made cut across organisational boundaries (such as marketing, operations, finance, legal, human
resources) and so can only be made by top management. In many of the projects studied, once senior management had
decided how 'to do the right business right', commitment, coordination and communication were achieved much more
easily.

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.

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10 May 2007

The syllabus for ACCA Qualification Paper P3, jjj jj 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. This role is underpinned by IT solutions but students need to appreciate the strategic importance of IT. The
syllabus has three whole sections on strategic choices and strategic action. It also has a section on information
technology and how it is used to implement strategic plans. 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.
The syllabus requires students to apply knowledge rather than simply testing their ability to recall information.

In the determination of how companies use IT there are many models available to us. These are powerful tools, which
can be used to analyse how IT can be used strategically. The purpose of this article is to explain some of the more
popular models students will come across in their studies.

 9   


Professor Richard Nolan, of the London School of Economics, hypothesised in 1979 that the way organisations have
introduced IT and IT applications into their organisations can be viewed as a series of stages, somewhat similar to
Greiner¶s Life Cycle of Organisations, ie the idea that organisations go through defined periods of growth and crises.
The six stages are as follows:

"#*.    The organisation has no IT systems at all. 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, Volume of Processing and Accuracy). The individual is then freed up to use
their skills in a more analytical way, using the information from these systems for decision making.

"(*   Following the initial deployment of IT departments and individuals see the advantages arising
and begin clamouring 'Me too'. Soon IT applications spread like wildfire around the organisation. At this stage, little
'islands of automation' develop, as some sections and work processes are automated and others are not, often
depending on the level of IT awareness of the head of that department or section.

"_*  The IT spend increases and the organisation begins to realise it has a potential problem. More and
more users are demanding IT applications and hardware. No attempt was made to show the link between cost and
benefit and, therefore, the organisation puts a moratorium on any new spending. Controls are introduced, typically
budgets for hardware and software purchases, the use of standard software applications and the use of a centralised
purchasing department for IT hardware and software purchases.

"/*.   The organisation now realises the need to link the islands of automation that developed during
the contagion stage. Different departments are using different applications. The stock application cannot talk to the
sales application with the result that a sale has to be entered twice, once to update the debtors ledger and again to
update the stock records. This duplication of data causes errors and unnecessary time wasting. In addition, hardware is
not compatible throughout the organisation.

This phase involves networking the organisation¶s IT hardware and software to ensure that all systems and
applications can talk to one another.

"*‰   The organisation now realises that the information it has is a key resource.
Information needs to be accessible by all individuals at all levels and that information has to be in a common standard
format, understandable by all. This phase involves the building of the organisation¶s database, possibly even an
intranet or an extranet.

"4* 
  This is the final phase and at this point, information is used as a key resource and as a source
of added value. 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. The information flows in the organisation mirror the real
world requirements of the organisation.

The organisation fully integrates IT as a resource and manages it as effectively as its other assets:

a.Ê IT is subject to long-range planning.


b.Ê IT is used as a source of competitive advantage.
c.Ê There is heavy use by users and managers, with IT professionals performing a support role.
d.Ê The focus is on value not the technology.

The interesting thing about Professor Nolan¶s hypothesis is that whilst it was developed over 20 years ago, it can still
be relevant to what organisations are doing today and how they use IT. Professor Nolan suggested that few companies
were at the final phase and his view on that point is probably still as true today.

It could be argued that the model is too simplistic, as it would seem to suggest that an organisation could not exhibit
the characteristics of a number of stages concurrently. This is patently not the case.

A good use of Nolan¶s hypothesis is to consider where your own company is in terms of this life cycle. You can then
postulate where the company is headed and, hopefully, come up with the appropriate strategies needed to guide the
organisation successfully to the final phase. Note, however, that Professor Nolan gives no guidance as to how long
each stage might last!

From an exam standpoint, you should be able to identify where any particular organisation currently stands from the
information given to you by the examiner. It is important that you then back up that observation by referring to the
relevant theory.

6 :  1c " â 


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 be
used simply to support current operations. It might be a vital part of data processing, where the alternative, ie to revert
to manual methods of processing, is simply unthinkable. 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.

McFarlan and McKenney, in 1983, devised a very useful grid for assessing a company¶s use of IT ± see Figure 1.

6 
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The grid has four quadrants built around two straightforward questions:

a.Ê How important does management feel the current IT systems are to the company?
b.Ê How important does the company think future developments in IT will be for the company, ie the impact of
future IT developments on its way of doing business?

Depending on the responses to these questions, a company can be placed in the four quadrants as follows:

1.Ê Low Current: Low Future Impact. IT has little relevance and simply supports existing processes.
2.Ê Low Current: High Future Impact. IT will feature more on the business agenda in the future. 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.e. IT will be a key feature of future strategic planning. It may not have played such a role in the past.

The example of the supermarket industry is interesting. The retailing industry is often given as an example of how IT
has become critical to operations. EFTPOS technology (ie Electronic Funds Transfer at Point of Sales) is the scanning
technology we all see at the checkout counter. However, this technology not only indicates the price of the goods
being purchased and computes the bill, 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). The
supermarket can also use the data collected from loyalty cards at the point of sale for marketing purposes. Payments
both from the customer and to the supplier are automated electronically. So IT is a key part of operations.

However, 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. Whilst EFTPOS technology is in the factory role, the retail
industry can see major changes in the future in the terms of how we, the consumers, do business with the industry,
ie e-commerce and the development of web-based retailing, home shopping etc. Consequently, the business model in
the future will be completely different and IT will have a new role to play. Therefore retailing is placed in the
turnaround quadrant.

3.Ê High Current: Low Future Impact. Here IT is said to have a Factory Role. It is important in terms of day-to-
day 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. Here, the key issue is the maintenance of existing systems.
4.Ê High Current: High Future Impact. In this quadrant, 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. IT is said to have a
strategic significance. 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). The role IT strategy plays in the
formulation of the overall business strategy is critical.

It is likely that most questions you will face in this paper will involve companies that are either in the turnaround or
strategic quadrants. 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. This shows the application of your knowledge to the
specifics of a question.
For companies in the factory role, the key issue will be the security of their systems, back-up procedures, standby
arrangements and disaster recovery plans.

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). Take the example of a car manufacturer. The automated payroll system would be
a good example of the support role. It would be a pain if the computerisedpayroll were to fail but it would be possible
to revert to manual methods of processing. Payroll has no strategic impact. The software governing Computer
Integrated Manufacturing might be viewed as having a factory role, ie it has key operational implications but the
technology is routine and no major developments might be expected. In the turnaround role, we might classify EDI
links (Electronic Data Interchange) and the software governing the links with their suppliers. EDI technology has been
around for some time but major developments might be on-line and web-based procurement and the development of
extranets. In the strategic role we might place the manufacturer¶s Customer Relationship Marketing (CRM) software.
The interface with customers has current strategic significance (ie it is mission critical) but again developments in e-
commerce and the way the customer deals with the manufacturer (i.e. possibly by-passing the dealer and buying on-
line) means that changes in this area need to be carefully monitored by the company.

Joe Peppard provides an alternative version to the Strategic Grid (the Applications Portfolio). The same logic applies.
He calls the Low Future: High Current Impact ± 'µKey Operational' and the Low Current: High Future Impact ± 'High
Potential'.

ï    


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From an examination of McFarlan&McKenney¶s Grid, it should be obvious why a company should have an IT
strategy. If a company is on either the turnaround or strategic quadrants of McFarlan¶s Grid, then obviously a
company should have the appropriate strategy to enable it to plan for future developments. Even if it is in the factory
quadrant, 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.e. have a back-up or
recovery plan).

!9  
Professor Earl of the LSE provides a useful list of nine reasons as to why a company should have an IT strategy.
Briefly, they are as follows:

1.Ê IT involves high costs.


2.Ê IT is critical to the success of many organisations.
3.Ê IT is now used as part of the commercial strategy in the battle for competitive advantage.
4.Ê IT is required by the economic context (from a macro-economic point of view).
5.Ê IT affects all levels of management.
6.Ê IT has meant a revolution in the way information is created and presented to management.
7.Ê IT involves many stakeholders, not just management, and not just within the organisation.
8.Ê The detailed technical issues in IT are important.
9.Ê IT requires effective management, as this can make a real difference to successful IT use.

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. Briefly, these can be summarised as follows:

a.Ê Competitors, suppliers and customers gaining advantage.


b.Ê Corporate objectives becoming unachievable due to systems limitations.
c.Ê Systems are not integrated thus causing duplication of effort, inaccuracy, delays and poor quality management
information.
d.Ê Systems¶ implementations are late, over cost and fail to deliver expected benefits.
e.Ê No means exist to establish appropriate IS/IT resource levels, to evaluate investments and set priorities.

It is important to note that very little credit will be given to students who simply recite Earl¶s nine reasons without any
application to the question set. The approach should be to identify, from the information given in the question, 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. That is the point of studying these models. They help our understanding
of the issues and are a useful starting point for a consideration of the problems and possible solutions.

!2‰
 â 
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 might be the
case that the systems used are not suitable for the task or, alternatively, that the systems are actually over specified i.e.
they are too elaborate for what is required.

Either scenario is not a good one from the company¶s point of view. Professor Earl¶s Audit Grid provides a useful
method of assessing the quality of a company¶s systems. Refer to Figure 2.

6 
(

Again, two questions are asked for a determination using this model:

a.Ê Business Value. How does the company assess the value of IT systems in terms of ease and frequency of use.
The system users make this evaluation.
b.Ê Technical Quality. How good are the systems in terms of cost, reliability and the need for maintenance. The IT
specialists make this evaluation.

The four quadrants can be described as follows:

1.Ê Low Technical: Low Business. The organisation really needs to ask itself why it has such a system at all.
Divestment may be the best approach.
2.Ê Low Technical: High Business. Here, the end users perceive that the systems can add value to their work but
are dissatisfied with poor technical quality of those systems. The organisation needs to renew the IT systems if
users are to be kept satisfied.
3.Ê High Technical: Low Business. 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. It adds very little in terms
of business value. The organisation needs to reassess why it has invested in IT resources in this way. (Did the
IT specialists suggest the investment i.e. the technical staff rather than the end-users drove the IT strategy?)
4.Ê High Technical: High Business. 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.

Again, from an examination viewpoint, students should be able to assess where a given company¶s systems lie on this
grid from the information given in the question. 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.

r2â  " 
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. This is one of the strategic
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). From the IT strategy viewpoint, students should be able to see
how IT could support either of these methods of competition. Figure 3 details possible IT applications.

6 
_
      
r
    2Ê Production engineering systems
2Ê Product control systems
  2Ê C.I.M
2Ê R&D databases
2Ê C.A.D
2Ê Speed of development
2Ê Co-operative working

0   2Ê Processing engineering systems


2Ê Inventory management 2Ê C.A.M
2Ê Process control systems 2Ê Quality assurance systems
2Ê Labour control systems 2Ê Value system links
2Ê Value system links

  2Ê Sophisticated marketing system


2Ê Streamlined distribution system 2Ê Marketing databases
2Ê Modelling capabilities 2Ê IT displays/promotion
2Ê Centralised control system 2Ê Telemarketing
2Ê Competition analysis system

" 2Ê Differential pricing system


2Ê Sales control system
2Ê Office-field communication
2Ê Advertising monitoring system
2Ê Customer ± sales support
2Ê Strict incentive ± monitoring
2Ê Dealer support system
system
2Ê Value system links

‰   2Ê Cost control systems


2Ê Planning and budgeting systems
2Ê Office automation for staff
reduction

r26  


This model, shown in Figure 4, can also be applied to a company¶s use of IT. The answer to all of the questions posed
within the model is, 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. Let me use a simple
example to illustrate the point ± the Internet. The Internet has fundamentally changed the bargaining power of both
suppliers and customers. E-commerce, online retailing, more effective supply chain management, on-line
procurement, customer databases, loyalty cards, greater access to information, 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, computers and telephony.

6 
/
It would be wrong to characterise all these changes as shifting the balance of the forces one-way or the other i.e. as
either closing off an industry to outsiders (IT used defensively) or opening up an industry to new players (IT used
offensively). IT has been used offensively, 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).

An exam question could require students to assess the nature of the existing forces affecting the industry, 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.

r27
 
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. Refer to Figure 5.

6 


Questions in this area are likely to be straightforward. The information in the question would allow the student to see
the operation of various primary and support activities. Various applications that could be used in these activities can
be identified to earn marks. Supply chain management and the linkages in the value chain system need to be fully
understood, as does the role IT plays in the integration of the value system, eg EDI and Customer Relationship
Marketing.

.c
     
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. But what does this term µcompetitive advantage¶ mean? Joe Peppard provides the
following useful summary:

2Ê Establishing entry barriers.


2Ê Affecting the cost of switching operations.
2Ê Differentiating products/services.
2Ê Limiting access to distribution channels.
2Ê Ensuring competitive pricing.
2Ê Decreasing supply costs.
2Ê Increasing cost efficiency.
2Ê Using information as a product.
2Ê Building closer relationships with suppliers and customers.

Ward and Griffiths suggested four ways that IS/IT could be used for competitive advantage:

1.Ê Linking the organisation to customers or suppliers, eg EDI, website, VANs, extranets.
2.Ê Creating effective integration of the use of information in a value-adding process, eg data mining, data
warehousing, ERP.
3.Ê Enabling the organisation to develop, produce, market and distribute new products or services, eg CAD, CRM.
4.Ê Giving senior management information to help to develop and implement strategy, eg knowledge
management.

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. They explain how technology can increase productivity through
providing better marketing information (eg databases) and more efficient sales and marketing tools (eg direct mail,
websites). To be classed as a competitive advantage the increased productivity would not be available to others. This
is unlikely unless the technology is very expensive (entry barrier), or competitors are unaware of how to utilise it.

Increased productivity may lead to reduced fixed costs. For example, fewer sales and marketing staff may be required,
allowing a move to smaller premises. The effect of reduced fixed costs and a greater contribution arising from savings
in variable costs is shown in Figure 6.

6 
4

As a result of the use of IS/IT, the breakeven point has been reduced from (A) to (B).

 
 
Detailed consideration of the various models discussed above can be found in various study textbooks. 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. Very little credit is given at this level of your
accountancy studies for regurgitation of the theory. The reason why the questions are set in the form of scenarios is to
test the students¶ application of the theory. It is all very well learning the models, but if you cannot apply them, you
won¶t pass. Hopefully, this article will help you do both.

 ‰.c.‰ ‰   rr. 

6
  
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) 

This article explains the structure and purpose of the Project Quality Plan. The contents and structure of a Project
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.

6uality Plan Contents


Introduction

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 `equirement

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:

2Ê  a      


         
2Ê           a 
  O!   

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 åifecycle

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

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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.

6uality ‰ssurance

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:

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 a  
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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´.

Testing
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.

6uality 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:

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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.

Procurement

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:

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Sub-Contractors

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:

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on-conformance

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. Non-
conformance has to be recognised and possibly reflected in the contract with both the customer and the sub-contractor
/ supplier.

Change Management
Describes the procedures to document and control changes to the scope of the project. This will include the system for
logging change requests, the method of impact analysis and gaining and documenting the authorisation/approval to
apply the change. 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.

Configuration Management

Configuration management concerns the control of the product at all stages of development and production. It is
mainly concerned with controlling the components and versions of the system during production and maintenance.
During the development of the system it is not uncommon for multiple versions of the system to exist. 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. Configuration management software may be used and specified in the Project Quality Plan to help ensure
proper configuration management.

`isk management

Risk management is concerned with identifying potential problems and eliminating or reducing the damage the
realisation of those risks would cause. Failure to adequately manage risks will threaten the success of the project.

Risk management is the responsibility of the Project Manager because this is the person responsible for the success of
the project. 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.

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. 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, in advance, methods of
dealing with them if they occur.

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). Both need to be considered because avoidance
measures may fail. (See Example 1).

As a project proceeds, the nature of risk changes. Old risks disappear and new ones appear. Consequently, risk
management is a continuous process and so there needs to be a procedure to regularly review and reassess risks.
Furthermore, it is essential that all risks are owned by someone who has sufficient authority and resources to do
something about the risk. 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. 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.

It is likely that standards exist for risk management in the organisation. These will be applied in the Project Quality
Plan or perhaps in a separate document, which is referenced by the Project Quality Plan.

Delivery

This section specifies the arrangements for handling, delivering and installing the deliverables defined in the Product
Requirement section of the Project Quality Plan. Any special needs, such as security, access to buildings, transport
and insurance should be included in this section. It is possible that a standard checklist exists for this section, defined
to help project managers identify the issues they must consider in delivering the product. Appropriate parts of this
checklist will be used in this section.

Summary

This article defines the level of knowledge required by a candidate for the 2.1 examination. In many organisations the
Project Quality Plan is an exception document, ensuring that the project managers have considered these aspects of
the project. In other instances, the absence of such standard procedures means that many requirements have to be
defined in the Project Quality Plan itself.

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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. However, organisations have reached different decisions as to what
constitutes a µcore activity¶. The basis of decisionmaking has included:

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For some organisations, all or part of their IS/IT activities have not been defined as core and have thus been
candidates for outsourcing. The nomination of IS/IT for outsourcing has also been favoured in some cases because of
difficulties in recruiting, retaining and fully utilising the necessary technical expertise to adequately staff the function
in the competitive environment of the United Kingdom IS/IT marketplace, where there is a shortage of qualified
experienced staff.

Outsourcing is a term, which embraces a number of different approaches. It involves purchasing the services required
to perform business functions from outside the organisation . The organisation creates a contractual relationship with
its supplier but relinquishes direct managerial control.

Different approaches to outsourcing

c

 
This is where an organisation enters into a contract with a specialist company to provide all of their IS/IT operations,
maintenance and development activities. This is frequently described as Facilities Management, which is defined as
the contracting out of the management and operation of an organisation¶s IT services to an external source, at an
agreed service level, over a fixed time period, to an agreed cost formula. 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. 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.


 3  
 
Where an organisation enters into agreements with a range of suppliers; it may create framework contracts whereby it
can purchase specialist equipment or services with a degree of competition as and when required; the host
organisation will retain its main IS/IT internal staff organisation.

&  
3   
 
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
application across other organisations. The host organisation will usually retain its in-house IS/IT function.

. 
 
This is where an organisation buys in management or technical capabilities to accommodate the peaks of IS
development work. The company retains its own centralised IS/IT function but buys in maintenance or development
services from outside. 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, with the specification of requirements being made by the host
company. 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. The benefit is seen as access to lower-priced, skilled
labour but frequently the difficulties in project management and communication have been under-estimated.

Overall the benefits of outsourcing have been seen as:

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Difficulties with outsourcing have been seen as:

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A survey of organisations with outsourced IS/IT contracts has highlighted cost escalation, quality control, loss of
independence and over-dependency upon suppliers, lack of supplier flexibility and shortage of management skills as
major problems. Now that there is longer experience of outsourcing of IS/IT, the issue of maintaining and developing
the host organisation¶sorganisational learning capability is becoming an issue.

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. To develop and retain these staff is difficult if all µaction learning¶ is
performed outside the organisation. 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. Any outsourcing decision needs to be treated with care; it can give apparent short-term
advantages in cost-reduction but provide a hostage to fortune in the longer term.

& "  


5   
   


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