Professional Documents
Culture Documents
Formerly Called Management Governance and Ethics. My own Style is to Give You the Breakdown of
the Paper Under Review and Then Analyse The Syllabus For U. Some of U Guys Might Have Known Me
In Other Courses
This Course is 100% Theoretical. Comprising of 4 Sections, A - D. As The Name Implies, Corporate
Strategic Management and Ethics. Its A Course That is Introducing Strategic Management into
Accounting Profession. Accountants of Olden Days are different from Accountants of Nowadays. We are
in the 21st Century, where by things are Changing Day By Day. What Accountants Were Known For
Yesteryears is to Be Dealing With Figures.... Calculations and Quantitative Analysis. The Case is not like
that Anymore... Chartered Accountants are now needed in The Top Rank of the Organisation Structure,
Issuing Managerial Decisions. Decisions that are Strategic in Nature.
Projecting into the Future, Dealing With Risks, Governance, Etc. That's Why Courses Like CSME Came
Into the Syllabus. But, we discovered that Most Accountancy Students Are Calculation Oriented. This
makes some to fall Victim of The Course. The Reason Being that They Don't Find it Interesting, Some
Sort of Boring Stuffs from The Beginning To The End. But, at the Same Time, You Have To Pass it
before You Move to Another Level. And Another Significance of this Paper is that, every thing we will
be doing here will be Useful in CASE STUDY, A Final Level Paper. So, Don't Joke With Them. And
Make Sure you Keep Your Notes Intact ✔.
The Syllabus
Let Me Give You An Important Hint About the Syllabus in Relation to the New Exam Style.
The Significance is that Once You nack Q1 Very Well, You Don Hammer Be that.
But, If You Miss Q1, to the extent that You Have No Idea about it At All.... Chaiiiii Its A Sorry Case ó.
Because, You are left with 50 out 60. Which is Slim. Though, Looking @ Past Questions For The Past
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Corporate Strategic Mgt & Ethics By: Yusuff Kabiru Aremu ACA; 08169069670 @APEX Professionals
10 Diets, It Used To Be Taken From Section A. But, I have seen a Scenario where Risk is Set as Q1. But,
Mostly, it Used to Be Section A. Because, Its the Most Voluminous Section of All. And It's Got Some
Stupid Models like that. Enough of Preamble, Let's Get Started!
Chapter 1
Strategic Management is a Branch in Management which deals with the Art and Science of Formulating,
Implementing and evaluating Cross functional Decisions that enable an Organisation to achieve its
Objectives.
A Plan
A Ploy
A Pattern
A Position
A Perspective
✔ Chandler Defined it as a Determination of the Basic Longterm Goals and the Objectives of an Entity
and adoption of courses of Action and allocation of Resources necessary to carry out the Goals.
✔ Drucker: A Pattern of activities that seek to achieve the objectives of the organisation & adapt its
resources & operations to environmental Changes in the long-term.
✔ Johnson, Scholes and Whittington (2008): They gave the Most Acceptable Definition.
"The Direction & Scope of an Organisation Over the Long term, which achieves advantage in a Changing
Environment through its Configuration of Resources and Competencies with the Aim of fulfilling
Stakeholders expectations"
Level of Strategy:
✔ Corporate Strategy: How Value will be added to Various Strategic Business Units. This is Carried
Out by The Top Managers.
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Corporate Strategic Mgt & Ethics By: Yusuff Kabiru Aremu ACA; 08169069670 @APEX Professionals
✔ Business Strategy: How to Compete Successfully In the Market, Considering the Different Strategic
Business Unit. Carried out By Middle Level Managers.
✔ Functional Strategy: This are the Strategies employed In the Operational Level of an Organization. It
is meant to Support the Other 2.
1. Strategic Position
2. Strategic Choices
These 3 Elements are what We Will be Discussing all through in this Section A. From Chapter 2 all the
way to Chapter 8.
There is A Lot of Explanations on Each of those Elements Up There. Of Which U Need to Know them.
In fact.... There was A Diet ICAN Tested Those Elements. No Place ICAN no Fit Test My People.
Please.... Let's Make Sure We Cover the Syllabus
Explanation
✔ Strategic Position:
Where the Company is Presently in the Market and where they are trying to get to.
1. The Environment
The Environment has to do With Threats & Opportunities around the Entity. Those 2 are Beyond the
Control of The Entity. But, They can Take Advantage Of Opportunities and Reduce Threats.
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Corporate Strategic Mgt & Ethics By: Yusuff Kabiru Aremu ACA; 08169069670 @APEX Professionals
Strategic Capability are the Strengths & Weaknesses within The Business. Strengths are Their Internal
Resources and Competencies. Weaknesses are their Weak Points. But, they can control the 2, because
they are Internal.
Expectation & Purposes: This One Has to do With Mission of the Entity. Where they expect to be.
✔ Strategic Choices:
Highlighting the different Possible Strategies Available and Then, Make Choice on the Preferred One to
Adapt.
Though, Explanations in the Pack are lengthy, but they are Simple to Understand. So Read Them Up.
1. Organisational Structure: What Type of Structure will the Company adopt to Suit their Chosen Strategy?
2. Managing Change: After A Company Chose A Strategy, they will need to change from Old Style to
new style. They must be able to manage the Change Effectively, because Human Beings by nature dislike
Change.
Level of Planning
1. Strategic Planning
2. Tactical Planning
3. Operational Planning.
Its Just Like Level of Strategy we treated Earlier. The Explanation are the Same
Note: This is a New Concept in the Pack. U Can Find this in Page 11 of Your New Pack.
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Corporate Strategic Mgt & Ethics By: Yusuff Kabiru Aremu ACA; 08169069670 @APEX Professionals
There are 3.
A Stakeholder is Any Individual or Group of Individuals, which Have Interest (Stake) in The Activities of
An Organisation. They can Either Affect or Are Affected by the Activities carried out by the Organisation.
Though, Some Stakeholders are More Significant than One Another. So, the More the Significance, the
More the Expectations from the Company.
For Example,
Etc....
Stakeholders' Matrix
As the Name Implies, It a Diagram that makes it easy for Managers of Organisations to Place
Stakeholders in their Order of Priority.
Stakeholders Theory is a very Important aspect of Corporate Governance which Puts the Head of
Managers on the Table every day.
Decisions are made with the Consideration of Interests, Status, Importance and Powers of an
Organisation's Stakeholders...
But the most Widely Used One is that of a Man known as Mendelow. He named his Model Stakeholders'
Power/Interest Matrix.
A 2 by 2 Matrix with the Actions to be taken concerning each categories of Stakeholders by Managers.
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Interest of the Shareholders on the Vertical Up. While Power on the Horizontal Left Side. Actions to be
taken on each Categories are Placed in Each Box ☐.
Ie.
➖Low Interest - Low Power = Minimal Effort: Meaning those Stakeholders that has low Interest and
Low Power, the effort of the Organisation should be Minimal on them.
M - Minimal Effort
K- Keep Informed
K- Key Players.
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Corporate Strategic Mgt & Ethics By: Yusuff Kabiru Aremu ACA; 08169069670 @APEX Professionals
Chapter 2
Environmental Analysis
Introduction:
A Business Environment is any group of individual or thing that are not part of the Business itself, but has
impacts and influence on the Business Activities. Eg. Government, Immediate Community, Suppliers, but
a very good example is the Competitors.
An Entity can not succeed in Vacuum. Therefore, environmental analysis is talking about how well it sees
the external environment around it and how able it manages them to his Survival.
PESTEL Analysis
This is ICAN Favourite. They have tested it in number of Cases, directly or indirectly.
P - Political Factors
E - Economic Factors
S - Socio-Cultural Factors
T - Technological Factors
E - Ecological Factors
L - Legal Factors
The Model is Widely used most especially when the Scenario is More of External Environment of the
Company than Internal. Each Major Factor has other Sub-Factors Under Them.
Once You read the question, the Understanding of what to bring under each Factor will Flow in.
➖ No Quantitative Approach to its Application. Managers only use their Descretion in Classifying them.
➖ No Way to rate them whether one has more influence than another.
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PORTER'S DIAMOND
A Model propounded by Michael Porter, dealing with International, National and Regional Competitive
Advantages.
Michael Porter came into conclusion that Industries in one particular Country or Region of a country
perform better than others due to some Advantages that are present in the Country/Region.
He Gave Four Major Factors and placed them in form of Diamond where each of them connects to one
another from sides and within.
FFC
RSI
DC
FSS
1. FFC: As the Name Implies, those factors of production that are Favorable for Organisations
Operating in those Areas.
Basic, or
Advanced.
✔Basic Factors are the Natural Resources. Eg. Land, Mineral Resources, Water, Good Weather, Etc..
✔Advanced factors are man made like Labour Skills, Technology and Social Infrastructure that The
Govt of that Country or Region put in Place.
What Porter is trying to make us know is that Some Companies enjoying these factors will definitely
perform well than companies that their own Factors of Production is not Favourable. And In some
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countries, their Government has assisted Companies Operating there with Stable Social Infrastructure like
Uninterrupted Power Supply, Good Road, etc. Weather is not as Favourable as it is in some Regions Or
Country.
2. RSI: By their name, u shall understand what they stand for. Industries that are Related and not
only that they Support One Another. With that, they will be able to explore more advantages and
pull more opportunities than their counterparts.
3. FSSR: The Strategy that a company employs, their Organisation Structure and the way they
compete with other companies will assist them a lot.
4. DC in Home Market: Charity, they say, begins at home.... Michael Porter is making us to
understand that when Home Customers demand a lot of the products, it will serve as a bedrock to
move Internationally. A Very Good Example is the Chinese Economy.
It's applied in a scenario where One Company is Compared to its Counterparts in another Country or
Region. If you are lucky, the Question will specify. But, if the Question wanna be Tough a little, they
might not specify.
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Chapter 3
Competitive Forces
Introduction:
In the Previous Chapter, we have been able to analyse How Companies deal with External Environment.
What we need to look at now is how Companies deal within their Industries (Amongst Competitors), ie.
Market.
Concept of Market
✔ Industries are collection of Firms that are Producing Same Goods or rendering Same Services. Eg.
Banking Industry, Automobile Industry, etc.
Sector: This is segment, that can be separately identified as part of a Large Industry. Eg. Banking
Industry has different sectors like Commercial Bank, Merchant Bank, Mortgage Bank, Micro Finance
Bank, etc.
1. Fragmented Industries: This is Made up of small Firms that offer products or services to small portion
of People.
2. Emerging Industries: These are industries just Coming into the Existence beginning to develop
Gradually.
3. Mature Industries: Their Products have reached the high level of their Life Cycle and they can fade out.
4. Declining Industries: Industries that are experiencing wane in terms of goods and services and as a
result of that, competitors are reducing in the industry.
5. Global Industries: They operate across borders and regions, on a global Scale. Eg. Football Industry.
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✔ 5 Forces Model
✔ BCG Matrix
✔ SWOT Analysis.
Porter's 5 Forces
Another Beautiful Work of Michael Porter. This one is used to analyse certain industries might become
and remain profitable than another.
In other words, The Forces that drives a particular industry to make more profit or hinder them from
making profits.
Competitive Rivalry
1. Threats from Potential Entrants: Michael Porter propounded that if an industry Is Profitable, more
Companies will want to Come in. In the process, the industry will become more competitive and
competitive. And then, Profit will reduce.
To avoid this, the company can set Barriers to Entry which are:
Economies of Scale
Govt Regulations
2. Bargaining Power of the Customers: When Customers demand for Lower Price or improved quality. It
will affect Profitability.
3. Bargaining Power of the Supplier: When Suppliers can charge high prices. This will affect the Profits
of companies in that Industry.
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4. Threats from Close Substitute: The Threat posed as a result that Consumers can go for another Product
instead of their own.
5. Competitive Rivalry: When the Coys in the Industry are also Competing with one another.
They Might Reduce their Profitability, because they can result into Reduction of Price or reduction of
Quality.
▪A Product, or
▪An Asset.
The Rationale behind this model is that every product/asset as the case may be has its own Life Cycle.
We Move from one stage of life to another. These stages form our Life Cycle. Infancy ➡Childhood
➡Adolescence➡ Youthfulness ➡Adulthood➡Oldage
➖Introduction Phase
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➖Growth Phase
➖Maturity Phase
➖Decline Phase.
But, the Most important and widely acceptable Stages are the 1st 4.
➖ Introduction Phase: The Stage the product of a Company is freshly introduced to the Market.
Everyone will be talking about it and willing to Buy it. At this stage, sales and profit will be Low Because
no Much recognition is Derived yet. The Product is just gaining ground. We can relate this to A Man as
well That Stage of life we pass through that we were small in age and size. Our thinking is Childish
Because we were children. No one is thinking about making money as we are now. All what we are after
is how to eat, play, sleep and Watch Cartoons.
➖Growth Stage: This Stage, the product is getting well known and more Patronisers come in. The profit
grows Because the sales grew already.
➖Maturity Stage: This is when the Recognition, Sales of the Product gets to its Peak. Then, the profit
derived from the product gets to its pinnacle. At this Point, no increase in the Profit derived from the
Product again.
➖Decline Stage: The Product starts fading out of the Market and Sales Drop. So do Profit. At this point,
the Company has 2 Options, either they Withdraw it from the Market or they repackage it.
Each Stage of the Product or asset has its own Peculiar Costs, Sales and Profit. And That’s what
Constitute the Diagram of the Model.
The Model is applicable where you are dealing with Selecting Pricing Strategy for a Product... And
Whether a Product should still stay in the Market or not. The Stage it is will determine that.
One of the Limitations of the Model is that One might not easily distinguish the Stages from one another.
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➖ Market Growth
➖ Market Share
They presented a 2 by 2 Matrix where Left Vertical Side Represents Market Growth and Top
Horizontally represents Market Share.
The Question is what's the Understanding of the 2 Concepts in respect to Company's Performance and
Activity?
➖Market Growth: This is the Probability that People will buy the Product of the Product.
For example, in 2015, the Coy sells 30, then, in 2016, the sales increase to 40 then, in 2017, it increases
to 50. We say the Company has a High Growth Rate.
➖Market Share: As the Name Implies, this is percentage that the Company sells out the Total Market
Sales.
For Example, it we have 10 Companies selling Car in Nigeria and all of them sold 1000 Cars during the
year, but our company alone sold 200 Cars. That means, our company have gained (200/1000) 20% of the
Total Market Share...
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➖Portfolio of Products: In a Situation where you wish to select which Product is performing well or
which one is Under performing.
➖Strategic Business Units or Subsidiaries of a Group Company: This Model can also be used to analyse
a Big Company with different business units. For instance, Dangote Group of Companies now. They
Have Dangote Sugar, Dangote Cement, Dangote Salt, etc. Each of them is a Business Unit. U can use it to
Analyse which of the units is performing well or not. Also, in the Case of a Group Company with Many
Subsidiaries selling different Products. U can use this same model to analyse which subsidiary is
Performing well or not, and decide whether to Dispose off the subsidiary or not.
1. Star (High Growth + High Share): These are the Market leaders products. Products like these generate
Netcash flows but at reasonable Low amount, because the company will be spending more cash to
maintain the High Position of Growth it has in the Market, than what they earn from it.
The Strategy the Company should employ with them is to use money gained from Cash Cows to continue
financing it.
2. Cash Cow (Low Growth + High Shares): As the Name Implies Cash Cow, The Product has highest
percentage of Customers buying it while the product itself is no more growing in the market. This makes
the Product to generate more Cash than what the Company Invests in it. This is the Point where the
Company reap what they sow In a Product.
The Strategy is that they should no more spend to develop the product, rather use the Bundle of Cash
generated from it to Develop other Products like Stars and Problem Child.
3. Question Mark/Problem Child (High Growth + Low Share): The Company still spend a huge amount
of money to Develop the Product, but yet, no reasonable market share in Compensation for the Money
spent on it. It raises a Question Mark ? What should we Do?
Whether they should continue to invest on it Ní o or Withdraw it from the Market. The Simple Strategy
Here is that the Company Increase the Product Life or increase its investment.
4. Dog: This product is Tantamount to a Decline State of Product Life Cycle. The Company should not
even bother to invest more on it because there's no certainty that they will recoup their investment at all.
If it still bring in little Cashflows, the company can decide to enjoy it for a few Moment and then decide
to Withdraw it (in the case of Product) or Close the Unit down or Dispose off the Subsidiary, as the Case
may be.
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Corporate Strategic Mgt & Ethics By: Yusuff Kabiru Aremu ACA; 08169069670 @APEX Professionals
It is limited to only 2 Factors in analysing competitiveness of a Product while there are other Factors
as well. E.g. Quality, Branding, Pricing Etc...
The Definition of Market itself might not be easily determinable in Real Life.
What's Remaining in that Chapter is Opportunity & Threats. But, we are gonna do it Together Under
SWOT Analysis In Chapter 4.
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Chapter 4
Internal Analysis
Introduction
In The Last 2 Chapters, we were discussing something about External Factors or Environmental
Influences on the Business and its relationship amongst its Competitors. This Chapter and the Next, we
will be dealing with Internal Factors that can Assist the Business to grow well.
✔ Strategic Capability:
Ability of a firm to Outperform its Competitors through effective use of their Resources & Competencies.
2 Key words are important there.
That is looking at the market from an internal point of View, building our areas of core Competencies
instead of looking outward to competitors. By the time we get outside to the market, it becomes a
problem to the Competitors.
✔ Customers Need:
Since market can also be defined as customers as earlier said, we look at our products from the Point of
View of our customers, who they are and what do they Need.
Customers' Need are the reason why They Buy Goods. Eg:
-Price
-Quality
-Better Design
-Convenience of Product
Categories of Customers
1. Individual Customers
2. Industrial Customers
3. Government Organisations
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The Idea behind this is that for a product or service to be Successful, it must have Value. Therefore, CSFs
are factors or features or components Our products must possess for them to be Successful in the Market
and Outperform Competitors Products.
-Etc.
However, not all of them might be Critical to the Success of the Organisation. Therefore, we need to look
at them from a Scale of Preference Point. Which comes first after another. This Leads Us To Another
Important Concept Key Performance Indicators KPIs.
These are Quantitative Measures to evaluate monitor and control the Attainment of CSFs.
Benchmarking
This is a Competitive Analysis by comparing the performance of an Organisation with that of another
organisation which is performing better in the industry. Then, that organisation becomes the "Benchmark".
The Rationale behind this is not just to compare, but to identify our own area of Weaknesses that they are
performing well in it and adopt it(If Possible).
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Types/Methods of Benchmarking.
Note, there is no widely acceptable types for Benchmarking. So, just stick to one.
➖ Internal Benchmarking: This is within the Organisation itself. Comparing a particular Biz unit/branch
with another in the Same Organisation.
➖Customer Benchmarking: Comparing our Products with what the Customer Expects.
➖Operational Benchmarking: Comparing our own operation or process with that of another company.
➖Competitive Benchmarking: This is the most Widely used. Comparing our overall performances with
that of the Most Successful Competitor.
Benefits of Benchmarking.
Meaning: A Value Chain is set of Activities that a product or Service of an organisation will pass
through before reaching the Final Consumers. What Porter is saying is that Each Activity should add
Value to the product. If not, they are regarded as Non Value Additive...
Secondary Activities
1. Inbound Logistics
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2. Operations
3. Outbound Logistics
✔Inbound Logistics: This is Dealing with Buying of Raw Materials and keeping save for Production
Purpose. The Major Players here are the Suppliers.
✔Operation: Those Raw Materials bought are to be transformed into Finished Goods that are for the
usage of the Final Consumers. But, they will pass through production processes which is Work in
Process... This One is Dealing with Factory and Factory Workers in the Case of Manufacturing
Company and its very important and should be Managed Well...
✔Outbound Logistics: This has to do with Keeping of Finished Goods Save until they are readily sold
to Customers. Some Companies used to Keep them in Warehouses...
✔After Sales Services: Some products do not end with just Buying. Installation, Fitting, Maintenance at
intervals and other After sales Services should be rendered as well....
✔Marketing and Sales: One of the Most Important Chain as well. Its dealing with Channel of
Distribution and Advertising. Our Products should be known to the Consumers and even if they know,
how do we get it across to them.
1. Procurement
2. Technology Devt
4. Corporate Infrastructure
✔Procurement: This has to do with Purchasing of Assets.. Its a procedure that a company embarks on
that makes them to be able to get the best and efficient Assets and Inventory.
✔Corporate Infrastructure: This is referring to the Organisation Structure. How the company is managed.
Those in charge of Governance. Those giving policies... Any Policy they adopt can either make or Mar
the Organisation.
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✔Technology Development: As the Name Implies, present day companies should not be left out In the
Advent of Technology and technological Development. They make life easier.
✔Human Resources: Even with the Advent of Technology, machines can still do some things. Infact, it's
Man that will operate the machines. Human Beings could be very difficult to manage. A successful
organisation should understand that without the staff, the organisation will not be able to move forward.
Manage them well and treat them like Humans, not animals. Even if you pay them for the Job
The Model is Very useful but has some limitations. One of it is that It does not consider the External
Factor in the Organisation.
Diagram below:
A Resource is an asset, item, material, skill and knowledge that an entity has control over. This is a
Strength of organisation and it could be useful under SWOT analysis.
While Competency is the ability to put the Resources together to achieve the Best. Both of them work
hand in hand. It's one thing to have something, but another thing is to be able to make good use of it. We
have Threshold Resources and Unique Resources.
✔ While Unique Resources/ Core Competencies are those ones that Only the firm possesses it in That
Industry. This is what will make them Competitively Different from Others, and it will make them
Perform Better.
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Categories of Resources:
✅ Intellectual Resources: Intangible Assets like Patents, copyright and brands... Ability to innovate and
R&D.
Resource Audit
This is the Initial Assessment of an Entity's Resources & How they are used efficiently to achieve the
Overall Objectives of an Entity. The Following Data Are Very Important about the Resources of A Firm:
1. Human Resources
2. Raw Materials
3. Management
5. Intangible Resources
6. Financial Resources
Evaluating Resources
✔ Value
✔ Imitability
✔ Rarity
✔ Organisation
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Chapter 5
Competitive Advantage
Introduction:
As said in the Earlier Chapter, a Company creates Competitive Advantage above its Rival by creating
Value for their Customers above their Competitors. Though, customers wise, what Gives Value to one
Customer, may not do so to another Customer.
Strategic Clock
A Model Suggested by Bowman in 1996 as a Way of Combining 2 Factors to gain Competitive
Advantage. The factors are:
Price, and
Perceived Benefit.
The Model is Placed in form of A Graph, of which 8 Hands of Clock represents each strategy an
Organization Should Adopt depending on the Point the Company is on the Graph.
1. No Frill Strategy: Under this Strategy, the Company Will have Low Price, Low Benefit.
2. Low Price Strategy: Under this, the Company employs Average Low Price, Average Benefit.
4. Differentiation Strategy:
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1. Market Leader: The Major Player in the Market. Eg. Dangote Cement, in Cement Industry.
2. The Challenger: The Major Competitor to A Market Leader. Eg. Lafarge Cement.
A Market Niche is Small Segment of a Target Market with a relatively small number of Potential
Customers.
Product Positioning
This is a concept of product in the Mind of the Consumer. An idea initiated by Ries & Tout in 1960. What
this means is that out the 4 Positions listed above, which one should an Entity be Trying to Be? They
argued that Advertising is an Important Factor in creating Product Position, but no matter how a product
is advertised, consumers will only accept the Message that are consistent with their Existing Knowledge
& Experience. They concluded that the best Product Position to achieve in the Mind of the Consumers is
the Position of the Market Leader.
Lock-In Strategy
As the Name Implies, when a customer is locked in to the Supplier's Product or services, to the extent that
it has made a decision to be buying more & More of the Product, and Do not consider buying from other
places.
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Hyper-Competition
A Situation where Organisations find themselves in an Environment facing fast changing, uncertain &
dynamic business environments where there are aggressive and ruthless Competitors consistently
challenging current Assumptions & Methods. In an environment like this, no constant situation. To
survive here, a firm should be moving in a way to achieve competitive advantage through the following:
2. Imitating Competitors
Collaboration
In order to survive & achieve Competitive Advantages, Companies may collaborate with:
1. Suppliers or Customers
3. Other Competitors.
Collaboration with Supplier and Customer can create Additional Value in as such as:
• Product Design
• Fast Delivery
Strategic Alliances
An Arrangement where by a number of Separate Companies Share their Resources & Competencies to
pursue Joint Strategy or Goal.
Examples are :
✔ Joint Ventures: Two Different Entities coming together with the aim of carrying out a Business of
which no one is superior to the other.
✔ Franchising: A form of collaboration where by a franchisor designs a product and sells the right to
sell the Right To Sell it to a Franchisee as a way of Protecting his Intellectual Property.
✔ Licensing: An agreement like that of Franchise, but this has to do with Production of Goods & not
rendering of Services like that of Franchise
✔ Cartel: An Arrangement between rival firms in the industry to operate the Same Policy on Pricing.
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Chapter 6
Methods of Development
Introduction
This is one of the Largest Chapter in Section A, Strategic Management. And It's talking about the 2nd
Element of Strategic Mgt, Known as Strategic Choice. That means from Chapter 2 to 5, we have been
treating the 1st Element, Known as Strategic Position.
PIMS Analysis
PIMS stands for "Profit Impact on Marketing Strategy". This is an Analysis originated in the 1960s at
General Electric in the US, but its data base now maintained by the Strategic Planning Institute. It links
Profitability to relative market Share. Ie. The Higher the Market Share, the higher the ROI. This is
Achieved through Economies of Scale for large firms in its market due to some factors such as the
Purchasing Benefits, selling in large volumes, efficient use of equipment, scale of advertising, etc.
1. Product-Market Scope
2. Competitive Advantage
3. Growth Vector
4. Synergy: Instead of making one product, make 2 different ones with same Resources & get the better
Utilisation of the Resources or sell two products with the Same Sales Force instead of one.
The Matrix placed Market on the Horizontal Left Side and Product on the Vertical Top side in relation to
Existing Market and New Market.
✅Market Penetration Strategy: As seen in the Matrix, this relates to existing product and existing market.
I.e. An entity seeks to sell more of its existing products in its existing market. This is a sensible choice to
make when People still demand for the Product. Ie, the market is growing rapidly.
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✅Market Development Strategy : Still on Existing Products, but probably its Fading away in the
Market that people are no more interested in it anymore. The Company takes it to a new Place (Market) or
look for new buyers, it will be new to them.
✅Product Development Strategy: This is an innovation strategy, where we see that our Customers are
loyal to us and they still wish to continue buying from us. We Development New products with the help
of our Research and Development department. A Very Good Example of this is Mobile Phones in Nigeria.
Eg. Infinix, Tecno, Huawei, Apple, etc..
✅Diversification: Where Company moves from what they sell to a totally different something by
acquisition of another company. This can be Concentric or Conglomerate Diversification.
This model is applicable in A Situation where a company is faced with the Marketing Strategy to make
use of for their products. Whether they should Differentiate the Product ni ó or Change the Market. It
depends on how the Question Comes Anyway.
✔ The Position A Business Entity wants to be by the end of the Planning Period, and
This Model is used to close this Strategic Gap. In a Nutshell, looking at the Gap Covered By An
Organisation if these Strategies are applied in terms of Profitability.
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Withdrawal Of Strategy
A Strategy adopted by a company in relation to A Product, may be withdrawn totally if the company
deems fit.
Corrective Strategy.
Strategies of making corrections or adjustments to the current strategy in order to respond to the Changes
in the Customer's Need or Environment or to counter the threats coming from the Competitors.
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• Internal Growth: When an Entity grows its Business Activities with its own resources and
capabilities.
Advantages
Disadvantages
3. The Company still needs to change its Organisation Structure in order to manage this Type of Change.
In his Model, he sets out 5 Phases and the crisis peculiar to each of them.
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Merger is when 2 different companies come together and became one bigger and strong entity.
Acquisition is when Big One Big Company purchases the Controlling Shares of another company, but the
2 exists as Separate Entities. One will be Parent, the other will be Subsidiary.
Through the 2 techniques, there is a Synergistic Benefit as a result of reduction in operational Expenses
and increased Sales.
Advantages of M & A
Disadvantages of M&A
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3. Bringing together two different Entities might be difficult due to different Cultures & Structure.
Diversification
Diversification of an Entity is Process of moving from Present Product or market to new ones at the same
time. It is a Strategic Method of Growth, but with high risk because the Entity might not have much
experience needed in the industry it is Moving to.
➖Types Of Diversification
1. Concentric Diversification: Moving to a closely related market. This is less risky because it might use
the Experience it has in the existing market to operate in the new market.
Before one can choose a Business Strategy To Adopt, it must have being evaluated for its:
3. Feasibility: Is it Practical?
No matter how Suitable a strategy is, if its not financially sound, it will not be recommended.
Suitability of A Strategy
1. Competitive Advantage
2. Market Development
3. Product Development
4. Less Risk.
Acceptability of a Strategy
Whether it will be acceptable to Key Stakeholders or not. We need to consider the following Areas:
1. Ethical Aspect of the Strategy. It must not be unethical, otherwise, not acceptable.
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3. High Return.
Feasibility of a Strategy
Whether the Strategy will work out or not. Whether it can be implemented successfully or not. This is
determined by Mgt. Judgement.
The Next Concept in that Chapter is CSR, but we will Treat it extensively under Ethics, in order to avoid
repetition.
Chapter 7
Strategy Implementation
Introduction
This is the last Element of Strategy known as Strategy into Action or Implementation of Strategy. After
we have known the Strategic Position an Entity is Moving Towards and we have Chosen the Most
Suitable One for us, the next thing is to Put it into Action.
1. Organizational Structure
3. Implementing Strategy.
The structure of an organisation is a very good concept of Business Analysis because it determines a lot
on Implementation of strategies.
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2. Functional Structure: Where the business grows beyond one man Business and there are different
functions like Account, Admin, Marketing, etc.
3. Divisional Structure: When the Business grows further and they now have different lines of Businesses
or Branches. Then, the company is faced with movement of information and authorities. It will be more
difficult so, Each of them needs to be headed by a branch/Unit Manager.
4. Matrix Structure: This is applicable in A more organised Organisation where different projects are
undertaken.
Those things have Diagrams that will make u Understand Better. So, Study Them.
Span of Control
This refers to the Number of people who report to a Manager in a Hierarchical Mgt Structure. How
command moves.
1. Tall Narrow: Each Manager has Subordinates Reporting directly to him. So also each subordinate will
have some Persons under them reporting to them as well. So, there are many layers of Management from
Top Downward.
2. Wide Flat : A Large number of Subordinates Reporting directly to One Manager. There are no layers.
So, the Span is wide and Flat.
Plans are implemented by either Internal or External Efforts. External Efforts can come in form of:
1. Strategic Alliance
2. Value Network
3. Outsourcing
4. Virtual Organisation.
✔ Outsourcing: A Situation where a service or activity of an organisation is being let out to other entity
to handle for them. It depends on the Decision of the organisation to determine what and what out of their
Activities to Outsource.
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Reasons for It
✔ Virtual Organisation:
This is a Company without a Physical Existence, rather it operates IT Systems, Communication networks
& Business Contacts through telephone & Emails. They might not necessarily come to office, or may not
have one. They can be operating from Home, because the nature of their Work is Customer Based. A
Very Good Example of Virtual Organisations are Online Ordering Companies like Jumia, Konga, Etc.
Contingency Theory states that for a Company to choose any Organisation Structure, it is a dependant of
the Circumstances it finds itself, Size of the Entity and Complexity.
Burns & Stalker Classification: They classified Organisation Structure into 2 Categories:
1. Mechanistic Structure
2. Organic Structure
✔ Under Mechanistic Structure, Decisions is obtained by Position or Hierarchy. While under Organic
Structure, decisions are based on Knowledge regardless of Position.
✔ Under Mechanistic Structure, there is a Bureaucratic Setting. While control is Cultural & not
bureaucratic.
✔ There is Vertical Flow of Communication under Mechanistic. While under organic structure,
communication flows Horizontally Free.
Burns & Stalker opined that no one is out of the Organisation Structure is better than the other. It's just a
matter of the environment and circumstances an Entity Find itself, as proposed by the Contingency
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Theory. For instance, Mechanistic Structure is Good For Stable Environment, while Organic Structure is
better off in a Dynamic Environment.
1. Strategic Apex: They are the Top Management in Every Organisation. As the Name Implies, they give
the Most Strategic Decisions in the Organisation and they determine the Future Outlook of an Entity.
2. Operating Core: As the Name Implies, This represents the basic work or Ordinary Activities of the
organisation and Individuals that carry out the Work. They are the Core Operators as they deal with Day
to day Activities of the Business Activities; They are the ones selling and dealing with the Customers.
They are the Lowest Level Managers.
3. Middle Line: These are the Middle Level Managers between the Strategic Apex & The Operating Core.
4. Supporting Staff: These are the ones that provide support to the Operating Core. Eg. Secretary,
Cleaners, Repairs & Maintenance, IT Staff, etc.
5. Techno-Structure: The Staff without direct management responsibility. They produce procedures
manual for others to follow.
We Have learnt how Organisation is built up using various Blocks. The next thing is how do we configure
or carry them out? Mintzberg also suggested 6 Configurations:
1. Simple Structure: This Configuration is used in An Entrepreneurial Setting, where the Strategic Apex
Controls Directly the Operating Core without any Middle Line.
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2. Machine Bureaucracy: Under this Kind of Configuration, the Techno-Structure dominates, because the
Entity is controlled by a form of Bureaucracy or Regulation.
3. Professional Bureaucracy: Here, the Operating Core dominates and they are Professionals & Highly
Skilled Individuals, eg. Accountants, Lawyers, Engineers, etc.
4. Divisionalised Form: With this configuration, the middle line Dominates. It is applicable in a very
large Divisionalised Organisation where Decisions of the Divisional or Branch Managers are very
Influencial.
5. Adhocracy: Any organisation to use this, there is a lot of Project Based Work & Team Based Work.
6. Missionary Organisation: This applies to small Entities where members share same set of common
beliefs and values.
Business Plan
This is a set of written document put in place to introduce new business, its operational and financial
feasibility.
1. Title Page
2. Table of Contents
3. Introduction
4. Executive Summary
Business Description
Operating Plans
Management Summary
Financial Plans
7. Appendices
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Strategic Change
Once a strategy is selected successfully, there need to be a change in the Organisation. Each Time there is
a Strategic Development, change can occur in 2 Ways:
1. Planned/Proactive Change: When the change is deliberate & intended. The Entity moves from an
existing situation to a new situation.
2. Unplanned/Reactive Change: When the Entity does not prepare for it. It just happened out of
Circumstance.
Explanation
✔ Incremental Change: Where the change is a small or mere change, the entity can easily adapt to it.
✔ Transformational Change: A Big form of change when there is a major reorganisation in the System
of the Entity and Procedures. The Company Might find it difficult to adapt Easily. It Requires the Effort
of Change Managers.
✔ One Off Change: When it is Swift and Rapid that the Entity just moved Easily to new System.
These are the reasons that call for Change in An Entity. These can either be:
1. External Triggers: Those Changes caused by the Environment a business is dealing with. PESTEL
Analysis Factors are the External Triggers here.
2. Internal Triggers: This can be caused by development with in the Organisation. Eg:
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Consequences of Change
Anytime there is a change in an Organisation, there used to be Distruption in an Entity. Most Especially
Transformational Change.
Before people get adapted to Change, there used to be a Quiet number of Difficulties. Therefore, proper
management of change should be put in place in the following Ways:
Attitude to Change
Human Being by nature don't like Change. They don't want want Disturbance, anything that will cause
inconvenience to them and their working relationship, they may kick against it. However, change is
inevitable. The most constant factor is Change. Some Employees may Easily welcome Change, while
some may resist it due to the Following Reasons:
When Employees believe that there job is at risk, & they might be redundant.
They might dislike the manager involved or the way it's being introduced.
According to Elizabeth Ross Kanter, she opined that some organisations adapt to change easily that one
another due to 3 Cultural Reasons:
1. Imagination to Innovate: It is a popular saying that Change Begins from the Mind. If the employees in
that organisation already prepare their mind for any possible change that might occur, then adapting to it
can be as easy as possible.
2. Professionalism to Perform: Adapting to change easily also boils down to the Calibre of the Staff
working in that Organisation, whether Skilled or Unskilled. If you are dealing with some kinds of
Professionals who knows the Effect and the Need for change, they will not resist.
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3. Openness to Collaborate: The Concept of freemindedness is another factor. And this affects both the
Management and the Workforce. There should be a an Open Mind to welcome any change thereon.
2. Leader's Commitment.
4. Organisational Structure.
These factors above are very Important, or else the Change Will not Work.
This is a model for managing Change. An organisation may decide to dump one strategy for another,
therefore, calling for a Change. A Strategic Change needs to be Managed Well otherwise the objective
that's to be derived from such strategy will not be achieved.
A Guy Called Lewin, some years ago suggested that there are 2 Categories of Forces in a Situation of
Change:
He argued that the change might not work if the Restraining Forces are stronger than the Driving Forces,
because Human Beings by nature does not like Change.
2. Attitudes of Employees.
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4. Organisation Structure
5. Resources Available.
1. Unfreeze: People are used to their old ways of Activities and its not easy to just change them like that.
It takes a serious persuasion of the employees that the change is necessary.
We persuade them by making them see the lapses in the Current System and show them how the Future
of the change will look like.
2. Movement (Change itself) : Then, after you have decoupled them, you introduce the new system
successfully.
3. Refreeze (Consistency): As Argued by Lewin that once change is done, an organisation should put
some monitoring tactics in place so that people do not turn back to their old ways of life.
Measuring Performances in the Service Industry differs from that of Manufacturing due to the following
Reasons:
Simultaneity: Unlike manufacturing companies, where goods have to be produced before being sold to
customers. In Service industry, providing the service and receiving the service by the Consumer happens
at the Same Time. Ie. Both are Simultaneous in Nature.
Intangibility: Their Products can not be seen, nor Hold. But if valuable, we can notice.
Perishability: It's impossible to store a Service For Future Consumption. Unlike manufacturing &
retailing companies, there is no stock of Unused Services. The services must be provided when the
Customer Wants it.
The Model
Fitzgerald & Moon gave 3 Building Blocks to measure performance in a Service Industry
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1. Dimensions
2. Rewards
3. Standards
❖ Rewards: How we give back Sth to the person that achieved the Performance Targets. There are
3 Aspects here:
▶ Awareness of the Motivation Metric: If Employees knew Bonus exists, they perform well.
▶ Individuals should only be responsible for aspects of financial performance they can control.
❖ Standard: This has to do with how we Measure the Performance. Setting Standards for
measuring performance. This can be analysed in 3 Aspects:
▶ Quality of Service, Measured by Customer Satisfaction and Number of Complaints from Customers.
Mind You, It's The Compulsory Question (40 Marks) in Nov. 2019. It's as simple as that.
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The Rationale behind BSC is that there are several perspectives to Performance and targets should be set
for each of them.
They are:
Customer Perspective
Internal Perspective
Financial Perspective
Explanation
1. Costumer Perspective: This has to do with What Customers Value and their Needs, Satisfaction,
Convenience & Quality.
2. Internal Perspective: Internal Perspective deals with Strengths of the Entity and their Resources,
Competencies and Capability.
3. Innovation & Learning: This is saying for an organisation to survive in this Present Economy, it must
not be Stagnant. How to maintain that Competitive Position by Developing New Products or new ways of
doing Services.
4. Financial Perspective: How the Organisation creates value for its Shareholders enhancing their wealth
and make more Profit.
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Kaplan & Norton argued that although the main objective of every business is Financial but, for long-
term success and survival, a company should be able to meet up with other Perspectives as well.
Performance Pyramid
A Model developed by Lynch & Cross in 1991. They argued that traditional performance measurement
systems were not as effective as they should be, because they had a Narrow Financial Focus,
concentrating on measures such as ROCE, Cashflows, Profit etc.
They argued that in a dynamic business environment, achieving strategic business objectives depends on
Good Performance with regards to Customer Satisfaction Flexibility & Productivity.
Lynch & Cross argued that, within an Organisation, there are different levels of Management, of which
each has different concerns or focus. However, they must be consistent with One another so that they Can
support One another. Performance Measures at Operational Level of the Management should support the
Corporate Strategy.
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Mc Kinsey 7 S Approach
This is a Model Used for implementing Strategic Change, with the view that there are 7 Interrelated
Factors that contribute to effective implementation of change.
▶Strategy: This consists of Formally Stated Goals and Objectives of the Company.
▶Structure: Organisation Structure of an Entity. How Authority Moves and responsibilities allocated in
order to achieve Strategic Goals.
▶Systems: These are Specific Systems that Operates within an Organisation. Eg. Manufacturing System,
Information System, etc.
▶Staff: People working in the organisation and their attributes, numbers motivation, loyalty, pay rates,
and career Advancement.
▶Shared Values: No one can work in isolation. Knowledge should be Shared with in Organisation.
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Chapter 8
Functional Strategies
✔ Finance Strategy
✔Production Strategy
✔ Marketing Strategy
Finance Strategy
Finance Mgt is Very Important & relevant to Strategic Planning in order to achieve the Main Goals &
Objectives. It Provides strategic support to other Functions.
Financial Performance: How an Entity is able to achieve It's Financial Objectives Over the Years.
Comparing The Present Situation with the Positions Over the Years.
If you are given Estimated Figures, find out whether those Estimates are Optimistic.
One of the Major Responsibility of the Finance Function of a given Business Entity aside from
ascertaining how the firm is performing financially is to determine Funding, or source of financing Each
Project or Investment. Whether Short term, Medium or Long. Also how the available resources should be
allocated and how idle funds should be Invested duly.
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In Order to Make Some of the Business Strategies work well, the attitudes of the Accountants being too
Conservative & Risk Avoided need to be Adjusted. Thus:
1. Risk Avoidance: Traditionally, Accountants are known for Avoiding Risks. Whereas for any Business
Strategy to work, risks must be taken and one should be Entrepreneurial in Nature.
2. Profitability & Short Term Financial Return: Accountants are associated with dealing with Short term
Profitability of a Company. And Most Strategic Decisions are usually long-term in Nature.
3. Reluctant to Innovate: Accountants of nowadays should not work in isolation of other Field and
Discipline. For the Vast benefit of Organizational Achievement, they should get closer to their colleagues
in Marketing, Project Monitoring, etc.
For a company to grow, it must innovate because every product has its life cycle, no matter how
successful it is. So, at the end of every project economic useful life, a company must renew his product or
bring in new one.
1. Product Renewal
2. Product Adaptation
R & D Strategy: This must be applied in a way that it will reduce the Cost on research program, because
not all research lead to any specific development.
Intrapreneur: A Person within a large business entity who takes direct responsibility for converting a
new product idea into a Profitable Finished Product, by taking Risk.
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Explanation.
These are systems that provides or process routine transactions in large volume numbers. They deal with
Operation Aspects of the Business.
They include:
Accounting Systems
Sales
Human Resources
➖ Storage Efficiencies
➖ Much Effective.
This is a System that analyse data & convert it into organised information for Management to plan and
control. They make use of Raw Documents produced by the TPS. Eg. Sales Order for sales report,
General Ledger used for financial report.
These are supposed to provide support to the Management for Decision Making. It consists of Data
Analysis Models Providing Users with Information about different alternatives or outcomes.
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This is for Senior Executive Officials. Information are provided from both Internal & External Sources.
Also known as Executive Support Systems. It provides information in a Summarised Form, with the use
of the following instruments:
- Pivot Tables
-Bar Charts
-Pie Charts
- Graphs.
It provides information to Management about Critical Success Factors (CSFs) & Key Performance
Indicators (KPIs) of an organisation, but which also allows them to drill down to extract more detailed
information.
Eg. If Actual Sales is less than the budgeted, they find out which Sales Region is Performing Badly.
5. Expert Systems
This is an Artificial Intelligence System, where several areas of expertise are covered. Users can obtain
Information advice or profer Solutions to a Problem. Examples are:
In A Nutshell, Information System, as the name implies provides Strategic Support within an
Organisation because the Quality of Decision making depends on a lot on the Qualitative Information
available to the Management.
So, if the transactions are processed very well from the Onset through TPS, it will be transformed to an
informed decision by the DSS or EIS.
Information Technology: This is the Combination of both Computer Technology and Communication
Technology in transforming a business transaction information to an Information.
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Impact of IT on Business
1. IT have resulted into new products. Eg. Smart Phones & Gadgets.
3. Through Internet, businesses have assess Virtual information and can be done online.
As IT changes, business entities should also adapt and attract new Opportunities.
This has to be do with the way Employees are managed in an Entity, whether Full-time, Part time or
Virtual Workers. It can even be extended towards Outsourced Personnel like Sub-Contractors or experts
providing consultancy services.
To Access The Quantity & Quality of Human Resources currently available in a Firm.
To Ascertain Those Amongst employees whose service is getting redundant & may he updated or
relieved.
Marketing Strategy
Product
Price
Place
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Promotion
✔ Product Strategy: This has to do with designing new products or differentiating the existing one as at
when due. The Purpose is to make it Appealing to Customers, and buy more of the Product.
-Comfortability
-Convenience
-Useful Life
-Packaging
-Delivery Package.
Also, we should be aware that a Good Strategy is not only about the Product Itself. Other Factors like
Warranty, after sales services are to be Considered.
It Remains: Price, Place & Promotion. Kindly Read them from your Pack.
Chapter 9
In the modern world, organisations are faced with a number of risky situations that they have to manage.
It's now the responsibility of Professionals (Chartered Accountants) to monitor and assess risks
depending on the Risk Appetite of the Organisation.
1. Pure Risk: Only the Worse Situation is Expected to occur. No two Way.
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2. Speculative Risk: As the Name Implies, its a 2-way risk. Where there are 2 Possibilities. Whether Good
or Bad. This is a very Good Example of Risk Faced in Business Environment...
Management of Risk
It's the responsibility of the Board of Directors (BODs) to manage Risks. By setting up a Risk Mgt
Though, it differs from one Organisation to another. Some organisations employs a Risk Management
Types of Business Risk
✅ Market Risk
✅Credit Risk
✅Legal Risk
✅Reputational Risk
✅Liquidity Risk
✅Technology Risk
1. Market Risk: Risks associated with the Prices of Goods in the Market. Prices do go Up or down. So, a
company can manage this by passing the Burden of this to The Final Consumers...
2. Credit Risk: Risks associated with Giving Credit to Customers. The Risk that they will not pay us our
Money. This is associated to Bad Debt and we should reduce it. Thank God we just Finished Working
Capital Management... You know what this Means.
3. Liquidity Risk: This is the Risk that a Company do not have enough Cash/Cash Equivalent to settle
Liabilities as at when due. A company might be making Profits but, still not Liquid...
4. Legal Risk: Risks Associated with the Laws and Regulations of the Industry the Company operates in.
And the risks that a company might lose their Law Suits Or Cases
5. Reputational Risk: The Risk that a Company gain bad reputation from the view of the Public. Probably
may be they are doing something Unethical in Nature that Exposes them to this Kind of Risks.
6. Technological Risk: Risks associated with changes in technology. The Company should follow the
trend of technology for them not be Outdated or to be competitively advantaged in the Industry.
7. Health, Safety And Environmental Risk: This is a risk associated with Safety of employees and
Sustainability of the Environment. There is regulation for this and its a trending issue.
8. Derivative Risk: This is the Risk associated with derivatives and settlement of financial Instruments
and Commodities.
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Business Risks of an Entity can be financial and non financial. And it also differ from one industry to
another. Though, some risks are common, but some are Peculiar to some industries or sectors than others.
Eg. In Oil Sector, Safety and Environmental Risk is Peculiar to them. While in Banking Sector, Credit
Risk is Peculiar to them.
There are lots of Concepts that you must note as far as RISK Management is Concerned.
Some are:
✔Exposure to Risk
✔Risk Appetite
✔Risk Identification
✔Risk Mapping(Model)
✔Measuring Risk
Exposure to Risk
This is the concept used when an event that an Entity is about to embark on will eventually turn out to be,
Unfavourable to them. In such case, we say an Entity is exposed to Risk.
Then, it is the Management responsibility to reduce the amount of Risk that a company might seek
exposed to by putting in some reasonable measures. Then, after such measures is taken and the risk is
reduced, any remaining risk thereafter is called Residual Risk
This concept is trying to explain the Fact that the environment that a company operates in is not constant,
so the risks faced by organisations as well can not be constant. It changes over time depending on the
turbulence of the Environment.
1. Static Environment : Where Risks faced are not changing from time to time.
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Risk Appetite
This concept of risk is Concerned about the percentage of Risk a company can Take. From the Word
Appetite . How much Risk Can they Digest????
It is not possible that Management accepts all kinds of Risk. Its the Responsibility of the BODs to inform
the Mgt what risks they should endure.
This is an Approach to Management where by Risks are put into Consideration before Decisions are made.
That is, the management evaluates each options at hand and any risks attached to each before arriving at
decision.
Risk Identification
For an Entity to effectively manage Risk, it need to firstly identify that risk itself. This is the
responsibility of the Risk Committee to identify Risk following the procedures below:
✔Control it.
Risks that affect Stakeholders differ from one another. For Example:
Creditors Face Credit Risk, risk that we will not pay him his Money.
Investors face risks related to their Share Price, whether the value might fall or not.
Measurement of Risk
Risks that are Quantitative in nature can be quantified and put down in Numbers. For example, measuring
Expected Loss or injuries to employees.
While those that are Qualitative in nature can only be measured through Management Decision.
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Risk Profiling
Risk Dashboard
ALARP Principle
A 2x2 Matrix which assists the Management to identify the Gravity of each risks and Action to Take on
them.
➖ Impact of a Risk (On the Left Vertical Side): The Gravity it will have on the Survival of the
Organisation.
➖Probability of a Risk (on the top Horizontal Side): How Often It Happens.
✅Low Impact/Low Probability Risks: The Mgt should Review them Periodically.
✅ High Impact, High Probability: Mgt should take immediate Action to these. Eg. Factories Injuries.
✅ High Impact/Low Probability: Mgt should buy Insurance Policy to tackle these. Eg. Theft of Property,
assets, fire, accident,etc.
Prioritising Risk
Controlling Risks are based on priority and that's how Management does.
Risk Dashboard
This is used to identify which risks need further attention and control.
➖High Risks - RED LIGHT.= Its Dangerous and it needs Immediate Action.
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➖Green Amber. Both are in between the Board while Amber means they are under Review.
ALARP Principle.
Its illustrated with a Graph , trying to portray the Level of Risk and its Acceptability. That is Low
Risks are more acceptable to a reasonable organisation than high risks.
The Principle is associated with Safety Precautions from the UK Health & Safety legislation. The
Principle advocates that though, it is impossible to eliminate risks totally but, we can actually manage
them.
Related Risks are those of the Same Family, while Correlated Risks are those vary together, either
positively or negatively. Probably, because they have some things in Common.
Chapter 10
Controlling Risks
Introduction:
In the last chapter, We have successfully identified what risk is all about and different concepts in Risk
Management. We now go through different approaches that Organisations use in controlling risks.
Risk Managers
Risk Committee
Risk Auditing
Risk Embedding/Awareness
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Risk Managers➖
This is an officer in charge creating awareness and advising the Mgt on measures to take concerning
Risks in an organisation. His Role is not primarily to manage Risks per say but to identify and give
control measures.
Though, any given organisation might appoint different Managers for each aspect of risky activities in an
organisation. Eg. Insurance, Health and Safety, regulatory and compliance, Financial Risk Managers, etc.
Risk Committee
Depending on how the organisation wants it, a committee might be set up from the Board of Directors
(BODs) or from different departments within the firm. Even, Internal Auditor, Risk Managers might be
included in the committee.
Their main objective is to identify and monitor risks and give reports of their observations to the BODs
on regular basis.
Risk Auditing
Though, it could be done by An Internal Auditor as well but not quite appropriate because of Familiarity
Threat, he might fail to identify some threats. While being carried out by a specialist or External Auditor
is more professional only that some consultancy firms might have had some Ready Made Solutions which
does not fit into the client's situation and impose it on them.
1. Identication Stage
2. Assessment
3. Review
4. Report
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Every Organisation should make sure they embed risk awareness in to their Culture. This will make the
employees to be at alert any time, knowing fully that risk could occur. This is the Role of Risk
professionals, Risk Managers And risk Auditors. (Read More from your Pack)
1. Risk Spreading/Diversification: An Entity should not put all its egg in the same Basket. It should have
a portfolio of different Business Activities where some might perform better than another. So, the good
performers will offset the bad ones. Though, diversification will reduce risk if an Entity is diversifying
into a new line of Business.
2. Risk Transfer: This is act of passing the risk to someone else, either totally or partly. A very good
Example of this is Insurance Policy.
3. Risk Sharing: This is a method of Sharing risk jointly between 2 entities. May be through Joint Venture
or partnership.
4. Hedging: This has to do with Financial Instruments and derivatives. Hedging foreign exchange
currency and interest rate.
T - Transferring Risk
A - Avoiding Risk
R - Reducing Risk
A - Accepting Risk
Meaning :
A- Avoiding Risks: Which is not practicable in real life. Because, not taking risk is a risk itself.
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It has 3 Levels:
Each of them has Sublevels. (Study your Pack and the Diagram there).
In 2009, the International Standards Organisation (ISO) issued a standard for managing Risk
Internationally, and its applicable to any industry.
It has 3 Elements: A S P
✔ Risk Architecture: This is talking about Roles & Responsibilities for Risk Management and the
Reporting Structure. Eg. Roles of the BODs, Risk Managers, Risk Committee, etc
Risk Strategy: This is talking about different plans and tactics to tackle risk, Risk Appetite of the
Organisation and other relevant matters.
Risk Protocols: This is Dealing with Rules and procedures for the Implementation of Risk
Management and how to apply them.
Risk Implementation
In order to implement risk successfully, ISO 31000 also issued 7Rs & 4Ts
1. Recognition
2. Retention
3. Responding to Risk
4. Resource Control
5. Reaction Planning
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Risk Treatment
Chapter 11
Corporate Governance
Introduction:
This is a Concept used to explain how a Corporate Organisation is Governed. And what we mean by
Corporate Organisations here encompasses Companies, Govt Organisations and Charitable Societies.
Anytime the Owners of an Organisation are different from the Controllers, the following problems could
occur:
Because of such problems that may occur, there is a need for Guidelines on Corporate Governance so
that Organisations are Governed in the Best Manner and Ways.
But, note: In A Situation where the same person that owns the company is the one controlling it, there's
no need for Corporate Governance. Who are The Owners and who are The Controllers?
For any Corporate Governance to be effective, it must be supported by Law. For example, in Nigeria,
CAMA 2004 says that the BODs are accountable to the Shareholders. Also, the Securities and Exchange
Commission (SEC) issues some Codes for Listed Companies to follow.
There are 7 Key Issues in C. G. Of which all other ones revolve around.
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✔Director's Remuneration.
Pls. This is Very important and it has come out in Past Question Some times. Make sure u read up their
Explanation from the Pack. Though, we will still come across some of them in
Like we knew, Private Organisations are different from Public Establishments because of their Objectives
and Activities. Also, in terms of Governance as well.
In Private Sector, the shareholders are the Key Stakeholders. While in Public Sector, its the General
Public. ♂
1. Hospitals
2. Schools
4. Other NGOs.
There are 7
1. Fairness: The Principle that all Shareholders receive Equal Treatment from Directors.
2. Independence: What this principle Is saying is that a Good Corporate Governance system must be free
from any influence from someone else. And that's why the Code Said that some reasonable amount of
Directors should be Non-Executive Directors(NEDs) to make an unbiased opinion.
3. Honesty & Integrity: This is Saying that Directors should be truthful about their Dealings.
4. Responsibility and Accountability: The Code of Corporate Governance allowed Directors to delegate
some of the Responsibilities to the Management and also retain some. Though, they are Responsible and
will be held Accountable for Both.
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5. Openness and Transparency: The Directors should be acting in an Open way, they Should not hide
anything from the Shareholders.
6. Reputation: This is linked to CSR. The BODs Should make sure that a Good Corporate Governance
maintains good reputation by being Environmental Friendly.
These principles applies to Public Servants and Politicians in dealing with The General Public or Citizens.
Though, they have some things in Common with the 1st Principles:
1. Selflessness
2. Integrity
3. Objectivity
4. Accountability
5. Openness
6. Honesty
7. Leadership.
Institutional Investors
As the Name Implies, they are not Individual Investors like me and you. They are Corporate Bodies
whose ordinary activities is to invest in Bonds and Investments. They are majorly 3 Classes of Companies:
➖Mutual Fund
As we know, stakeholders are those whom activities of an organisation revolve around. Action taken by
the organisation can either affect them positively or negatively. They can also in turn affect the
Organisation in one way or the other, because they have Claims, Influence, Power, Importance, Position,
Interest in a Given Organisation. They have 2 Models to Manage them. We will study them under Section
A.
Categories of Stakeholders
➖ Narrow Stakeholders: Those whose actions of the Organisation affect mostly. Eg. The Stakeholders
and Employees.
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➖ Wide Stakeholders: Those that are less affected by the Actions of the Organisation. Eg. The
Government & Wider Communities.
➖ Primary Stakeholders: Those whom the organisation rely upon mostly. Their actions are important for
the organisation to Survive, because they are primarily connected to the Organisation. Eg. Directors,
Shareholders and Mgt.
➖ Secondary Stakeholders: Those that the Organisation does not directly rely upon.
➖ Active Stakeholders: Those that gets involved in the Company's activities and decisions. Eg. Mgt and
Employees.
➖ Passive Stakeholders: They do not usually get involved in the Organisation's Decision. Eg. Govt.
➖ Voluntary Stakeholders: Those whom by them being stakeholders, it's by their own willingness. Eg.
Employees, Shareholders, Directors. Employees can go for another job if he likes, Shareholders can sell
their Shares and buy in another Company.
➖Involuntary Stakeholders: Those who have got no choice than to become stakeholders. Eg. Immediate
Community, Some Competitors, Future Generations.
➖ Known Stakeholders are those that the Company can easily distinguish that they are it's stakeholders.
➖Unknown Stakeholders: Those that the Company might not be aware of.
➖ Internal Stakeholders: Those that are part of the Business. Eg. Shareholders, Directors, Mgt,
Employees.
➖External Stakeholders: Those not taking part of the Business, but are affected in one way or another.
Eg. Regulators, Customers, Suppliers, Govt, etc.
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Agency Theory
This is the Most Important Concept as far as Corporate Governance is concerned. It's the theory that
postulates the relationship between an Agent and His Principal.
For Example,
Fiduciary Duty
The theory says that every director is acting as Agents for the Company and he owes duty of Care and
Good Faith towards the Owners of the Company. He must not put his own interest over that of his
Principal or else he can be Sued for that.
Though, in practice, Shareholders do not challenge the decisions of the BODs anyhow like that, except if
its demonstrated in the court of law that the Director is Found Guilty.
Agency Conflicts
Conflict set in when there is a difference between the interest of the Directors(Agents) and that of the
Shareholders (Principal). They can come in the Following Ways:
1. Moral Hazard: This occurs when a Director has No Share or Few Contribution in the Company, he
would be so much interested in receiving much benefits from his position. Eg. Private Car, Subscription,
etc.
2. Effort Level: This can be best explained as Based on Effort. The effort of the Managers will be less if
they have low benefits to derive from the Company.
3. Earnings Retention: Because the Remuneration of Directors and The Senior Managers is based on
Sales made rather than Profit. So, they will rather work on how to increase Sales nor profit.
4. Risk Aversion: The Executive Directors and The senior managers are workers of the Company
amongst other Directors. They will secure their job by avoiding high risk investments. Meanwhile, the
Higher the risk, the higher the returns.
5. Time Horizon: Directors are concerned with Short Term Financial Prospects of the company in order to
secure their Annual Bonuses based on Short Term Performance. Whereas, Shareholders are after the Long
term Prospects of the Coy.
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In a Nutshell, agency Conflicts are agency problems and it creates Costs for the Company.
Agency Costs
These are costs attached to the use of Directors running the affairs of the company for the Shareholders.
They are:
1. Cost of Monitoring - This arise as a result of Auditing the Financial Reports Submitted by the
Managers.
2. Bonding Costs: These are the Remuneration of the Directors, bonuses and incentives.
The code of corporate governance allows the Directors to delegate the Day to Day
Responsibilities/Running of the Business to the Senior Management (Executive Directors). However,
they cannot delegate their Accountability either. If the managers employed for Function of the Business
refuse to perform well, its the Directors that will be held Accountable for it.
Therefore, Managers can be employed for each Functions of the Business like:
➖ Finance
➖Operation
➖Admin
➖Human Resources
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Chapter 12
In the Last Chapter, We have being able to understand what Corporate Governance Entails and its
principles. Here, we have to understand what different approaches can be employed in Governing a
Company.
Countries with Stock Exchange Market Must Develop Codes for Corporate Governance because of the
following Reasons:
So that they can be protected from Unethical behaviour of the Senior Management.
1. Rule-Based Approach
2. Principles-Based Approach
This approach advocates that Corporate bodies must be compelled to follow a Compulsory Rules put into
Law By Acts of the National Assembly. Those Laid Down Rules are a must to be followed by Listed
Companies in particular and any violation is an offence. A Very Good Example of Rulebased Approach is
Used in The USA.
Advantages
Disadvantages.
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This is A Very Good Example of Rule-Based Corporate Governance. In the United States, following the
Collapse of 'Enron & Worldcom' in 2001/2002, and the resultant problems in the New York Stock
Market, The US Politicians became much involved in Corporate Governance. This led to the New
Legislation (Bill) sponsored by the 2 Congress Men in their National Assembly in order to improve
standards on Corporate Governance.
➢ Sabanex, and
➢ Oxley.
The Act introduced Specific Requirements on "Corporate Accountability Legislation" which requires the
Financial Market Regulator (The SEC) to implement some of the Pronouncements of the Rules. Also, a
New Regulator was established by the Act (As Common to Most Acts) to oversee the Audit of Public
Companies. The Body Named " Public Company Accounting Oversights Board" (PCAOB). That body
sets standards for Accounting Firms to Follow in Auditing of Quoted/Registered Companies.
✅ Forfeiture of Bonuses
✅ No Insider Dealing.
✅Audit Committee.
✅Audit Standards.
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1. CEO & CFO Certification: According to The Act, both of them must sign the Certificate of
Incorporation to be submitted along with Annual Reports to the CAC. With this, both of them will be held
Accountable for Any Irregularity in the Company's Accounts.
2. Forfeiture of Bonuses: The Act further states that any Account returned for Non Compliance with
Rules of this Act, both CEO & CFO must refund the Bonuses received for that year.
3. No Loan TO Executives: The Acts totally prohibits Companies (Other than Banks) to Lend Money to
Directors or Any Senior Executive.
4. No Insider Dealing: Insider Dealing is an offence which can cost an organisation to lose a huge
amount of money. It simply means when Directors used Inside Information concerning Shares at their
advantage at the expense of the Company. The Act prohibits this such that No Director should trade in
shares of the Company during any "Blackout Period".
5. Assessment of Internal Control: Section 404 of the Act requires that the company must include the
Internal Control Report in their Annual Accounts and this must be attested by an External Auditor.
6. Protection of Whistle Blower: Any Employee who reports a fraudulent activity suspected by him to
the Agents must be protected from Loss of Life or Jobs (This is what Enron did to a Whistle Blower).
7. Audit Committee: An Audit Committee must be set up by the Company consisting of Independent
Directors of the Company.
8. Non Audit Assignment: The Act also prohibited Independent Auditors to carry out Non Audit related
Works like Bookkeeping, Payroll, Valuation, etc.
9. Audit Standards: Audit must have adequate standards put in place and Audit Working Papers must be
retained for at least 7 Years.
Features:
✅ Guidelines & Provisions should supplement how those Principles are applied in Practice.
✅ Companies can ignore the guidelines if they find it inappropriate for some specific circumstances.
✅ When any company is not complying, reasons must be communicated to the Shareholders.
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Comply or Explain
This is applicable to Principle Based Governance where Listed Companies are implored to comply with
the provisions of the Code of C. G or Explain their Non-Compliance in the Annual Reports.
Because better Governance will attract more investors to the economy, international bodies have issued
statements applicable to all countries regarding Corporate Governance so that there will be a unifying
standard in application.
Chapter 13
This is the fundamental component of maintaining Good Corporate Governance. The BODs are the Major
Players here and we shall explain a number of things here.
A lot of references will be made the Codes of Corporate Governance because they are applicable to Listed
Companies in Nigeria.
There is no standard as to how much power the Directors can delegate to the Executive Directors and how
much it should retain... It depends on each Company's Directives.
The Board Is Just like a Unitary System of Government where there is a difference between The Political
Head of State and The Executive Head of State
➖ Executive Directors: Who Manages the Day to day activities of the Business. And
➖ The Board of Directors whose role is to control the overall affairs of the Entity.
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1. The Board is held Accountable for the performance and affairs of the Company.
3. Ensure that all Human and Financial Resources are put in place for better goal.
➖ The Board should retain Responsibilities and make decisions on such areas by itself.
➖Where some Responsibilities are delegated to the Executive Management, they should also monitor
their performance.
Though, it's the BODs that will be held Accountable for the Twin Roles.
According to The Institute of Chartered Secretaries and Administrators (ICSA), they issued a Note
concerning matters to be reserved by the Board.
➖ Capital Structure
➖ Internal Controls
➖ Contracts
➖ Remuneration of Directors
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➖ Delegation of Authority.
(Read Up the Explanation from your Pack), and don't joke with it ó
Types of Board
Unitary Board
Unitary Board
A Unitary Board is that which only one single Board performs the Whole Functions of the BODs. This is
the case in many Countries.
Advantages:
As the Name Implies, the structure of the board here is separated into 2 Namely:
1. The Management Board is responsible for the oversight of the Day to day business operations of
the Company. The Head here is the Chief Executive Officer.
2. The Supervisory Board: In a 2 Tier Board, This is the one responsible for general oversight of the
Company and the Mgt Board as well. They Consists of all Non Executive Directors(NEDs). The
Company Chairman is the Head.
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The Size of the Board in Nigeria is between 5 - 15. Every Board Comprises of Both Executive Directors
and Non Executive Directors, (EDs & NEDs).
They are the Directors among the BODs who also have the responsibilities of the Executive Management
in the Company. They are Full time Employees in order to run the Every day affairs of the Company. Eg.
CFO, CEO, MDs of Companies...
Non-Executive Directors
The NEDs are not employees of the Company and are on part time basis. They come in when there's is a
Board Meeting. Most NEDs are independent because they don't usually have Direct Interest in the
Company.
For a Corporate Governance to be good, there should be a balance among those sitting in the Board.
There should be a balance between The Executive Directors and the NEDs and the NEDs should be
Independent. At least, 50% of the Board must be NEDs.
Also, Directors should be picked from a range of different skills, experience and expertise.
Board Diversity
This concept is Saying Those People that will be sitting on the Board should be different from one
another in the terms if Age, Race, Gender, Religion, educational background, professional qualifications,
etc.
Benefits of Diversity.
4. It displays Equality.
Limitations of Diversity :
1. It increases Conflicts.
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A report was carried out in the UK in 2011 which reveals that Women only makes 12.5% of the members
of the BODs of 100 Listed Companies in the UK. Lord Davies now recommended that the Number
should increase to 25% minimum by 2015 for 350 Companies.
➖ Every Company should disclose the number of Women in their Board and Working in the
Organisation as well.
Those 2 Guys possess the most powerful positions as regards a company. So, because of this, the Code
States that:
➖A CEO of a company should not rise to become the Chairman of the Board.
Though, the last provision is a little bit controversial. The Reason why the Code prohibits it is that if a
CEO jumps to become the Chairman, he might influence the decision of his successor as the former CEO.
4. He then reports to the Board all activities and operational performance of the Company.
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Strategy
Risk
Performance
People
The UK Code also suggests that, among the NEDs, there should be a Senior Independent Director (SID)
who calls meetings on matters that does not partake the Executive Directors. He argues with the
Chairman or the CEO if they default in Standards.
➖ There should be a formal way to identify what's missing in the Skills needed in the Board.
Also, the Board must be kept refreshed regularly as times go on by appointing or replacing Old NEDs
with Experienced and skillful Ones. Their Tenure last for 3 years of 2 Terms Each.
They are criticised for not performing effective roles due to:
Lack of Knowledge
Company Law dictates some Legal and Regulatory Pronouncements as regards Directors of Companies.
For example, in Nigeria, CAMA 2004 have some sections regarding this.
They have power to control the affairs of the company, but can delegate their power to the Mgt of the
Company.
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✅ Service Contract: The Executive Directors fall under this. Since they are employees of company, they
have all rights attributable to employment and to Salaries & Pensions.
✅ Fixed Term Contract: This applies to the NEDs, their own appointment is fixed. They only have right
to be appointed for 2 Terms only, 3Years Each, as said earlier.
The Shareholders have the Right to appoint and remove Directors from the Board.
Also, the directors hold Fiduciary Duty, duty of care and to the company.
They have the to own shares in their company. Though, they should stay away from Insider Dealing
which is a Criminal Offence.
Disqualification of a Director
When a Director does an Illegal or unacceptable action, he may be disqualified from being a member of
the Board. This is a form of protecting the Interests of the Shareholders.
➖ A Bankrupt
➖ A Mentally Infirm
➖ A Criminal
Changing of Directors
Directors are not meant to serve for ever. Under a system of Good Corporate Governance, there should be
Induction of New Members.
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Bringing in New Members to the System requires a formal Training in form of Induction. Most
Especially the NEDs. They need to be familiarised with the Company upon their appointment. Even the
Executive Directors too, they might have some knowledge of the Organisation but that doesn't mean they
knows all.
Visitation to important sites and locations where the Coy carries out its Operations.
The Code states that all directors should regularly update and refresh their skill & knowledge. Since the
world is changing and new concepts are arising, so the Directors as well should not be stagnant. They
should participate in relevant continuing education programmes set up by the company.
Though, it is subject to the view of the Director himself. But areas like Business Strategy, Corporate
Governance, financial strategy, etc. are necessary.
Performance Evaluation
Roles and Activities of the Directors need to be assessed and evaluated by the Shareholders since they are
accountable to them. Though, it is difficult to do so in Practice. But in some countries, it is Carried out by
the Chairman of the Board whether they fulfil the Roles or not.
In Nigeria, the code states that the Board should establish a system of formal and rigorous evaluation of
its own performance, the performance of the Committee and the Individual Directors.
They should state the performance indicators used. They can also engage an external Consultant if they
like.
However, the Chairman may evaluate the performance of the Executive Directors through the CEO.
✅ Risk Management.
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Committees are Set up by the Board Consisting of Selected Directors responsible for monitoring a
particular aspect of the Company's Affairs while the board makes decisions on them. The Committee are
not to decide, just to give recommendations for the decision of the Board. The Board can reject any
recommendation given by a committee if they deem fit.
In order to avoid conflict of interest, it is recommended that committees should be made up of more of
independent directors.
1. Remuneration Committee
2. Audit Committee
3. Nomination Committee
Nomination Committee: They are the one in charge of new appointments to the board. Most
Especially, appointment of new Executive Directors.
Audit Committee: This is a committee in charge of Monitoring the Finance Director and The Auditor.
They make sure that financial reports satisfy the applicable standards and are complete.
Risk Committee: They Make sure an effective Risk Management or Internal Control Occurs within the
Organisation.
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Chapter 14
Director's Remuneration
Introduction
When discussing about Remuneration, distinction should be made between the Remuneration Package of
the Executive Directors and That of the Non Executive Directors.
✅ The NEDs Remuneration are usually fixed, paid annually or quarterly. Based on the Number of
Meetings they have in a year.
The Code of Governance states that If the NEDs also receive additional benefits aside from the Basics,
they might not be considered independent anymore.
✅ But the concentration of this chapter is on the Remuneration Package for the Executive Directors.
This is an Integral part of Director's Contract of Services as agreed through Negotiation between the
Individual Director and the Remuneration Committee.
Components include:
✅ A Basic Salary
✅ Share Options
✅ Pension Rights
✅Other Benefits in Kinds like Official Car, Apartments, Free Medical Insurance, etc.
Remuneration package of Directors is made up of different Components. So they should be taken together
and also separated into different Structural Parts.
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For Example:
The implication of this is that a Director in one company might receive an averagely low Basic Salary
with a Sumptuous Retirement Plan. While another Director, in another Company might receive an
enormous Basic Pay with a poor Retirement Plan.
In an ideal situation, performance should be linked with Reward. If a Director is seem to perform better,
or achieve a set targets for an organisation, they should be rewarded with incentive packages for
motivational purposes.
Though, there are problems associated with this in Practice in the Sense that some directors might be
concerned about short term objectives instead of Long term because of the incentives attached to it.
Performance Targets
Annual Bonus: The performance targets usually come with annual bonus in Practice. Probably, if a
specified Profit is Achieved.
Share Options: This is long-term in nature. It is used to link the Long-term interest of the Individual
Director Shareholders with that of the Shareholders. This one should be properly regulated and not abused
by the Directors and the Remuneration Committee should be aware of it.
The Code states that Shareholders of a company should be given full information about the Remuneration
Package of the Directors. So that the Shareholders can be able to Link the Directors Remuneration with
their Performances.
In the UK, it is required that Quoted Companies prepare a Director's Remuneration Report Every Year, to
be included in the Annual Reports of the Company. Where Information like Total Remuneration, Share
Options granted, and the ones exercised by them should be disclosed and subject to Audit.
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Chapter 15
The Directors as agents of Companies are responsible to the Shareholders. In order for them to know how
performing they are, they should be communicated with in the Annual Reports.
✅Transparency: In Stock Market, this means information about the condition of the market is clear and
well understood.
✅ Disclosure: This means all information are available so that there's transparency.
➖ Financial Information.
In Nigeria, it is required that all companies are states in their Annual Reports whether they comply with
the Code of Corporate Governance and their extent.
Some Disclosures are Mandatory because they are required by law and The Stock Exchange. While Some
are Voluntary, depending on the Company's Discretion. Eg. CSR Reports.
Usually, Statements on Corporate Governance are long and take up to 5 - 6 Pages in the Financial
Statements. However, the Code Requires the Following Contents:
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➖Statement of performance evaluation of the Board and How its being conducted.
Narrative Reports
Recall, this is one of the 7 Points Agenda in Corporate Governance as earlier studied in Chapter 11. What
this is Saying is that in addition to the Financial Information provided in the Annual Reports, Companies
should also provide some Narrative Notes that will be much easier to understand by Lay men. Though,
information there might leave out some contents and therefore not reliable.
For Mandatory Purposes, Companies are required to show Analysis of KPIs, Matters relating to
environmental issues, employees, communities and social issues, risk and uncertainties facing the
Business.
In order to improve the quality of Corporate Governance and reduce the imminent Agent-Principal
Problem, there should be a Dialogue between the Shareholders and The Directors. With that dialogue, the
shareholders will be able to:
➖ Receive Explanations from them in more Details rather than Annual Reports.
Most of the dialogues are conducted by the Chairman, the CEO and the Finance Director. They are the
ones who usually give presentations to Institutional Investors. Though, they only have meetings with the
Major Shareholders and it is the Responsibility of the Chairman to carry other Members along.
Shareholders Activism
When a shareholder is dissatisfied with the performance of a company, he can sell his Shares. However,
as alternative to selling shares, he can also:
This is a meeting where the owners of the company discuss and Vote on Certain Issues. The BODs,
Auditor and Advisors of the Company also attend such meetings.
They are of 2:
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Extra-Ordinary General Meeting(EGM): Hold on specific issues that can not be delayed till the next
AGM.
In a Well-Governed Organisation, all Ordinary Shareholders have Equal Right to Vote. One Share, One
Vote...
Ie. If someone has 500 Shares and the total number of shares in that company is 1000, a finger of such
person raised up stands for 500 Fingers.
➖ Reappointment of Auditor.
Shareholders can use his voting right to carry out activism as discussed earlier, by voting against the
BODs on Reappointment and Remuneration issue.
In 2004, Miner issues a report identifying the problems facing institutional investors in using their voting
rights. He issued the Following Recommendations:
➖ Institutions that own shares should use it wisely. If they do not attend AGM, they should use Proxy
Vote.
➖Institutions that give their Shares to Fund Managers should use make sure they use it as instructed.
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7. Monitoring Companies.
These Principles applies to Institutional Investors. Eg. Pension Fund Administrators (PFAs), Insurance
Companies, Pension Assets Custodian. Read the Explanation from Your Pack.
Chapter 16
Ethical Theories
Introduction:
Ethics is about morality. What is considered right or wrong as regarding how you view matters which
might be different from how others view it.
➖ Personal Ethics
➖ Business Ethics
➖ Professional Ethics
✅ Personal Ethics:
This pertains to an Individual Himself. His actions and interactions with others, developed personally by
him, not backed up by any code nor principles. It's just a matter of of how you see things.
✅ Business Ethics:
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This is the Moral Principles and Values that guides how people and institutions in the world of commerce
relate. Some entities issue it as a Code applicable to all employees whether you belong to any profession
or not, you are binded by it.
✅ Professional Ethics
These are principles and codes that guides the practice of a particular profession. Eg. Lawyers, Doctors,
Architects, Accountants, etc. Every Profession specify these ethics in a code of conduct known to all
members and intending members (Students), which must be adhered to strictly. Failure to adhere to it
might attract sanction.
Moral Dilemma
At times, in practice, an individual might be pressed to bend the rules and act in an Unethical way. Some
ethical behaviour might be Legal but immoral, thus creates a dilemma to the individual.
Ethical Dilemma might also occur when there is a conflict between 2 Moral Principles. Eg. Where a
particular action will benefit one stakeholder and harm the other.
An Accountant is compelled to act in an ethical way in discharging his professional duty. A Good Ethical
behaviour is linked with Good Code of Corporate Governance.
4. So that the public can value their opinion on Audit, Assurance and Advisory.
Theories of Ethics
Absolutism
Relativism
➖Absolutism
This is the theory which postulates that there is an absolute standard to what is Right or Wrong. ie. Right
or Wrong is known to Everyone and on no account should anyone justify what is wrong.
➖Relativism
This view holds that there is no absolute standard to what is right or wrong. It's just a matter of how
things appear.
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Approaches to Ethics
The theories above deal with Moral Reasoning, while these 2 Approaches deal with Actions taken, based
on the Moral Judgment.
Deontological Approach
This is the approach associated with a German Philosopher in the 18th Century, known as Kant. It goes in
line with the theory of Absolutism. It is the belief in Sense of Duty with the view that there are universal
moral laws and individual has a duty to obey them irrespective of what the consequences will be.
This boils down to the fact that before anyone do something wrong, he should Question Himself.
For instance, before u steal, ask yourself "What If Everybody Steal the I do"? How would this Life will
be?
Teleological Approach
This is the idea associated with a British Philosopher in 19th Century by the name John Stuart Mill.
He argued that an act is Right so far it brings Much Good to People. Which means Actions are judged by
their Consequences.
For Example, If someone steals, and the stealing brings much Goodness to people, then it's not wrong.
This is the approach common in Business Environment. It justifies all those dubious actions companies
do in the Name of making or maximising Profits, that a large number of people will benefit. Actions like:
Cutting Costs
Downsizing
Some Companies deal with Human Trafficking. All in the name of making profits.
Heinz Story is a very good example of ethical dilemma, and it goes thus:
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The Story:
Heinz, a Good Family Man, living in the city. One of his family members was sick and the only medicine
that can cure it was in the pharmacy of one famous scientist in the City. If he does not get this Medicine,
the person could die. Heinz went to him to seek for the Drug. The Scientist told him he developed it with
let's say #200 in our own Currency, but he's not giving it out for nothing less than #1000. Heinz told him
that he can afford to pay #800 but the man refused. He begged and begged, but the man refused. Heinz
went back home depressed and dejected. In the Midnight, out of desperation, Heinz went to the Pharmacy
and broke in the place to take the medicine, with the Justification that he cannot allow his family member
to die just like that while he knows where the antidote is.
The Question is: Is Heinz Right or Wrong? Kohlberg’s came in with his Concepts of moral development,
and he said one will answer such question based on the level that the environment he lives in is.
Kohlberg is an American Philosopher who published a Book in 1958 and gave 3 Stages of Moral
Development, subclassified into 6 Stages.
2. Self-interest
5. Social Contract
He said as a philosopher, you will be able to know where any given community belongs to in their Ethical
View. Whether Stage 1, 2 or 3?
➖ Some Philosophy argued against Post Conventional level that its not attainable.
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Before any decision about business is made, the following 5 Questions must be asked:
PLFRE
✔ Is it Profitable?
Is it Legal?
Discussion:
It is agreed that Making Profit is the main objective of every business activities. But, for the company to
survive and continue to survive, not only profit must be considered. Legal Side must be looked at so that
the business will not be sanctioned by the Regulatory Body or tried in the court of law. All other factors
should be considered as well.
The American Accounting Association (AAA) gave their own model in 1990. This goes thus:
In Summary
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✅Facts
✅Ethical Issues
✅Moral Principles
✅Alternative Actions.
✅Best Action.
✅Consequences of each.
✅ Decision itself.
Note: In a Situation where Question did not specify which of the 2 to use, just stay by the 1st one and
apply to a scenario. It's Simpler.
Chapter 17
Therefore, he must be a Good Citizen by displaying ethical values and respect for individuals, society and
the Environment itself.
5 Principles of CSR
5. Sustainability of the Environment (ie. reducing Air, Land, Water Pollution, and replacing Used Natural
Resources)
Shareholder's Theory
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This theory believes that Shareholders are the owners of the company, and its their interest alone that
must be protected. Their wealth must be maximised, no matter what! whether Action is Right or
Wrong(Teleological Approach).
Some Shareholders are concerned with Short Term benefits, like dividend. While Some are after long
term growth of the Business.
Stakeholders Theory
This theory says that no only shareholders are important, other stakeholders are also important. Everyone
should be treated in a way that their interest is protected.
This is a theory of Corporate Governance with the view that members of the society should allow a
company to live, exist and act as a legal citizen in their community, by allowing the entity make use of the
Natural Resources in their communities. Like Land, Crude Oil, Timbers, etc. However, the company as
well must not be an Ingrate for this. They should also give back to the Society by improving their well-
being.
The Major Concern of Corporate Citizenship is that any strategy the company is employing must take
into consideration the Social & Environmental issues, otherwise its not acceptable. If a company fails to
consider this, its open to Reputational Risk.
Ethical Stance
This is also referred to as Ethical Posture. A position that a company/an individual take on ethical issue.
Its a matter of how an organisation or individual sees something, and decide on it.
According to Johnson & Scholes, there are 4 Ethical Stances a company can maintain:
➖ Position 4: Shaper of the Society. Ie. Society 1st, then even shareholders interest come after that.
This simply means changing the condition of the society and its well-being. Although, the technology in
this modern world has being a very Good Shaper of the Society itself. Nonetheless, Companies who are in
control of resources should make sure their decisions revolve around this to make the World an Easy
Place to live in.
1. Fines: Like when a company flaunts a regulation, the regulatory authority will fine him a huge amount.
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2. Damages/Compensation: Such company aside from being fined might also be compelled to pay
compensation to the concerned members.
4. Jail: The Veil of incorporation might be lifted and individual directors chased.
5. Reputational Risk: Through Incessant protest of the Community, the company might lose its Good
Name. A Case of Study of the Niger Delta Region.
Gray, Owen and Adams (1996) provided a framework for Classifying different Groups of people with
their views on Business Organisation and Society.
1. Pristine Capitalist
2. Expedients
4. Social Ecologist
5. Socialist
6. Radical Feminist
7. Deep Ecologist
Culture is the shared belief, attitudes and values of speakers of one Language in a region. Ie. For any
culture to hold, common language and region are very important. These cultural views are injected to
companies situated in a society it is being Practiced by its people because it is the people of the Culture
working in that company. Culture has a great influence on ethics and its Said that it formed a bedrock for
ethics.
Even Multinational Companies where employees do not share the same language, culture or hailed from
the Same geographical area develop a culture among themselves.
Also, there is a Link between Culture, ethics and CSR because of the interest of the following sets of
people:
➖ Employees
➖ Customers
➖ Community
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➖ Society as a whole
1. Routine and Rituals : This Means Ways & Methods things are done in the Organisation.
2. Stories & Myths: This has to do with Past Experience of the Organisation.
6. Control System: This is talking about Performance Measures the organisation uses.
They are of the View that the Cultural Web with in a company shapes its cultural Web.
✔The Paradigm
Discussion
1. The Outer Skin: The Culture of any company is evidenced in what we can physically observe by
visiting the company. The way they dress, interact with one another.
2. The Inner Layer: This is the 2nd level which deals with specific issues that employees of a company
share common views on. Eg. Whether they should trade with companies engaging in Slave trade or not.
3. The Heart (Paradigm) : This is the core culture of the company and the Major reason why they exist. It
might not be written down but, difficult to change. For example, a school is a place of learning while
Police force exists to catch criminals.
Schein argued that the outer skin can be fairly changed, but difficult to change the Paradigm.
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Chapter 18
Professionals are highly qualified group of individuals, trained to carry out their profession in a highly
skilled manner.
Between Professionals and their clients, the following basis are important:
1. Relationship of Trust.
They should act in a professional manner in a way that will not tarnish the image of the Profession itself.
1. Integrity
2. Objectivity
3. Competency
4. Confidentiality
5. Independence
Public Interest
One of the features of a Profession that separates it from mere Vocation or trade is that Professionals are
expected to act in the Public Interest. Not to act exclusively to satisfy the needs of a particular client or
employer. In a Situation where the Interests of their Clients and that of the Public conflict, the Interest of
the public prevails.
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The General Public expects high of the discipline because of the following:
1. They are the ones that present the performance & Position of the Company to them.
Financial Reporting.
Auditing
Management Accounting
Tax Management
This is a theory that argues the fact that Accountants are objective as traditionally being regarded. They
have the following arguments to support their View:
3. The Concept of Truth and Fairness as claimed by Accounting Profession is subject to different
Interpretations.
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Research has indicated that Accountants see their role as technical one not a moral or ethical issue, and
that they are poor at taking ethical decisions. In Many cases, they treat a problem as Technical
Accounting Issue & Fail to see any ethical implications at all.
A code of ethics is a formal statement issued by the Board of Directors of any organisation and make
available to Employees to follow. It guides the actions of the employees and the staff. Its effectiveness
depends on the Leadership of the Country.
There is no standard format for what the contents should be. But the following general contents are
relevant:
Nature of Codes:
Breaching the code attracts Disciplinary Action taken upon the erring employee based on the Gravity of
the breach and the position of the Individual.
➖Suspension
➖Dismissal or delisting
The person might report to the BODs or it's committee or blow Whistle.
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Whistle Blowing
Reporting suspicious, illegal actions to those in Authority.
➖ Consider the impact that the Whistle blowing might cause to the person himself.
Therefore, the company should find a way of protecting the Whistle Blower and discourage baseless
allegation.
Though, The Codes might contain Principles-Based and Rule-Based Alike as discussed earlier.
The Code is applicable to both members and students. Though, similar to that of IFAC.
Features:
3. Both codes include guidelines for professional accountants in public practice and in business.
➖ Objectivity
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➖ Integrity
➖ Confidentiality
➖ Competency
➖ Professional Behaviour
Chapter 19
A Situation when 2 Ethical Principles demand opposite result in the same situation. Ie. The 2 Principles
are right but different result will be out when applied. So, it will leave a dilemma as to which one to apply
without being compromising.
A Practical Example in the case of An Auditor who must earn a living for himself and his family. In order
to achieve this, he cuts down most of the Audit work to do and used more Junior Staff and by the way, he
violates the Audit Standards. In such situation, we may Say An Accountant Is faced with a conflict
between his own personal Interest and interests of his client.
SSAFIM
3. Advocacy Threat
4. Familiarity Threat
5. Intimidation Threat
6. Management Threat
Explanation:
➖ Self Interest Threat: This is a threat that an Accountant might some of his own interests conflicting
with that of his Client.
➖ Self Review: A Situation where Professionals are faced with reviewing the work done by him or his
firm. Probably, Auditing the Accounts prepared by his firm.
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➖ Advocacy Threat: A threat that Accountants could be seen siding with the opinion of his client. Ie,
standing as Advocates for him.
➖ Familiarity Threat: When a professional and his client have some close relationships. Be it from
Relative, or friendship or being an Auditor of the Company for long.
➖ Intimidation Threat: When the client is seen to be threatening A professional with Law Suit or
Something intimidating.
Ethical Safeguards
These are measures taken by Accountants to either reduce the threats or eliminate them totally.
Before you decide on any conflicting matter, Look yourself in the Mirror and ask the following questions:
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✅Is it Logical?
These 2 Scourges are common in public practice. However, corruption covers a large range of improper
actions than bribery. Bribery is a gift, in Cash or in kind, bestowed to influence the recipient's conduct or
gain his judgement.
Bribery around the world is estimated around $1Trillion and this has a grave effect on Corporate
Governance.
1. Political costs
3. Social costs
4. Environmental costs.
There is no Concensus Way of combating this menace. But, bribery will fail to distort the fair running of
Business in out society where there is:
2. Fairness of performance.
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Chapter 20
Traditionally, the main purpose of economic activity is to create economic wealth. But, in recent times it
is now getting more awareness that economic activities also have a footprint on the environment it is
being operated. Ie. A mark left on the Place and on the Lives people/organism living in that community,
as a result of our operation. It is also known as Ecological Footprint and it comes from the following
stuffs:
Because of all these, a new campaign is going round on how to reduce the environmental footprint.
Example are:
➖ Waste Management/Minimization.
This can be measured on the Categories of Environmental Construction in relation to the Population of
the people living in it on per head Basis. The following are useful:
Energy Use
Food Product
Forestry Products
Water
Land itself
Carbon Neutrality
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Carbon Products which have great impacts on Plants, animal and Human, by replacing it with another
source of energy better off.
Social Footprint
This is referring to the effect of economic activity on the Society and the People itself. While
Environmental Footprint is talking about The Planet, social footprint is referring to The People living on
the planet. Companies should be friendly and give back to the Society with the Following Activities:
✅ Employment of Women.
✅ Employment of Disabled.
✅ Welfare of Employees
✅ Donations of Facilities
✅ Empowerment Program.
This is a Concept invented in 1994 by Elkington with the argument that companies are encouraged to add
social and environmental issues to profit in their reporting model. This Method also encouraged Global
Reporting Initiative (GRI). The Word "Triple-Bottom or 3 Bottom" took its name from the fact that
Companies only provide 1 Line at the Bottom of their Profit/Loss Account indicating Profit. They should
also add 2 Lines representing Social + Environmental to complete 3. This can also be referred to as
Sustainability Reporting which simply postulates that Economic Activity should be carried out in a way
that it will sustain our environment. Both present and future generations will benefit.
Social Ecology
The Social Ecologists criticised the Western Capitalists Approach to environmental problems, with the
view that most of this crisis has been caused by Companies seeking growth and profits.
The Structure of the Society and the future of the Environment are closely Link.
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Environmental and Social efforts need to be quantified because managers find figures easier to plan on
rather than Qualitative Assessments. Therefore, Accountants come to play, by not only concentrating on
Financial Accounting or Reporting alone but add those 2 aspects to it.
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